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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended ___ October 31, 2003 ________________________________
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________________
Commission file number _________ 000-28405 ____________________________________
MEVC DRAPER FISHER JURVETSON FUND INC.
D/B/A MVC CAPITAL
(Exact name of registrant as specified in its charter)
DELAWARE 94-3346760
- ------------------------------ -------------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
287 BOWMAN AVENUE, PURCHASE, NEW YORK 10577
- --------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 251-1817
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
_______________________________________________________________________________
(Title of class)
_______________________________________________________________________________
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
---- ----
Approximate aggregate market value of common stock held by non-affiliates of the
registrant as of the last business day of the Fund's most recently completed
fiscal second quarter: $118,935,432, computed on the basis of $7.92 per share,
closing price of the common stock on the New York Stock Exchange (the "NYSE") on
April 30, 2003. For purposes of calculating this amount only, all directors and
executive officers of the registrant have been treated as affiliates.
There were 12,293,042 shares of the registrant's common stock, $.01 par value,
outstanding as of January 28, 2004. The net asset value per share at January 28,
2004 was $8.76.
Document Incorporated by Reference:
Proxy Statement for the Fund's Annual Meeting of Shareholders 2004,
incorporated by reference in Part III, Item 10
meVC Draper Fisher Jurvetson Fund I, Inc.
(A Delaware Corporation)
Index
Part I Page
Item 1. Business................................................................................ 1
Item 2. Properties.............................................................................. 12
Item 3. Legal Proceedings....................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders..................................... 13
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................... 14
Item 6. Selected Financial Data................................................................. 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................... 16
Item 7A. Quantitative and Qualitative Disclosure about Market Risk............................... 31
Item 8. Financial Statements and Supplementary Data............................................. 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures.................................................... 53
Item 9A. Controls and Procedures ................................................................ 53
Part III
Item 10. Directors and Executive Officers of the Registrant...................................... 54
Item 11. Executive Compensation.................................................................. 54
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 54
Item 13. Certain Relationships and Related Transactions.......................................... 54
Item 14. Principal Accounting Fees and Services.................................................. 54
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 55
SIGNATURES ........................................................................................ 58
PART I
FACTORS THAT MAY AFFECT FUTURE RESULTS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS THAT INVOLVE SUBSTANTIAL
UNCERTAINTIES AND RISKS. THE FUND'S FUTURE RESULTS MAY DIFFER MATERIALLY FROM
ITS HISTORICAL RESULTS AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN RISK FACTORS.
READERS SHOULD PAY PARTICULAR ATTENTION TO THE CONSIDERATIONS DESCRIBED IN THE
SECTION OF THIS REPORT ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." READERS SHOULD ALSO CAREFULLY
REVIEW THE RISK FACTORS DESCRIBED IN THE OTHER DOCUMENTS THE FUND FILES, OR HAS
FILED, FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION.
ITEM 1. BUSINESS
meVC Draper Fisher Jurvetson Fund I, Inc., D/B/A MVC Capital (the "Fund"),
is a Delaware Corporation organized on December 2, 1999. On March 31, 2000, the
Fund raised $330 million in an initial public offering whereupon it commenced
operations as a closed-end investment company. The Fund's investment objective
is to seek to maximize total return from capital appreciation and/or income. The
Fund seeks to achieve its investment objective by providing equity and debt
financing to companies that are, for the most part, privately owned ("Portfolio
Companies"). The Fund's current equity and debt investments in Portfolio
Companies consist of equity securities such as common and preferred stock,
senior and subordinated loans, venture capital, mezzanine and preferred
instruments and private equity instruments. The Fund has elected to be treated
as a business development company under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). On December 4, 2002, the Fund announced
it had commenced doing business under the name MVC Capital.
The Fund currently has six employees. From the Fund's inception through
February 28, 2003, the Fund had a five-member board of directors (the "Former
Board"), all of whom had been selected by principals of the Fund's original
investment adviser and approved by the stockholders. On February 28, 2003, the
Fund's shareholders elected an entirely new board of seven directors with no
prior affiliation with the Fund. The Fund currently has seven members on the
Board of Directors, six of whom were elected on February 28, 2003. Five of the
directors are not "interested persons" of the Fund (the "Independent
Directors"), as defined by the Investment Company Act. The directors are
responsible for providing overall guidance and supervision of the Fund,
approving the valuation of the Fund's investments and performing various duties
imposed on directors of a business development company by the Investment Company
Act. Among other things, the Independent Directors supervise the management
arrangements for the Fund, the custody arrangements with respect to portfolio
securities, the selection of independent public accountants, fidelity bonding
and any transactions with affiliates.
The Fund's principal executive office is located at 287 Bowman Avenue,
Purchase NY 10577, its telephone number is 914-251-1825 and its website is
WWW.MVCCAPITAL.COM. Copies of the Fund's annual regulatory filings on Form 10-K,
quarterly regulatory filings on Form 10-Q, Form 8-K, and other regulatory
filings may be obtained from the Fund's website, free of charge.
ORGANIZATION
From inception through June 19, 2002, meVC Advisers, Inc., a Delaware
Corporation (the "Former Advisor" or "meVC Advisers") provided certain
management and administrative services to the Fund under the supervision of the
Board of Directors. The Former Advisor arranged for third parties to perform
certain management, administrative and other services, including hiring Fleet
Investment Advisors, Inc. to manage the Fund's cash and short term interest
bearing investments, and hiring State Street Bank and Trust Co, Inc. ("State
Street") to handle all functions of administration, accounting and custodial
work necessary for the operations of the Fund. The Former Advisor provided the
Fund with office space, facilities, equipment, and personnel (all paid by the
Former Advisor). The Former Advisor also hired a sub-advisor, Draper Fisher
Jurvetson MeVC Management Co., LLC (the "Former Sub-Advisor"), who provided the
Fund with office space, facilities, equipment, and personnel (all paid by the
Former Sub-Advisor) to conduct the investment management aspects of its
business.
At the Annual Meeting of the Fund held on March 27, 2002, two proposals
pertaining to the renewal of the contracts of the Former Advisor and the Former
Sub-Advisor were rejected by the Fund's shareholders. The Former Board then
determined that meVC Advisers, Inc. and Draper Fisher Jurvetson MeVC Management
Co., LLC would continue to serve as the Fund's investment advisor and
sub-advisor, respectively, pursuant to interim agreements, which under
Securities and Exchange Commission (the "SEC") rules would be allowed to remain
in effect for a period of up to 150 days from March 27, 2002.
On June 17, 2002, Peter S. Freudenthal, then the President, Chief Executive
Officer and Chairman of the Board of the Former Advisor of the Fund and of the
parent entity of the Former Advisor, resigned from his positions as Vice
Chairman, President and a Director of the Fund. At the same time Paul D.
Wozniak, then the Vice President of Operations for the Former Advisor and the
Chief Operating Officer and Chief Financial Officer of the parent entity of the
Former Advisor, resigned from his positions as Vice President, Chief Financial
Officer, Treasurer and Secretary of the Fund. Messrs. Freudenthal and Wozniak
also resigned from the Former Advisor.
From the Fund's inception through June 19, 2002, the Fund had been charged
a management fee by meVC Advisers at an annual rate of 2.5% of the average
weekly net assets of the Fund, paid monthly in arrears. However, meVC Advisers
had agreed to pay all Fund expenses above and beyond the 2.5% management fee. On
June 19, 2002, meVC Advisers resigned without prior notice to the Fund,
effective immediately, as the Fund's investment advisor. This resignation
resulted in the automatic termination of the agreement between the Former
Advisor and the Former Sub-Advisor to the Fund.
On June 19, 2002, the Former Board voted to internalize the management of
the Fund's operations temporarily under the circumstances and appointed John M.
Grillos, the principal of the Former Sub-Advisor and fellow director, to serve
as the interim Chief Executive Officer. The Former Board no longer required the
Fund to limit its expenses to 2.5% of net assets as had been the practice from
the Fund's inception through June 19, 2002. Certain individuals who had been
employed by the Former Advisor or the Former Sub-Advisor were hired by Mr.
Grillos to perform the services formerly provided by the Former Advisor and
Former Sub-Advisor.
In October 2002, the Former Board a) appointed John Grillos, the then
Chairman of the Board and CEO, to serve as the Fund's Chief Investment Officer;
b) elected William Del Biaggio III as President of the Fund; c) agreed to
consider investing in debt instruments issued by information technology
companies; and d) agreed to continue to conduct the Fund's operations through
internal management by the Fund's Board of Directors, officers and employees. In
November 2002, Mr. Michael D. Stewart was hired as Acting Chief Financial
Officer of the Fund.
Six of the seven members (excluding Mr. Tokarz) of the current Board were
elected at the February 28, 2003 Annual Meeting of the shareholders (the
"Current Board"), replacing the Former Board in its entirety. On March 6, 2003,
the results of the election were certified by the Inspector of Elections,
whereupon the Current Board terminated John M. Grillos, the Fund's previous CEO.
Shortly thereafter, other members of the Fund's senior management team (that had
previously reported to the former CEO) resigned. The Fund's day-to-day
administrative operations were then overseen by Robert S. Everett, the Fund's
interim CEO who was appointed by the Board to fill that role on March 6, 2003.
Since these significant changes in the Board and management of the Fund, the
Fund has operated in a transition mode and, as a result, no new portfolio
investments were made from early March 2003 through the end of October 2003 (the
end of the current Fiscal Year). During this period, the Current Board explored
various alternatives for a long-term management plan for the Fund, including the
possibility of retaining an external investment advisor. However, the Current
Board concluded that it was in the Fund's best interest to implement the
proposed management plan, as described below, and as voted on and approved by
stockholders at the September 16, 2003 Special Meeting of 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, (iii)
seeking to achieve its investment objective through senior and subordinated
loans, venture capital, mezzanine and preferred instruments and private equity
instruments and (iv) 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.
On November 6, 2003, Michael Tokarz assumed his new position as Chairman,
Portfolio Manager and a director of the Fund, pursuant to the shareholder vote
held on September 16, 2003. Concurrent with Mr. Tokarz's appointment, Robert
Everett stepped down after completing his role as interim CEO of the Fund.
Shortly thereafter, the principal executive office of the Fund was relocated to
287 Bowman Avenue, Purchase, New York.
Subject to the supervision of the Current Board, the Fund's management
("Management") performs services necessary for the operations of the Fund. The
investment team is charged with evaluating, monitoring, and disposing of the
Fund's investments in Portfolio Companies. Subject to the supervision of the
Board, Management has arranged for third parties to perform certain of the
administrative services and other services necessary for the operations of the
Fund. Effective November 1, 2002, US Bancorp Fund Services LLC handles all
functions of administration and accounting work, and U.S. Bank National
Association (the "Current Custodian") handles all custodial work necessary for
the operations of the Fund. At the Fund's direction, the Current Custodian also
purchases 90-day U.S. Treasury Bills with the Fund's short-term assets except
that if the Fund's cash balances are not large enough to be invested in 90-day
Treasury Bills, balances are swept into a designated money market account. The
Fund directly incurs expenses for all office space, facilities, equipment,
personnel and other administrative costs necessary to conduct its business.
INVESTMENT PRACTICES
Substantially all amounts not invested in securities of Portfolio Companies
are invested in short-term, highly liquid investments consisting of interest
bearing securities of registered investment companies (money market mutual
funds) or securities issued or guaranteed as to interest and principal by the
United States or by a person or entity controlled or supervised by and acting as
an instrumentality of the government of the United States that have maturities
of less than one year from the date of the investment. As of October 31, 2003,
the Fund had investments in short term securities valued at $113.2 million.
The Fund's investments in Portfolio Companies are typically structured in
private transactions negotiated directly with the owner or issuer of the
securities acquired.
The Fund's former investment objective was to achieve long-term capital
appreciation from venture capital investments in information technology
companies, primarily in the Internet, e-commerce, telecommunications,
networking, software and information services industries. As approved by the
stockholders on September 16, 2003, the Fund's investment objective has been
amended to read as follows:
THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK TO MAXIMIZE TOTAL RETURN
FROM CAPITAL APPRECIATION AND/OR INCOME.
Unlike the former "long-term capital appreciation" objective, the "total
return" objective affords the Fund the flexibility to seek to maximize return
from both capital appreciation and/or income. This flexibility is particularly
important for Mr. Tokarz, whose contemplated strategy for managing the Fund
involves seeking investment opportunities that have potential for providing both
current yield and equity participation, while seeking to protect principal.
There can be no assurances, however, that this strategy will be successful in
protecting principal. The amended objective also eliminates the Fund's current
limited focus on information technology companies. The Fund has adopted related
changes to its principal investment strategies in order to pursue the amended
investment objective. These strategies include investments in senior and
subordinated loans, venture capital, mezzanine and preferred instruments and
private equity investments, and as such, afford Mr. Tokarz the flexibility to
consider potential investment opportunities in a wide range of instruments and
industries.
The Fund is concentrating its investment efforts on companies that, in
Management's view, provide opportunities to maximize total return from capital
appreciation and/or income. Under the Fund's flexible investment approach, the
Fund has the authority to invest, without limit, in any one Portfolio Company,
subject to any diversification limitations that may be required in order for the
Fund to continue to qualify as a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986, as amended.
INVESTMENT CRITERIA
Prospective investments are evaluated by Management based upon criteria
that may be modified from time to time. The criteria currently being used by
Management in determining whether to make an investment in a prospective
Portfolio Company include, but are not limited to Management's view of:
- The presence or availability of highly qualified management teams;
- Products and services with opportunistic markets;
- Favorable industry and competitive dynamics;
- Cash flow and free cash flow of the business.
CO-INVESTMENTS
The Fund is permitted to co-invest in certain Portfolio Companies with its
affiliates, subject to specified conditions set forth in an order obtained from
the SEC. Under the terms of the order, Portfolio Companies purchased by the Fund
and its affiliates are required to be approved by the Independent Directors and
are required to satisfy certain conditions established by the SEC.
INVESTMENT OPERATIONS
The investment operations of the Fund will consist principally of the
following basic activities:
IDENTIFYING INVESTMENTS. Investment opportunities are identified for the
Fund by the investment team. Investment proposals may, however, come to the Fund
from many other sources, and may include unsolicited proposals from the public
and from referrals from banks, lawyers, accountants and other members of the
financial community.
EVALUATING INVESTMENT OPPORTUNITIES. Prior to committing funds to an
investment opportunity, due diligence will be conducted to assess the prospects
and risks of the potential investment. See "Investment Criteria" above.
STRUCTURING INVESTMENTS. Portfolio Company investments typically will be
negotiated directly with the prospective Portfolio Company or its affiliates.
The investment team will structure the terms of a proposed investment, including
the purchase price, the type of security to be purchased or financing to be
provided and the future involvement of the Fund and affiliates in the Portfolio
Company's business (including potential representation on its board of
directors). The investment team will seek to structure the terms of the
investment so as to provide for the capital needs of the Portfolio Company and
at the same time seek to maximize the Fund's total return from both capital
appreciation and/or income.
PROVIDING MANAGEMENT ASSISTANCE AND MONITORING OF INVESTMENTS. Private
equity investors often assist Portfolio Companies with various aspects of their
business operations and business development companies can offer such assistance
to portfolio companies. In some cases, officers and directors of the Fund may
serve as members of the board of directors of Portfolio Companies. The Fund may
provide guidance and management assistance to Portfolio Companies with respect
to such matters as budgets, profit goals, business and financing strategy,
management additions or replacements and plans for liquidity events for
Portfolio Company investors such as a merger or initial public offering.
TEMPORARY INVESTMENTS
Pending investment in Portfolio Companies, the Fund invests its available
funds in interest-bearing money market mutual funds and U.S. Treasury securities
with maturities of less than one year (collectively, "Temporary Investments").
Temporary Investments constituting cash, cash items, and securities issued or
guaranteed by the U.S. Treasury or U.S. Government agencies will qualify in
determining whether the Fund has 70% of its total assets invested in Managed
Companies (as defined below) or in qualified Temporary Investments for purposes
of the business development company provisions of the Investment Company Act.
See "Regulation" below.
FOLLOW-ON INVESTMENTS
Following its initial investment in a Portfolio Company, the Fund may be
requested to make follow-on investments in the company. Follow-on investments
may be made to take advantage of warrants or other preferential rights granted
to the Fund or otherwise to increase or maintain the Fund's position in a
successful or promising Portfolio Company. The Fund may also be called upon to
provide additional equity or loans needed by a Portfolio Company to fully
implement its business plans, to develop a new line of business or to recover
from unexpected business problems. Follow-on investments in a Portfolio Company
are evaluated on a case-by-case basis.
DISPOSITION OF INVESTMENTS
The method and timing of the disposition of the Fund's portfolio
investments can be critical to the realization of maximizing total return and to
the minimization of any capital losses. The Fund expects to dispose of its
portfolio securities through a variety of transactions, including the negotiated
private sales of such securities to other investors, the sales of portfolio
securities in underwritten public offerings, and public sales of such
securities. The Fund expects the debt financings to be repaid with interest and
hopes to realize further appreciation from the warrants or other equity type
instruments it receives in connection with making the loan. The Fund bears the
costs of disposing of investments to the extent not paid by a Portfolio Company.
OPERATING EXPENSES
The Fund bears the costs of obtaining office space, facilities, equipment,
personnel and other administrative costs necessary to conduct the Fund's
business. The Fund also bears other costs relating to the Fund's operations,
including fees and expenses of the Independent Directors; fees of unaffiliated
transfer agents, registrars and disbursing agents; legal and accounting
expenses; costs of printing and mailing proxy materials and reports to
shareholders; New York Stock Exchange fees; custodian fees; litigation costs;
costs of disposing of investments including brokerage fees and commissions; and
other extraordinary or nonrecurring expenses and other expenses properly payable
by the Fund.
VALUATION
Investments in Portfolio Companies are carried at fair value with the net
change in unrealized appreciation or depreciation included in the determination
of increases or decreases in net assets resulting from their operations. Cost is
used to approximate fair value of these investments until developments affecting
an investment provide a basis for valuing such investment at a value other than
cost.
The fair value of investments for which no market exists and for which the
Board of Directors and/or the Fund's Valuation Committee have determined that
the original cost of the investment is no longer an appropriate fair valuation
will be determined on the basis of procedures approved by the Current Board.
Valuations are based upon such factors as the financial and/or operating results
of the most recent fiscal period, the performance of the company relative to
planned budgets/forecasts, the issuer's financial condition and the markets in
which it does business, the prices of any recent transactions or offerings
regarding such securities or any proxy securities, any available analysis,
media, or other reports or information regarding the issuer, or the markets or
industry in which it operates, the nature of any restrictions on disposition of
the securities and other analytical data. In the case of unsuccessful
operations, the valuation may be based upon anticipated liquidation proceeds.
Because of the inherent uncertainty of the valuation of portfolio
securities which do not have readily ascertainable market values, the Fund's
estimate of fair value may significantly differ from the fair market value that
would have been used had a ready market existed for the securities. Such values
do not reflect brokers' fees or other normal selling costs which might become
payable on disposition of such investments.
Investments in companies whose securities are publicly traded are valued at
their quoted market price, less a discount to reflect the estimated effects of
restrictions on the sale of such securities ("Valuation Discount"), if
applicable.
Short-term investments having maturities of 90 days or less are stated at
amortized cost, which approximates fair value. Other fixed income securities are
stated at fair value. Fair value of these securities is determined at the most
recent bid or yield equivalent from dealers that make markets in such
securities.
The Fund's Valuation Committee reviews the valuations on a quarterly basis
or more frequently if deemed necessary to determine their appropriateness and
such valuations are approved quarterly by the Current Board. Any changes in
valuation are recorded in the statements of operations as "Net unrealized gain
(loss) on investments."
CUSTODIAN
Pursuant to an agreement with the Fund, State Street acted as the Fund's
custodian with respect to the safekeeping of its securities until October 31,
2002. The principal business office of State Street was 225 Franklin Street,
Boston, Massachusetts, 02110. Effective November 1, 2002, US Bank National
Association became the custodian of the Fund's securities. The principal
business office of the Current Custodian is 425 Walnut Street, Cincinnati, OH
45202.
TRANSFER AGENT AND DISBURSING AGENT
The Fund employs EquiServe Trust Company, N.A. ("EquiServe") as its
transfer agent to record transfers of the shares, maintain proxy records and to
process distributions. The principal business office of such company is 150
Royall Street, Canton, Massachusetts, 02021.
FACTORS THAT MAY AFFECT FUTURE RESULTS, THE MARKET PRICE OF COMMON STOCK, AND
THE ACCURACY OF FORWARD-LOOKING STATEMENTS
In the normal course of its business, the Fund, in an effort to keep its
stockholders and the public informed about the Fund's operations and portfolio
of investments, may from time-to-time issue certain statements, either in
writing or orally, that contain or may contain forward-looking information.
Generally, these statements relate to business plans or strategies of the Fund
or Portfolio Companies, projected or anticipated benefits or consequences of
such plans or strategies, projected or anticipated benefits of new or follow-on
investments made by or to be made by the Fund, or projections involving
anticipated purchases or sales of securities or other aspects of the Fund's
operating results. Forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties that could cause actual
results to differ materially. As noted elsewhere in this report, the Fund's
operations and portfolio of investments are subject to a number of
uncertainties, risks, and other influences, many of which are outside the
control of the Fund, and any one of which, or a combination of which, could
materially affect the results of the Fund's operations or net asset value, the
market price of its common stock, and whether forward-looking statements made by
the Fund ultimately prove to be accurate.
The following discussion outlines certain factors that in the future could
affect the Fund's results for 2004 and beyond and cause them to differ
materially from those that may be set forth in any forward-looking statement
made by or on behalf of the Fund:
LONG-TERM OBJECTIVE. The Fund is intended for investors seeking to maximize
total return from capital appreciation and/or income. The Portfolio Companies
acquired by the Fund may require several or many years to reach maturity and
generally are illiquid. An investment in shares of the Fund should not be
considered a complete investment program. Each prospective stockholder should
take into account his investment objectives as well as his other investments
when considering the purchase of shares of the Fund.
NON-DIVERSIFIED STATUS; NUMBER OF INVESTMENTS. The Fund is classified as a
"non-diversified" investment company under the Investment Company Act, which
means the Fund is not limited in the proportion of its assets that may be
invested in the securities of a single issuer. To the extent the Fund takes
large positions in the securities of a small number of issuers, the Fund will be
exposed to a greater risk of loss and the Fund's net asset value and the market
price of its common stock may fluctuate as a result of changes in the financial
condition, the stock price of, or in the market's assessment of any single
Portfolio Company to a greater extent than would be the case if it were a
"diversified" company holding numerous investments. As of October 31, 2003, the
Fund has investments in 23 Portfolio Companies.
LACK OF LIQUIDITY OF PORTFOLIO INVESTMENTS. The portfolio investments of
the Fund consist principally of securities that are subject to restrictions on
sale because they were acquired from the issuer in "private placement"
transactions. Currently, none of the Fund's Portfolio Companies are publicly
traded. If in the future public markets develop for such securities, any public
sale of these securities by the Fund could still be burdened by the expense and
time required to register the securities under the Securities Act of 1933, as
amended, and applicable state securities law, unless an exemption from such
registration requirements is available. In addition, contractual or practical
limitations may restrict the Fund's ability to liquidate its securities in
Portfolio Companies since in many cases the securities of such companies will be
privately held and the Fund may own a relatively large percentage of the
issuer's outstanding securities. Sales may also be limited by securities market
conditions, which may be unfavorable for sales of securities of particular
issuers or issuers in particular industries. The above limitations on liquidity
of the Fund's securities could preclude or delay any disposition of such
securities or reduce the amount of proceeds that might otherwise be realized.
DEBT FINANCINGS IN PORTFOLIO INVESTMENTS. The portfolio investments of the
Fund may also consist of debt financing to portfolio companies. The borrower's
ability to repay the loan may be adversely impacted by a number of factors and
consequently the loan may not be fully repaid. Furthermore, the Fund's security
interest in any collateral over the borrower's assets may not realize a
sufficient amount to make up any shortfall.
NEED FOR FOLLOW-ON INVESTMENTS IN PORTFOLIO COMPANIES. After its initial
investment in a Portfolio Company, the Fund may be called upon from time to time
to provide additional funds to such company or have the opportunity to increase
its investment in a successful situation, e.g., the exercise of a warrant to
purchase common stock. There is no assurance that the Fund will make, or have
sufficient funds to make, follow-on investments. Any decision by the Fund not to
make a follow-on investment or any inability on its part to make such an
investment may have a negative impact on a Portfolio Company in need of such an
investment or may result in a missed opportunity for the Fund to increase its
participation in a successful operation and may dilute the Fund's equity
interest in or reduce the expected yield on its investment. In many cases, if a
Portfolio Company is unable to secure a follow-on investment from its investors,
the likely outcome is that the Portfolio Company will cease operations due to a
lack of working capital available to that Portfolio Company.
COMPETITION FOR INVESTMENTS. The Fund encounters competition from other
persons or entities with similar investment objectives. These competitors
include venture capital firms, small business investment companies, large
industrial and financial companies investing directly or through affiliates,
other business development companies, foreign investors of various types and
individuals. Many of these competitors have greater financial resources and more
personnel than the Fund and may be subject to different and frequently less
stringent regulations.
LOSS OF CONDUIT TAX TREATMENT. The Fund may cease to qualify for conduit
tax treatment as a regulated investment company ("RIC") if it is unable to
comply with the diversification and income requirements contained in Subchapter
M of the Internal Revenue Code of 1986, as amended (the "Code"). Subchapter M
requires, among other things, that (1) at the end of each quarter of the Fund's
taxable year (i) at least 50% of the value of the Fund's assets must consist of
cash, government securities, securities of other RICs and other securities of
any single issuer that do not represent more than 5% of the value of the Fund's
then current total assets and 10% of the outstanding voting securities of such
issuer, and (ii) no more than 25% of the value of the Fund's assets may be
invested in the securities of any one issuer (other than United States
government securities or securities of other RICs), or of two or more issuers
that are controlled by the Fund and are engaged in the same or similar or
related trades or businesses and (2) at least 90% of the Fund's gross income in
each taxable year is derived from dividends, interest, payments received with
respect to loans of securities, gains from the sale or other disposition of
stock or securities and certain related income. The Fund may also cease to
qualify for conduit tax treatment, or be subject to a 4% excise tax on certain
amounts, if it fails to distribute a sufficient portion of its income and gains.
If the Fund ceases to qualify for conduit tax treatment, the Fund will be
subject to income tax on its income and gains and stockholders will be subject
to income tax on distributions to the extent of the Fund's earnings and profits.
MARKET VALUE AND NET ASSET VALUE. The shares of the Fund's common stock are
listed on the NYSE. Investors desiring liquidity may trade their shares of
common stock on the NYSE at current market value, which may differ from the then
current net asset value (Shareholders' Equity). Shares of closed-end investment
companies frequently trade at a discount from net asset value. This
characteristic of shares of a closed-end fund is a risk separate and distinct
from the risk that the Fund's net asset value will decrease. The risk of
purchasing shares of a closed-end fund that might trade at a discount is more
pronounced for investors who wish to sell their shares in a relatively short
period of time because for those investors, realization of a gain or loss on
their investments is likely to be more dependent upon the existence of a premium
or discount than upon portfolio performance. The Fund's shares have historically
traded at a significant discount to net asset value since they began trading.
For information concerning the trading history of the Fund's shares see "Market
for Registrant's Common Stock and Related Stockholder Matters."
VALUATION OF INVESTMENTS. The Fund's net asset value is based on the value
assigned to its portfolio investments. Investments in companies whose securities
are publicly traded are valued at their quoted market price, less a discount to
reflect the estimated effects of restrictions on the sale of such securities, if
applicable. The Fund adjusts its net asset value for changes in the value of its
publicly held securities, if any, on a daily basis. The value of the Fund's
investments in securities for which market quotations are not available is
determined as of the end of each fiscal quarter but monitored regularly in case
there is a significant event requiring a change in valuation in the interim.
Cost is used to approximate fair value of such investments until significant
developments affecting an investment provide a basis for valuing an investment
at other than cost. Thereafter, such portfolio investments are carried at fair
values as determined at least quarterly. Due to the inherent uncertainty of the
valuation of portfolio securities which do not have readily ascertainable market
values, the Fund's estimate of fair value may significantly differ from the fair
value that would have been used had a ready market existed for the securities.
At October 31, 2003, all of the preferred stocks and debt instruments in
Portfolio Companies held by the Fund, representing approximately 8.47% and
9.10%, respectively, of the Fund's net assets, were invested in securities for
which market quotations were not readily available. See "Valuation."
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Fund's common
stock could be subject to significant fluctuations in response to variations in
the net asset value of the Fund, its quarterly operating results, and other
factors. The market price of the common stock may be significantly affected by
such factors as the announcement of new or follow-on investments in Portfolio
Companies, the sale or proposed sale of a portfolio investment, the results of
operations or fluctuations in the market prices or appraised value of one or
more of the Fund's Portfolio Companies, changes in earnings estimates by market
analysts, speculation in the press or analyst community and general market
conditions or market conditions specific to particular industries. From time to
time in recent years, the securities markets have experienced significant price
and volume fluctuations that have often been unrelated or disproportionate to
the operating performance of particular companies. These broad fluctuations may
adversely affect the market price of the common stock. In addition, the Fund is
subject to the risk of the securities markets in which the portfolio securities
of the Fund are traded. Securities markets are cyclical and the prices of the
securities traded in such markets rise and fall at various times. These cyclical
periods may extend over significant periods of time.
REGULATION
The Fund has elected to be treated as a business development company under
the Investment Company Act. Accordingly, it may provide for incentive
compensation in the form of one of the following: (i) a performance fee based on
the capital appreciation of the Fund's investments, (ii) a profit-sharing plan
based on the Fund's income, or (iii) a stock option plan. As Portfolio Manager,
Mr. Tokarz will be compensated by the Fund based upon his positive performance
as the Portfolio Manager. Under the terms of his agreement with the Fund, the
Fund will pay Mr. Tokarz an amount equal to the lesser of (a) 20% of the net
income of the Fund for the fiscal year; and (b) the sum of (i) 20% of the net
capital gains realized by the Fund in respect of the investments made during his
tenure as Portfolio Manager; and (ii) the amount, if any, by which the Fund's
total expenses for a fiscal year were less than two percent of the Fund's net
assets (determined as of the last day of the period). Any payments to be made
shall be calculated based upon the audited financial statements of the Fund for
the applicable fiscal year and shall be paid as soon as practicable following
the completion of such audit. Mr. Tokarz may allocate a part or all of such
compensation to other professionals of the Fund.
The Fund may not withdraw its election to be treated as a business
development company without first obtaining the approval of a majority of its
shareholders. The following is a summary of the requirements imposed on business
development companies by the Investment Company Act and is qualified in its
entirety by reference to the full text of the Investment Company Act and the
rules thereunder.
A business development company must be operated for the purpose of
investing in the securities of certain present and former "eligible portfolio
companies" or certain bankrupt or insolvent companies and must make available
significant managerial assistance to such companies. An eligible portfolio
company generally is a company that (i) is organized under the laws of, and has
its principal place of business in, any state or states, (ii) is not an
investment company and (iii)(a) does not have a class of securities registered
on an exchange or included in the Federal Reserve Board's over-the-counter
margin list, (b) is actively controlled by the business development company
acting either alone or as part of a group acting together and an affiliated
person of the business development company is a member of the company's board of
directors or (c) meets such other criteria as may be established by the SEC.
Control is presumed to exist where the business development company owns more
than 25% of the outstanding voting securities of an eligible portfolio company.
"Making available significant managerial assistance" is defined by the
Investment Company Act to mean (i) any arrangement whereby a business
development company, through its directors, officers or employees, offers to
provide and, if accepted, does provide significant guidance and counsel
concerning the management, operations or business objectives or policies of a
company or (ii) the exercise of a controlling influence over the management or
policies of a company by the business development company acting individually or
as part of a group of which the business development company is a member acting
together which controls such company ("Managed Company"). A business development
company may satisfy the requirements of clause (i) with respect to an eligible
portfolio company by purchasing securities of such a company as part of a group
of investors acting together if one person in such group provides the type of
assistance described in such clause. However, the business development company
will not satisfy the general requirement of making available significant
managerial assistance if it in all cases provides such assistance only
indirectly through an investor group. A business development company need only
extend significant managerial assistance with respect to eligible portfolio
companies which are treated as Qualifying Assets (as defined below) for the
purpose of satisfying the 70% test discussed below.
The Investment Company Act prohibits or restricts the Fund from investing
in certain types of companies, such as brokerage firms, insurance companies,
investment banking firms and investment companies. Moreover, the Investment
Company Act limits the type of assets that the Fund may acquire to "Qualifying
Assets" and certain assets necessary for its operations (such as office
furniture, equipment and facilities) if, at the time of the acquisition, less
than 70% of the value of the Fund's total assets consists of Qualifying Assets.
Qualifying Assets include (i) securities of companies that were eligible
portfolio companies at the time that the Fund acquired their securities; (ii)
securities of companies that are actively controlled by the Fund; (iii)
securities of bankrupt or insolvent companies that are not otherwise eligible
portfolio companies; (iv) securities acquired as follow-on investments in
companies that were eligible portfolio companies at the time of the Fund's
initial acquisition of their securities but are no longer eligible portfolio
companies, provided that the Fund has maintained a substantial portion of its
initial investment in such companies; (v) securities received in exchange for or
distributed on or with respect to any of the foregoing; and (vi) cash items,
government securities and high-quality, short-term debt. The Investment Company
Act also places restrictions on the nature of the transactions in which, and the
persons from whom, securities can be purchased in order for such securities to
be considered Qualifying Assets. As a general matter, Qualifying Assets may only
be purchased from the issuer or an affiliate in a transaction not constituting a
public offering. The Fund may not purchase any security on margin, except such
short-term credits as are necessary for the clearance of portfolio transactions,
or engage in short sales of securities.
The Fund is permitted by the Investment Company Act, under specified
conditions, to issue multiple classes of senior debt and a single class of
preferred stock senior to the common stock if its asset coverage, as defined in
the Investment Company Act, is at least 200% after the issuance of the debt or
the senior stockholders' interests. In addition, provisions must be made to
prohibit any distribution to common shareholders or the repurchase of any shares
unless the asset coverage ratio is at least 200% at the time of the distribution
or repurchase.
The Fund generally may sell its securities at a price that is below the
prevailing net asset value per share only upon the approval of the shareholders
holding a majority of the shares issued by the Fund, including a majority of
shares held by nonaffiliated shareholders. The Fund may, in accordance with
certain conditions established by the SEC, sell shares below net asset value in
connection with the distribution of rights to all of its stockholders. The Fund
may also issue shares at less than net asset value in payment of dividends to
existing shareholders.
Since the Fund is a closed-end business development company, stockholders
have no right to present their shares to the Fund for redemption. Recognizing
the possibility that the Fund's shares might trade at a discount, the Board of
Directors has determined that it would be in the best interest of stockholders
for the Fund to be authorized to attempt to reduce or eliminate a market value
discount from net asset value. Accordingly, the Fund from time to time may, but
is not required to, repurchase its shares (including by means of tender offers)
to attempt to reduce or eliminate any discount or to increase the net asset
value of its shares, or both. Pursuant to a shareholder vote at the Special
Meeting held on September 16, 2003, the Fund commenced a tender offer on
November 26, 2003, which terminated on December 31, 2003, as described in Item
5, "Market for Registrant's Common Equity and Related Stockholder Matters".
Many of the transactions involving the Fund and its affiliates (as well as
affiliates of such affiliates) require the prior approval of a majority of the
Independent Directors. However, certain transactions involving closely
affiliated persons of the Fund would require the prior approval of the SEC. In
general (a) any person who owns, controls or holds with power to vote more than
5% of the outstanding shares, (b) any director or executive officer and (c) any
person who directly or indirectly controls, is controlled by or is under common
control with such person, must obtain the prior approval of a majority of the
Independent Directors and, in some situations, the prior approval of the SEC,
before engaging in certain transactions involving the Fund or any company
controlled by the Fund. In accordance with the Investment Company Act, a
majority of the directors must be persons who are not "interested persons" of
the Fund as defined in such act. Except for certain transactions which must be
approved by the Independent Directors, the Investment Company Act generally does
not restrict transactions between the Fund and the Portfolio Companies.
ITEM 2. PROPERTIES
The Fund does not own any real estate or other physical property. Its
principal executive office is located at 287 Bowman Avenue, Purchase, New York
10577, pursuant to an operating lease which is scheduled to expire on November
30, 2005. Future payments under this lease total $110,933, with annual minimum
payments of $49,517 from December 8, 2003 through October31, 2004, $56,682 from
November 1, 2004 through October 31, 2005, and $4,734 from November 1, 2005
through November 30, 2005. The building at 287 Bowman Avenue is owned by Phoenix
Capital Partners, LLC, an entity which is 97% owned by Mr. Tokarz. The Fund has
continued to pay rent on its former office space pursuant to an operating lease,
entered into by Former Management in late 2002, which was scheduled to expire on
October 31, 2005. Future payments under this lease totaled $597,000 as of
October 31, 2003, with annual minimum payments of $298,500; however, in January
2004, the Fund reached agreement to terminate this lease for $232,835 effective
January 31, 2004.
ITEM 3. 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 Advisor. The complaint alleges that the
fees received by the Former Advisor for the year prior to the filing of the
complaint were excessive, in violation of Section 36(b) of the Investment
Company Act. The Former Advisor'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 and mediation scheduled
to begin in April 2004. The Fund is monitoring this litigation inasmuch as any
net 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 Advisor and between the Fund and the Former
Sub-Advisor. On April 5, 2002, Millenco moved to accelerate the trial of the
case and later that day the Former Board 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 Former
Board 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 Board had breached its 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 Board was elected.
On February 6, 2003, the Fund filed a complaint against Millennium
Partners, L.P., Millenco 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
Board. The complaint asked the Court for injunctive relief aimed at limiting the
stockholders' voting rights at the February 28, 2003 annual meeting of
stockholders.
On February 24, 2003, after expedited 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.
On March 3, 2003, after the Annual Meeting, but prior to the transfer of
control by the Former Board to the Current Board, John Grillos signed a document
which purported to extend the maturity date of the Fund's $3 million 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 passed
without payment to the Fund of any principal or interest on the loan. The Fund's
Current Board 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 stockbroker to which such money had been transferred by 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. In August 2003, the
parties settled the litigation, and the Fund received $2,580,000, 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, the Fund recovered a total of
approximately $2,624,000 of the original $3,000,000 loan. Potential Fund
proceeds from the remaining 550,000 shares of Transware stock are believed to
have nominal value at best. 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.
In 2003, a former officer and director who had been hired by the Former
Board demanded severance pay of approximately $255,000, and threatened to sue
the Fund for such severance, plus 10% interest and attorney's fees. The Fund
rejected the demand and, in 2004, informed the former officer that if he sued,
the Fund would oppose such lawsuit and take such affirmative legal action as may
be appropriate to recover damages to the Fund caused by certain conduct of the
former officer. No assurance can be given as to whether the former officer will
sue the Fund or the outcome of such litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Fund held a Special Meeting of Stockholders on September 16, 2003 for
the following purpose:
To approve the proposed management plan of the Board of Directors (the
"Proposed Plan") under which: (i) Michael Tokarz would be appointed
Chairman of the Board of Directors and Portfolio Manager of the Fund;
(ii) the Fund would adopt an amended investment objective whereby the
Fund would seek to maximize total return from capital appreciation
and/or income; (iii) the Fund would seek to achieve its investment
objective primarily through senior and subordinated loans, venture
capital, mezzanine and preferred instruments and private equity
investments; and (iv) the Fund would conduct 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.
Of the 16,152,600 shares outstanding and entitled to vote, 8,216,271 shares
were represented at the meeting by proxy or in person. The following table
identifies the matter voted upon at the meeting, the number of votes cast for or
against, as well as the number of abstentions, as to each such matter. There
were no broker non-votes.
MATTER VOTES VOTES VOTES
FOR AGAINST WITHHELD/ABSTAINED
PROPOSAL:
- ---------
Approval of the Proposed Plan 7,513,748 658,236 44,287
of the Board of Directors set
forth in the Notice of Special
Meeting of Shareholders dated
August 20, 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Fund's shares of common stock began to trade on the New York Stock
Exchange (NYSE) on June 26, 2000, under the symbol "MVC." The Fund had
approximately 11,500 shareholders on August 8, 2003, the record date set for the
Fund's Special Meeting of Shareholders held in September 2003.
The following table reflects, for the periods indicated the high and low
closing prices per share of the Fund's common stock on the NYSE, by quarter.
QUARTER
ENDED HIGH LOW
-------- ------- -------
FISCAL YEAR 2003
10/31/03 $8.36 $7.92
07/31/03 $8.48 $7.89
04/30/03 $8.68 $7.85
01/31/03 $8.60 $7.90
FISCAL YEAR 2002
10/31/02 $8.05 $7.25
07/31/02 $9.50 $7.50
04/30/02 $10.06 $8.80
01/31/02 $10.06 $9.22
DIVIDENDS
As a RIC under Subchapter M of the Code, the Fund is required to distribute
to its shareholders, in a timely manner, at least 90% of its investment company
taxable income and tax-exempt income each year. If the Fund distributes, in a
calendar year, at least 98% of its ordinary income for such calendar year and
its capital gain net income for the 12-month period ending on October 31 of such
calendar year (as well as any portion of the respective 2% balances not
distributed in the previous year), it will not be subject to the 4%
non-deductible federal excise tax on certain undistributed income of RICs.
During the Fund's fiscal years ended October 31, 2002 and October 31, 2003,
respectively, the Fund did not declare, nor was it required to distribute under
Subchapter M, any dividends. In the event of a declared dividend, distributions
can be made payable by the Fund in the form of either a cash distribution or a
stock dividend. If on the Fund's ex-dividend date, the Fund was trading on the
NYSE at a discount to net asset value, in accordance with the Dividend
Reinvestment Plan, the Dividend Distribution Agent would purchase shares on the
open market of the NYSE for those shareholders electing to take their
distributions in the form of stock dividends. If on the Fund's ex-dividend date,
the Fund was trading on the NYSE at a premium to net asset value, in accordance
with the Dividend Reinvestment Plan, the Dividend Distribution Agent would
distribute new shares at net asset value to those shareholders electing to take
their distributions in the form of stock dividends.
The Fund reserves the right to retain net long-term capital gains in excess
of net short-term capital losses for reinvestment or to pay contingencies and
expenses. Such retained amounts, if any, will be taxable to the Fund, and
shareholders will be able to claim their proportionate share of the federal
income taxes paid by the Fund on such gains as a credit against their own
federal income tax liabilities. Stockholders will also be entitled to increase
the adjusted tax basis of their Fund shares by the difference between their
undistributed capital gains and their tax credit.
REPURCHASE PLAN
During the year ended October 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, as amended
(the "Exchange Act").
TENDER OFFER
On November 26, 2003, the Fund commenced a tender offer to acquire up to
twenty-five percent (25%) of its outstanding shares of common stock at a per
share cash purchase price equal to ninety-five percent (95%) of net asset value
per share as of December 31, 2003, the day the offer expired. Based on a final
count by the depositary for the tender offer, 3,859,558 shares, or 23.9% of the
Fund's outstanding common stock, were tendered. Because less than 25% of the
Fund's shares were tendered, the Fund purchased all shares tendered. Each share
accepted for purchase was purchased at a price of $8.18 resulting in a total
disbursement from the Fund of $31,571,184. Since completion of the tender offer,
MVC has 12,293,042 shares of common stock outstanding. The anti-dilutive effect
of the tender offer totaled $1,650,697 or approximately $0.134 per share for all
remaining shares after the tender offer. The discussion above is a summary of
the Tender Offer and is qualified in its entirety by reference to the full text
of the Schedule TO as filed with the SEC.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the fiscal year ended October 31,
2003 is derived from the financial statements, which have been audited by Ernst
& Young LLP, the Fund's current independent accountants. The following selected
financial data for the fiscal years ended October 31, 2002 and 2001 and the
period ended October 31, 2000 are derived from the financial statements, which
were audited by PricewaterhouseCoopers, LLP, the Fund's former independent
accountants. The data should be read in conjunction with the financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
report.
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
OCTOBER 31, 2003 OCTOBER 31, 2002 OCTOBER 31, 2001 OCTOBER 31, 2000*
Total investment income $2,895,314 $3,739,893 $9,046,526 $9,325,822
Total operating expenses $11,386,872 $6,861,850 $7,388,061 $4,615,284
Net investment (loss) income $(8,491,558) $(3,121,957) $1,658,465 $4,710,538
Net realized (loss) gain on investment
transactions $(4,220,380) $(33,469,122) $5,123 $(789)
Net unrealized depreciation on investment
transactions $(42,771,460) $(21,765,310) $(52,994,121) $(4,913,010)
Dividends declared per share $0.00 $0.04 $0.34 $0.00
Balance Sheet data:
Total assets $137,880,292 $196,511,000 $255,049,783 $312,114,878
Total liabilities $872,130 $1,124,523 $578,227 $668,139
Total Shareholders Equity $137,008,162 $195,386,477 $254,471,556 $311,446,739
Net asset value per share $8.48 $11.84 $15.42 $18.88
* Commenced operations on March 31, 2000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the 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 SEC. 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.
OVERVIEW
The Fund is a non-diversified investment company that is regulated as a
business development company under the Investment Company Act. The primary
investment objective, as amended by shareholder vote on September 16, 2003, is
to seek to maximize total return from capital appreciation and/or income. The
Fund seeks to achieve its investment objective by providing equity and debt
financing to Portfolio Companies.
Historically the Fund's investing activities have focused on private equity
securities. Generally, private equity investments are structured as convertible
preferred stock, and portfolio companies do not pay dividends. Consequently
current income has not been a significant part of the equity portfolio. Private
equity investments typically range up to $10.0 million and the Fund's goal had
previously 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 16, 2003, the stockholders approved the Current Board's
Proposed Plan, as discussed in Part I, Item 1, "Investment Practices", and in
Item 4, "Submission of Matters to a Vote of Security Holders", which included
(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 and (iv) 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 Fund did not complete any investments under the new investment
objective as of the end of its most recently completed fiscal year. On November
6, 2003, Michael Tokarz assumed his new position as Portfolio Manager and is in
the process of seeking to implement the new strategy.
GENERAL INVESTMENT CLIMATE
During the current fiscal year, the Fund continued to operate in the
aftermath of the 2001 severe downturn in technology stocks and its profound
impact on the technology venture capital industry. M&A activity and new issues
of technology stocks began fiscal 2003 at pre-1998 levels but were demonstrating
signs of modest recovery by mid-year. Macro economic trends appeared to be
guided throughout the year by the conflict in the Middle East, the U.S.
political debate about both the form and amount of tax stimulus, and the outlook
for job growth. Risk capital for emerging tech companies remained scarce as
measured by the slow pace of fundraising by private venture capital funds and
relatively stable quarterly disbursements by existing venture funds during the
period.
It is estimated by the National Venture Capital Association that more than
half of the committed capital of private venture capital funds is held as
reserves for follow-on financing. Most follow-on rounds in the technology
venture-backed companies during the past fiscal year took place at prices below
existing holdings or on terms that were more favorable to the investors than for
previous rounds of financing. The Fund's new management team will continue to
evaluate every Portfolio Company for opportunities to participate in follow-on
investments that are believed to have potential for enhancing the Fund's overall
returns.
The fiscal year ended October 31, 2003 revealed that the venture capital
industry continued its trend of devoting significant portion of its resources to
poorly performing, unprofitable companies. Our co-investors and the Fund took
steps seeking to get back to pre-bubble standards of accountability and planning
in providing assistance to the Fund's Portfolio Companies. This resulted in
falling valuations for those technology companies without a clear path to
profitability or wide acceptance of new technologies and products. Further, the
standards for alternative methods of exiting private technology stocks, i.e.,
IPOs and mergers and acquisitions, have been raised, in Management's view, to
require profitable operating performance or significant market penetration.
The venture capital industry appears to have made moderate improvement,
especially in the later half of 2003, as measured by the increased flow of new
deals and rising tech stock indexes. These trends may help create a favorable
climate for our existing holdings of technology-based companies. With the shift
in the Fund's investment objective in September 2003 to seeking total return
from a broad range of private equity investments, including senior and
subordinated loans (across a broad range of industries and sectors), the
investment climate for private technology stocks may have less of an impact on
our activities in the new fiscal year and beyond. This greater investment
flexibility may permit us to take advantage of what appears to be an uneven
economic recovery but there can be no assurances such strategy will be
successful.
INVESTMENT INCOME
FOR THE YEARS ENDED OCTOBER 31, 2003 AND 2002. Dividend and interest income
was $2.9 million in 2003 and $3.7 million in 2002, a decrease of $0.8 million or
21.6%. The reduction in dividend and interest income during the year ended
October 31, 2003 was primarily the result of lower interest rates on a reduced
cash balance. Interest and dividend income was primarily related to the Fund's
investment in short-term investments and not from portfolio companies.
FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001. Dividend and interest income
was $3.7 million in 2002 and $9.0 million in 2001, a decrease of $5.3 million or
58.9%. The reduction in dividend and interest income during the year ended
October 31, 2002 was primarily due to the redeployment of both cash available
for short term investing and the decline in short-term interest rates.
OPERATING EXPENSES
FOR THE YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001. Operating expenses
were $11.4 million in 2003 and $6.9 million in 2002, an increase of $4.5 million
or 65.2%. The increase in operating expenses during the year ended October 31,
2003 is explained below. Operating expenses were $6.9 million in 2002 and $7.39
million in 2001, a decrease of $0.49 million or 6.63%.
On an annualized basis operating expenses are not expected to increase,
though it is not possible to predict with any degree of accuracy the future
level of operating costs associated with the Fund's operations.
YEAR ENDED OCTOBER 31, 2003
Significant components of operating expenses for the year ended October 31,
2003 include proxy/litigation fees & expenses of $4.0 million (discussed below),
salaries and benefits of $2.5 million, legal fees of $1.5 million, facilities
costs of $1.3 million, insurance premium expenses of $1.1 million, directors'
fees of $455,000, and administration fees of $139,000.
During the year ended October 31, 2003, the Fund paid or incurred $4.0
million for legal and proxy solicitation fees and expenses, which includes $2.2
million accrued and paid 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 a 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
from the Fund's insurance carrier.
During the year ended October 31, 2003, the Fund paid or accrued $2.5
million in salaries and benefits. The Fund does not anticipate paying or
accruing as much in salaries and benefits for the year ending October 31, 2004
as the number of Fund employees has been significantly reduced.
During the year ended October 31, 2003, the Fund paid or accrued an
additional $1.5 million in legal fees. The Fund does not anticipate paying or
accruing as much in legal fees for the year ending October 31, 2004 as
Management and the Board of Directors have solidified the Fund's intended
direction.
During the year ended October 31, 2003, the Fund paid or accrued $1.3
million in facilities expenses. Included in that expense is an accrual of
$547,250 for future payments for the Fund's property lease at 3000 Sand Hill
Road, Building 1 Suite 155, Menlo Park, CA for the remainder of the lease
through October 2005. The Fund anticipates lower facilities expenses during the
year ending October 31, 2004.
During the year ended October 31, 2003, the Fund paid or accrued $455,000
in directors' fees. On July 1, 2003, the Current Board reduced their fees by 50%
through October 31, 2003.
In February 2003, the former management of the Fund ("Former Management")
entered into new Directors & Officers/Professional Liability Insurance policies
with a premium of approximately $1.4 million. The cost is being amortized over
the life of the policy, through February 2004. For the year ended October 31,
2003, the Fund had expensed $1.1 million in insurance premiums.
YEAR ENDED OCTOBER 31, 2002
During the fiscal year ended October 31, 2002, the Fund operated under an
advisory agreement with meVC Advisers, Inc. The Fund was charged a management
fee by the Former Advisor at an annual rate of 2.5% of the weekly net assets of
the Fund. The Former Advisor agreed to pay all Fund expenses above and beyond
the 2.5% paid to the Former Advisor by the Fund. The Former Advisor 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.
Significant components of operating expenses for the period from June 19,
2002 through October 31, 2002 included salaries and benefits of $696,000,
consulting and public relation fees of $547,000, directors fees of $307,000,
professional fees, comprising audit of $155,000 and legal fees of $998,000,
insurance of $134,000 and facilities of $166,000 . Prior to June 19, 2002, all
Fund expenses, including compensation to the directors and officers, were paid
by the Former Advisor.
Subsequent to the resignation of the Former Advisor, the Fund determined
that the Former Advisor had not paid certain vendors for services performed on
behalf of the Fund, which it had agreed to pay. During the fiscal year ended
October 31, 2002, the Fund paid or accrued $463,535 in expenses to pay those
vendors. See "Legal Proceedings" in Part I, Item 3 of this Form 10-K for a
discussion of legal action against the Former Advisor by Millenco L.P., a
stockholder of the Fund, to recover certain advisory fees paid by the Fund to
the Former Advisor.
YEAR ENDED OCTOBER 31, 2001
During the fiscal year ended October 31, 2001, the Fund operated under an
advisory agreement with meVC Advisers, Inc. The Fund was charged a management
fee by the Former Advisor at an annual rate of 2.5% of the weekly net assets of
the Fund. The Former Advisor agreed to pay all Fund expenses above and beyond
the 2.5% paid to the Former Advisor by the Fund. During the year ended October
31, 2001, the Fund paid the Former Advisor $7.39 million in management fees who
in turn distributed $2.96 million to the Former Sub-Advisor.
REALIZED GAINS AND LOSSES ON SALES OF PORTFOLIO SECURITIES
FOR THE YEARS ENDED OCTOBER 31, 2003 AND 2002. Net realized losses were
$4.3 million for 2003 and $33.5 million for 2002, a decrease of $29.3 million or
87.3%.
Realized losses for 2003 resulted mainly from (i) the write-off of Cidera,
Inc. due to its ceasing operations, resulting in a realized loss of $3.75
million, (ii) the return of capital disbursement from EXP Systems, Inc. to its
preferred shareholders, resulting in a realized loss of approximately $178,000,
and (iii) the partial return of the Fund's investment in BS Management resulting
in a loss of approximately $322,000.
Realized losses for 2002 resulted mainly from the transactions involving
the assets of INFOUSA.com, Inc. being acquired by INFOUSA, Inc., the parent
company of INFOUSA.com, Inc., resulting in a realized loss of $3.3 million, the
disbursement of assets from EXP Systems, Inc. to its preferred shareholders
resulting in a realized loss of $8 million, the write-off of Personic Software,
Inc. ("Personic") due to the irreversible dilution of the Fund's equity position
resulting in a realized loss of $10.8 million, the write-off of InfoImage, Inc.
("InfoImage") due to the company filing for Chapter 7 of the Bankruptcy Code
resulting in a realized loss of $2.4 million, the write-off of IQdestination due
to the cessation of operations and subsequent dissolution of the company
resulting in a realized loss of $3.5 million, the acquisition of the assets of
Annuncio Software, Inc. ("Annuncio") by PeopleSoft resulting in a realized loss
of $3.4 million, and the write-off of Mediaprise, Inc. ("Mediaprise") due to the
cessation of operations and subsequent dissolution of the company resulting in a
realized loss of $2 million.
FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001. Net realized losses were
$33.5 million for 2002 and net realized gains were $5,123 for 2001, a difference
of $33.5 million. Such realization of gains for 2001 was mainly from the sale of
short-term securities.
UNREALIZED APPRECIATION AND DEPRECIATION OF PORTFOLIO SECURITIES AND ACCUMULATED
DEFICIT
FOR THE YEARS ENDED OCTOBER 31, 2003 AND 2002. Net unrealized depreciation
was $42.8 million in 2003 and $21.8 million in 2002, an increase of $21.0
million or 96.3%.
Such net increase in unrealized depreciation on investment transactions for
2003 resulted from the determinations of the Valuation Committee of the Former
Board (the "Former Valuation Committee") and/or the Valuation Committee of the
Current Board (the "Current Valuation Committee") 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., Integral Development Corporation, Ishoni Networks, Inc., Lumeta
Corporation, Mainstream Data, Inc., PTS Messaging, Inc. (formerly 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 $36.2 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 a further discussion on the Portfolio Companies,
please refer to "Portfolio Investments" below.
Such net increase in unrealized depreciation on investment transactions for
2002 resulted mainly from the Former Valuation Committee's decision to mark down
the value of the Fund's investments in Actelis Networks, Inc., AuctionWatch.com,
Inc., BlueStar Solutions, Inc., Cidera, Inc., DataPlay, Inc., Endymion Systems,
Inc., FolioFN, Inc., Ishoni Networks, Inc., PTS Messaging (formerly Pagoo,
Inc.), SafeStone Technologies PLC, ShopEaze Systems, Inc., Sonexis, Inc., and
Yaga, Inc. The Former 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.
The Fund's increase in accumulated deficit was $55.4 million in 2003 and
$59.1 million in 2002, a comparatively lower increase by $3.7 million or 6.3%.
The Fund's total accumulated deficit was $171.7 million for 2003 and $116.3
million for 2002, an increase of $55.4 million or 47.6%. The accumulated deficit
in 2003 is due primarily to the Valuation Committee's mark down of the
valuations of certain Portfolio Company investments of $42.8 million, net
realized losses of $4.2 million, and net investment loss of $8.5 million.
FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001. Net unrealized depreciation
was $21.8 million in 2002 and $53.0 million in 2001, a decrease of $31.2 million
or 58.9%.
The net increase in unrealized depreciation for 2001 resulted mainly from
the Board of Directors' decision to mark down the value of the Fund's
investments in Annuncio Software, Inc.; AuctionWatch.com, Inc.; BlueStar
Solutions, Inc.; Cidera, Inc.; Endymion Systems, Inc.; EXP Systems, Inc.;
FOLIOFN, Inc.; InfoImage, Inc.; INFOUSA.com, Inc.; IQdesination; Ishoni
Networks, Inc.; Pagoo.com, Inc.; Personic Software, Inc.; SafeStone Technologies
PLC; and ShopEaze Systems, Inc.
The Fund's increase in accumulated deficit was $59.1 million in 2002 and
$56.9 million in 2001, an increase of $2.2 million or 3.9%. The Fund's total
accumulated deficit was $116.3 million for 2002 and $57.2 million for 2001, an
increase of $59.1 million or 103.3%.
PORTFOLIO INVESTMENTS
FOR THE YEARS ENDED OCTOBER 31, 2003 AND 2002. The cost of equity
investments held by the Fund was $125.6 million in 2003 and $127.6 million in
2002, a decrease of $2.0 million or 1.6%. The aggregate fair value of equity
investments was $11.6 million in 2003 and $50.1 million in 2002, a decrease of
$38.5 million or 76.8%. The decrease in the fair value of the equity investments
held by the Fund resulted mainly from the Valuation Committee's mark down of the
valuations of certain Portfolio Company investments. The cost of debt
instruments held by the Fund was $16.4 million in 2003 and $0 in 2002. The
aggregate fair value of debt instruments was $12.5 million in 2003 and $0 in
2002. The increase in the cost and fair value of the debt investments resulted
mainly from the Fund's debt investments made in 2003. The cost of subordinated
notes held by the Fund was $4.5 million in 2003 and $6.3 million in 2002, a
decrease of $1.8 million or 28.6%. The aggregate fair value of subordinated
notes was $0 in 2003 and $4.1 million in 2002. The decrease in the fair value of
the subordinated notes held by the Fund resulted mainly from the Valuation
Committee's mark down of the valuations of certain Portfolio Company
investments. The cost and aggregated fair value of short-term securities held by
the Fund was $113.2 million in 2003 and $62.8 million in 2002, an increase of
$50.4 million or 80.3%. The increase in short-term investments resulted mainly
from the Fund's increased investments in short-term securities and subsequent
decrease of investments in cash and cash equivalents in 2003. The cost and
aggregate fair value of cash and cash equivalents held by the Fund was $6,850 in
2003 and $78.8 million in 2002, a decrease of $78.8 million or 100%. The
aggregate fair value of short-term securities was $113.2 million in 2003 and
$62.8 million in 2002, an increase of $50.4 million or 80.3%. The decrease in
cash and cash equivalents resulted mainly from the Fund's decreased investments
in cash and cash equivalents and subsequent increase of investments in
short-term investments in 2003. Management continues to evaluate opportunities
for its Portfolio Companies to realize value for the Fund and its stockholders.
At October 31, 2003, the Fund had active investments in the following
Portfolio Companies:
ACTELIS NETWORKS, INC.
Actelis Networks, Inc. ("Actelis"), Fremont, California, provides
authentication and access control solutions to secure the integrity of
e-business in Internet-scale and wireless environments.
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 $5.0 million. The
investment was assigned a fair value of $2.5 million, or approximately $1.66 per
share.
During the year ended October 31, 2003, the Current Valuation Committee
marked down the carrying value of the Fund's investment in Actelis by writing
down the investment by $1.5 million to $1.0 million.
At October 31, 2003, the Fund's investment in Actelis consisted of
1,506,025 shares of Series C Preferred Stock at a cost of $5.0 million. The
investment has been assigned a fair value of $1.0 million, or approximately
$0.66 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 $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.
During the year ended October 31, 2003, 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 October 31, 2003, the Fund's investment in Arcot consisted of an
outstanding balance on the loan of $5.05 million with a cost of $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 $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.
During the year ended October 31, 2003, 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. At October 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 $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.
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.
During the year ended October 31, 2003, 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 and on August 22, 2003, the Fund received a
final return of capital from BS Management of $2.6 million.
At October 31, 2003, the Fund no longer held an investment in BS
Management.
During the year ended October 31, 2003, 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 Part I, Item 3 "Legal Proceedings".
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 $10.0 million. The investment
was assigned a fair value of $10.0 million, or approximately $2.09 per share.
In December 2002, the Fund entered into follow-on investments of $2.0
million in CBCA, consisting of 955,346 shares of Series E Preferred Stock at
approximately $2.09 per share.
During the year ended October 31, 2003, 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 $11.5 million to $500,000.
At October 31, 2003, the Fund's investment in CBCA consisted of 5,729,562
shares of Series E Preferred Stock with a cost of $12.0 million. The investment
has been assigned a fair value of $500,000, at approximately $0.09 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, provided 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 $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.
On September 26, 2003, the Fund received a nominal return of capital from
Cidera as a single and final repayment of the Fund's investment.
During the year ended October 31, 2003, the Current Valuation Committee
marked down the carrying value of the Fund's investments in Mainstream by
writing down the Series D Preferred Stock by $500,000 to $0.
At October 31, 2003, the Fund no longer held an investment in Cidera.
At October 31, 2003, the Fund's investment in Mainstream consisted of
85,719 shares of Series D Preferred Stock with a cost of $3.75 million. The
investment has been assigned a fair value of $0.
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 $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
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 October 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 $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 October 31, 2003, the Fund's investment in Determine consisted of an
outstanding balance on the loan of $2.02 million with a cost of $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 $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 $7.0 million. The
investment was assigned a fair value of $2.0 million, or approximately $0.28 per
share.
During the year ended October 31, 2003, 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 October 31, 2003, the Fund's investment in Endymion consisted of
7,156,760 shares of Series A Preferred Stock with a cost of $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 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 $3.0 million, or approximately $0.52 per
share.
During the year ended October 31, 2003, 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.
At October 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 behalf of the Fund 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 $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.
During the year ended October 31, 2003, Integral made principal repayments
of the Credit Facility totaling $561,112.
During the year ended October 31, 2003, the Current Valuation Committee
then marked down the carrying value of the Fund's investments in Integral by
writing down the investment by $1.0 million to $3.5 million.
At October 31, 2003, the Fund's investment in Integral consisted of an
outstanding balance on the loan of $4.46 million with a cost of $4.46 million.
The investment is being valued at $3.5 million and the warrants are being valued
at $0.0.
ISHONI NETWORKS, INC.
Ishoni Networks, Inc. ("Ishoni"), Santa Clara, California, developed
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 $10.0 million. The investment
was assigned a fair value of $2.5 million, or approximately $1.25 per share.
During the year ended October 31, 2003, 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 October 31, 2003, the Fund's investment in Ishoni consisted of 2,003,607
shares of Series C Preferred Stock with a cost of $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 $250,000 and $156,489, respectively. The
investment in the Series A Preferred Stock was assigned a fair value of
approximately $269,000 and the investment in the Series B Preferred Stock was
assigned a fair value of approximately $187,000, or approximately $0.70 per
share for each the Series A and B Preferred Stock.
During the year ended October 31, 2003, 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 $225,000 to approximately
$44,000 and by writing down the Series B Preferred Stock from $187,000 to
approximately $156,000.
At October 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.
PHOSISTOR TECHNOLOGIES, INC.
Phosistor Technologies, Inc. ("Phosistor"), Pleasanton, California,
designed and developed 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 $1.0
million. The investment was assigned a fair value of $1.0 million, or
approximately $0.15 per share.
During the year ended October 31, 2003, the Current Valuation Committee
marked down the carrying value of the Fund's investments in Phosistor by $1.0
million to $0.0.
At October 31, 2003, the Fund's investment in Phosistor consisted of
6,666,667 shares of Series B Preferred Stock with a cost of $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 $2.4 million. The investment
in the Series C Preferred Stock was assigned a fair value of $2.94 million, or
approximately $0.471 per share of Series C Preferred Stock, the investment in
the Series D Preferred Stock was assigned a fair value of $400,000 or
approximately $0.471 per share of Series D Preferred Stock, and the investment
in the Series E warrants was assigned a fair value of $0.0.
During the year ended October 31, 2003, 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 October 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 $2.4 million. The investment
in the Series C Preferred Stock was assigned a fair value of $2.0 million, or
approximately $0.32 per share of Series C Preferred Stock, the investment in the
Series D Preferred Stock was assigned a fair value of $400,000 or approximately
$0.471 per share of Series D Preferred Stock, and the investment in the Series E
warrants was assigned a fair value of $0.0.
Nino Marakovic, an employee of the Fund, serves as a director of
ProcessClaims.
PTS MESSAGING, INC. (FORMERLY PAGOO, INC.)
PTS Messaging, Inc. ("PTS Messaging"), formerly Pagoo, Inc., Lafayette,
California, developed Internet voice technologies offering Internet services
direct to the consumer.
At October 31, 2002, the Fund's investment in PTS Messaging consisted of
1,956,026 shares of Series A-1 Convertible Preferred Stock with a cost of $11.6
million. The investment was assigned a fair value of approximately $170,000, or
approximately $0.09 per share.
During the year ended October 31, 2003, the Current Valuation Committee
marked down the carrying value of the Fund's investment in PTS Messaging by
writing down the Series A-1 Convertible Preferred Stock by approximately
$170,000 to $0.0.
At October 31, 2003, the Fund's investment in PTS Messaging consisted of
1,956,026 shares of Series A-1 Convertible Preferred Stock with a cost of $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 PTS
Messaging.
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 $4.0 million. The investment in
the Series A Preferred Stock was assigned a fair value of $2.19 million, or
approximately $1.28 per share and the investment in the Series B Preferred Stock
was assigned a fair value of $500,000, or approximately $1.28 per share.
During the year ended October 31, 2003, 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 $1.19
million to $1.0 million.
During the year ended October 31, 2003, 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 $1.0
million to $0 and by writing down the remaining carrying value of the Series B
Preferred Stock by approximately $500,000 to $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 October 31, 2003, the Fund's investments in SafeStone consisted of
2,106,378 shares of Series A Ordinary Stock with a cost of $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 October 31, 2003, the Fund's investment in ShopEaze
consisted of 2,097,902 shares of Series B Preferred Stock with a cost of $6.0
million. At both October 31, 2002 and October 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 $10.0 million. The
investment was assigned a fair value of $7.0 million, or approximately $2.70 per
share.
During the year ended October 31, 2003, 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 $6.5 million to approximately $500,000.
At October 31, 2003, the Fund's investment in Sonexis consisted of
2,590,674 shares of Series C Preferred Stock with a cost of $10.0 million. The
investment has been assigned a fair value of approximately $500,000, or
approximately $0.19 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 October 31, 2003, the Fund's investment in Sygate
consisted of 9,756,098 shares of Series D Preferred Stock with a cost of $4.0
million. At both October 31, 2002 and October 31, 2003, the investment was
assigned a fair value of $4.0 million, or approximately $0.41 per share.
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 $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 October 31, 2003, the Fund's investment in Synhrgy consisted of an
outstanding balance on the loan of $5.0 million with a cost of $4.96 million.
The investment is being valued at $4.96 million and the warrants are being
valued at $0.0.
Subsequent to October 31, 2003, Synhrgy repaid the balance of its original
$5.0 million credit facility to the Fund. In conjunction with the repayment of
the credit facility, the Fund also exercised its 43,750 warrants in a cashless
transaction for a gain of approximately $40,000.
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 $6.6 million. The investments were assigned a fair value of $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.
During the year ended October 31, 2003, 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 October 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 $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.com, Inc. 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.
During the year ended October 31, 2003, 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.
During the year ended October 31, 2003, 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 October 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.
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 $4.0 million. The investments
were assigned a fair value of $4.0 million, or approximately $1.79 per share.
During the year ended October 31, 2003, 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 $3.0 million to $1.0 million.
At October 31, 2003, the Fund's investment in 0-In consisted of 2,239,291
shares of Series E Preferred Stock at a cost of $4.0 million. The investments
have been assigned a fair value of $1.0 million, or approximately $0.45 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 October 31, 2003, the Fund had $137.3 million of investments consisting
of investments in preferred and common stocks totaling $11.6 million,
investments in debt instruments totaling $12.5 million, investments in U.S.
government and agency securities totaling $113.2 million and cash and cash
equivalents totaling approximately $6,850. 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 to October 31, 2003, the Fund commenced and completed a tender
offer to acquire up to twenty-five percent (25%) of its outstanding shares of
common stock at a per share cash purchase price equal to ninety-five percent
(95%) of net asset value per share as of December 31, 2003, the day the offer
expired. Based on a final count by the depositary for the tender offer,
3,859,558 shares were tendered at a price of $8.18 resulting in a total
disbursement from the Fund of $31,571,184.
SUBSEQUENT EVENTS
On November 6, 2003, Michael Tokarz assumed his new position as Chairman,
Portfolio Manager and director of the Fund. As Portfolio Manager, Mr. Tokarz
will be compensated by the Fund based upon his positive performance as the
Portfolio Manager. Under the terms of his agreement with the Fund, the Fund will
pay Mr. Tokarz an amount equal to the lesser of (a) 20% of the net income of the
Fund for the fiscal year; and (b) the sum of (i) 20% of the net capital gains
realized by the Fund in respect of investments made during his tenure as
Portfolio Manager; and (ii) the amount, if any, by which the Fund's total
expenses for a fiscal year were less than two percent of the Fund's net assets
(determined as of the last day of the period). Any payments to be made shall be
calculated based upon the audited financials of the Fund for the applicable
fiscal year and shall be paid as soon as practicable following the completion of
such audit. Mr. Tokarz has the right and the intention to allocate all or part
of such compensation to other professionals of the Fund.
On November 26, 2003, the Fund commenced a tender offer to acquire up to
twenty-five percent (25%) of its outstanding shares of common stock at a per
share cash purchase price equal to ninety-five percent (95%) of net asset value
per share as of December 31, 2003, the day the offer expired. Based on a final
count by the depositary for the tender offer, 3,859,558 shares, or 23.9% of the
Fund's outstanding common stock, were tendered. Because less than 25% of the
Fund's shares were tendered, the Fund purchased all shares tendered. Each share
accepted for purchase was purchased at a price of $8.18 resulting in a total
disbursement from the Fund of $31,571,184. Since completion of the tender offer,
MVC has 12,293,042 shares of common stock outstanding. The anti-dilutive effect
of the tender offer totaled $1,650,697 or approximately $0.134 per share for all
remaining shares after the tender offer. The discussion above is a summary of
the Tender Offer and is qualified in its entirety by reference to the full text
of the Schedule TO as filed with the SEC.
Effective December 8, 2003, the Fund agreed to a lease for new office space
in Purchase, New York, which is scheduled to expire on November 30, 2005. Future
payments under this lease total $110,933, with annual minimum payments of
$49,517 from December 8, 2003 through October31, 2004, $56,682 from November 1,
2004 through October 31, 2005, and $4,734 from November 1, 2005 through November
30, 2005. The building at 287 Bowman Avenue is owned by Phoenix Capital
Partners, LLC, an entity which is 97% owned by Mr. Tokarz.
On December 29, 2003, the Current Valuation Committee marked up the Fund's
investment in 0-In Design Automation, Inc. by $1.0 million to $2.0 million and
marked up the Fund's investment in Sygate Technologies, Inc. by $1.5 million to
$5.5 million.
On December 30, 2003, Ishoni Networks, Inc. filed for bankruptcy in United
States Bankruptcy Court, Northern District of California, San Jose Division.
On January 21, 2004, the Fund reached an agreement with the property
manager at 3000 Sand Hill Road, Menlo Park, California to terminate its lease at
such location as a result of the property manager's ability to reach an
agreement with a new tenant for the space. Under the terms of the agreement, the
Fund will buy-out its lease directly from the property manager, for an amount
equal to $232,835. As a result, the Fund expects to be able to recover
approximately $250,000 of the remaining reserve established at October 31, 2003.
On January 23, 2004, Synhrgy HR Technologies, Inc. repaid the balance of
its original $5.0 million credit facility to the Fund. In conjunction with the
repayment of the credit facility, the Fund also exercised its 43,750 warrants in
a cashless transaction for a gain of approximately $40,000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Historically the Fund has invested in small companies, and its investments
in these companies 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.
ILLIQUID INVESTMENTS. The Fund invests in securities which are subject to
legal or other restrictions on transfer or for which no liquid market exists.
The market prices, if any, for such securities tend to be volatile and may not
be readily ascertainable, and the Fund may not be able to sell them when it
desires to do so or to realize what it perceives to be their fair value in the
event of a sale. The sale of restricted and illiquid securities often requires
more time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. The Fund may
not be readily able to dispose of such illiquid investments and, in some cases,
may be contractually prohibited from disposing of such investments for a
specified period of time. Restricted securities may sell at a price lower than
similar securities that are not subject to restrictions on resale.
INVESTMENTS IN UNLISTED SECURITIES. The Fund invests in unlisted
securities. Because of the absence of any trading market for these investments,
it may take longer to liquidate, or it may not be possible to liquidate, these
positions than would be the case for publicly traded securities. Although these
securities may be resold in privately negotiated transactions, the prices
realized on these sales could be less than those originally paid by the Fund.
Further, companies whose securities are not publicly traded may not be subject
to public disclosure and other investor protection requirements applicable to
publicly traded securities.
GROWTH STAGE COMPANIES. While investments in growth stage companies offer
the opportunity for significant capital gains, such investments involve a high
degree of business and financial risk which can result in substantial losses.
The stock market has experienced volatility which has particularly affected the
securities of technology companies. As a result, the Fund's performance may
experience substantial volatility. An investment in the Fund should not
constitute a complete investment program for the investor.
EVENTS OF SEPTEMBER 11, 2001. On September 11, 2001, terrorist attacks on
the United States caused significant loss of life and property damage and
disruptions in U.S. markets and in global markets. Since that time, the United
States has commenced military action and imposed economic and diplomatic
sanctions. The long-term impact of these events, and of further possible
terrorist attacks, is unclear, but could have a material effect on general
economic conditions and market liquidity.
VALUATION RISK. 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 Current Board and/or the Current Valuation Committee determine 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 the Current Board and/or the Current Valuation Committee
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
comprised approximately 82.65% of the Fund's net assets at October 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.
VALUATION OF INVESTMENTS. Investments in non-publicly traded preferred and
common stock are carried at fair value with the net change in unrealized
appreciation or depreciation included in the determination of increases or
decreases in net assets resulting from its operations. Cost is used to
approximate fair value of these investments until developments affecting an
investment provide a basis for valuing such investment at a value other than
cost.
The fair value of investments for which no market exists and for which the
Current Board and/or the Fund's Valuation Committee have determined that the
original cost of the investment is no longer an appropriate fair valuation will
be determined on the basis of procedures established by the Former Advisor in
good faith and approved by the Current Board. Valuations are based upon such
factors as the financial and/or operating results of the most recent fiscal
period, the performance of the company relative to planned budgets/forecasts,
the issuer's financial condition and the markets in which it does business, the
prices of any recent transactions or offerings regarding such securities or any
proxy securities, any available analysis, media, or other reports or information
regarding the issuer, or the markets or industry in which it operates, the
nature of any restrictions on disposition of the securities and other analytical
data. In the case of unsuccessful operations, the valuation may be based upon
anticipated liquidation proceeds.
Because of the inherent uncertainty of the valuation of portfolio
securities which do not have readily ascertainable market values, the Fund's
determination of fair value may significantly differ from the fair market value
that would have been used had a ready market existed for the securities. Such
values do not reflect brokers' fees or other normal selling costs which might
become payable on disposition of such investments.
Investments in securities that are publicly traded on an organized exchange
are valued at their quoted closing market price, less a discount to reflect the
estimated effects of restrictions on the sale of such securities ("Valuation
Discount"), if applicable. Investments in companies whose securities are
actively traded in the over the counter market are valued at the average closing
of their Bid and Ask prices, less a Valuation Discount to reflect the estimated
effects of restrictions on the sale of such securities, if applicable. If a
reliable last bid and ask price are not available, market values for equity
securities are determined based on the last reliable bid quotation available
from a market maker in the security.
Short-term investments, including cash equivalents, having maturities of 90
days or less are stated at amortized cost, which approximates fair value. Other
fixed income securities are stated at fair value. Fair value of these securities
is determined at the most recent bid or yield equivalent from dealers that make
markets in such securities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
MVC CAPITAL
BALANCE SHEET
OCTOBER 31, OCTOBER 31,
2003 2002
ASSETS
Cash and cash equivalents $ 6,850 $ 78,873,485
(cost $6,850 and $78,873,485, respectively)
Investments in short term securities, at market value 113,237,521 62,797,687
(cost $113,237,521 and $62,800,088, respectively)
Investments in subordinated notes, at fair value - 4,077,474
(cost $4,500,000 and $6,327,474, respectively) (Note 7)
Investments in debt instruments, at fair value 12,471,288 -
(cost $16,439,343 and $0, respectively) (Note 7)
Investments in preferred/common stocks, at fair value 11,600,000 50,116,026
(cost $125,575,852 and $127,536,066, respectively), (Note 7)
Interest receivable 152,630 216,024
Prepaid expenses 412,003 50,672
Receivable for investments sold - 379,632
--------------- ---------------
TOTAL ASSETS $ 137,880,292 $ 196,511,000
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Administration 19,771 11,250
Audit fees 70,736 149,000
Legal fees 43,046 387,459
Directors' fees 27,511 14,400
Employee compensation & benefits 102,337 57,279
Other accrued expenses 608,729 505,135
--------------- ---------------
TOTAL LIABILITIES $ 872,130 $ 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 (171,746,921) (116,263,523)
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 137,008,162 195,386,477
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 137,880,292 $ 196,511,000
=============== ===============
NET ASSET VALUE PER SHARE $ 8.48 $ 11.84
=============== ===============
The accompanying notes are an integral part of these financial statements.
MVC CAPITAL
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
OCTOBER 31, 2003 OCTOBER 31, 2002 OCTOBER 31, 2001
INVESTMENT INCOME:
Interest income $ 2,870,370 $ 3,730,148 $ 9,046,526
Dividend income - 9,745 -
Other income 24,944 - -
---------------- ------------- ---------------
TOTAL INVESTMENT INCOME 2,895,314 3,739,893 9,046,526
OPERATING EXPENSES:
Management fees - 3,592,757 7,388,061
Proxy/Litigation related fees & expenses 4,037,327 - -
Employee compensation & benefits 2,476,068 696,399 -
Legal fees 1,514,549 998,436 -
Insurance 1,058,776 134,421 -
Facilities 1,281,054 166,483 -
Directors fees 455,292 307,200 -
Audit fees 102,102 155,000 -
Administration 138,512 67,500 -
Consulting and public relations fees 126,490 546,952 -
Other expenses 110,374 99,190 -
Printing and postage 86,328 97,512 -
---------------- ------------- ---------------
Total operating expenses 11,386,872 6,861,850 7,388,061
NET INVESTMENT (LOSS) INCOME (8,491,558) (3,121,957) 1,658,465
---------------- ------------- ---------------
NET REALIZED AND UNREALIZED (LOSS) GAIN ON
INVESTMENTS:
Net realized (loss) gain on
investments (4,220,380) (33,469,122) 5,123
Net unrealized depreciation on
investments (42,771,460) (21,765,310) (52,994,121)
---------------- ------------- ---------------
Net realized and unrealized loss on
investments (46,991,840) (55,234,432) (52,988,998)
---------------- ------------- ---------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ (55,483,398) $ (58,356,389) $ (51,330,533)
================ ============= ===============
NET DECREASE IN NET ASSETS PER SHARE
RESULTING FROM OPERATIONS $ (3.42) $ (3.54) $ (3.12)
================ ============= ===============
DIVIDENDS DECLARED PER SHARE $ - $ 0.04 $ 0.34
================ ============= ===============
The accompanying notes are an integral part of these financial statements.
MVC CAPITAL
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
OCTOBER 31, 2003 OCTOBER 31, 2002 OCTOBER 31, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets resulting from operations $ (55,483,398) $ (58,356,389) $ (51,330,533)
Adjustments to reconcile to net cash (used for) provided by
operating activities:
Realized loss (gain) 4,220,380 33,469,122 (5,123)
Net unrealized loss 42,771,460 21,765,310 52,994,121
Changes in assets and liabilities:
Liabilities (252,393) 546,296 (89,912)
Prepaid expenses (361,331) (50,672) -
Interest receivable 63,394 180,632 243,964
Receivable for investments sold 379,632 (379,632) -
Purchases of preferred stock (1,999,997) (22,076,694) (36,331,834)
Purchases of debt instruments (19,955,000) - -
Purchases of short-term investments (365,017,933) (157,541,221) (218,380,747)
Purchases of cash equivalents (586,995,355) (1,119,326,199) (955,884,612)
Purchases of subordinated notes - (4,500,000) -
Proceeds from preferred stocks 1,884,848 9,955,664 -
Proceeds from debt instruments 3,239,364 - -
Sales/maturities of short-term investments 277,144,371 35,097,303 185,569,861
Sales/maturities of cash equivalents 624,390,240 1,328,465,233 925,452,721
-------------- -------------- -------------
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES (75,971,718) 67,248,753 (97,762,094)
-------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Re-purchases of capital stock (2,894,917) - -
Distributions - (728,690) (5,644,650)
-------------- -------------- -------------
NET CASH USED FOR FINANCING ACTIVITIES (2,894,917) (728,690) (5,644,650)
-------------- -------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS FOR THE YEAR (78,866,635) 66,520,063 (103,406,744)
-------------- -------------- -------------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 78,873,485 12,353,422 115,760,166
-------------- -------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 6,850 $ 78,873,485 $ 12,353,422
============== ============== =============
The accompanying notes are an integral part of these financial statements.
MVC CAPITAL
STATEMENT OF SHAREHOLDERS' EQUITY
ADDITIONAL TOTAL
COMMON PAID IN ACCUMULATED SHAREHOLDERS'
STOCK CAPITAL DEFICIT EQUITY
BALANCE AT NOVEMBER 1, 2000 $ 165,000 $ 311,485,000 $ (203,261) $ 311,446,739
Distributions - - (5,644,650) (5,644,650)
Net decrease in net assets from operations - - (51,330,533) (51,330,533)
------------- ---------------- --------------- --------------
BALANCE AT OCTOBER 31, 2001 $ 165,000 $ 311,485,000 $ (57,178,444) $ 254,471,556
------------- ---------------- --------------- --------------
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 - - (58,356,389) (58,356,389)
------------- ---------------- --------------- --------------
BALANCE AT OCTOBER 31, 2002 $ 165,000 $ 311,485,000 $ (116,263,523) $ 195,386,477
------------- ---------------- --------------- --------------
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 - - (55,483,398) (55,483,398)
------------- ---------------- --------------- --------------
BALANCE AT OCTOBER 31, 2003 $ 161,526 $ 308,593,557 $ (171,746,921) $ 137,008,162
------------- ---------------- --------------- --------------
The accompanying notes are an integral part of these financial statements.
MVC CAPITAL
SELECTED PER SHARE DATA AND RATIOS
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 2003 OCTOBER 31, 2002 OCTOBER 31, 2001
Net asset value, beginning of year $ 11.84 $ 15.42 $ 18.88
Loss from investment operations:
Net investment (loss) income (0.53) (0.19) 0.10
Net realized and unrealized loss on investments (2.89) (3.35) (3.22)
----------- --------- -----------
Total loss from investment operations (3.42) (3.54) (3.12)
----------- --------- -----------
Less distributions from:
Net investment income - (0.04) (0.34)
----------- --------- -----------
Total distributions - (0.04) (0.34)
----------- --------- -----------
Capital share transactions
Anti-dilutive effect of Share Repurchase Program 0.06 - -
----------- --------- -----------
Net asset value, end of year $ 8.48 $ 11.84 $ 15.42
=========== ========= ===========
Market value, end of year $ 8.10 $ 7.90 $ 9.25
=========== ========= ===========
Market discount -4.48% -33.28% -40.01%
TOTAL RETURN - AT NAV (a) -28.38% -22.88% -15.99%
TOTAL RETURN - AT MARKET (a) 2.53% -14.22% -17.26%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) $ 137,008 $ 195,386 $ 254,472
Ratios to average net assets:
Expenses 7.01% (b) 3.02% 2.50%
Net investment income -5.22% (b) -1.37% 0.56%
(a) Total annual return is historical and assumes changes in share price,
reinvestments of all dividends and distributions, and no sales charge for the
year.
(b) The expense ratio for the year ended October 31, 2003 includes approximately
$4.0 million of proxy/litigation fees and expenses. When these fees and expenses
are excluded, the Fund's expense ratio is 4.52% and the net investment loss is
- -2.74%.
The accompanying notes are an integral part of these financial statements.
MVC CAPITAL
SCHEDULE OF INVESTMENTS
OCTOBER 31, 2003
Date of
Initial
Description Shares/Principal Investment Cost Fair Value
PREFERRED STOCKS-8.47% (a, b, d, g) (NOTE 6, 7, 8)
TECHNOLOGY INVESTMENTS - 8.47%
Actelis Networks, Inc. Series C 1,506,025 May 2001 $ 5,000,003 $ 1,000,000
* 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 11,999,995 500,000
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 -
* Phosistor Technologies, Inc., Series B (f) 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 (g) 873,362 May 2002 20 -
* PTS Messaging, Inc., Series A-1 (f) 1,956,026 July 2000 11,569,939 -
* SafeStone Technologies PLC
Series A Ordinary Shares 2,106,378 Dec. 2000 4,015,402 -
ShopEaze Systems, Inc., Series B (f) 2,097,902 May 2000 6,000,000 -
* Sonexis, Inc., Series C 2,590,674 June 2000 10,000,000 500,000
* 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 300,000 Nov. 2000 300,000 -
The accompanying notes are an intergral part of these financial statements.
MVC CAPITAL
SCHEDULE OF INVESTMENTS
(CONTINUED)
OCTOBER 31, 2003
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 (g) 100,000 June 2001 - -
* 0-In Design Automation, Inc., Series E 2,239,291 Nov. 2001 4,000,001 1,000,000
TOTAL PREFERRED STOCKS 125,575,852 11,600,000
DEBT INSTRUMENTS-9.10% (a, b)
TECHNOLOGY INVESTMENTS - 9.10%
Arcot Systems, Inc. (h)
10.0000%, 12/31/2005 5,050,000 Dec. 2002 5,012,500 2,000,000
Determine Software, Inc.
12.0000%, 01/31/2006 2,025,000 Feb. 2003 2,009,224 2,009,224
Determine Software, Inc., Series C Warrants (g) 2,229,955 Feb. 2003 - -
Intergral Development Corporation (h)
10.0000%, 12/31/2005 4,488,888 Dec. 2002 4,455,555 3,500,000
Synhrgy HR Technologies
12.0000%, 01/03/2006 5,000,000 Dec. 2002 4,962,064 4,962,064
Synhrgy HR Technologies, Series B-1 Warrant (g) 43,750 Dec. 2002 - -
------------ ------------
TOTAL DEBT INSTRUMENTS 16,439,343 12,471,288
------------ ------------
SUBORDINATED NOTES-0.00% (a, b, g)
TECHNOLOGY INVESTMENTS - 0.00%
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 intergral part of these financial statements.
MVC CAPITAL
SCHEDULE OF INVESTMENTS
(CONTINUED)
OCTOBER 31, 2003
Date of
Initial Fair Value/
Description Shares/Principal Investment Cost Market Value
SHORT-TERM SECURITIES-82.65% (b)
U.S. GOVERNMENT & AGENCY SECURITIES-82.65% (b)
U.S. Treasury Bill
1.1000%, 11/06/2003 8,338,000 Aug. 2003 $ 8,337,016 $ 8,337,016
U.S. Treasury Bill
1.1000%, 11/13/2003 5,495,000 Aug. 2003 5,493,425 5,493,425
U.S. Treasury Bill
0.8550%, 11/20/2003 2,585,000 Aug. 2003 2,583,840 2,583,840
U.S. Treasury Bill
0.8400%, 12/26/2003 9,013,000 Sept. 2003 9,001,433 9,001,433
U.S. Treasury Bill
0.8600%, 01/02/2004 36,649,000 Oct. 2003 36,594,719 36,594,719
U.S. Treasury Bill
0.8000%, 01/08/2004 13,533,000 Oct. 2003 13,512,550 13,512,550
U.S. Treasury Bill
0.8500%, 01/15/2004 15,738,000 Oct. 2003 15,710,459 15,710,459
U.S. Treasury Bill
0.9200%, 01/22/2004 14,585,000 Oct. 2003 14,556,762 14,556,762
U.S. Treasury Bill
0.9600%, 01/29/2004 7,463,000 Oct. 2003 7,447,317 7,447,317
-------------- ------------
TOTAL U.S. GOVERNMENT & AGENCY SECURITIES 113,237,521 113,237,521
-------------- ------------
TOTAL SHORT-TERM SECURITIES 113,237,521 113,237,521
-------------- ------------
CASH AND CASH EQUIVALENTS-0.00% (b)
MONEY MARKET FUNDS-0.00% (b)
First American Prime Obligations Fund - Class S 6,850 Nov. 2002 6,850 6,850
-------------- ------------
TOTAL CASH AND CASH EQUIVALENTS 6,850 6,850
-------------- ------------
TOTAL INVESTMENTS-100.22% (b) $ 259,759,566 $ 137,315,659
============== ============
The accompanying notes are an intergral part of these financial statements.
MVP Capital
Schedule of Investments (Contined)
October 31, 2003
(a) These securities are restricted from public sale without registration under
the Securities Act of 1933. The Fund negotiates certain aspects of the method
and timing of the dispostion of these investments, including registration rights
and related costs.
(b) Percentages are based on net assets of $137,008,162.
(c) As defined in the Investment Company Act of 1940, at October 31, 2003, the
Fund was considered to have a controlling interest in Vendio Services, Inc.
(d) All of the Fund's preferred and common stock and debt investments are in
eligible portfolio companies, as defined in the Investment Company Act of 1940,
except SafeStone Technologies PLC. 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 $10,400,000): companies in which the
Fund owns at least 5% of the voting securities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MEVC DRAPER FISHER JURVETSON FUND I, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
1. ORGANIZATION AND BUSINESS PURPOSE
meVC Draper Fisher Jurvetson Fund I, Inc., D/B/A MVC Capital (the "Fund"),
is a Delaware corporation organized on December 2, 1999 which commenced
operations on March 31, 2000. On December 2, 2002 the Fund announced that it
would begin doing business under the name MVC Capital. The Fund's investment
objective is to seek to maximize total return from capital appreciation and/or
income. The Fund seeks to achieve its investment objective by providing equity
and debt financing to companies that are, for the most part, privately owned
("Portfolio Companies"). The Fund's current investments in Portfolio Companies
consist of senior and subordinated loans, venture capital, mezzanine and
preferred instruments and private equity investments.
The Fund has elected to be treated as a business development company under
the Investment Company Act of 1940, as amended (the "Investment Company Act").
The shares of the Fund commenced trading on the New York Stock Exchange, Inc.
(the "NYSE") under the symbol MVC on June 26, 2000.
The Fund had entered into an advisory agreement with meVC Advisers, Inc.
(the "Former Advisor") which had entered into a sub-advisory agreement with
Draper Fisher Jurvetson MeVC Management Co., LLC (the "Former Sub-Advisor"). On
June 19, 2002, the Former Advisor resigned without prior notice to the Fund as
the Fund's investment advisor. This resignation resulted in the automatic
termination of the agreement between the Former Advisor and the Former
Sub-Advisor to the Fund. As a result, the Fund's board internalized the Fund's
operations, including management of the Fund's investments.
Six of the seven members (excluding Mr. Tokarz) of the current Board were
elected at the February 28, 2003 Annual Meeting of Stockholders (the "Current
Board"), replacing the former Board of Directors of the Fund (the "Former
Board") in its entirety. On March 6, 2003, the results of the election were
certified by the Inspector of Elections, whereupon the Current Board terminated
John M. Grillos, the Fund's previous CEO. Shortly thereafter, other members of
the Fund's senior management team, who had previously reported to Mr. Grillos,
resigned. Since these significant changes in the Board and management of the
Fund, the Fund has operated in a transition mode and, as a result, no new
portfolio investments were made from early March 2003 through the end of October
2003 (the end of the Fiscal Year). During this period, the Current Board
explored various alternatives for a long-term management plan for the Fund,
including the possibility of retaining an external investment advisor. However,
the Current Board concluded that it was in the Fund's best interests to
implement the proposed plan, as described in Note 12, and as voted on and
approved by stockholders at the September 16, 2003 Special Meeting of
Stockholders. Michael Tokarz, as described below, was elected to the Board at
the September 16, 2003 Special Meeting of Stockholders effective November 6,
2003.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements:
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
VALUATION OF INVESTMENTS - Investments in non-publicly traded preferred and
common stock are carried at fair value with the net change in unrealized
appreciation or depreciation included in the determination of increases or
decreases in net assets resulting from its operations. Cost is used to
approximate fair value of these investments until developments affecting an
investment provide a basis for valuing such investment at a value other than
cost.
The fair value of investments for which no market exists and for which the
Current Board and/or the Fund's Valuation Committee have determined that the
original cost of the investment is no longer an appropriate fair valuation will
be determined on the basis of procedures established by the Former Advisor in
good faith and approved by the Current Board. Valuations are based upon such
factors as the financial and/or operating results of the most recent fiscal
period, the performance of the company relative to planned budgets/forecasts,
the issuer's financial condition and the markets in which it does business, the
prices of any recent transactions or offerings regarding such securities or any
proxy securities, any available analysis, media, or other reports or information
regarding the issuer, or the markets or industry in which it operates, the
nature of any restrictions on disposition of the securities and other analytical
data. In the case of unsuccessful operations, the valuation may be based upon
anticipated liquidation proceeds.
Because of the inherent uncertainty of the valuation of portfolio
securities which do not have readily ascertainable market values, the Fund's
determination of fair value may significantly differ from the fair market value
that would have been used had a ready market existed for the securities. Such
values do not reflect brokers' fees or other normal selling costs which might
become payable on disposition of such investments.
Investments in securities that are publicly traded on an organized exchange
are valued at their quoted closing market price, less a discount to reflect the
estimated effects of restrictions on the sale of such securities ("Valuation
Discount"), if applicable. Investments in companies whose securities are
actively traded in the over the counter market are valued at the average closing
of their Bid and Ask prices, less a Valuation Discount to reflect the estimated
effects of restrictions on the sale of such securities, if applicable. If a
reliable last bid and ask price are not available, market values for equity
securities are determined based on the last reliable bid quotation available
from a market maker in the security.
Short-term investments, including cash equivalents, having maturities of 90
days or less are stated at amortized cost, which approximates fair value. Other
fixed income securities are stated at fair value. Fair value of these securities
is determined at the most recent bid or yield equivalent from dealers that make
markets in such securities.
INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME - Investment
transactions are accounted for on the trade date (the date the order to buy or
sell is executed). The cost of securities sold is determined on a first-in,
first-out basis, unless otherwise specified. Dividend income on investment
securities is recorded on the ex-dividend date. Interest income, which includes
accretion of discount and amortization of premium, if applicable, is recorded on
the accrual basis.
CASH AND CASH EQUIVALENTS - For the purpose of the Balance Sheet and
Statement of Cash Flows, the Fund considers all money market and all highly
liquid temporary cash investments purchased with an original maturity of three
months or less to be cash equivalents.
RESTRICTED SECURITIES - The Fund will invest in privately placed restricted
securities. These securities may be resold in transactions exempt from
registration or to the public if the securities are registered. Disposal of
these securities may involve time-consuming negotiations and expense, and a
prompt sale at an acceptable price may be difficult.
INCOME TAXES - It is the policy of the Fund to meet the requirements for
qualification as a "regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended. The Fund is not subject to income tax
to the extent that it distributes all of its investment company taxable income
and net realized gains for its taxable year. The Fund is also exempt from excise
tax if it distributes most of its ordinary income and/or capital gains during
each calendar year.
RECLASSIFICATIONS - There have been no amounts which have had to be
reclassified to conform to the current year presentation.
3. MANAGEMENT
For the year ended October 31, 2003, the Fund has managed its operations
and investments internally. Previously, from commencement of operations through
June 19, 2002, the Fund was charged a management fee by the Former Advisor at an
annual rate of 2.5% of the average weekly net assets of the Fund, paid monthly
in arrears. A portion of this fee was also used to pay the Former Sub-Advisor.
The Former Advisor had entered into a sub-advisory agreement with the Former
Sub-Advisor in which the Former Advisor paid the Former Sub-Advisor an annual
investment sub-advisory fee equal to 1.0% of the Fund's average weekly net
assets, paid monthly in arrears. The sub-advisory fees were not an additional
expense to the Fund. During the period November 1, 2001 to May 31, 2002, the
Fund paid the Former Advisor $3.48 million in management fees who in turn
distributed $1.51 million to the Former Sub-Advisor. During the year ended
October 31, 2001, the Fund paid the Former Advisor $7.39 million in management
fees who in turn distributed $2.96 million to the Former Sub-Advisor.
The Former Advisor resigned without notice on June 19, 2002. As a result,
the Fund's board internalized the Fund's operations, including management of the
Fund's investments, and the Fund began to pay its expenses directly. The
previous 2.5% expense cap, the maximum amount of compensation to be paid to the
Former Advisor, was terminated at the time of the Former Advisor's resignation.
The Fund determined that the Former Advisor had not paid certain vendors
for services performed on behalf of the Fund, which it had agreed to pay. During
the fiscal year ended October 31, 2003, the Fund paid or accrued $463,535 in
expenses to those vendors. See Note 10, "Legal Proceedings" for a discussion of
legal action against the Former Advisor by Millenco L.P., a stockholder of the
Fund, to recover certain advisory fees paid by the Fund to the Former Advisor.
4. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Income dividends and capital gain distributions, if any, are recorded on
the ex-dividend date. Dividends and capital gain distributions, if any, are
generally declared and paid annually. An additional distribution may be paid by
the Fund to avoid imposition of federal income tax on any remaining
undistributed net investment income and capital gains. Distributions can be made
payable by the Fund either in the form of a cash distribution or a stock
dividend. The amount and character of income and capital gain distributions are
determined in accordance with income tax regulations which may differ from
accounting principles generally accepted in the United States of America. These
differences are due primarily to differing treatments of income and gain on
various investment securities held by the Fund, timing differences and differing
characterizations of distributions made by the Fund. Permanent book and tax
basis differences relating to shareholder distributions will result in
reclassifications and may affect the allocation between net investment income,
net realized gain (loss) and paid in capital.
During the year ended October 31, 2003, the Fund's expenses exceeded its
ordinary income and its capital losses exceeded its capital gains. As such, the
Fund did not declare any dividends during the year ended October 31, 2003.
On December 4, 2001, the Fund announced an ordinary income cash dividend of
$0.044163 per share, payable on January 3, 2002, to stockholders of record at
the close of business on December 10, 2001. In accordance with the Dividend
Reinvestment Plan, the Dividend Distribution Agent purchased shares on the open
market of the NYSE for those shareholders electing to take their distributions
in the form of stock dividends. The total distribution amounted to $728,690.
On December 6, 2000, the Fund announced an ordinary income cash dividend of
$0.34210 per share, payable on January 3, 2001, to stockholders of record at the
close of business on December 8, 2000. In accordance with the Dividend
Reinvestment Plan, the Dividend Distribution Agent purchased shares on the open
market of the NYSE for those shareholders electing to take their distributions
in the form of stock dividends. The total distribution amounted to $5,644,650.
5. TRANSACTIONS WITH OTHER PARTIES
The Fund is permitted to co-invest in certain Portfolio Companies with its
affiliates subject to specified conditions set forth in an order obtained from
the SEC. Under the terms of the order, Portfolio Companies purchased by the Fund
and its affiliates are required to be approved by the Independent Directors and
are required to satisfy certain conditions established by the SEC.
On February 7, 2003, the Fund acquired various assets from Sand Hill
Capital Holdings, Inc., the entity previously affiliated with the Fund's former
President, William Del Biaggio III, for the Fund's operations, including but not
limited to, furniture and systems hardware and software. The assets were
purchased for $24,000.
Through March 2002, Fleet Investment Advisors managed the Fund's cash
portfolio under a sub-advisory agreement with the Former Advisor. Subsequently,
the Former Advisor managed those assets until its resignation on June 19, 2002.
From June 19, 2002 through March 27, 2003, the Fund's short term investment
portfolio was managed internally by Fund employees. From March 28, 2003 through
the current date, and at the Fund's direction, U.S. Bank National Association
purchased 90-day U.S. Treasury Bills with the Fund's short term assets except
that the Fund's cash balances, if not large enough to be invested in 90-day
Treasury Bills, are swept into a designated money market account.
On June 19, 2002, when meVC Advisers resigned as the Investment Advisor to
the Fund, the Former Advisor's sub-advisory agreement with Draper Fisher
Jurvetson MeVC Management Co., LLC (the "Former Sub-Advisor") was terminated
automatically as a matter of contract construction. On June 20, 2002, the Board
voted to internalize all investment management and administrative functions of
the Fund. For the year ended October 31, 2002, the Fund paid meVC Advisers
advisory fees amounting to $3.59 million and the Former Advisor paid the Former
Sub-Advisor sub-advisory fees amounting to $1.58 million, or 1% of the 2.5%
management fee.
On June 26, 2002, the Fund acquired various assets from meVC Advisers
necessary to run the Fund's information systems and web site, including but not
limited to, website equipment, systems hardware and software, and intellectual
property. The assets were purchased for $17,855.
In June and July 2002, the Fund utilized the services of the Former
Sub-Advisor as a temporary payroll agent to facilitate the payment of the Fund's
employees. Former Management and the Former Board believed it was in the
stockholders' best interest to maintain continuity of payroll while operations
were initiated with the Fund's ongoing payroll vendor.
During the year ended October 31, 2001, the Fund accrued and paid the
Former Advisor $7.39 million in management fees who in turn distributed $2.96
million to the Former Sub-Advisor.
6. CONCENTRATION OF MARKET AND CREDIT 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 17.57% of the Fund's net assets. As
discussed in Note 7 and Note 8, 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. At this time, the Fund's investments in
short-term securities are in 90-day Treasury Bills, which are federally insured
securities, except that the Fund's cash balances, if not large enough to be
invested in 90-day Treasury Bills, are swept into a designated money market
account.
7. PORTFOLIO INVESTMENTS
FOR THE YEAR ENDED OCTOBER 31, 2003. During the year ended October 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. The current Board of Directors was elected at the Annual Meeting of
Stockholders held on February 28, 2003. All investments made during the year
ended October 31, 2003 were made under the supervision of the Former Board.
There have been no new investments (other than short-term investments) made
under the supervision of the Current Board. The Fund also had one portfolio
company exit event with proceeds totaling approximately $40,000 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, Inc. in excess of the Fund's complete write-off of the investment in
MediaPrise, Inc. during the fiscal year ended October 31, 2002, and had two
return of capital disbursements from BS Management totaling approximately $2.7
million and a realized loss of approximately $322,000 and had a complete
write-off of Cidera, Inc. of $3.75 million. 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 $0.70
per share. The warrants expire on December 31, 2009.
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 year ended
October 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. by $1.5 million, Arcot Systems, Inc. by
$3.0 million, BlueStar Solutions, Inc. by $3.0 million, BS Management by $1.5
million, CBCA, Inc. by $11.5 million, Endymion Systems, Inc. by $2.0 million,
Foliofn, Inc. by $3.0 million, Integral Development Corporation by $1.0 million,
Ishoni Networks, Inc. by $2.5 million, Lumeta Corporation by approximately
$237,000, Mainstream Data, Inc. by approximately $500,000, Phosistor
Technologies, Inc. by $1.0 million, ProcessClaims, Inc. by approximately
$940,000, PTS Messaging, Inc. (formerly Pagoo, Inc.) by approximately $170,000,
SafeStone Technologies PLC by $1.5 million, Sonexis, Inc. by $6.5 million, Yaga,
Inc. by $1.3 million, Vendio Services, Inc. (formerly AuctionWatch.com, Inc.) by
approximately $600,000, 0-In Design Automation, Inc. by $3.0 million, and
DataPlay Inc. by $2.25 million, and wrote-off all of the accrued interest from
the DataPlay, Inc. Promissory Notes. At October 31, 2003, the fair value of all
portfolio investments, exclusive of short-term securities, was $24.1 million
with a cost of $146.5 million and at October 31, 2002 the fair value of all
portfolio investments, exclusive of short-term securities, was $54.2 million
with a cost of $133.9 million.
At October 31, 2003, all of the Fund's investments in preferred stocks
totaling $11.6 million (8.47% of net assets), investments in debt instruments
totaling $12.5 million (9.10% of net assets), and investments in subordinated
notes totaling $0, had been valued by the Valuation Committee of the Board of
Directors, in 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 and the differences could be material.
FOR THE YEAR ENDED OCTOBER 31, 2002. During the year ended October 31,
2002, the Fund invested approximately $19,000,000 in four new companies, CBCA,
Inc., Phosistor Technologies, Inc., Sygate, Inc. and 0-In Design Automation,
Inc., made fourteen follow-on investments in AuctionWatch.com, Inc. (now Vendio
Services, Inc.), BlueStar Solutions, Inc., DataPlay, Inc., IQdestination, Inc.,
Lumeta Corporation, ProcessClaims, Inc., and SafeStone PLC of approximately
$10,006,000, had three portfolio company exit events with proceeds totaling
approximately $9,955,000 and realized losses totaling approximately $14,834,000
in the sale of infoUSA.com to its parent entity, the disbursement of assets from
EXP Systems, Inc., and the sale of Annuncio Software, Inc. to PeopleSoft, had
one return of capital of approximately $2,430,000 from Pagoo, Inc. (now PTS
Messaging, Inc.), and had four portfolio company write-offs with realized losses
totaling approximately $18,637,000 in the irreversible dilution of equity in
Personic Software, Inc., the filing of Chapter 7 of the US Code by InfoImage,
Inc., the cessation of operations by IQdestination, Inc., and the cessation of
operations by MediaPrise, Inc.
At October 31 of 2002, all of the Fund's investments in preferred stocks
totaling $50.1 million (25.6% of net assets) and investments in subordinated
notes totaling $4.1 million (2.09% of net assets), had been valued by the Former
Valuation Committee of the Board of Directors, in 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 and the differences could be
material.
FOR THE YEAR ENDED OCTOBER 31, 2001. During the year ended October 31,
2001, the Fund invested approximately $28,200,000 in six new companies and made
five follow-on investments in InfoImage, Inc., IQdestination, Inc., Pagoo.com,
Inc. (now PTS Messaging, Inc.), Personic Software, Inc., and Yaga, Inc. of
approximately $8,132,000. During the year ended October 31, 2001, there were no
changes made or additions to the initial investments in Lumeta Corporation and
MediaPrise, Inc.
At October 31 of 2001, all of the Fund's investments in preferred stocks
totaling $90.9 million (35.7% of net assets) had been valued by the Former
Valuation Committee of the Board of Directors, in 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 and the differences could be
material.
8. COMMITMENTS AND CONTINGENCIES
The Fund rents office space at 3000 Sand Hill Road, Menlo Park, CA 94025,
under a lease which is scheduled to expire on October 31, 2005. Future payments
under this lease, as of October 31, 2003, totaled $597,000, with annual minimum
payments of $298,500. In January 2004, the Fund agreed to a buy-out of this
lease for $232,835 effective January 31, 2004.
On February 13, 2003, the Fund entered into a Directors &
Officers/Professional Liability Insurance policy with a cost of approximately
$1.4 million. The cost will be amortized over the life of the policy ending
February 2004. At October 31, 2003, the balance of the cost as yet to be
amortized was $424,735.
9. CERTAIN REPURCHASES OF EQUITY SECURITIES BY THE ISSUER
During the year ended October 31, 2003, the Fund repurchased 347,400 of its
shares at an average price of approximately $8.28, excluding brokerage fees for
the transactions executed on the open market of the NYSE. The Fund ceased
repurchasing shares after the Current Board 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, as amended (the "Exchange
Act").
10. 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 Advisor. The complaint alleges that the
fees received by the Former Advisor for the year prior to the filing of the
complaint were excessive, in violation of Section 36(b) of the Investment
Company Act. The Former Advisor'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 and mediation is
scheduled to begin in April 2004. The Fund is monitoring this litigation
inasmuch as any net 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 Advisor and between the Fund and the Former
Sub-Advisor. 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 Former Board 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 invalidate 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 Board had breached its fiduciary duty of disclosure under Delaware
law in connection with the 2001 and 2002 elections 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 six members of the Fund's Current Board 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
Board. The complaint asked the Court for injunctive relief aimed at limiting the
stockholders' voting rights at the February 28, 2003 annual meeting of
stockholders.
On February 24, 2003, after expedited 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.
On March 3, 2003, after the Annual Meeting, but prior to the transfer of
control by the Former Board to the Current Board, John Grillos signed a document
which purported to extend the maturity date of the Fund's $3 million 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 passed
without payment to the Fund of any principal or interest on the loan. The Fund's
Current Board 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 stockbroker to which such money had been transferred by 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. In August 2003, the
parties settled the litigation, and the Fund received $2,580,000, 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, the Fund recovered a total of
approximately $2,624,000 of the original $3,000,000 loan. Potential Fund
proceeds from the remaining 550,000 shares of Transware stock are believed to
have nominal value at best. 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.
In 2003, a former officer and director who had been hired by the Former
Board demanded severance pay of approximately $255,000, and threatened to sue
the Fund for such severance, plus 10% interest and attorney's fees. The Fund
rejected the demand and, in 2004, informed the former officer that if he sued,
the Fund would oppose such lawsuit and take such affirmative legal action as may
be appropriate to recover damages to the Fund caused by certain conduct of the
former officer. No assurance can be given as to whether the former officer will
sue the Fund or the outcome of such litigation.
11. TAX MATTERS
ROCSOP ADJUSTMENT: During the year ended October 31, 2003, permanent
differences, primarily due to net operating losses, resulted in a net decrease
in accumulated net investment loss, a net increase in accumulated net realized
loss on investment transactions and a corresponding decrease in additional
paid-in capital. This reclassification had no effect on net assets.
DISTRIBUTIONS TO SHAREHOLDERS: As of October 31, 2003, the components of
accumulated earnings/(deficit) on a tax basis were as follows:
TAX BASIS ACCUMULATED EARNINGS (DEFICIT)
Accumulated capital and other losses (37,689,502)
Unrealized appreciation/depreciation (122,443,907)
Total tax basis accumulated deficit (160,133,409)
Add: Paid in capital 297,141,571
Other temporary differences -
Tax basis net assets 137,008,162
On October 31, 2003, the Fund had a net capital loss carryforward of
$37,689,502 of which $33,469,122 will expire in the year 2010 and $4,220,380
will expire in the year 2011. To the extent future capital gains are offset by
capital loss carryforwards, such gains will not be distributed.
12. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (UNAUDITED)
The Fund held a Special Meeting of Stockholders on September 16, 2003 for
the following purpose:
To approve the proposed management plan of the Board of Directors (the
"Proposed Plan") under which: (i) Michael Tokarz would be appointed
Chairman of the Board of Directors and Portfolio Manager of the Fund;
(ii) the Fund would adopt an amended investment objective whereby the
Fund would seek to maximize total return from capital appreciation
and/or income; (iii) the Fund would seek to achieve its investment
objective primarily through senior and subordinated loans, venture
capital, mezzanine and preferred instruments and private equity
investments; and (iv) the Fund would conduct 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.
Of the 16,152,600 shares outstanding and entitled to vote, 8,216,271 shares
were represented at the meeting by proxy or in person. The number of votes cast
for the proposed plan were 7,513,748, against the proposed plan were 658,236,
and withheld were 44,287. There were no broker non-votes.
13. SUBSEQUENT EVENTS
On November 6, 2003, Michael Tokarz assumed his new position as Chairman,
Portfolio Manager and director of the Fund. As Portfolio Manager, Mr. Tokarz
will be compensated by the Fund based upon his positive performance as the
Portfolio Manager. Under the terms of his agreement with the Fund, the Fund will
pay Mr. Tokarz an amount equal to the lesser of (a) 20% of the net income of the
Fund for the fiscal year; and (b) the sum of (i) 20% of the net capital gains
realized by the Fund in respect of the investments made during his tenure as
Portfolio Manager; and (ii) the amount, if any, by which the Fund's total
expenses for a fiscal year were less than two percent of the Fund's net assets
(determined as of the last day of the period). Any payments to be made shall be
calculated based upon the audited financial statements of the Fund for the
applicable fiscal year and shall be paid as soon as practicable following the
completion of such audit.
On November 26, 2003, the Fund commenced a tender offer to acquire up to
twenty-five percent (25%) of its outstanding shares of common stock at a per
share cash purchase price equal to ninety-five percent (95%) of net asset value
per share as of December 31, 2003, the day the offer expired. Based on a final
count by the depositary for the tender offer, 3,859,558 shares, or 23.9% of the
Fund's outstanding common stock, were tendered. Because less than 25% of the
Fund's shares were tendered, the Fund purchased all shares tendered. Each share
accepted for purchase was purchased at a price of $8.18 resulting in a total
disbursement from the Fund of $31,571,184. Since completion of the tender offer,
MVC has 12,293,042 shares of common stock outstanding. The anti-dilutive effect
of the tender offer totaled $1,650,697 or approximately $0.134 per share for all
remaining shares after the tender offer.
Effective December 8, 2003, the Fund agreed to a lease for new office space
in Purchase, New York, which is scheduled to expire on November 30, 2005. Future
payments under this lease total $110,933, with annual minimum payments of
$49,517 from December 8, 2003 through October 31, 2004, $56,682 from November 1,
2004 through October 31, 2005, and $4,734 from November 1, 2005 through November
30, 2005. The building at 287 Bowman Avenue, Purchase, New York is owned by
Phoenix Capital Partners, LLC, an entity which is 97% owned by Mr. Tokarz.
On December 29, 2003, the Current Valuation Committee marked up the Fund's
investment in 0-In Design Automation, Inc. by $1.0 million to $2.0 million and
marked up the Fund's investment in Sygate Technologies, Inc. by $1.5 million to
$5.5 million.
On December 30, 2003, Ishoni Networks, Inc. filed for bankruptcy in United
States Bankruptcy Court, Northern District of California, San Jose Division.
On January 21, 2004, the Fund reached an agreement with the property
manager at 3000 Sand Hill Road, Menlo Park, California to terminate its lease at
such location as a result of the property manager's ability to reach an
agreement with a new tenant for the space. Under the terms of the agreement, the
Fund will buy-out its lease directly from the property manager, for an amount
equal to $232,835. As a result, the Fund expects to be able to recover
approximately $250,000 of the remaining reserve established at October 31, 2003.
On January 23, 2004, Synhrgy HR Technologies, Inc. repaid the balance of
its original $5.0 million credit facility to the Fund. In conjunction with the
repayment of the credit facility, the Fund also exercised its 43,750 warrants in
a cashless transaction for a gain of approximately $40,000.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of MVC Capital
We have audited the accompanying balance sheet, including the schedule of
investments, of MVC Capital (the "Fund") as of October 31, 2003, and the related
statements of operations, shareholders' equity and cash flows, and the selected
per share data and ratios for the year then ended. These financial statements
and selected per share data and ratios are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and selected per share data and ratios based on our audit. The
financial statements of the Fund for the period ended October 31, 2002 and all
other prior periods were audited by other auditors whose report expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
selected per share data and ratios are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and selected per share data and ratios.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements and selected per share data and
ratios referred to above present fairly, in all material respects, the financial
position of the MVC Capital at October 31, 2003, and the results of its
operations, the shareholders' equity and cash flows and the selected per share
data and ratios for the year then ended, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York
January 9, 2004, except for Note 13 which date is January 23, 2004
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
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. The reports of PwC on the financial statements of the
Fund for the fiscal years ended October 31, 2001 and October 31, 2002 contain no
adverse opinion or disclaimer and were not qualified or modified as to
uncertainty, audit scope, or accounting principle. Further, during the past two
fiscal years of the Fund and the subsequent interim period through April 16,
2003, there were 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 in
connection with their reports on the financial statements. Exhibit 16 to this
Form 10-K is a letter from PwC stating that it agrees with the above statements.
On October 27, 2003, Ernst & Young, LLP ("Ernst & Young") was engaged by
the Audit Committee of the Board of Directors as the Fund's new principal
accountant. During the Fund's two most recent fiscal years, and any subsequent
interim period prior to engaging Ernst & Young, the Fund (or anyone on its
behalf) did not consult the newly engaged accountant regarding: (i) the
application of accounting principles to a specified transaction, either
completed or proposed, (ii) the type of audit opinion that might be rendered on
the Fund's financial statements, (iii) either a written report was provided to
the Fund or oral advice was provided that the new accountant concluded was an
important factor considered by the Fund in reaching a decision as to the
accounting, auditing or financial reporting issue, or (iv) any matter that was
either the subject of a disagreement or a reportable event.
ITEM 9A. CONTROLS AND PROCEDURES
The Fund recognizes management's responsibility for establishing and
maintaining adequate internal control over financial reporting for the Fund.
Within the 90 days prior to the filing date of this annual report on Form 10-K,
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
the individual who performs the functions of a Principal Executive Officer (the
"CEO") and the individual who performs the functions of a Principal Financial
Officer (the "CFO"). Based upon that evaluation, the CEO and the CFO have
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 and 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 above.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the information with respect to "directors and
executive officers of the Registrant" to be contained in the Fund's proxy
statement to be filed with the SEC, in connection with the Fund's annual meeting
of shareholders to be held in 2004 (the "2004 Proxy Statement"), which
information is incorporated herein by reference.
The Fund has adopted a code of ethics that applies to the Fund's chief
executive officer and chief financial officer/chief accounting officer, a copy
of which can be obtained from the Fund's website (WWW.MVCCAPITAL.COM), free of
charge.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information with respect to "executive
compensation" to be contained in the Fund's 2004 Proxy Statement, which
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the information with respect to "security ownership of
certain beneficial owners and management" to be contained in the Fund's 2004
Proxy Statement, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As stated above in Item 1 (Business---Co-Investments and Follow-On
Investments) and in Item 8 (Note 5 of the notes accompanying the financial
statements in "Transactions with Other Parties"), the Fund co-invested in
Portfolio Companies from time to time with affiliates of the Fund and the Former
Sub-Advisor, including certain venture capital investment partnerships. The
Fund's co-investments with such affiliates are subject to the terms and
conditions of the exemptive order granted by the SEC, which relieves the Fund
from certain provisions of the Investment Company Act and permits certain joint
transactions with the investment partnerships.
In accordance with the conditions of the order, the Fund has co-invested
with certain affiliates of Draper Fisher Jurvetson in the following current
Portfolio Companies of the Fund: Lumeta Corporation and Phosistor Technologies,
Inc.
As stated above in Item 2, "Properties", the Fund has leased property at
287 Bowman Avenue, Purchase, NY 10577 from Phoenix Capital Partners, LLC, an
entity which is 97% owned by Mr. Tokarz.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Reference is made to the information with respect to "principal accounting
fees and services" to be contained in the Fund's 2004 Proxy Statement, which
information is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements Page(s)
-------------------- ------
Balance Sheets
October 31, 2003 and October 31, 2002 33
Statement of Operations
For the Year Ended October 31, 2003,
the Year Ended October 31, 2002, and
the Year Ended October 31, 2001 34
Statement of Cash Flows
For the Year Ended October 31, 2003,
the Year Ended October 31, 2002, and
the Year Ended October 31, 2001 35
Statement of Shareholders' Equity
For the Year Ended October 31, 2003,
the Year Ended October 31, 2002, and
the Year Ended October 31, 2001 36
Selected Per Share Data and Ratios
For the Year Ended October 31, 2003,
the Year Ended October 31, 2002, and
the Year Ended October 31, 2001 37
Schedule of Investments
October 31, 2003 38-41
Notes to Financial Statements 42-51
Report of Independent Public Accountants 52
All other information required in the financial statement schedules
has been incorporated in the financial statements or notes thereto or has
been omitted since the information is not applicable, not present or not
present in amounts sufficient to require submission of the schedule.
(b) Reports on Form 8-K
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 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.
On September 19, 2003, the Fund filed a report on Form 8-K
advising that the Fund's stockholders voted to implement the Board of
Director's Proposed Plan concerning the amendment of the Fund's
investment strategy, the approval of Michael Tokarz as the Chairman of
the Board of Directors and Portfolio Manager of the Fund and the
approval of a tender offer for up to 25% of the Fund's outstanding
shares at a price of 95% of the Fund's net asset value. In addition,
the report, as filed on Form 8-K, advised that Ernst & Young had been
engaged as the Fund's new independent accountants.
On October 7, 2003, the Fund filed a report on Form 8-K advising
that the Fund had changed its office and principal place of business
to 10 Rockefeller Plaza, Suite 815, New York, New York.
On November 6, 2003, the Fund filed a report on Form 8-K advising
that Michael Tokarz had assumed his new position as Chairman,
Portfolio Manager and director of the Fund. 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 of the Fund's holdings had been written down.
(c) Exhibits
Exhibit No. Exhibit
------------- ---------
3.2 Amended and Restated By-Laws.
10.1 Lease for 287 Bowman Avenue, Purchase, NY 10577.
10.2 Agreement between the Fund and Michael Tokarz.
16 Letter regarding change in certifying accountant.
23.1 Consent from PricewaterhouseCoopers LLP.
23.2 Consent from Ernst & Young LLP.
31 Rule 13a-14(a) Certifications.
32 Section 1350 Certification.
(d) Financial Statement Schedules
None
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date Signature Title
- ------- ------------- ------
Date: January 29, 2004 /s/ Michael Tokarz Chairman and Director
- ---------------------------- -------------------------
(Michael Tokarz)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date Signature Title
- ------- ------------- ------
Date: January 29, 2004 /s/ Michael Tokarz Chairman and Director
- ---------------------------- -------------------------
(Michael Tokarz)
Date: January 29, 2004 /s/ Frances Spark Chief Financial Officer
- ---------------------------- -------------------------
(Frances Spark)
Date: January 29, 2004 /s/ Gerald Hellerman Director
- ---------------------------- -------------------------
(Gerald Hellerman)
Date: January 29, 2004 /s/ Robert C. Knapp Director
- ---------------------------- -------------------------
(Robert C. Knapp)
Date: January 29, 2004 /s/ Bruce W. Shewmaker Director
- ---------------------------- -------------------------
(Bruce W. Shewmaker)
Date: January 29, 2004 /s/ George Karpus Director
- ---------------------------- -------------------------
(George Karpus)
Date: January 29, 2004 /s/ Emilio Dominianni Director
- ---------------------------- -------------------------
(Emilio Dominianni)
Date: January 29, 2004 /s/ Terry Feeney Director
- ---------------------------- -------------------------
(Terry Feeney)