10-Q 1 bos233369.txt 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended January 31, 2002 --------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from _________________ to ____________________ Commission file number 000-24856 ----------- UST PRIVATE EQUITY INVESTORS FUND, INC. --------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) MARYLAND 13-3786385 --------------------------------------------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 114 West 47th Street, New York, NY 10036-1532 --------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (212) 852-1000 ------------------------ --------------------------------------------------------------------------- Former Name, Former Address and Former Fiscal Year, if Changed Since last Report. Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of January 31, 2002, there were 40,463 shares of the Registrant's Common Stock, $.01 par value per share, outstanding. UST PRIVATE EQUITY INVESTORS FUND, INC. This Quarterly Report on Form 10-Q contains historical information and forward-looking statements. Statements looking forward in time are included in this Form 10-Q pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. They involve known and unknown risks and uncertainties that may cause UST Private Equity Investors Fund, Inc.'s (the "Company's") actual results to differ from future performance suggested herein.

PART I. FINANCIAL INFORMATION Item 1. Financial Statements.

UST Private Equity Investors Fund, Inc. Notes to Financial Statements (Unaudited) Note 1 -- Significant Accounting Policies UST Private Equity Investors Fund, Inc. (the "Company") was incorporated under the laws of the State of Maryland on September 16, 1994, and is a non-diversified, closed-end management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940, as amended. The following is a summary of the Company's significant accounting policies. Such policies are in conformity with generally accepted accounting principles 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 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 under the supervision of the Board pursuant to certain valuation procedures summarized below. Securities having remaining maturities of 60 days or less 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" method 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 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. At January 31, 2002, market quotations were not readily available for securities valued at $8,382,533. 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 enters into agreements to purchase securities and to resell them at a future date. It is the Company's policy to take custody 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 seller 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. Dividends and distributions are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent. To the extent these differences are permanent, such amounts are reclassified within the capital accounts based on their federal tax basis treatment; temporary differences do not require reclassification. During the current period, permanent differences, primarily due to net operating losses, resulted in increases in undistributed net investment income and accumulated net realized gain on investments and a corresponding decrease in additional paid-in capital. The reclassification had no effect on net assets. The Company has an unused capital loss carryforward of $2,261,586 available for income tax purposes, to be applied against future net security profits, if any, realized after January 31, 2002. If not applied, the carryover expires in fiscal year 2009. At January 31, 2002, the tax basis of the Company's investments for federal income tax purposes amounted to $12,684,285. The net unrealized depreciation amounted to $1,188,024, which is comprised of gross unrealized appreciation of $2,767,363 and aggregate gross unrealized depreciation of $3,955,387. (e) Cash Equivalents The Company treats all highly-liquid financial instruments that mature within three months as cash equivalents. Note 2-- Investment Advisory Fee, Administration Fee and Related Party Transactions Pursuant to an Investment Management Agreement ("Agreement"), United States Trust Company of New York ("U.S. Trust NY") and U.S. Trust Company ("U.S. Trust") serve as the Managing Investment Adviser to the Company. 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 fiscal quarter, that are invested or committed to be invested in portfolio companies or private funds and equal to an annual rate of 0.50% of the net assets of the Company, determined as of the end of each fiscal quarter, that are invested in short-term investments and are not committed to portfolio companies or private funds. In addition to the management fee, the Company has agreed to pay the Managing Investment Adviser an incentive fee in an amount equal to 10% of the cumulative realized capital gains (net of realized capital losses and unrealized net capital depreciation), 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 net 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. On December 20, 2001, the Board (including a majority of the directors that are not interested persons of the Company) approved an Investment Sub-Advisory Agreement (the "Sub-Advisory Agreement") among the Company, U.S. Trust NY, U.S. Trust and U.S. Trust Company, N.A. Pursuant to the Sub-Advisory Agreement, U.S. Trust Company, N.A., serves as the investment sub-adviser to the Company and receives an investment management fee from the Managing Investment Adviser. U.S. Trust NY is a New York state-chartered bank and trust company and a member bank of the Federal Reserve System. U.S. Trust is a Connecticut state bank and trust company. U.S. Trust Company, N.A. is a nationally chartered bank. Each is a wholly-owned subsidiary of U.S. Trust Corporation, a registered bank holding company. U.S. Trust Corporation is a wholly-owned subsidiary of The Charles Schwab Corporation. Beginning January 1, 2002, PFPC, Inc. ("PFPC") began providing administrative and accounting services to the Company pursuant to an Administration and Accounting Services Agreement. Also beginning January 1, 2002, PFPC Trust Company began providing custodian services to the Company pursuant to a Custodian Services Agreement. Beginning February 1, 2002, PFPC began providing 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, subject to a $14,000 base fee, payable monthly. 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 0.42% of the Company's net assets, and will waive or reimburse, exclusive of management fees, all such expenses with respect to that portion of the Company's net assets, determined as of the end of each fiscal quarter, that is invested in short-term investments. Each director of the Company receives an annual fee of $9,000, plus a meeting fee of $1,500 for each meeting attended, and is reimbursed for expenses incurred for attending meetings. No person who is an officer, director or employee of the Managing Investment Adviser, or U.S. Trust Corporation or its subsidiaries, who serves as an officer, director or employee of the Company receives any compensation from the Company. Note 3 -- Purchases and Sales of Securities Excluding short-term investments, the Company's purchases and sales of securities for the three-month period ended January 31, 2002 were $0 and $423,680 respectively. Note 4 -- Transactions with Affiliated Companies An affiliated company is a company in which the Company has ownership of at least 5% of the voting securities. The Company did not receive dividend or interest income from affiliated companies during the three-month period ended January 31, 2002. There were no transactions with companies which are or were affiliates during the period. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations --------------------- Three-Month Period Ended January 31, 2002 as Compared to the Similar Period in 2001 The Company's net asset value per common share was $284.37 at January 31, 2002, down $64.97 per share from the net asset value per common share of $349.34 at October 31, 2001. This decrease is principally the result of a return of capital distribution of $2,905,629 ($71.81 per share) paid to shareholders on January 7, 2002. The Company's net asset value per common share was $510.15 at January 31, 2001, down $267.57 per share from the net asset value per common share of $777.72 at October 31, 2000. Realized and Unrealized Gains and Losses from Portfolio Investments ------------------------------------------------------------------- For the three-month periods ended January 31, 2002 and 2001, the Company had a net realized gain/(loss) on security transactions of ($2,550,001) and $89,693, respectively. For the three-month periods ended January 31, 2002 and 2001, the Company had a net change in unrealized appreciation/(depreciation) on investments of $2,888,257 and ($4,336,885), respectively. The change in unrealized depreciation was principally the result of a reclassification from unrealized depreciation to realized loss. The realized loss was the result of the conclusion of the bankruptcy proceeding related to AbTox, Inc. Investment Income and Expenses ------------------------------ For the three-month period ended January 31, 2002, the Company had interest income of $15,293 and net operating expenses, net of expenses reimbursed by the Managing Investment Adviser (as defined below), of $42,974, resulting in net investment loss of ($27,681) as compared to interest income of $83,958 and net operating expenses, net of expenses reimbursed by the Managing Investment Adviser, of $94,478 resulting in net investment loss of $10,520 for the three-month period ended January 31, 2001. The primary reason for the decrease in interest income was a decrease in assets invested in short-term instruments. United States Trust Company of New York and U.S. Trust Company (together, the "Managing Investment Adviser") provide 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. Such management fee is determined and payable quarterly. For the three-month periods ended January 31, 2002 and 2001, the Managing Investment Adviser earned $40,272 and $74,237 in management fees, respectively. In addition, for the three-month periods ended January 31, 2002 and 2001, the change in allowance for the management incentive fee was ($33,826) (an increase in accumulated management incentive fees) and $424,719 (a decrease in accumulated management incentive fees), respectively. For the same periods, the Managing Investment Adviser reimbursed other operating expenses of the Company in the amounts of $68,846 and $53,127, respectively, as a result of expenses incurred in excess of those permitted pursuant to the Company's prospectus. Net Assets ---------- At January 31, 2002, the Company's net assets were $11,506,595, a decrease of $2,628,880 from net assets of $14,135,475 at October 31, 2001. The Company's net assets at January 31, 2001 were $20,642,037, down $10,826,795 from net assets of $31,468,832 at October 31, 2000. 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 of marketable securities pending distribution to shareholders. The Company made no follow-on investments in the three-month period ended January 31, 2002. At January 31, 2002, the Company held $0 in cash and $11,496,261 in investments as compared to $16,232 in cash and $13,553,675 in investments at October 31, 2001. These changes from October 31, 2001 were primarily the result of a return of capital distribution of $2,905,629, or $71.81 per share, made to shareholders on January 7, 2002. As of January 31, 2002, the Company has contributed all of its aggregate capital commitments to private funds, a total of $12 million. Item 3. Quantitative and Qualitative Disclosures about Market Risk. Equity Price Risk A majority of the Company's investment portfolio consists of equity securities in private companies and private investment funds 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. Nevertheless, the Company is exposed to equity price risk through its investments in the equity securities of two public companies. At January 31, 2002, these publicly traded equity securities were valued at $2,071,367. Thus, there is exposure to equity price risk, estimated as the potential loss in fair value due to a hypothetical 10% decrease in quoted market prices, of approximately a $218,911 decrease in the value of these securities. At October 31, 2001, publicly traded equity securities were valued at $1,733,075 and there was exposure to equity price risk of approximately a $185,083 decrease in the value of those securities. The change during the period was the principally the result of appreciation in the price of shares of LogicVision, Inc. (NASDAQ: LGVN) and QuickLogic Corp. (NASDAQ: QUIK), each a publicly traded equity security. PART II. OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Changes in Securities and Use of Proceeds. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. On December 20, 2001, the Board (including a majority of the directors that are not interested persons of the Company) approved an Investment Sub-Advisory Agreement (the "Sub-Advisory Agreement") among the Company, United States Trust Company of New York, U.S. Trust Company and U.S. Trust Company, N.A. Pursuant to the Sub-Advisory Agreement, U.S. Trust Company, N.A., serves as the investment sub-adviser to the Company and receives an investment management fee from the Managing Investment Adviser. Beginning January 1, 2002, PFPC, Inc. ("PFPC") began providing administrative and accounting services to the Company pursuant to an Administration and Accounting Services Agreement. Also beginning January 1, 2002, PFPC Trust Company began providing custodian services to the Company pursuant to a Custodian Services Agreement. Beginning February 1, 2002, PFPC began providing 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, subject to a $14,000 base fee, payable monthly. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. (10.1) Form of Investment Sub-Advisory Agreement among the Company, United States Trust Company of New York, U.S. Trust Company and U.S. Trust Company, N.A. (10.2) Form of Administration and Accounting Services Agreement between the Company and PFPC Inc. (10.3) Form of Custodian Services Agreement between the Company and PFPC Trust Company. (10.4) Form of Transfer Agency Services Agreement between the Company and PFPC Inc. (b) Reports on Form 8-K. None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UST PRIVATE EQUITY INVESTORS FUND, INC. Date: March 14, 2002 By: /s/ David I. Fann ----------------------------------- David I. Fann (Principal Executive Officer) Date: March 14, 2002 By: /s/ Brian F. Schmidt ----------------------------------- Brian F. Schmidt (Principal Financial and Accounting Officer)

UST PRIVATE EQUITY INVESTORS FUND INC 10-Q