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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-28405
MEVC DRAPER FISHER JURVETSON FUND I, INC.
D/B/A MVC CAPITAL
(Exact name of the registrant as specified in its charter)
DELAWARE 94-3346760
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3000 Sand Hill Road
Building 1, Suite 155
Menlo Park, California
(Address of principal 94025
executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 926-7000
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 [ ]
As of September 12, 2003, there were 16,152,600 shares of Registrant's common
stock, $.01 par value (the "Shares"), outstanding.
meVC Draper Fisher Jurvetson Fund I, Inc.
(A Delaware Corporation)
Index
Part I. Financial Information Page
Item 1. Financial Statements
Balance Sheets
- July 31, 2003 and October 31, 2002................................................. 1
Statement of Operations
- For Period November 1, 2002 to July 31, 2003 and
the Period November 1, 2001 to July 31, 2002....................................... 2
Statement of Operations
- For Period May 1, 2003 to July 31, 2003 and
the Period May 1, 2002 to July 31, 2002............................................ 3
Statement of Cash Flows
- For the Period November 1, 2002 to July 31, 2003 and
the Period November 1, 2001 to July 31, 2002....................................... 4
Statement of Shareholders' Equity
- For the Period November 1, 2002 to July 31, 2003 and
the Period November 1, 2001 to July 31, 2002....................................... 5
Selected Per Share Data and Ratios
- For the Period November 1, 2002 to July 31, 2003 and
the Year ended October 31, 2002.................................................... 6
Schedule of Investments
- July 31, 2003...................................................................... 7
Notes to Financial Statements.......................................................... 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................... 14
Item 3. Quantitative and Qualitative Disclosure about Market Risk.............................. 25
Item 4. Controls and Procedures................................................................ 25
Part II. Other Information
Item 1. Legal Proceedings....................................................................... 26
Item 4. Submission of Matters to a Vote of Security Holders..................................... 26
Item 5. Other Information....................................................................... 28
Item 6. Exhibits and Reports on Form 8-K........................................................ 28
SIGNATURE................................................................................................ 30
Exhibits................................................................................................. 31
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
MVC CAPITAL
BALANCE SHEET
JULY 31, OCTOBER 31,
2003 2002
ASSETS (UNAUDITED)
Investments in preferred/common stocks, at fair value $ 15,599,999 $ 50,116,026
(cost $129,325,848 and $127,536,066, respectively), (Note 3)
Investments in debt instruments, at fair value 15,300,474 -
(cost $19,774,112 and $0, respectively) (Note 3)
Investments in short-term securities, at market value 112,313,648 62,797,687
(cost $112,313,648 and $62,800,088, respectively)
Cash and cash equivalents 228,980 78,873,485
(cost $228,980 and $78,873,485, respectively)
Subordinated notes, at fair value - 4,077,474
(cost $4,500,000 and $6,327,474, respectively) (Note 3)
Interest receivable 156,220 216,024
Prepaid expenses 697,533 50,672
Receivable for investments sold - 379,632
----------------- ----------------
TOTAL ASSETS $ 144,296,854 $ 196,511,000
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Administration 25,867 11,250
Audit fees 109,983 149,000
Legal fees 175,863 387,459
Directors' fees 26,379 14,400
Employee compensation & benefits 99,623 57,279
Consulting and public relations fees 14,089 344,608
Proxy/Litigation related fees & expenses 2,134,726 -
Other accrued expenses 41,118 160,527
------------------ ----------------
TOTAL LIABILITIES $ 2,627,648 $ 1,124,523
------------------ ----------------
SHAREHOLDERS' EQUITY
Common Stock, $0.01 par value; 150,000,000 shares
authorized; 16,152,600 and 16,500,000 shares outstanding, respectively 161,526 165,000
Additional paid in capital 308,593,557 311,485,000
Accumulated deficit (167,085,877) (116,263,523)
------------------ ----------------
TOTAL SHAREHOLDERS' EQUITY 141,669,206 195,386,477
------------------ ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 144,296,854 $ 196,511,000
================= ================
NET ASSET VALUE PER SHARE $ 8.77 $ 11.84
================= ================
The accompanying notes are an integral part of these financial statements.
1
MVC CAPITAL
STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE PERIOD FOR THE PERIOD
NOVEMBER 1, 2002 NOVEMBER 1, 2001
TO JULY 31, 2003 TO JULY 31, 2002
INVESTMENT INCOME:
Interest income $ 2,152,810 $ 2,776,045
Dividend income - 9,745
Other income 988 -
------------------- -------------------
TOTAL INVESTMENT INCOME 2,153,798 2,785,790
OPERATING EXPENSES:
Management fees - 3,592,753
Proxy/Litigation related fees & expenses 4,037,327 -
Employee compensation & benefits 2,236,987 221,736
Legal fees 1,412,517 485,559
Insurance 689,929 -
Facilities 565,696 -
Directors fees 396,000 206,400
Audit fees 141,349 89,400
Administration 108,712 33,750
Consulting and public relations fees 82,492 -
Other expenses 77,561 229,576
Printing and postage 48,606 -
------------------- -------------------
TOTAL OPERATING EXPENSES 9,797,176 4,859,174
------------------- -------------------
NET INVESTMENT LOSS (7,643,378) (2,073,384)
------------------- -------------------
NET REALIZED AND UNREALIZED LOSS ON
INVESTMENTS:
Net realized loss on
investments (151,931) (20,696,133)
Net unrealized depreciation on
investments (43,027,045) (27,064,872)
------------------- -------------------
Net realized and unrealized loss on
investments (43,178,976) (47,761,005)
------------------- -------------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ (50,822,354) $ (49,834,389)
=================== ===================
NET DECREASE IN NET ASSETS PER SHARE
RESULTING FROM OPERATIONS $ (3.13) $ (3.02)
=================== ===================
DIVIDENDS DECLARED PER SHARE $ - $ 0.04
=================== ===================
The accompanying notes are an integral part of these financial statements.
2
MVC CAPITAL
STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE PERIOD FOR THE PERIOD
MAY 1, 2003 MAY 1, 2002
TO JULY 31, 2003 TO JULY 31, 2002
INVESTMENT INCOME:
Interest income $ 776,232 $ 806,238
--------------------- ------------------
TOTAL INVESTMENT INCOME 776,232 806,238
OPERATING EXPENSES:
Management fees - 588,049
Employee compensation & benefits 344,697 221,736
Legal fees 260,806 485,559
Insurance 368,395 -
Facilities 126,669 -
Directors fees 83,769 206,400
Audit fees 41,758 89,400
Administration 36,605 33,750
Consulting and public relations fees 48,726 -
Other expenses 23,999 229,576
--------------------- -----------------
TOTAL OPERATING EXPENSES 1,335,424 1,854,470
--------------------- -----------------
NET INVESTMENT LOSS (559,192) (1,048,232)
--------------------- -----------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss) on
investments 914 (17,368,574)
Net unrealized depreciation on
investments (13,824,254) (2,380,632)
--------------------- -----------------
Net realized and unrealized loss on
investments (13,823,340) (19,749,206)
--------------------- -----------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ (14,382,532) $ (20,797,438)
===================== =================
NET DECREASE IN NET ASSETS PER SHARE
RESULTING FROM OPERATIONS $ (0.89) $ (1.26)
===================== =================
DIVIDENDS DECLARED PER SHARE $ - $ -
===================== =================
The accompanying notes are an integral part of these financial statements.
3
MVC CAPITAL
STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE PERIOD FOR THE PERIOD
NOVEMBER 1, 2002 NOVEMBER 1, 2001
TO JULY 31, 2003 TO JULY 31, 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets resulting from operations $ (50,822,354) $ (49,834,389)
Adjustments to reconcile to net cash (used for) provided by
operating activities:
Realized loss 151,931 20,696,133
Net unrealized loss 43,027,045 27,064,872
Changes in assets and liabilities:
Accounts payable 1,503,125 802,635
Prepaid expenses (646,861) -
Interest receivable 59,805 379,245
Receivable for investments sold 379,632 -
Investment purchased payable - 6,089,918
Purchases of preferred stock (1,999,998) (20,506,754)
Purchases of debt instruments (19,955,000) -
Purchases of short-term investments (251,771,529) (123,189,975)
Purchases of cash equivalents (585,975,377) (770,704,696)
Proceeds from preferred stocks 1,884,840 8,170,283
Proceeds from debt instruments 210,308 -
Sales/maturities of short-term investments 164,382,598 203,421,303
Sales/maturities of cash equivalents 623,822,247 777,012,516
------------------- ------------------
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES (75,749,588) 79,401,091
------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Re-purchases of capital stock (2,894,917) -
Distributions - (728,690)
------------------- -----------------
NET CASH USED FOR FINANCING ACTIVITIES (2,894,917) (728,690)
------------------- -----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS FOR THE PERIOD (78,644,505) 78,672,401
------------------- -----------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 78,873,485 12,353,422
------------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 228,980 $ 91,025,823
=================== =================
The accompanying notes are an integral part of these financial statements.
4
MVC CAPITAL
STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
ADDITIONAL TOTAL
COMMON PAID IN ACCUMULATED SHAREHOLDERS'
STOCK CAPITAL DEFICIT EQUITY
BALANCE AT NOVEMBER 1, 2001 $ 165,000 $ 311,485,000 $ (57,178,444) $ 254,471,556
Distributions - - (728,690) (728,690)
Net decrease in net assets from operations - - (49,834,389) (49,834,389)
-------------- ----------------- ------------------ ----------------
BALANCE AT JULY 31, 2002 $ 165,000 $ 311,485,000 $ (107,741,523) $ 203,908,477
-------------- ----------------- ------------------ ----------------
BALANCE AT NOVEMBER 1, 2002 $ 165,000 $ 311,485,000 $ (116,263,523) $ 195,386,477
Shares repurchased (347,400) (3,474) (2,891,443) - (2,894,917)
Net decrease in net assets from operations - - (50,822,354) (50,822,354)
-------------- ----------------- ------------------ ----------------
BALANCE AT JULY 31, 2003 $ 161,526 $ 308,593,557 $ (167,085,877) $ 141,669,206
-------------- ----------------- ------------------ ----------------
The accompanying notes are an integral part of these financial statements.
5
MVC CAPITAL
SELECTED PER SHARE DATA AND RATIOS
FOR THE PERIOD FOR THE
NOVEMBER 1, 2002 YEAR ENDED
TO JULY 31, 2003 OCTOBER 31, 2002
(UNAUDITED)
Net asset value, beginning of period $ 11.84 $ 15.42
Loss from investment operations:
Net investment loss (0.47) (0.19)
Net realized and unrealized loss on investments (2.66) (3.35)
-------------------- -----------------
Total loss from investment operations (3.13) (3.54)
-------------------- -----------------
Less distributions from:
Net investment income - (0.04)
-------------------- -----------------
Total distributions - (0.04)
-------------------- -----------------
Capital share transactions
Anti-dilutive effect of Share Repurchase Program 0.06 -
Net asset value, end of period $ 8.77 $ 11.84
==================== =================
Market Value, end of period $ 7.99 $ 7.90
==================== =================
Discount -8.89% -33.28%
TOTAL RETURN - AT NAV (a) -25.93%(c) -22.88%
TOTAL RETURN - AT MARKET (a) 1.14%(c) -14.22%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 141,669 $ 195,386
Ratios to average net assets:
Expenses 6.93%(b) 3.02%
Net investment income -5.23%(b) -1.37%
(a) 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.
(b) Annualized. The expense ratio for the nine months ended July 31, 2003
includes approximately $4.0 million of actual (un-annualized) proxy/litigation
fees and expenses. When these fees and expenses are excluded, the Fund's expense
ratio is 4.54% and the net investment income is -2.84%.
(c) Not annualized
The accompanying notes are an integral part of these financial statements.
6
MVC CAPITAL
SCHEDULE OF INVESTMENTS
JULY 31, 2003
(UNAUDITED)
Date of
Initial
Description Shares/Principal Investment Cost Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS-11.01% (a, b, d, g) (NOTE 6, 7, 8)
Actelis Networks, Inc. Series C 1,506,025 May 2001 $ 5,000,003 $ 1,500,000
*Blue Star Solutions, Inc.:
Common Stock 49,474 May 2000 3,999,999 -
Series C Preferred 74,211 May 2000 5,999,999 -
*BlueStar Solutions Inc., Series D 4,545,455 Feb. 2002 3,000,000 1,500,000
*CBCA, Inc., Series E 5,729,562 Apr. 2002 11,999,990 1,000,000
Cidera, Inc., Series D (e) 857,192 Aug. 2002 3,750,000 -
DataPlay, Inc., Series D (e) 2,500,000 June 2001 7,500,000 -
*Endymion Systems, Inc., Series A 7,156,760 June 2000 7,000,000 -
*FOLIOFN, INC., SERIES C 5,802,259 June 2000 15,000,000 -
Ishoni Networks, Inc., Series C 2,003,607 Nov. 2000 10,000,003 -
Lumeta Corporation, Series A 384,615 Oct. 2000 250,000 43,511
Lumeta Corporation, Series B 266,846 June 2002 156,489 156,489
MainStream Data, Series D 85,719 Aug. 2002 3,750,001 499,999
*Pagoo, Inc., Series A-1 1,956,026 July 2000 11,569,939 -
*Phosistor Technologies, Inc., Series B 6,666,667 Jan. 2002 1,000,000 -
*ProcessClaims, Inc., Series C 6,250,000 June 2001 2,000,000 2,000,000
*ProcessClaims, Inc., Series D 849,257 May 2002 400,000 400,000
*ProcessClaims, Inc.
Series E warrants, expire 12/31/05 873,362 May 2002 20 -
*SafeStone Technologies PLC
Series A Ordinary Shares 2,106,378 Dec. 2000 4,015,403 -
ShopEaze Systems, Inc., Series B (f) 2,097,902 May 2000 6,000,000 -
*Sonexis, Inc., Series C 2,590,674 June 2000 10,000,000 2,000,000
*Sygate Technologies, Inc., Series D 9,756,098 Oct. 2002 4,000,000 4,000,000
*Vendio Services, Inc., Common Stock (c) 10,476 June 2000 5,500,000 -
*Vendio Services, Inc., Series A (c) 6,443,188 Jan. 2002 1,134,001 500,000
*Yaga, Inc., Series A 4,000,000 Nov. 2000 300,000 -
The accompanying notes are an integral part of these financial statements.
7
MVC CAPITAL
SCHEDULE OF INVESTMENTS (CONTINUED)
JULY 31, 2003
(UNAUDITED)
Date of
Initial
Description Shares/Principal Investment Cost Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
*Yaga, Inc.:
Series B 1,000,000 June 2001 $ 2,000,000 $ -
Series B Warrants, expire 06/08/04 100,000 June 2001 - -
*0-In Design Automation, Inc., Series E 2,239,291 Nov. 2001 4,000,001 2,000,000
------------------- ------------------
TOTAL PREFERRED STOCKS 129,325,848 15,599,999
------------------- ------------------
DEBT INSTRUMENTS-10.80% (a, b)
Arcot Systems, Inc. (h)
10.0000%, 12/31/2005 5,050,000 Dec. 2002 5,008,653 2,000,000
BS Management Limited (g)
12.0000%, 09/30/2003 3,000,000 Dec. 2002 2,929,970 1,464,985
Determine Software, Inc.
12.0000%, 01/31/2006 2,025,000 Feb. 2003 2,007,694 2,007,694
Determine Software, Inc., Series C Warrants 2,229,955 Feb. 2003 - -
Integral Development Corporation (h)
10.0000%, 12/31/2005 5,050,000 Dec. 2002 4,869,523 4,869,523
Synhrgy HR Technologies
12.0000%, 12/23/2005 5,000,000 Dec. 2002 4,958,272 4,958,272
Synhrgy HR Technologies, Series B-1 Warrant 43,750 Dec. 2002 - -
------------------- ------------------
TOTAL DEBT INSTRUMENTS 19,774,112 15,300,474
------------------- ------------------
SUBORDINATED NOTES-0.00% (a, b, g)
DataPlay, Inc. (e)
6.000%, 05/15/2005 2,000,000 May 2002 2,000,000 -
DataPlay, Inc. (e)
6.000%, 06/17/2005 500,000 June 2002 500,000 -
DataPlay, Inc. (e)
6.000%, 09/24/2005 200,000 Sept. 2002 200,000 -
DataPlay, Inc. (e)
6.000%, 08/16/2005 200,000 Aug. 2002 200,000 -
DataPlay, Inc. (e)
6.000%, 08/26/2005 400,000 Aug. 2002 400,000 -
DataPlay, Inc. (e)
6.000%, 09/03/2005 200,000 Sept. 2002 200,000 -
DataPlay, Inc. (e)
6.000%, 06/27/2005 1,000,000 June 2002 1,000,000 -
-------------------- ----------------
TOTAL SUBORDINATED NOTES 4,500,000 -
-------------------- ----------------
The accompanying notes are an integral part of these financial statements.
8
MVC CAPITAL
SCHEDULE OF INVESTMENTS (CONTINUED)
JULY 31, 2003
(UNAUDITED)
Date of
Initial Fair Value/
Description Shares/Principal Investment Cost Market Value
- --------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES-79.28% (b)
U.S. GOVERNMENT & AGENCY SECURITIES-79.28% (B)
U.S. Treasury Bill
1.0950%, 08/07/2003 8,321,000 May 2003 $ 8,319,576 $ 8,319,576
U.S. Treasury Bill
1.1700%, 08/14/2003 5,483,000 May 2003 5,481,020 5,481,020
U.S. Treasury Bill
1.0900%, 09/25/2003 9,018,000 June 2003 9,006,978 9,006,978
U.S. Treasury Bill
0.8500%, 10/02/2003 36,189,000 July 2003 36,140,386 36,140,386
U.S. Treasury Bill
0.8600%, 10/09/2003 13,527,000 July 2003 13,506,259 13,506,259
U.S. Treasury Bill
0.8700%, 10/16/2003 15,746,000 July 2003 15,719,407 15,719,407
U.S. Treasury Bill
0.7890%, 10/23/2003 14,554,000 July 2003 14,527,492 14,527,492
U.S. Treasury Bill
1.1000%, 10/30/2003 9,633,000 July 2003 9,612,530 9,612,530
----------------- ----------------
TOTAL U.S. GOVERNMENT & AGENCY SECURITIES 112,313,648 112,313,648
----------------- ----------------
TOTAL SHORT-TERM SECURITIES 112,313,648 112,313,648
----------------- ----------------
CASH AND CASH EQUIVALENTS-0.16% (b)
MONEY MARKET FUNDS-0.02% (b)
First American Prime Obligations Fund - Class S 29,228 Nov. 2002 29,228 29,228
----------------- ----------------
U.S. GOVERNMENT & AGENCY SECURITIES-0.14% (b)
U.S. Treasury Bill
0.8500%, 10/02/2003 200,000 July 2003 199,752 199,752
----------------- ----------------
TOTAL CASH AND CASH EQUIVALENTS 228,980 228,980
----------------- ----------------
TOTAL INVESTMENTS-101.25% (b) $ 266,142,588 $ 143,443,101
================= ================
The accompanying notes are an integral part of these financial statements.
9
MVC CAPITAL
SCHEDULE OF INVESTMENTS (CONTINUED)
JULY 31, 2003
(UNAUDITED)
(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 $141,669,206.
(c) As defined in the Investment Company Act of 1940, at July 31, 2003, the Fund
was considered to have a controlling interest in Vendio Services, Inc.
(d) As defined in the Investment Company Act of 1940, all of the Fund's
preferred and common stock and debt investments are in eligible portfolio
companies except SafeStone Technologies PLC and BS Management Limited. The Fund
makes available significant managerial assistance to all of the portfolio
companies in which it has invested.
(e) Company in bankruptcy/liquidation.
(f) Company in dissolution.
(g) Non-income producing assets.
(h) Also received warrants to purchase a number of shares of preferred stock to
be determined upon exercise.
* Affiliated Issuers (Total Market Value of $13,400,000): companies in which the
Fund owns at least 5% of the voting securities.
The accompanying notes are an integral part of these financial statements.
10
meVC Draper Fisher Jurvetson Fund I, Inc. (the "Fund")
Notes to Financial Statements
July 31, 2003
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. These statements should be read in conjunction
with the financial statements and notes thereto included in the Fund's Annual
Report on Form 10-K for the year ended October 31, 2002, as filed with the
Securities and Exchange Commission (the "SEC") on January 27, 2003 (File No.
814-00201). THE FINANCIAL INFORMATION CONTAINED IN THIS REPORT HAS NEITHER BEEN
AUDITED NOR REVIEWED BY INDEPENDENT ACCOUNTANTS ON BEHALF OF THE FUND.
2. CONCENTRATION OF MARKET RISK
Financial instruments that subject the Fund to concentrations of market
risk consist principally of preferred stocks, subordinated notes, and debt
instruments, which represent approximately 21.81% of the Fund's net assets. As
discussed in Note 3 and Note 4, investments consist of securities in companies
with no readily determinable market values and as such are valued in accordance
with the Fund's fair value policies and procedures. 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.
3. PORTFOLIO INVESTMENTS
During the nine months ended July 31, 2003, the Fund invested a total of
approximately $21.95 million in new and existing portfolio companies.
Approximately $19.95 million was invested in five new companies: BS Management
Limited, Synhrgy HR Technologies, Inc., Integral Development Corporation, Arcot
Systems, Inc., and Determine Software, Inc. Approximately $2.0 million was
invested in two follow-on investments in CBCA, Inc. As further discussed in Part
II, Item 4, the current Board of Directors was elected at the Annual Meeting of
Stockholders held on February 28, 2003. All investments made during the nine
months ended July 31, 2003 were made under the supervision of the former Board
of Directors. There have been no new investments made under the supervision of
the current Board of Directors. The Fund also had one portfolio company exit
event with proceeds totaling approximately $33,000 and a realized loss totaling
approximately $178,000 from the final disbursement of assets from EXP Systems,
Inc., had one gain of $25,000 representing proceeds received from MediaPrise in
excess of the Fund's complete write-off of the investment in MediaPrise during
the fiscal year ended October 31, 2002, and had one return of capital from BS
Management totaling approximately $70,000. The Fund also received early
repayment of the INFOUSA, Inc. promissory note with proceeds of $1,845,445,
representing full repayment of the note and outstanding accrued interest.
In connection with the Fund's $5.05 million Credit Facility with Arcot
Systems, Inc., the Fund also received warrants to purchase shares of Series E
Convertible Preferred Stock of Arcot Systems, Inc., equal to 3% of the
outstanding common stock on a fully diluted basis, at an exercise price of
approximately $0.97 per share, as adjusted. The warrants expire on December 31,
2009.
In connection with the Fund's $5.05 million Credit Facility with Integral
Development Corporation, the Fund also received warrants to purchase shares of
Series C Convertible Preferred Stock of Integral Development Corporation (or a
future round of Preferred Stock), equal to the number obtained by multiplying
the outstanding common stock by 0.030928, at an exercise price equal to the
price per share at which the Integral issues its next Preferred Stock, or if a
future financing does not occur before June 29, 2003, at an exercise price equal
to $0.70 per share. The warrants expire on December 31, 2009.
11
As a result of the change in the composition of the Board of Directors, the
Valuation Committee existing at the time of the change (the "Former Valuation
Committee") was replaced, with the current Board electing new members to serve
on this committee (the "Current Valuation Committee"). For the nine months ended
July 31, 2003, the Former Valuation Committee and/or the Current Valuation
Committee of the Board of Directors marked down the value of the Fund's
investments in Actelis Networks, Inc., Arcot Systems, Inc., BlueStar Solutions,
Inc., BS Management, CBCA, Inc., Endymion Systems, Inc., FOLIOFN, Inc., Ishoni
Networks, Inc., Lumeta Corporation, Pagoo, Inc., Phosistor Technologies, Inc.,
ProcessClaims, Inc., SafeStone Technologies PLC, Sonexis, Inc., Yaga, Inc.,
Vendio Services, Inc. (formerly AuctionWatch.com, Inc.), 0-In Design Automation,
Inc., and DataPlay Inc., and wrote-off all of the accrued interest from the
DataPlay Promissory Notes. At October 31, 2002, the fair value of all portfolio
investments was $54.2 million with a cost of $133.9 million and at July 31, 2003
the fair value of all portfolio investments was $30.9 million with a cost of
$153.6 million.
4. COMMITMENTS AND CONTINGENCIES
The Fund occupies its office space pursuant to an operating lease, which is
scheduled to expire on October 31, 2005. Future payments under this lease total
$671,625, with annual minimum payments of $298,500. The Fund is attempting to
either buy-out this lease or sub-lease its existing office space, but there can
be no assurances such efforts will be successful, nor can the Fund accurately
predict the terms of any such contemplated transaction.
On February 13, 2003, the Fund entered into new Directors &
Officers/Professional Liability Insurance policies with a cost of approximately
$1.4 million. The cost will be amortized over the life of the policy, through
February 2004.
During the nine months ended July 31, 2003, the Fund accrued $4.0 million
for legal and proxy solicitation fees and expenses, which includes $2.2 million
accrued at the direction of the Board of Directors, to reimburse the legal and
proxy solicitation fees and expenses of two major Fund shareholders, Millenco,
L.P. and Karpus Investment Management, including their costs of obtaining
judgment against the Fund in the Delaware Chancery Court and costs associated
with the proxy process and the election of the current Board of Directors. A
review is being made of the Fund's rights of reimbursement for expenses and
losses to determine what amounts, if any, may be recoverable by the Fund.
At July 31, 2003 and October 31, 2002, all of the Fund's investments in
preferred and common stocks totaling $15.6 million (11.01% of net assets) and
$50.1 million (25.6% of net assets), respectively, investments in debt
instruments totaling $15.3 million (10.80% of net assets) and $0.0,
respectively, and investments in subordinated notes totaling $0.0 and $4.1
million (2.1% of net assets), respectively, have been carried at fair value as
determined by the valuation committee of the Board of Directors, due to the
absence of readily ascertainable market values. Because of the inherent
uncertainty of valuation, these values may differ significantly from the values
that would have been used had a ready market for the investments existed.
5. CERTAIN REPURCHASES OF EQUITY SECURITIES BY THE ISSUER
During the nine months ended July 31, 2003, the Fund repurchased 347,400 of
its shares at an average price of approximately $8.28, excluding brokerage fees.
The Fund ceased repurchasing shares after the current Board of Directors was
elected on February 28, 2003. The Fund's repurchase of shares was conducted
according to a written plan for the purpose of satisfying the provisions set
forth in Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934
(the "Exchange Act").
6. SUBSEQUENT EVENTS
On December 18, 2002, the Fund entered into an investment of $3.0 million
in the form of a Loan Agreement with BS Management maturing on March 17, 2003.
BS Management is based in the Isle of Man.
On March 3, 2003, after the Annual Meeting, but prior to the transfer of
control by the former Board to the current Board, a former officer and director
of the Fund signed a document which purported to extend the maturity date of the
loan to BS Management from March 2003 to September 2003 and to modify other
terms of the loan which could result in the impairment of the Fund's rights as a
lender and the collectability of the loan. The original March 2003 maturity date
12
passed without payment to the Fund of any principal or interest on the loan. The
Fund's new management believed that BS Management was a shell corporation
without material assets apart from its interest in the loan and its proceeds. In
May 2003, the Fund recovered approximately $70,000 of the original loan from an
Irish stock broker to which such money had been transferred by BS Management. By
then, the Fund had determined that approximately $2.78 million of the loan
remained unspent in an account at an Irish law firm. That law firm refused to
transfer that money to the Fund absent a court order or joint instruction from
the Fund and BS Management.
In June 2003, the Fund sued BS Management and Oyster Technologies
Investments Ltd., an Isle of Man company (which was a party to the March 3, 2003
amendment) in the United States District Court for the Northern District of
California, asserting that the December 2002 loan agreement was breached and/or
that the March 3, 2003 amendment was void and/or breached. The lawsuit sought
the return to the Fund of the approximately $2.78 million held in escrow by the
law firm in Ireland. In August 2003, the parties settled the litigation, and the
Fund received $2,580,000 of the escrowed cash, plus rights to the proceeds of
sale of approximately 1,000,000 shares of Transware PLC, an Irish public
company, which BS Management had purchased with some of the proceeds of the
original loan. As of the date of the settlement, 453,000 Transware shares had
been sold in open market transactions, resulting in proceeds to the Fund of
approximately $29,000. Accordingly and after deducting approximately $55,000 in
legal expenses, to date, the Fund has recovered a total of approximately
$2,624,000 of the original $3,000,000 loan. Fund proceeds from the remaining
550,000 shares of Transware stock are believed to have only nominal value. On
August 26, 2003, the Fund's lawsuit against BS Management and Oyster
Technologies was dismissed with prejudice and the parties were all released from
any obligations under the December 2002 agreement and March 2003 amendment.
On August 18, 2003, the Fund filed a definitive proxy statement with the
SEC asking the stockholders to approve a proposed management plan including (i)
appointing Michael Tokarz as the Chairman of the Board and Portfolio Manager of
the Fund, (ii) adopting an amended investment objective whereby the Fund would
seek to maximize total return from capital appreciation and/or income, and (iii)
seeking to achieve its investment objective through senior and subordinated
loans, venture capital, mezzanine and preferred instruments and private equity
instruments. The proxy also included a proposal relating to conducting a tender
offer of up to 25% of the Fund's outstanding shares at a price of 95% of the net
asset value of such shares. The proxy statement and related materials were
mailed on or about August 20, 2003.
13
ITEM 2. 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 Fund and
its investment portfolio companies. Words such as MAY, WILL, EXPECT, BELIEVE,
ANTICIPATE, INTEND, COULD, ESTIMATE, MIGHT and CONTINUE, and 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 predictions only, and the
actual events or results may differ materially from those 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 Fund'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 Fund 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 operations of the Fund should be read in conjunction with the
Financial Statements, the Notes thereto and the other financial information
included elsewhere in this report.
SELECTED FINANCIAL DATA
The following table sets forth, for the periods indicated selected
financial data:
STATEMENT OF OPERATIONS DATA: NINE MONTHS ENDED NINE MONTHS ENDED
JULY 31, 2003 JULY 31, 2002
- ------------------------------------------ ---------------------- ----------------------
Total investment income $2,153,798 $2,785,790
Total operating expenses $9,797,176 $4,859,174
Net investment loss $(7,643,378) $(2,073,384)
Net realized loss on investments $(151,931) $(20,696,133)
Net unrealized loss on investments $(43,027,045) $(27,064,872)
BALANCE SHEET DATA: JULY 31, 2003 OCTOBER 31, 2002
Total assets $144,296,854 $196,511,000
Total liabilities $2,627,648 $1,124,523
Total Shareholders Equity $141,669,206 $195,386,477
Net asset value per share $8.77 $11.84
OVERVIEW
The Fund is a non-diversified investment company that is regulated as a
business development company under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund provides equity and debt financing to
privately held companies which historically have consisted primarily of
information technology companies. The primary investment objective is to achieve
long-term capital appreciation in the value of its investments.
Historically the Fund's investing activities have focused on private equity
securities. Generally, private equity investments are structured as convertible
preferred stock. Generally, portfolio companies do not pay dividends and
consequently current income has not been a significant part of the equity
portfolio. Private equity investments typically range up to $10.0 million and
14
the Fund's goal had been for these investments to achieve liquidity within three
to five years. Typically a cash return on the investment is not received until a
liquidity event, i.e. such as a public offering or merger, occurs. On September
30, 2002 the Fund announced a new strategy of investing its capital in debt
securities by providing debt financing to late stage venture capital backed
information technology companies. As noted in Part II, Item 4, on February 28,
2003 the current Board of Directors to the Fund was elected. The current Board
has not made any new portfolio investments but has adopted a long-term
management plan going forward which is subject to approval by stockholders. On
August 18, 2003, the Fund filed a definitive proxy statement with the SEC asking
the stockholders to approve a proposed management plan including (i) appointing
Michael Tokarz as the Chairman of the Board and Portfolio Manager of the Fund,
(ii) adopting an amended investment objective whereby the Fund would seek to
maximize total return from capital appreciation and/or income, and (iii) seeking
to achieve its investment objective through senior and subordinated loans,
venture capital, mezzanine and preferred instruments and private equity
instruments. The proxy also included a proposal relating to conducting a tender
offer of up to 25% of the Fund's outstanding shares at a price of 95% of the net
asset value of such shares. The proxy statement and related materials were
mailed on or about August 20, 2003.
INVESTMENT INCOME
Dividend and interest income for the nine months ended July 31, 2003 and
2002 was $2.2 million and $2.8 million, respectively. The reduction in dividend
and interest income during the nine months ended July 31, 2003 was primarily the
result of lower interest rates on a reduced cash balance.
OPERATING EXPENSES
Operating expenses for the nine months ended July 31, 2003 and 2002 were
$9.8 million and $4.9 million, respectively.
From inception through June 19, 2002, the Fund operated under an advisory
agreement with meVC Advisers, Inc. (the "Former Adviser"). The Fund was charged
a management fee by the Former Adviser at an annual rate of 2.5% of the weekly
net assets of the Fund. The Former Adviser agreed to pay all Fund expenses above
and beyond the 2.5% paid to the Former Adviser by the Fund. The Former Adviser
resigned without notice on June 19, 2002 whereupon the Board of Directors for
the Fund voted to internalize all management and administrative functions of the
Fund. Consequently, since June 19, 2002, the Fund has directly paid all of its
own operating expenses in addition to legal fees and proxy solicitation expenses
of incumbent directors.
Subsequent to the resignation of the Former Adviser, the Fund determined
that the Former Adviser had not paid certain vendors for services performed on
behalf of the Fund, which it had agreed to pay. On August 30, 2002, the Fund
paid or accrued $463,535 in expenses to pay those vendors, which resulted in a
$0.028 decrease in net asset value per share. See "Legal Proceedings" in Part II
of this Form 10-Q for a discussion of legal action against the Former Adviser by
Millenco L.P., a stockholder of the Fund, to recover certain advisory fees paid
by the Fund to the Former Adviser.
On February 7, 2003, the Fund acquired various assets from Sand Hill
Capital Holdings, Inc. for the Fund's operations, including but not limited to,
furniture and systems hardware and software. The assets were purchased for
$24,000.
On February 13, 2003, the Fund entered into new Directors &
Officers/Professional Liability Insurance policies with a cost of approximately
$1.4 million. The cost will be amortized over the life of the policy, through
February 2004.
During the nine months ended July 31, 2003, the Fund accrued $4.0 million
for legal and proxy solicitation fees and expenses, which includes $2.2 million
accrued at the direction of the Board of Directors, to reimburse the legal and
proxy solicitation fees and expenses of two major Fund shareholders, Millenco,
L.P. and Karpus Investment Management, including their costs of obtaining
judgment against the Fund in the Delaware Chancery Court and costs associated
with the proxy process and the election of the current Board of Directors. A
review is being made of the Fund's rights of reimbursement for expenses and
losses to determine what amounts, if any, may be recoverable by the Fund.
Significant components of operating expenses for the nine months ended July
31, 2003 include proxy/litigation fees & expenses of $4,037,327 (discussed
15
above), salaries and benefits of $2,236,987, legal fees of $1,412,517, insurance
premium expenses of $689,929, facilities costs of $565,696, directors' fees of
$396,000, audit fees of $141,349, and administration fees of $108,712.
REALIZED GAIN AND LOSS ON PORTFOLIO SECURITIES
For the nine months ended July 31, 2003, the Fund had a net realized loss
of $151,931. Such loss was realized mainly from the disbursement of assets from
EXP Systems, Inc. to its preferred shareholders.
For the nine months ended July 31, 2002, the Fund had a net realized loss
of $20.7 million. Such loss was realized mainly from the transactions involving
the assets of INFOUSA.com, Inc. being acquired by INFOUSA, Inc., the parent
company of INFOUSA.com, Inc., the disbursement of assets from EXP Systems, Inc.
to its preferred shareholders, and the write-off of Personic Software, Inc. due
to the dilution of the Fund's equity position.
UNREALIZED APPRECIATION AND DEPRECIATION OF PORTFOLIO SECURITIES
During the nine months ended July 31, 2003, the Fund had a net increase in
unrealized depreciation on investment transactions of $43.0 million. Such
depreciation resulted from the Former Valuation Committee's and/or the Current
Valuation Committee's decisions to mark down the fair value of the Fund's
investments in Actelis Networks, Inc., Arcot Systems, Inc., BlueStar Solutions,
Inc., BS Management, CBCA, Inc., Endymion Systems, Inc., FOLIOFN, Inc., Ishoni
Networks, Inc., Lumeta Corporation, Pagoo, Inc., Phosistor Technologies, Inc.,
ProcessClaims, Inc., DataPlay, Inc., SafeStone Technologies PLC, Sonexis, Inc.,
Vendio Services, Inc. (formerly AuctionWatch.com, Inc.), Yaga, Inc., and 0-In
Design Automation, Inc. The Former Valuation Committee marked down the fair
value of the Fund's investments by $6.6 million and the Current Valuation
Committee marked down the fair value of the Fund's investments by an additional
$36.4 million. The Former Valuation Committee and/or the Current Valuation
Committee decided to write down the carrying value of the investments for a
variety of reasons including, but not limited to, portfolio company performance,
prospects of a particular sector, data on purchases or sales of similar
interests of the portfolio company, cash consumption, cash on-hand, valuation
comparables, the likelihood of a company being able to attract further
financing, a third party valuation event, cramdowns, limited liquidity options,
and a company's likelihood or ability to meet financial obligations.
For the nine months ended July 31, 2003, the increase in the Fund's
accumulated deficit was $50.8 million and the total accumulated deficit since
inception is $167.1 million; the accumulated deficit is due primarily to the
Fund's mark down of the valuations of certain portfolio company investments.
Management expects the unrealized losses of the Fund's investments in ShopEaze
Systems, Inc. to be realized as soon as dissolution papers are completed and
signed by the company's respective inside investors and the unrealized losses of
the Fund's investments in DataPlay, Inc. to be realized as soon as the portfolio
company's bankruptcy proceedings are completed.
For the nine months ended July 31, 2002, the Fund had a net increase in
unrealized depreciation of $27.1 million. Such depreciation also resulted mainly
from the Fund's mark down of the value of the Fund's investments in certain
portfolio companies. During the nine months ended July 31, 2002, the increase in
the Fund's accumulated deficit was $50.6 million and the total accumulated
deficit since inception was $107.7 million. Such deficit also resulted mainly
from the mark down of the value of the Fund's investments in certain portfolio
companies.
PORTFOLIO INVESTMENTS
At July 31, 2003, the cost of equity investments held by the Fund was
$129.3 million, and their aggregate fair value was $15.6 million. In addition
the Fund held subordinated notes in portfolio companies with a cost of $4.5
million and aggregate fair value of $0.0 million. Also, the fund held debt
instruments with a cost of $19.8 million and an aggregate fair value of $15.3
million. Management continues to evaluate opportunities for its portfolio
companies to realize value for the Fund and its stockholders.
At July 31, 2003, the Fund had active investments in the following
portfolio companies:
16
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, 2002, the Fund's investment in Actelis consisted of
1,506,025 shares of Series C Preferred Stock at a cost of approximately $5.0
million. The investment was assigned a fair value of approximately $2.5 million,
or approximately $1.66 per share.
The Current Valuation Committee marked down the carrying value of the
Fund's investment in Actelis by writing down the investment by $1.0 million to
$1.5 million.
At July 31, 2003, the Fund's investment in Actelis consisted of 1,506,025
shares of Series C Preferred Stock at a cost of approximately $5.0 million. The
investment has been assigned a fair value of $1.5 million, or approximately
$1.00 per share.
ARCOT SYSTEMS, INC.
Arcot Systems, Inc. ("Arcot"), Santa Clara, California, develops solutions
to address the challenges of securing e-business applications in Internet-scale
and transactional environments.
On December 30, 2002, the Fund entered into an investment of approximately
$5.0 million in the form of a Credit Facility with Arcot maturing on December
31, 2005. The note earns a floating rate of interest at prime plus 5% per annum
with a floor at 10% per annum and a ceiling at 12% per annum on the outstanding
balance of the note. In connection with the Fund's $5.05 million Credit Facility
with Arcot Systems, Inc., the Fund also received warrants to purchase shares of
Series E Convertible Preferred Stock of Arcot Systems, Inc., equal to 3% of the
outstanding common stock on a fully diluted basis, at an exercise price of
$0.966 per share, as adjusted. The warrants expire on December 31, 2009.
The Current Valuation Committee marked down the carrying value of the
Fund's investments in Arcot by writing down the investment by $3.0 million to
$2.0 million.
At July 31, 2003, the Fund's investment in Arcot consisted of an
outstanding balance on the loan of $5.05 million with a cost of approximately
$5.0 million. The investment is being valued at $2.0 million and the warrants
are being valued at $0.0.
BLUESTAR SOLUTIONS, INC.
BlueStar Solutions, Inc. ("BlueStar"), Cupertino, California, is a provider
of enterprise applications outsourcing services. BlueStar delivers complete
end-to-end services for managing SAP applications.
At October 31, 2002, the Fund's investments in BlueStar consisted of 74,211
shares of Series C Preferred Stock, 4,545,455 shares of Series D Preferred
Stock, 49,474 shares of Common Stock, and 136,054 warrants to purchase 136,054
shares of Series C Preferred Stock with a combined cost of approximately $13.0
million. The investments were assigned a fair value of $4.5 million, or
approximately $20.21 per share of the Series C Preferred Stock, approximately
$0.66 per share of the Series D Preferred Stock, $0.00 per share of the Common
Stock, and $0.00 per warrant.
The Current Valuation Committee marked down the carrying value of the
Fund's investments in BlueStar by writing down the Series C Preferred Stock by
$1.5 million to $0.0 and by writing down the Series D Preferred Stock by $1.5
million to $1.5 million.
On May 26, 2003, and based on the Fund's investment-related diligence, the
136,054 warrants to purchase shares of Series C Preferred Stock of BlueStar were
not exercised by the Fund and were subsequently expired.
At July 31, 2003, the Fund's investments in BlueStar consisted of 74,211
shares of Series C Preferred Stock, 4,545,455 shares of Series D Preferred
Stock, and 49,474 shares of Common Stock with a combined cost of approximately
$13.0 million. The investments have been assigned a fair value of $1.5 million,
or $0.00 per share of the Series C Preferred Stock, approximately $0.33 per
share of the Series D Preferred Stock, and $0.00 per share of the Common Stock.
17
BS MANAGEMENT
On December 18, 2002, the Fund entered into an investment of $3.0 million
in the form of a Loan Agreement with BS Management maturing on March 17, 2003.
BS Management is based in the Isle of Man.
The Current Valuation Committee marked down the carrying value of the
Fund's investment in BS Management by writing down the loan by $1.5 million to
$1.5 million.
On April 13, 2003, the Fund received a partial return of capital from BS
Management of approximately $70,000.
At July 31, 2003, the Fund's investment in BS Management has been assigned
a fair value of approximately $1.5 million.
The United States Securities and Exchange Commission (the "SEC") requested
that the Fund provide it with documents and other information concerning the BS
Management transaction, and the Fund has complied with such requests.
For a discussion of the BS Management legal proceedings and negotiated
return of capital, please refer to Footnote 6 ("Subsequent Events") in Part I,
Item 1 "Notes to Financial Statements".
CBCA, INC.
CBCA, Inc. ("CBCA"), Oakland, California, has developed an automated health
benefit claims processing and payment system that includes full website
functionality.
At October 31, 2002, the Fund's investment in CBCA consisted of 4,774,636
shares of Series E Preferred Stock with a cost of approximately $10.0 million.
The investment was assigned a fair value of approximately $10.0 million, or
approximately $2.09 per share.
On December 20, 2002, the Fund entered into a follow-on investment of $1.0
million in CBCA, consisting of 477,463 shares of Series E Preferred Stock at
approximately $2.09 per share.
On December 31, 2002, the Fund entered into a follow-on investment of $1.0
million in CBCA, consisting of 477,463 shares of Series E Preferred Stock at
approximately $2.09 per share.
The Current Valuation Committee marked down the carrying value of the
Fund's investments in CBCA by writing down the Series E Preferred Stock by $11.0
million to $1.0 million.
At July 31, 2003, the Fund's investment in CBCA consisted of 5,729,562
shares of Series E Preferred Stock with a cost of approximately $12.0 million.
The investment has been assigned a fair value of $1.0 million, at approximately
$0.17 per share.
John Grillos, the former Chief Executive Officer of the Fund, served as a
director of CBCA and resigned his directorship on March 6, 2003.
CIDERA, INC./MAINSTREAM DATA, INC.
Cidera, Inc. ("Cidera"), Laurel, Maryland, provides satellite-based
delivery of broadband content directly to Internet access points closest to the
end users. Mainstream Data, Inc. ("Mainstream"), Salt Lake City, Utah, builds
and operates satellite, Internet, and wireless broadcast networks for the
world's largest information companies. Mainstream Data networks deliver text
news, streaming stock quotations, and digital images to subscribers around the
world. At October 31, 2002, the Fund's investment in Cidera consisted of 857,192
shares of Series D Preferred Stock with a cost of approximately $7.5 million.
The investment was assigned a fair value of approximately $500,000, or
approximately $0.58 per share. Subsequent to October 31, 2002, Mainstream was
spun out from Cidera, resulting in a 50%/50% cost basis split between the two
investments.
At July 31, 2003, the Fund's investment in Cidera consisted of 857,192
shares of Series D Preferred Stock with a cost of approximately $3.75 million.
The investment has been assigned a fair value of $0.0.
At July 31, 2003, the Fund's investment in Mainstream consisted of 85,719
shares of Series D Preferred Stock with a cost of approximately $3.75 million.
The investment has been assigned a fair value of approximately $500,000 or
approximately $5.83 per share.
18
DATAPLAY, INC.
DataPlay, Inc. ("DataPlay"), Boulder, Colorado, developed new ways of
enabling consumers to record and play digital content.
At October 31, 2002, the Fund's total investment in DataPlay, with a cost
basis of $12.0 million, consisted of 2,500,000 shares of Series D Preferred
Stock and seven promissory notes with a combined cost of $4.5 million. The
investment had been assigned a fair value of approximately $2.25 million,
comprising $0.00 per share for the Series D Preferred Stock and 50% of the face
value of the promissory notes.
On November 20, 2002, DataPlay filed for bankruptcy under Chapter 11 of the
U.S. Code.
On January 15, 2003, the Former Valuation Committee marked down the
remaining value of the Fund's investment in all of the Promissory Notes issued
by DataPlay by $2.25 million and wrote off all of the accrued interest from the
Notes.
At July 31, 2003, the Fund's total investment in DataPlay consisted of
2,500,000 shares of Series D Preferred Stock with a cost basis of $7.5 million
and seven promissory notes with a combined cost of $4.5 million. The investments
have been assigned a fair value of $0.0.
DETERMINE SOFTWARE, INC.
Determine Software, Inc. ("Determine"), San Francisco, California, is a
provider of web-based contract management software.
On February 5, 2003, the Fund entered into an investment of approximately
$2.0 million in the form of a Credit Facility with Determine maturing on January
31, 2006. The note earns a floating rate of interest at prime plus 5% per annum
with a floor at 12% per annum on the outstanding balance. The Fund also received
2,229,955 warrants to purchase a future round of convertible preferred stock at
a price of $0.205 per share. The warrants expire on January 31, 2010.
At July 31, 2003, the Fund's investment in Determine consisted of an
outstanding balance on the loan of $2.02 million with a cost of approximately
$2.0 million and 2,229,955 warrants to purchase a future round of convertible
preferred stock at a price of $0.205 per share. The investment is being valued
at approximately $2.0 million and the warrants are being valued at $0.0.
ENDYMION SYSTEMS, INC.
Endymion Systems, Inc. ("Endymion"), Oakland, California, is a single
source supplier for strategic, web-enabled, end-to-end business solutions that
help its customers leverage Internet technologies to drive growth and increase
productivity.
At October 31, 2002, the Fund's investment in Endymion consisted of
7,156,760 shares of Series A Preferred Stock with a cost of approximately $7.0
million. The investment was assigned a fair value of $2.0 million, or
approximately $0.28 per share.
The Current Valuation Committee marked down the carrying value of the
Fund's investments in Endymion by writing down the Series A Preferred Stock by
$2.0 million to $0.0.
At July 31, 2003, the Fund's investment in Endymion consisted of 7,156,760
shares of Series A Preferred Stock with a cost of approximately $7.0 million.
The investment has been assigned a fair value of $0.0.
FOLIOFN, INC.
FOLIOFN, Inc. ("FOLIOFN"), Vienna, Virginia, is a financial services
technology company that delivers leading-edge investment solutions to financial
services firms and investors.
At October 31, 2002, the Fund's investment in FOLIOFN consisted of
5,802,259 shares of Series C Preferred Stock with a cost of $15.0 million. The
investment was assigned a fair value of approximately $3.0 million, or
approximately $0.52 per share.
The Current Valuation Committee marked down the carrying value of the
Fund's investments in FOLIOFN by writing down the Series C Preferred Stock by
$3.0 million to $0.0.
19
At July 31, 2003, the Fund's investment in FOLIOFN consisted of 5,802,259
shares of Series C Preferred Stock with a cost of $15.0 million. The investment
has been assigned a fair value of $0.0.
John Grillos, the former Chief Executive Officer of the Fund, served as a
director of FolioFN and resigned his directorship on March 10, 2003.
INFOUSA.COM, INC.
At October 31, 2002, the Fund's investment consisted of a $1.8 million
promissory note from INFOUSA, Inc., the parent company of INFOUSA.com. The
investment was assigned a fair value of $1.8 million.
On March 5, 2003, the Fund received early repayment of the INFOUSA, Inc.
promissory note with proceeds of $1,845,445 representing full repayment of the
note and outstanding accrued interest.
INTEGRAL DEVELOPMENT CORPORATION
Integral Development Corporation ("Integral"), Mountain View, California,
is a developer of technology which enables financial institutions to expand,
integrate and automate their capital markets businesses and operations.
On December 30, 2002, the Fund entered into an investment of approximately
$5.0 million in the form of a Convertible Credit Facility with Integral maturing
on December 31, 2005. The transaction earns a floating rate of interest at prime
plus 5% per annum with a floor at 10% per annum and a ceiling at 12% per annum
on the outstanding balance, prior to conversion. In connection with the Fund's
$5.05 million Credit Facility with Integral Development Corporation, the Fund
also received warrants to purchase shares of Series C Convertible Preferred
Stock of Integral Development Corporation (or a future round of Preferred
Stock), equal to the number obtained by multiplying the outstanding common stock
by 0.030928, at an exercise price equal to $0.70 per share. The warrants expire
on December 31, 2009.
At July 31, 2003, the Fund's investment in Integral consisted of an
outstanding balance on the loan of $4.91 million with a cost of approximately
$4.9 million. The investment is being valued at approximately $4.9 million and
the warrants are being valued at $0.0.
ISHONI NETWORKS, INC.
Ishoni Networks, Inc. ("Ishoni"), Santa Clara, California, is a developer
of technology that allows customer premises equipment manufacturers and service
providers to offer integrated voice, data and security services over a single
broadband connection to residential and business customers.
At October 31, 2002, the Fund's investment in Ishoni consisted of 2,003,607
shares of Series C Preferred Stock with a cost of approximately $10.0 million.
The investment was assigned a fair value of $2.5 million, or approximately $1.25
per share.
The Former Valuation Committee marked down the carrying value of the Fund's
investments in Ishoni by writing down the Series C Preferred Stock by $2.5
million to $0.0.
At July 31, 2003, the Fund's investment in Ishoni consisted of 2,003,607
shares of Series C Preferred Stock with a cost of approximately $10.0 million.
The investment has been assigned a fair value of $0.0.
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.
At October 31, 2002, the Fund's investment in Lumeta consisted of 384,615
shares of Series A Preferred Stock and 266,846 shares of Series B Preferred
Stock with a cost of approximately $406,000. The investment was assigned a fair
value of approximately $456,000, or approximately $0.70 per share for each the
Series A and B Preferred Stock.
20
The Current Valuation Committee marked down the carrying value of the
Fund's investments in Lumeta by writing down the Series A Preferred Stock by
approximately $206,000 to approximately $44,000 and by writing down the Series B
Preferred Stock from $187,000 to approximately $156,000.
At July 31, 2003, the Fund's investment in Lumeta consisted of 384,615
shares of Series A Preferred Stock and 266,846 shares of Series B Preferred
Stock with a combined cost of approximately $406,000. The investments have been
assigned a fair value of $200,000, or approximately $0.11 per share of Series A
Preferred Stock and approximately $0.59 per share of Series B Preferred Stock.
PAGOO, INC.
Pagoo, Inc. ("Pagoo"), Lafayette, California, is a developer of Internet
voice technologies offering Internet services direct to the consumer.
At October 31, 2002, the Fund's investment in Pagoo consisted of 1,956,026
shares of Series A-1 Convertible Preferred Stock with a cost of approximately
$11.6 million. The investment was assigned a fair value of approximately
$170,000, or approximately $0.09 per share.
The Current Valuation Committee marked down the carrying value of the
Fund's investment in Pagoo by writing down the Series A-1 Convertible Preferred
Stock by approximately $170,000 to $0.0.
At July 31, 2003, the Fund's investment in Pagoo consisted of 1,956,026
shares of Series A-1 Convertible Preferred Stock with a cost of approximately
$11.6 million. The investment has been assigned a fair value of $0.0.
Nino Marakovic, an employee of the Fund, serves as a director of Pagoo.
PHOSISTOR TECHNOLOGIES, INC.
Phosistor Technologies, Inc. ("Phosistor"), Pleasanton, California, designs
and develops integrated semiconductor components and modules for global
telecommunications and data communications networks.
At October 31, 2002, the Fund's investment in Phosistor consisted of
6,666,667 shares of Series B Convertible Preferred Stock with a cost of
approximately $1.0 million. The investment was assigned a fair value of
approximately $1.0 million, or approximately $0.15 per share.
The Current Valuation Committee marked down the remaining carrying value of
the Fund's investments in Phosistor by $1.0 million to $0.0.
At July 31, 2003, the Fund's investment in Phosistor consisted of 6,666,667
shares of Series B Preferred Stock with a cost of approximately $1.0 million.
The investment has been assigned a fair value of $0.0.
PROCESSCLAIMS, INC.
ProcessClaims, Inc. ("ProcessClaims"), Manhattan Beach, California,
provides web-based solutions and value added services that streamline the
automobile insurance claims process for the insurance industry and its partners.
At October 31, 2002, the Fund's investment in ProcessClaims consisted of
6,250,000 shares of Series C Preferred Stock, 849,257 shares of Series D
Preferred Stock, and 873,362 warrants to purchase 873,362 shares of Series E
Convertible Preferred Stock with a combined cost of approximately $2.4 million.
The investment was assigned a fair value of approximately $3.3 million, or
approximately $0.471 per share of Series C Preferred Stock, approximately $0.471
per share of Series D Preferred Stock, and $0.00 per warrant.
The Current Valuation Committee marked down the carrying value of the
Fund's investments in ProcessClaims by writing down the Series C Preferred Stock
by approximately $940,000 to $2.0 million.
At July 31, 2003, the Fund's investments in ProcessClaims consisted of
6,250,000 shares of Series C Preferred Stock, 849,257 shares of Series D
Preferred Stock, and 873,362 warrants to purchase 873,362 shares of Series E
Convertible Preferred Stock with a combined cost of approximately $2.4 million.
The investments were assigned a fair value of approximately $2.4 million, or
approximately $0.32 per share of Series C Preferred Stock, approximately $0.47
per share of Series D Preferred Stock, and $0.00 per warrant.
Nino Marakovic, an employee of the Fund, serves as a director of
ProcessClaims.
21
SAFESTONE TECHNOLOGIES PLC
SafeStone Technologies PLC ("SafeStone"), Old Amersham, UK, provides
organizations with secure access controls across the extended enterprise,
enforcing compliance with security policies and enabling effective management of
the corporate IT and e-business infrastructure.
At October 31, 2002, the Fund's investments in SafeStone consisted of
1,714,455 shares of Series A Preferred Stock and 391,923 shares of Series B
Preferred Stock with a combined cost basis of approximately $4.0 million. The
investments were assigned a fair value of $2.7 million, or approximately $1.28
per share for each the Series A and B Preferred Stock.
The Former Valuation Committee marked down the carrying value of the Fund's
investments in SafeStone by writing down the remaining carrying value of the
Series A Preferred Stock by approximately $1.19 million to $1.0 million.
The Current Valuation Committee marked down the carrying value of the
Fund's investments in SafeStone by writing down the remaining carrying value of
the Series A Preferred Stock by approximately $1.0 million to $0.0 and by
writing down the remaining carrying value of the Series B Preferred Stock by
approximately $500,000 to $0.0.
On July 29, 2003, the Fund's 1,714,455 shares of Series A Preferred Stock
and 391,923 shares of Series B Preferred Stock were recapitalized into 2,106,378
shares of Series A Ordinary Stock.
At July 31, 2003, the Fund's investments in SafeStone consisted of
2,106,378 shares of Series A Ordinary Stock with a cost of approximately $4.0
million. The investments have been assigned a fair value of $0.0.
SHOPEAZE SYSTEMS, INC.
ShopEaze Systems, Inc. ("ShopEaze"), Sunnyvale, California, partnered with
established retailers to help them build online businesses to complement their
existing brick-and-mortar businesses.
At October 31, 2002 and July 31, 2003, the Fund's investment in ShopEaze
consisted of 2,097,902 shares of Series B Preferred Stock with a cost of
approximately $6.0 million. At both October 31, 2002 and July 31, 2003, the
investment has been assigned a fair value of $0.0. ShopEaze ceased operations
during 2002.
SONEXIS, INC.
Sonexis, Inc. ("Sonexis"), Boston, Massachusetts, is the developer of a new
kind of conferencing solution - Sonexis ConferenceManager - a modular platform
that supports a breadth of audio and web conferencing functionality to deliver
rich media conferencing.
At October 31, 2002, the Fund's investment in Sonexis consisted of
2,590,674 shares of Series C Preferred Stock with a cost of approximately $10.0
million. The investment was assigned a fair value of $7.0 million, or
approximately $2.70 per share.
The Current Valuation Committee marked down the carrying value of the
Fund's investment in Sonexis by writing down the Series C Preferred Stock by
$5.0 million to $2.0 million.
At July 31, 2003, the Fund's investment in Sonexis consisted of 2,590,674
shares of Series C Preferred Stock with a cost of approximately $10.0 million.
The investment has been assigned a fair value of $2.0 million, or approximately
$0.77 per share.
SYGATE TECHNOLOGIES, INC.
Sygate Technologies, Inc. ("Sygate"), Fremont, California, is a provider of
enterprise-focused security policy enforcement solutions which provide the
infrastructure to maintain an unbroken chain of control to IT Management.
At October 31, 2002 and July 31, 2003, the Fund's investment in Sygate
consisted of 9,756,098 shares of Series D Preferred Stock with a cost of
approximately $4.0 million. At both October 31, 2002 and July 31, 2003, the
investment was assigned a fair value of approximately $4.0 million, or
approximately $0.41 per share.
22
SYNHRGY HR TECHNOLOGIES, INC.
Synhrgy HR Technologies, Inc. ("Synhrgy"), Houston, Texas, provides human
resources technology and outsourcing services to Fortune 1000 companies.
On December 26, 2002, the Fund entered into an investment of approximately
$5.0 million in the form of a Credit Facility with Synhrgy HR Technologies, Inc.
("Synhrgy") maturing on January 3, 2006. The note earns a fixed rate of interest
at 12% per annum on the outstanding balance of the note. The Fund also received
43,750 warrants to purchase Series B-1 Preferred Stock at a price of $8.00 per
share. The warrants expire on December 23, 2009.
At July 31, 2003, the Fund's investment in Synhrgy consisted of an
outstanding balance on the loan of $5.0 million with a cost of approximately
$4.95 million. The investment is being valued at approximately $4.96 million and
the warrants are being valued at $0.0.
VENDIO SERVICES, INC. (FORMERLY AUCTIONWATCH.COM, INC.)
Vendio Services, Inc. ("Vendio"), formerly AuctionWatch.com, Inc., San
Bruno, California, enables small businesses and entrepreneurs to build Internet
sales channels by providing software solutions to help these merchants
efficiently market, sell and distribute their products.
At October 31, 2002, the Fund's investment in Vendio consisted of 10,476
shares of Common Stock and 6,443,188 shares of Series A Preferred Stock at a
cost of approximately $6.6 million. The investments were assigned a fair value
of approximately $1.1 million, or $0.00 per share for the Common Stock and
approximately $0.18 per share for the Series A Preferred Stock, respectively.
The Current Valuation Committee marked down the carrying value of the
Fund's investments in Vendio by writing down the Series A Preferred Stock by
approximately $600,000 to $500,000.
At July 31, 2003, the Fund's investments in Vendio consisted of 10,476
shares of Common Stock and 6,443,188 shares of Series A Preferred Stock at a
cost of approximately $6.6 million. The investments have been assigned a fair
value of approximately $500,000, or $0.00 per share for the Common Stock and
approximately $0.08 per share for the Series A Preferred Stock.
On April 2, 2003, the portfolio company Auctionwatch changed its name to
Vendio Services, Inc.
Nino Marakovic, an employee of the Fund, serves as a director of Vendio.
YAGA, INC.
Yaga, Inc. ("Yaga"), San Francisco, California, provides an advanced hosted
application service provider (ASP) platform that addresses emerging revenue and
payment infrastructure needs of online businesses. Yaga's sophisticated payment
and accounting application supports micropayments, aggregated billing and stored
value accounts while also managing royalty/affiliate accounting and split
payments.
At October 31, 2002, the Fund's investment in Yaga consisted of 300,000
shares of Series A Preferred Stock, 1,000,000 shares of Series B Preferred and
100,000 warrants to purchase 100,000 shares of Series B Preferred Shares with a
combined cost of $2.3 million. The investments were assigned a fair value of
$1.3 million, or $1.00 per share of Series A Preferred Stock and Series B
Preferred Stock and $0.00 per warrant.
The Former Valuation Committee marked down the carrying value of the Fund's
investments in Yaga by writing down the Series A Preferred Stock by
approximately $300,000 to $0.0 and the Series B Preferred Stock by approximately
$350,000 to approximately $650,000.
The Current Valuation Committee marked down the carrying value of the
Fund's investments in Yaga by writing down the Series B Preferred Stock by
approximately $650,000 to $0.0.
At July 31, 2003, the Fund's investment in Yaga consisted of 300,000 shares
of Series A Preferred Stock, 1,000,000 shares of Series B Preferred and 100,000
warrants to purchase 100,000 shares of Series B Preferred Shares with a combined
cost of $2.3 million. The investments have been assigned a fair value of $0.0.
23
0-IN DESIGN AUTOMATION, INC.
0-In Design Automation, Inc. ("0-In"), San Jose, California, is an
electronic design automation (EDA) company providing functional verification
products that help verify multi-million gate application specific integrated
circuit (ASIC) and system-on-chip (SOC) chip designs.
At October 31, 2002, the Fund's investment in 0-In consisted of 2,239,291
shares of Series E Preferred Stock at a cost of approximately $4.0 million. The
investments were assigned a fair value of approximately $4.0 million, or
approximately $1.79 per share.
The Current Valuation Committee marked down the carrying value of the
Fund's investments in 0-In by writing down the Series E Preferred Stock by
approximately $2.0 million to $2.0 million.
At July 31, 2002, the Fund's investment in 0-In consisted of 2,239,291
shares of Series E Preferred Stock at a cost of approximately $4.0 million. The
investments have been assigned a fair value of approximately $2.0 million, or
approximately $0.89 per share.
Mr. Gerhard, a director of the Fund through January 16, 2003, when he
resigned, served as a director of 0-In through March 8, 2003.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2003, the Fund had $143.4 million of investments consisting of
investments in preferred and common stocks totaling $15.6 million, investments
in debt instruments totaling $15.3 million, investments in U.S. government and
agency securities totaling $112.3 million and cash and cash equivalents totaling
approximately $229,000. 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. Current balance sheet resources are
believed to be sufficient to finance anticipated future commitments.
SUBSEQUENT EVENTS
For a discussion of the BS Management legal proceedings and negotiated
return of capital, please refer to Footnote 6 ("Subsequent Events") in Part I,
Item 1 "Notes to Financial Statements".
For a discussion of the Fund's definitive proxy statement filed with the
SEC on August 18, 2003, please refer to Footnote 6 ("Subsequent Events") in Part
I, Item 1 "Notes to Financial Statements".
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Historically the Fund has invested in small companies, and its investments
are considered speculative in nature. The Fund's investments often include
securities that are subject to legal or contractual restrictions on resale that
adversely affect the liquidity and marketability of such securities. As a
result, the Fund is subject to risk of loss which may prevent our stockholders
from achieving price appreciation, dividend distributions and return of capital.
The portion of our portfolio consisting of investments in private companies
is also subject to valuation risk. The market value of the Fund's shares in
large part depends on the values of the Fund's investments and the prospects and
financial results of the companies in which the Fund invests. Many of the Fund's
investments are securities of private companies that are not publicly traded.
The financial and other information regarding the issuers of these securities
that is available to the Fund may be more limited than the information available
in the case of issuers whose securities are publicly traded. The Board of
Directors determines the fair value of these securities in accordance with
procedures deemed reasonable. However, fair value is an estimate and,
notwithstanding the good faith efforts of the Board of Directors to determine
the fair value of securities held by the Fund, there can be no assurance that
those values accurately reflect the prices that the Fund would realize upon
sales of those securities. Moreover, the prospects and financial condition of
the companies in which the Fund invests may change and these changes may have a
significant impact on the fair values of the Fund's investments. We value our
privately held investments based on a determination made by our Board of
Directors on a quarterly basis and as otherwise required in accordance with our
established fair value procedures. In the absence of a readily ascertainable
market value, the estimated values of our investments may differ significantly
from the values that would exist if a ready market for these securities existed.
Any changes in valuation are recorded in our statements of operations as "Net
unrealized gain (loss) on investments."
Investments in short term securities and cash and cash equivalents comprise
approximately 79.44% of the Fund's net assets at July 31, 2003, and are subject
to financial market risk, including changes in interest rates. The Fund has
invested a portion of its capital in debt securities, the yield and value of
which may be impacted by changes in market interest rates.
As noted in Part II, Item 4, on February 28, 2003 a new Board of Directors
to the Fund was elected. The current Board has adopted a long-term management
plan going forward which is subject to approval by stockholders. As noted in
Part I, Item 2, on August 18, 2003, the Fund filed a definitive proxy statement
with the SEC asking the stockholders to approve a proposed management plan.
ITEM 4. CONTROLS AND PROCEDURES.
Within the 90 days prior to the filing date of this quarterly report on
Form 10-Q, the Fund carried out an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures. This evaluation was
carried out under the supervision and with the participation of management,
including our current Chief Executive Officer, who also performs the functions
of a Chief Financial Officer (the CEO/ CFO). Based upon that evaluation, the
CEO/CFO has concluded that our disclosure controls and procedures are adequate
and effective.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in our
reports filed under the Exchange Act is accumulated and communicated to
management, including our CEO/CFO, as appropriate to allow timely decisions
regarding required disclosure.
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
we carried out the evaluation discussed in paragraph (a) above.
25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 20, 2002, Millenco LP ("Millenco"), a stockholder, filed a
complaint in the United States District Court for the District of Delaware on
behalf of the Fund against the Former Adviser. The Fund was designated a
"nominal" defendant for purposes of effectuating the relief sought in the
complaint. The complaint alleges that the fees received by the Former Adviser
for the year prior to the filing of the complaint were excessive, in violation
of Section 36(b) of the 1940 Act. The Former Adviser's motions to dismiss the
action or transfer it to California were both denied. The case is in discovery,
which has been stayed temporarily for the purpose of settlement negotiations.
The Fund is monitoring this litigation inasmuch as any recovery would accrue to
the Fund.
On April 3, 2002, Millenco filed a complaint against the Fund in the Court
of Chancery, New Castle County, Delaware, seeking a judicial confirmation of the
stockholder vote of March 27, 2002, rejecting new investment advisory agreements
between the Fund and the Former Adviser and between the Fund and the Former
Sub-Adviser. On April 5, 2002, Millenco moved to accelerate the trial of the
case and later that day the Fund's Board of Directors acknowledged that the
proposals for shareholder approval of the advisory and sub-advisory agreements
had failed and that a stockholder's meeting would not be reconvened on this
matter. On July 30, 2002, Millenco filed an amended complaint against the Fund
and the Fund's directors in the Court of Chancery, New Castle County, Delaware,
seeking to (i) invalidate the election of two of the Fund's former directors,
John M. Grillos and Larry Gerhard, at the 2001 and 2002 Annual Meetings of
Stockholders, to three-year terms expiring 2004 and 2005, respectively; and the
election of former director Peter Freudenthal, at the 2001 Annual Meeting, to a
three-year term expiring 2004; and (ii) require the Fund to hold a special
Meeting of Stockholders, for the purpose of holding new elections to fill the
board seats currently held by Mr. Grillos and Mr. Gerhard and the board seat
vacated by Peter Freudenthal due to his resignation in June 2002.
On December 19, 2002, the Court granted judgment for Millenco holding that
the former directors had breached their fiduciary duty of disclosure under
Delaware law in connection with the 2001 and 2002 election of directors and
ordered the Fund to hold new elections for the seats held by directors Grillos
and Gerhard and former director Freudenthal. The election was held on February
28, 2003, at which the Fund's current directors were elected.
On February 6, 2003 the Fund filed a complaint against Millennium Partners,
L.P., Millenco, L.P. and Karpus Management, Inc. (collectively "the
stockholders") in the United States District Court for the Southern District of
New York, alleging various violations of federal securities law primarily in
connection with the ongoing proxy contest between Millenco and the Fund's former
management. The complaint asked the Court for preliminary and permanent
injunctive relief aimed at limiting the stockholders voting rights at the
February 28, 2003 annual meeting of stockholders.
On February 24, 2003, after extensive discovery and an evidentiary hearing,
the United States District Court for the Southern District of New York denied
the Fund's motion for a preliminary injunction against the defendants finding
there was insubstantial likelihood of the Fund succeeding on any of the claims
asserted. On March 27, 2003, the Fund voluntarily dismissed the lawsuit.
For a discussion of the BS Management legal proceedings and negotiated
return of capital, please refer to Footnote 6 ("Subsequent Events") in Part I,
Item 1 "Notes to Financial Statements".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Fund's Annual Meeting of Stockholders was held on February 28, 2003 for
the following purposes:
(1) To elect two directors to serve for the remainder of the term to
expire at the Annual Meeting of Stockholders to be held in 2004
("Proposal 1");
(2) To elect two directors to serve for the remainder of the term to
expire at the Annual Meeting of Stockholders to be held in 2005
("Proposal 2");
26
(3) To elect three directors to serve until the Annual Meeting of
Stockholders to be held in 2006 ("Proposal 3");
(4) To consider a stockholder proposal that the Fund's By-laws be
amended to permit any stockholder owning at least five percent of
the outstanding common stock of the Fund to demand that the
Fund's Chairman, Vice Chairman, Chief Executive Officer, or
President call a special meeting of stockholders ("Proposal 4");
and
(5) To consider a stockholder proposal that the Board of Directors
conduct a tender offer for 25 percent of the outstanding shares
of the Fund at an amount equal to 95 percent of the Fund's net
asset value in any year that the Fund's discount averages over 10
percent ("Proposal 5").
Of the 16,161,900 shares outstanding and entitled to vote, 9,943,539 shares
were represented at the meeting by proxy or in person. The following table
identifies the matters voted upon at the meeting, the number of votes cast for,
against or withheld, as well as the number of abstentions, as to each such
matter, including a separate tabulation with respect to each nominee for office.
There were no broker non-votes.
MATTER VOTES FOR VOTES AGAINST VOTES
WITHHELD/ABSTAINED
PROPOSAL 1:
John M. Grillos 1,662,889 284,030
Michael H. Jordan 1,684,919 262,000
Gerald Hellerman 7,406,154 590,466
Robert C. Knapp 7,405,754 590,866
PROPOSAL 2:
Laurence R. Hootnick 1,685,970 260,949
Peter J. Locke 1,693,823 253,096
Bruce W. Shewmaker 7,406,654 589,966
George Karpus 7,411,754 584,866
PROPOSAL 3:
Frederick M. Hoar 1,686,354 260,565
Vincent H. Tobkin 1,693,822 253,097
James K. Sims 1,690,915 256,004
Emilio Dominianni 7,403,254 593,366
Terry Feeney 7,409,854 586,766
Robert S. Everett 7,406,854 589,766
PROPOSAL 4: 7,794,529 1,678,994 470,016
PROPOSAL 5: 7,410,053 1,839,287 694,199
Under Proposals 1, 2, 3, the shareholders elected seven new directors:
Gerald Hellerman, Robert C. Knapp, Bruce W. Shewmaker, George Karpus, Emilio
Dominianni, Terry Feeney, and Robert Everett. Gerald Hellerman, Robert C. Knapp,
Bruce W. Shewmaker, George Karpus, Emilio Dominianni, and Terry Feeney will
serve as members of the Board who are not "interested persons" of the Fund and
its affiliated persons ("Independent Directors"), within the meaning of the 1940
Act. On March 6, 2003, the Board appointed director nominee Robert S. Everett to
the CEO post on an interim basis. In connection with his appointment, Mr.
27
Everett has decided not to serve as a director of the Fund. Proposals 4 and 5
are advisory and not binding on the Fund.
Although the former Board of Directors acknowledged, by press release on
February 28, 2003, that the current directors appeared to have won, and they had
seen the proxies demonstrating that the current directors had won, they declined
to transfer control over the Fund until formal certification of the vote by the
inspector of election on March 6, 2003. On that date, John Grillos, Chief
Executive Officer of the Fund, was officially terminated by the current Board of
Directors. Also on that date, Michael Stewart, acting Chief Financial Officer of
the Fund, and Nino Marakovic, Secretary of the Fund, resigned as officers of the
Fund.
ITEM 5. OTHER INFORMATION
On February 27, 2003, the Fund's former Board of Directors amended the
Fund's By-laws to change the indemnification provisions for directors and
officers.
On March 13, 2003, the Fund's current Board of Directors amended the Fund's
By-laws to make the chairmanship a non-executive position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Exhibit
------------- ---------
31 Rule 13a-14(a) Certifications.
32 Section 1350 Certification.
Other required Exhibits are included in this Form 10-Q or
have been previously filed in the Fund's Registration
Statement on Form N-2 (Reg. No. 333-92287).
(b) Reports on Form 8-K
On December 2, 2002, the Fund filed one report on Form
8-K reporting the Fund's commencement of doing business
under the name MVC Capital and to announce the hiring of an
interim Chief Financial Officer.
On March 11, 2003 the Fund filed a report on Form 8-K
confirming the election results following the Annual Meeting
of Shareholders, advising that John Grillos had been
terminated as Chief Executive Officer of the Fund and that
Robert S. Everett had been appointed as acting Chief
Executive Officer.
On March 17, 2003 the Fund filed a report on Form 8-K
advising that Michael Stewart had resigned as acting Chief
Financial Officer of the Fund, and that the filing of the
Form 10-Q quarterly report for the period ended January 31,
2003 would be delayed, pending a full review of the
portfolio valuation by the Current Valuation Committee
appointed by the Board of Directors.
On April 23, 2003, the Fund filed a report on Form 8-K
advising that, on April 16, 2003, PricewaterhouseCoopers LLP
("PwC"), the Fund's independent accountants, had resigned.
During the past two fiscal years of the Fund and the
subsequent interim period through April 16, 2003, there have
been no disagreements with PwC on any matter of accounting
principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not
resolved to the satisfaction of PwC would have caused them
to make reference to the subject matter of the disagreement
28
in connection with their reports on the financial
statements. In addition, the report, as filed on Form 8-K,
advised that a review of the Fund's portfolio valuation had
been conducted and as a result of this review, the fair
value of many of the Fund's holdings had been written down.
On June 9, 2003, the Fund filed a report on Form 8-K
announcing the Fund's new long term strategy, subject to
shareholder approval, pursuant to which the Fund would: (i)
be managed as a more traditional, mezzanine and buyout
focused Business Development Company with an increased
dividend yield, (ii) conduct a tender offer for 25% of the
Fund's outstanding shares at a price of 95% of the Fund's
net asset value, and (iii) appoint Michael Tokarz, a private
merchant banker and a former General Partner of Kohlberg
Kravis Roberts & Co., as the Chairman of the Board and
Portfolio Manager of the Fund. This Form 8-K also reported
that the Fund would seek shareholder approval of the new
long term strategy, even though such approval is not
required.
On July 22, 2003, the Fund filed a report on Form 8-K
advising that the Fund had filed a preliminary proxy
statement with the SEC asking the stockholders to approve
the proposed management plan of the Board of Directors at a
special meeting of stockholders to be held on Tuesday,
September 16, 2003. In addition, the report, as filed on
Form 8-K, advised that a review of the Fund's portfolio
valuation had been conducted and as a result of this review,
the fair value of certain holdings of the Fund had been
written down.
29
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: September 12, 2003 /s/ Robert S. Everett
-----------------------------------------------------------
Robert S. Everett
Chief Executive Officer, and in the capacity of the officer
who performs the functions of Principal Financial Officer.
30
EXHIBIT 31
RULE 13A-14(A) CERTIFICATIONS
I, Robert S. Everett, certify that:
1. I have reviewed this quarterly report on Form 10-Q of meVC Draper
Fisher Jurvetson Fund I, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and have:
a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared; and
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financing
reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
Board of Directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation
of internal control over financial reporting which could
adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Dated:
September 12, 2003 /s/ Robert S. Everett
-----------------------------------------
Robert S. Everett
Chief Executive Officer
meVC Draper Fisher Jurvetson Fund I, Inc.
31
I, Robert S. Everett, certify that:
1. I have reviewed this quarterly report on Form 10-Q of meVC Draper
Fisher Jurvetson Fund I, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and have:
a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared; and
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financing
reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
Board of Directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation
of internal control over financial reporting which could
adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Dated:
September 12, 2003 /s/ Robert S. Everett
--------------------------------------------
Robert S. Everett
In the capacity of the officer who performs
the functions of Principal Financial Officer
meVC Draper Fisher Jurvetson Fund I, Inc.
32
EXHIBIT 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Robert S. Everett, as Chief Executive Officer and in the capacity of the officer
who performs the functions of Principal Financial Officer, of meVC Draper Fisher
Jurvetson Fund I, Inc., a Delaware corporation (the "Registrant"), certifies
that:
1. The Registrant's quarterly report on Form 10-Q for the period ended July
31, 2003 (the "Form 10-Q") fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of the
Registrant.
Chief Executive Officer and in the capacity of the officer who
performs the functions of Principal Financial Officer
meVC Draper Fisher Jurvetson Fund I, Inc.
/S/ ROBERT S. EVERETT
- --------------------------
Robert S. Everett
Date: September 12, 2003
33