FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-28405
MVC CAPITAL, INC.
(FORMERLY KNOWN AS MEVC DRAPER FISHER JURVETSON FUND I, INC.)
(Exact name of the registrant as specified in its charter)
DELAWARE 94-3346760
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
287 Bowman Avenue
3rd Floor
Purchase, New York
(Address of principal 10577
executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 701-0310
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
Common Stock New York Stock Exchange
------------------- ---------------------------------
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of September 9, 2004, there were 12,293,042 shares of Registrant's common
stock, $.01 par value (the "Shares"), outstanding.
MVC Capital, Inc.
(A Delaware Corporation)
Index
Part I. Consolidated Financial Information Page
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
- July 31, 2004 and October 31, 2003......................................... 1
Consolidated Statement of Operations
- For the Period November 1, 2003 to July 31, 2004 and
the Period November 1, 2002 to July 31, 2003................................ 2
Consolidated Statement of Operations
- For the Period May 1, 2004 to July 31, 2004 and
the Period May 1, 2003 to July 31, 2003..................................... 3
Consolidated Statement of Cash Flows
- For the Period November 1, 2003 to July 31, 2004 and
the Period November 1, 2002 to July 31, 2003................................ 4
Consolidated Statement of Shareholders' Equity
- For the Period November 1, 2003 to July 31, 2004 and
the Period November 1, 2002 to July 31, 2003................................ 5
Consolidated Selected Per Share Data and Ratios
- For the Period November 1, 2003 to July 31, 2004 and
the Year ended October 31, 2003............................................. 6
Consolidated Schedule of Investments
- July 31, 2004............................................................... 7
Notes to Consolidated Financial Statements..................................... 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................ 15
Item 3. Quantitative and Qualitative Disclosure about Market Risk...................... 28
Item 4. Controls and Procedures........................................................ 31
Part II. Other Information
Item 1. Legal Proceedings.............................................................. 32
Item 6. Exhibits and Reports on Form 8-K............................................... 32
SIGNATURE........................................................................................ 33
Exhibits......................................................................................... 34
PART I. CONSOLIDATED FINANCIAL INFORMATION
------------------------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
MVC CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
JULY 31, OCTOBER 31,
2004 2003
(UNAUDITED)
ASSETS
ASSETS
Cash and cash equivalents $ 1,242,663 $ 6,850
Investments in short term securities, at market value 57,175,439 113,237,521
(cost $57,175,439 and $113,237,521, respectively)
Investments in subordinated notes, at fair value - -
(cost $4,500,000 and $4,500,000, respectively) (Note 4)
Investments in debt instruments, at fair value 21,847,889 12,471,288
(cost $23,879,233 and $16,439,343, respectively) (Note 4)
Investments in preferred/common stocks, at fair value 33,494,001 11,600,000
(cost $119,265,909 and $125,575,852, respectively), (Note 4)
Interest receivable 205,434 152,630
Prepaid expenses 396,381 412,003
Deposit 12,500 -
Other assets 51,628 -
----------------- ------------------
TOTAL ASSETS $ 114,425,935 $ 137,880,292
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Administration 16,785 19,771
Audit fees 90,566 70,736
Legal fees 201,498 43,046
Directors' fees 47,246 27,511
Employee compensation & benefits 262,955 102,337
Other accrued expenses 238,531 608,729
----------------- ------------------
TOTAL LIABILITIES $ 857,581 $ 872,130
----------------- ------------------
SHAREHOLDERS' EQUITY
Common stock, $0.01 par value; 150,000,000 shares
authorized; 12,293,042 and 16,152,600 shares outstanding, respectively 165,000 165,000
Additional paid in capital 299,871,488 311,485,000
Accumulated deficit (152,002,033) (171,746,921)
Treasury stock, at cost, 4,206,958 and 347,400 shares held, respectively (34,466,101) (2,894,917)
----------------- ------------------
TOTAL SHAREHOLDERS' EQUITY 113,568,354 137,008,162
----------------- ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 114,425,935 $ 137,880,292
================= ==================
NET ASSET VALUE PER SHARE $ 9.24 $ 8.48
================= ==================
The accompanying notes are an integral part of these consolidated financial statements.
- 1 -
MVC CAPITAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE PERIOD FOR THE PERIOD
NOVEMBER 1, 2003 NOVEMBER 1, 2002
TO JULY 31, 2004 TO JULY 31, 2003
INVESTMENT INCOME:
Interest income $ 1,876,852 $ 2,152,810
Fee income 640,729 988
Other income 5,060 -
----------------- ------------------
TOTAL INVESTMENT INCOME 2,522,641 2,153,798
OPERATING EXPENSES:
Proxy/Litigation related fees & expenses - 4,037,327
Employee compensation & benefits 1,053,579 2,236,987
Legal fees 565,817 1,412,517
Insurance 773,454 689,929
Facilities 8,250 565,696
Directors fees 178,723 396,000
Audit fees 122,830 141,349
Administration 76,849 108,712
Consulting and public relations fees 104,885 82,492
Other expenses 182,838 77,561
Printing and postage 67,674 48,606
----------------- ------------------
TOTAL OPERATING EXPENSES 3,134,899 9,797,176
NET INVESTMENT LOSS (612,258) (7,643,378)
----------------- ------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized loss on
investments (21,397,019) (151,931)
Net change in unrealized appreciation (depreciation)
on investments 30,140,653 (43,027,045)
----------------- ------------------
Net realized and unrealized gain (loss) on
investments 8,743,634 (43,178,976)
----------------- ------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ 8,131,376 $ (50,822,354)
================= ==================
NET INCREASE (DECREASE) IN NET ASSETS PER SHARE
RESULTING FROM OPERATIONS $ 0.63 $ (3.13)
================= ==================
DIVIDENDS DECLARED PER SHARE $ - $ -
================= ==================
The accompanying notes are an integral part of these consolidated financial statements.
- 2 -
MVC CAPITAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE QUARTER FOR THE QUARTER
MAY 1, 2004 MAY 1, 2003
TO JULY 31, 2004 TO JULY 31, 2003
INVESTMENT INCOME:
Interest income $ 707,360 $ 776,232
Fee Income 590,729 -
Other Income - -
----------------- ------------------
TOTAL INVESTMENT INCOME 1,298,089 776,232
OPERATING EXPENSES:
Proxy/Litigation related fees & expenses - -
Employee compensation & benefits 473,934 344,697
Legal fees 122,688 260,806
Insurance 193,636 368,395
Facilities 81,918 126,669
Directors fees 56,994 83,769
Audit fees 33,584 41,758
Administration 25,142 36,605
Consulting and public relations fees 31,026 48,726
Other expenses (49,467) 23,999
Printing and postage 13,008 -
----------------- ------------------
TOTAL OPERATING EXPENSES 982,463 1,335,424
NET INVESTMENT INCOME (LOSS ) 315,626 (559,192)
----------------- ------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss) on
investments (11,092,280) 914
Net change in unrealized appreciation (depreciation)
on investments 15,498,977 (13,824,254)
----------------- ------------------
Net realized and unrealized gain (loss) on
investments 4,406,697 (13,823,340)
----------------- ------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ 4,722,323 $ (14,382,532)
================= ==================
NET INCREASE (DECREASE) IN NET ASSETS PER SHARE
RESULTING FROM OPERATIONS $ 0.38 $ (0.89)
================= ==================
DIVIDENDS DECLARED PER SHARE $ - $ -
================= ==================
The accompanying notes are an integral part of these consolidated financial statements.
- 3 -
MVC CAPITAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE PERIOD FOR THE PERIOD
NOVEMBER 1, 2003 NOVEMBER 1, 2002
TO JULY 31, 2004 TO JULY 31, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations $ 8,131,376 $ (50,822,354)
Adjustments to reconcile to net cash provided by
operating activities:
Realized loss 21,397,019 151,931
Net change in unrealized (appreciation) depreciation (30,140,653) 43,027,045
Changes in assets and liabilities:
Prepaid expenses 15,622 (646,861)
Interest receivable (52,804) 59,805
Deposit (12,500) -
Other assets (51,628) -
Receivable for investments sold - 379,632
Liabilities (14,549) 1,503,125
Purchases of preferred/common stocks (14,710,000) (1,999,998)
Purchases of debt instruments (14,988,194) (19,955,000)
Purchases of short-term investments (248,045,000) (251,771,529)
Purchases of cash equivalents (57,418,119) (585,975,377)
Purchases of warrants (550,000) -
Proceeds from preferred stocks 171,286 1,884,840
Proceeds from debt instruments 7,637,226 210,308
Sales/maturities of short-term investments 304,662,299 164,382,598
Sales/maturities of cash equivalents 56,775,616 623,822,247
----------------- ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 32,806,997 (75,749,588)
----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Re-purchases of capital stock (31,571,184) (2,894,917)
----------------- ------------------
NET CASH USED FOR FINANCING ACTIVITIES (31,571,184) (2,894,917)
----------------- ------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS FOR THE PERIOD 1,235,813 (78,644,505)
----------------- ------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,850 78,873,485
----------------- ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,242,663 $ 228,980
================= ==================
The accompanying notes are an integral part of these consolidated financial statements.
- 4 -
MVC CAPITAL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
FUND ADDITIONAL
SHARES COMMON PAID IN TREASURY
ISSUED STOCK CAPITAL STOCK
BALANCE AT NOVEMBER 1, 2002 16,500,000 $ 165,000 $ 311,485,000 $ -
Treasury shares repurchased (347,400) - - (2,894,917)
Net decrease in net assets from operations - - - -
---------- ----------- --------------- -------------
BALANCE AT JULY 31, 2003 16,152,600 $ 165,000 $ 311,485,000 $ (2,894,917)
---------- ----------- --------------- -------------
BALANCE AT NOVEMBER 1, 2003 16,152,600 $ 165,000 $ 311,485,000 $ (2,894,917)
Return of capital statement of position reclass - - (11,613,512) -
Treasury shares repurchased (3,859,558) - - (31,571,184)
Net increase in net assets from operations - - - -
---------- ----------- --------------- -------------
BALANCE AT JULY 31, 2004 12,293,042 $ 165,000 $ 299,871,488 $ (34,466,101)
---------- ----------- --------------- -------------
TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT EQUITY
BALANCE AT NOVEMBER 1, 2002 $ (116,263,523) $ 195,386,477
Treasury shares repurchased - (2,894,917)
Net decrease in net assets from operations (50,822,354) (50,822,354)
--------------- ---------------
BALANCE AT JULY 31, 2003 $ (167,085,877) $ 141,669,206
--------------- ---------------
BALANCE AT NOVEMBER 1, 2003 $ (171,746,921) 137,008,162
Return of capital statement of position reclass 11,613,512 -
Treasury shares repurchased - (31,571,184)
Net increase in net assets from operations 8,131,376 8,131,376
--------------- ---------------
BALANCE AT JULY 31, 2004 $ (152,002,033) $ 113,568,354
--------------- ---------------
The accompanying notes are an integral part of these consolidated financial statements.
- 5 -
MVC CAPITAL, INC.
CONSOLIDATED SELECTED PER SHARE DATA AND RATIOS
FOR THE PERIOD FOR THE
NOVEMBER 1, 2003 YEAR ENDED
JULY 31, 2004 OCTOBER 31, 2003
(UNAUDITED)
Net asset value, beginning of period $ 8.48 $ 11.84
Gain (Loss) from investment operations:
Net investment loss (0.04) (0.53)
Net realized and unrealized gain (loss) on investments 0.67 (2.89)
----------------- ------------------
Total gain (loss) from investment operations 0.63 (3.42)
----------------- ------------------
Less distributions from:
Net investment income - -
----------------- ------------------
Total distributions - -
----------------- ------------------
Capital share transactions
Anti-dilutive effect of Share Repurchase Program 0.13 0.06
----------------- ------------------
Net asset value, end of period $ 9.24 $ 8.48
================= ==================
Market value, end of period $ 9.60 $ 8.10
================= ==================
Market premium (discount) 3.90% (4.48%)
TOTAL RETURN - AT NAV (a) 8.96% (28.38%)
TOTAL RETURN - AT MARKET (a) 18.52% 2.53%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 113,568 $ 137,008
Ratios to average net assets:
Expenses 3.61% (b) 7.01% (c)
Net investment loss (0.71%) (b) (5.22%) (c)
(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) Annualized.
(c) The expense ratio for the year ended October 31, 2003 included approximately
$4.0 million of proxy/litigation fees and expenses. When these fees and expenses
are excluded, the Fund's expense ratio was 4.52% and the net investment loss was
- -2.74%.
The accompanying notes are an integral part of these consolidated financial statements.
- 6 -
MVC CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
JULY 31, 2004
(UNAUDITED)
Date of
Initial
Description Shares/Principal Investment Cost Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
PREFERRED/COMMON STOCKS - 29.49% (a, b, d, g) (NOTE 3, 4, 5)
AUTOMOTIVE DEALERSHIPS - 5.28%
*Baltic Motors Corporation
Common Stock 54,947 June 2004 $ 6,000,000 $ 6,000,000
CONFECTIONS MANUFACTURING AND DISTRIBUTION - 2.38%
*Impact Confections, Inc.
Common Stock 252 July 2004 2,700,000 2,700,000
FINANCIAL SERVICES - 0.98%
Octagon Credit Investors, LLC, Common Stock 5 June 2004 560,000 560,000
Octagon Credit Investors, LLC, Warrants 1 June 2004 550,000 550,000
-------------- ------------
TOTAL FINANCIAL SERVICES 1,110,000 1,110,000
IRON FOUNDRIES - 0.40%
*Vestal Manufacturing Enterprises, Inc.
Common Stock 40,500 Apr. 2004 450,000 450,000
MANUFACTURER OF PACKAGED FOODS - 4.40%
*Dakota Growers Pasta Company, Inc.
Common Stock 909,091 July 2004 5,000,000 5,000,000
TECHNOLOGY INVESTMENTS - 16.05%
Actelis Networks, Inc. Series C 1,506,025 May 2001 5,000,003 -
*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 3,000,000
CBCA, Inc., Common Stock 753,350 Apr. 2002 11,999,995 -
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 -
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 3,750,000 -
*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 -
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 -
*Sygate Technologies, Inc., Series D 9,756,098 Oct. 2002 4,000,000 5,500,000
*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 1,134,001
The accompanying notes are an integral part of these consolidated financial statements.
- 7 -
MVC CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
JULY 31, 2004
(UNAUDITED)
Date of
Initial
Description Shares/Principal Investment Cost Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
*Yaga, Inc., Series A 300,000 Nov. 2000 $ 300,000 $ -
*Yaga, Inc.:
Series B 1,000,000 June 2001 2,000,000 -
*0-In Design Automation, Inc., Series E 2,239,291 Nov. 2001 4,000,001 6,000,000
-------------- -------------
TOTAL TECHNOLOGY INVESTMENTS 104,005,909 18,234,001
-------------- -------------
TOTAL PREFERRED/COMMON STOCKS 119,265,909 33,494,001
-------------- -------------
DEBT INSTRUMENTS-19.24% (a, b)
AUTOMOTIVE DEALERSHIPS - 3.97%
Baltic Motors Corporation
10.0000%, 06/25/2007 4,500,000 June 2004 4,500,000 4,500,000
CONFECTIONS MANUFACTURING AND DISTRIBUTION - 4.40%
Impact Confections, Inc.
17.0000%, 07/30/2011 5,000,000 July 2004 5,000,000 5,000,000
FINANCIAL SERVICES - 3.96%
Octagon Credit Investors, LLC
15.0000%, 05/07/2011 5,038,194 May 2004 4,498,142 4,498,142
IRON FOUNDRIES - 0.88%
Vestal Manufacturing Enterprises, Inc.
12.0000%, 04/29/2011 1,000,000 Apr. 2004 1,000,000 1,000,000
TECHNOLOGY INVESTMENTS - 6.03%
Arcot Systems, Inc. (h)
10.0000%, 12/31/2005 4,068,054 Dec. 2002 4,047,581 2,000,000
Determine Software, Inc.
12.0000%, 01/31/2006 1,632,222 Feb. 2003 1,623,361 1,623,361
Determine Software, Inc., Series C Warrants (g) 2,229,955 Feb. 2003 - -
Integral Development Corporation (h)
10.0000%, 12/31/2005 3,226,386 Dec. 2002 3,210,149 3,226,386
-------------- -------------
TOTAL TECHNOLOGY INVESTMENTS 8,881,091 6,849,747
-------------- -------------
TOTAL DEBT INSTRUMENTS 23,879,233 21,847,889
-------------- -------------
SUBORDINATED NOTES-0.00% (a, b, g)
TECHNOLOGY INVESTMENTS - 0.00%
DataPlay, Inc. (e)
6.0000%, 05/10/2005 2,000,000 May 2002 2,000,000 -
DataPlay, Inc. (e)
6.0000%, 06/17/2005 500,000 June 2002 500,000 -
DataPlay, Inc. (e)
6.0000%, 09/24/2005 200,000 Sept. 2002 200,000 -
DataPlay, Inc. (e)
6.0000%, 08/16/2005 200,000 Aug. 2002 200,000 -
DataPlay, Inc. (e)
6.0000%, 08/26/2005 400,000 Aug. 2002 400,000 -
DataPlay, Inc. (e)
6.0000%, 09/03/2005 200,000 Sept. 2002 200,000 -
DataPlay, Inc. (e)
6.0000%, 06/27/2005 1,000,000 June 2002 1,000,000 -
-------------- -------------
TOTAL SUBORDINATED NOTES 4,500,000 -
-------------- -------------
The accompanying notes are an integral part of these consolidated financial statements.
- 8 -
MVC CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
JULY 31, 2004
(UNAUDITED)
Date of
Initial
Description Shares/Principal Investment Cost Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES-50.34% (b)
U.S. GOVERNMENT & AGENCY SECURITIES-50.34% (b)
U.S. Treasury Bill
0.9400%, 08/05/2004 3,881,000 May 2004 $ 3,880,612 $ 3,880,612
U.S. Treasury Bill
0.8800%, 08/12/2004 6,014,000 May 2004 6,012,309 6,012,309
U.S. Treasury Bill
0.9000%, 08/19/2004 2,599,000 May 2004 2,597,830 2,597,830
U.S. Treasury Bill
0.9600%, 08/26/2004 550,000 May 2004 549,637 549,637
U.S. Treasury Bill
1.1000%, 09/23/2004 8,900,000 June 2004 8,885,587 8,885,587
U.S. Treasury Bill
1.0500%, 09/30/2004 12,848,000 July 2004 12,823,375 12,823,375
U.S. Treasury Bill
1.1400%, 10/07/2004 3,300,000 July 2004 3,292,999 3,292,999
U.S. Treasury Bill
1.0000%, 10/14/2004 250,000 July 2004 249,383 249,383
U.S. Treasury Bill
0.9700%, 10/21/2004 4,706,000 July 2004 4,693,294 4,693,294
U.S. Treasury Bill
1.3100%, 10/28/2004 14,236,000 July 2004 14,190,413 14,190,413
-------------- -------------
TOTAL U.S. GOVERNMENT & AGENCY SECURITIES 57,175,439 57,175,439
-------------- -------------
TOTAL SHORT-TERM SECURITIES 57,175,439 57,175,439
-------------- -------------
CASH AND CASH EQUIVALENTS - 1.10% (b)
MONEY MARKET FUNDS - 1.10% (b)
First American Prime Obligations Fund - Class A 1,242,663 July 2004 1,242,663 1,242,663
-------------- -------------
TOTAL CASH AND CASH EQUIVALENTS 1,242,663 1,242,663
-------------- -------------
TOTAL INVESTMENTS - 100.17% (b) $ 206,063,244 $113,759,992
============== =============
The accompanying notes are an integral part of these consolidated financial statements.
- 9 -
MVC CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS (CONTINUED)
JULY 31, 2004
(UNAUDITED)
(a) These securities are restricted from public sale without prior registration
under the Securities Act of 1933. The Fund negotiates certain aspects of the
method and timing of the disposition of these investments, including
registration rights and related costs.
(b) Percentages are based on net assets of $113,568,354 as of July 31, 2004.
(c) As defined in the Investment Company Act of 1940, at July 31, 2004, the Fund
was considered to have a controlling interest in Baltic Motors Corporation,
Vendio Services, Inc., and Vestal Manufacturing Enterprises, Inc.
(d) All of the Fund's preferred and common stock and debt investments are issued
by eligible portfolio companies, as defined in the Investment Company Act of
1940, except Baltic Motors Corporation and SafeStone Technologies PLC. The Fund
makes available significant managerial assistance to all of the portfolio
companies in which it has invested.
(e) Company assets purchased out of bankruptcy - still awaiting confirmation of
conversion rights on DataPlay, Inc. subordinated notes.
(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 $32,184,001): companies in which the
Fund owns at least 5% of the voting securities.
- - Denotes zero cost/fair value.
The accompanying notes are an integral part
of these consolidated financial statements.
- 10 -
MVC Capital, Inc. (the "Fund")
Notes to Consolidated Financial Statements
July 31, 2004
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and footnotes required by generally accepted
accounting principles for complete consolidated financial statements. Certain
amounts have been reclassified to adjust to current periods presentations. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. These
statements should be read in conjunction with the financial statements and notes
thereto included in the Fund's Annual Report on Form 10-K for the year ended
October 31, 2003, as filed with the United States Securities and Exchange
Commission (the "SEC") on January 29, 2004 (File No. 814-00201).
2. CONSOLIDATION
On July 16, 2004, the Fund formed a wholly owned subsidiary MVC Financial
Services, Inc. ("MVCFS"). MVCFS is incorporated in Delaware and its principal
purpose is to provide advisory, administrative and other services to the Fund
and the Fund's portfolio companies. Under regulations governing the content of
the Fund's financial statements, the Fund is generally precluded from
consolidating any entity other than another investment company; however, an
exception to these regulations requires the Fund to consolidate MVCFS since it
is a wholly owned operating subsidiary. The Fund does not hold MVCFS for
investment purposes and does not intend to sell MVCFS. All intercompany accounts
have been eliminated in consolidation.
3. CONCENTRATION OF MARKET RISK
Financial instruments that subjected the Fund to concentrations of market
risk consisted principally of preferred stocks, subordinated notes, and debt
instruments, which represent approximately 48.73% of the Fund's net assets. As
discussed in Note 4, investments consist of securities in companies with no
readily determinable market values and as such are valued in accordance with the
Fund's fair value policies and procedures. The Fund's investment strategy
represents a high degree of business and financial risk due to the fact that the
investments (other than cash equivalents) are generally illiquid and include
entities with little operating history or entities that possess operations in
new or developing industries. These investments, should they become publicly
traded, would generally be (i) subject to restrictions on resale, if they were
acquired from the issuer in private placement transactions; and (ii) susceptible
to market risk. 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.
4. PORTFOLIO INVESTMENTS
During the nine months ended July 31, 2004, the Fund made five new
investments, totaling $30.26 million. The investments were made in Vestal
Manufacturing Enterprises, Inc., Octagon Credit Investors LLC, Baltic Motors
Corporation, Dakota Growers Pasta Company, Inc. and Impact Confections, Inc. The
amounts invested were $1,450,000, $5,610,000, $10,500,000, $5,000,000, and
$7,700,000 respectively. No additional investments were made in existing
portfolio companies. The Fund had a return of capital from PTS Messaging, Inc.
("PTS Messaging") with proceeds totaling approximately $102,138 from the initial
and final disbursement of assets and a realized loss totaling approximately
- 11 -
$11.6 million. As of July 31, 2004 the Fund no longer held an investment in PTS
Messaging. The market value of PTS Messaging was previously written down to
zero. The Fund also realized a loss on Ishoni Networks, Inc. ("Ishoni") of
approximately $10.0 million. The Fund received no proceeds from the dissolution
of this company and the investment has been removed from the Fund's portfolio.
The market value of Ishoni was previously written down to zero. There was one
gain of $39,630 representing proceeds received from the cashless exercise of the
Fund's warrants of Synhrgy HR Technologies, Inc. ("Synhrgy") in conjunction with
the early repayment by Synhrgy of the $4.9 million remaining balance of the
Fund's credit facility. The Fund also began to receive the monthly principal
repayments on the credit facilities of Integral Development Corporation
("Integral"), Arcot Systems, Inc. ("Arcot"), and Determine Software, Inc.
("Determine"). Each made payments according to its respective credit facility
agreement totaling the following amounts: Arcot $981,946, Determine, $392,778
and Integral, $1,262,502.
For the nine months ended July 31, 2004, the Valuation Committee of the
Board of Directors ("Valuation Committee") increased the fair value of the
Fund's investments in 0-In Design Automation, Inc. ("0-In") by $5 million,
Sygate Technologies, Inc. ("Sygate") by $1.5 million, BlueStar Solutions by $1.5
million, Vendio by $634,000 and Integral Development Corp. by $989,000 and wrote
down the fair value of the Fund's investments in Actelis Networks, Inc., by
$1,000,000, CBCA, Inc. by $500,000, and Sonexis, Inc. by $500,000.
At July 31, 2004, the fair value of all portfolio investments, exclusive of
short-term securities, was $55.34 million with a cost of $143.15 million and 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.
5. COMMITMENTS AND CONTINGENCIES
The Fund rents office space at 287 Bowman Avenue, 3rd Floor, Purchase, New
York 10577, under a lease which is scheduled to expire on November 30, 2005.
Future payments under this lease total $71,025, with minimum payments of $14,343
from August 1, 2004 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 Michael Tokarz, the
Fund's Chairman, Portfolio Manager, and Director.
The Fund also extended a $5,000,000 senior secured credit facility to
Octagon Credit Investors, LLC ("Octagon"). This credit facility expires on May
7, 2009 and bears interest at LIBOR plus 4%. Octagon has not yet drawn down on
this facility.
6. CERTAIN REPURCHASES OF EQUITY SECURITIES BY THE ISSUER
During the nine months ended July 31, 2004, the Fund conducted 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 in
January 2004, 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. Repurchased shares are included in treasury stock on the Balance
Sheet. Since completion of the tender offer, the Fund has 12,293,042 shares of
common stock outstanding (excluding those held in treasury). The anti-dilutive
effect of the tender offer totaled $1,659,610 or approximately $0.13 per share
for all remaining shares after the tender offer.
- 12 -
7. MANAGEMENT
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; or (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 January 12, 2004, Frances Spark was appointed Interim Chief Financial
Officer and Jackie Shapiro was appointed Secretary to the Fund.
On March 29, 2004 at the Annual Shareholder meeting, the stockholders
approved the election of Emilio Dominianni, Gerald Hellerman, Robert C. Knapp,
Michael Tokarz, and Robert S. Everett to serve as members of the Board of
Directors of the Fund and adopted an amendment to the Fund's Certificate of
Incorporation authorizing the changing of the name of the Fund from "meVC Draper
Fisher Jurvetson Fund I, Inc." to "MVC Capital, Inc."
On July 7, 2004 the Fund's name change from "meVC Draper Fisher Jurvetson
Fund I, Inc." to "MVC Capital, Inc." became effective.
On July 16, 2004 the Fund commenced operations of MVCFS.
8. RECOVERY OF EXPENSES
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 bought-out its lease directly from the property manager, for an amount
equal to $232,835. As a result, the Fund recovered approximately $250,000 of the
remaining reserve established at October 31, 2003. Without the recovery of the
reserve, the gross facilities expense for the nine months ending July 31, 2004
would have been approximately $258,250.
On July 13, 2004, the Fund received $245,213 from the settlement of the
case Millenco L.P. v. meVC Advisers, Inc. (See Part II, Item I Legal
Proceedings.) The cash received was the reimbursement of management fees and
such cash was used to offset current year other expenses resulting in a balance
of $182,838 at July 31, 2004. Without this recovery, the gross other expenses
for the nine months ended July 31, 2004 would have been $428,051.
9. TAX MATTERS
RETURN OF CAPITAL STATEMENT OF POSITION (ROCSOP) ADJUSTMENT: During the
nine months ended July 31, 2004, the Fund recorded a reclassification for
permanent book to tax differences during the year ended October 31, 2003. The
differences totaling $11,613,512 were primarily due to net operating losses,
which for tax purposes cannot be used to offset future taxable income, under
Subchapter M of the Internal Revenue Code. The net operating loss 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.
- 13 -
On October 31, 2003, the Fund has 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 need not be distributed.
10. SEGMENT DATA
The Fund's reportable segments are its investing operations as a business
development company, MVC Capital, Inc. ("MVC"), and the financial advisory
operations of its wholly owned subsidiary, MVC Financial Services, Inc.
("MVCFS").
The following table presents segment data for the nine months ended July
31, 2004:
- ---------------------------------------- ----------------------- --------------------- -----------------------
MVC MVCFS Consolidated
- ---------------------------------------- ----------------------- --------------------- -----------------------
Interest and dividend income 1,876,852 - 1,876,852
- ---------------------------------------- ----------------------- --------------------- -----------------------
Fee income 265,729 375,000 640,729
- ---------------------------------------- ----------------------- --------------------- -----------------------
Other income 5,060 - 5,060
- ---------------------------------------- ----------------------- --------------------- -----------------------
Total operating income 2,147,641 375,000 2,522,641
- ---------------------------------------- ----------------------- --------------------- -----------------------
- ---------------------------------------- ----------------------- --------------------- -----------------------
Total operating expenses 3,134,899 - 3,134,889
- ---------------------------------------- ----------------------- --------------------- -----------------------
- ---------------------------------------- ----------------------- --------------------- -----------------------
Net operating income (loss) (987,258) 375,000 (612,258)
- ---------------------------------------- ----------------------- --------------------- -----------------------
Net realized loss on investments (21,397,019) - (21,397,019)
- ---------------------------------------- ----------------------- --------------------- -----------------------
Net change in unrealized appreciation
on investments 30,140,653 - 30,140,653
- ---------------------------------------- ----------------------- --------------------- -----------------------
Net increase in net assets resulting
from operations 7,756,376 375,000 8,131,376
- ---------------------------------------- ----------------------- --------------------- -----------------------
11. SUBSEQUENT EVENTS
Effective August 1, 2004, the Fund granted Determine Software Inc.
("Determine") a six month moratorium with regards to the payment of required
principal installments. The Fund agreed that for the period commencing August 1,
2004 through and including January 1, 2005, Determine shall not be required to
make scheduled payments of principal, but must continue to make payments of
interest.
On August 5, 2004, the Fund made an investment in Timberland Machines &
Irrigation, Inc. ("Timberland"). The Fund has provided Timberland with a
$6,000,000 Senior Subordinated Note and $4,500,000 in equity financing. This
financing is being used in conjunction with Timberland's purchase of the assets
of The Sprinkler House and Timberland Machines divisions of Turf Products
Corporation. The Senior Subordinated Note has a maturity date of August 5, 2009
and bears interest of 17%. The Fund also received warrants to purchase an
additional 150 shares of Common Stock at a price of $10,000 per share. Michael
Tokarz, Chairman of the Fund, and Puneet Sanan, an employee of the Fund, now
serve as directors of Timberland.
- 14 -
Timberland Machines has a floor plan financing program administered by
Transamerica Commercial Finance Corporation. As is typical in this industry,
under the terms of the dealer financing arrangement, Timberland guarantees the
repurchase of product from Transamerica, if a dealer defaults on payment and the
underlying assets are repossessed. The Fund has agreed to be a co-guarantor of
this repurchase commitment, but its maximum potential exposure as a result of
the guarantee is contractually limited to $0.5 million.
On August 26, 2004, Affiliated Computer Services, Inc. ("ACS") acquired the
Fund's portfolio company BlueStar Solutions, Inc. ("BlueStar") in a cash
transaction. The Fund received approximately $4.5 million for its investment in
BlueStar. The cash received includes contingent payments, to be held in escrow
that may be received in late 2005 up to $459,000. The carrying value of the
BlueStar investment was $3.0 million. The Fund realized a loss of approximately
$8.9 million, which was offset by a decrease in unrealized loss by the same
amount. The effect of the transaction on the Fund was an increase in assets by
$1.1 million. After the sale, the Fund no longer held any investment in
BlueStar.
On August 30, 2004, the Fund entered into a transaction pursuant to which
it received 602,131 Series A-1 preferred shares of DPHI, Inc. which purchased
the assets of DataPlay, Inc. out of bankruptcy in late 2003. The Fund's legal
fees in connection with the transaction were approximately $20,000.
On September 1, 2004, Mentor Graphics Corp. ("Mentor") acquired the Fund's
portfolio company 0-In Design Automation, Inc. ("0-In"). The Fund received
685,679 common shares of Mentor stock for its investment in 0-In. Of these
shares approximately 82,293 will be held in escrow for a one year period. The
603,386 shares received at the time of the exchange had a market value of
approximately $6.6 million. The Fund's carrying value of the 0-In investment was
$6.0 million. The effect of the transaction on the Fund was an increase in
assets and unrealized gain of approximately $0.6 million. After the exchange,
the Fund no longer held any investment in 0-In.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Fund and
its investment portfolio companies. Words such as MAY, WILL, EXPECT, BELIEVE,
ANTICIPATE, INTEND, COULD, ESTIMATE, MIGHT and CONTINUE, and the negative or
other variations thereof or comparable terminology, are intended to identify
forward-looking statements. Forward-looking statements are included in this
report pursuant to the "Safe Harbor" provision of the Private Securities
Litigation Reform Act of 1995. Such statements are predictions only, and the
actual events or results may differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those relating to investment
capital demand, pricing, market acceptance, the effect of economic conditions,
litigation and the effect of regulatory proceedings, competitive forces, the
results of financing and investing efforts, the ability to complete transactions
and other risks identified below or in the Fund's filings with the Commission.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Fund undertakes no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events. The following analysis of the financial condition and
results of operations of the Fund should be read in conjunction with the
Consolidated Financial Statements, the Notes thereto and the other financial
information included elsewhere in this report.
- 15 -
SELECTED FINANCIAL DATA
The following table sets forth, for the periods indicated, selected
financial data:
- ---------------------------------------------------------------- -------------------------- -------------------------
Statement of Operations data: NINE MONTHS ENDED NINE MONTHS ENDED
JULY 31, 2004 JULY 31, 2003
- ---------------------------------------------------------------- -------------------------- -------------------------
Total investment income $2,522,641 $2,153,798
- ---------------------------------------------------------------- -------------------------- -------------------------
Total operating expenses 3,134,899 9,797,176
- ---------------------------------------------------------------- -------------------------- -------------------------
Net investment loss (612,258) (7,643,378)
- ---------------------------------------------------------------- -------------------------- -------------------------
Net realized loss on investments (21,397,019) (151,931)
- ---------------------------------------------------------------- -------------------------- -------------------------
Net unrealized gain (loss) on investments 30,140,653 (43,027,045)
- ---------------------------------------------------------------- -------------------------- -------------------------
Net increase (decrease) in assets resulting from operations $8,131,376 $(50,822,354)
- ---------------------------------------------------------------- -------------------------- -------------------------
- ---------------------------------------------------------------- -------------------------- -------------------------
BALANCE SHEET DATA: JULY 31, 2004 OCTOBER 31, 2003
- ---------------------------------------------------------------- -------------------------- -------------------------
Total assets $114,425,935 $137,880,292
- ---------------------------------------------------------------- -------------------------- -------------------------
Total liabilities 857,581 872,130
- ---------------------------------------------------------------- -------------------------- -------------------------
Total Shareholders Equity $113,568,354 $137,008,162
- ---------------------------------------------------------------- -------------------------- -------------------------
Net asset value per share $9.24 $8.48
- ---------------------------------------------------------------- -------------------------- -------------------------
OVERVIEW
The Fund is a non-diversified investment company that is regulated as a
business development company under the Investment Company Act. The Fund's
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 smaller and middle market companies.
Historically, the Fund's investing activities have focused primarily on
private equity securities. Generally, private equity investments are structured
as convertible preferred stock which do not pay dividends. Consequently, current
income has not been a significant part of the portfolio. Typically, a cash
return on the investment is not received until a liquidity event, i.e. such as a
public offering or merger, occurs. However, as the Fund endeavors to implement
its amended investment objective and strategy, it is expected that many
investments could include a debt component that offers current income potential.
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 limits 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.
On November 6, 2003, Michael Tokarz assumed his new position as Portfolio
Manager and is seeking to implement the new strategy of maximizing total return
from capital appreciation and/or income through investments primarily in senior
and subordinated loans, venture capital, mezzanine and preferred instruments or
other private equity instruments. The Fund has completed five new investments as
of the end of its most recently completed fiscal quarter.
- 16 -
INVESTMENT INCOME
FOR THE NINE MONTHS ENDED JULY 31, 2004 AND 2003. Interest and other income
for the nine months ended July 31, 2004 and 2003 was $2,522,641 and $2,153,798,
respectively, an increase of approximately $369,000. The increase in interest
and fee income during the nine months ended July 31, 2004 was the result of a
combination of factors: the Fund's investment in new portfolio companies paying
different rates of interest and the Fund's receipt of closing and monitoring
fees from certain portfolio companies by the Fund and MVC Financial Services,
Inc. a wholly owned subsidiary of the Fund.
OPERATING EXPENSES
FOR THE NINE MONTHS ENDED JULY 31, 2004 AND 2003. Operating expenses for
the nine months ended July 31, 2004 and 2003 were $3.13 million and $9.80
million, respectively, a decrease of $6.67 million.
The significant components of operating expenses for the nine months ended
July 31, 2004 and the major factors contributing to the decrease over the nine
month period ended July 31, 2003 are outlined below.
During the nine month period ended July 31, 2003, Proxy and Litigation
expenses were $4 million. The expenses in 2003 were non-recurring and were
associated specifically with the costs of replacing the Board of Directors in
February 2003 and the repayment of legal expenses of the two major Fund
shareholders, Millenco, L.P. and Karpus Investment Management who obtained
judgment against the Fund in the Delaware Chancery Court.
Other significant components of operating expenses for the nine months
ended July 31, 2004 include insurance premium expenses of $773,454, salaries and
benefits of $1,053,579, legal fees of $565,817, facilities of $8,250 and other
expenses of $182,838.
In February 2004, the Fund renewed its Directors & Officers/Professional
Liability Insurance policies at an expense of approximately $719,000 which is
being amortized over the life of the policy. The prior policy premium was $1.4
million. During the nine months ended July 31, 2003, the Fund paid or accrued
$689,929 in insurance premium expense.
During the nine months ended July 31, 2004, the Fund paid or accrued
$1,053,579 in salaries and benefits. During the nine months ended July 31, 2003,
the Fund paid or accrued $2,236,987 in salaries and benefits. The reduced
expense for the nine months ended July 31, 2004 is reflective of the significant
reduction in the number of Fund employees as compared to the previous period.
During the nine months ended July, 2004, the Fund paid or accrued $565,817
in legal fees. During the nine months ended July 31, 2003, the Fund paid or
accrued $1,412,517 in legal fees. The reduced expense for the nine months ended
July 31, 2004 is reflective of a decreased need for legal counsel due to the
solidification of the Fund's intended direction by the current Management and
that the Fund was not involved in litigation during the current period.
During the nine months ended July 31, 2004, the Fund showed a balance of
$8,250 in facilities expenses. During the nine months ended July 31, 2003, the
Fund paid or accrued $565,969 in facilities expenses. 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. Under the terms
of the agreement, the Fund bought-out its lease directly from the property
manager, for an amount equal to $232,835. As a result, the Fund recovered
approximately $250,000 of the remaining reserve established at October 31, 2003.
Without the recovery of the reserve, the gross facilities expense for the nine
months ended July 31, 2004 was approximately $258,250.
- 17 -
During the nine months ended July 31, 2004, the Fund showed a balance of
$182,838 in other expenses. During the nine months ended July 31, 2003, the Fund
paid or accrued $77,561 in other expenses. On July 13, 2004, the Fund received
$245,213 from the settlement of the case Millenco L.P. v. meVC Advisers, Inc.
(See Part II, Item I Legal Proceedings.) The recovery of the management fee was
used to offset against current year other expenses. Without this recovery the
gross other expenses for the nine months ended July 31, 2004 would have been
approximately $428,051. The increase in other expenses was caused by the
retention of a firm to perform an independent valuation of the Fund's securities
as a part of the Fund's year-end audit and increased professional fees related
to deal expenses. The expenses related to professional fees were not incurred in
the prior period because the Fund was not actively seeking new portfolio
investments.
REALIZED GAIN AND LOSS ON PORTFOLIO SECURITIES
FOR THE NINE MONTHS ENDED JULY 31, 2004 AND 2003. Net realized losses for
the nine months ended July 31, 2004 and 2003 were $21.4 million and $151,931,
respectively, an increased loss of $21.2 million.
Realized losses for the nine months ended July 31, 2004 resulted from the
sale of PTS Messaging and Ishoni Networks. These sales resulted in net losses of
$11.5 million and $10.0 million, respectively. These losses were previously
included with unrealized losses.
Realized losses for the nine months ended July 31, 2003 resulted mainly
from the disbursement of assets from EXP Systems, Inc., a former portfolio
company, to its preferred shareholders.
UNREALIZED APPRECIATION AND DEPRECIATION OF PORTFOLIO SECURITIES
FOR THE NINE MONTHS ENDED JULY 31, 2004 AND 2003. Net decrease in
unrealized depreciation for the nine months ended July 31, 2004 was $30.14
million and net increase in unrealized depreciation for the nine months ended
July 31, 2003 was $43.02 million.
Such net decrease in unrealized depreciation on investment transactions for
the nine months ended July 31, 2004 resulted mainly from the $21.5 million
reclassification from unrealized depreciation to realized loss caused by the
disbursement of assets from PTS Messaging and Ishoni Networks. Such net decrease
also resulted from the determinations of the Valuation Committee to increase the
fair value of the Fund's investments in Sygate, 0-In, BlueStar, Vendio and
Integral by $9.6 million and to decrease the fair value of the Fund's
investments in Actelis, CBCA, and Sonexis by $2.0 million. For a further
discussion on the portfolio companies, please refer to "Portfolio Investments"
below.
The net increase in unrealized depreciation on investment transactions for
the nine months ended July 31, 2003 resulted mainly from the Valuation
Committee's decision to decrease the fair value of the Fund's investments in
Actelis Networks, Inc., Arcot, BlueStar Solutions, Inc., BS Management, CBCA,
Inc., Endymion Systems, Inc., FOLIOFN, Inc., Ishoni Networks, Inc., Lumeta
Corporation, Pagoo, Inc., Phosistor Technologies, Inc., ProcessClaims, Inc.
DataPlay, Inc., SafeStone Technologies PLC, Sonexis, Inc., Vendio Services,
Inc., Yaga, Inc., and 0-In Design Automation, Inc.
For the nine months ended July 31, 2004, the accumulated deficit decreased
$8.1 million and for the nine months ended July 31, 2003, the accumulated
deficit increased $50.8 million. The Fund's total accumulated deficit for the
nine months ended July 31, 2004 and 2003 was $152.0 million and $167.1 million,
respectively. The decrease in accumulated deficit for the nine months ended July
31, 2004 is due primarily to the Valuation Committee's net increase of the fair
valuations of certain portfolio company investments by $7.6 million offset by a
net investment loss of $612,258. The decrease is also due to the
reclassification of previously repurchased treasury shares.
- 18 -
PORTFOLIO INVESTMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2004 AND THE YEAR ENDED OCTOBER 31,
2003. The cost of equity investments held by the Fund at July 31, 2004 and at
October 31, 2003 was $119.3 million and $125.6 million, respectively, a decrease
of $6.3 million. The aggregate fair value of equity investments at July 31, 2004
and at October 31, 2003 was $33.5 million and $11.6 million, respectively, an
increase of $21.9 million. The increase in the fair value of the equity
investments held by the Fund resulted mainly from the purchase of equity
positions in new portfolio companies and the Valuation Committee's increase of
the fair valuations of certain portfolio company equity investments. The cost of
debt instruments held by the Fund at July 31, 2004 and at October 31, 2003 was
$23.9 million and $16.4 million, respectively, an increase of $7.5 million. The
aggregate fair value of debt instruments at July 31, 2004 and at October 31,
2003 was $21.8 million and $12.5 million, respectively, an increase of $9.3
million. The increase in the cost and fair value of the debt investments
resulted mainly from the debt investments made in new portfolio companies during
the period. The cost of subordinated notes held by the Fund at July 31, 2004 and
at October 31, 2003 was $4.5 million and $4.5 million, respectively. The
aggregate fair value of subordinated notes at July 31, 2004 and at October 31,
2003 was $0 and $0, respectively. The cost and aggregated fair value of
short-term securities held by the Fund at July 31, 2004 and at October 31, 2003
was $57.2 million and $113.2 million, respectively, a decrease of $56.0 million.
The decrease in short-term investments resulted mainly from the return of $31.6
million in cash to the shareholders in January 2004 resulting from the
completion of the Fund's tender offer and investments made in new portfolio
companies. The cost and aggregate fair value of cash and cash equivalents held
by the Fund at July 31, 2004 and at October 31, 2003 was $1.2 million and $7
thousand, respectively, an increase of approximately $1.1 million. This change
in position was also impacted by the acquisition of highly liquid securities
with maturities of ninety days or less. Management continues to evaluate
opportunities for its portfolio companies to realize value for the Fund and its
stockholders.
During the nine months ended July 31, 2004, 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, 2003 and July 31, 2004, the Fund's investment in Actelis
consisted of 1,506,025 shares of Series C Preferred Stock at a cost of $5.0
million. On April 29, 2004 the Valuation Committee wrote down the value of
Actelis by $1.0 million to $0.0. The investment has been assigned a fair value
of $0.0.
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.
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 was assigned a fair value of $2.0 million and the warrants were
assigned a fair value of $0.0.
During the nine months ended July 31, 2004, Arcot made scheduled principal
repayments totaling $981,946.
At July 31, 2004, the Fund's investment in Arcot consisted of an
outstanding balance on the loan of $4.07 million with a cost of $4.05 million.
The investment has been assigned a fair value of $2.0 million and the warrants
have been assigned a fair value of $0.0.
- 19 -
BALTIC MOTORS CORPORATION
Baltic Motors Corporation ("Baltic"), Farmington Hills, Michigan, is a U.S.
company focused on the importation and sale of Ford and Land Rover vehicles and
parts throughout Latvia, a member of the European Union.
On June 25, 2004, the Fund made an investment in Baltic consisting of
54,947.37 shares of Common Stock at $109.20 per share for $6.0 million. In
conjunction with this investment, the Fund made a mezzanine loan of $4.5 million
to Baltic in the form of a Senior Subordinated Note. The loan has a maturity
date of June 25, 2007 and earns interest at 10% per annum.
At July 31, 2004, the Fund's investment in Baltic had a cost and fair value
of $10.5 million. Michael Tokarz, Chairman of the Fund, and Frances Spark and
Bruce Shewmaker, officers of the Fund, serve as directors for Baltic.
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, 2003 and July 31, 2004, 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. At October 31, 2003, the investments had 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.
On April 29, 2004 and July 29, 2004 the Valuation Committee wrote up the
value of the BlueStar investment by $750,000 for a total write up of $1.5
million. The increase of the fair value was based upon better than anticipated
financial results. The investments have been assigned a combined fair value of
$3.0 million.
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, 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
was assigned a fair value of $500,000, at approximately $0.09 per share.
On November 14, 2003, CBCA raised additional capital by re-capitalizing the
company. The Fund's 5,729,562 shares in Series E Preferred Stock were converted
to 753,350 shares of Common Stock. On April 29, 2004 the Valuation Committee
wrote down the value of CBCA by $250,000. On July 29, 2004, the Valuation
Committee wrote down the value of CBCA by another $250,000. The investment has
been assigned a fair value of $0.0.
DAKOTA GROWERS PASTA COMPANY, INC.
Dakota Growers Pasta Company, Inc. ("Dakota"), Carrington, North Dakota, is
the third largest manufacturer of dry pasta in North America and a market leader
in private label sales. Dakota and its partners in DNA Dreamfields Company, LLC
recently introduced a new process that reduces the number of digestible
carbohydrates found in traditional pasta products.
On July 30, 2004, the Fund made an investment in Dakota consisting of
909,091 shares of Common Stock at $5.49 per share for $5.0 million.
- 20 -
At July 31, 2004, the Fund's investment in Dakota had a cost and fair value
of $5.0 million. Michael Tokarz, Chairman of the Fund, serves as a director of
Dakota.
DATAPLAY, INC.
DataPlay, Inc. ("DataPlay"), Boulder, Colorado, developed new ways of
enabling consumers to record and play digital content.
At October 31, 2003 and July 31, 2004, 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.
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 was assigned a fair value of $2.0
million and the warrants were assigned a fair value of $0.0.
During the nine months ended July 31, 2004, Determine made scheduled
principal repayments totaling $392,778.
At July 31, 2004, the Fund's investment in Determine consisted of a loan
which had an outstanding balance of $1.63 million with a cost of $1.62 million.
The investment has been assigned a fair value of $1.62 million and the warrants
have been assigned a fair value of $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, 2003 and July 31, 2004, 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, 2003 and July 31, 2004, 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.
Bruce Shewmaker, an officer of the Fund, serves as a Director of FolioFN.
IMPACT CONFECTIONS, INC.
Impact Confections, Inc. ("Impact"), Roswell, New Mexico founded in 1981,
is a manufacturer and distributor of children's candies.
- 21 -
On July, 30, 2004, the Fund made an investment in Impact consisting of
252.472 shares of Common Stock at $10,694.26 per share for $2.7 million. In
conjunction with this investment, the Fund made a loan of $5.0 million to Impact
in the form of a Senior Subordinated Note. The loan has a maturity of July 30,
2011 and earns interest at 17% per annum.
At July 31, 2004, the Fund's investment in Impact had a cost and a combined
fair value of $7.7 million.
Puneet Sanan and Shivani Khurana, employees of the Fund, serve as directors
of Impact.
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.
At October 31, 2003, the Fund's investment in Integral consisted of an
outstanding balance on the loan of $4.49 million with a cost of $4.46 million.
The investment was assigned a fair value of $3.5 million and the warrants were
assigned a fair value of $0.0.
During the nine months ended July 31, 2004, Integral made scheduled
principal repayments totaling $1,262,502.
On April 29, 2004 the Valuation Committee wrote up the fair value of the
Integral loan by $989,000 to $3.647 million.
At July 31, 2004, the Fund's investment in Integral consisted of an
outstanding balance on the loan of $3.23 million with a cost of $3.21 million.
The investment has been assigned a fair value of $3.23 million.
ISHONI NETWORKS, INC.
Ishoni Networks, Inc. ("Ishoni"), Santa Clara, California, developed
technology that allowed 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, 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
was assigned a fair value of $0.0.
During the nine months ended July 31, 2004, Ishoni filed for bankruptcy
under Chapter 7 of the U.S. Bankruptcy Code. The case was closed on April 13,
2004 as a "No Asset Case".
At July 31, 2004, the Fund no longer held any investment in Ishoni. As a
result, a realized loss of approximately $10.0 million was recognized which was
offset by a reduction in unrealized loss by the same $10.0 million. Therefore,
the net effect of the removal of the investment was zero.
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.
- 22 -
At October 31, 2003 and July 31, 2004, 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.
MAINSTREAM DATA, INC.
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, 2003 and July 31, 2004, 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 $0.0.
OCTAGON CREDIT INVESTORS, LLC
On May 7, 2004, the Fund made an investment in Octagon Credit Investors,
LLC ("Octagon"), a New York-based manager of leveraged loans and high yield
bonds.
The first closing consisted of a $5,000,000 Senior Subordinated Loan,
bearing interest at 15% over a seven year term. The note has a $5,000,000
principal face amount and was issued at a discounted cost basis of $4,450,000.
The mezzanine loan included detachable warrants with a cost basis of $550,000.
The Fund also entered into a $5,000,000 senior secured credit facility with
Octagon. This credit facility expires on May 7, 2009 and bears interest at LIBOR
plus 4%. Octagon has not yet drawn down on this facility.
The second closing occurred on June 1, 2004, in which the Fund closed a
$560,000 equity investment in Octagon which provides the Fund a membership
interest in the company.
At July 31, 2004, the Fund's mezzanine loan had an outstanding balance of
$5.04 million with a cost of $4.50 million. The mezzanine loan was assigned a
fair value of $4.50 million. The increase in the outstanding balance, cost and
fair value of the loan is due to the accretion of the market discount and the
capitalization of "paid in kind" interest. The equity investment in Octagon had
been assigned a fair value of $560,000.
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, 2003 and July 31, 2004, 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.
Phosistor ceased operations in 2003.
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.
- 23 -
At October 31, 2003 and July 31, 2004, 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 has been 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 has been 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 has been 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, 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 was assigned a fair value of $0.0.
During the nine months ended July 31, 2004, PTS Messaging initiated a
partial and final disbursement of assets with proceeds totaling approximately
$102,138. As a result, a realized loss of approximately $11.46 million was
recognized which was offset by a reduction in unrealized loss by the same $11.46
million. Therefore, the net effect of the removal of the investment was zero.
At July 31, 2004, the Fund no longer held any investment in 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, 2003 and July 31, 2004, 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 investment has 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, 2003 and July 31, 2004, the Fund's investment in ShopEaze
consisted of 2,097,902 shares of Series B Preferred Stock with a cost of $6.0
million. The investment has been assigned a fair value of $0.0. ShopEaze ceased
operations during 2002.
- 24 -
SONEXIS, INC.
Sonexis, Inc. ("Sonexis"), Tewksbury, 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, 2003 and July 31, 2004, the Fund's investment in Sonexis
consisted of 2,590,674 shares of Series C Preferred Stock with a cost of $10.0
million. On July 29, 2004 the Valuation Committee wrote down the value of
Sonexis by $500,000. The investment has been assigned a fair value of $0.0.
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, 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. The investment
was assigned a fair value of $4.0 million, or approximately $0.41 per share.
During the nine months ended July 31, 2004, the Valuation Committee
determined to increase the carrying value of the Fund's investments in the
Series D Preferred Stock of Sygate by approximately $1.5 million to $5.5
million. The increase of the fair value was based upon the company's improved
financial condition.
At July 31, 2004, the Fund's investment in Sygate consisted of 9,756,098
shares of Series D Preferred Stock with a cost of $4.0 million. The investment
has been assigned a fair value of $5.5 million, or approximately $0.56 per
share.
SYNHRGY HR TECHNOLOGIES, INC.
Synhrgy HR Technologies, Inc. ("Synhrgy"), Houston, Texas, provides human
resources technology and outsourcing services to Fortune 1000 companies.
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 was assigned a fair value of $4.96 million and the warrants were
assigned a fair value of $0.0.
During the three months ended January 31, 2004, 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. As of
July 31, 2004, the Fund no longer held an investment in Synhrgy.
VENDIO SERVICES, INC.
Vendio Services, Inc. ("Vendio"), 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, 2003, and July 31, 2004, 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. At October 31, 2003, the investments
had 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.
- 25 -
On April 29, 2004, the Valuation Committee wrote up the value of Vendio by
$634,000 to $1.134 million. At July 31, 2004, the investments have been assigned
a fair value of $1.134 million, $0.00 per share for the Common Stock and
approximately $0.176 per share for the Series A Preferred Stock.
Nino Marakovic, an employee of the Fund, serves as a director of Vendio.
VESTAL MANUFACTURING ENTERPRISES, INC.
Vestal Manufacturing Enterprises, Inc. ("Vestal"), Sweetwater, Tennessee,
is a market leader for steel fabricated products to brick and masonry segments
of the construction industry. It is believed to be the only U.S. company which
manufactures and sells both cast iron and fabricated steel specialty products
used in the construction of single-family homes.
On April 29, 2004, the Fund made an investment in Vestal consisting of
40,500 shares of Common Stock at $1.11 per share for $450,000. In conjunction
with this investment, the Fund made a loan of $1,000,000 to Vestal in the form
of a Senior Subordinated Promissory Note. The loan has a maturity date of April
29, 2011 and earns interest at 12% per annum.
At July 31, 2004, the Fund's investment in Vestal had a cost and fair value
of $1,450,000. Michael Tokarz, Chairman of the Fund, and Bruce Shewmaker, an
officer of the Fund, serve as directors of Vestal.
YAGA, INC.
Yaga, Inc. ("Yaga"), San Francisco, California, provides a hosted
application service provider (ASP) platform that addresses emerging revenue and
payment infrastructure needs of online businesses. Yaga's payment and accounting
application supports micropayments, aggregated billing and stored value accounts
while also managing royalty/affiliate accounting and split payments.
At October 31, 2003 and July 31, 2004, 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, 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 investment was
assigned a fair value of $1.0 million, or approximately $0.45 per share.
During the nine months ended July 31, 2004, the Valuation Committee
determined to increase the carrying value of the Fund's investments in the
Series E Preferred Stock of 0-In by $5.0 million to $6.0 million.
At July 31, 2004, 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 investment has
been assigned a fair value of $6.0 million, or approximately $2.68 per share.
Please see Note 11, Subsequent Events, for additional information on this
investment.
- 26 -
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2004, the Fund had $113.7 million of investments consisting of
investments in preferred and common stocks totaling $33.5 million, investments
in debt instruments totaling $21.8 million, investments in U.S. government
securities totaling $57.2 million and cash and cash equivalents totaling
approximately $1.2 million. The Fund considers all money market and other
temporary cash investments purchased with an original maturity of three months
or less to be cash equivalents. U.S. government securities and cash equivalents
are highly liquid. During the nine months ended July 31, 2004, the Fund made
five new investments, totaling $30.26 million. The investments were made in
Vestal Manufacturing Enterprises, Inc., Octagon Credit Investors LLC, Baltic
Motors Corporation, Dakota Growers Pasta Company, Inc. and Impact Confections,
Inc. The amounts invested were $1,450,000, $5,610,000, $10,500,000, $5,000,000,
and $7,700,000 respectively. No additional investments were made in existing
portfolio companies.
Current balance sheet resources are believed to be sufficient to finance
current commitments. The Fund also maintains a $5,000,000 senior secured credit
facility with Octagon Credit Investors, LLC ("Octagon"). This credit facility
has a term of up to five years and bears interest at LIBOR plus 4%. Octagon has
not yet drawn down on this facility.
During the nine months ended July 31, 2004, 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
Effective August 1, 2004, the Fund granted Determine Software Inc.
("Determine") a six month moratorium with regards to the payment of required
principal installments. The Fund agreed that for the period commencing August 1,
2004 through and including January 1, 2005, Determine shall not be required to
make scheduled payments of principal, but must continue to make payments of
interest.
On August 5, 2004, the Fund made an investment in Timberland Machines &
Irrigation, Inc. ("Timberland"). The Fund has provided Timberland with a
$6,000,000 Senior Subordinated Note and $4,500,000 in equity financing. This
financing is being used in conjunction with Timberland's purchase of the assets
of The Sprinkler House and Timberland Machines divisions of Turf Products
Corporation. The Senior Subordinated Note has a maturity date of August 5, 2009
and bears interest of 17%. The Fund also received warrants to purchase an
additional 150 shares of Common Stock at a price of $10,000 per share. Michael
Tokarz, Chairman of the Fund, and Puneet Sanan, an employee of the Fund, now
serve as directors of Timberland.
Timberland Machines has a floor plan financing program administered by
Transamerica Commercial Finance Corporation. As is typical in this industry,
under the terms of the dealer financing arrangement, Timberland guarantees the
repurchase of product from Transamerica, if a dealer defaults on payment and the
underlying assets are repossessed. The Fund has agreed to be a co-guarantor of
this repurchase commitment, but its maximum potential exposure as a result of
the guarantee is contractually limited to $0.5 million.
- 27 -
On August 26, 2004, Affiliated Computer Services, Inc. ("ACS") acquired the
Fund's portfolio company BlueStar Solutions, Inc. ("BlueStar") in a cash
transaction. The Fund received approximately $4.5 million for its investment in
BlueStar. The cash received includes contingent payments, to be held in escrow
that may be received in late 2005 up to $459,000. The carrying value of the
BlueStar investment was $3.0 million. The Fund realized a loss of approximately
$8.9 million, which was offset by a decrease in unrealized loss by the same
amount. The effect of the transaction on the Fund was an increase in assets by
$1.1 million. After the sale, the Fund no longer held any investment in
BlueStar.
On August 29, 2004, the Fund entered into a transaction pursuant to which
it received 602,131 Series A-1 preferred shares of DPHI, Inc. which purchased
the assets of DataPlay, Inc. out of bankruptcy in late 2003. The Fund's legal
fees in connection with the transaction were approximately $20,000.
On September 1, 2004, Mentor Graphics Corp. ("Mentor") acquired the Fund's
portfolio company 0-In Design Automation, Inc. ("0-In"). The Fund received
685,679 common shares of Mentor stock for its investment in 0-In. Of these
shares approximately 82,293 will be held in escrow for a one year period. The
603,386 shares received at the time of the exchange had a market value of
approximately $6.6 million. The Fund's carrying value of the 0-In investment was
$6.0 million. The effect of the transaction on the Fund was an increase in
assets and unrealized gain of approximately $0.6 million. After the exchange,
the Fund no longer held any investment in 0-In.
ITEM 3. 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 typically 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. 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.
EQUITY MARKET RISK. Generally the Fund has not invested in publicly traded
securities. However, if the Fund were to make such investments in the future,
the Fund will be subjected to equity market risk.
INVESTMENTS IN UNLISTED SECURITIES. The Fund typically 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.
- 28 -
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.
MEZZANINE, SENIOR LOANS AND SUBORDINATED LOANS. Mezzanine securities,
senior loans and subordinated loans are typically not rated by any rating
agency; we believe that if such investments were rated, they would be rated
below investment grade (rated lower than "Baa3" by Moody's or lower than "BBB-"
by Standard & Poor's). Indebtedness of below-investment-grade quality is
regarded as having predominantly speculative characteristics with respect to the
issuer's capacity to pay interest and repay principal. Our loans may result in a
high level of risk and volatility, including loss of principal. Portfolio
companies may be susceptible to economic downturns and may be unable to repay
our loans during these periods.
A portfolio company's failure to satisfy financial or operating covenants
imposed by us or other lenders could lead to defaults and, potentially,
termination of its loans and foreclosure on the assets securing such loans,
which could trigger cross-defaults under other agreements and jeopardize our
portfolio company's ability to meet its obligations under the debt securities
that we hold. We may incur expenses to the extent necessary to seek recovery
upon default or to negotiate new terms with a defaulting portfolio company. In
addition, if one or more of our portfolio companies were to go bankrupt, even
though we may have structured our investment as senior debt, depending on the
facts and circumstances, including the extent to which we actually provided
managerial assistance to that portfolio company, a bankruptcy court might
recharacterize our debt holding and subordinate all or a portion of our claim to
that of other creditors.
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 to
the Fund. The stock market has experienced volatility over the past several
periods which has particularly affected the securities of technology companies.
As a result, the Fund's performance may experience substantial volatility as a
result of its investments in growth stage companies. 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 going forward.
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, except for investments in short-term securities and cash
equivalents. The financial and other information regarding the issuers of these
securities that is available to the Fund may be more limited than the
information available in the case of issuers whose securities are publicly
traded. The Board and/or the 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
- 29 -
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
positively or negatively 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 Board and/or the 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 51.44% of the Fund's net assets at July 31, 2004. 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
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 approved by the 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.
- 30 -
ITEM 4. CONTROLS AND PROCEDURES
The Fund recognizes management's responsibility for establishing and
maintaining adequate internal controls over financial reporting for the Fund.
Within the 90 days prior to the filing date of this quarterly report on Form
10-Q, the Fund carried out an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures. This evaluation was carried
out under the supervision and with the participation of management, including
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.
- 31 -
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 20, 2002, Millenco LP ("Millenco"), a stockholder, filed a
complaint in the United States District Court for the District of Delaware on
behalf of the Fund against meVC Advisers, Inc. (the "Former Advisor"). The
complaint alleged that the fees received by the Former Advisor, beginning one
year prior to the filing of the complaint, were excessive, in violation of
Section 36(b) of the Investment Company Act. The case was settled for $370,000
from which the Company received net proceeds in July 2004 of $245,213 after
payment of legal fees and expenses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Exhibit
------------- ---------
31 Rule 13a-14(a) Certifications.
32 Section 1350 Certification.
Other required Exhibits are included in this Form 10-Q or have
been previously filed with the Securities and Exchange Commission
(the "SEC") in the Fund's Registration Statement on Form N-2
(Reg. No. 333-92287) or the Fund's Annual Report on Form 10-K for
the year ended October 31, 2003, as filed with the Securities and
Exchange Commission (the "SEC") on January 29, 2004 (File No.
814-00201).
- 32 -
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed by the
undersigned, thereunto duly authorized.
MVC CAPITAL, INC.
Date: 9/9/2004 /s/ Michael Tokarz
---------------------------------------
Michael Tokarz
In the capacity of the officer who
performs the functions of Principal
Executive Officer.
MVC CAPITAL, INC.
Date: 9/9/2004 /s/ Frances Spark
---------------------------------------
Frances Spark
In the capacity of the officer who
performs the functions of Principal
Financial Officer.
- 33 -
EXHIBIT 31
RULE 13A-14(A) CERTIFICATIONS
I, Michael Tokarz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
MVC Capital, Inc.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in
light of the circumstances under which such statements
were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) for the registrant and
have:
a) designed such disclosure controls and
procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this report is
being prepared; and
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation;
and
c) disclosed in this report any change in the
registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the
registrant's internal control over financing reporting;
and
- 34 -
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's Board of Directors (or persons performing
the equivalent functions):
a) all significant deficiencies and material
weaknesses in the design or operation of internal
control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to
record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that
involves management or other employees who have a
significant role in the registrant's internal control
over financial reporting.
Dated: 9/9/2004
/s/ Michael Tokarz
---------------------------------------
Michael Tokarz
In the capacity of the officer who
performs the functions of Principal
Executive Officer of MVC Capital, Inc.
- 35 -
I, Frances Spark, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
MVC Capital, Inc.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in
light of the circumstances under which such statements
were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) for the registrant and
have:
a) designed such disclosure controls and
procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this report is
being prepared; and
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation;
and
c) disclosed in this report any change in the
registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the
registrant's internal control over financing reporting;
and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's Board of Directors (or persons performing
the equivalent functions):
a) all significant deficiencies and material
weaknesses in the design or operation of internal
control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to
record, process, summarize and report financial
information; and
- 36 -
b) any fraud, whether or not material, that
involves management or other employees who have a
significant role in the registrant's internal control
over financial reporting.
Dated: 9/9/2004
/s/ Frances Spark
---------------------------------------
Frances Spark
In the capacity of the officer who
performs the functions of Principal
Financial Officer of MVC Capital, Inc.
- 37 -
EXHIBIT 32
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Michael Tokarz, in the capacity of the officer who performs the functions of
Principal Executive Officer of MVC Capital, Inc., a Delaware corporation (the
"Registrant"), certifies that:
1. The Registrant's quarterly report on Form 10-Q for the period ended July 31,
2004 (the "Form 10-Q") fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of the Registrant.
In the capacity of the officer who performs the functions of Principal Executive
Officer of MVC Capital, Inc.
/S/ MICHAEL TOKARZ
- -------------------------------
Michael Tokarz
Date: 9/9/2004
Frances Spark, in the capacity of the officer who performs the functions of
Principal Financial Officer, of MVC Capital, Inc., a Delaware corporation (the
"Registrant"), certifies that:
1. The Registrant's quarterly report on Form 10-Q for the period ended July 31,
2004 (the "Form 10-Q") fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of the Registrant.
In the capacity of the officer who performs the functions of Principal Financial
Officer of MVC Capital, Inc.
/S/ FRANCES SPARK
- --------------------------------
Frances Spark
Date: 9/9/2004