FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the year ended October 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (no fee required)
Commission File Number 000-28405
MEVC DRAPER FISHER JURVETSON FUND I, INC.
(Exact name of the registrant as specified in its charter)
DELAWARE 94-3346760
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
991 Folsom Street
San Francisco, California 94107-1020
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (877) 474-6382
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Approximate aggregate market value of common stock held by non-affiliates of the
registrant: $165,850,547, computed on the basis of $10.06 per share, closing
price of the common stock on the New York Stock Exchange on December 18, 2001.
For purposes of calculating this amount only, all directors and executive
officers of the registrant have been treated as affiliates. There were
16,500,000 shares of the registrant's common stock, $.01 par value, outstanding
as of December 18, 2001. The net asset value of a share at October 31, 2001 was
$15.42.
meVC Draper Fisher Jurvetson Fund I, Inc.
(A Delaware Corporation)
Index
Part I Page
Item 1. Business................................................... 1
Item 2. Properties................................................. 13
Item 3. Legal Proceedings.......................................... 13
Item 4. Submission of Matters to a Vote of Security Holders........ 13
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 14
Item 6. Selected Financial Data.................................... 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 15
Item 7A. Quantitative and Qualitative Disclosure about
Market Risk............................................... 18
Item 8. Financial Statements and Supplementary Data................ 19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures....................... 40
Part III
Item 10. Directors and Executive Officers of the Registrant......... 40
Item 11. Executive Compensation..................................... 42
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................ 42
Item 13. Certain Relationships and Related Transactions............. 43
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K....................................... 44
SIGNATURE................................................................. 45
Part I
Item 1. Business
meVC Draper Fisher Jurvetson Fund I, Inc. (the "Fund") is a Delaware
Corporation that seeks to achieve capital appreciation principally by making
investments in equity and equity-oriented securities issued by privately-owned
companies in transactions negotiated directly with such companies ("Portfolio
Companies"). The Fund seeks to make venture capital investments in information
technology companies, primarily in the Internet, e-commerce, telecommunications,
networking, software and information services industries. The Fund's investments
in Portfolio Companies will consist principally of equity securities such as
common and preferred stock, but may also include other equity-oriented
securities such as debt convertible into common or preferred stock or debt
combined with warrants, options or other rights to acquire common or preferred
stock. Current income is not a significant factor in the selection of Portfolio
Company investments. The Fund has elected to be treated as a business
development company under the Investment Company Act of 1940, as amended ("the
Investment Company Act").
The Fund has five directors. Three of the directors are disinterested
individuals (the "Independent Directors") as defined by the Investment Company
Act. The directors are responsible for providing overall guidance and
supervision of the Fund, approving the valuation of the Fund's investments and
performing various duties imposed on directors of a business development company
by the Investment Company Act. Among other things, the Independent Directors
supervise the management arrangements for the Fund, the custody arrangements
with respect to portfolio securities, the selection of independent public
accountants, fidelity bonding and any transactions with affiliates.
The Fund has engaged meVC Advisers, Inc., a Delaware Corporation (the
"Adviser", "meVC Advisers"), to provide certain management and administrative
services necessary for the operation of the Fund. The Adviser is a wholly-owned
subsidiary of meVC.com, Inc., a Delaware Corporation ("meVC.com"). The largest
investor in meVC.com is the Draper Fisher Jurvetson Fund VI, L.P.
Subject to the supervision of the directors, the Adviser performs services
necessary for the operations of the Fund. Subject to the supervision of the
directors, the Adviser has arranged for third parties to perform the management,
administrative, investment sub-advisory and other services necessary for the
operations of the Fund. The Adviser has engaged Draper Fisher Jurvetson MeVC
Management Co., LLC, a Delaware Corporation (the "Sub-Adviser", "Draper
Advisers"), to identify, evaluate, structure, monitor, and dispose of the Fund's
investments in Portfolio Companies. The Adviser has engaged Fleet Investment
Advisors, Inc. (the "Short-Term Money Manager"), to manage the Fund's cash and
short-term, interest-bearing investments. The Adviser has engaged State Street
Bank and Trust Co, Inc. (the "Fund Administrator", the "Fund Accounting Agent",
the "Custodian"), to handle all functions of administration, accounting, and
custodial work necessary for the operations of the Fund. The Adviser provides
the Fund, at the Adviser's expense, with the office space, facilities, equipment
and personnel (whose salaries and benefits are paid by the Adviser) necessary to
enable the Fund to conduct the operational aspects of its business. The
Sub-Adviser provides the Fund, at the Sub-Adviser's expense, with the office
space, facilities, equipment and personnel (whose salaries and benefits are paid
by the Sub-Adviser) necessary to enable the Fund to conduct the investment
management aspects of its business.
The Adviser and its officers, the Sub-Adviser and its officers, and the
officers of the Fund are collectively referred to herein as "Management". The
Fund's principal office is located at 991 Folsom Street, San Francisco,
California 94107, and the telephone number is (877) 474-6382.
1
INVESTMENT PRACTICES
Substantially all of the net assets of the Fund are invested or are
intended to be invested in securities of Portfolio Companies. Substantially all
amounts not invested in securities of Portfolio Companies are invested in
short-term, highly liquid investments consisting of interest bearing
certificates of deposit or securities issued or guaranteed as to interest and
principal by the United States or by a person or entity controlled or supervised
by and acting as an instrumentality of the government of the United States that
have maturities of less than one year from the date of the investment or other
short-term, highly liquid investment providing, in the opinion of Management,
appropriate safety of principal.
The Fund's investments in Portfolio Companies are structured in private
transactions negotiated directly with the owner or issuer of the securities
acquired.
The Fund is concentrating its investment efforts on companies of a type and
size that, in Management's view, provide opportunities for significant capital
appreciation and prudent diversification of risk.
The Fund is attempting to reduce certain risks inherent in private
equity-oriented investments by investing in a portfolio of companies involved in
different sectors of the Information Technology industry. The Fund has limited
its initial investment (whether in the form of equity or debt securities,
commitments to purchase securities or debt guaranties) in any Portfolio Company
to no more than 5% of the Fund's net assets. However, if a follow-on investment
is available or required, as discussed below, the Fund's investment in a
particular Portfolio Company may exceed those initial investment limitations.
Also, investments in certain Portfolio Companies may be in excess of the Fund's
initial investment limitations due to increases in the value of such
investments.
INVESTMENT CRITERIA
Prospective investments are evaluated by Management based upon criteria
that may be modified from time to time. The criteria currently being used by
Management in determining whether to make an investment in a prospective
Portfolio Company include:
- The presence or availability of strong management teams;
- Favorable industry and competitive dynamics;
- Markets characterized by rapid growth and new product adaptation.
CO-INVESTMENTS
The Fund has coinvested in certain Portfolio Companies with its affiliates
in the Draper Fisher Jurvetson network (the "Draper Network"). The Fund and
Management obtained an order from the Securities and Exchange Commission (the
"SEC") exempting the Fund from certain prohibitions contained in the Investment
Company Act relating to coinvestments by the Fund and the Draper Network. Under
the terms of the order, Portfolio Companies purchased by the Fund and the Draper
Network are required to be approved by the Independent Directors and are
required to satisfy certain conditions established by the SEC.
INVESTMENT OPERATIONS
The investment operations of the Fund consist principally of the following
basic activities:
IDENTIFYING INVESTMENTS. Investment opportunities are identified for the
Fund by the members and staff of Draper Advisers. Investment proposals may,
however, come to the Fund from many other sources, and may
2
include unsolicited proposals from the public and from referrals from banks,
lawyers, accountants and other members of the financial community.
EVALUATING INVESTMENT OPPORTUNITIES. Prior to committing funds to an
investment opportunity, due diligence is conducted to assess the prospects and
risks of the potential investment. See "Investment Criteria" above.
STRUCTURING INVESTMENTS. Portfolio Company investments typically are
negotiated directly with the prospective Portfolio Company or its affiliates.
Draper Advisers structures the terms of a proposed investment, including the
purchase price, the type of security to be purchased and the future involvement
of the Fund and affiliates in the Portfolio Company's business (including
potential representation on its board of directors). Draper Advisers seeks to
structure the terms of the investment so as to provide for the capital needs of
the Portfolio Company and at the same time maximize the Fund's opportunities for
capital appreciation in its investments.
PROVIDING MANAGEMENT ASSISTANCE AND MONITORING OF INVESTMENTS. Private
equity investors often assist Portfolio Companies with various aspects of their
business operations. In some cases, officers of the Fund serve as members of the
board of directors of Portfolio Companies. The Fund often provides guidance and
management assistance to Portfolio Companies with respect to such matters as
budgets, profit goals, business and financing strategy, management additions or
replacements and plans for liquidity events for Portfolio Company investors such
as a merger or initial public offering.
CURRENT PORTFOLIO COMPANIES
Actelis Networks, Inc.
Actelis Networks, Inc. ("Actelis"), Fremont, California, enables
telecommunications carriers and service providers to deliver high-speed,
high-quality broadband services over the existing copper wire infrastructure. At
October 31, 2001, the Fund's investment in Actelis, valued at approximately
$5,000,000 with a cost of approximately $5,000,000, consisted of 1,506,025
shares of Series C Convertible Preferred Stock at $3.32 per share.
Annuncio Software, Inc.
Annuncio Software, Inc. ("Annuncio"), Mountain View, California, provides
customer relationship software that allows companies to market their products
more effectively to their consumers. This software enables companies to manage
their interactions with customers through email, and their Web site, as well as
more traditional channels and also allows companies to proactively engage
existing and prospective customers by delivering them personalized information
and marketing offers. At October 31, 2001, the Fund's investment in Annuncio,
valued at $3,750,000 with a cost of $5,000,000, consisted of 625,000 shares of
Series E Convertible Preferred Stock at $6.00 per share.
AuctionWatch.com, Inc.
AuctionWatch.com, Inc. ("AuctionWatch"), San Bruno, California, has
developed an e-commerce platform that enables businesses of all sizes to benefit
from dynamic pricing environments in addition to typical fixed price channels.
The company's services provide businesses with the tools necessary to
efficiently distribute merchandise and acquire customers, while providing a
convenient service for customers to locate and purchase these products. At
October 31, 2001, the Fund's investment in AuctionWatch, valued at approximately
$2,320,000 with a cost of $5,500,000, consisted of 1,047,619 shares of Series C
Convertible Preferred Stock at $2.2148 per share.
3
BlueStar Solutions, Inc. (formerly eOnline, Inc.)
BlueStar Solutions, Inc. ("BlueStar"), Cupertino, California, is a provider
of applications outsourcing services. The company designs, manages and delivers
software solutions for its customers. BlueStar also provides consulting,
customer support, and maintenance services using the SAP business applications
platform. At October 31, 2001, the Fund's investment in BlueStar, valued at
approximately $2,500,000 with a cost of approximately $10,000,000, consisted of
1,360,544 shares of Series C Convertible Preferred Stock at $1.8375 per share.
The Fund also received 136,054 warrants to purchase 136,054 shares of Series C
Preferred Stock at a purchase price of $7.35 per share (as adjusted). The
warrants expire at the earlier of (i) May 26, 2003 or (ii) BlueStar's Qualified
Initial Public Offering ("Qualified IPO").
Cidera, Inc.
Cidera, Inc. ("Cidera"), Laurel, Maryland, is an international leader in
the satellite delivery of broadband content to the Internet. Cidera uses
high-speed satellite technology designed to transport high-bandwidth data
faster, more reliably, and more efficiently to ISPs and DSL and Cable access
providers. At October 31, 2001, the Fund's investment in Cidera, valued at
approximately $3,750,000 with a cost of approximately $7,500,000, consisted of
857,192 shares of Series D Convertible Preferred Stock at $4.3748 per share.
DataPlay, Inc.
DataPlay, Inc. ("DataPlay"), Boulder, Colorado, is developing new ways of
enabling consumers to record and play digital content. At October 31, 2001, the
Fund's investment in DataPlay, valued at approximately $7,500,000 with a cost of
approximately $7,500,000, consisted of 2,500,000 shares of Series D Convertible
Preferred Stock at $3.00 per share.
Endymion Systems, Inc.
Endymion Systems ("Endymion Systems"), Oakland, California, helps clients
migrate their existing businesses and business systems to the Internet. Endymion
provides comprehensive guidance for clients through services ranging from Web
strategy consulting to Web site design and implementation. Their main focus is
on the back-end, namely integrating a business's ERP (enterprise resource
planning) systems as well as older systems with Web-based technologies. At
October 31, 2001, the Fund's investment in Endymion Systems, valued at
approximately $5,250,000 with a cost of approximately $7,000,000, consisted of
7,156,760 shares of Series A Convertible Preferred Stock at $.7336 per share.
EXP Systems, Inc.
EXP Systems, Inc. ("EXP"), Menlo Park, California, provides enterprise
software that helps companies improve sales and service through their Web sites
by enabling buyers to engage with real people in real time who can assist them
in answering questions and making purchase decisions. At October 31, 2001, the
Fund's investment in EXP, valued at approximately $3,750,000 with a cost of
approximately $10,000,000, consisted of 1,748,252 shares of Series C Convertible
Preferred Stock at $2.145 per share.
FOLIOfn, Inc.
FOLIOfn, Inc. ("FOLIOfn"), Vienna, Virginia, together with its wholly owned
brokerage subsidiary FOLIOfn Investments, Inc., is harnessing the power of the
Internet to enable individual and smaller institutional investors to invest and
trade better, smarter, and easier. FOLIOfn's first product, FOLIO Investing,
offers a whole new way to invest and trade, combining many of the best qualities
of mutual funds, traditional brokerage services, and on-line trading. FOLIO
Investing, lets investors buy and sell personalized baskets of stocks - known as
"FOLIOs". At October 31, 2001, the Fund's investment in FOLIOfn, valued at
$7,500,000 with a cost
4
of $15,000,000, consisted of 5,802,259 shares of Series C Convertible Preferred
Stock at $1.2926 per share. Mr. Grillos, the Chief Executive Officer of the
Fund, serves as a director of FOLIOfn.
InfoImage, Inc.
InfoImage, Inc. ("InfoImage"), Phoenix, Arizona, helps companies increase
their decision-making efficiency with intranet/extranet solutions using Web and
collaborative technologies. InfoImage's decision portal software product allows
access to structured and unstructured data, advanced personalization, intuitive
search, business intelligence and collaboration tools. At October 31, 2001, the
Fund's initial investment in InfoImage, valued at $0.00 with a cost of
$2,004,480, consisted of 933,120 shares of Common Stock (exchanged from 432,000
shares of Series C Convertible Preferred Stock) at $0.00 per share. The Fund
also received 259,200 warrants to purchase 259,200 shares of Common Stock. The
warrants expire at the earlier of (i) June 2, 2010 or (ii) InfoImage's Qualified
Initial Public Offering ("Qualified IPO"). At October 31, 2001, the Fund's
subsequent investment in InfoImage, valued at $352,210 with a cost of $352,210,
consisted of 11,740,340 shares of Series AA Convertible Preferred Stock
(converted from a Convertible Promissory Note plus accrued interest) at $0.03
per share. The Fund also received 92,663,933 warrants to purchase 92,663,933
shares of Common Stock. The warrants expire on June 14, 2006.
infoUSA.com, Inc.
infoUSA.com, Inc. ("infoUSA.com"), Foster City, California, provides
comprehensive and accurate directory information plus targeted mailing lists for
Internet and wireless users. The infoUSA.com site provides customizable sales
leads, business and consumer information and database marketing services that
enable businesses to compete more effectively. At October 31, 2001, the Fund's
investment in infoUSA.com, valued at approximately $6,750,000 with a cost of
approximately $10,000,000, consisted of 2,145,922 shares of Series B Convertible
Preferred Stock at $3.1455 per share.
IQdestination
IQdestination, Boulder, Colorado, facilitates IT training for corporate
clients by performing all of the tasks normally associated with technical
education: locating the training, negotiating the best price, and evaluating the
best ways to achieve specific training goals. At October 31, 2001, the Fund's
initial investment in IQdestination, valued at $816,500 with a cost of
$2,300,000, consisted of 1,150,000 shares of Series B Convertible Preferred
Stock at $0.71 per share. At October 31, 2001, the Fund's subsequent investment
in IQdestination, valued at $920,000 with a cost of $920,000, consisted of
1,295,775 shares of Series C Convertible Preferred Stock at $0.71 per share. V.
Frank Mendicino III, non-managing member of Draper Advisers, serves as a
director of IQdestination.
Ishoni Networks, Inc.
Ishoni Networks, Inc. ("Ishoni"), Santa Clara, California, is a developer
of highly integrated broadband platforms that allow Original Equipment
Manufacturers (OEMs) and service providers to offer secure voice and Internet
services over a single broadband connection to residential and business
customers. At October 31, 2001, the Fund's investment in Ishoni, valued at
approximately $7,500,000 with a cost of approximately $10,000,000, consisted of
2,003,607 shares of Series C Convertible Preferred Stock at $3.7433 per share.
Lumeta Corporation
Lumeta Corporation ("Lumeta"), Somerset, New Jersey, is a developer of
network management, security, and auditing solutions. The company provides
businesses with a comprehensive analysis of their network security that reveals
the vulnerabilities and inefficiencies of their corporate intranets. The company
also facilitates network optimization and IT management during integration
processes such as mergers. At October 31, 2001, the Fund's investment in Lumeta,
valued at $250,000 with a cost of $250,000, consisted of 384,615
5
shares of Series A Convertible Preferred Stock at $0.65 per share. Ross H.
Goldstein, non-managing member of Draper Advisers, serves as a director of
Lumeta.
MediaPrise, Inc.
MediaPrise, Inc. ("MediaPrise"), Austin, Texas, facilitates the complete
integration of brand and product marketing information for corporations via the
Internet. MediaPrise brings structure to the information distribution process
through the creation of a consistent branding and product-marketing platform for
its clients. At October 31, 2001, the Fund's investment in MediaPrise, valued at
approximately $2,000,000 with a cost of approximately $2,000,000, consisted of
2,196,193 shares of Series A Convertible Preferred Stock at $0.9107 per share.
John E. Campion, non-managing member of Draper Advisers, serves as a director of
MediaPrise.
Pagoo, Inc.
Pagoo, Inc. ("Pagoo"), San Francisco, California, is a leading provider of
comprehensive Internet Protocol (IP)-based voice solutions. The applications
that Pagoo has developed and patented are the first to make voice-over-IP a true
alternative to voice over traditional telephone networks. At October 31, 2001,
the Fund's initial investment in Pagoo, valued at $7,542,661 with a cost of
approximately $10,000,000, consisted of 3,412,969 shares of Series C Convertible
Preferred Stock at $2.21 per share. At October 31, 2001, the Fund's subsequent
investment in Pagoo, valued at $4,000,000 with a cost of approximately
$4,000,000, consisted of 2,098,636 shares of Series D Convertible Preferred
Stock at $1.906 per share. Nino Marakovic, Partner of Draper Advisers, serves as
a director of Pagoo.
Personic Software, Inc.
Personic Software, Inc. ("Personic"), Brisbane, California, provides
marketplace and ebusiness solutions which afford the communications and
transaction infrastructure to enable organizations and staffing agencies to
attract, qualify, hire and retain a superior workforce. At October 31, 2001, the
Fund's initial investment in Personic, valued at $0.00 with a cost of
approximately $10,000,000, consisted of 512,296 shares of Series F Convertible
Preferred Stock at $0.00 per share. The Fund's subsequent investment in
Personic, valued at $0.00 with a cost of approximately $760,460, consisted of
38,958 shares of Series G1 Convertible Preferred Stock at $0.00 per share. The
Fund also received 973,950 warrants to purchase 973,950 shares of Common Stock.
The warrants expire on October 31, 2005.
ProcessClaims
ProcessClaims ("ProcessClaims"), Redondo Beach, California, provides
Web-based solutions and value added services that streamline the automobile
claims process for the insurance industry and its partners. At October 31, 2001,
the Fund's investment in ProcessClaims, valued at approximately $2,000,000 with
a cost of approximately $2,000,000, consisted of 6,250,000 shares of Series C
Convertible Preferred Stock at $0.32 per share. Peter Freudenthal, Vice-Chairman
and President of the Fund, serves as Chairman of the Board of ProcessClaims.
SafeStone Technologies PLC
SafeStone Technologies PLC ("SafeStone"), Old Amersham, UK, provides their
corporate clients with network security solutions. SafeStone's comprehensive
suite of auditing, data and system management software products allows an
enterprise to monitor and protect its network while identifying areas of
security exposure. At October 31, 2001, the Fund's investment in SafeStone,
valued at approximately $2,624,000 with a cost of approximately $3,500,000,
consisted of 650,401 shares of Series A Convertible Preferred Stock at $4.035
per share.
6
ShopEaze Systems, Inc.
ShopEaze Systems, Inc. ("ShopEaze"), Sunnyvale, California, partners with
established retailers to help them build online businesses to complement their
existing brick-and-mortar businesses. ShopEaze's suite of comprehensive services
helps its partners' customers to enjoy the experience and convenience of
shopping online with their local, trusted retailers. At October 31, 2001, the
Fund's investment in ShopEaze, valued at $2,250,000 with a cost of $6,000,000,
consisted of 2,097,902 shares of Series B Convertible Preferred Stock at $1.0725
per share.
Sonexis, Inc. (formerly eYak, Inc.)
Sonexis, Inc. ("Sonexis"), Boston, Massachusetts, is a leading global
provider of voice solutions for enterprise customers and service providers that
enable anytime, anywhere transactions and information access. Its product and
services reduce the cost, time-to-market, and complexity of developing these
solutions, which currently include enterprise and consumer voice portals,
enhanced self-service, voice commerce, and voice-enabled Customer Relationship
Management. At October 31, 2001, the Fund's investment in Sonexis, valued at
approximately $10,000,000 with a cost of approximately $10,000,000, consisted of
2,590,674 shares of Series C Convertible Preferred Stock at $3.86 per share.
Yaga, Inc.
Yaga, Inc. ("Yaga"), Foster City, California, is developer of peer-to-peer
networking technology. This technology provides the infrastructure that
companies of all sizes need to acquire and communicate with their customers in a
secure and efficient environment. At October 31, 2001, the Fund's investment in
Yaga, valued at approximately $600,000 with a cost of approximately $300,000,
consisted of 300,000 shares of Series A Convertible Preferred Stock at $2.00 per
share. At October 31, 2001, the Fund's subsequent investment in Yaga, valued at
approximately $2,000,000 with a cost of approximately $2,000,000, consisted of
1,000,000 shares of Series B Convertible Preferred Stock at $2.00 per share and
100,000 warrants valued at $0.00 per share. The warrants expire on June 8, 2004.
TEMPORARY INVESTMENTS
Pending investment in Portfolio Companies, the Fund invests its available
funds in interest-bearing bank accounts, money market mutual funds, U.S.
Treasury securities and/or certificates of deposit with maturities of less than
one year (collectively, "Temporary Investments"). Temporary Investments may also
include commercial paper and other short-term securities. Temporary Investments
constituting cash, cash items, securities issued or guaranteed by the U.S.
Treasury or U.S. Government agencies and high quality debt securities
(commercial paper rated in the highest rating category by Moody's Investor
Services, Inc. or Standard and Poor's Corporation) will qualify in determining
whether the Fund has 70% of its total assets invested in Managed Companies (as
hereafter defined) or in qualified Temporary Investments for purposes of the
business development company provisions of the Investment Company Act. See
"Regulation" below.
FOLLOW-ON INVESTMENTS
Following its initial investment in a Portfolio Company, the Fund may be
requested to make follow-on investments in the company. Follow-on investments
may be made to take advantage of warrants or other preferential rights granted
to the Fund or otherwise to increase the Fund's position in a successful or
promising Portfolio Company. The Fund may also be called upon to provide
additional equity or loans needed by a Portfolio Company to fully implement its
business plans, to develop a new line of business or to recover from unexpected
business problems.
7
DISPOSITION OF INVESTMENTS
The method and timing of the disposition of the Fund's portfolio
investments is critical to the realization of capital appreciation and to the
minimization of any capital losses. The Fund expects to dispose of its portfolio
securities through a variety of transactions, including sales of portfolio
securities in underwritten public offerings, public sales of such securities and
negotiated private sales of such securities to other investors. The Fund bears
the costs of disposing of investments to the extent not paid by a Portfolio
Company.
OPERATING EXPENSES
The Adviser, at its expense, provides the Fund with office space,
facilities, equipment and personnel (whose salaries and benefits are paid by the
Adviser) necessary to conduct the Fund's business. The Adviser has agreed to pay
certain expenses relating to the Fund's operations, including fees and expenses
of the Independent Directors; fees of unaffiliated transfer agents, registrars
and disbursing agents; legal and accounting expenses; costs of printing and
mailing proxy materials and reports to shareholders; New York Stock Exchange
fees; custodian fees; litigation costs; costs of disposing of investments
including brokerage fees and commissions; and other extraordinary or
nonrecurring expenses and other expenses properly payable by the Adviser. The
Fund is responsible for paying the Management Fee to the Adviser.
VALUATION
Investments in Portfolio Companies are carried at fair value with the net
change in unrealized appreciation or depreciation included in the determination
of net assets. Cost is used to approximate fair value of these investments until
significant developments affecting an investment provide a basis for valuing
such investment at a number other than cost.
The fair value of investments for which no market exists and for which our
Board of Directors has determined that the original cost of the investment is no
longer an appropriate valuation will be determined on the basis of procedures
established in good faith by the Board of Directors. Valuations will be based
upon such factors as the financial and/or operating results of the most recent
fiscal period, the performance of the company relative to planned
budgets/forecasts, the issuer's financial condition and the markets in which it
does business, the prices of any recent transactions or offerings regarding such
securities or any proxy securities, any available analysis, media, or other
reports or information regarding the issuer, or the markets or industry in which
it operates, the nature of any restrictions on disposition of the securities and
other analytical data. In the case of unsuccessful operations, the valuation may
be based upon anticipated liquidation proceeds.
Because of the inherent uncertainty of the valuation of portfolio
securities which do not have readily ascertainable market values, the Fund's
estimate of fair value may significantly differ from the fair market value that
would have been used had a ready market existed for the securities. Appraised
values do not reflect brokers' fees or other normal selling costs which might
become payable on disposition of such investments.
Investments in companies whose securities are publicly traded are valued at
their quoted market price, less a discount to reflect the estimated effects of
restrictions on the sale of such securities ("Valuation Discount"), if
applicable.
Short-term investments having maturities of 60 days or less are stated at
amortized cost, which approximates fair value. Other fixed income securities are
stated at fair value. Fair value of these securities is determined at the most
recent bid or yield equivalent from dealers that make markets in such
securities.
8
The directors review the valuation policies on a quarterly basis or more
frequently if deemed necessary to determine their appropriateness and may also
hire independent firms to review the Adviser's methodology of valuation or to
conduct an independent valuation.
CUSTODIAN
The Fund has entered into an agreement with State Street Bank and Trust
Company to act as the custodian with respect to the safekeeping of its
securities. The principal business office of the custodian is 225 Franklin
Street, Boston, Massachusetts, 02110.
TRANSFER AGENT AND DISBURSING AGENT
The Fund employs EquiServe as its transfer agent to record transfers of the
shares, maintain proxy records and to process distributions. The principal
business office of such company is 150 Royall Street, Canton, Massachusetts,
02021.
FACTORS THAT MAY AFFECT FUTURE RESULTS, THE MARKET PRICE OF COMMON STOCK, AND
THE ACCURACY OF FORWARD-LOOKING STATEMENTS
In the normal course of its business, the Fund, in an effort to keep its
stockholders and the public informed about the Fund's operations and portfolio
of investments, may from time-to-time issue certain statements, either in
writing or orally, that contain or may contain forward-looking information.
Generally, these statements relate to business plans or strategies of the Fund
or Portfolio Companies in which it invests, projected or anticipated benefits or
consequences of such plans or strategies, projected or anticipated benefits of
new or follow-on investments made by or to be made by the Fund, or projections
involving anticipated purchases or sales of securities or other aspects of the
Fund's operating results. Forward-looking statements are not guarantees of
future performance and are subject to risks and uncertainties that could cause
actual results to differ materially. As noted elsewhere in this report, the
Fund's operations and portfolio of investments are subject to a number of
uncertainties, risks, and other influences, many of which are outside the
control of the Fund, and any one of which, or a combination of which, could
materially affect the results of the Fund's operations or net asset value, the
market price of its common stock, and whether forward-looking statements made by
the Fund ultimately prove to be accurate.
The following discussion outlines certain factors that in the future could
affect the Fund's results for 2001 and beyond and cause them to differ
materially from those that may be set forth in any forward-looking statement
made by or on behalf of the Fund:
LONG-TERM OBJECTIVE. The Fund is intended for investors seeking long-term
capital growth. The Fund is not meant to provide a vehicle for those who wish to
play short-term swings in the stock market. The Portfolio Companies acquired by
the Fund generally require several or many years to reach maturity and generally
are illiquid. An investment in shares of the Fund should not be considered a
complete investment program. Each prospective purchaser should take into account
their investment objectives as well as their other investments when considering
the purchase of shares of the Fund.
NON-DIVERSIFIED STATUS; NUMBER OF INVESTMENTS. The Fund is classified as a
"non-diversified" investment company under the Investment Company Act, which
means the Fund is not limited in the proportion of its assets that may be
invested in the securities of a single issuer. Generally, the Fund does not
intend to initially invest more than 5% of the value of its net assets in a
single Portfolio Company. However, follow-on investments or a disproportionate
increase in the value of one Portfolio Company may result in greater than 5% of
the Fund's net assets being invested in a single Portfolio Company. While these
restrictions limit the exposure of the capital of the Fund in any single
investment, to the extent the Fund takes large positions in the securities
9
of a small number of issuers, the Fund will be exposed to a greater risk of loss
and the Fund's net asset value and the market price of its common stock may
fluctuate as a result of changes in the financial condition, the stock price of,
or in the market's assessment of any single Portfolio Company to a greater
extent than would be the case if it were a "diversified" company holding
numerous investments. The Fund currently has investments in 22 Portfolio
Companies, of which none exceed 5% of the net asset value.
LACK OF LIQUIDITY OF PORTFOLIO INVESTMENTS. The portfolio investments of
the Fund consist principally of securities that are subject to restrictions on
sale because they were acquired from the issuer in "private placement"
transactions or because the Fund is deemed to be an affiliate of the issuer.
Generally, the Fund will not be able to sell these securities publicly without
the expense and time required to register the securities under the Securities
Act and applicable state securities law unless an exemption from such
registration requirements is available. In addition, contractual or practical
limitations may restrict the Fund's ability to liquidate its securities in
Portfolio Companies since in many cases the securities of such companies will be
privately held and the Fund may own a relatively large percentage of the
issuer's outstanding securities. Sales may also be limited by securities market
conditions, which may be unfavorable for sales of securities of particular
issuers or issuers in particular industries. The above limitations on liquidity
of the Fund's securities could preclude or delay any disposition of such
securities or reduce the amount of proceeds that might otherwise be realized.
NEED FOR FOLLOW-ON INVESTMENTS IN PORTFOLIO COMPANIES. After its initial
investment in a Portfolio Company, the Fund may be called upon from time to time
to provide additional funds to such company or have the opportunity to increase
its investment in a successful situation, e.g., the exercise of a warrant to
purchase common stock. There is no assurance that the Fund will make, or have
sufficient funds to make, follow-on investments. Any decision by the Fund not to
make a follow-on investment or any inability on its part to make such an
investment may have a negative impact on a Portfolio Company in need of such an
investment or may result in a missed opportunity for the Fund to increase its
participation in a successful operation and may dilute the Fund's equity
interest in or reduce the expected yield on its investment.
COMPETITION FOR INVESTMENTS. The Fund encounters competition from other
persons or entities with similar investment objectives. These competitors
include venture capital partnerships, investment partnerships and corporations,
small business investment companies, large industrial and financial companies
investing directly or through affiliates, other business development companies,
foreign investors of various types and individuals. Many of these competitors
have greater financial resources and more personnel than the Fund and may be
subject to different and frequently less stringent regulation.
LOSS OF CONDUIT TAX TREATMENT. The Fund may cease to qualify for conduit
tax treatment if it is unable to comply with the diversification requirements
contained in Subchapter M of the Code. Subchapter M requires that at the end of
each quarter (i) at least 50% of the value of the Fund's assets must consist of
cash, government securities and other securities of any one issuer that do not
represent more than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) no more than 25% of the
value of the Fund's assets may be invested in the securities of any one issuer
(other than United States government securities), or of two or more issuers that
are controlled by the Fund and are engaged in the same or similar or related
trades or businesses. If the Fund fails to satisfy such diversification
requirements and ceases to qualify for conduit tax treatment, the Fund will be
subject to income tax on its income and gains and stockholders will be subject
to income tax on distributions. The Fund may also cease to qualify for conduit
tax treatment, or be subject to a 4% excise tax, if it fails to distribute a
sufficient portion of its net investment income and net realized capital gains.
MARKET VALUE AND NET ASSET VALUE. The shares of the Fund's common stock are
listed on the NYSE. Investors desiring liquidity may trade their shares of
common stock on the NYSE at current market value, which may differ from the then
current net asset value (Shareholders' Equity). Shares of closed-end investment
companies frequently trade at a discount from net asset value. This
characteristic of shares of a closed-end fund
10
is a risk separate and distinct from the risk that the Fund's net asset value
will decrease. The risk of purchasing shares of a closed-end fund that might
trade at a discount is more pronounced for investors who wish to sell their
shares in a relatively short period of time because for those investors,
realization of a gain or loss on their investments is likely to be more
dependent upon the existence of a premium or discount than upon portfolio
performance. The Fund's shares have traded at a significant discount to net
asset value since they began trading. For information concerning the trading
history of the Fund's shares see "Market for Registrant's Common Stock and
Related Stockholder Matters."
VALUATION OF INVESTMENTS. The Fund's net asset value is based on the value
assigned to its portfolio investments. Investments in companies whose securities
are publicly traded are valued at their quoted market price, less a discount to
reflect the estimated effects of restrictions on the sale of such securities, if
applicable. The Fund adjusts its net asset value for changes in the value of its
publicly held securities, if any, on a daily basis. The value of the Fund's
investments in securities for which market quotations are not available is
determined as of the end of each fiscal quarter but monitored daily in case
there is a significant event requiring a change in valuation in the interim.
Cost is used to approximate fair value of such investments until significant
developments affecting an investment provide a basis for use of an appraisal
valuation. Thereafter, such portfolio investments are carried at appraised
values as determined at least quarterly. Due to the inherent uncertainty of the
valuation of portfolio securities which do not have readily ascertainable market
values, the Fund's estimate of fair value may significantly differ from the fair
value that would have been used had a ready market existed for the securities.
At October 31, 2001, 100% of the preferred stocks in Portfolio Companies held by
the Fund, representing approximately 35.73% of the Fund's net asset value, were
invested in securities for which market quotations were not readily available.
See "Valuation".
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Fund's common
stock could be subject to significant fluctuations in response to variations in
the net asset value of the Fund, its quarterly operating results, and other
factors. The market price of the common stock may be significantly affected by
such factors as the announcement of new or follow-on investments in Portfolio
Companies, the sale or proposed sale of a portfolio investment, the results of
operations or fluctuations in the market prices or appraised value of one or
more of the Fund's Portfolio Companies, changes in earnings estimates by market
analysts, speculation in the press or analyst community and general market
conditions or market conditions specific to particular industries. From time to
time in recent years, the securities markets have experienced significant price
and volume fluctuations that have often been unrelated or disproportionate to
the operating performance of particular companies. These broad fluctuations may
adversely affect the market price of the common stock. In addition, the Fund is
subject to the risk of the securities markets in which the portfolio securities
of the Fund are traded. Securities markets are cyclical and the prices of the
securities traded in such markets rise and fall at various times. These cyclical
periods may extend over significant periods of time.
REGULATION
The Investment Advisers Act generally prohibits investment advisers from
entering into investment advisory contracts with an investment company that
provides for compensation to the investment adviser on the basis of a share of
capital gains or capital appreciation of the portfolio investments or any
portion of the funds of the investment company or pursuant to a stock option
plan. The Investment Advisers Act, however, does permit the payment of
compensation based on capital gains or the issuance of incentive stock options
to management in an investment advisory contract between an investment adviser
and a business development company. The Fund has elected to be treated as a
business development company under the Investment Company Act. Accordingly, it
has provided for incentive compensation to the Adviser based on the capital
appreciation of the Fund's investments.
The Fund may not withdraw its election to be treated as a business
development company without first obtaining the approval of a majority in
interest of its shareholders. The following brief description of the
11
Investment Company Act is qualified in its entirety by reference to the full
text of the Investment Company Act and the rules thereunder.
A business development company must be operated for the purpose of
investing in the securities of certain present and former "eligible Portfolio
Companies" or certain bankrupt or insolvent companies and must make available
significant managerial assistance to Portfolio Companies. An eligible Portfolio
Company generally is a company that (i) is organized under the laws of, and has
its principal place of business in, any state or states, (ii) is not an
investment company and (iii)(a) does not have a class of securities registered
on an exchange or included in the Federal Reserve Board's over-the-counter
margin list, (b) is actively controlled by the business development company
acting either alone or as part of a group acting together and an affiliate of
the business development company is a member of the Portfolio Company's board of
directors or (c) meets such other criteria as may be established by the SEC.
Control is presumed to exist where the business development company owns more
than 25% of the outstanding voting securities of a Portfolio Company.
"Making available significant managerial assistance" is defined under the
Investment Company Act to mean (i) any arrangement whereby a business
development company, through its directors, officers or employees, offers to
provide and, if accepted, does provide significant guidance and counsel
concerning the management, operations or business objectives or policies of a
Portfolio Company or (ii) the exercise of a controlling influence over the
management or policies of a Portfolio Company by the business development
company acting individually or as part of a group of which the business
development company is a member acting together which controls such company
("Managed Company"). A business development company may satisfy the requirements
of clause (i) with respect to a Portfolio Company by purchasing securities of
such a company as part of a group of investors acting together if one person in
such group provides the type of assistance described in such clause. However,
the business development company will not satisfy the general requirement of
making available significant managerial assistance if it only provides such
assistance indirectly through an investor group. A business development company
need only extend significant managerial assistance with respect to Portfolio
Companies which are treated as Qualifying Assets (as defined below) for the
purpose of satisfying the 70% test discussed below.
The Investment Company Act prohibits or restricts the Fund from investing
in certain types of companies, such as brokerage firms, insurance companies,
investment banking firms and investment companies. Moreover, the Investment
Company Act limits the type of assets that the Fund may acquire to "Qualifying
Assets" and certain assets necessary for its operations (such as office
furniture, equipment and facilities) if, at the time of the acquisition, less
than 70% of the value of the Fund's total assets consists of qualifying assets.
Qualifying Assets include (i) securities of companies that were eligible
Portfolio Companies at the time that the Fund acquired their securities; (ii)
securities of companies that are actively controlled by the Fund; (iii)
securities of bankrupt or insolvent companies that are not otherwise eligible
Portfolio Companies; (iv) securities acquired as follow-on investments in
companies that were eligible Portfolio Companies at the time of the Fund's
initial acquisition of their securities but are no longer eligible Portfolio
Companies, provided that the Fund has maintained a substantial portion of its
initial investment in such companies; (v) securities received in exchange for or
distributed on or with respect to any of the foregoing; and (vi) cash items,
government securities and high-quality, short-term debt. The Investment Company
Act also places restrictions on the nature of the transactions in which, and the
persons from whom, securities can be purchased in order for such securities to
be considered Qualifying Assets. As a general matter, Qualifying Assets may only
be purchased from the issuer or an affiliate in a transaction not constituting a
public offering. The Fund may not purchase any security on margin, except such
short-term credits as are necessary for the clearance of portfolio transactions,
or engage in short sales of securities.
The Fund is permitted by the Investment Company Act, under specified
conditions, to issue multiple classes of senior debt and a single class of
preferred stock senior to the common stock if its asset coverage, as defined in
the Investment Company Act, is at least 200% after the issuance of the debt or
the senior stockholders' interests.
12
In addition, provisions must be made to prohibit any distribution to common
shareholders or the repurchase of any shares unless the asset coverage ratio is
at least 200% at the time of the distribution or repurchase.
The Fund generally may sell its securities at a price that is below the
prevailing net asset value per share only upon the approval of the policy by
shareholders holding a majority of the shares issued by the Fund, including a
majority of shares held by nonaffiliated shareholders. The Fund may, in
accordance with certain conditions established by the SEC, sell shares below net
asset value in connection with the distribution of rights to all of its
stockholders. The Fund may also issue shares at less than net asset value in
payment of dividends to existing shareholders.
Since the Fund is a closed-end business development company, stockholders
have no right to present their shares to the Fund for redemption. Recognizing
the possibility that the Fund's shares might trade at a discount, the Board of
Directors of the Fund has determined that it would be in the best interest of
stockholders for the Fund to be authorized to attempt to reduce or eliminate a
market value discount from net asset value. Accordingly, the Fund from time to
time may, but is not required to, repurchase its shares (including by means of
tender offers) to attempt to reduce or eliminate any discount or to increase the
net asset value of its shares, or both.
Many of the transactions involving the Fund and its affiliates (as well as
affiliates of such affiliates) require the prior approval of a majority of the
Independent Directors and a majority of the Independent Directors having no
financial interest in the transactions. However, certain transactions involving
closely affiliated persons of the Fund, including the Adviser, would require the
prior approval of the SEC. In general (a) any person who owns, controls or holds
with power to vote more than 5% of the outstanding shares, (b) any director or
executive officer and (c) any person who directly or indirectly controls, is
controlled by or is under common control with such person, must obtain the prior
approval of a majority of the Independent Directors and, in some situations, the
prior approval of the SEC, before engaging in certain transactions involving the
Fund or any company controlled by the Fund. In accordance with the Investment
Company Act, a majority of the directors must be persons who are not "interested
persons" as defined in such act. Except for certain transactions which must be
approved by the Independent Directors, the Investment Company Act generally does
not restrict transactions between the Fund and its Portfolio Companies.
Item 2. Properties
The Fund does not have any interest in any physical properties.
Item 3. Legal Proceedings
Certain Portfolio Companies of the Fund are involved in asserted claims and
have the possibility for unasserted claims which may ultimately affect the net
asset value of the Fund or the fair value of the Fund's portfolio investments.
Item 4. Submission of Matters to a Vote of Security Holders
On April 12, 2001, the Fund held its Annual Meeting of Shareholders. Of the
16,500,000 shares outstanding and entitled to vote, 13,435,125 were represented
at the meeting by proxy or in person. At the meeting the shareholders were asked
to re-elect John Grillos and Peter Freudenthal to serve on the Fund's Board of
Directors for three-year terms. For John Grillos, 12,797,723 shares voted for
his reelection, with 637,401 share votes
13
withheld. For Peter Freudenthal, 12,778,793 shares voted for his reelection,
with 656,331 share votes withheld. Both of the directors received a majority of
the votes cast and were subsequently reelected as directors of the Fund until
2004.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Fund's shares of common stock began to trade on the New York Stock
Exchange on June 26, 2000, under the symbol "MVC". The Fund had approximately
17,000 shareholders at October 31, 2001. The net asset value per share of the
Fund's common stock at October 31, 2001, was $15.42.
The following table reflects the high and low closing prices per share of
the Fund's common stock on the New York Stock Exchange for the fiscal year ended
October 31, 2001, by quarter.
QUARTER
ENDED HIGH LOW
-------- ------- --------
01/31/01 $12.875 $ 9.9375
04/30/01 $12.49 $10.16
07/31/01 $12.20 $10.70
10/31/01 $11.05 $ 9.20
As a regulated investment company under Subchapter M of the Code, the Fund
is required to distribute to its shareholders, in a timely manner, at least 90%
of its taxable net investment income each year. If the Fund distributes, in a
timely manner, 98% of its taxable net capital gains and 98% of its taxable net
investment income each year (as well as any portion of the respective 2%
balances not distributed in the previous year), it will not be subject to the 4%
non-deductible federal excise tax on certain undistributed income of regulated
investment companies. Under the Investment Company Act, the Fund is not
permitted to pay dividends to shareholders unless it meets certain asset
coverage requirements.
The Fund is investing in companies that it believes have a high potential
for capital appreciation, and the Fund intends to realize the majority of its
profits upon the sale of its investments in Portfolio Companies. Consequently,
it is likely that few or none of the companies in which the Fund invests will
have established policies of paying annual dividends.
The Fund reserves the right to retain net long-term capital gains in excess
of net short-term capital losses for reinvestment or to pay contingencies and
expenses. Such retained amounts, if any, will be taxable to the Fund as
long-term capital gains and shareholders will be able to claim their
proportionate share of the federal income taxes paid by the Fund on such gains
as a credit against their own federal income tax liabilities. Stockholders will
also be entitled to increase the adjusted tax basis of their Fund shares by the
difference between their undistributed capital gains and their tax credit.
Item 6. Selected Financial Data
The information set forth under Item 8 is incorporated herein by reference.
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company and
its investment in Portfolio Companies. Words such as "may," "will," "expect,"
"believe," "anticipate," "intend," "could," "estimate," "might," or "continue"
or the negative or other variations thereof or comparable terminology are
intended to identify forward-looking statements. Forward-looking statements are
included in this report pursuant to the "Safe Harbor" provision of the Private
Securities Litigation Reform Act of 1995. Such statements are only predictions
and the actual events or results may differ materially from the results
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those relating
to investment capital demand, pricing, market acceptance, the effect of economic
conditions, litigation and the effect of regulatory proceedings, competitive
forces, the results of financing and investing efforts, the ability to complete
transactions and other risks identified below or in the Company's filings with
the Commission. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking statements to
reflect events or circumstances occurring after the date hereof or to reflect
the occurrence of unanticipated events. The following analysis of the financial
condition and results of operation of the Company should be read in conjunction
with the Financial Statements, the Notes thereto and the other financial
information included elsewhere in this report.
GENERAL INVESTMENT CLIMATE
Over the course of the reporting year, we witnessed a pronounced
contraction in both the public and private equity markets. The public technology
sector was hit particularly hard as it became clear to investors that the
"irrational exuberance" which reached its peak in early 2000 had created
considerably over-inflated valuations for technology stocks. The resulting
correction, which began in the second quarter of 2000, continued its downward
drift through the third quarter of 2001 as corporate profits sank, business
activity slowed, and the availability of capital quickly dried up.
Just as the technology sector had spearheaded the boom of the late 1990's,
its deterioration significantly contributed to the erosion of the overall
economy. The declining demand from businesses and consumers for new products and
services resulted in grossly overstocked inventories and an overcrowded
technology market. Despite the Fed's aggressive attempts to dampen the effects
of an inevitable consolidation, as well as President Bush's supportive tax cuts,
the economy continued to skid into what is now recognized as a mild recession.
The private technology market, though typically more insulated from
systematic market risk, was clearly not immune to the public market and economic
downturn. The difficult environment in which private technology companies
continued to operate was reflected by the Fund writing down the value of a
number of its investments during the reporting period, primarily those companies
funded in 2000. Notwithstanding the reduced valuations, the Fund continued to
finance and support its existing Portfolio Companies, focusing extensive efforts
on those that it feels will weather the storm and emerge leaner, stronger, and
poised to take advantage of improved market conditions.
With respect to the Fund's current investment environment, the deflated
market capitalizations of public technology companies and the lack of IPO and
profitable merger and acquisition opportunities presented so far this year have
created conditions that we believe may significantly benefit shareholders in the
long run. The reduced valuations of private information technology companies are
considerably more reasonable, and the liquidation preferences and anti-dilution
provisions that the Fund is able to negotiate into the terms of each new deal
have improved substantially. In addition, a large number of venture capitalists
have been spending a majority of their time supporting existing Portfolio
Companies. This decreased competition for new deals has allowed liquid venture
capital funds, such as ours, more time to diligently research and scrupulously
invest in new companies.
15
Looking forward, although corporate earnings for technology companies will
likely continue to reflect diminished business activity in the near term, we
believe that much of the correction in this sector, as well as for the overall
economy, has already been absorbed. Furthermore, it is likely that the Fed's
continuing monetary stimulus, as well as the fiscal response to the events of
September 11, will provide a strong foundation for economic recovery. With a
significant cash position remaining to be invested, and an existing portfolio
containing promising young companies, we feel that the Fund is in an excellent
position to generate strong, long-term gains for shareholders as information
technology once again becomes a driving force behind a return to economic
growth.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2001, the Fund had $90,926,328 of its net assets (the value
of total assets less total liabilities) of $254,471,556 invested in Portfolio
Companies of 22 companies and $163,726,799 of its net assets invested in
temporary investments consisting of Certificates of Deposit, commercial paper,
money market funds, and U.S. government and agency securities. Current balance
sheet resources are believed to be sufficient to finance any future commitments.
Net cash used for operating activities was $97,762,094 for the year ended
October 31, 2001.
Net investment income and net realized gains from the sales of portfolio
investments are intended to be distributed at least annually. Management
believes that its cash reserves and the ability to sell its temporary
investments in publicly traded securities are adequate to provide payment for
any expenses and contingencies of the Fund.
The Fund reserves the right to retain net long-term capital gains in excess
of net short-term capital losses for reinvestment or to pay contingencies and
expenses. Such retained amounts, if any, will be taxable to the Fund as
long-term capital gains, and shareholders will be able to claim their
proportionate share of the federal income taxes paid by the Fund on such gains
as a credit against their own federal income-tax liabilities. Shareholders will
also be entitled to increase the adjusted tax basis of their Fund shares by the
difference between their undistributed capital gains and their tax credit.
RESULTS OF OPERATIONS
INVESTMENT INCOME AND EXPENSE
Net investment income after all operating expenses amounted to $1,658,465
for the year ended October 31, 2001.
The Adviser receives management fee compensation at an annual rate of 2.5
percent of the average weekly net assets of the Fund, paid monthly in arrears.
Such fees amounted to $7,388,061 for the year ended October 31, 2001.
REALIZED GAINS AND LOSSES ON SALES OF PORTFOLIO SECURITIES
The Fund realized a net capital gain of $5,123 from the sale of short-term
securities during the year ended October 31, 2001.
16
UNREALIZED APPRECIATION AND DEPRECIATION OF PORTFOLIO SECURITIES
For the year ended October 31, 2001, the Fund had a net unrealized
depreciation of $52,994,121. Such depreciation resulted mainly from the Board of
Directors' decision to mark down the value of the Fund's investments in Annuncio
Software, Inc.; AuctionWatch.com, Inc.; BlueStar Solutions, Inc.; Cidera, Inc.;
Endymion Systems, Inc.; EXP Systems, Inc.; FOLIOfn, Inc.; InfoImage, Inc.;
infoUSA.com, Inc.; IQdesination; Ishoni Networks, Inc.; Pagoo.com, Inc.;
Personic Software, Inc.; SafeStone Technologies PLC; and ShopEaze Systems, Inc.
DIVIDENDS
On December 5, 2000, the Fund announced an ordinary income cash dividend of
$0.34210 per share, payable on January 3, 2001, to stockholders of record at the
close of business on December 8, 2000. The Fund went ex-dividend on December 6,
2000. Distributions can be made payable by the Fund in the form of either a cash
distribution or a stock dividend. On the Fund's ex-dividend date, the Fund was
trading on the New York Stock Exchange (the "NYSE") at a discount to net asset
value. In accordance with the Dividend Reinvestment Plan, the Dividend
Distribution Agent purchased shares on the open market of the NYSE for those
shareholders electing to take their distributions in the form of stock
dividends.
PORTFOLIO INVESTMENTS
At October 31, 2001, the cost of equity and equity-linked security
investments made by the Fund to date was $148,886,310, and their aggregate
market value was estimated to be $90,926,328. While the current values of
certain Portfolio Companies have been reduced, Management believes that many of
the companies identified have upside potential for long-term growth in sales and
earnings. The Sub-Adviser continuously evaluates opportunities to maximize the
valuation of its investments. In that regard the Sub-Adviser will periodically
evaluate potential acquisitions, financing transactions, initial public
offerings, strategic alliances and sale opportunities involving the Fund's
Portfolio Companies. These transactions and activities are generally not
disclosed to the Fund's shareholders and the investing public until such time as
the transactions are publicly announced or completed, as the case may be. Any
such pending transaction could have an impact on the valuation of an investment,
however, which may be adjusted prior to the transaction's being publicly
announced or completed.
SUBSEQUENT EVENTS
On November 29, 2001, the Fund entered into an investment of approximately
$4,000,000 of Series E Preferred Stock of 0-In Design Automation, Inc.
On December 4, 2001 the Fund declared an ordinary income cash dividend of
$0.044163 per share, payable on January 3, 2002, to stockholders of record at
the close of business on December 10, 2001. The Fund went ex-dividend on
December 6, 2001.
17
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The Fund is subject to financial market risks, including changes in
interest rates with respect to its investments in debt securities as well as
changes in marketable equity security prices. The Fund does not use derivative
financial instruments to mitigate any of these risks. The return on the Fund's
investments is generally not affected by foreign-currency fluctuations.
The Fund's investment in portfolio securities consists of some fixed rate
debt securities. Since the debt securities are generally priced at a fixed rate,
changes in interest rates do not directly impact interest income. The Fund's
debt securities are generally held to maturity and their fair values are
determined on the basis of the terms of the debt security and the financial
condition of the issuer.
Concentrations of market and credit risk exist with respect to debt and
equity investments in Portfolio Companies which are subject to significant risk
usual to companies in various stages of start-up. Generally, there is no ready
market for the Fund's investments, as they are closely held, generally not
publicly traded or, in circumstances where an investment is publicly traded, the
Fund may be subject to certain trading restrictions for a specified period of
time.
18
Item 8. Financial Statements and Supplementary Data
FINANCIAL STATEMENTS
meVC Draper Fisher Jurvetson Fund I, Inc.
Balance Sheets
October 31, October 31,
ASSETS 2001 2000
Investments in preferred stocks, at fair value
(cost $148,886,310 and $112,554,476, respectively), (Note 2)....... $ 90,926,328 $ 107,554,476
Investments in short-term securities, at market value
(cost $151,320,526 and $88,073,112, respectively), (Note 2) ....... 151,373,377 88,159,616
Cash and cash equivalents
(cost $12,353,422 and $115,759,680, respectively), (Note 2) ....... 12,353,422 115,760,166
Interest receivable ............................................... 396,656 640,620
------------- -------------
Total Assets ...................................................... 255,049,783 312,114,878
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Management fee payable, (Notes 3, 5) .............................. 578,227 668,139
------------- -------------
Shareholders' Equity:
Common Stock, $0.01 par value; 150,000,000 shares
authorized and 16,500,000 outstanding .................... 165,000 165,000
Additional paid in capital .................................... 311,485,000 311,485,000
Retained deficit .............................................. (57,178,444) (203,261)
------------- -------------
Total Shareholders' Equity ........................................ 254,471,556 311,446,739
------------- -------------
Total Liabilities and Shareholders' Equity ........................ $ 255,049,783 $ 312,114,878
============= =============
Net Asset Value Per Share ......................................... $ 15.42 $ 18.88
============= =============
The accompanying notes are an integral part of these financial statements.
19
meVC Draper Fisher Jurvetson Fund I, Inc.
Statements of Operations
For the Period
For the Year Ended March 31, 2000*
October 31, 2001 to October 31, 2000
Investment Income:
Interest income .......................................... $ 9,046,526 $ 9,325,822
Operating Expenses:
Management fees (Notes 3, 5) ............................. 7,388,061 4,615,284
------------ -----------
Net investment income ............................................. 1,658,465 4,710,538
------------ -----------
Net Realized and Unrealized Gain (Loss) on
Investment Transactions:
Net realized gain (loss) on
investment transactions .................................. 5,123 (789)
Net unrealized depreciation on
investment transactions .................................. (52,994,121) (4,913,010)
------------ -----------
Net realized and unrealized loss on
investment transactions .................................. (52,988,998) (4,913,799)
------------ -----------
Net decrease in net assets resulting
from operations ................................................... $(51,330,533) $ (203,161)
============ ===========
Net decrease in net assets resulting
from operations per share ......................................... $ (3.12) $ (0.01)
============ ===========
Dividends declared per Share ...................................... $ 0.34 $ --
============ ===========
* Commencement of operations
The accompanying notes are an integral part of these financial statements.
20
meVC Draper Fisher Jurvetson Fund I, Inc.
Statements of Cash Flows
For the period
For the Year Ended March 31, 2000*
October 31, 2001 to October 31, 2000
Cash Flows from Operating Activities:
Net (decrease) increase in net assets resulting from operations .... $ (51,330,533) $ (203,261)
Adjustments to reconcile net cash provided by operations:
Realized (gain) loss .......................................... (5,123) 789
Net unrealized depreciation ................................... 52,994,121 4,913,010
Changes in assets and liabilities:
Management fee payable ................................... (89,912) 668,139
Interest receivable ...................................... 243,964 (640,620)
Purchases of preferred stock .................................. (36,331,834) (112,554,476)
Purchases of short-term investments ........................... (218,380,747) (102,055,901)
Purchases of cash equivalents ................................. (955,884,612) (2,508,601,655)
Sales/Maturities of short-term investments .................... 185,569,861 14,983,808
Sales/Maturities of cash equivalents .......................... 925,452,721 2,507,600,333
------------- ---------------
Net cash provided by (used for) operating activities .......... (97,762,094) (195,889,834)
------------- ---------------
Cash Flows from Financing Activities:
Gross proceeds from initial public offering ................... -- 330,000,000
Sales load .................................................... -- (16,500,000)
Advisory fee, Prudential Securities Incorporated .............. -- (1,500,000)
Deferred offering costs (Note 2) .............................. -- (350,000)
Redemption of seed money ...................................... -- (5,000)
Distributions ................................................. (5,644,650) --
------------- ---------------
Net cash used for financing activities ........................ (5,644,650) 311,645,000
------------- ---------------
Net change in cash and cash equivalents for the period ................. (103,406,744) 115,755,166
------------- ---------------
Cash and cash equivalents, beginning of period ......................... 115,760,166 5,000
------------- ---------------
Cash and cash equivalents, end of the period ........................... $ 12,353,422 $ 115,760,166
============= ===============
* Commencement of operations.
The accompanying notes are an integral part of these financial statements.
21
meVC Draper Fisher Jurvetson Fund I, Inc.
Statement of Shareholders' Equity
Additional Total
Common Paid in Retained Shareholders'
Stock Capital Deficit Equity
------ ---------- -------- -------------
Balance at March 31, 2000* $ 3 $ 4,997 $ -- $ 5,000
Issuance of 16,500,000 shares through
Initial public offering (Net of Offering Costs) 165,000 311,485,000 -- 311,650,000
Redemption of seed shares (3) (4,997) -- (5,000)
Net decrease in net assets from operations -- -- (203,261) (203,261)
--------- ------------- ------------ -------------
Balance at October 31, 2000 $ 165,000 $ 311,485,000 $ (203,261) $ 311,446,739
--------- ------------- ------------ -------------
Distributions from net investment income -- -- (5,644,650) (5,644,650)
Net decrease in net assets from operations -- -- (51,330,533) (51,330,533)
--------- ------------- ------------ -------------
Balance at October 31, 2001 $ 165,000 $ 311,485,000 $(57,178,444) $ 254,471,556
========= ============= ============ =============
* Commencement of operations.
The accompanying notes are an integral part of these financial statements.
22
meVC Draper Fisher Jurvetson Fund I, Inc.
Selected Per Share Data and Ratios
For the Year Ended For the Period
10/31/01 3/31/00* - 10/31/00
Net asset value, beginning of period ............. $ 18.88 $ 18.89 (a)
Income (loss) from investment operations:
Net investment income ......................... 0.10 0.29
Net realized and unrealized loss on investments (3.22) (0.30)
---------- ----------
Total from investment operations .............. (3.12) (0.01)
---------- ----------
Less distributions from:
Net investment income ......................... (0.34) --
---------- ----------
Total distributions ........................... (0.34) --
---------- ----------
Net asset value, end of period ................... $ 15.42 $ 18.88
========== ==========
Market Value, end of period ...................... $ 9.25 $ 11.50
========== ==========
Total Return - At NAV (b) ......................... (15.99)% (0.05)%
Total Return - At Market (b) ...................... (17.26)% (42.50)%(c)
Ratios and Supplemental Data:
Net assets, end of period (in thousands) .......... $ 254,472 $ 311,447
Ratios to average net assets:
Expenses (d) (Note 3) ............................ 2.50% 2.50%
Net investment income ............................ 0.56% 1.49% (d)
* Commencement of operations.
(a) Initial public offering, net of initial sales load, underwriting and
offering costs of $1.11 per share.
(b) Total return is historical and assumes changes in share price,
reinvestments of all dividends and distributions, and no sales charge.
Total return for periods of less than one year is not annualized.
(c) For the period June 26, 2000 (commencement of trading on the NYSE) to
October 31, 2000.
(d) Annualized.
The accompanying notes are an integral part of these financial statements.
23
meVC Draper Fisher Jurvetson Fund I, Inc.
Schedule of Investments
October 31, 2001
Date of
Initial
Description Shares/Principal Investment Cost Value
- ---------------------------------------------------------------------------------------------------------------------------
Preferred Stocks-35.73% (a, b) (Note 2, 3)
Actelis Networks Inc., Series C ................................... 1,506,025 May 2001 $ 5,000,003 $5,000,003
Annuncio Software Inc., Series E .................................. 625,000 July 2000 5,000,000 3,750,000
AuctionWatch.com, Inc., Series C .................................. 1,047,619 June 2000 5,500,000 2,320,267
*BlueStar Solutions, Inc. (Formerly eOnline, Inc.):
Series C ..................................................... 1,360,544 May 2000 9,999,998 2,500,000
Series C Warrants, expire 5/26/03 ............................ 136,054 May 2000 -- --
Cidera, Inc., Series D ............................................ 857,192 Aug. 2000 7,500,001 3,750,044
DataPlay, Inc., Series D .......................................... 2,500,000 June 2001 7,500,000 7,500,000
*Endymion Systems, Inc., Series A .................................. 7,156,760 June 2000 7,000,000 5,250,199
*EXP Systems, Inc., Series C ....................................... 1,748,252 June 2000 10,000,002 3,750,000
*Foliofn, Inc., Series C ........................................... 5,802,259 June 2000 15,000,000 7,500,000
InfoImage, Inc. Series AA Preferred ............................... 11,740,340 June 2001 352,210 352,210
InfoImage, Inc
Common Stock Warrants, expire 6/14/06......................... 92,663,933 June 2001 -- --
Common Stock ................................................. 933,120 June 2001 2,004,480 --
InfoImage, Inc. ...................................................
Series C Warrants for Common
Stock, expire 6/2/10 .................................... 259,200 June 2000 -- --
*infoUSA.com, Inc., Series B ....................................... 2,145,922 June 2000 9,999,997 6,749,998
Ishoni Networks, Inc, Series C .................................... 2,003,607 Nov. 2000 10,000,003 7,500,102
*IQdestination, Series B ........................................... 1,150,000 Sep. 2000 2,300,000 816,500
*IQdestination, Series C ........................................... 1,295,775 June 2001 920,000 920,000
Lumeta Corporation, Series A ...................................... 384,615 Oct. 2000 250,000 250,000
*MediaPrise, Inc., Series A ........................................ 2,196,193 Sep. 2000 2,000,000 2,000,000
*Pagoo, Inc., Series C ............................................. 3,412,969 July 2000 9,999,999 7,542,661
*Pagoo, Inc., Series D ............................................. 2,098,636 Feb. 2001 4,000,000 4,000,000
Personic Software, Inc., Series F ................................. 512,296 May 2000 10,000,000 --
Personic Software, Inc.:
Series G-1 ................................................... 38,958 Nov. 2000 760,460 --
Series G-1 Warrants, expire 10/31/05 ......................... 973,950 Nov. 2000 -- --
The accompanying notes are an integral part of these financial statements.
24
meVC Draper Fisher Jurvetson Fund I, Inc.
Schedule of Investments
October 31, 2001
Date of
Initial
Description Shares/Principal Investment Cost Value
- -------------------------------------------------------------------------------------------------------
Preferred Stocks (cont.)
*ProcessClaims, Inc., Series C .................. 6,250,000 June 2001 $2,000,000 $2,000,000
Safestone Technologies PLC, Series A ............ 650,401 Dec. 2000 3,499,157 2,624,368
*ShopEaze Systems, Inc., Series B ............... 2,097,902 May 2000 6,000,000 2,250,000
*Sonexis, Inc. (Formerly eYak, Inc.), Series C... 2,590,674 June 2000 10,000,000 9,999,976
Yaga, Inc., Series A ............................ 300,000 Nov. 2000 300,000 600,000
Yaga, Inc.:
Series B .................................. 1,000,000 June 2001 2,000,000 2,000,000
Series B Warrants, expire 6/8/04 .......... 100,000 June 2001 -- --
----------- -----------
Total Preferred Stocks ................................................... 148,886,310 90,926,328
----------- -----------
Short-Term Securities-59.49% (b)
Corporate Bonds-4.31%
Caterpillar Financial Services Corp.
2.210%, 02/12/2002 ........................ 7,500,000 Oct. 2001 7,452,577 7,452,577
Ford Motor Credit Corp.
6.500%, 02/28/2002 ........................ 2,500,000 Mar. 2001 2,511,010 2,526,130
General Motors Acceptance Corp.
5.350%, 12/07/2001 ........................ 1,000,000 June 2001 1,001,322 1,001,322
----------- -----------
Total Corporate Bonds ................................................ 10,964,909 10,980,029
----------- -----------
Certificates of Deposit-4.74%
Commerica BK
5.240%, 01/11/2002 ........................ 4,000,000 Jan. 2001 4,000,151 4,000,151
National City Corp.
2.346%, 09/24/2002 ........................ 4,500,000 June 2001 4,500,000 4,500,000
State Street CD
3.470%, 11/13/2001 ........................ 3,550,000 June 2001 3,550,000 3,550,000
----------- -----------
Total Certificates of Deposit ....................................... 12,050,151 12,050,151
----------- -----------
The accompanying notes are an integral part of these financial statements.
25
meVC Draper Fisher Jurvetson Fund I, Inc.
Schedule of Investments
October 31, 2001
Date of
Initial
Description Shares/Principal Investment Cost Value
- -----------------------------------------------------------------------------------------------------------
U.S. Government & Agency Securities-22.03%
Federal Home Loan Banks
5.005%, 12/04/2001 .......................... 2,000,000 June 2001 $2,002,091 $ 2,005,270
Federal Home Loan Mortgage Corp.
6.625%, 08/15/2002 .......................... 3,000,000 Aug. 2001 3,087,930 3,106,131
Federal Home Loan Mortgage Disc. Cons.
0.000%, 11/16/2001 .......................... 6,022,000 July 2001 6,013,218 6,016,430
Federal Home Loan Mortgage Disc. Cons.
0.000%, 12/14/2001 .......................... 7,800,000 July 2001 7,767,392 7,780,531
Federal Home Loan Mortgage Disc. Cons.
3.360%, 12/21/2001 .......................... 10,000,000 Aug. 2001 9,953,333 9,953,333
Federal Home Loan Mortgage Disc. Cons.
2.170%, 06/28/2002 .......................... 5,975,000 Oct. 2001 5,888,922 5,888,922
Federal National Mortgage Association
3.680%, 03/05/02 ............................ 5,750,000 July 2001 5,677,116 5,677,116
Federal National Mortgage Association Disc. Cons
0.000%, 01/10/2002 .......................... 6,000,000 Aug. 2001 5,960,917 5,960,917
Federal National Mortgage Association Disc. Cons
0.000%, 08/09/2002 .......................... 10,000,000 Aug. 2001 9,660,894 9,660,894
---------- -----------
Total U.S. Government & Agency ................................................ 56,011,813 56,049,544
---------- -----------
Commercial Paper-28.41%
ABB Treasury Centre (U.S.A), Inc.
3.500%, 12/27/2001 .......................... 7,000,000 Aug. 2001 6,961,889 6,961,889
Allied Irish Banks
3.360%, 11/26/2001 .......................... 7,000,000 Aug. 2001 6,983,667 6,983,667
American Express Co.
3.540%, 12/20/2001 .......................... 6,345,000 July 2001 6,314,428 6,314,428
B.M.W. U.S. Cap. Corp.
2.480%, 12/26/2001 .......................... 2,725,000 Sept. 2001 2,714,675 2,714,675
B.P. Amoco Cap. plc
2.370%, 03/26/2002 .......................... 2,700,000 Oct. 2001 2,674,226 2,674,226
2.230%, 04/03/2002 .......................... 5,000,000 Oct. 2001 4,952,613 4,952,613
The accompanying notes are an integral part of these financial statements.
26
meVC Draper Fisher Jurvetson Fund I, Inc.
Schedule of Investments
October 31, 2001
Date of
Initial
Description Shares/Principal Investment Cost Value
- --------------------------------------------------------------------------------------------------------
Commercial Paper (cont.)
Ford Motor Credit Co.
3.500%, 12/18/2001 ................... 4,950,000 Aug. 2001 $4,927,381 $4,927,381
General Electric Cap Corp.
3.220%, 12/13/2001 ................... 7,000,000 Sept. 2001 6,973,703 6,973,703
General Motors Corp.
3.750%, 03/04/02 ..................... 3,500,000 July 2001 3,455,156 3,455,156
M&I Marshall & Ilsley Bank
4.320%, 05/02/2002 ................... 7,200,000 May 2001 7,199,651 7,199,651
Pfizer, Inc.
2.210%, 01/23/2002.................... 4,200,000 Oct. 2001 4,178,600 4,178,600
SBC Communications, Inc.
3.370%, 11/29/2001 ................... 3,500,000 Aug. 2001 3,490,826 3,490,826
Siemens Cap. Corp.
2.450%, 05/06/2002 ................... 7,100,000 Oct. 2001 7,017,463 7,017,463
Verizon Global Funding
2.250%, 04/30/2002 ................... 4,500,000 Oct. 2001 4,449,375 4,449,375
------------ -----------
Total Commercial Paper..................................................... 72,293,653 72,293,653
------------ -----------
Total Short Term Securities .......................................... 151,320,526 151,373,377
------------ -----------
Cash and Cash Equivalents-4.86% (b)
Commercial Paper-4.85%
ABB Treasury Centre (USA), Inc.
2.500%, 12/27/2001 ................... 700,000 Oct. 2001 697,278 697,278
SBC Communications, Inc.
2.450%, 12/19/2001 ................... 1,475,000 Sep. 2001 1,470,181 1,470,181
Toyota Motor Credit Co.
2.530%, 11/01/2001 ................... 7,700,000 Oct. 2001 7,700,000 7,700,000
UBS Financial, Inc.
3.370%, 11/20/2001.................... 2,475,000 Aug. 2001 2,470,598 2,470,598
------------ -----------
Total Commercial Paper................................................. 12,338,057 12,338,057
------------ -----------
The accompanying notes are an integral part of these financial statements.
27
meVC Draper Fisher Jurvetson Fund I, Inc.
Schedule of Investments
October 31, 2001
Date of
Initial
Description Shares/Principal Investment Cost Value
- --------------------------------------------------------------------------------------------------------
Money Market Funds-0.01%
SSgA Money Market Fund
2.598% ........................... 15,365 Oct. 2001 $ 15,365 $ 15,365
------------ ------------
Total Cash and Cash Equivalents ..................................... 12,353,422 12,353,422
------------ ------------
Total Investments ................................................... $312,560,258 $254,653,127
============ ============
(a) These securities are restricted from public sale without prior registration
under the Securities Act of 1933. The Fund negotiates certain aspects of
the method and timing of the disposition of these investments, including
registration rights and related costs.
(b) Percentages are based on net assets of $254,471,556.
* Affiliated Issuers (Total Market Value of $55,279,334): companies in which the
Fund owns at least 5% of the voting securities.
The accompanying notes are an integral part of these financial statements.
28
meVC Draper Fisher Jurvetson Fund I, Inc.
Notes to Financial Statements
October 31, 2001
1. Organization and Business Purpose
meVC Draper Fisher Jurvetson Fund I, Inc. (the "Fund"), a closed-end
investment company sponsored by meVC.com, Inc. ("meVC.com"), was organized as a
Delaware corporation on December 2, 1999 and commenced operations on March 31,
2000. The largest investor in meVC.com is the Draper Fisher Jurvetson Fund VI,
L.P. The Fund seeks to achieve long-term capital appreciation from equity and
equity-oriented securities issued by privately owned companies in transactions
negotiated directly with such companies ("Portfolio Companies"). The Fund seeks
to make venture capital investments in information technology companies,
primarily in the Internet, e-commerce, telecommunications, networking, software
and information services industries. The Fund's investments in Portfolio
Companies will consist principally of equity securities such as common and
preferred stock, but may also include other equity-oriented securities such as
debt convertible into common or preferred stock or debt combined with warrants,
options or other rights to acquire common or preferred stock. Current income is
not a significant factor in the selection of Portfolio Company investments. The
Fund has elected to be treated as a business development company under the
Investment Company Act of 1940, as amended ("the Act"). The shares of the Fund
commenced trading on the New York Stock Exchange (the "Exchange") under the
symbol MVC on June 26, 2000. As described in the Fund's definitive Prospectus,
dated March 28, 2000 (the "Public Offering Date"), the Shares had been
authorized to list on the Exchange, subject to official notice of issuance, but
the Fund and the Exchange mutually agreed that the commencement of trading would
be delayed until not later than 90 days from the Public Offering Date. The Fund
has entered into an advisory agreement with meVC Advisers, Inc. ("meVC
Advisers"), a wholly-owned subsidiary of meVC.com. meVC Advisers has entered
into a sub-advisory agreement with Draper Fisher Jurvetson MeVC Management Co.,
LLC (the "Sub-Adviser").
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements:
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
In November 2000 the American Institute of Certified Public Accountants
(AICPA) issued a revised version of the AICPA Audit and Accounting Guide for
Investment Companies (the "Guide"). The Fund has adopted the provisions of the
Guide, which is effective for annual financial statements issued for fiscal
years beginning after December 15, 2000. The Guide will require investment
companies to amortize premiums and discounts on debt securities. The Fund
currently follows this policy and as such the adoption of the Guide did not have
any material effect on the financial statements.
Valuation of Investments - Investments in preferred stock are carried at
fair value with the net change in unrealized appreciation or depreciation
included in the determination of net assets (the value of total assets less
total liabilities). Cost is used to approximate fair value of these investments
until significant developments affecting an investment provide a basis for
valuing such investment at a number other than cost.
The fair value of investments for which no market exists and for which the
Board of Directors has determined that the original cost of the investment is no
longer an appropriate valuation will be determined on the basis of procedures
established in good faith by our Board of Directors. Valuations will be based
upon such factors as the financial and/or operating results of the most recent
fiscal period, the performance of the company
29
relative to planned budgets/forecasts, the issuer's financial condition and the
markets in which it does business, the prices of any recent transactions or
offerings regarding such securities or any proxy securities, any available
analysis, media, or other reports or information regarding the issuer, or the
markets or industry in which it operates, the nature of any restrictions on
disposition of the securities and other analytical data. In the case of
unsuccessful operations, the valuation may be based upon anticipated liquidation
proceeds.
Because of the inherent uncertainty of the valuation of portfolio
securities which do not have readily ascertainable market values, the Fund's
estimate of fair value may significantly differ from the fair market value that
would have been used had a ready market existed for the securities. Appraised
values do not reflect brokers' fees or other normal selling costs which might
become payable on disposition of such investments.
Investments in companies whose securities are publicly traded on an
organized exchange are valued at their quoted closing market price, less a
discount to reflect the estimated effects of restrictions on the sale of such
securities ("Valuation Discount"), if applicable. Investments in companies whose
securities are publicly traded in the over the counter market are valued at the
average closing of their Bid and Ask prices, less a discount to reflect the
estimated effects of restrictions on the sale of such securities ("Valuation
Discount"), if applicable. If a reliable last bid and ask price are not
available, market values for equity securities are determined based on the last
reliable bid quotation available from a market maker in the security.
Short-term investments (securities which have maturities of one year or
less), including cash equivalents, having maturities of 60 days or less are
stated at amortized cost, which approximates fair value. Other fixed income
securities are stated at fair value. Fair value of these securities is
determined at the most recent bid or yield equivalent from dealers that make
markets in such securities.
Investment Transactions and Related Investment Income - Investment
transactions are accounted for on the trade date (the date the order to buy or
sell is executed). The cost of securities sold is determined on a first-in,
first-out basis, unless otherwise specified. Dividend income on investment
securities is recorded on the ex-dividend date. Interest income, which includes
accretion of discount and amortization of premium, if applicable, is recorded on
the accrual basis.
Cash and Cash Equivalents - For the purpose of the Statement of Cash Flows,
the Fund considers all money market and all highly liquid temporary cash
investments purchased with an original maturity of three months or less to be
cash equivalents.
Restricted Securities - The Fund will invest in privately placed restricted
securities. These securities may be resold in transactions exempt from
registration or to the public if the securities are registered. Disposal of
these securities may involve time-consuming negotiations and expense, and a
prompt sale at an acceptable price may be difficult.
Income Taxes - It is the policy of the Fund to meet the requirements for
qualification as a "regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended. The Fund is not subject to income or
excise taxes to the extent that it distributes all of its investment company
taxable income and net realized gains for its fiscal year.
Accounting Estimates - The preparation of financial statements in
accordance with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statement. Actual results could differ from those estimates.
30
Organizational/Offering Costs - Costs relating to the organization of the
Fund were borne by meVC Advisers, Inc. Certain initial public offering costs
were charged to paid-in capital upon the sale of the shares.
3. Management
The Fund has entered into a management agreement with meVC Advisers, Inc.
(the "Adviser"), a Delaware corporation. Pursuant to such agreement, the Adviser
performs certain services including certain management and administrative
services necessary for the operation of the Fund. The Adviser receives a
management fee equal to 2.5% of the average weekly net assets of the Fund, paid
monthly in arrears. A portion of this fee is also used to pay the Fund's
Sub-Adviser. The Adviser also receives compensation equal to 20.0% of the Fund's
annual realized capital gains net of realized and unrealized capital losses
("carried interest"). The Adviser is a wholly owned subsidiary of a privately
owned corporation.
The Adviser has entered into a sub-advisory agreement with Draper Fisher
Jurvetson MeVC Management Co., LLC (the "Sub-Adviser"). For the Sub-Adviser's
services, the Adviser pays the Sub-Adviser an annual investment sub-advisory fee
equal to 1.0% of the Fund's average weekly net assets, paid monthly in arrears.
The Adviser shall also pay the Sub-Adviser an amount equal to 90.0% of any
carried interest paid by the Fund to the Adviser. The sub-advisory fees are not
an additional expense to the Fund.
The Adviser has entered into a sub-advisory agreement with Fleet Investment
Advisors, Inc. (the "Short-Term Money Manager"). The Short-Term Money Manager
provides all short-term management of the Fund's uninvested cash. The
sub-advisory fees are not an additional expense to the Fund.
meVC Advisers has agreed to pay compensation to the directors and officers
for any and all services rendered to the Fund. As compensation for such
services, each director who is not an officer of the Fund receives an annual fee
of $4,800 paid monthly in arrears, a fee of $10,000 for each meeting of the
Board of Directors, or a committee of the Board of Directors, in which each such
independent director participates, whether attended in person or by telephone,
and reimbursement of all out-of-pocket expenses relating to attendance at such
meetings.
meVC Advisers has agreed to pay all Fund expenses above and beyond the 2.5%
Management Fee paid to meVC Advisers by the Fund.
4. Dividends and Distributions to Shareholders
On December 5, 2000, the Fund announced an ordinary income cash dividend of
$0.34210 per share, payable on January 3, 2001, to stockholders of record at the
close of business on December 8, 2000. The Fund went ex-dividend on December 6,
2000. Distributions can be made payable by the Fund in the form of either a cash
distribution or a stock dividend. On the Fund's ex-dividend date, the Fund was
trading on the New York Stock Exchange (the "NYSE") at a discount to net asset
value. In accordance with the Dividend Reinvestment Plan, the Dividend
Distribution Agent purchased shares on the open market of the NYSE for those
shareholders electing to take their distributions in the form of stock
dividends.
Income dividends and capital gain distributions, if any, are recorded on
the ex-dividend date. Dividends and capital gain distributions are generally
declared and paid annually. An additional distribution may be paid by the Fund
to avoid imposition of federal income tax on any remaining undistributed net
investment income and capital gains. Distributions can be made payable by the
Fund either in the form of a cash distribution or a stock dividend. The amount
and character of income and capital gain distributions are determined in
accordance with income tax regulations which may differ from accounting
principles generally accepted in the United States of America. These differences
are due primarily to differing treatments of income and gain on various
investment securities held by the Fund, timing differences and differing
characterizations of distributions made by the Fund. Permanent book and tax
basis differences relating to shareholder distributions will result in
reclassifications and may affect the allocation between net investment income,
net realized gain (loss) and paid in capital.
31
5. Transactions With Related Parties
The Fund has been granted exemptive relief from certain provisions of the
Investment Company Act of 1940, as amended, to permit the Fund to make
co-investments with certain affiliates of Draper Fisher Jurvetson. The Fund
anticipates that it may, subject to certain terms and conditions, frequently
invest in the same Portfolio Companies as current and future affiliates of the
Adviser.
The Fund has accrued $578,227 and $668,139 at October 31, 2001 and 2000,
respectively, payable to the Adviser, of which $231,291 and $267,255, or 1% are
payable to the Sub-Adviser. For the year ended October 31, 2001 and the period
ended October 31, 2000, respectively, the Adviser has paid Draper Fisher
Jurvetson MeVC Management Co., LLC (the "Sub-Adviser") sub-advisory fees
amounting to $2,723,933 and $1,578,859, or 1% of the 2.5% management fee.
6. Concentration of Market Risk
Financial instruments that subject the Fund to concentrations of market
risk consist principally of preferred stocks, which represent approximately
35.73% of the Fund's net assets. The preferred stocks, as discussed in Note 2,
consist of investments in companies with no readily determinable market values
and as such are valued in accordance with the Fund's fair value policies. The
Fund's investment strategy represents a high degree of business and financial
risk due to the fact that the investments include entities with little operating
history or entities that possess operations in new or developing industries.
These investments are subject to restrictions on resale because they were
acquired from the issuer in private placement transactions.
7. Portfolio Investments
During the year ended October 31, 2001, the Fund invested approximately
$28,200,000 in six new companies and made five follow-on investments in
InfoImage, Inc., IQdestination, Inc., Pagoo.com, Inc., Personic Software, Inc.,
and Yaga, Inc. of approximately $8,132,000. During the year ended October 31,
2001, there were no changes made or additions to the initial investments in
Lumeta Corporation and MediaPrise, Inc. Changes that were made to and additions
that were made to the Fund's individual equity and equity-linked security
investments, during the year ended October 31, 2001, were comprised of the
following:
Ishoni Networks, Inc.
On November 6, 2000 the Fund entered into approximately a $10,000,000
investment in Ishoni Networks, Inc. ("Ishoni Networks"). The Fund's investment
then consisted of 2,003,607 shares of Series C Convertible Preferred Stock
(Series C Preferred Stock") at $4.991 per share.
The Series C Preferred Stock ranks pari passu, with respect to liquidation
preference, to any series of Preferred Stock issued prior to the Series C and
senior to the Common Stock. In the event of a Qualified Initial Public Offering
("Qualified IPO"), the Series C Preferred Stock, as converted to common stock,
will not be transferred in a public distribution prior to one hundred and eighty
days after the date of the final prospectus used in such Qualified IPO.
On July 25, 2001, the Valuation Committee of the Board of Directors marked
down the valuation of the Fund's approximately $10,000,000 investment in the
Series C Preferred Stock issue of Ishoni Networks by 25%. The Fund's investment
now consists of 2,003,607 shares of Series C Preferred Stock at a valuation of
$3.7433 per share.
Personic Software, Inc.
On November 28, 2000, the Fund entered into a follow-on investment of
approximately $760,000 of Series G1 Convertible Preferred Stock of Personic
Software, Inc. ("Personic") The Fund's investment then consisted of 38,958
shares of Series G1 Convertible Preferred Stock ("Series G1 Preferred Stock") at
$19.52 per share. The Fund also received 973,950 warrants to purchase 973,950
shares of Common Stock. The warrants expire on October 31, 2005.
32
In conjunction with the Fund's investment in Series G1 Preferred Stock, the
outstanding capital stock of Personic, including the Fund's investment in Series
G Convertible Preferred Stock ("Series G Preferred Stock") and Series G
Warrants, was automatically converted into 0.125 shares of capital stock of the
same class or series, with fractional shares being rounded up (the
"Recapitalization"). Subsequent to the Recapitalization, the 310,174 shares of
Series G Preferred Stock and the 125,000 Series G Warrants, in total, were
exchanged for 512,296 shares of Series F Convertible Preferred Stock ("Series F
Preferred Stock"). Due to (i) the Valuation Committee of the Board of Directors
50% mark down, on October 27, 2000, of the valuation of the Fund's $10,000,000
investment in the Series G Preferred Stock issue, (ii) the Recapitalization, and
(iii) the Exchange, the Fund's investment in Series F Preferred Stock then
consisted of 512,296 shares at a valuation of $9.76 per share.
The Series F Preferred Stock ranks equally ("pari passu") to the Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the
Series D Preferred Stock and the Series E Preferred Stock, prior to and in
preference to the Common Stock, and junior to the Series AA Preferred Stock and
the Series G1 Preferred Stock with respect to Liquidation Preference. In the
event of a Qualified Initial Public Offering ("Qualified IPO"), the Series F
Preferred Stock, as converted to Common Stock, will not be transferred in a
public distribution prior to one hundred and eighty days after the date of the
final prospectus used in such Qualified IPO.
The Series G1 Preferred Stock ranks senior to the Series A Preferred Stock,
the Series B Preferred Stock, the Series C Preferred Stock, the Series D
Preferred Stock, the Series E Preferred Stock and Series F Preferred Stock and
the Common Stock, and junior to the Series AA Preferred Stock with respect to
liquidation preference. In the event of a Qualified Initial Public Offering
("Qualified IPO"), the Series G1 Preferred Stock, as converted to Common Stock,
will not be transferred in a public distribution prior to one hundred and eighty
days after the date of the final prospectus used in such Qualified IPO.
On June 13, 2001, the Valuation Committee of the Board of Directors marked
down the valuation of the Fund's approximately $10,000,000 investment in the
Series F Preferred Stock issue of Personic by the remaining 50% and marked down
the valuation of the Fund's approximately $760,000 investment in the Series G1
Preferred Stock issue of Personic by 100%. The Fund's investment now consists of
512,296 shares of Series F Preferred Stock at a valuation of $0.00 per share,
38,958 shares of Series G1 Preferred Stock at a valuation of $0.00 per share,
and 973,950 warrants at a valuation of $0.00 per share.
Yaga, Inc.
On November 30, 2000 the Fund entered into a $200,000 investment in Yaga,
Inc. ("Yaga"). The Fund's investment then consisted of 200,000 shares of Series
A Convertible Preferred Stock ("Series A Preferred Stock") at $1.00 per share.
The Series A Preferred Stock ranks senior, with respect to liquidation
preference, to the Common Stock and any series of Junior Preferred Stock. In the
event of a Qualified Initial Public Offering ("Qualified IPO"), the Series A
Preferred Stock, as converted to common stock, will not be transferred in a
public distribution prior to one hundred and eighty days after the date of the
final prospectus used in such Qualified IPO.
On June 8, 2001 the Fund entered into a $2,000,000 investment in Yaga. The
Fund's investment consisted of 1,000,000 shares of Series B Convertible
Preferred Stock ("Series B Preferred Stock") at $2.00 per share. The Fund also
received 100,000 warrants to purchase 100,000 shares of Series B Preferred
Stock. The warrants expire on June 8, 2004.
The Series B Preferred Stock ranks pari passu, with respect to liquidation
preference, to the Series A Preferred Stock and senior to the Common Stock and
any series of Junior Preferred Stock. In the event of a Qualified Initial Public
Offering ("Qualified IPO"), the Series B Preferred Stock, as converted to common
stock, will not be transferred in a public distribution prior to one hundred and
eighty days after the date of the final prospectus used in such Qualified IPO.
Due to the investment in Series B Preferred Stock at a higher price per
share than the Series A Preferred Stock, the value of the Series A Preferred
Stock was subsequently marked up in accordance with the valuation policies as
set forth in the Fund's Registration Statement.
33
On July 31, 2001, the Fund entered into a $100,000 investment of Series A
Preferred Stock of Yaga. The Fund's investment then consisted of 300,000 shares
of Series A Convertible Preferred Stock ("Series A Preferred Stock") at $2.00
per share.
SafeStone Technologies PLC
On December 22, 2000, the Fund entered into approximately $3,500,000
investment in SafeStone Technologies PLC ("SafeStone"), a UK-incorporated
company. The Fund's investment consists of 650,401 shares of Series A
Convertible Preferred Stock ("Series A Preferred Stock") at $5.38 per share. The
Fund's investment also consists of a warrant for the right to subscribe at par
for Series A preference shares of (pound)0.01 each in accordance with the terms
of the Warrant Agreement.
The Series A Preferred Stock ranks senior, with respect to liquidation
preference, to the Common Stock and any series of Junior Preferred Stock. In the
event of a Qualified Initial Public Offering ("Qualified IPO"), the Series A
Preferred Stock, as converted to common stock, will not be transferred in a
public distribution prior to one hundred and eighty days after the date of the
final prospectus used in such Qualified IPO.
On October 26, 2001, the Valuation Committee of the Board of Directors
marked down the valuation of the Fund's approximately $3,500,000 investment in
the Series A Preferred Stock issue of SafeStone by 25%. The Fund's investment
now consists of 650,401 shares of Series A Preferred Stock at a valuation of
$4.0350 per share.
InfoImage, Inc.
On January 29, 2001, the Valuation Committee of the Board of Directors
marked down the valuation of the Fund's $2,004,480 investment in the Series C
Convertible Preferred Stock ("Series C Preferred Stock") issue of InfoImage,
Inc. ("InfoImage") by 50%. The Fund's Series C investment then consisted of
432,000 shares of Series C Preferred Stock at a valuation of $2.32 per share and
259,200 warrants at a valuation of $0.00 per share.
On June 8, 2001, the Fund entered into a $345,533 investment in InfoImage.
The Fund's investment consisted of a Convertible Promissory Note with a face
value of $345,533. In connection with the financing, InfoImage had agreed to
issue warrants to purchase either (i) a series of preferred stock or (ii)
additional shares of common stock, $0.001 par value per share, in connection
with future equity financings.
On October 19, 2001, the Fund's 432,000 shares in the Series C Preferred
Stock was converted into 933,120 shares of Common Stock, along with the entirety
of InfoImage's Series A Convertible Preferred Stock, Series B Convertible
Preferred Stock, and all other Series C Convertible Preferred Stock. This
conversion was done in conjunction with the Fund's $345,533 Convertible
Promissory Note being converted into 11,740,340 shares of Series AA Convertible
Preferred Stock ("Series AA Preferred Stock"). The Series AA Preferred Stock
ranks senior, with respect to liquidation preference, to the Common Stock and
any series of Junior Preferred Stock. In the event of a Qualified Initial Public
Offering ("Qualified IPO"), the Series AA Preferred Stock, as converted to
common stock, will not be transferred in a public distribution prior to one
hundred and eighty days after the date of the final prospectus used in such
Qualified IPO. The warrants originally issued with the Convertible Promissory
note were restated as only being eligible to convert into shares of Common
Stock.
On October 23, 2001, the Valuation Committee of the Board of Directors
marked down the valuation of the Fund's approximately $2,004,000 investment in
the Common Stock issue of InfoImage by the remaining 50%. The Fund's investment
now consists of 11,740,340 shares of Series AA Preferred Stock at a valuation of
$0.03 per share, 933,120 shares of Common Stock at a valuation of $0.00 per
share, 259,200 warrants at a valuation of $0.00, and 92,663,933 warrants at a
valuation of $0.00. The warrants expire on June 2, 2010 and June 14, 2006,
respectively.
34
Pagoo, Inc.
On February 26, 2001, the Fund entered into a follow-on investment of
approximately $4,000,000 of Series D Convertible Preferred Stock of Pagoo, Inc
("Pagoo"). The Fund's investment consists of 2,098,636 shares of Series D
Convertible Preferred Stock ("Series D Preferred Stock") at $1.906 per share.
The Series D Preferred Stock ranks equally ("pari passu"), with respect to
liquidation preference, to the Series A Preferred Stock, the Series B Preferred
Stock, and the Series C Preferred Stock and senior to the Common Stock and any
series of Junior Preferred Stock. In the event of a Qualified Initial Public
Offering ("Qualified IPO"), the Series D Preferred Stock, as converted to common
stock, will not be transferred in a public distribution prior to one hundred and
eighty days after the date of the final prospectus used in such Qualified IPO.
Due to the investment in Series D Preferred Stock at a lower price per
share than the Series C Convertible Preferred Stock ("Series C Preferred
Stock"), the value of the Series C Preferred Stock was subsequently marked down.
The markdown considers the anti-dilutive covenants of the Series C Preferred
Stock as contained in Pagoo's Articles of Incorporation.
AuctionWatch.com, Inc.
On April 20, 2001, the Valuation Committee of the Board of Directors marked
down the valuation of the Fund's $5,500,000 investment in the Series C
Convertible Preferred Stock ("Series C Preferred Stock") issue of
AuctionWatch.com, Inc. ("AuctionWatch") by 25%. The Fund's investment then
consisted of 1,047,619 shares of Series C Preferred Stock at a valuation of
$3.94 per share.
On July 25, 2001, the Valuation Committee of the Board of Directors marked
down the valuation of the Fund's $5,500,000 investment in the Series C Preferred
Stock issue of AuctionWatch.com, Inc. ("AuctionWatch") by another 25%. The
Fund's investment then consisted of 1,047,619 shares of Series C Preferred Stock
at a valuation of $2.625 per share.
On October 23, 2001, the Valuation Committee of the Board of Directors
marked down the valuation of the Fund's $5,500,000 investment in the Series C
Preferred Stock issue of AuctionWatch.com, Inc. ("AuctionWatch") by another 25%.
The Fund's investment now consists of 1,047,619 shares of Series C Preferred
Stock at a valuation of $2.2148 per share.
Cidera, Inc.
On April 20, 2001, the Valuation Committee of the Board of Directors marked
down the valuation of the Fund's $7,500,001 investment in the Series D
Convertible Preferred Stock ("Series D Preferred Stock") issue of Cidera, Inc.
("Cidera") by 50%. The Fund's investment now consists of 857,192 shares of
Series D Preferred Stock at a valuation of $4.3748 per share.
EXP Systems, Inc. (Formerly EXP.com, Inc.)
On April 20, 2001, the Valuation Committee of the Board of Directors marked
down the valuation of the Fund's $10,000,001 investment in the Series C
Convertible Preferred Stock ("Series C Preferred Stock") issue of EXP Systems,
Inc. ("EXP") by 25%. The Fund's investment then consists of 1,748,252 shares of
Series C Preferred Stock at a valuation of $4.29 per share.
On October 23, 2001, the Valuation Committee of the Board of Directors
marked down the valuation of the Fund's $10,000,001 investment in the Series C
Preferred Stock issue of EXP Systems, Inc. ("EXP") by 50%. The Fund's investment
now consists of 1,748,252 shares of Series C Preferred Stock at a valuation of
$2.1450 per share.
EXP.com, Inc. has changed its name to EXP Systems, Inc.
35
Sonexis, Inc. (Formerly eYak, Inc.)
On May 8, 2001 and as a result of its acquisition of Brooktrout Software,
eYak, Inc. said that the combined company has changed its name to Sonexis, Inc.
Actelis Networks, Inc.
On May 21, 2001, the Fund entered into an approximately $5,000,000
investment in Actelis Networks, Inc. ("Actelis"). The Fund's investment consists
of 1,506,025 shares of Series C Convertible Preferred Stock ("Series C Preferred
Stock") at $3.32 per share.
The Series C Preferred Stock ranks senior, with respect to liquidation
preference, to any series of Preferred Stock issued prior to the Series C and
senior to the Common Stock. In the event of a Qualified Initial Public Offering
("Qualified IPO"), the Series C Preferred Stock, as converted to common stock,
will not be transferred in a public distribution prior to one hundred and eighty
days after the date of the final prospectus used in such Qualified IPO.
DataPlay, Inc
On June 4, 2001, the Fund entered into a $7,500,000 investment in DataPlay,
Inc. ("DataPlay"). The Fund's investment consists of 2,500,000 shares of Series
D Convertible Preferred Stock ("Series D Preferred Stock") at $3.00 per share.
The Series D Preferred Stock ranks pari passu, with respect to liquidation
preference, to the Series B Preferred Stock and the Series C Preferred Stock and
senior the Series A Preferred Stock and Common Stock. In the event of a
Qualified Initial Public Offering ("Qualified IPO"), the Series D Preferred
Stock, as converted to common stock, will not be transferred in a public
distribution prior to one hundred and eighty days after the date of the final
prospectus used in such Qualified IPO.
BlueStar Solutions, Inc. (Formerly eOnline, Inc.)
On June 13, 2001, eOnline, Inc., changed its name to BlueStar Solutions,
Inc.
On October 23, 2001, the Valuation Committee of the Board of Directors
marked down the valuation of the Fund's approximately $10,000,000 investment in
the Series C Convertible Preferred Stock ("Series C Preferred Stock") issue of
BlueStar Solutions, Inc. ("BlueStar") by 75%. The Fund's investment now consists
of 1,360,544 shares of Series C Preferred Stock at a valuation of $1.8375 per
share and 136,054 warrants at a valuation of $0.00 per share. The warrants
expire at the earlier of (i) May 26, 2003 or (ii) BlueStar's Qualified Initial
Public Offering ("Qualified IPO").
ProcessClaims
On June 13, 2001, the Fund entered into a $2,000,000 investment in
ProcessClaims ("ProcessClaims"). The Fund's investment consists of 6,250,000
shares of Series C Convertible Preferred Stock ("Series C Preferred Stock") at
$0.32 per share.
The Series C Preferred Stock ranks senior, with respect to liquidation
preference, to the Series A Preferred Stock and the Series B Preferred Stock and
senior the Common Stock. In the event of a Qualified Initial Public Offering
("Qualified IPO"), the Series C Preferred Stock, as converted to common stock,
will not be transferred in a public distribution prior to one hundred and eighty
days after the date of the final prospectus used in such Qualified IPO.
IQdestination
On June 27, 2001, the Fund entered into a follow-on investment of $920,000
of Series C Convertible Preferred Stock in IQdestination ("IQdestination"). The
Fund's investment consists of 1,295,775 shares of Series C Convertible Preferred
Stock ("Series C Preferred Stock") at $0.71 per share.
36
The Series C Preferred Stock ranks pari passu, with respect to liquidation
preference, to the Series B Preferred Stock and senior the Common Stock and any
Junior Preferred Stock. In the event of a Qualified Initial Public Offering
("Qualified IPO"), the Series C Preferred Stock, as converted to common stock,
will not be transferred in a public distribution prior to one hundred and eighty
days after the date of the final prospectus used in such Qualified IPO.
Due to the investment in Series C Preferred Stock at a lower price per
share than the Series B Convertible Preferred Stock ("Series B Preferred
Stock"), the value of the Series B Preferred Stock was subsequently marked down
in accordance with the valuation policies as set forth in the Fund's
Registration Statement.
Annuncio Software, Inc.
On July 25, 2001, the Valuation Committee of the Board of Directors marked
down the valuation of the Fund's $5,000,000 investment in the Series E
Convertible Preferred Stock ("Series E Preferred Stock") issue of Annuncio
Software, Inc. ("Annuncio") by 25%. The Fund's investment now consists of
625,000 shares of Series E Preferred Stock at a valuation of $6.00 per share.
FOLIOfn, Inc.
On July 25, 2001, the Valuation Committee of the Board of Directors marked
down the valuation of the Fund's $15,000,000 investment in the Series C
Convertible Preferred Stock ("Series C Preferred Stock") issue of FOLIOfn, Inc.
("FOLIOfn") by 25%. The Fund's investment then consisted of 5,802,259 shares of
Series C Preferred Stock at a valuation of $1.9389 per share.
On October 26, 2001, the Valuation Committee of the Board of Directors
marked down the valuation of the Fund's $15,000,000 investment in the Series C
Preferred Stock issue of FOLIOfn by another 25%. The Fund's investment now
consists of 5,802,259 shares of Series C Preferred Stock at a valuation of
$1.2926 per share.
ShopEaze Systems, Inc. (Formerly ShopEaze.com, Inc.)
On July 25, 2001, the Valuation Committee of the Board of Directors marked
down the valuation of the Fund's $6,000,000 investment in the Series B
Convertible Preferred Stock ("Series B Preferred Stock") issue of ShopEaze
Systems, Inc. ("ShopEaze") by 25%. The Fund's investment then consisted of
2,097,902 shares of Series B Preferred Stock at a valuation of $2.15 per share.
On October 23, 2001, the Valuation Committee of the Board of Directors
marked down the valuation of the Fund's $6,000,000 investment in the Series B
Preferred Stock issue of ShopEaze by 50%. The Fund's investment now consists of
2,097,902 shares of Series B Preferred Stock at a valuation of $1.0725 per
share.
ShopEaze.com, Inc. has changed its name to ShopEaze Systems, Inc.
infoUSA.com, Inc.
On September 28, 2001, the Valuation Committee of the Board of Directors
marked down the valuation of the Fund's approximately $10,000,000 investment in
the Series B Convertible Preferred Stock ("Series B Preferred Stock") issue of
infoUSA.com, Inc. ("infoUSA.com") by 32.5%. The Fund's investment now consists
of 2,145,922 shares of Series B Preferred Stock at a valuation of $3.1455 per
share.
Endymion Systems, Inc.
On October 26, 2001, the Valuation Committee of the Board of Directors
marked down the valuation of the Fund's approximately $7,000,000 investment in
the Series A Preferred Stock ("Series A Preferred Stock") issue of Endymion
Systems, Inc. ("Endymion") by 25%. The Fund's investment now consists of
7,156,760 shares of Series A Preferred Stock at a valuation of $0.7336 per
share.
37
8. Subsequent Events
On November 29, 2001, the Fund entered into an investment of approximately
$4,000,000 of Series E Preferred Stock of 0-In Design Automation, Inc.
On December 4, 2001 the Fund declared an ordinary income cash dividend of
$0.044163 per share, payable on January 3, 2002, to stockholders of record at
the close of business on December 10, 2001. The Fund went ex-dividend on
December 6, 2001.
38
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
meVC Draper Fisher Jurvetson Fund I, Inc.
In our opinion, the accompanying balance sheet, including the schedule of
investments, and the related statements of operations, cash flows and of
shareholders' equity and the selected per share data and ratios present fairly,
in all material respects, the financial position of meVC Draper Fisher Jurvetson
Fund I, Inc. (the "Fund") at October 31, 2001, the results of its operations,
cash flows, shareholders' equity and selected per share data and ratios for the
periods indicated, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and selected per
share data and ratios (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit 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, and evaluating the overall financial statement presentation. We
believe that our audit, which included confirmation of securities at October 31,
2001 by correspondence with the custodian, provides a reasonable basis for our
opinion.
PricewaterhouseCoopers LLP
December 7, 2001
39
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosures
None
Part III
Item 10. Directors and Executive Officers of the Registrant
Name and Occupation Age Since
- ------------------- ------ -------
John M. Grillos *.......................................................... 59 2000
Chairman of the Board, Chief Executive Officer of the Fund
Peter S. Freudenthal * (2)................................................ 38 2000
Vice-Chairman, President, Director of the Fund
Larry J. Gerhard (1) (3).................................................. 60 2000
Director of the Fund
Harold E. Hughes, Jr (1) (3).............................................. 55 2000
Director of the Fund
Chauncey F. Lufkin (1) (2) (3)........................................... 44 2000
Director of the Fund
Paul D. Wozniak * (2)..................................................... 37 2000
Vice-President, Chief Financial Officer, Treasurer, Secretary of the Fund
* "Interested Person" as defined in the Investment Company Act.
(1) Member of Audit Committee.
(2) Member of Valuation Committee.
(3) Member of the Committee of the Independent Directors
John M. Grillos is Chairman, Chief Executive Officer and a director of the Fund.
Mr. Grillos is also the Managing Member of Draper Advisers. He is also founder
and Managing General Partner of ITech Partners, L.P., a seed stage information
technology fund. Mr. Grillos has over thirteen years experience in information
technology venture capital investing and twenty-one years of entrepreneurial,
professional and managerial experience in information technology. Most recently,
Mr. Grillos served as the Executive Vice President, Chief Operating Officer and
is a director of SmartForce PLC (formerly CBT Group PLC), or SmartForce, a
leading supplier of e-learning products with revenues exceeding $200 million.
From 1997 to 1998, Mr. Grillos served as Managing Director at SoundView Venture
Partners, L.P., where he was responsible for managing the venture capital
business activities of SoundView Financial Group, an information
technology-focused investment bank recently acquired by Wit Capital. From 1988
to 1997, Mr. Grillos was Managing Director responsible for information
technology venture capital investing for Robertson, Stephens & Co., a San
Francisco-based investment bank focused on high technology and high growth
industries. From 1985 to 1987, Mr. Grillos served as President and Chief
Operating Officer of SPSS, Inc., a leading supplier of statistical analysis,
graphics and
40
decision support software. From 1983 to 1985, Mr. Grillos served as President
and Chief Executive Officer of Tesseract Corporation, a venture-backed supplier
of payroll and human resource software. From 1972 to 1983, Mr. Grillos held
various management positions with American Management Systems, an information
technology consulting and custom application development company. For the last
five of his 11 years with AMS, Mr. Grillos was Vice President and Business Unit
Manager responsible for the operations of AMS on the West Coast. From 1968 to
1972, Mr. Grillos worked as a Development Manager and Principal Designer for the
Institute for Computer Research, University of Chicago, where he was responsible
for developing computerized control and data acquisition systems for several
departments of the University. From 1965 to 1968, Mr. Grillos worked as a Staff
Engineer for Bell Labs and Western Electric Company. Mr. Grillos received his
M.B.A. from the University of Chicago in 1971 and his B.S. in Electrical
Engineering and Computer Science from the Illinois Institute of Technology in
1969.
Peter S. Freudenthal is Vice-Chairman, President, and a director of the Fund.
Mr. Freudenthal is also co-founder, President, Chief Executive Officer, and
Chairman of the Board of meVC.com, Inc. and President and Chairman of the Board
of meVC Advisers, Inc. Previously, Mr. Freudenthal was a Senior Biotechnology
Equity Research Analyst and a Vice President with Robertson Stephens & Company.
Before joining Robertson Stephens, Mr. Freudenthal also served as Director of
Healthcare Research at Brean Murray & Company, a privately held investment bank
in New York. Mr. Freudenthal attended the Yale School of Medicine where he
focused on Neurosurgery and Trauma Surgery. Prior to medical school, Mr.
Freudenthal was Senior Graduate Fellow in the Laboratory of Immunology &
Cellular Physiology at The Rockefeller University in New York, as well as a
National Science Foundation Fellow and a David C. Scott Foundation Fellow. From
1981 to 1985, Mr. Freudenthal was a Thomas J. Watson Scholar at the IBM Research
Center in Yorktown, New York. Mr. Freudenthal received his B.S. with a double
major in Molecular Biophysics & Biochemistry and Molecular Biology from Yale
College.
Larry J. Gerhard is a director of the Fund. Mr. Gerhard has over 39 years of
experience in the computer and electronics industries and has held senior
management positions for the past 26 years. He is currently President and Chief
Executive Officer at eVineyard. Prior to eVineyard, he was President, Chief
Executive Officer and director of Summit Design, Inc. since January 1993 and
Chairman of the Board since May 1996. Mr. Gerhard was President and Chief
Executive Officer of Enterprise Communications and Computing, Inc. from November
1991 to November 1992. Before that, he was the President and Chief Executive
Officer of Ventura Software, Inc. from 1989 to November 1991. Prior to that
time, Mr. Gerhard was President and Chief Executive Officer of Decision Data,
Inc. He began his career at North American Aviation as a programmer working on
the original Apollo Missile program. After 4 years at NAA he joined Raytheon
Data and his last position with Raytheon was Senior Vice President of
Engineering and Operations. Mr. Gerhard received his B.S. in Electrical
Engineering from West Coast University and his M.B.A. from the University of
Pittsburgh, Executive M.B.A. Program.
Harold E. Hughes, Jr is a director of the Fund. Mr. Hughes is a 23-year veteran
of Intel during which time he served as Treasurer, Vice President responsible
for Intel's venture fund, Chief Financial Officer, and Vice President and
Director of Planning and Logistics. Prior to joining Intel, he served as a U.S.
Army Officer from 1968-1972. He currently serves on the board of directors of
London Pacific Corp., Merant PLC and Hummingbird Communications. Mr. Hughes
received his B.A. in Economics from the University of Wisconsin and his M.B.A.
from the University of Michigan.
Chauncey F. Lufkin is a director of the Fund. Mr. Lufkin is also Senior Vice
President of Franklin Advisers, Inc. (a subsidiary of Franklin Resources, listed
on the NYSE), and Portfolio Manager of Franklin Floating Rate Trust, a mutual
fund focusing on floating rate debt approaching $2 billion in assets under
management. Mr. Lufkin launched Franklin Floating Rate Trust in 1997. More
recently, he has focused on launching two related products, a version of the
bank debt fund (Franklin Floating Rate Fund PLC) for foreign investors, and a
collateralized loan obligation (CLO) for institutional investors. Before
launching Franklin Floating Rate Trust, Mr. Lufkin was portfolio manager of
Franklin Principal Maturity Trust, a debt strategies fund that traded on the
41
New York Stock Exchange. Earlier in his career, Mr. Lufkin worked for
Manufactures Hanover Trust Co. (since acquired by Chase Manhattan Bank) in the
acquisition finance group specializing in structuring leveraged transactions. He
also worked at the merchant bank arm of Security Pacific National Bank (since
acquired by Bank of America). Mr. Lufkin received his B.A. in History from St.
Lawrence University.
Paul D. Wozniak is Vice President, Chief Financial Officer, Treasurer, and
Secretary of the Fund. Mr. Wozniak is also Chief Operating Officer for meVC.com,
Inc. and Vice President of Operations for meVC Advisers, Inc. Mr. Wozniak has
fifteen years experience in international fund management operations.
Previously, Mr. Wozniak served in various operational roles, most recently as
Vice President and Director, Mutual Fund Operations, at GT Global Inc./AIM
Funds. At GT Global, Mr. Wozniak was responsible for the overall management of
the mutual fund accounting and pricing groups for the GT Global mutual fund
family, comprising over $10 billion in 37 funds invested worldwide. Mr. Wozniak
also served as an officer of both GT Global Inc. and the GT Global Family of
Funds. Mr. Wozniak received his B.S. in Accounting from the University of
Scranton.
There is no family relationship between any director or executive officer of the
Fund.
Item 11. Executive Compensation
The Fund's board does not have a standing nominating or compensation committee.
meVC Advisers has agreed to pay compensation to the directors and officers for
any and all services rendered to the Fund. As compensation for such services,
each director who is not an officer of the Fund receives an annual fee of $4,800
paid monthly in arrears, a fee of $10,000 for each meeting of the Board of
Directors, or a committee of the Board of Directors, in which each such
independent director participates, whether attended in person or by telephone,
and reimbursement of all out-of-pocket expenses relating to attendance at such
meetings. Directors of the Fund who are "interested persons" as defined by the
1940 Act receive no compensation from the Fund.
Compensation Table
- ----------------------------------- -----------------------------------
Name of Total Compensation*
Person, Position
- ----------------------------------- -----------------------------------
Larry J. Gerhard, Director $108,784
- ----------------------------------- -----------------------------------
Harold E. Hughes, Jr., Director $107,600
- ----------------------------------- -----------------------------------
Chauncey F. Lufkin, Director $107,600
- ----------------------------------- -----------------------------------
* Represents fees paid to each director during the fiscal year ended October 31,
2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
PRINCIPAL STOCKHOLDER
The Fund does not know of any person who is a beneficial owner of more than
5% of the outstanding shares of the Fund's common stock.
OWNERSHIP OF MANAGEMENT
The following table sets forth at October 31, 2001, the number and
percentage of outstanding shares of the Fund's common stock beneficially held by
(i) each director of the Fund, and (ii) all officers and directors as a group.
Under the rules of the SEC, a person is deemed to own beneficially all
securities as to which that person
42
owns or shares voting or investment power, as well as all securities which such
person may acquire within 60 days through the exercise of currently available
conversion rights, warrants or options. Except as otherwise indicated, the
stockholders listed in the table below have sole voting and investment power
with respect to the shares indicated.
Amount and Nature of Beneficial Ownership
-----------------------------------------------------------
Sole Voting and Other Beneficial Percent of
Title of Class Name Investment Power Ownership Total Class
- -------------------- ------------------------- -------------------------------------------- ------------- -------------
Common Stock John M. Grillos 13,862.08579 0 13,862.08579 *
Peter S. Freudenthal 0 0 0 0
Larry J. Gerhard 0 0 0 0
Harold E. Hughes, Jr 0 0 0 0
Chauncey F. Lufkin 0 0 0 0
Paul D. Wozniak 0 0 0 0
All Directors and 13,862.08579 0 13,862.08579 *
Officers as a group
* Indicates less than one percent.
Item 13. Certain Relationships and Related Transactions
The Adviser, pursuant to the terms of the Investment Advisory Agreement, is
responsible for the supervision of portfolio investments. Transactions between
the Fund and the Adviser, including operational responsibilities, duties and
compensation, are governed by the Investment Advisory Agreement. Throughout the
term of the Investment Advisory Agreement, the Fund will pay to the Adviser an
annual management fee of 2.5% of the Fund's average weekly net assets, payable
monthly, in arrears. For the year ended October 31, 2001, the Investment Adviser
earned an investment advisory fee in the aggregate amount of $7,388,061.
The Sub-Advisor, pursuant to the terms of the Investment Sub-Advisory
Agreement, is responsible, on a day-to-day basis for the selection and
supervision of portfolio investments. The Sub-Adviser provides all co-investment
opportunities for approval by the Fund's Board of Directors. Throughout the term
of the Investment Sub-Advisory Agreement, the Adviser will pay to the
Sub-Adviser an annual management fee of 1.0% of the Fund's average weekly net
assets, payable monthly, in arrears. For the year ended October 31, 2001, the
Investment Sub-Adviser earned an investment advisory fee in the aggregate amount
of $2,955,224.
The Adviser has entered into a sub-advisory agreement with Fleet Investment
Advisors, Inc. (the "Short-Term Money Manager"). The Short-Term Money Manager
provides all short-term management of the Fund's uninvested cash. The
sub-advisory fees are not an additional expense to the Fund.
As stated above in Item 1 (Business---Co-Investments and Follow-On
Investments) and in Item 8 (Note 5 of the notes accompanying the financial
statements in "Transactions with Related Parties"), the Fund co-invests in
Portfolio Companies from time to time with affiliates of the Fund and the
Investment Sub-Adviser, including certain venture capital investment
partnerships. The Fund's co-investments with such affiliates are subject to the
terms and conditions of the exemptive order granted by the Commission, which
relieves the Fund from certain provisions of the Act and permits certain joint
transactions with the investment partnerships.
43
Part IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K
(a)(1) Financial Statements Page
-------------------- ----
Balance Sheets
October 31, 2001 and October 31, 2000 19
Statement of Operations
For the Year Ended October 31, 2001 and
the Period March 31, 2000 to October 31, 2000 20
Statement of Cash Flows
For the Year Ended October 31, 2001 and
the Period March 31, 2000 to October 31, 2000 21
Statement of Shareholders' Equity
For the Period Ended March 31, 2000 to October 31, 2000 and 22
the Year Ended October 31, 2001
Selected Per Share Data and Ratios
For the Year Ended October 31, 2001 and
the Period Ended March 31, 2000 to October 31, 2000 23
Schedule of Investments
October 31, 2001 24
Notes to Financial Statements 29
Report of Independent Public Accountants 39
All other information required in the financial statement schedules has
been incorporated in the financial statements or notes thereto or has been
omitted since the information is not applicable, not present or not present in
amounts sufficient to require submission of the schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Fund during the year for which
this report is filed.
44
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed by the
undersigned, thereunto duly authorized.
MEVC DRAPER FISHER JURVETSON FUND I, INC.
Date: December 18, 2001 /s/ JOHN M GRILLOS
--------------------------------------------------
John M. Grillos
Chairman, Chief Executive Officer, Director
Date: December 18, 2001 /s/ PAUL WOZNIAK
--------------------------------------------------
Paul Wozniak
Vice President, Treasurer, Chief Financial Officer
45
Pursuant to the requirements of Section 13 or 15(d) 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.
Date Signature Title
- ------- ------------- ------
December 18, 2001 /s/ John M. Grillos Chairman, Chief Executive Officer, Director
- ---------------------------- -------------------------
(John M. Grillos)
December 18, 2001 /s/ Peter S. Freudenthal Vice-Chairman, President, Director
- ---------------------------- -------------------------
(Peter S. Freduenthal)
December 18, 2001 /s/ Larry J. Gerhard Director
- ---------------------------- -------------------------
(Larry J. Gerhard)
December 18, 2001 /s/ Harold E. Hughes, Jr. Director
- ---------------------------- -------------------------
(Harold E. Hughes, Jr.)
December 18, 2001 /s/ Chauncey F. Lufkin Director
- ---------------------------- -------------------------
(Chauncey F. Lufkin)
December 18, 2001 /s/ Paul D. Wozniak Vice-President, Chief Financial Officer, Treasurer,
Secretary
- ---------------------------- -------------------------
(Paul D. Wozniak)
46