ITEM 1. BUSINESS.
Overview
Excelsior Private Equity Fund II, Inc. (the "Company" or the "Fund") is a Maryland corporation organized on March 20, 1997. The Company is a non-diversified, closed-end management investment company operating as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (“Investment Company Act”), and, in connection with its initial offering of shares, registered said offering of shares under the Securities Act of 1933, as amended. BDCs are a special type of investment company, as defined and regulated by the Investment Company Act, which focus primarily on investing in the privately issued securities of eligible portfolio companies, as defined by the Investment Company Act. A BDC must also make available significant managerial assistance to such companies. The Company's investment objective is to achieve long-term capital appreciation by investing in private later-stage venture capital and private middle-market companies and in certain venture capital, buyout and private equity funds that the Managing Investment Adviser (defined herein) believes offer significant long-term capital appreciation.
UST Advisers, Inc. serves as the investment adviser (the “Managing Investment Adviser”) to provide investment management services to the Company pursuant to a management agreement dated July 18, 2000 (the “Management Agreement”). UST Advisers, Inc. is a wholly-owned subsidiary of United States Trust Company, National Association, which in turn is a wholly-owned subsidiary of U.S. Trust Corporation, a registered financial holding company. U.S. Trust Corporation is an indirect wholly-owned subsidiary of The Charles Schwab Corporation. All officers of the Company are employees and/or officers of the Managing Investment Adviser. The Managing Investment Adviser has been responsible for performing the management and administrative services necessary for the operation of the Company.
Pursuant to a Registration Statement on Form N-2 (File No. 333-23811) which was declared effective on June 2, 1997, the Company publicly offered up to 200,000 shares of common stock at $1,000 per share. The Company held its initial and final closings on October 8, 1997 and November 19, 1997, representing over $155.5 million and $40.2 million, respectively. The Company sold a total of 195,730 shares in the public offering for gross proceeds totaling $195,730,000. Shares of the Company were made available through UST Financial Services Corp. (the "Selling Agent") to clients of U.S. Trust and its affiliates who met the Company's investor suitability standards.
In connection with the public offering of the Company's shares, the Managing Investment Adviser paid to the Selling Agent a commission totaling $60,000. The Company incurred offering costs associated with the public offering totaling $367,154. Net proceeds to the Company from the public offering, after offering costs, totaled $195,362,846.
The Company's Articles of Incorporation provide that the duration of the Company will be ten years from the final closing of the sale of the shares, subject to the rights of the Managing Investment Adviser and the investors to extend the term of the Company.
The following is a summary of the Company’s investment portfolio.
Investments Held - Private
ClearOrbit, Inc. (“Clear Orbit”) (formerly known as BPA Systems, Inc.)
Description: Extends enterprise systems value with proven Supply Chain Execution (SCE) and Collaborative Supply Management (CSM) software solutions. Our unique approach allows customers to fully leverage their investment in enterprise applications. ClearOrbit customers enhance the functionality of their procurement, manufacturing and warehousing/distribution systems through the automation of internal business processes and by incorporating their trading partners into extended supply chain execution processes. The Fund originally invested $5.0 million in ClearOrbit, and the investment is currently being held at a cost of $5.0 million.
2006 Activity and Outlook: 2006 was ClearOrbit’s eleventh year in operation and Clear Orbit continues to provide supply chain solutions for a number of its clients. It has also successfully met the revenue, operations and cost management goals for the year and we are optimistic about the growth potential in 2007.
Metrigen, Inc. (“Metrigen”)
Description: A pioneer in the commercial oligo synthesis field, Metrigen has purchased or licensed more than 45 patents in the field of pico-scale synthesis and related applications. Metrigen was founded by a group of professionals from Operon, Stanford, and Protogene. In December 2002, Protogene Laboratories, Inc., a former Fund portfolio company investment, negotiated a transaction in which it sold substantially all of its assets. In exchange for its Protogene ownership, the Fund received $0.1 million in cash, a $0.5 million promissory note and warrants in Metrigen, Inc. The investment is currently valued at $0.5 million.
2006 Activity and Outlook: Metrigen has 2 employees who are located in the Roche facilities and the focus is still on product development with applications in the genomic industry. The Fund investment is in a senior note which will be paid out first in event of any future financing.
Mosaica Education, Inc. (“Mosaica”) (formerly known as Advantage Schools, Inc.)
Description: For-profit provider of public school education management services. Mosaica’s schools are publicly-funded, receiving per-student capitalization rates generally consistent with those received by other schools in the district. The Fund originally invested $7.1 million in Advantage Schools, Inc.(“Advantage”), which manages charter schools in troubled urban school districts in cooperation with local partners. In August 2001, Mosaica Education, Inc. a privately held operator of charter schools acquired Advantage, forming Mosaica Advantage. The Fund received 75,059 shares of preferred stock in Mosaica Education, Inc. and promissory notes in the principal amount of $2.0 million from the acquisition of Advantage. As of October 31, 2006, the investment was valued at $2.0 million.
2006 Activity and Outlook: Mosaica currently operates arts and technology oriented charter schools in Arizona, Colorado, Georgia, Indiana, Louisiana, Michigan, Ohio, Pennsylvania and Washington, D.C. In addition, the Company operates schools in Abu Dhabi and Qatar. Mosaica currently operates 90 school programs in with 36 US-based charters and 12 Middle East locations, in total serving approximately 18,000 students.
Investments Held - Third-party Investment Funds
Advanced Technology Ventures V, LP (“ATV”) is an early-stage focused fund targeting information technology and health care markets. ATV has drawn all of the Fund’s $3 million commitment. At October 31, 2006, the total investment value (fair market value plus net distributions) of this investment was $1.4 million.
Brand Equity Ventures I, LP (“Brand Equity”) is focused on investing broadly across the consumer sector, particularly in branded opportunities within e-commerce, retailing, and direct response markets. Brand Equity has drawn all of the Fund’s $2.5 million commitment. At October 31, 2006, the total investment value (fair market value plus net distributions) of this investment was $1.5 million.
Brentwood Associates III, LP (“Brentwood”) is focused on middle-market buyouts and consolidations. Brentwood’s strategy is to identify industries with consolidation characteristics, develop a strategy for implementation and recruit management to execute that strategy. Brentwood has drawn all of the Fund’s $5 million commitment. At October 31, 2006, the total value (fair market value plus net distributions) of this investment was $9.5 million.
Broadview Capital Partners, LP (“Broadview”) is focused on buyouts, recapitalizations and growth financings within the technology sector. Broadview has drawn all of the Fund’s $5 million commitment. At October 31, 2006, the total value (fair market value plus net distributions) of this investment was $4.0 million.
Commonwealth Capital Ventures II, LP (“Commonwealth”) invests in early to later-stage information technology companies in New England. Commonwealth is focused on communications technology, Internet software and services, and ecommerce companies. Commonwealth has drawn all of the Fund’s $4 million commitment. At October 31, 2006, the total value (fair market value plus net distributions) of this investment was $5.5 million.
Communications Ventures III, LP (“CommVentures”) targets early-stage companies exclusively in the communications sector. CommVentures has drawn all of the Fund’s $5 million commitment. At October 31, 2006 the total value (fair market value plus net distributions) of this investment was $1.7 million.
Friedman, Fleischer & Lowe, LP (“Friedman”) is a fund focused exclusively on participation in middle-market buyouts. Friedman has drawn all of the Fund’s $5 million commitment. At October 31, 2006, the total value (fair market value plus net distributions) of this investment was $12.8 million.
Mayfield X, LP (“Mayfield”) invests in early-stage information technology and healthcare companies, primarily located in Silicon Valley. Mayfield has drawn all of the Fund’s $5 million commitment. At October 31, 2006, the total value (fair market value plus net distributions) of this investment was $1.1 million.
Mayfield X Annex, LP (“Annex Fund”) invests follow-on capital in select Mayfield portfolio companies. The Annex Fund has drawn all of the Fund’s $0.25 million commitment. As of October 31, 2006, the total value (fair market value plus net distributions) of this investment was $0.2 million.
Mid-Atlantic Venture Fund III, LP (“MAVF”) invests in early and expansion-stage companies throughout the Mid-Atlantic region. MAVF has drawn all of the Fund’s $5 million commitment. As of October 31, 2006, the total value (fair market value plus net distributions) of this investment was $2.4 million.
Morgenthaler Venture Partners V, LP (“Morgenthaler”) is primarily an early-stage venture fund, investing largely in information technology and healthcare companies but also invests in buyouts of basic businesses. Morgenthaler has drawn all of the Fund’s $8 million commitment. As of October 31, 2006, the total value (fair market value plus net distributions) of this investment was $7.7 million.
Quad-C Partners V, LP (“Quad C”) is focused on taking controlling positions in leveraged acquisitions and recapitalizations of middle-market companies. Quad C has drawn all of the Fund’s $5 million commitment. As of October 31, 2006, the total value (fair market value plus net distributions) of this investment was $7.6 million.
Sevin Rosen Fund VI, LP (“Sevin Rosen”) invests in early-stage technology companies, focusing specifically on companies in communications and eBusiness infrastructure and solutions, as well as those companies with Internet-enabled business models. Sevin Rosen has drawn all of the Fund’s $2.5 million commitment. As of October 31, 2006, the total value (fair market value plus net distributions) of this investment was $4.6 million.
Trinity Ventures VI, LP (“Trinity”) is a multi-stage venture capital fund which invests in the software, communications and electronic commerce sectors. Trinity has drawn the entire $3 million commitment. As of October 31, 2006, the total value (fair market value plus net distributions) of this investment was $3.5 million.
We will be communicating to you in the first calendar quarter of 2007 with an update on our progress pursuing a Potential Sale Transaction.
For additional information concerning the Company's investments see the financial statements beginning on page 9 of this report.
Competition
The Company encounters competition from other entities and individuals having similar investment objectives. Primary competition for desirable investments comes from investment partnerships, venture capital affiliates of large industrial and financial companies, investment companies and wealthy individuals. Some of the competing entities and individuals have investment managers or advisers with greater experience, resources and managerial capabilities than the Company and may therefore be in a stronger position than the Company to obtain access to attractive investments. To the extent that the Company can compete for such investments, it may not be able to do so on terms as favorable as those obtained by larger, more established investors.
Employees
At October 31, 2006, the Company had no full-time employees. All personnel of the Company are employed by and compensated by the Managing Investment Adviser pursuant to the Management Agreement.
ITEM 2.
ITEM 2. PROPERTIES.
The Company does not own or lease any physical properties.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Shareholders of the Company was held at the offices of United States Trust Company, National Association, 114 West 47th Street, New York, New York 10036 at 10:00 a.m. (New York time) on March 23, 2006 (the "Meeting"). Of the 195,730 shares outstanding as of January 27, 2006, the record date for the Meeting, 109,820 were present or represented by proxy at the Meeting. The shareholders of the Company approved the following matter: to elect each of Mr. Bernstein, Mr. Hover, Mr. Murphy and Mr. Imbimbo as Directors of the Company. The results of the voting for this proposal were as follows:
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
The Company has 200,000 authorized shares. As of December 31, 2006, 195,730 shares were issued and outstanding. There is no established public trading market for the Company's shares.
Holders
There were 2,194 holders of the Company’s shares as of December 31, 2006.
Dividends and Distributions
Fiscal Year Ended October 31, 2006. There were no dividends or distributions paid during fiscal year 2006.
Fiscal Year Ended October 31, 2005. There was a distribution of $60.09 per share in December 2004 as a return of capital.
For additional information concerning the payment of dividends, see "Significant Accounting Policies" in the notes to the financial statements of the Company included in Item 8 hereof.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
($ in 000’s except for per share data)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Liquidity and Capital Resources
The Company has focused its investments in the private equity securities of expansion and later-stage venture capital companies and middle-market companies that the Company believes offer significant long-term capital appreciation. The Company may offer managerial assistance to certain of these companies. The Company invests its available cash in short-term investments pending distributions to shareholders or to provide the liquidity necessary to make portfolio investments as investment opportunities arise.
At October 31, 2006, the Company held $3,843 in cash and $23,793,821 in short-term investments as compared to $0 in cash and $12,775,632 in short-term investments at October 31, 2005. The change in cash and short-term investments from October 31, 2005 was primarily the result of proceeds received from cash distributions received from the Company’s private investment funds. In connection with the Company's commitments to private investment funds, a total of $58,250,000 since inception has been contributed by the Company through October 31, 2006 and an additional contribution of $307,504 during this period which is a recallable distribution from one of its
private investment funds, Brentwood Associates III, LP. The Company has no additional capital commitment obligations to the private investment funds. The Company made no follow-on investments in its private company investments during the fiscal year ended October 31, 2006.
The Company believes that its liquidity and capital resources are adequate to satisfy its operational needs.
The Company has qualified as a “regulated investment company” under Subchapter M of the Internal Revenue Code. As such, the Company is required to adhere to various tax requirements which may impact its ability to pay dividends to its shareholders. Due to these requirements the Company has not paid dividends in this fiscal year and is presently evaluating its ability to pay dividends later this year. The Company is also evaluating other opportunities to enhance shareholder value and liquidity. In particular, the Company commenced a process which may result in the sale of all of its assets (a “Potential Sale Transaction”). There is no assurance that the Company will enter into a Potential Sale Transaction, or if such transaction does occur, what the proceeds will be or the timing of the consummation of a Potential Sale Transaction. Any such transaction would be subject to the approval of the Board of Directors and shareholders of the Company.
Results of Operations
Investment Income and Expenses
For the fiscal year ended October 31, 2006, the Company had investment income of $930,634 and net operating expenses, net of expenses reimbursed by the Managing Investment Adviser, of $615,657, resulting in a net investment income of $314,977. For the fiscal year ended October 31, 2005, the Company had investment income of $381,462 and net operating expenses, net of expenses reimbursed by the Managing Investment Adviser, of $673,948, resulting in a net investment loss of ($292,486). For the fiscal year ended October 31, 2004, the Company had investment income of $182,061 and net operating expenses, net of expenses reimbursed by the Managing Investment Adviser, of $800,665, resulting in a net investment loss of ($618,604). The Company’s investment income was up from the fiscal year ended October 31, 2005 to the fiscal year ended October 31, 2006 due to higher balances of interest-bearing short-term securities. The Company’s investment income was up from the fiscal year ended October 31, 2004 to the fiscal year ended October 31, 2005 due to higher balances of interest-bearing short-term securities.
The decrease in net operating expenses from fiscal year 2004 through fiscal year 2006 is primarily attributable to the decrease in Managing Investment Adviser fees as a result of the decline in the net assets upon which fees are charged.
The Managing Investment Adviser provides investment management and administrative services required for the operation of the Company. In consideration of the services rendered by the Managing Investment Adviser, the Company pays a management fee based upon a percentage of the net assets of the Company invested or committed to be invested in certain types of investments and an incentive fee based in part on a percentage of realized capital gains of the Company. The management fee is determined and payable quarterly. For the fiscal years ended October 31, 2006, 2005 and 2004, the Managing Investment Adviser earned $501,093, $560,476, and $673,403 in management fees, respectively. The decrease in the fees earned by the Managing Investment Adviser over time can be attributed to the decrease in the Company's net assets that are invested or committed to be invested in Private Companies or Private Investment Funds. The Managing Investment Adviser has voluntarily agreed to waive or reimburse other operating expenses of the Company, exclusive of management fees, to the extent they exceed 0.25% of the Company’s average net assets. During fiscal years ended October 31, 2006, 2005 and 2004, the Managing Investment Adviser reimbursed other operating expenses of the Company, in the amount of $498,117, $349,580, and $223,870, respectively, as a result of expenses incurred in excess of those permitted pursuant to the Company's prospectus. In fiscal 2006, the reimbursement increased as a result of an increase in the maximum allowable expenses as well as a decrease in net assets. This reimbursement has increased from fiscal 2004 to fiscal 2005 as a result of the decrease in net assets, and therefore, a reduced threshold upon which to calculate the maximum allowable expenses. As of October 31, 2006 and October 31, 2005, there was no incentive fee receivable by the Managing Investment Adviser or payable by the Company.
Net Assets
For the fiscal year ended October 31, 2006, the Company's net assets were $49,229,604, or a net asset value per common share of $251.52. This represents an increase of $3,552,459, or $18.15 per share, from net assets of $45,677,145, or a net asset value per common share of $233.37, at October 31, 2005. The increase in net assets during the fiscal year ended October 31, 2006 is principally due to i) net investment income of $314,977 or $1.61 per share ii) realized gain on investment of $2,256,108 or $11.53 per share, and iii) net change in unrealized appreciation on investments of $981,374 or $5.01 per share.
For the fiscal year ended October 31, 2005, the Company's net assets were $45,677,145, or a net asset value per common share of $233.37. This represents a decrease of ($6,040,409), or $30.86 per share, from net assets of $51,717,554, or a net asset value per common share of $264.23, at October 31, 2004. The decrease in net assets during the fiscal year ended October 31, 2005 is principally due to the distribution of ($11,761,416) or ($60.09) per share, paid on December 9, 2004 to shareholders, realized loss on investment of ($9,493,649) or ($48.50) per share, and net investment loss of ($292,486) or ($1.49) per share. This was partially offset by a net change in unrealized appreciation of $15,507,142 or $79.22 per share.
Realized and Unrealized Gains and Losses from Portfolio Investments
For the fiscal year ended October 31, 2006, the Company had a net realized gain on security transactions of $2,256,108 and a net change in unrealized appreciation on investments of $981,374. The net realized gain for the fiscal year was primarily the result of distributions by the Company’s private investment funds. The net change in unrealized depreciation on investments for the fiscal year ended October 31, 2006 is the result of a decrease in the valuation of Mosaica Education, Inc, a private company investment of ($3,537,722), which was offset by an increase in the overall valuation of the private investment funds.
For the fiscal year ended October 31, 2005, the Company had a net realized loss on security transactions of ($9,493,649) and a net change in unrealized appreciation on investments of $15,507,142. The net realized loss for the fiscal year was primarily the result of reclassification of Firstsource Corp., from unrealized depreciation to realized loss of $12,666,667, and the reclassification of Killerbiz, Inc, from unrealized depreciation to realized loss of $750,000. This was partially offset by realized gain which was primarily the result of distributions by Freidman, Fleisher and Lowe Capital Partners, LP which is one of the Company’s private investment funds. The net change in unrealized appreciation for the fiscal year ended October 31, 2005 was principally the result of i) a reclassification of Firstsource Corp, and Killerbiz Inc, from unrealized depreciation to realized loss, thereby increasing change in unrealized appreciation/(depreciation) and ii) the result of an increase in the overall valuation of the private investment funds
For the fiscal year ended October 31, 2004, the Company had a net realized loss on security transactions of ($4,269,628) and a net change in unrealized appreciation on investments of $6,889,598. The net realized loss for the fiscal year was primarily the result of the sale of the Company’s shares of Curon Medical, Inc. common stock. The net change in unrealized appreciation for the fiscal year ended October 31, 2004 was principally the result of increases in the valuations of the Company’s private investment funds.
Application of Critical Accounting Policies
Under the supervision of the Company’s Valuation and Audit Committees, consisting of the independent directors of the Company, the Managing Investment Adviser makes certain critical accounting estimates with respect to the valuation of private portfolio investments. These estimates could have a material impact on the presentation of the Company’s financial condition because in total, they currently represent 50.79% and 69.81% of the Company’s net assets at October 31, 2006 and October 31, 2005, respectively. For the private investments held at October 31, 2006 changes to these estimates, i.e. changes in the valuations of these private investments, resulted in a $0.98 million and $6.3 million increase in net asset value, respectively.
The value for securities for which no public market exists is difficult to determine. Generally speaking, such investments will be valued on a “going concern” basis without giving effect to any disposition costs. There is a range of values that is reasonable for such investments at any particular time. Because of the inherent uncertainty of valuation, the estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material.
Initially, direct private company investments are valued based upon their original cost until developments provide a sufficient basis for use of a valuation other than cost. Upon the occurrence of developments providing a sufficient basis for a change in valuation, direct private company investments will be valued by the “private market” or “appraisal” methods of valuation. The private market method shall only be used with respect to reliable third party transactions by sophisticated, independent investors. The appraisal method shall be based upon such factors affecting the company such as earnings, net worth, reliable private sale prices of the company’s securities, the market prices for similar securities of comparable companies, an assessment of the company’s future prospects or, if appropriate, liquidation value. The values for the investments referred to in this paragraph will be estimated regularly by the Managing Investment Adviser or a committee of the Board of Directors (the “Board”), both under the supervision of the Board, and, in any event, not less frequently than quarterly. However, there can be no assurance that such value will represent the return that might ultimately be realized by the Company from the investments.
The valuation of the Company’s private funds is based upon its pro-rata share of the value of the assets of a private fund as determined by such private fund, in accordance with its partnership agreement, constitutional or other documents governing such valuation, on the valuation date. If such valuation with respect to the Company’s investments in private funds is not available by reason of timing or other event on the valuation date, or are deemed to be unreliable by the Managing Investment Adviser, the Managing Investment Adviser, under supervision of the Board, shall determine such value based on its judgment of fair value on the appropriate date, less applicable charges, if any.
The Managing Investment Adviser also makes estimates regarding discounts on market prices of publicly traded securities where appropriate. For securities which have legal, contractual or practical restrictions on transfer, a discount of 10% to 40% from the public market price will be applied.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The following discussion includes forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements.
Equity Price Risk
A majority of the Company's investment portfolio consists of equity securities in private companies and private investment funds, currently representing 50.79% and 69.81% of the Company’s net assets as of October 31, 2006 and 2005, respectively, which are not publicly traded. These investments are recorded at fair value as determined by the Managing Investment Adviser in accordance with valuation guidelines adopted by the Board of Directors. This method of valuation does not result in increases or decreases in the fair value of these equity securities in response to changes in market prices. Thus, these equity securities are not subject to equity price risk normally associated with public equity markets. At October 31, 2006, and October 31, 2005 the Company was not subject to equity price risk normally associated with public equity markets, except to the extent that the private investment funds that the Company has invested in has, from time to time, interests in securities which may be publicly traded.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Registered Public Accounting Firm
Portfolios of Investments at October 31, 2006 and October 31, 2005
Statements of Assets and Liabilities at October 31, 2006 and October 31, 2005
Statements of Operations for the years ended October 31, 2006, October 31, 2005 and October 31, 2004
Statements of Changes in Net Assets for the years ended October 31, 2006, October 31, 2005 and October 31, 2004
Statements of Cash Flows for the years ended October 31, 2006, October 31, 2005 and October 31, 2004
Financial Highlights - Selected Per Share Data and Ratios for the years ended October 31, 2006, October 31, 2005, October 31, 2004, October 31, 2003 and October 31, 2002
Notes to Financial Statements
Note - All other schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or the notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Excelsior Private Equity Fund II, Inc.
We have audited the accompanying statements of assets and liabilities of Excelsior Private Equity Fund II, Inc. (the “Fund”), including the portfolio of investments, as of October 31, 2006 and 2005, and the related statements of operations, changes in net assets and its cash flows for each of the three years in the period ended October 31, 2006, and the financial highlights for each of the four years in the period ended October 31, 2006. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for the year ended October 31, 2002 were audited by other auditors whose report, dated December 17, 2002, expressed an unqualified opinion on such financial highlights.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2006 and 2005, by correspondence with the custodian and the management of the private investment funds. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1(a), the financial statements include investment securities valued at $25,002,261 and $ 31,886,805 as of October 31, 2006 and 2005, respectively, representing 50.79% and 69.81%, respectively, of net assets, whose values have been estimated by the Managing Investment Advisor, under the supervision of the Board of Directors, in the absence of readily ascertainable market values. We have reviewed the procedures used by the Managing Investment Adviser in preparing the valuations of investment securities and have inspected the underlying documentation, and in the circumstances we believe the procedures are reasonable and the documentation appropriate. However, in the case of those securities with no readily ascertainable market value, because of the inherent uncertainty of valuation, the Managing Investment Adviser’s estimate of values may differ significantly from the values that would have been used had a ready market existed for the securities and the differences could be material.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Excelsior Private Equity Fund II, Inc. as of October 31, 2006 and 2005, the results of its operations, the changes in its net assets and its cash flows for each of the three years in the period ended October 31, 2006, and the financial highlights for each of the four years in the period ended October 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
December 21, 2006
New York, NY
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments at October 31, 2006
Notes to Financial Statements are an integral part of these Financial Statements
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments at October 31, 2006 - (continued)
 At October 31, 2006, the Company owned 5% or more of the company’s outstanding voting shares thereby making the company an affiliate as defined by the Investment Company Act of 1940, as amended. Total market value of affiliated securities owned at October 31, 2006 was $6,231,109.
# Restricted as to public resale. Acquired between March 1998 and July, 2006. Total cost of restricted securities at October 31, 2006 aggregated $41,785,506. Total market value of restricted securities owned at October 31, 2006 was $25,002,261 or 50.79% of net assets.
* Contributions paid in advance remaining as of 10/31/06 (Broadview Capital Partners L.P. - $342,914, Mayfield X Annex - $87,500, Quad-C Partners V, L.P. - $716,565, Trinity Ventures VI, L.P. - $86,249).
@ Non-income producing security.
## Disclosure required for restricted securities.
Notes to Financial Statements are an integral part of these Financial Statements.
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments at October 31, 2005
Notes to Financial Statements are an integral part of these Financial Statements
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments at October 31, 2005-(continued)
 At October 31, 2005, the Company owned 5% or more of the company’s outstanding voting shares thereby making the company an affiliate as defined by the Investment Company Act of 1940, as amended. Total market value of affiliated securities owned at October 31, 2005 was $6,660,038.
# Restricted as to public resale. Acquired between March 1998 and July, 2003. Total cost of restricted securities at October 31, 2005 aggregated $49,651,424. Total value of restricted securities owned at October 31, 2005 was $31,886,805 or 69.81% of net assets.
@ Non-income producing security.
## Disclosure required for restricted securities.
Notes to Financial Statements are an integral part of these Financial Statements.
Excelsior Private Equity Fund II, Inc.
Statements of Assets and Liabilities
Notes to Financial Statements are an integral part of these Financial Statements.
Excelsior Private Equity Fund II, Inc.
Statements of Operations
Notes to Financial Statements are an integral part of these Financial Statements.
Excelsior Private Equity Fund II, Inc.
Statements of Changes in Net Assets
Notes to Financial Statements are an integral part of these Financial Statements.
Excelsior Private Equity Fund II, Inc.
Statements of Cash Flows
Notes to Financial Statements are an integral part of these Financial Statements.
Excelsior Private Equity Fund II, Inc.
Financial Highlights - Selected Per Share Data and Ratios
Per Share Operating Performance (1)
(1) For a share outstanding throughout each year.
(2) Total net asset value return based on per share net asset value reflects the effects of changes in net asset value based on the performance of the Company during the year, and assumes dividends and distributions, if any, were reinvested. The Company’s shares are not traded. Therefore, market value total investment return is not presented.
(3) Expense ratio before waiver of fees and reimbursement of expenses by the Managing Investment Adviser.
(4) Income and expense ratios do not reflect the Company’s proportionate share of net investment income (loss) and expenses, including any performance-based fees, of the Private Investment Funds.
Notes to Financial Statements are an integral part of these Financial Statements.
EXCELSIOR PRIVATE EQUITY FUND II, INC.
NOTES TO FINANCIAL STATEMENTS
October 31, 2006
Note 1 - Significant Accounting Policies
Excelsior Private Equity Fund II, Inc. (the "Company") was incorporated under the laws of the State of Maryland on March 20, 1997, and is a non-diversified, closed-end management investment company that has elected to be treated as a business development company or "BDC" under the Investment Company Act of 1940, as amended.
As a BDC, the Company must be primarily engaged in the business of furnishing capital and making available managerial assistance to companies that generally do not have ready access to capital through conventional financial channels. The Company’s investment objective is to achieve long-term capital appreciation primarily by investing in private later-stage venture capital companies and private middle-market companies in which the equity is closely held by company founders, management and/or a limited number of institutional investors and, to a lesser extent, privately offered venture capital, buyout and private equity funds managed by third parties which have attractive investment return prospects and offer compelling strategic benefits to the Company. The Company does not have the right to demand any such investee securities be registered.
The following is a summary of the Company’s significant accounting policies. Such policies are in conformity with generally accepted accounting principles in the United States for investment companies and are consistently followed in the preparation of the financial statements. Generally accepted accounting principles in the United States require management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from these estimates.
(a) Portfolio valuation:
The Company values portfolio securities quarterly and at such other times as, in the Company’s Board of Directors’ (the “Board” or “Board of Directors”) view, circumstances warrant. Investments in securities for which market quotations are readily available generally will be valued at the last sale price on the date of valuation or, if no sale occurred, at the mean of the latest bid and ask prices; provided that, as to such securities that may have legal, contractual or practical restrictions on transfer, a discount of 10% to 40% from the public market price will be applied. Securities for which no public market exists and other assets will be valued at fair value as determined in good faith by the Managing Investment Adviser (as defined below) or a committee of the Board of Directors or both under the supervision of the Board of Directors pursuant to certain valuation procedures summarized below. Securities having remaining maturities of 60 days or less from the date of purchase are valued at amortized cost.
The value for securities for which no public market exists is difficult to determine. Generally, such investments will be valued on a “going concern” basis without giving effect to any disposition costs. There is a range of values that is reasonable for such investments at any particular time. Initially, direct investments are valued based upon their original cost, until developments provide a sufficient basis for use of a valuation other than cost. Upon the occurrence of developments providing a sufficient basis for a change in valuation, direct investments will be valued by the “private market” or “appraisal” methods of valuation. The private market method shall only be used with respect to reliable third party transactions by sophisticated, independent investors. The appraisal method shall be based upon such factors affecting the investee such as earnings, net worth, reliable private sale prices of the investee’s securities, the market prices for similar securities of comparable companies, an assessment of the investee’s future prospects or, if appropriate, liquidation value. The values for the investments referred to in this paragraph will be estimated regularly by the Managing Investment Adviser (as defined below) or a committee of the Board of Directors under the supervision of the Board of Directors and, in any event, not less frequently than quarterly. However, there can be no assurance that such values will represent the return that might ultimately be realized by the Company from the investments.
The valuation of the Company’s Private Investment Funds is based upon its pro-rata share of the value of the net assets of a Private Investment Fund as determined by such Private Investment Fund, in accordance with its partnership agreement, constitutional or other documents governing such valuation, on the valuation date. If such valuation with respect to the Company’s investments in Private Investment Funds is not available by reason of timing or other event on the valuation date, or are deemed to be unreliable by the Managing Investment Adviser, the Managing Investment Adviser, under the supervision of the Board of Directors, shall determine such value based on its judgment of fair value
on the appropriate date, less applicable charges, if any. The valuation of the Company’s Private Investment Funds also includes contributions to such Private Investment Funds made in advance of remaining capital commitments being called by the Private Investment Funds’ respective general partners. At October 31, 2006 and 2005, these contributions paid in advanced totaled $1,233,228 and $1,554,432 respectively, are included in investments in the statement of assets and liabilities. These contributions paid in advance are non-income producing.
At October 31, 2006 and 2005, market quotations were not readily available for the Company’s securities valued at $25,002,261 or 50.79% and $31,886,805 or 69.81%, respectively, of the Company’s net assets. Such securities were valued by the Managing Investment Adviser under the supervision of the Board of Directors. Because of the inherent uncertainty of valuation, the estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material.
(b) Security transactions and investment income:
Security transactions are recorded on a trade date basis. Realized gains and losses on investments sold are recorded on the basis of identified cost. Interest income, adjusted for amortization of premiums and discounts on investments, is earned from settlement date and is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date.
(c) Repurchase agreements:
The Company may enter into agreements to purchase securities and to resell them at a future date. It is the Company’s policy to take receipt of securities purchased and to ensure that the market value of the collateral including accrued interest is sufficient to protect the Company from losses incurred in the event the counterparty does not repurchase the securities. If the counterparty defaults and the value of the collateral declines or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Company may be delayed or limited.
(d) Federal income taxes:
It is the policy of the Company to continue to qualify as a “regulated investment company” under Subchapter M of the Internal Revenue Code and distribute substantially all of its taxable income to its shareholders. Therefore, no federal income or excise tax provision is required.
Dividends from net investment income are declared and paid at least annually. Any net realized capital gains, unless offset by any available capital loss carryforwards, are distributed to shareholders at least annually subject to certain limitations imposed by complying with the provisions of Subchapter M of the Internal Revenue Code. Dividends and distributions are determined in accordance with federal income tax regulations that may differ from generally accepted accounting principles. These “book/tax” differences are either considered temporary or permanent and may be reclassified within the capital accounts based on their federal tax basis treatment.
At October 31, 2006 and October 31,2005, the Company has undistributed income of $622,658 and $608,241on a tax basis.
As of October 31, 2006, the Company has unused capital loss carryforwards of approximately $57,037,828 available for income tax purposes, to be applied against future net realized gains, if any, after October 31, 2006. If not applied, $8,378,322 of the carryover will expire in 2009, $13,721,422 will expire in 2010, $18,471,137 will expire in 2011, $5,855,841will expire in 2012 and $10,611,106 will expire in 2013. And as of October 31,2005 the Company has unused capital loss carryforwards of approximately $56,647,188 available for income tax purposes, to be applied against future net realized gains, if any, after October 31, 2005. If not applied, $8,602,181 of the carryover will expire in 2009, $13,721,421 will expire in 2010, $18,471,137 will expire in 2011, $5,855,841will expire in 2012 and $9,996,608 will expire in 2013.
The tax character of distributions paid during the fiscal years ended October 31, 2006,2005 and 2004 were as follows:
The cost of the Private Investment Funds for federal tax purposes is based on amounts reported to the Company on Schedule K-1 from the Private Investment Funds. As of October 31, 2006, the Company has not received information to determine the tax cost of the Private Investment Funds as of October 31, 2006. At December 31, 2005 and 2004 respectively, the Private Investment Funds had a cost basis for tax purposes of $20,621,007 and $28,912,715. Based on the values of the Private Investment Funds at October 31, 2006 and after adjustment for purchases and sales between December 31, 2005 and October 31, 2006, this results in net appreciation of $6,469,353. The cost of all other investments for federal tax purposes for October 31, 2006, is $36,421,281 and those investments had a tax basis net unrealized depreciation of $5,207,435. The cost of investments other than Private Investment Funds for federal tax purposes at October 31, 2005, was $25,315,066 and those investments had a tax basis net of unrealized depreciation of $1,581,687, consisting of gross appreciation of $13 and gross depreciation of $1,581,700. There is no appreciation or depreciation for tax purposes on the Money Market Instruments or Investment Companies.
Note 2 - Investment Advisory Fee, Administration Fee and Related Party Transactions
UST Advisers, Inc. (“USTA”), which has its principal offices at 225 High Ridge Road, Stamford, Connecticut 06905, is a Delaware corporation and registered investment adviser (the “Managing Investment Adviser”). The Managing Investment Adviser is a wholly-owned subsidiary of United States Trust Company, National Association (“USTC-NA”). USTC-NA is a wholly-owned subsidiary of U.S. Trust Corporation (“U.S. Trust”), a registered financial holding company, which has its principal offices at 114 West 47th Street, New York, New York 10036-1532, and which is, in turn, a wholly-owned subsidiary of The Charles Schwab Corporation (“Schwab”), which has its principal offices at 120 Kearney Street, San Francisco, California 94108.
Prior to December 16, 2005, United States Trust Company of New York, acting through its registered investment advisory division, New York Asset Management Division (“NYAMD”), and U.S. Trust Company, N.A., acting through its registered investment advisory division, U. S. Trust Asset Management Division (“USTAMD”), served as co-investment advisers (together the “former Managing Investment Adviser”) to the Company under a management agreement with the Company (the “Agreement”). Effective December 16, 2005, USTA assumed the duties of NYAMD and USTAMD under the Agreement pursuant to an assumption agreement. Prior to March 31, 2006, USTA was a wholly owned subsidiary of U.S. Trust Company, N.A. (“UST-NA”) and UST-NA and United States Trust Company of New York were wholly-owned subsidiaries of U.S. Trust. Effective March 31, 2006, United States Trust Company of New York converted into a national bank named United States Trust Company, National Association (USTC-NA) and U.S. Trust Company, N.A. merged into USTC-NA. USTC-NA is the surviving entity and remains a wholly-owned subsidiary of U.S. Trust. “See Note 9.”
Under the Agreement, for the services provided, the Managing Investment Adviser is entitled to receive a management fee at the annual rate of 1.50% of the net assets of the Company, determined as of the end of each calendar quarter, that are invested or committed to be invested in Private Companies or Private Investment Funds and equal to an annual rate of 0.50% of the net assets of the Company, determined as of the end of each calendar quarter, that are invested in short-term investments and are not committed to Private Companies or Private Investment Funds. As of October 31, 2006 and 2005, $124,418 and $138,793, respectively, was payable to the Managing Investment Adviser.
In addition to the management fee, the Company has agreed to pay the Managing Investment Adviser an incentive fee in an amount equal to 20% of the cumulative realized capital gains (net of realized capital losses and unrealized capital depreciation) on investments other than Private Investment Funds, less the aggregate amount of incentive fee
payments in prior years. If the amount of the incentive fee in any year is a negative number, or cumulative net realized gains less unrealized capital depreciation at the end of any year is less than such amount calculated at the end of the previous year, the Managing Investment Adviser will be required to repay the Company all or a portion of the incentive fee previously paid. As of, and for the year ended October 31, 2006,2005 and 2004, no incentive fee was earned by the Managing Investment Adviser.
PFPC, Inc., a majority-owned subsidiary of The PNC Financial Services Group, (“PFPC”) provides administrative and accounting services to the Company pursuant to an Administration and Accounting Services Agreement. PFPC Trust Company provides custodian services to the Company pursuant to a Custodian Services Agreement. Also, PFPC provides transfer agency services to the Company pursuant to a Transfer Agency Agreement. For the services provided to the Company by PFPC and its affiliates, PFPC is entitled to an annual fee of 0.02% of average net assets plus reimbursement of reasonable expenses, and a base fee, payable monthly of $7,000. Administration fees for the years ended October 31, 2006, 2005 and 2004 amounted to $97,750, $100,074 and $121,304, respectively, of which $15,086, $17,885 and $25,236 was payable at October 31, 2006, 2005 and 2004, respectively.
The Managing Investment Adviser has voluntarily agreed to waive or reimburse other operating expenses of the Company, exclusive of management fees, to the extent they exceed 0.25% of the Company’s average net assets. This reimbursement amounted to $498,117, $349,580 and $223,870 for the years ended October 31, 2006, 2005 and 2004, respectively, which includes a receivable to the Company of $193,634, $83,214 and $52,122 as of October 31, 2006, 2005 and 2004, respectively.
Each member of the Board of Directors receives a $10,000 annual retainer and the Chairman of the Board receives an additional $1,000 annual retainer. Also, each member of the Board of Directors will receive $2,000 per quarterly meeting attended. In addition each Board member will receive $500 per quarterly telephonic meeting and $500 for any other telephonic special meeting. For each audit committee meeting attended, Board members will receive $1,500, while the Chairman of the Audit Committee will receive an additional $1,000 retainer. Each member of the Board is reimbursed for expenses incurred for attending meetings. No person who is an officer, manager or employee of the U.S. Trust, or its subsidiaries, who serves as an officer, manager or employee of the Company receives any compensation from the Company. For the year ended October 31, 2006, 2005 and 2004 the Board of Directors’ fees totaled $110,500, $60,000 and $66,000 of which $22,000, $1,500 and $66,000 was payable at October 31, 2006, 2005 and 2004, respectively.
On November 23, 2004, the Company engaged Deloitte & Touche, LLP (“D&T”) as the Company’s Independent Registered Public Accounting Firm for the fiscal year ended October 31, 2004, replacing Ernst & Young LLP (“E&Y”), the Company’s prior independent public accountants. E&Y was terminated by the Company on October 28, 2004 as a result of concerns regarding their independence at the time of issuance of their report on the Company’s October 31, 2003 financial statements. These concerns are the result of certain real estate consulting services performed by E&Y on a contingent fee basis for Charles Schwab & Co., Inc., an affiliate of the Company’s Managing Investment Adviser.
On December 16, 2004, Schwab entered into an agreement with the Company and other funds managed by the former Managing Investment Adviser whereby Schwab has funded a reserve account to be held by the Managing Investment Adviser or its affiliate. This reserve account was established so that the Company and other funds managed by the Managing Investment Adviser will be able to draw upon it to pay in full all costs incurred related to the termination of E&Y. This agreement was executed in order to ensure that these costs related to the termination of E&Y are not borne by the Company, the other funds managed by the Managing Investment Adviser or their respective shareholders. Schwab is an affiliate of the Company’s Managing Investment Adviser. In consideration of the funding of the reserve account, the Company and the other funds managed by the Managing Investment Adviser subrogated all of their claims, causes of action and rights against E&Y for payment of these expenses to Schwab.
Note 3 - Purchases and Sales of Securities
Excluding short-term investments, the Company had $307,504 in purchases and $10,429,529 in proceeds of sales of securities for the year ended October 31, 2006. For years ended October 31, 2005 and October 31, 2004 the amount of purchases were $0 and $0, respectively, and the amount of sales were $12,453,886 and $3,334,000, respectively.
Note 4 - Transactions with Affiliated Portfolio Companies
An affiliated company is a company in which the Company has ownership of over 5% of the voting securities. No dividend income was received from affiliated companies during the year ended October 31, 2006 and 2005. Transactions with companies, which are or were affiliates are as follows:
Note that, although Mosaica Education, Inc. was an affiliated company in prior fiscal years, as of October 31, 2005 the Company holds less than 5% of its shares. Therefore, Mosaica Education, Inc. is not included as an affiliated company on the October 31, 2005 schedule of investments or statement of assets and liabilities, and interest earned on Mosaica Education Inc. notes is not presented as interest income from affiliates on the October 31, 2005 statement of operations.
Note 5 - Pending Litigation
The former Managing Investment Adviser was contacted in September 2003 by the Office of the New York State Attorney General (the “NYAG”), and the Securities and Exchange Commission (the “SEC”) in connection with their investigations of practices in the mutual fund industry identified as “market timing” and “late trading” of mutual fund shares (the “Investigations”). The former Managing Investment Adviser has provided full cooperation with respect to these Investigations and continues to review the facts and circumstances relevant to the Investigations. As disclosed previously, these investigations focused on circumstances in which a small number of parties were permitted to engage in short-term trading of shares of certain mutual funds managed by the former Managing Investment Adviser. The short-term trading activities permitted under these arrangements have been terminated and the former Managing Investment Adviser has strengthened its policies and procedures to deter frequent trading.
The former Managing Investment Adviser, certain of its affiliates and others have also been named in four class action lawsuits and two derivative actions which allege that the former Managing Investment Adviser, certain of its affiliates and others allowed certain parties to engage in illegal and improper mutual fund trading practices, which allegedly caused financial injury to the shareholders of certain mutual funds managed by the former Managing Investment Adviser. Each seeks unspecified monetary damages and related equitable relief.
The class and derivative actions described above were transferred to the United States District Court for the District of Maryland for coordinated and consolidated pre-trial proceedings. In November 2005, the Maryland court dismissed many of the plaintiffs’ claims in both the fund shareholder class action and derivative lawsuits. Several affiliates of the former Managing Investment Adviser and individual defendants have also been dismissed. Plaintiffs’ claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and under Section 36(b) and 48(a) of the Investment Company Act of 1940, as amended, however, have not been dismissed. Discovery has commenced with respect to plaintiffs’ remaining claims.
While the ultimate outcome of these matters cannot be predicted with any certainty at this time, based on currently available information and consultation with counsel, the Managing Investment Adviser believes that the pending Investigations and private lawsuits are not likely to materially affect the Managing Investment Adviser’s ability to provide investment management services to the Company. Neither the Managing Investment Adviser nor the Company are a subject of the Investigations nor a party to the lawsuits described above.
Note 6 - Guarantees
In the normal course of business, the Company enters into contracts that provide general indemnifications. The Company’s maximum exposure under these agreements is dependent on future claims that may be made against the Company, and therefore cannot be established; however, based on experience, the risk of loss from such claims is considered remote.
Note 7 - New Accounting Pronouncement
In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position must meet before being recognized in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is in the process of evaluating the effects of the adoption of FIN 48 on the financial statements.
FASB issued a Statement No. 157 in September 2006, Fair Value Measurements, which is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. This statement provides enhanced guidance for using fair value to measure assets and liabilities. It clarifies fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. The company is reviewing the statement and its impact on the financial statements.
Note 8 - Liquidity and Potential Sale Transaction
In September 2006, the Company commenced a process which may result in the sale of substantially all its assets (a “Potential Sale Transaction”). There is no assurance that the Company will enter into a Potential Sale Transaction, or if such transaction does occur, what the proceeds will be or the timing of the consummation of a Potential Sale Transaction. Any such transaction would be subject to the approval of the Board of Directors and shareholders of the Company.
Note 9 - Subsequent Event
On November 20, 2006, Schwab announced an agreement to sell U.S. Trust, a wholly-owned subsidiary of Schwab, to the Bank of America Corporation (the “Sale”). The Sale of U.S. Trust includes all of U.S. Trust’s subsidiaries, including UST Advisers, Inc., the Company’s Managing Investment Adviser. The Sale is subject to Federal Reserve Board and other regulatory approvals.
UST Advisers, Inc. will continue to serve as the Managing Investment Adviser to the Company after the Sale. However, due to the change in ownership of the UST Advisers, Inc., the Sale may have the effect of terminating the existing investment advisory agreement between the Company and UST Advisers, Inc. Accordingly, it is anticipated that UST Advisers, Inc. will enter into a new investment advisory agreement with the Company upon consummation of the Sale (the “New Advisory Agreement”). It is anticipated the New Advisory Agreement will be subject to the approval of the Board of Directors and the shareholders of the Company. The proposed New Advisory Agreement will be submitted to the shareholders of the Company for approval late in the first quarter or early in the second quarter of 2007. A proxy statement is expected to be mailed to the shareholders of the Company in the first quarter of 2007 that will provide further details with respect to the Sale and the proposed New Advisory Agreement.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There has been a change in the Company’s independent registered public accounting firm (see Note 2 to the financial statements), however there were no disagreements or reportable events.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. As of October 31, 2006 (the end of the period covered by this report), the Company's principal executive officers and principal financial officer evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and have concluded that, based on such evaluation, the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company was made known to them by others within those entities.
(b) Changes in Internal Controls. There were no significant changes in the Company's internal controls over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in the Company's internal controls over financial reporting. Accordingly, no corrective actions were required or undertaken.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below are names, ages, positions and certain other information concerning the current directors and certain officers of the Company as of October 31, 2006.
Name, Address and Age
Position(s) Held
with the
Company
Term of Office
and Length of
Time Served
Principal Occupation During Past Five Years
Number of
Portfolios
in Fund
Complex*
Overseen
by Director
Disinterested Directors
Mr. Gene M. Bernstein, 59
United States Trust
Company, National
Association
114 West 47th Street
New York, NY 10036
Director and
Member of
the Audit
and Valuation
Committees
Annual
Terms since
December 1,
Mr. Bernstein is Director of NIC Holding Corp. He was Dean of the Skodneck Business Development Center at Hofstra University from 2000-2001. Prior to that, Mr. Bernstein was President and Vice Chairman at Northville Industries, a petroleum marketing, distribution, trading and storage company and wholly-owned subsidiary of NIC Holding Corp. Mr. Bernstein also serves as a director or manager of Excelsior Private Equity Fund II, Inc., Excelsior Venture Investors III, LLC, Excelsior Venture Partners III, LLC and Excelsior Directional Hedge Fund of Funds, LLC.
Mr. Victor F. Imbimbo, 54 United States Trust
Company, National
Association
114 West 47th Street
New York, NY 10036
Director and
Member of
the Audit
and Valuation
Committees
Annual
Terms since
April 6,
Mr. Imbimbo is the President and CEO of Caring Today, LLC., the publisher of Caring Today Magazine, the leading information resource within the family caregivers market. Prior to this, Mr. Imbimbo, was Executive Vice President of TBWA\New York and President for North America with TBWA/WorldHealth, a division of TBWA Worldwide where he directed consumer marketing program development for healthcare companies primarily within the pharmaceutical industry. Mr. Imbimbo serves as a director or manager of Excelsior Private Equity Fund II, Inc., Excelsior Venture Partners III, LLC, Excelsior Venture Investors III, LLC and Excelsior Directional Hedge Fund of Funds, LLC. Mr. Imbimbo is a Board member for Vertical Branding, Inc, a public company specializing in direct response branding and marketing.
Mr. Stephen V. Murphy, 61 United States Trust
Company, National
Association
114 West 47th Street
New York, NY 10036
Director and
Member of
the Audit
and Valuation
Committees
Annual
Terms since
December 1,
Mr. Murphy is President of S.V. Murphy & Co., an investment banking firm. Mr. Murphy serves as a director or manager of Excelsior Private Equity Fund II, Inc., Excelsior Venture Partners III, LLC, Excelsior Venture Investors III, LLC and Excelsior Directional Hedge Fund of Funds, LLC. He also serves on the board of directors of The First of Long Island Corporation, The First National Bank of Long Island and Bowne & Co., Inc.
Interested Director
Mr. John C. Hover II, 63**
United States Trust Company, National Association
114 West 47th Street
New York, NY 10036
Director and Chairman of the Board
Annual
terms since
December 9,
Mr. Hover was an Executive Vice President of U.S. Trust Company (retired since 1998). Mr. Hover serves as chairman of the board of directors or managers of Excelsior Private Equity Fund II, Inc., Excelsior Venture Partners III, LLC and Excelsior Venture Investors III, LLC. He also serves on the board of directors of Tweedy, Browne Fund, Inc.
* The “Fund Complex” consists of Excelsior Private Equity Fund II, Inc., Excelsior Venture Partners III, LLC, Excelsior Venture Investors III, LLC and Excelsior Directional Hedge Fund of Funds, LLC.
** Mr. Hover is considered an “interested person”, as defined by the Investment Company Act of 1940, as amended, of the Company due to the fact that he holds securities of The Charles Schwab Corporation, a parent company of the Managing Investment Adviser.
Officers
All officers of the Company are employees and/or officers of the Managing Investment Adviser.
Officers of the Company are elected by the directors and hold office until they resign, are removed or are otherwise disqualified to serve.
* On December 7, 2006, Mr. Grohowski resigned as the Company’s Co-Chief Executive Officer. On December 7, 2006, David Bailin was appointed by the Board of Directors to be the Company’s Co-Chief Executive Officer.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the captions "Election of Directors" and "Additional Information-Officers" in the Company's definitive Proxy Statement for the 2006 Annual Meeting of Stockholders to be held on March 15, 2007, which will be filed with the Securities and Exchange Commission not later than 120 days after October 31, 2006, is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" appearing in the Company's definitive Proxy Statement for the 2007 Annual Meeting of Stockholders to be held on March 15, 2007, which will be filed with the Securities and Exchange Commission not later than 120 days after October 31, 2006, is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
(a) The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years are $80,650 for 2005 and $101,000 for 2006.
Audit-Related Fees
(b) The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of this Item are $0 for 2005 and $0 for 2006.
Tax Fees
(c) The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning are $0 for 2005 and $0 for 2006.
All Other Fees
(d) The aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item are $0 for 2005 and $0 for 2006.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) 1. Financial Statements
The financial statements listed in Item 8, "Financial Statements and Supplementary Data," beginning on page 9 are filed as part of this report.
2. Financial Statement Schedules
The financial statement schedules listed in Item 8, "Financial Statements and Supplementary Data," beginning on page 9 are filed as part of this report.
3. Exhibits
Incorporated by reference to the Company's Registration Statement on Form N-2, (File No. 333-23811), filed with the Securities Exchange Commission on March 24, 1997.
Incorporated by reference to the Company's definitive Proxy Statement for the 2000 Annual Meeting of Shareholders, filed with the Securities and Exchange Commission on May 25, 2000.
Incorporated by reference to the Company's Registration Statement on Form N-2/A (File No. 333-23811), filed with the Securities and Exchange Commission on May 13, 1997.
Incorporated by reference to the Company's Quarterly Report on Form 10Q, as filed with the Securities and Exchange Commission on March 18, 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EXCELSIOR PRIVATE EQUITY FUND II, INC.
By:
/s/ David Bailin
Date: January 25, 2007
David Bailin
Co-Chief Executive Officer
(co-principal executive officer)
Date: January 25, 2007
By:
/s/ Raghav V. Nandagopal
Raghav V. Nandagopal
Co-Chief Executive Officer
(co-principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: