-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HfskeXxUDsrSF5mDJdZoQ15sDB1O66TozvNl9mzi80mUdmUeRMxGvvxvjLHQFFcy 5E2D1rpNNKsmHE+RgvN/Pw== 0000902664-04-000142.txt : 20040129 0000902664-04-000142.hdr.sgml : 20040129 20040129163710 ACCESSION NUMBER: 0000902664-04-000142 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20031031 FILED AS OF DATE: 20040129 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEVC DRAPER FISHER JURVETSON FUND I INC CENTRAL INDEX KEY: 0001099941 IRS NUMBER: 943346760 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 814-00201 FILM NUMBER: 04552918 BUSINESS ADDRESS: STREET 1: 3000 SAND HILL ROAD STREET 2: BUILDING 1, SUITE 155 CITY: MENLO PARK STATE: CA ZIP: 94025 BUSINESS PHONE: 6509267000 MAIL ADDRESS: STREET 1: 3000 SAND HILL ROAD STREET 2: BUILDING 1, SUITE 155 CITY: MENLO PARK STATE: CA ZIP: 94025 FORMER COMPANY: FORMER CONFORMED NAME: MEVC DRAPER FISHER JURVETSON FUND I INC DATE OF NAME CHANGE: 19991207 10-K 1 srz-draper10q.txt MEVC DRAPER FISHER 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended ___ October 31, 2003 ________________________________ or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________________ Commission file number _________ 000-28405 ____________________________________ MEVC DRAPER FISHER JURVETSON FUND INC. D/B/A MVC CAPITAL (Exact name of registrant as specified in its charter) DELAWARE 94-3346760 - ------------------------------ ------------------------- State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 287 BOWMAN AVENUE, PURCHASE, NEW YORK 10577 - --------------------------------------- ---------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (914) 251-1817 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered COMMON STOCK NEW YORK STOCK EXCHANGE - ------------------------- -------------------------------- - ------------------------ --------------------------------------- Securities registered pursuant to section 12(g) of the Act: None _______________________________________________________________________________ (Title of class) _______________________________________________________________________________ (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No ---- ---- Approximate aggregate market value of common stock held by non-affiliates of the registrant as of the last business day of the Fund's most recently completed fiscal second quarter: $118,935,432, computed on the basis of $7.92 per share, closing price of the common stock on the New York Stock Exchange (the "NYSE") on April 30, 2003. For purposes of calculating this amount only, all directors and executive officers of the registrant have been treated as affiliates. There were 12,293,042 shares of the registrant's common stock, $.01 par value, outstanding as of January 28, 2004. The net asset value per share at January 28, 2004 was $8.76. Document Incorporated by Reference: Proxy Statement for the Fund's Annual Meeting of Shareholders 2004, incorporated by reference in Part III, Item 10 meVC Draper Fisher Jurvetson Fund I, Inc. (A Delaware Corporation) Index
Part I Page Item 1. Business................................................................................ 1 Item 2. Properties.............................................................................. 12 Item 3. Legal Proceedings....................................................................... 12 Item 4. Submission of Matters to a Vote of Security Holders..................................... 13 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................... 14 Item 6. Selected Financial Data................................................................. 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................... 16 Item 7A. Quantitative and Qualitative Disclosure about Market Risk............................... 31 Item 8. Financial Statements and Supplementary Data............................................. 33 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.................................................... 53 Item 9A. Controls and Procedures ................................................................ 53 Part III Item 10. Directors and Executive Officers of the Registrant...................................... 54 Item 11. Executive Compensation.................................................................. 54 Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 54 Item 13. Certain Relationships and Related Transactions.......................................... 54 Item 14. Principal Accounting Fees and Services.................................................. 54 Part IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 55 SIGNATURES ........................................................................................ 58
PART I FACTORS THAT MAY AFFECT FUTURE RESULTS THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS THAT INVOLVE SUBSTANTIAL UNCERTAINTIES AND RISKS. THE FUND'S FUTURE RESULTS MAY DIFFER MATERIALLY FROM ITS HISTORICAL RESULTS AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN RISK FACTORS. READERS SHOULD PAY PARTICULAR ATTENTION TO THE CONSIDERATIONS DESCRIBED IN THE SECTION OF THIS REPORT ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." READERS SHOULD ALSO CAREFULLY REVIEW THE RISK FACTORS DESCRIBED IN THE OTHER DOCUMENTS THE FUND FILES, OR HAS FILED, FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION. ITEM 1. BUSINESS meVC Draper Fisher Jurvetson Fund I, Inc., D/B/A MVC Capital (the "Fund"), is a Delaware Corporation organized on December 2, 1999. On March 31, 2000, the Fund raised $330 million in an initial public offering whereupon it commenced operations as a closed-end investment company. The Fund's investment objective is to seek to maximize total return from capital appreciation and/or income. The Fund seeks to achieve its investment objective by providing equity and debt financing to companies that are, for the most part, privately owned ("Portfolio Companies"). The Fund's current equity and debt investments in Portfolio Companies consist of equity securities such as common and preferred stock, senior and subordinated loans, venture capital, mezzanine and preferred instruments and private equity instruments. The Fund has elected to be treated as a business development company under the Investment Company Act of 1940, as amended (the "Investment Company Act"). On December 4, 2002, the Fund announced it had commenced doing business under the name MVC Capital. The Fund currently has six employees. From the Fund's inception through February 28, 2003, the Fund had a five-member board of directors (the "Former Board"), all of whom had been selected by principals of the Fund's original investment adviser and approved by the stockholders. On February 28, 2003, the Fund's shareholders elected an entirely new board of seven directors with no prior affiliation with the Fund. The Fund currently has seven members on the Board of Directors, six of whom were elected on February 28, 2003. Five of the directors are not "interested persons" of the Fund (the "Independent Directors"), as defined by the Investment Company Act. The directors are responsible for providing overall guidance and supervision of the Fund, approving the valuation of the Fund's investments and performing various duties imposed on directors of a business development company by the Investment Company Act. Among other things, the Independent Directors supervise the management arrangements for the Fund, the custody arrangements with respect to portfolio securities, the selection of independent public accountants, fidelity bonding and any transactions with affiliates. The Fund's principal executive office is located at 287 Bowman Avenue, Purchase NY 10577, its telephone number is 914-251-1825 and its website is WWW.MVCCAPITAL.COM. Copies of the Fund's annual regulatory filings on Form 10-K, quarterly regulatory filings on Form 10-Q, Form 8-K, and other regulatory filings may be obtained from the Fund's website, free of charge. ORGANIZATION From inception through June 19, 2002, meVC Advisers, Inc., a Delaware Corporation (the "Former Advisor" or "meVC Advisers") provided certain management and administrative services to the Fund under the supervision of the Board of Directors. The Former Advisor arranged for third parties to perform certain management, administrative and other services, including hiring Fleet Investment Advisors, Inc. to manage the Fund's cash and short term interest bearing investments, and hiring State Street Bank and Trust Co, Inc. ("State Street") to handle all functions of administration, accounting and custodial work necessary for the operations of the Fund. The Former Advisor provided the Fund with office space, facilities, equipment, and personnel (all paid by the Former Advisor). The Former Advisor also hired a sub-advisor, Draper Fisher Jurvetson MeVC Management Co., LLC (the "Former Sub-Advisor"), who provided the Fund with office space, facilities, equipment, and personnel (all paid by the Former Sub-Advisor) to conduct the investment management aspects of its business. At the Annual Meeting of the Fund held on March 27, 2002, two proposals pertaining to the renewal of the contracts of the Former Advisor and the Former Sub-Advisor were rejected by the Fund's shareholders. The Former Board then determined that meVC Advisers, Inc. and Draper Fisher Jurvetson MeVC Management Co., LLC would continue to serve as the Fund's investment advisor and sub-advisor, respectively, pursuant to interim agreements, which under Securities and Exchange Commission (the "SEC") rules would be allowed to remain in effect for a period of up to 150 days from March 27, 2002. On June 17, 2002, Peter S. Freudenthal, then the President, Chief Executive Officer and Chairman of the Board of the Former Advisor of the Fund and of the parent entity of the Former Advisor, resigned from his positions as Vice Chairman, President and a Director of the Fund. At the same time Paul D. Wozniak, then the Vice President of Operations for the Former Advisor and the Chief Operating Officer and Chief Financial Officer of the parent entity of the Former Advisor, resigned from his positions as Vice President, Chief Financial Officer, Treasurer and Secretary of the Fund. Messrs. Freudenthal and Wozniak also resigned from the Former Advisor. From the Fund's inception through June 19, 2002, the Fund had been charged a management fee by meVC Advisers at an annual rate of 2.5% of the average weekly net assets of the Fund, paid monthly in arrears. However, meVC Advisers had agreed to pay all Fund expenses above and beyond the 2.5% management fee. On June 19, 2002, meVC Advisers resigned without prior notice to the Fund, effective immediately, as the Fund's investment advisor. This resignation resulted in the automatic termination of the agreement between the Former Advisor and the Former Sub-Advisor to the Fund. On June 19, 2002, the Former Board voted to internalize the management of the Fund's operations temporarily under the circumstances and appointed John M. Grillos, the principal of the Former Sub-Advisor and fellow director, to serve as the interim Chief Executive Officer. The Former Board no longer required the Fund to limit its expenses to 2.5% of net assets as had been the practice from the Fund's inception through June 19, 2002. Certain individuals who had been employed by the Former Advisor or the Former Sub-Advisor were hired by Mr. Grillos to perform the services formerly provided by the Former Advisor and Former Sub-Advisor. In October 2002, the Former Board a) appointed John Grillos, the then Chairman of the Board and CEO, to serve as the Fund's Chief Investment Officer; b) elected William Del Biaggio III as President of the Fund; c) agreed to consider investing in debt instruments issued by information technology companies; and d) agreed to continue to conduct the Fund's operations through internal management by the Fund's Board of Directors, officers and employees. In November 2002, Mr. Michael D. Stewart was hired as Acting Chief Financial Officer of the Fund. Six of the seven members (excluding Mr. Tokarz) of the current Board were elected at the February 28, 2003 Annual Meeting of the shareholders (the "Current Board"), replacing the Former Board in its entirety. On March 6, 2003, the results of the election were certified by the Inspector of Elections, whereupon the Current Board terminated John M. Grillos, the Fund's previous CEO. Shortly thereafter, other members of the Fund's senior management team (that had previously reported to the former CEO) resigned. The Fund's day-to-day administrative operations were then overseen by Robert S. Everett, the Fund's interim CEO who was appointed by the Board to fill that role on March 6, 2003. Since these significant changes in the Board and management of the Fund, the Fund has operated in a transition mode and, as a result, no new portfolio investments were made from early March 2003 through the end of October 2003 (the end of the current Fiscal Year). During this period, the Current Board explored various alternatives for a long-term management plan for the Fund, including the possibility of retaining an external investment advisor. However, the Current Board concluded that it was in the Fund's best interest to implement the proposed management plan, as described below, and as voted on and approved by stockholders at the September 16, 2003 Special Meeting of Stockholders. On August 18, 2003, the Fund filed a definitive proxy statement with the SEC asking the stockholders to approve a proposed management plan including (i) appointing Michael Tokarz as the Chairman of the Board and Portfolio Manager of the Fund, (ii) adopting an amended investment objective whereby the Fund would seek to maximize total return from capital appreciation and/or income, (iii) seeking to achieve its investment objective through senior and subordinated loans, venture capital, mezzanine and preferred instruments and private equity instruments and (iv) conducting a tender offer of up to 25% of the Fund's outstanding shares at a price of 95% of the net asset value of such shares. On November 6, 2003, Michael Tokarz assumed his new position as Chairman, Portfolio Manager and a director of the Fund, pursuant to the shareholder vote held on September 16, 2003. Concurrent with Mr. Tokarz's appointment, Robert Everett stepped down after completing his role as interim CEO of the Fund. Shortly thereafter, the principal executive office of the Fund was relocated to 287 Bowman Avenue, Purchase, New York. Subject to the supervision of the Current Board, the Fund's management ("Management") performs services necessary for the operations of the Fund. The investment team is charged with evaluating, monitoring, and disposing of the Fund's investments in Portfolio Companies. Subject to the supervision of the Board, Management has arranged for third parties to perform certain of the administrative services and other services necessary for the operations of the Fund. Effective November 1, 2002, US Bancorp Fund Services LLC handles all functions of administration and accounting work, and U.S. Bank National Association (the "Current Custodian") handles all custodial work necessary for the operations of the Fund. At the Fund's direction, the Current Custodian also purchases 90-day U.S. Treasury Bills with the Fund's short-term assets except that if the Fund's cash balances are not large enough to be invested in 90-day Treasury Bills, balances are swept into a designated money market account. The Fund directly incurs expenses for all office space, facilities, equipment, personnel and other administrative costs necessary to conduct its business. INVESTMENT PRACTICES Substantially all amounts not invested in securities of Portfolio Companies are invested in short-term, highly liquid investments consisting of interest bearing securities of registered investment companies (money market mutual funds) or securities issued or guaranteed as to interest and principal by the United States or by a person or entity controlled or supervised by and acting as an instrumentality of the government of the United States that have maturities of less than one year from the date of the investment. As of October 31, 2003, the Fund had investments in short term securities valued at $113.2 million. The Fund's investments in Portfolio Companies are typically structured in private transactions negotiated directly with the owner or issuer of the securities acquired. The Fund's former investment objective was to achieve long-term capital appreciation from venture capital investments in information technology companies, primarily in the Internet, e-commerce, telecommunications, networking, software and information services industries. As approved by the stockholders on September 16, 2003, the Fund's investment objective has been amended to read as follows: THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK TO MAXIMIZE TOTAL RETURN FROM CAPITAL APPRECIATION AND/OR INCOME. Unlike the former "long-term capital appreciation" objective, the "total return" objective affords the Fund the flexibility to seek to maximize return from both capital appreciation and/or income. This flexibility is particularly important for Mr. Tokarz, whose contemplated strategy for managing the Fund involves seeking investment opportunities that have potential for providing both current yield and equity participation, while seeking to protect principal. There can be no assurances, however, that this strategy will be successful in protecting principal. The amended objective also eliminates the Fund's current limited focus on information technology companies. The Fund has adopted related changes to its principal investment strategies in order to pursue the amended investment objective. These strategies include investments in senior and subordinated loans, venture capital, mezzanine and preferred instruments and private equity investments, and as such, afford Mr. Tokarz the flexibility to consider potential investment opportunities in a wide range of instruments and industries. The Fund is concentrating its investment efforts on companies that, in Management's view, provide opportunities to maximize total return from capital appreciation and/or income. Under the Fund's flexible investment approach, the Fund has the authority to invest, without limit, in any one Portfolio Company, subject to any diversification limitations that may be required in order for the Fund to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. INVESTMENT CRITERIA Prospective investments are evaluated by Management based upon criteria that may be modified from time to time. The criteria currently being used by Management in determining whether to make an investment in a prospective Portfolio Company include, but are not limited to Management's view of: - The presence or availability of highly qualified management teams; - Products and services with opportunistic markets; - Favorable industry and competitive dynamics; - Cash flow and free cash flow of the business. CO-INVESTMENTS The Fund is permitted to co-invest in certain Portfolio Companies with its affiliates, subject to specified conditions set forth in an order obtained from the SEC. Under the terms of the order, Portfolio Companies purchased by the Fund and its affiliates are required to be approved by the Independent Directors and are required to satisfy certain conditions established by the SEC. INVESTMENT OPERATIONS The investment operations of the Fund will consist principally of the following basic activities: IDENTIFYING INVESTMENTS. Investment opportunities are identified for the Fund by the investment team. Investment proposals may, however, come to the Fund from many other sources, and may include unsolicited proposals from the public and from referrals from banks, lawyers, accountants and other members of the financial community. EVALUATING INVESTMENT OPPORTUNITIES. Prior to committing funds to an investment opportunity, due diligence will be conducted to assess the prospects and risks of the potential investment. See "Investment Criteria" above. STRUCTURING INVESTMENTS. Portfolio Company investments typically will be negotiated directly with the prospective Portfolio Company or its affiliates. The investment team will structure the terms of a proposed investment, including the purchase price, the type of security to be purchased or financing to be provided and the future involvement of the Fund and affiliates in the Portfolio Company's business (including potential representation on its board of directors). The investment team will seek to structure the terms of the investment so as to provide for the capital needs of the Portfolio Company and at the same time seek to maximize the Fund's total return from both capital appreciation and/or income. PROVIDING MANAGEMENT ASSISTANCE AND MONITORING OF INVESTMENTS. Private equity investors often assist Portfolio Companies with various aspects of their business operations and business development companies can offer such assistance to portfolio companies. In some cases, officers and directors of the Fund may serve as members of the board of directors of Portfolio Companies. The Fund may provide guidance and management assistance to Portfolio Companies with respect to such matters as budgets, profit goals, business and financing strategy, management additions or replacements and plans for liquidity events for Portfolio Company investors such as a merger or initial public offering. TEMPORARY INVESTMENTS Pending investment in Portfolio Companies, the Fund invests its available funds in interest-bearing money market mutual funds and U.S. Treasury securities with maturities of less than one year (collectively, "Temporary Investments"). Temporary Investments constituting cash, cash items, and securities issued or guaranteed by the U.S. Treasury or U.S. Government agencies will qualify in determining whether the Fund has 70% of its total assets invested in Managed Companies (as defined below) or in qualified Temporary Investments for purposes of the business development company provisions of the Investment Company Act. See "Regulation" below. FOLLOW-ON INVESTMENTS Following its initial investment in a Portfolio Company, the Fund may be requested to make follow-on investments in the company. Follow-on investments may be made to take advantage of warrants or other preferential rights granted to the Fund or otherwise to increase or maintain the Fund's position in a successful or promising Portfolio Company. The Fund may also be called upon to provide additional equity or loans needed by a Portfolio Company to fully implement its business plans, to develop a new line of business or to recover from unexpected business problems. Follow-on investments in a Portfolio Company are evaluated on a case-by-case basis. DISPOSITION OF INVESTMENTS The method and timing of the disposition of the Fund's portfolio investments can be critical to the realization of maximizing total return and to the minimization of any capital losses. The Fund expects to dispose of its portfolio securities through a variety of transactions, including the negotiated private sales of such securities to other investors, the sales of portfolio securities in underwritten public offerings, and public sales of such securities. The Fund expects the debt financings to be repaid with interest and hopes to realize further appreciation from the warrants or other equity type instruments it receives in connection with making the loan. The Fund bears the costs of disposing of investments to the extent not paid by a Portfolio Company. OPERATING EXPENSES The Fund bears the costs of obtaining office space, facilities, equipment, personnel and other administrative costs necessary to conduct the Fund's business. The Fund also bears other costs relating to the Fund's operations, including fees and expenses of the Independent Directors; fees of unaffiliated transfer agents, registrars and disbursing agents; legal and accounting expenses; costs of printing and mailing proxy materials and reports to shareholders; New York Stock Exchange fees; custodian fees; litigation costs; costs of disposing of investments including brokerage fees and commissions; and other extraordinary or nonrecurring expenses and other expenses properly payable by the Fund. VALUATION Investments in Portfolio Companies are carried at fair value with the net change in unrealized appreciation or depreciation included in the determination of increases or decreases in net assets resulting from their operations. Cost is used to approximate fair value of these investments until developments affecting an investment provide a basis for valuing such investment at a value other than cost. The fair value of investments for which no market exists and for which the Board of Directors and/or the Fund's Valuation Committee have determined that the original cost of the investment is no longer an appropriate fair valuation will be determined on the basis of procedures approved by the Current Board. Valuations are based upon such factors as the financial and/or operating results of the most recent fiscal period, the performance of the company relative to planned budgets/forecasts, the issuer's financial condition and the markets in which it does business, the prices of any recent transactions or offerings regarding such securities or any proxy securities, any available analysis, media, or other reports or information regarding the issuer, or the markets or industry in which it operates, the nature of any restrictions on disposition of the securities and other analytical data. In the case of unsuccessful operations, the valuation may be based upon anticipated liquidation proceeds. Because of the inherent uncertainty of the valuation of portfolio securities which do not have readily ascertainable market values, the Fund's estimate of fair value may significantly differ from the fair market value that would have been used had a ready market existed for the securities. Such values do not reflect brokers' fees or other normal selling costs which might become payable on disposition of such investments. Investments in companies whose securities are publicly traded are valued at their quoted market price, less a discount to reflect the estimated effects of restrictions on the sale of such securities ("Valuation Discount"), if applicable. Short-term investments having maturities of 90 days or less are stated at amortized cost, which approximates fair value. Other fixed income securities are stated at fair value. Fair value of these securities is determined at the most recent bid or yield equivalent from dealers that make markets in such securities. The Fund's Valuation Committee reviews the valuations on a quarterly basis or more frequently if deemed necessary to determine their appropriateness and such valuations are approved quarterly by the Current Board. Any changes in valuation are recorded in the statements of operations as "Net unrealized gain (loss) on investments." CUSTODIAN Pursuant to an agreement with the Fund, State Street acted as the Fund's custodian with respect to the safekeeping of its securities until October 31, 2002. The principal business office of State Street was 225 Franklin Street, Boston, Massachusetts, 02110. Effective November 1, 2002, US Bank National Association became the custodian of the Fund's securities. The principal business office of the Current Custodian is 425 Walnut Street, Cincinnati, OH 45202. TRANSFER AGENT AND DISBURSING AGENT The Fund employs EquiServe Trust Company, N.A. ("EquiServe") as its transfer agent to record transfers of the shares, maintain proxy records and to process distributions. The principal business office of such company is 150 Royall Street, Canton, Massachusetts, 02021. FACTORS THAT MAY AFFECT FUTURE RESULTS, THE MARKET PRICE OF COMMON STOCK, AND THE ACCURACY OF FORWARD-LOOKING STATEMENTS In the normal course of its business, the Fund, in an effort to keep its stockholders and the public informed about the Fund's operations and portfolio of investments, may from time-to-time issue certain statements, either in writing or orally, that contain or may contain forward-looking information. Generally, these statements relate to business plans or strategies of the Fund or Portfolio Companies, projected or anticipated benefits or consequences of such plans or strategies, projected or anticipated benefits of new or follow-on investments made by or to be made by the Fund, or projections involving anticipated purchases or sales of securities or other aspects of the Fund's operating results. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially. As noted elsewhere in this report, the Fund's operations and portfolio of investments are subject to a number of uncertainties, risks, and other influences, many of which are outside the control of the Fund, and any one of which, or a combination of which, could materially affect the results of the Fund's operations or net asset value, the market price of its common stock, and whether forward-looking statements made by the Fund ultimately prove to be accurate. The following discussion outlines certain factors that in the future could affect the Fund's results for 2004 and beyond and cause them to differ materially from those that may be set forth in any forward-looking statement made by or on behalf of the Fund: LONG-TERM OBJECTIVE. The Fund is intended for investors seeking to maximize total return from capital appreciation and/or income. The Portfolio Companies acquired by the Fund may require several or many years to reach maturity and generally are illiquid. An investment in shares of the Fund should not be considered a complete investment program. Each prospective stockholder should take into account his investment objectives as well as his other investments when considering the purchase of shares of the Fund. NON-DIVERSIFIED STATUS; NUMBER OF INVESTMENTS. The Fund is classified as a "non-diversified" investment company under the Investment Company Act, which means the Fund is not limited in the proportion of its assets that may be invested in the securities of a single issuer. To the extent the Fund takes large positions in the securities of a small number of issuers, the Fund will be exposed to a greater risk of loss and the Fund's net asset value and the market price of its common stock may fluctuate as a result of changes in the financial condition, the stock price of, or in the market's assessment of any single Portfolio Company to a greater extent than would be the case if it were a "diversified" company holding numerous investments. As of October 31, 2003, the Fund has investments in 23 Portfolio Companies. LACK OF LIQUIDITY OF PORTFOLIO INVESTMENTS. The portfolio investments of the Fund consist principally of securities that are subject to restrictions on sale because they were acquired from the issuer in "private placement" transactions. Currently, none of the Fund's Portfolio Companies are publicly traded. If in the future public markets develop for such securities, any public sale of these securities by the Fund could still be burdened by the expense and time required to register the securities under the Securities Act of 1933, as amended, and applicable state securities law, unless an exemption from such registration requirements is available. In addition, contractual or practical limitations may restrict the Fund's ability to liquidate its securities in Portfolio Companies since in many cases the securities of such companies will be privately held and the Fund may own a relatively large percentage of the issuer's outstanding securities. Sales may also be limited by securities market conditions, which may be unfavorable for sales of securities of particular issuers or issuers in particular industries. The above limitations on liquidity of the Fund's securities could preclude or delay any disposition of such securities or reduce the amount of proceeds that might otherwise be realized. DEBT FINANCINGS IN PORTFOLIO INVESTMENTS. The portfolio investments of the Fund may also consist of debt financing to portfolio companies. The borrower's ability to repay the loan may be adversely impacted by a number of factors and consequently the loan may not be fully repaid. Furthermore, the Fund's security interest in any collateral over the borrower's assets may not realize a sufficient amount to make up any shortfall. NEED FOR FOLLOW-ON INVESTMENTS IN PORTFOLIO COMPANIES. After its initial investment in a Portfolio Company, the Fund may be called upon from time to time to provide additional funds to such company or have the opportunity to increase its investment in a successful situation, e.g., the exercise of a warrant to purchase common stock. There is no assurance that the Fund will make, or have sufficient funds to make, follow-on investments. Any decision by the Fund not to make a follow-on investment or any inability on its part to make such an investment may have a negative impact on a Portfolio Company in need of such an investment or may result in a missed opportunity for the Fund to increase its participation in a successful operation and may dilute the Fund's equity interest in or reduce the expected yield on its investment. In many cases, if a Portfolio Company is unable to secure a follow-on investment from its investors, the likely outcome is that the Portfolio Company will cease operations due to a lack of working capital available to that Portfolio Company. COMPETITION FOR INVESTMENTS. The Fund encounters competition from other persons or entities with similar investment objectives. These competitors include venture capital firms, small business investment companies, large industrial and financial companies investing directly or through affiliates, other business development companies, foreign investors of various types and individuals. Many of these competitors have greater financial resources and more personnel than the Fund and may be subject to different and frequently less stringent regulations. LOSS OF CONDUIT TAX TREATMENT. The Fund may cease to qualify for conduit tax treatment as a regulated investment company ("RIC") if it is unable to comply with the diversification and income requirements contained in Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). Subchapter M requires, among other things, that (1) at the end of each quarter of the Fund's taxable year (i) at least 50% of the value of the Fund's assets must consist of cash, government securities, securities of other RICs and other securities of any single issuer that do not represent more than 5% of the value of the Fund's then current total assets and 10% of the outstanding voting securities of such issuer, and (ii) no more than 25% of the value of the Fund's assets may be invested in the securities of any one issuer (other than United States government securities or securities of other RICs), or of two or more issuers that are controlled by the Fund and are engaged in the same or similar or related trades or businesses and (2) at least 90% of the Fund's gross income in each taxable year is derived from dividends, interest, payments received with respect to loans of securities, gains from the sale or other disposition of stock or securities and certain related income. The Fund may also cease to qualify for conduit tax treatment, or be subject to a 4% excise tax on certain amounts, if it fails to distribute a sufficient portion of its income and gains. If the Fund ceases to qualify for conduit tax treatment, the Fund will be subject to income tax on its income and gains and stockholders will be subject to income tax on distributions to the extent of the Fund's earnings and profits. MARKET VALUE AND NET ASSET VALUE. The shares of the Fund's common stock are listed on the NYSE. Investors desiring liquidity may trade their shares of common stock on the NYSE at current market value, which may differ from the then current net asset value (Shareholders' Equity). Shares of closed-end investment companies frequently trade at a discount from net asset value. This characteristic of shares of a closed-end fund is a risk separate and distinct from the risk that the Fund's net asset value will decrease. The risk of purchasing shares of a closed-end fund that might trade at a discount is more pronounced for investors who wish to sell their shares in a relatively short period of time because for those investors, realization of a gain or loss on their investments is likely to be more dependent upon the existence of a premium or discount than upon portfolio performance. The Fund's shares have historically traded at a significant discount to net asset value since they began trading. For information concerning the trading history of the Fund's shares see "Market for Registrant's Common Stock and Related Stockholder Matters." VALUATION OF INVESTMENTS. The Fund's net asset value is based on the value assigned to its portfolio investments. Investments in companies whose securities are publicly traded are valued at their quoted market price, less a discount to reflect the estimated effects of restrictions on the sale of such securities, if applicable. The Fund adjusts its net asset value for changes in the value of its publicly held securities, if any, on a daily basis. The value of the Fund's investments in securities for which market quotations are not available is determined as of the end of each fiscal quarter but monitored regularly in case there is a significant event requiring a change in valuation in the interim. Cost is used to approximate fair value of such investments until significant developments affecting an investment provide a basis for valuing an investment at other than cost. Thereafter, such portfolio investments are carried at fair values as determined at least quarterly. Due to the inherent uncertainty of the valuation of portfolio securities which do not have readily ascertainable market values, the Fund's estimate of fair value may significantly differ from the fair value that would have been used had a ready market existed for the securities. At October 31, 2003, all of the preferred stocks and debt instruments in Portfolio Companies held by the Fund, representing approximately 8.47% and 9.10%, respectively, of the Fund's net assets, were invested in securities for which market quotations were not readily available. See "Valuation." POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Fund's common stock could be subject to significant fluctuations in response to variations in the net asset value of the Fund, its quarterly operating results, and other factors. The market price of the common stock may be significantly affected by such factors as the announcement of new or follow-on investments in Portfolio Companies, the sale or proposed sale of a portfolio investment, the results of operations or fluctuations in the market prices or appraised value of one or more of the Fund's Portfolio Companies, changes in earnings estimates by market analysts, speculation in the press or analyst community and general market conditions or market conditions specific to particular industries. From time to time in recent years, the securities markets have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of particular companies. These broad fluctuations may adversely affect the market price of the common stock. In addition, the Fund is subject to the risk of the securities markets in which the portfolio securities of the Fund are traded. Securities markets are cyclical and the prices of the securities traded in such markets rise and fall at various times. These cyclical periods may extend over significant periods of time. REGULATION The Fund has elected to be treated as a business development company under the Investment Company Act. Accordingly, it may provide for incentive compensation in the form of one of the following: (i) a performance fee based on the capital appreciation of the Fund's investments, (ii) a profit-sharing plan based on the Fund's income, or (iii) a stock option plan. As Portfolio Manager, Mr. Tokarz will be compensated by the Fund based upon his positive performance as the Portfolio Manager. Under the terms of his agreement with the Fund, the Fund will pay Mr. Tokarz an amount equal to the lesser of (a) 20% of the net income of the Fund for the fiscal year; and (b) the sum of (i) 20% of the net capital gains realized by the Fund in respect of the investments made during his tenure as Portfolio Manager; and (ii) the amount, if any, by which the Fund's total expenses for a fiscal year were less than two percent of the Fund's net assets (determined as of the last day of the period). Any payments to be made shall be calculated based upon the audited financial statements of the Fund for the applicable fiscal year and shall be paid as soon as practicable following the completion of such audit. Mr. Tokarz may allocate a part or all of such compensation to other professionals of the Fund. The Fund may not withdraw its election to be treated as a business development company without first obtaining the approval of a majority of its shareholders. The following is a summary of the requirements imposed on business development companies by the Investment Company Act and is qualified in its entirety by reference to the full text of the Investment Company Act and the rules thereunder. A business development company must be operated for the purpose of investing in the securities of certain present and former "eligible portfolio companies" or certain bankrupt or insolvent companies and must make available significant managerial assistance to such companies. An eligible portfolio company generally is a company that (i) is organized under the laws of, and has its principal place of business in, any state or states, (ii) is not an investment company and (iii)(a) does not have a class of securities registered on an exchange or included in the Federal Reserve Board's over-the-counter margin list, (b) is actively controlled by the business development company acting either alone or as part of a group acting together and an affiliated person of the business development company is a member of the company's board of directors or (c) meets such other criteria as may be established by the SEC. Control is presumed to exist where the business development company owns more than 25% of the outstanding voting securities of an eligible portfolio company. "Making available significant managerial assistance" is defined by the Investment Company Act to mean (i) any arrangement whereby a business development company, through its directors, officers or employees, offers to provide and, if accepted, does provide significant guidance and counsel concerning the management, operations or business objectives or policies of a company or (ii) the exercise of a controlling influence over the management or policies of a company by the business development company acting individually or as part of a group of which the business development company is a member acting together which controls such company ("Managed Company"). A business development company may satisfy the requirements of clause (i) with respect to an eligible portfolio company by purchasing securities of such a company as part of a group of investors acting together if one person in such group provides the type of assistance described in such clause. However, the business development company will not satisfy the general requirement of making available significant managerial assistance if it in all cases provides such assistance only indirectly through an investor group. A business development company need only extend significant managerial assistance with respect to eligible portfolio companies which are treated as Qualifying Assets (as defined below) for the purpose of satisfying the 70% test discussed below. The Investment Company Act prohibits or restricts the Fund from investing in certain types of companies, such as brokerage firms, insurance companies, investment banking firms and investment companies. Moreover, the Investment Company Act limits the type of assets that the Fund may acquire to "Qualifying Assets" and certain assets necessary for its operations (such as office furniture, equipment and facilities) if, at the time of the acquisition, less than 70% of the value of the Fund's total assets consists of Qualifying Assets. Qualifying Assets include (i) securities of companies that were eligible portfolio companies at the time that the Fund acquired their securities; (ii) securities of companies that are actively controlled by the Fund; (iii) securities of bankrupt or insolvent companies that are not otherwise eligible portfolio companies; (iv) securities acquired as follow-on investments in companies that were eligible portfolio companies at the time of the Fund's initial acquisition of their securities but are no longer eligible portfolio companies, provided that the Fund has maintained a substantial portion of its initial investment in such companies; (v) securities received in exchange for or distributed on or with respect to any of the foregoing; and (vi) cash items, government securities and high-quality, short-term debt. The Investment Company Act also places restrictions on the nature of the transactions in which, and the persons from whom, securities can be purchased in order for such securities to be considered Qualifying Assets. As a general matter, Qualifying Assets may only be purchased from the issuer or an affiliate in a transaction not constituting a public offering. The Fund may not purchase any security on margin, except such short-term credits as are necessary for the clearance of portfolio transactions, or engage in short sales of securities. The Fund is permitted by the Investment Company Act, under specified conditions, to issue multiple classes of senior debt and a single class of preferred stock senior to the common stock if its asset coverage, as defined in the Investment Company Act, is at least 200% after the issuance of the debt or the senior stockholders' interests. In addition, provisions must be made to prohibit any distribution to common shareholders or the repurchase of any shares unless the asset coverage ratio is at least 200% at the time of the distribution or repurchase. The Fund generally may sell its securities at a price that is below the prevailing net asset value per share only upon the approval of the shareholders holding a majority of the shares issued by the Fund, including a majority of shares held by nonaffiliated shareholders. The Fund may, in accordance with certain conditions established by the SEC, sell shares below net asset value in connection with the distribution of rights to all of its stockholders. The Fund may also issue shares at less than net asset value in payment of dividends to existing shareholders. Since the Fund is a closed-end business development company, stockholders have no right to present their shares to the Fund for redemption. Recognizing the possibility that the Fund's shares might trade at a discount, the Board of Directors has determined that it would be in the best interest of stockholders for the Fund to be authorized to attempt to reduce or eliminate a market value discount from net asset value. Accordingly, the Fund from time to time may, but is not required to, repurchase its shares (including by means of tender offers) to attempt to reduce or eliminate any discount or to increase the net asset value of its shares, or both. Pursuant to a shareholder vote at the Special Meeting held on September 16, 2003, the Fund commenced a tender offer on November 26, 2003, which terminated on December 31, 2003, as described in Item 5, "Market for Registrant's Common Equity and Related Stockholder Matters". Many of the transactions involving the Fund and its affiliates (as well as affiliates of such affiliates) require the prior approval of a majority of the Independent Directors. However, certain transactions involving closely affiliated persons of the Fund would require the prior approval of the SEC. In general (a) any person who owns, controls or holds with power to vote more than 5% of the outstanding shares, (b) any director or executive officer and (c) any person who directly or indirectly controls, is controlled by or is under common control with such person, must obtain the prior approval of a majority of the Independent Directors and, in some situations, the prior approval of the SEC, before engaging in certain transactions involving the Fund or any company controlled by the Fund. In accordance with the Investment Company Act, a majority of the directors must be persons who are not "interested persons" of the Fund as defined in such act. Except for certain transactions which must be approved by the Independent Directors, the Investment Company Act generally does not restrict transactions between the Fund and the Portfolio Companies. ITEM 2. PROPERTIES The Fund does not own any real estate or other physical property. Its principal executive office is located at 287 Bowman Avenue, Purchase, New York 10577, pursuant to an operating lease which is scheduled to expire on November 30, 2005. Future payments under this lease total $110,933, with annual minimum payments of $49,517 from December 8, 2003 through October31, 2004, $56,682 from November 1, 2004 through October 31, 2005, and $4,734 from November 1, 2005 through November 30, 2005. The building at 287 Bowman Avenue is owned by Phoenix Capital Partners, LLC, an entity which is 97% owned by Mr. Tokarz. The Fund has continued to pay rent on its former office space pursuant to an operating lease, entered into by Former Management in late 2002, which was scheduled to expire on October 31, 2005. Future payments under this lease totaled $597,000 as of October 31, 2003, with annual minimum payments of $298,500; however, in January 2004, the Fund reached agreement to terminate this lease for $232,835 effective January 31, 2004. ITEM 3. LEGAL PROCEEDINGS On February 20, 2002, Millenco LP ("Millenco"), a stockholder, filed a complaint in the United States District Court for the District of Delaware on behalf of the Fund against the Former Advisor. The complaint alleges that the fees received by the Former Advisor for the year prior to the filing of the complaint were excessive, in violation of Section 36(b) of the Investment Company Act. The Former Advisor's motions to dismiss the action or transfer it to California were both denied. The case is in discovery, which has been stayed temporarily for the purpose of settlement negotiations and mediation scheduled to begin in April 2004. The Fund is monitoring this litigation inasmuch as any net recovery would accrue to the Fund. On April 3, 2002, Millenco filed a complaint against the Fund in the Court of Chancery, New Castle County, Delaware, seeking a judicial confirmation of the stockholder vote of March 27, 2002, rejecting new investment advisory agreements between the Fund and the Former Advisor and between the Fund and the Former Sub-Advisor. On April 5, 2002, Millenco moved to accelerate the trial of the case and later that day the Former Board acknowledged that the proposals for shareholder approval of the advisory and sub-advisory agreements had failed and that a stockholder's meeting would not be reconvened on this matter. On July 30, 2002, Millenco filed an amended complaint against the Fund and the Fund's Former Board in the Court of Chancery, New Castle County, Delaware, seeking to (i) invalidate the election of two of the Fund's former directors, John M. Grillos and Larry Gerhard, at the 2001 and 2002 Annual Meetings of Stockholders, to three-year terms expiring 2004 and 2005, respectively; and the election of former director Peter Freudenthal, at the 2001 Annual Meeting, to a three-year term expiring 2004; and (ii) require the Fund to hold a special Meeting of Stockholders, for the purpose of holding new elections to fill the board seats currently held by Mr. Grillos and Mr. Gerhard and the board seat vacated by Peter Freudenthal due to his resignation in June 2002. On December 19, 2002, the Court granted judgment for Millenco holding that the Former Board had breached its fiduciary duty of disclosure under Delaware law in connection with the 2001 and 2002 election of directors and ordered the Fund to hold new elections for the seats held by directors Grillos and Gerhard and former director Freudenthal. The election was held on February 28, 2003, at which the Fund's Current Board was elected. On February 6, 2003, the Fund filed a complaint against Millennium Partners, L.P., Millenco and Karpus Management, Inc. (collectively "the stockholders") in the United States District Court for the Southern District of New York, alleging various violations of federal securities law primarily in connection with the ongoing proxy contest between Millenco and the Fund's Former Board. The complaint asked the Court for injunctive relief aimed at limiting the stockholders' voting rights at the February 28, 2003 annual meeting of stockholders. On February 24, 2003, after expedited discovery and an evidentiary hearing, the United States District Court for the Southern District of New York denied the Fund's motion for a preliminary injunction against the defendants, finding there was insubstantial likelihood of the Fund succeeding on any of the claims asserted. On March 27, 2003, the Fund voluntarily dismissed the lawsuit. On March 3, 2003, after the Annual Meeting, but prior to the transfer of control by the Former Board to the Current Board, John Grillos signed a document which purported to extend the maturity date of the Fund's $3 million loan to BS Management from March 2003 to September 2003 and to modify other terms of the loan which could result in the impairment of the Fund's rights as a lender and the collectability of the loan. The original March 2003 maturity date passed without payment to the Fund of any principal or interest on the loan. The Fund's Current Board believed that BS Management was a shell corporation without material assets apart from its interest in the loan and its proceeds. In May 2003, the Fund recovered approximately $70,000 of the original loan from an Irish stockbroker to which such money had been transferred by BS Management. In June 2003, the Fund sued BS Management and Oyster Technologies Investments Ltd., an Isle of Man company (which was a party to the March 3, 2003 amendment) in the United States District Court for the Northern District of California, asserting that the December 2002 loan agreement was breached and/or that the March 3, 2003 amendment was void and/or breached. In August 2003, the parties settled the litigation, and the Fund received $2,580,000, plus rights to the proceeds of sale of approximately 1,000,000 shares of Transware PLC, an Irish public company, which BS Management had purchased with some of the proceeds of the original loan. As of the date of the settlement, 453,000 Transware shares had been sold in open market transactions, resulting in proceeds to the Fund of approximately $29,000. Accordingly and after deducting approximately $55,000 in legal expenses, the Fund recovered a total of approximately $2,624,000 of the original $3,000,000 loan. Potential Fund proceeds from the remaining 550,000 shares of Transware stock are believed to have nominal value at best. On August 26, 2003, the Fund's lawsuit against BS Management and Oyster Technologies was dismissed with prejudice and the parties were all released from any obligations under the December 2002 agreement and March 2003 amendment. In 2003, a former officer and director who had been hired by the Former Board demanded severance pay of approximately $255,000, and threatened to sue the Fund for such severance, plus 10% interest and attorney's fees. The Fund rejected the demand and, in 2004, informed the former officer that if he sued, the Fund would oppose such lawsuit and take such affirmative legal action as may be appropriate to recover damages to the Fund caused by certain conduct of the former officer. No assurance can be given as to whether the former officer will sue the Fund or the outcome of such litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Fund held a Special Meeting of Stockholders on September 16, 2003 for the following purpose: To approve the proposed management plan of the Board of Directors (the "Proposed Plan") under which: (i) Michael Tokarz would be appointed Chairman of the Board of Directors and Portfolio Manager of the Fund; (ii) the Fund would adopt an amended investment objective whereby the Fund would seek to maximize total return from capital appreciation and/or income; (iii) the Fund would seek to achieve its investment objective primarily through senior and subordinated loans, venture capital, mezzanine and preferred instruments and private equity investments; and (iv) the Fund would conduct a tender offer of up to 25% of the Fund's outstanding shares at a price of 95% of the net asset value of such shares. Of the 16,152,600 shares outstanding and entitled to vote, 8,216,271 shares were represented at the meeting by proxy or in person. The following table identifies the matter voted upon at the meeting, the number of votes cast for or against, as well as the number of abstentions, as to each such matter. There were no broker non-votes. MATTER VOTES VOTES VOTES FOR AGAINST WITHHELD/ABSTAINED PROPOSAL: - --------- Approval of the Proposed Plan 7,513,748 658,236 44,287 of the Board of Directors set forth in the Notice of Special Meeting of Shareholders dated August 20, 2003. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Fund's shares of common stock began to trade on the New York Stock Exchange (NYSE) on June 26, 2000, under the symbol "MVC." The Fund had approximately 11,500 shareholders on August 8, 2003, the record date set for the Fund's Special Meeting of Shareholders held in September 2003. The following table reflects, for the periods indicated the high and low closing prices per share of the Fund's common stock on the NYSE, by quarter. QUARTER ENDED HIGH LOW -------- ------- ------- FISCAL YEAR 2003 10/31/03 $8.36 $7.92 07/31/03 $8.48 $7.89 04/30/03 $8.68 $7.85 01/31/03 $8.60 $7.90 FISCAL YEAR 2002 10/31/02 $8.05 $7.25 07/31/02 $9.50 $7.50 04/30/02 $10.06 $8.80 01/31/02 $10.06 $9.22 DIVIDENDS As a RIC under Subchapter M of the Code, the Fund is required to distribute to its shareholders, in a timely manner, at least 90% of its investment company taxable income and tax-exempt income each year. If the Fund distributes, in a calendar year, at least 98% of its ordinary income for such calendar year and its capital gain net income for the 12-month period ending on October 31 of such calendar year (as well as any portion of the respective 2% balances not distributed in the previous year), it will not be subject to the 4% non-deductible federal excise tax on certain undistributed income of RICs. During the Fund's fiscal years ended October 31, 2002 and October 31, 2003, respectively, the Fund did not declare, nor was it required to distribute under Subchapter M, any dividends. In the event of a declared dividend, distributions can be made payable by the Fund in the form of either a cash distribution or a stock dividend. If on the Fund's ex-dividend date, the Fund was trading on the NYSE at a discount to net asset value, in accordance with the Dividend Reinvestment Plan, the Dividend Distribution Agent would purchase shares on the open market of the NYSE for those shareholders electing to take their distributions in the form of stock dividends. If on the Fund's ex-dividend date, the Fund was trading on the NYSE at a premium to net asset value, in accordance with the Dividend Reinvestment Plan, the Dividend Distribution Agent would distribute new shares at net asset value to those shareholders electing to take their distributions in the form of stock dividends. The Fund reserves the right to retain net long-term capital gains in excess of net short-term capital losses for reinvestment or to pay contingencies and expenses. Such retained amounts, if any, will be taxable to the Fund, and shareholders will be able to claim their proportionate share of the federal income taxes paid by the Fund on such gains as a credit against their own federal income tax liabilities. Stockholders will also be entitled to increase the adjusted tax basis of their Fund shares by the difference between their undistributed capital gains and their tax credit. REPURCHASE PLAN During the year ended October 31, 2003, the Fund repurchased 347,400 of its shares at an average price of approximately $8.28, excluding brokerage fees. The Fund ceased repurchasing shares after the Current Board of Directors was elected on February 28, 2003. The Fund's repurchase of shares was conducted according to a written plan for the purpose of satisfying the provisions set forth in Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). TENDER OFFER On November 26, 2003, the Fund commenced a tender offer to acquire up to twenty-five percent (25%) of its outstanding shares of common stock at a per share cash purchase price equal to ninety-five percent (95%) of net asset value per share as of December 31, 2003, the day the offer expired. Based on a final count by the depositary for the tender offer, 3,859,558 shares, or 23.9% of the Fund's outstanding common stock, were tendered. Because less than 25% of the Fund's shares were tendered, the Fund purchased all shares tendered. Each share accepted for purchase was purchased at a price of $8.18 resulting in a total disbursement from the Fund of $31,571,184. Since completion of the tender offer, MVC has 12,293,042 shares of common stock outstanding. The anti-dilutive effect of the tender offer totaled $1,650,697 or approximately $0.134 per share for all remaining shares after the tender offer. The discussion above is a summary of the Tender Offer and is qualified in its entirety by reference to the full text of the Schedule TO as filed with the SEC. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data for the fiscal year ended October 31, 2003 is derived from the financial statements, which have been audited by Ernst & Young LLP, the Fund's current independent accountants. The following selected financial data for the fiscal years ended October 31, 2002 and 2001 and the period ended October 31, 2000 are derived from the financial statements, which were audited by PricewaterhouseCoopers, LLP, the Fund's former independent accountants. The data should be read in conjunction with the financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report.
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED OCTOBER 31, 2003 OCTOBER 31, 2002 OCTOBER 31, 2001 OCTOBER 31, 2000* Total investment income $2,895,314 $3,739,893 $9,046,526 $9,325,822 Total operating expenses $11,386,872 $6,861,850 $7,388,061 $4,615,284 Net investment (loss) income $(8,491,558) $(3,121,957) $1,658,465 $4,710,538 Net realized (loss) gain on investment transactions $(4,220,380) $(33,469,122) $5,123 $(789) Net unrealized depreciation on investment transactions $(42,771,460) $(21,765,310) $(52,994,121) $(4,913,010) Dividends declared per share $0.00 $0.04 $0.34 $0.00 Balance Sheet data: Total assets $137,880,292 $196,511,000 $255,049,783 $312,114,878 Total liabilities $872,130 $1,124,523 $578,227 $668,139 Total Shareholders Equity $137,008,162 $195,386,477 $254,471,556 $311,446,739 Net asset value per share $8.48 $11.84 $15.42 $18.88
* Commenced operations on March 31, 2000. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Fund and its investment portfolio companies. Words such as MAY, WILL, EXPECT, BELIEVE, ANTICIPATE, INTEND, COULD, ESTIMATE, MIGHT and CONTINUE, and the negative or other variations thereof or comparable terminology, are intended to identify forward-looking statements. Forward-looking statements are included in this report pursuant to the "Safe Harbor" provision of the Private Securities Litigation Reform Act of 1995. Such statements are predictions only, and the actual events or results may differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those relating to investment capital demand, pricing, market acceptance, the effect of economic conditions, litigation and the effect of regulatory proceedings, competitive forces, the results of financing and investing efforts, the ability to complete transactions and other risks identified below or in the Fund's filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Fund undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. The following analysis of the financial condition and results of operations of the Fund should be read in conjunction with the Financial Statements, the Notes thereto and the other financial information included elsewhere in this report. OVERVIEW The Fund is a non-diversified investment company that is regulated as a business development company under the Investment Company Act. The primary investment objective, as amended by shareholder vote on September 16, 2003, is to seek to maximize total return from capital appreciation and/or income. The Fund seeks to achieve its investment objective by providing equity and debt financing to Portfolio Companies. Historically the Fund's investing activities have focused on private equity securities. Generally, private equity investments are structured as convertible preferred stock, and portfolio companies do not pay dividends. Consequently current income has not been a significant part of the equity portfolio. Private equity investments typically range up to $10.0 million and the Fund's goal had previously been for these investments to achieve liquidity within three to five years. Typically a cash return on the investment is not received until a liquidity event, i.e. such as a public offering or merger, occurs. On September 16, 2003, the stockholders approved the Current Board's Proposed Plan, as discussed in Part I, Item 1, "Investment Practices", and in Item 4, "Submission of Matters to a Vote of Security Holders", which included (i) appointing Michael Tokarz as the Chairman of the Board and Portfolio Manager of the Fund, (ii) adopting an amended investment objective whereby the Fund would seek to maximize total return from capital appreciation and/or income, and (iii) seeking to achieve its investment objective through senior and subordinated loans, venture capital, mezzanine and preferred instruments and private equity instruments and (iv) conducting a tender offer of up to 25% of the Fund's outstanding shares at a price of 95% of the net asset value of such shares. The Fund did not complete any investments under the new investment objective as of the end of its most recently completed fiscal year. On November 6, 2003, Michael Tokarz assumed his new position as Portfolio Manager and is in the process of seeking to implement the new strategy. GENERAL INVESTMENT CLIMATE During the current fiscal year, the Fund continued to operate in the aftermath of the 2001 severe downturn in technology stocks and its profound impact on the technology venture capital industry. M&A activity and new issues of technology stocks began fiscal 2003 at pre-1998 levels but were demonstrating signs of modest recovery by mid-year. Macro economic trends appeared to be guided throughout the year by the conflict in the Middle East, the U.S. political debate about both the form and amount of tax stimulus, and the outlook for job growth. Risk capital for emerging tech companies remained scarce as measured by the slow pace of fundraising by private venture capital funds and relatively stable quarterly disbursements by existing venture funds during the period. It is estimated by the National Venture Capital Association that more than half of the committed capital of private venture capital funds is held as reserves for follow-on financing. Most follow-on rounds in the technology venture-backed companies during the past fiscal year took place at prices below existing holdings or on terms that were more favorable to the investors than for previous rounds of financing. The Fund's new management team will continue to evaluate every Portfolio Company for opportunities to participate in follow-on investments that are believed to have potential for enhancing the Fund's overall returns. The fiscal year ended October 31, 2003 revealed that the venture capital industry continued its trend of devoting significant portion of its resources to poorly performing, unprofitable companies. Our co-investors and the Fund took steps seeking to get back to pre-bubble standards of accountability and planning in providing assistance to the Fund's Portfolio Companies. This resulted in falling valuations for those technology companies without a clear path to profitability or wide acceptance of new technologies and products. Further, the standards for alternative methods of exiting private technology stocks, i.e., IPOs and mergers and acquisitions, have been raised, in Management's view, to require profitable operating performance or significant market penetration. The venture capital industry appears to have made moderate improvement, especially in the later half of 2003, as measured by the increased flow of new deals and rising tech stock indexes. These trends may help create a favorable climate for our existing holdings of technology-based companies. With the shift in the Fund's investment objective in September 2003 to seeking total return from a broad range of private equity investments, including senior and subordinated loans (across a broad range of industries and sectors), the investment climate for private technology stocks may have less of an impact on our activities in the new fiscal year and beyond. This greater investment flexibility may permit us to take advantage of what appears to be an uneven economic recovery but there can be no assurances such strategy will be successful. INVESTMENT INCOME FOR THE YEARS ENDED OCTOBER 31, 2003 AND 2002. Dividend and interest income was $2.9 million in 2003 and $3.7 million in 2002, a decrease of $0.8 million or 21.6%. The reduction in dividend and interest income during the year ended October 31, 2003 was primarily the result of lower interest rates on a reduced cash balance. Interest and dividend income was primarily related to the Fund's investment in short-term investments and not from portfolio companies. FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001. Dividend and interest income was $3.7 million in 2002 and $9.0 million in 2001, a decrease of $5.3 million or 58.9%. The reduction in dividend and interest income during the year ended October 31, 2002 was primarily due to the redeployment of both cash available for short term investing and the decline in short-term interest rates. OPERATING EXPENSES FOR THE YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001. Operating expenses were $11.4 million in 2003 and $6.9 million in 2002, an increase of $4.5 million or 65.2%. The increase in operating expenses during the year ended October 31, 2003 is explained below. Operating expenses were $6.9 million in 2002 and $7.39 million in 2001, a decrease of $0.49 million or 6.63%. On an annualized basis operating expenses are not expected to increase, though it is not possible to predict with any degree of accuracy the future level of operating costs associated with the Fund's operations. YEAR ENDED OCTOBER 31, 2003 Significant components of operating expenses for the year ended October 31, 2003 include proxy/litigation fees & expenses of $4.0 million (discussed below), salaries and benefits of $2.5 million, legal fees of $1.5 million, facilities costs of $1.3 million, insurance premium expenses of $1.1 million, directors' fees of $455,000, and administration fees of $139,000. During the year ended October 31, 2003, the Fund paid or incurred $4.0 million for legal and proxy solicitation fees and expenses, which includes $2.2 million accrued and paid at the direction of the Board of Directors, to reimburse the legal and proxy solicitation fees and expenses of two major Fund shareholders, Millenco, L.P. and Karpus Investment Management, including their costs of obtaining a judgment against the Fund in the Delaware Chancery Court and costs associated with the proxy process and the election of the current Board of Directors. A review is being made of the Fund's rights of reimbursement for expenses and losses to determine what amounts, if any, may be recoverable from the Fund's insurance carrier. During the year ended October 31, 2003, the Fund paid or accrued $2.5 million in salaries and benefits. The Fund does not anticipate paying or accruing as much in salaries and benefits for the year ending October 31, 2004 as the number of Fund employees has been significantly reduced. During the year ended October 31, 2003, the Fund paid or accrued an additional $1.5 million in legal fees. The Fund does not anticipate paying or accruing as much in legal fees for the year ending October 31, 2004 as Management and the Board of Directors have solidified the Fund's intended direction. During the year ended October 31, 2003, the Fund paid or accrued $1.3 million in facilities expenses. Included in that expense is an accrual of $547,250 for future payments for the Fund's property lease at 3000 Sand Hill Road, Building 1 Suite 155, Menlo Park, CA for the remainder of the lease through October 2005. The Fund anticipates lower facilities expenses during the year ending October 31, 2004. During the year ended October 31, 2003, the Fund paid or accrued $455,000 in directors' fees. On July 1, 2003, the Current Board reduced their fees by 50% through October 31, 2003. In February 2003, the former management of the Fund ("Former Management") entered into new Directors & Officers/Professional Liability Insurance policies with a premium of approximately $1.4 million. The cost is being amortized over the life of the policy, through February 2004. For the year ended October 31, 2003, the Fund had expensed $1.1 million in insurance premiums. YEAR ENDED OCTOBER 31, 2002 During the fiscal year ended October 31, 2002, the Fund operated under an advisory agreement with meVC Advisers, Inc. The Fund was charged a management fee by the Former Advisor at an annual rate of 2.5% of the weekly net assets of the Fund. The Former Advisor agreed to pay all Fund expenses above and beyond the 2.5% paid to the Former Advisor by the Fund. The Former Advisor resigned without notice on June 19, 2002 whereupon the Board of Directors for the Fund voted to internalize all management and administrative functions of the Fund. Consequently, since June 19, 2002, the Fund has directly paid all of its own operating expenses in addition to legal fees and proxy solicitation expenses of incumbent directors. Significant components of operating expenses for the period from June 19, 2002 through October 31, 2002 included salaries and benefits of $696,000, consulting and public relation fees of $547,000, directors fees of $307,000, professional fees, comprising audit of $155,000 and legal fees of $998,000, insurance of $134,000 and facilities of $166,000 . Prior to June 19, 2002, all Fund expenses, including compensation to the directors and officers, were paid by the Former Advisor. Subsequent to the resignation of the Former Advisor, the Fund determined that the Former Advisor had not paid certain vendors for services performed on behalf of the Fund, which it had agreed to pay. During the fiscal year ended October 31, 2002, the Fund paid or accrued $463,535 in expenses to pay those vendors. See "Legal Proceedings" in Part I, Item 3 of this Form 10-K for a discussion of legal action against the Former Advisor by Millenco L.P., a stockholder of the Fund, to recover certain advisory fees paid by the Fund to the Former Advisor. YEAR ENDED OCTOBER 31, 2001 During the fiscal year ended October 31, 2001, the Fund operated under an advisory agreement with meVC Advisers, Inc. The Fund was charged a management fee by the Former Advisor at an annual rate of 2.5% of the weekly net assets of the Fund. The Former Advisor agreed to pay all Fund expenses above and beyond the 2.5% paid to the Former Advisor by the Fund. During the year ended October 31, 2001, the Fund paid the Former Advisor $7.39 million in management fees who in turn distributed $2.96 million to the Former Sub-Advisor. REALIZED GAINS AND LOSSES ON SALES OF PORTFOLIO SECURITIES FOR THE YEARS ENDED OCTOBER 31, 2003 AND 2002. Net realized losses were $4.3 million for 2003 and $33.5 million for 2002, a decrease of $29.3 million or 87.3%. Realized losses for 2003 resulted mainly from (i) the write-off of Cidera, Inc. due to its ceasing operations, resulting in a realized loss of $3.75 million, (ii) the return of capital disbursement from EXP Systems, Inc. to its preferred shareholders, resulting in a realized loss of approximately $178,000, and (iii) the partial return of the Fund's investment in BS Management resulting in a loss of approximately $322,000. Realized losses for 2002 resulted mainly from the transactions involving the assets of INFOUSA.com, Inc. being acquired by INFOUSA, Inc., the parent company of INFOUSA.com, Inc., resulting in a realized loss of $3.3 million, the disbursement of assets from EXP Systems, Inc. to its preferred shareholders resulting in a realized loss of $8 million, the write-off of Personic Software, Inc. ("Personic") due to the irreversible dilution of the Fund's equity position resulting in a realized loss of $10.8 million, the write-off of InfoImage, Inc. ("InfoImage") due to the company filing for Chapter 7 of the Bankruptcy Code resulting in a realized loss of $2.4 million, the write-off of IQdestination due to the cessation of operations and subsequent dissolution of the company resulting in a realized loss of $3.5 million, the acquisition of the assets of Annuncio Software, Inc. ("Annuncio") by PeopleSoft resulting in a realized loss of $3.4 million, and the write-off of Mediaprise, Inc. ("Mediaprise") due to the cessation of operations and subsequent dissolution of the company resulting in a realized loss of $2 million. FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001. Net realized losses were $33.5 million for 2002 and net realized gains were $5,123 for 2001, a difference of $33.5 million. Such realization of gains for 2001 was mainly from the sale of short-term securities. UNREALIZED APPRECIATION AND DEPRECIATION OF PORTFOLIO SECURITIES AND ACCUMULATED DEFICIT FOR THE YEARS ENDED OCTOBER 31, 2003 AND 2002. Net unrealized depreciation was $42.8 million in 2003 and $21.8 million in 2002, an increase of $21.0 million or 96.3%. Such net increase in unrealized depreciation on investment transactions for 2003 resulted from the determinations of the Valuation Committee of the Former Board (the "Former Valuation Committee") and/or the Valuation Committee of the Current Board (the "Current Valuation Committee") to mark down the fair value of the Fund's investments in Actelis Networks, Inc., Arcot Systems, Inc., BlueStar Solutions, Inc., BS Management, CBCA, Inc., Endymion Systems, Inc., FolioFN, Inc., Integral Development Corporation, Ishoni Networks, Inc., Lumeta Corporation, Mainstream Data, Inc., PTS Messaging, Inc. (formerly Pagoo, Inc.), Phosistor Technologies, Inc., ProcessClaims, Inc. DataPlay, Inc., SafeStone Technologies PLC, Sonexis, Inc., Vendio Services, Inc. (formerly AuctionWatch.com, Inc.), Yaga, Inc., and 0-In Design Automation, Inc. The Former Valuation Committee marked down the fair value of the Fund's investments by $6.6 million and the Current Valuation Committee marked down the fair value of the Fund's investments by an additional $36.2 million. The Former Valuation Committee and/or the Current Valuation Committee decided to write down the carrying value of the investments for a variety of reasons including, but not limited to, portfolio company performance, prospects of a particular sector, data on purchases or sales of similar interests of the portfolio company, cash consumption, cash on-hand, valuation comparables, the likelihood of a company being able to attract further financing, a third party valuation event, cramdowns, limited liquidity options, and a company's likelihood or ability to meet financial obligations. For a further discussion on the Portfolio Companies, please refer to "Portfolio Investments" below. Such net increase in unrealized depreciation on investment transactions for 2002 resulted mainly from the Former Valuation Committee's decision to mark down the value of the Fund's investments in Actelis Networks, Inc., AuctionWatch.com, Inc., BlueStar Solutions, Inc., Cidera, Inc., DataPlay, Inc., Endymion Systems, Inc., FolioFN, Inc., Ishoni Networks, Inc., PTS Messaging (formerly Pagoo, Inc.), SafeStone Technologies PLC, ShopEaze Systems, Inc., Sonexis, Inc., and Yaga, Inc. The Former Valuation Committee decided to write down the carrying value of the investments for a variety of reasons including, but not limited to, portfolio company performance, prospects of a particular sector, data on purchases or sales of similar interests of the portfolio company, cash consumption, cash on-hand, valuation comparables, the likelihood of a company being able to attract further financing, a third party valuation event, cramdowns, limited liquidity options, and a company's likelihood or ability to meet financial obligations. The Fund's increase in accumulated deficit was $55.4 million in 2003 and $59.1 million in 2002, a comparatively lower increase by $3.7 million or 6.3%. The Fund's total accumulated deficit was $171.7 million for 2003 and $116.3 million for 2002, an increase of $55.4 million or 47.6%. The accumulated deficit in 2003 is due primarily to the Valuation Committee's mark down of the valuations of certain Portfolio Company investments of $42.8 million, net realized losses of $4.2 million, and net investment loss of $8.5 million. FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001. Net unrealized depreciation was $21.8 million in 2002 and $53.0 million in 2001, a decrease of $31.2 million or 58.9%. The net increase in unrealized depreciation for 2001 resulted mainly from the Board of Directors' decision to mark down the value of the Fund's investments in Annuncio Software, Inc.; AuctionWatch.com, Inc.; BlueStar Solutions, Inc.; Cidera, Inc.; Endymion Systems, Inc.; EXP Systems, Inc.; FOLIOFN, Inc.; InfoImage, Inc.; INFOUSA.com, Inc.; IQdesination; Ishoni Networks, Inc.; Pagoo.com, Inc.; Personic Software, Inc.; SafeStone Technologies PLC; and ShopEaze Systems, Inc. The Fund's increase in accumulated deficit was $59.1 million in 2002 and $56.9 million in 2001, an increase of $2.2 million or 3.9%. The Fund's total accumulated deficit was $116.3 million for 2002 and $57.2 million for 2001, an increase of $59.1 million or 103.3%. PORTFOLIO INVESTMENTS FOR THE YEARS ENDED OCTOBER 31, 2003 AND 2002. The cost of equity investments held by the Fund was $125.6 million in 2003 and $127.6 million in 2002, a decrease of $2.0 million or 1.6%. The aggregate fair value of equity investments was $11.6 million in 2003 and $50.1 million in 2002, a decrease of $38.5 million or 76.8%. The decrease in the fair value of the equity investments held by the Fund resulted mainly from the Valuation Committee's mark down of the valuations of certain Portfolio Company investments. The cost of debt instruments held by the Fund was $16.4 million in 2003 and $0 in 2002. The aggregate fair value of debt instruments was $12.5 million in 2003 and $0 in 2002. The increase in the cost and fair value of the debt investments resulted mainly from the Fund's debt investments made in 2003. The cost of subordinated notes held by the Fund was $4.5 million in 2003 and $6.3 million in 2002, a decrease of $1.8 million or 28.6%. The aggregate fair value of subordinated notes was $0 in 2003 and $4.1 million in 2002. The decrease in the fair value of the subordinated notes held by the Fund resulted mainly from the Valuation Committee's mark down of the valuations of certain Portfolio Company investments. The cost and aggregated fair value of short-term securities held by the Fund was $113.2 million in 2003 and $62.8 million in 2002, an increase of $50.4 million or 80.3%. The increase in short-term investments resulted mainly from the Fund's increased investments in short-term securities and subsequent decrease of investments in cash and cash equivalents in 2003. The cost and aggregate fair value of cash and cash equivalents held by the Fund was $6,850 in 2003 and $78.8 million in 2002, a decrease of $78.8 million or 100%. The aggregate fair value of short-term securities was $113.2 million in 2003 and $62.8 million in 2002, an increase of $50.4 million or 80.3%. The decrease in cash and cash equivalents resulted mainly from the Fund's decreased investments in cash and cash equivalents and subsequent increase of investments in short-term investments in 2003. Management continues to evaluate opportunities for its Portfolio Companies to realize value for the Fund and its stockholders. At October 31, 2003, the Fund had active investments in the following Portfolio Companies: ACTELIS NETWORKS, INC. Actelis Networks, Inc. ("Actelis"), Fremont, California, provides authentication and access control solutions to secure the integrity of e-business in Internet-scale and wireless environments. At October 31, 2002, the Fund's investment in Actelis consisted of 1,506,025 shares of Series C Preferred Stock at a cost of $5.0 million. The investment was assigned a fair value of $2.5 million, or approximately $1.66 per share. During the year ended October 31, 2003, the Current Valuation Committee marked down the carrying value of the Fund's investment in Actelis by writing down the investment by $1.5 million to $1.0 million. At October 31, 2003, the Fund's investment in Actelis consisted of 1,506,025 shares of Series C Preferred Stock at a cost of $5.0 million. The investment has been assigned a fair value of $1.0 million, or approximately $0.66 per share. ARCOT SYSTEMS, INC. Arcot Systems, Inc. ("Arcot"), Santa Clara, California, develops solutions to address the challenges of securing e-business applications in Internet-scale and transactional environments. On December 30, 2002, the Fund entered into an investment of $5.0 million in the form of a Credit Facility with Arcot maturing on December 31, 2005. The note earns a floating rate of interest at prime plus 5% per annum with a floor at 10% per annum and a ceiling at 12% per annum on the outstanding balance of the note. In connection with the Fund's $5.05 million Credit Facility with Arcot Systems, Inc., the Fund also received warrants to purchase shares of Series E Convertible Preferred Stock of Arcot Systems, Inc., equal to 3% of the outstanding common stock on a fully diluted basis, at an exercise price of $0.966 per share, as adjusted. The warrants expire on December 31, 2009. During the year ended October 31, 2003, the Current Valuation Committee marked down the carrying value of the Fund's investments in Arcot by writing down the investment by $3.0 million to $2.0 million. At October 31, 2003, the Fund's investment in Arcot consisted of an outstanding balance on the loan of $5.05 million with a cost of $5.0 million. The investment is being valued at $2.0 million and the warrants are being valued at $0.0. BLUESTAR SOLUTIONS, INC. BlueStar Solutions, Inc. ("BlueStar"), Cupertino, California, is a provider of enterprise applications outsourcing services. BlueStar delivers complete end-to-end services for managing SAP applications. At October 31, 2002, the Fund's investments in BlueStar consisted of 74,211 shares of Series C Preferred Stock, 4,545,455 shares of Series D Preferred Stock, 49,474 shares of Common Stock, and 136,054 warrants to purchase 136,054 shares of Series C Preferred Stock with a combined cost of $13.0 million. The investments were assigned a fair value of $4.5 million, or approximately $20.21 per share of the Series C Preferred Stock, approximately $0.66 per share of the Series D Preferred Stock, $0.00 per share of the Common Stock, and $0.00 per warrant. During the year ended October 31, 2003, the Current Valuation Committee marked down the carrying value of the Fund's investments in BlueStar by writing down the Series C Preferred Stock by $1.5 million to $0.0 and by writing down the Series D Preferred Stock by $1.5 million to $1.5 million. On May 26, 2003, and based on the Fund's investment-related diligence, the 136,054 warrants to purchase shares of Series C Preferred Stock of BlueStar were not exercised by the Fund. At October 31, 2003, the Fund's investments in BlueStar consisted of 74,211 shares of Series C Preferred Stock, 4,545,455 shares of Series D Preferred Stock, and 49,474 shares of Common Stock with a combined cost of $13.0 million. The investments have been assigned a fair value of $1.5 million, or $0.00 per share of the Series C Preferred Stock, approximately $0.33 per share of the Series D Preferred Stock, and $0.00 per share of the Common Stock. BS MANAGEMENT On December 18, 2002, the Fund entered into an investment of $3.0 million in the form of a Loan Agreement with BS Management maturing on March 17, 2003. BS Management is based in the Isle of Man. During the year ended October 31, 2003, the Current Valuation Committee marked down the carrying value of the Fund's investment in BS Management by writing down the loan by $1.5 million to $1.5 million. On April 13, 2003, the Fund received a partial return of capital from BS Management of approximately $70,000 and on August 22, 2003, the Fund received a final return of capital from BS Management of $2.6 million. At October 31, 2003, the Fund no longer held an investment in BS Management. During the year ended October 31, 2003, the SEC requested that the Fund provide it with documents and other information concerning the BS Management transaction, and the Fund has complied with such requests. For a discussion of the BS Management legal proceedings and negotiated return of capital, please refer to Part I, Item 3 "Legal Proceedings". CBCA, INC. CBCA, Inc. ("CBCA"), Oakland, California, has developed an automated health benefit claims processing and payment system that includes full website functionality. At October 31, 2002, the Fund's investment in CBCA consisted of 4,774,636 shares of Series E Preferred Stock with a cost of $10.0 million. The investment was assigned a fair value of $10.0 million, or approximately $2.09 per share. In December 2002, the Fund entered into follow-on investments of $2.0 million in CBCA, consisting of 955,346 shares of Series E Preferred Stock at approximately $2.09 per share. During the year ended October 31, 2003, the Current Valuation Committee marked down the carrying value of the Fund's investments in CBCA by writing down the Series E Preferred Stock by $11.5 million to $500,000. At October 31, 2003, the Fund's investment in CBCA consisted of 5,729,562 shares of Series E Preferred Stock with a cost of $12.0 million. The investment has been assigned a fair value of $500,000, at approximately $0.09 per share. John Grillos, the former Chief Executive Officer of the Fund, served as a director of CBCA and resigned his directorship on March 6, 2003. CIDERA, INC./MAINSTREAM DATA, INC. Cidera, Inc. ("Cidera"), Laurel, Maryland, provided satellite-based delivery of broadband content directly to Internet access points closest to the end users. Mainstream Data, Inc. ("Mainstream"), Salt Lake City, Utah, builds and operates satellite, Internet, and wireless broadcast networks for the world's largest information companies. Mainstream Data networks deliver text news, streaming stock quotations, and digital images to subscribers around the world. At October 31, 2002, the Fund's investment in Cidera consisted of 857,192 shares of Series D Preferred Stock with a cost of $7.5 million. The investment was assigned a fair value of approximately $500,000, or approximately $0.58 per share. Subsequent to October 31, 2002, Mainstream was spun out from Cidera, resulting in a 50%/50% cost basis split between the two investments. On September 26, 2003, the Fund received a nominal return of capital from Cidera as a single and final repayment of the Fund's investment. During the year ended October 31, 2003, the Current Valuation Committee marked down the carrying value of the Fund's investments in Mainstream by writing down the Series D Preferred Stock by $500,000 to $0. At October 31, 2003, the Fund no longer held an investment in Cidera. At October 31, 2003, the Fund's investment in Mainstream consisted of 85,719 shares of Series D Preferred Stock with a cost of $3.75 million. The investment has been assigned a fair value of $0. DATAPLAY, INC. DataPlay, Inc. ("DataPlay"), Boulder, Colorado, developed new ways of enabling consumers to record and play digital content. At October 31, 2002, the Fund's total investment in DataPlay, with a cost basis of $12.0 million, consisted of 2,500,000 shares of Series D Preferred Stock and seven promissory notes with a combined cost of $4.5 million. The investment had been assigned a fair value of $2.25 million, comprising $0.00 per share for the Series D Preferred Stock and 50% of the face value of the promissory notes. On November 20, 2002, DataPlay filed for bankruptcy under Chapter 11 of the Code. On January 15, 2003, the Former Valuation Committee marked down the remaining value of the Fund's investment in all of the Promissory Notes issued by DataPlay by $2.25 million and wrote off all of the accrued interest from the Notes. At October 31, 2003, the Fund's total investment in DataPlay consisted of 2,500,000 shares of Series D Preferred Stock with a cost basis of $7.5 million and seven promissory notes with a combined cost of $4.5 million. The investments have been assigned a fair value of $0.0. DETERMINE SOFTWARE, INC. Determine Software, Inc. ("Determine"), San Francisco, California, is a provider of web-based contract management software. On February 5, 2003, the Fund entered into an investment of $2.0 million in the form of a Credit Facility with Determine maturing on January 31, 2006. The note earns a floating rate of interest at prime plus 5% per annum with a floor at 12% per annum on the outstanding balance. The Fund also received 2,229,955 warrants to purchase a future round of convertible preferred stock at a price of $0.205 per share. The warrants expire on January 31, 2010. At October 31, 2003, the Fund's investment in Determine consisted of an outstanding balance on the loan of $2.02 million with a cost of $2.0 million and 2,229,955 warrants to purchase a future round of convertible preferred stock at a price of $0.205 per share. The investment is being valued at $2.0 million and the warrants are being valued at $0.0. ENDYMION SYSTEMS, INC. Endymion Systems, Inc. ("Endymion "), Oakland, California, is a single source supplier for strategic, web-enabled, end-to-end business solutions that help its customers leverage Internet technologies to drive growth and increase productivity. At October 31, 2002, the Fund's investment in Endymion consisted of 7,156,760 shares of Series A Preferred Stock with a cost of $7.0 million. The investment was assigned a fair value of $2.0 million, or approximately $0.28 per share. During the year ended October 31, 2003, the Current Valuation Committee marked down the carrying value of the Fund's investments in Endymion by writing down the Series A Preferred Stock by $2.0 million to $0.0. At October 31, 2003, the Fund's investment in Endymion consisted of 7,156,760 shares of Series A Preferred Stock with a cost of $7.0 million. The investment has been assigned a fair value of $0.0. FOLIOFN, INC. FolioFN, Inc. ("FolioFN"), Vienna, Virginia, is a financial services technology company that delivers investment solutions to financial services firms and investors. At October 31, 2002, the Fund's investment in FolioFN consisted of 5,802,259 shares of Series C Preferred Stock with a cost of $15.0 million. The investment was assigned a fair value of $3.0 million, or approximately $0.52 per share. During the year ended October 31, 2003, the Current Valuation Committee marked down the carrying value of the Fund's investments in FolioFN by writing down the Series C Preferred Stock by $3.0 million to $0.0. At October 31, 2003, the Fund's investment in FolioFN consisted of 5,802,259 shares of Series C Preferred Stock with a cost of $15.0 million. The investment has been assigned a fair value of $0.0. John Grillos, the former Chief Executive Officer of the Fund, served as a director of FolioFN and resigned his directorship on behalf of the Fund on March 10, 2003. INFOUSA.COM, INC. At October 31, 2002, the Fund's investment consisted of a $1.8 million promissory note from INFOUSA, Inc., the parent company of INFOUSA.com. The investment was assigned a fair value of $1.8 million. On March 5, 2003, the Fund received early repayment of the INFOUSA, Inc. promissory note with proceeds of $1,845,445 representing full repayment of the note and outstanding accrued interest. INTEGRAL DEVELOPMENT CORPORATION Integral Development Corporation ("Integral"), Mountain View, California, is a developer of technology which enables financial institutions to expand, integrate and automate their capital markets businesses and operations. On December 30, 2002, the Fund entered into an investment of $5.0 million in the form of a Convertible Credit Facility with Integral maturing on December 31, 2005. The transaction earns a floating rate of interest at prime plus 5% per annum with a floor at 10% per annum and a ceiling at 12% per annum on the outstanding balance, prior to conversion. In connection with the Fund's $5.05 million Credit Facility with Integral Development Corporation, the Fund also received warrants to purchase shares of Series C Convertible Preferred Stock of Integral Development Corporation (or a future round of Preferred Stock), equal to the number obtained by multiplying the outstanding common stock by 0.030928, at an exercise price equal to $0.70 per share. The warrants expire on December 31, 2009. During the year ended October 31, 2003, Integral made principal repayments of the Credit Facility totaling $561,112. During the year ended October 31, 2003, the Current Valuation Committee then marked down the carrying value of the Fund's investments in Integral by writing down the investment by $1.0 million to $3.5 million. At October 31, 2003, the Fund's investment in Integral consisted of an outstanding balance on the loan of $4.46 million with a cost of $4.46 million. The investment is being valued at $3.5 million and the warrants are being valued at $0.0. ISHONI NETWORKS, INC. Ishoni Networks, Inc. ("Ishoni"), Santa Clara, California, developed technology that allows customer premises equipment manufacturers and service providers to offer integrated voice, data and security services over a single broadband connection to residential and business customers. At October 31, 2002, the Fund's investment in Ishoni consisted of 2,003,607 shares of Series C Preferred Stock with a cost of $10.0 million. The investment was assigned a fair value of $2.5 million, or approximately $1.25 per share. During the year ended October 31, 2003, the Former Valuation Committee marked down the carrying value of the Fund's investments in Ishoni by writing down the Series C Preferred Stock by $2.5 million to $0.0. At October 31, 2003, the Fund's investment in Ishoni consisted of 2,003,607 shares of Series C Preferred Stock with a cost of $10.0 million. The investment has been assigned a fair value of $0.0. LUMETA CORPORATION Lumeta Corporation ("Lumeta"), Somerset, New Jersey, is a developer of network management, security, and auditing solutions. The company provides businesses with a comprehensive analysis of their network security that reveals the vulnerabilities and inefficiencies of their corporate intranets. At October 31, 2002, the Fund's investment in Lumeta consisted of 384,615 shares of Series A Preferred Stock and 266,846 shares of Series B Preferred Stock with a cost of approximately $250,000 and $156,489, respectively. The investment in the Series A Preferred Stock was assigned a fair value of approximately $269,000 and the investment in the Series B Preferred Stock was assigned a fair value of approximately $187,000, or approximately $0.70 per share for each the Series A and B Preferred Stock. During the year ended October 31, 2003, the Current Valuation Committee marked down the carrying value of the Fund's investments in Lumeta by writing down the Series A Preferred Stock by approximately $225,000 to approximately $44,000 and by writing down the Series B Preferred Stock from $187,000 to approximately $156,000. At October 31, 2003, the Fund's investment in Lumeta consisted of 384,615 shares of Series A Preferred Stock and 266,846 shares of Series B Preferred Stock with a combined cost of approximately $406,000. The investments have been assigned a fair value of $200,000, or approximately $0.11 per share of Series A Preferred Stock and approximately $0.59 per share of Series B Preferred Stock. PHOSISTOR TECHNOLOGIES, INC. Phosistor Technologies, Inc. ("Phosistor"), Pleasanton, California, designed and developed integrated semiconductor components and modules for global telecommunications and data communications networks. At October 31, 2002, the Fund's investment in Phosistor consisted of 6,666,667 shares of Series B Convertible Preferred Stock with a cost of $1.0 million. The investment was assigned a fair value of $1.0 million, or approximately $0.15 per share. During the year ended October 31, 2003, the Current Valuation Committee marked down the carrying value of the Fund's investments in Phosistor by $1.0 million to $0.0. At October 31, 2003, the Fund's investment in Phosistor consisted of 6,666,667 shares of Series B Preferred Stock with a cost of $1.0 million. The investment has been assigned a fair value of $0.0. PROCESSCLAIMS, INC. ProcessClaims, Inc. ("ProcessClaims"), Manhattan Beach, California, provides web-based solutions and value added services that streamline the automobile insurance claims process for the insurance industry and its partners. At October 31, 2002, the Fund's investment in ProcessClaims consisted of 6,250,000 shares of Series C Preferred Stock, 849,257 shares of Series D Preferred Stock, and 873,362 warrants to purchase 873,362 shares of Series E Convertible Preferred Stock with a combined cost of $2.4 million. The investment in the Series C Preferred Stock was assigned a fair value of $2.94 million, or approximately $0.471 per share of Series C Preferred Stock, the investment in the Series D Preferred Stock was assigned a fair value of $400,000 or approximately $0.471 per share of Series D Preferred Stock, and the investment in the Series E warrants was assigned a fair value of $0.0. During the year ended October 31, 2003, the Current Valuation Committee marked down the carrying value of the Fund's investments in ProcessClaims by writing down the Series C Preferred Stock by approximately $940,000 to $2.0 million. At October 31, 2003, the Fund's investments in ProcessClaims consisted of 6,250,000 shares of Series C Preferred Stock, 849,257 shares of Series D Preferred Stock, and 873,362 warrants to purchase 873,362 shares of Series E Convertible Preferred Stock with a combined cost of $2.4 million. The investment in the Series C Preferred Stock was assigned a fair value of $2.0 million, or approximately $0.32 per share of Series C Preferred Stock, the investment in the Series D Preferred Stock was assigned a fair value of $400,000 or approximately $0.471 per share of Series D Preferred Stock, and the investment in the Series E warrants was assigned a fair value of $0.0. Nino Marakovic, an employee of the Fund, serves as a director of ProcessClaims. PTS MESSAGING, INC. (FORMERLY PAGOO, INC.) PTS Messaging, Inc. ("PTS Messaging"), formerly Pagoo, Inc., Lafayette, California, developed Internet voice technologies offering Internet services direct to the consumer. At October 31, 2002, the Fund's investment in PTS Messaging consisted of 1,956,026 shares of Series A-1 Convertible Preferred Stock with a cost of $11.6 million. The investment was assigned a fair value of approximately $170,000, or approximately $0.09 per share. During the year ended October 31, 2003, the Current Valuation Committee marked down the carrying value of the Fund's investment in PTS Messaging by writing down the Series A-1 Convertible Preferred Stock by approximately $170,000 to $0.0. At October 31, 2003, the Fund's investment in PTS Messaging consisted of 1,956,026 shares of Series A-1 Convertible Preferred Stock with a cost of $11.6 million. The investment has been assigned a fair value of $0.0. Nino Marakovic, an employee of the Fund, serves as a director of PTS Messaging. SAFESTONE TECHNOLOGIES PLC SafeStone Technologies PLC ("SafeStone"), Old Amersham, UK, provides organizations with secure access controls across the extended enterprise, enforcing compliance with security policies and enabling effective management of the corporate IT and e-business infrastructure. At October 31, 2002, the Fund's investments in SafeStone consisted of 1,714,455 shares of Series A Preferred Stock and 391,923 shares of Series B Preferred Stock with a combined cost basis of $4.0 million. The investment in the Series A Preferred Stock was assigned a fair value of $2.19 million, or approximately $1.28 per share and the investment in the Series B Preferred Stock was assigned a fair value of $500,000, or approximately $1.28 per share. During the year ended October 31, 2003, the Former Valuation Committee marked down the carrying value of the Fund's investments in SafeStone by writing down the remaining carrying value of the Series A Preferred Stock by $1.19 million to $1.0 million. During the year ended October 31, 2003, the Current Valuation Committee marked down the carrying value of the Fund's investments in SafeStone by writing down the remaining carrying value of the Series A Preferred Stock by $1.0 million to $0 and by writing down the remaining carrying value of the Series B Preferred Stock by approximately $500,000 to $0. On July 29, 2003, the Fund's 1,714,455 shares of Series A Preferred Stock and 391,923 shares of Series B Preferred Stock were recapitalized into 2,106,378 shares of Series A Ordinary Stock. At October 31, 2003, the Fund's investments in SafeStone consisted of 2,106,378 shares of Series A Ordinary Stock with a cost of $4.0 million. The investments have been assigned a fair value of $0.0. SHOPEAZE SYSTEMS, INC. ShopEaze Systems, Inc. ("ShopEaze"), Sunnyvale, California, partnered with established retailers to help them build online businesses to complement their existing brick-and-mortar businesses. At October 31, 2002 and October 31, 2003, the Fund's investment in ShopEaze consisted of 2,097,902 shares of Series B Preferred Stock with a cost of $6.0 million. At both October 31, 2002 and October 31, 2003, the investment has been assigned a fair value of $0.0. ShopEaze ceased operations during 2002. SONEXIS, INC. Sonexis, Inc. ("Sonexis"), Boston, Massachusetts, is the developer of a new kind of conferencing solution - Sonexis ConferenceManager - a modular platform that supports a breadth of audio and web conferencing functionality to deliver rich media conferencing. At October 31, 2002, the Fund's investment in Sonexis consisted of 2,590,674 shares of Series C Preferred Stock with a cost of $10.0 million. The investment was assigned a fair value of $7.0 million, or approximately $2.70 per share. During the year ended October 31, 2003, the Current Valuation Committee marked down the carrying value of the Fund's investment in Sonexis by writing down the Series C Preferred Stock by $6.5 million to approximately $500,000. At October 31, 2003, the Fund's investment in Sonexis consisted of 2,590,674 shares of Series C Preferred Stock with a cost of $10.0 million. The investment has been assigned a fair value of approximately $500,000, or approximately $0.19 per share. SYGATE TECHNOLOGIES, INC. Sygate Technologies, Inc. ("Sygate"), Fremont, California, is a provider of enterprise-focused security policy enforcement solutions which provide the infrastructure to maintain an unbroken chain of control to IT Management. At October 31, 2002 and October 31, 2003, the Fund's investment in Sygate consisted of 9,756,098 shares of Series D Preferred Stock with a cost of $4.0 million. At both October 31, 2002 and October 31, 2003, the investment was assigned a fair value of $4.0 million, or approximately $0.41 per share. SYNHRGY HR TECHNOLOGIES, INC. Synhrgy HR Technologies, Inc. ("Synhrgy"), Houston, Texas, provides human resources technology and outsourcing services to Fortune 1000 companies. On December 26, 2002, the Fund entered into an investment of $5.0 million in the form of a Credit Facility with Synhrgy HR Technologies, Inc. ("Synhrgy") maturing on January 3, 2006. The note earns a fixed rate of interest at 12% per annum on the outstanding balance of the note. The Fund also received 43,750 warrants to purchase Series B-1 Preferred Stock at a price of $8.00 per share. The warrants expire on December 23, 2009. At October 31, 2003, the Fund's investment in Synhrgy consisted of an outstanding balance on the loan of $5.0 million with a cost of $4.96 million. The investment is being valued at $4.96 million and the warrants are being valued at $0.0. Subsequent to October 31, 2003, Synhrgy repaid the balance of its original $5.0 million credit facility to the Fund. In conjunction with the repayment of the credit facility, the Fund also exercised its 43,750 warrants in a cashless transaction for a gain of approximately $40,000. VENDIO SERVICES, INC. (FORMERLY AUCTIONWATCH.COM, INC.) Vendio Services, Inc. ("Vendio"), formerly AuctionWatch.com, Inc., San Bruno, California, enables small businesses and entrepreneurs to build Internet sales channels by providing software solutions to help these merchants efficiently market, sell and distribute their products. At October 31, 2002, the Fund's investment in Vendio consisted of 10,476 shares of Common Stock and 6,443,188 shares of Series A Preferred Stock at a cost of $6.6 million. The investments were assigned a fair value of $1.1 million, or $0.00 per share for the Common Stock and approximately $0.18 per share for the Series A Preferred Stock, respectively. During the year ended October 31, 2003, the Current Valuation Committee marked down the carrying value of the Fund's investments in Vendio by writing down the Series A Preferred Stock by approximately $600,000 to $500,000. At October 31, 2003, the Fund's investments in Vendio consisted of 10,476 shares of Common Stock and 6,443,188 shares of Series A Preferred Stock at a cost of $6.6 million. The investments have been assigned a fair value of approximately $500,000, or $0.00 per share for the Common Stock and approximately $0.08 per share for the Series A Preferred Stock. On April 2, 2003, the portfolio company AuctionWatch.com, Inc. changed its name to Vendio Services, Inc. Nino Marakovic, an employee of the Fund, serves as a director of Vendio. YAGA, INC. Yaga, Inc. ("Yaga"), San Francisco, California, provides an advanced hosted application service provider (ASP) platform that addresses emerging revenue and payment infrastructure needs of online businesses. Yaga's sophisticated payment and accounting application supports micropayments, aggregated billing and stored value accounts while also managing royalty/affiliate accounting and split payments. At October 31, 2002, the Fund's investment in Yaga consisted of 300,000 shares of Series A Preferred Stock, 1,000,000 shares of Series B Preferred and 100,000 warrants to purchase 100,000 shares of Series B Preferred Shares with a combined cost of $2.3 million. The investments were assigned a fair value of $1.3 million, or $1.00 per share of Series A Preferred Stock and Series B Preferred Stock and $0.00 per warrant. During the year ended October 31, 2003, the Former Valuation Committee marked down the carrying value of the Fund's investments in Yaga by writing down the Series A Preferred Stock by approximately $300,000 to $0.0 and the Series B Preferred Stock by approximately $350,000 to approximately $650,000. During the year ended October 31, 2003, the Current Valuation Committee marked down the carrying value of the Fund's investments in Yaga by writing down the Series B Preferred Stock by approximately $650,000 to $0.0. At October 31, 2003, the Fund's investment in Yaga consisted of 300,000 shares of Series A Preferred Stock, 1,000,000 shares of Series B Preferred and 100,000 warrants to purchase 100,000 shares of Series B Preferred Shares with a combined cost of $2.3 million. The investments have been assigned a fair value of $0.0. 0-IN DESIGN AUTOMATION, INC. 0-In Design Automation, Inc. ("0-In"), San Jose, California, is an electronic design automation (EDA) company providing functional verification products that help verify multi-million gate application specific integrated circuit (ASIC) and system-on-chip (SOC) chip designs. At October 31, 2002, the Fund's investment in 0-In consisted of 2,239,291 shares of Series E Preferred Stock at a cost of $4.0 million. The investments were assigned a fair value of $4.0 million, or approximately $1.79 per share. During the year ended October 31, 2003, the Current Valuation Committee marked down the carrying value of the Fund's investments in 0-In by writing down the Series E Preferred Stock by $3.0 million to $1.0 million. At October 31, 2003, the Fund's investment in 0-In consisted of 2,239,291 shares of Series E Preferred Stock at a cost of $4.0 million. The investments have been assigned a fair value of $1.0 million, or approximately $0.45 per share. Mr. Gerhard, a director of the Fund through January 16, 2003, when he resigned, served as a director of 0-In through March 8, 2003. LIQUIDITY AND CAPITAL RESOURCES At October 31, 2003, the Fund had $137.3 million of investments consisting of investments in preferred and common stocks totaling $11.6 million, investments in debt instruments totaling $12.5 million, investments in U.S. government and agency securities totaling $113.2 million and cash and cash equivalents totaling approximately $6,850. The Fund considers all money market and all highly liquid temporary cash investments purchased with an original maturity of three months or less to be cash equivalents. Current balance sheet resources are believed to be sufficient to finance anticipated future commitments. Subsequent to October 31, 2003, the Fund commenced and completed a tender offer to acquire up to twenty-five percent (25%) of its outstanding shares of common stock at a per share cash purchase price equal to ninety-five percent (95%) of net asset value per share as of December 31, 2003, the day the offer expired. Based on a final count by the depositary for the tender offer, 3,859,558 shares were tendered at a price of $8.18 resulting in a total disbursement from the Fund of $31,571,184. SUBSEQUENT EVENTS On November 6, 2003, Michael Tokarz assumed his new position as Chairman, Portfolio Manager and director of the Fund. As Portfolio Manager, Mr. Tokarz will be compensated by the Fund based upon his positive performance as the Portfolio Manager. Under the terms of his agreement with the Fund, the Fund will pay Mr. Tokarz an amount equal to the lesser of (a) 20% of the net income of the Fund for the fiscal year; and (b) the sum of (i) 20% of the net capital gains realized by the Fund in respect of investments made during his tenure as Portfolio Manager; and (ii) the amount, if any, by which the Fund's total expenses for a fiscal year were less than two percent of the Fund's net assets (determined as of the last day of the period). Any payments to be made shall be calculated based upon the audited financials of the Fund for the applicable fiscal year and shall be paid as soon as practicable following the completion of such audit. Mr. Tokarz has the right and the intention to allocate all or part of such compensation to other professionals of the Fund. On November 26, 2003, the Fund commenced a tender offer to acquire up to twenty-five percent (25%) of its outstanding shares of common stock at a per share cash purchase price equal to ninety-five percent (95%) of net asset value per share as of December 31, 2003, the day the offer expired. Based on a final count by the depositary for the tender offer, 3,859,558 shares, or 23.9% of the Fund's outstanding common stock, were tendered. Because less than 25% of the Fund's shares were tendered, the Fund purchased all shares tendered. Each share accepted for purchase was purchased at a price of $8.18 resulting in a total disbursement from the Fund of $31,571,184. Since completion of the tender offer, MVC has 12,293,042 shares of common stock outstanding. The anti-dilutive effect of the tender offer totaled $1,650,697 or approximately $0.134 per share for all remaining shares after the tender offer. The discussion above is a summary of the Tender Offer and is qualified in its entirety by reference to the full text of the Schedule TO as filed with the SEC. Effective December 8, 2003, the Fund agreed to a lease for new office space in Purchase, New York, which is scheduled to expire on November 30, 2005. Future payments under this lease total $110,933, with annual minimum payments of $49,517 from December 8, 2003 through October31, 2004, $56,682 from November 1, 2004 through October 31, 2005, and $4,734 from November 1, 2005 through November 30, 2005. The building at 287 Bowman Avenue is owned by Phoenix Capital Partners, LLC, an entity which is 97% owned by Mr. Tokarz. On December 29, 2003, the Current Valuation Committee marked up the Fund's investment in 0-In Design Automation, Inc. by $1.0 million to $2.0 million and marked up the Fund's investment in Sygate Technologies, Inc. by $1.5 million to $5.5 million. On December 30, 2003, Ishoni Networks, Inc. filed for bankruptcy in United States Bankruptcy Court, Northern District of California, San Jose Division. On January 21, 2004, the Fund reached an agreement with the property manager at 3000 Sand Hill Road, Menlo Park, California to terminate its lease at such location as a result of the property manager's ability to reach an agreement with a new tenant for the space. Under the terms of the agreement, the Fund will buy-out its lease directly from the property manager, for an amount equal to $232,835. As a result, the Fund expects to be able to recover approximately $250,000 of the remaining reserve established at October 31, 2003. On January 23, 2004, Synhrgy HR Technologies, Inc. repaid the balance of its original $5.0 million credit facility to the Fund. In conjunction with the repayment of the credit facility, the Fund also exercised its 43,750 warrants in a cashless transaction for a gain of approximately $40,000. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Historically the Fund has invested in small companies, and its investments in these companies are considered speculative in nature. The Fund's investments often include securities that are subject to legal or contractual restrictions on resale that adversely affect the liquidity and marketability of such securities. As a result, the Fund is subject to risk of loss which may prevent our stockholders from achieving price appreciation, dividend distributions and return of capital. ILLIQUID INVESTMENTS. The Fund invests in securities which are subject to legal or other restrictions on transfer or for which no liquid market exists. The market prices, if any, for such securities tend to be volatile and may not be readily ascertainable, and the Fund may not be able to sell them when it desires to do so or to realize what it perceives to be their fair value in the event of a sale. The sale of restricted and illiquid securities often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than does the sale of securities eligible for trading on national securities exchanges or in the over-the-counter markets. The Fund may not be readily able to dispose of such illiquid investments and, in some cases, may be contractually prohibited from disposing of such investments for a specified period of time. Restricted securities may sell at a price lower than similar securities that are not subject to restrictions on resale. INVESTMENTS IN UNLISTED SECURITIES. The Fund invests in unlisted securities. Because of the absence of any trading market for these investments, it may take longer to liquidate, or it may not be possible to liquidate, these positions than would be the case for publicly traded securities. Although these securities may be resold in privately negotiated transactions, the prices realized on these sales could be less than those originally paid by the Fund. Further, companies whose securities are not publicly traded may not be subject to public disclosure and other investor protection requirements applicable to publicly traded securities. GROWTH STAGE COMPANIES. While investments in growth stage companies offer the opportunity for significant capital gains, such investments involve a high degree of business and financial risk which can result in substantial losses. The stock market has experienced volatility which has particularly affected the securities of technology companies. As a result, the Fund's performance may experience substantial volatility. An investment in the Fund should not constitute a complete investment program for the investor. EVENTS OF SEPTEMBER 11, 2001. On September 11, 2001, terrorist attacks on the United States caused significant loss of life and property damage and disruptions in U.S. markets and in global markets. Since that time, the United States has commenced military action and imposed economic and diplomatic sanctions. The long-term impact of these events, and of further possible terrorist attacks, is unclear, but could have a material effect on general economic conditions and market liquidity. VALUATION RISK. The portion of our portfolio consisting of investments in private companies is also subject to valuation risk. The market value of the Fund's shares in large part depends on the values of the Fund's investments and the prospects and financial results of the companies in which the Fund invests. Many of the Fund's investments are securities of private companies that are not publicly traded. The financial and other information regarding the issuers of these securities that is available to the Fund may be more limited than the information available in the case of issuers whose securities are publicly traded. The Current Board and/or the Current Valuation Committee determine the fair value of these securities in accordance with procedures deemed reasonable. However, fair value is an estimate and, notwithstanding the good faith efforts of the Board of Directors to determine the fair value of securities held by the Fund, there can be no assurance that those values accurately reflect the prices that the Fund would realize upon sales of those securities. Moreover, the prospects and financial condition of the companies in which the Fund invests may change and these changes may have a significant impact on the fair values of the Fund's investments. We value our privately held investments based on a determination made by the Current Board and/or the Current Valuation Committee on a quarterly basis and as otherwise required in accordance with our established fair value procedures. In the absence of a readily ascertainable market value, the estimated values of our investments may differ significantly from the values that would exist if a ready market for these securities existed. Any changes in valuation are recorded in our statements of operations as "Net unrealized gain (loss) on investments." Investments in short term securities and cash and cash equivalents comprised approximately 82.65% of the Fund's net assets at October 31, 2003, and are subject to financial market risk, including changes in interest rates. The Fund has invested a portion of its capital in debt securities, the yield and value of which may be impacted by changes in market interest rates. VALUATION OF INVESTMENTS. Investments in non-publicly traded preferred and common stock are carried at fair value with the net change in unrealized appreciation or depreciation included in the determination of increases or decreases in net assets resulting from its operations. Cost is used to approximate fair value of these investments until developments affecting an investment provide a basis for valuing such investment at a value other than cost. The fair value of investments for which no market exists and for which the Current Board and/or the Fund's Valuation Committee have determined that the original cost of the investment is no longer an appropriate fair valuation will be determined on the basis of procedures established by the Former Advisor in good faith and approved by the Current Board. Valuations are based upon such factors as the financial and/or operating results of the most recent fiscal period, the performance of the company relative to planned budgets/forecasts, the issuer's financial condition and the markets in which it does business, the prices of any recent transactions or offerings regarding such securities or any proxy securities, any available analysis, media, or other reports or information regarding the issuer, or the markets or industry in which it operates, the nature of any restrictions on disposition of the securities and other analytical data. In the case of unsuccessful operations, the valuation may be based upon anticipated liquidation proceeds. Because of the inherent uncertainty of the valuation of portfolio securities which do not have readily ascertainable market values, the Fund's determination of fair value may significantly differ from the fair market value that would have been used had a ready market existed for the securities. Such values do not reflect brokers' fees or other normal selling costs which might become payable on disposition of such investments. Investments in securities that are publicly traded on an organized exchange are valued at their quoted closing market price, less a discount to reflect the estimated effects of restrictions on the sale of such securities ("Valuation Discount"), if applicable. Investments in companies whose securities are actively traded in the over the counter market are valued at the average closing of their Bid and Ask prices, less a Valuation Discount to reflect the estimated effects of restrictions on the sale of such securities, if applicable. If a reliable last bid and ask price are not available, market values for equity securities are determined based on the last reliable bid quotation available from a market maker in the security. Short-term investments, including cash equivalents, having maturities of 90 days or less are stated at amortized cost, which approximates fair value. Other fixed income securities are stated at fair value. Fair value of these securities is determined at the most recent bid or yield equivalent from dealers that make markets in such securities. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FINANCIAL STATEMENTS MVC CAPITAL BALANCE SHEET
OCTOBER 31, OCTOBER 31, 2003 2002 ASSETS Cash and cash equivalents $ 6,850 $ 78,873,485 (cost $6,850 and $78,873,485, respectively) Investments in short term securities, at market value 113,237,521 62,797,687 (cost $113,237,521 and $62,800,088, respectively) Investments in subordinated notes, at fair value - 4,077,474 (cost $4,500,000 and $6,327,474, respectively) (Note 7) Investments in debt instruments, at fair value 12,471,288 - (cost $16,439,343 and $0, respectively) (Note 7) Investments in preferred/common stocks, at fair value 11,600,000 50,116,026 (cost $125,575,852 and $127,536,066, respectively), (Note 7) Interest receivable 152,630 216,024 Prepaid expenses 412,003 50,672 Receivable for investments sold - 379,632 --------------- --------------- TOTAL ASSETS $ 137,880,292 $ 196,511,000 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Administration 19,771 11,250 Audit fees 70,736 149,000 Legal fees 43,046 387,459 Directors' fees 27,511 14,400 Employee compensation & benefits 102,337 57,279 Other accrued expenses 608,729 505,135 --------------- --------------- TOTAL LIABILITIES $ 872,130 $ 1,124,523 =============== =============== SHAREHOLDERS' EQUITY Common Stock, $0.01 par value; 150,000,000 shares authorized; 16,152,600 and 16,500,000 shares outstanding, respectively 161,526 165,000 Additional paid in capital 308,593,557 311,485,000 Accumulated deficit (171,746,921) (116,263,523) --------------- --------------- TOTAL SHAREHOLDERS' EQUITY 137,008,162 195,386,477 --------------- --------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 137,880,292 $ 196,511,000 =============== =============== NET ASSET VALUE PER SHARE $ 8.48 $ 11.84 =============== =============== The accompanying notes are an integral part of these financial statements.
MVC CAPITAL STATEMENT OF OPERATIONS FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED OCTOBER 31, 2003 OCTOBER 31, 2002 OCTOBER 31, 2001 INVESTMENT INCOME: Interest income $ 2,870,370 $ 3,730,148 $ 9,046,526 Dividend income - 9,745 - Other income 24,944 - - ---------------- ------------- --------------- TOTAL INVESTMENT INCOME 2,895,314 3,739,893 9,046,526 OPERATING EXPENSES: Management fees - 3,592,757 7,388,061 Proxy/Litigation related fees & expenses 4,037,327 - - Employee compensation & benefits 2,476,068 696,399 - Legal fees 1,514,549 998,436 - Insurance 1,058,776 134,421 - Facilities 1,281,054 166,483 - Directors fees 455,292 307,200 - Audit fees 102,102 155,000 - Administration 138,512 67,500 - Consulting and public relations fees 126,490 546,952 - Other expenses 110,374 99,190 - Printing and postage 86,328 97,512 - ---------------- ------------- --------------- Total operating expenses 11,386,872 6,861,850 7,388,061 NET INVESTMENT (LOSS) INCOME (8,491,558) (3,121,957) 1,658,465 ---------------- ------------- --------------- NET REALIZED AND UNREALIZED (LOSS) GAIN ON INVESTMENTS: Net realized (loss) gain on investments (4,220,380) (33,469,122) 5,123 Net unrealized depreciation on investments (42,771,460) (21,765,310) (52,994,121) ---------------- ------------- --------------- Net realized and unrealized loss on investments (46,991,840) (55,234,432) (52,988,998) ---------------- ------------- --------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (55,483,398) $ (58,356,389) $ (51,330,533) ================ ============= =============== NET DECREASE IN NET ASSETS PER SHARE RESULTING FROM OPERATIONS $ (3.42) $ (3.54) $ (3.12) ================ ============= =============== DIVIDENDS DECLARED PER SHARE $ - $ 0.04 $ 0.34 ================ ============= ===============
The accompanying notes are an integral part of these financial statements.
MVC CAPITAL STATEMENT OF CASH FLOWS FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED OCTOBER 31, 2003 OCTOBER 31, 2002 OCTOBER 31, 2001 CASH FLOWS FROM OPERATING ACTIVITIES: Net decrease in net assets resulting from operations $ (55,483,398) $ (58,356,389) $ (51,330,533) Adjustments to reconcile to net cash (used for) provided by operating activities: Realized loss (gain) 4,220,380 33,469,122 (5,123) Net unrealized loss 42,771,460 21,765,310 52,994,121 Changes in assets and liabilities: Liabilities (252,393) 546,296 (89,912) Prepaid expenses (361,331) (50,672) - Interest receivable 63,394 180,632 243,964 Receivable for investments sold 379,632 (379,632) - Purchases of preferred stock (1,999,997) (22,076,694) (36,331,834) Purchases of debt instruments (19,955,000) - - Purchases of short-term investments (365,017,933) (157,541,221) (218,380,747) Purchases of cash equivalents (586,995,355) (1,119,326,199) (955,884,612) Purchases of subordinated notes - (4,500,000) - Proceeds from preferred stocks 1,884,848 9,955,664 - Proceeds from debt instruments 3,239,364 - - Sales/maturities of short-term investments 277,144,371 35,097,303 185,569,861 Sales/maturities of cash equivalents 624,390,240 1,328,465,233 925,452,721 -------------- -------------- ------------- NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES (75,971,718) 67,248,753 (97,762,094) -------------- -------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Re-purchases of capital stock (2,894,917) - - Distributions - (728,690) (5,644,650) -------------- -------------- ------------- NET CASH USED FOR FINANCING ACTIVITIES (2,894,917) (728,690) (5,644,650) -------------- -------------- ------------- NET CHANGE IN CASH AND CASH EQUIVALENTS FOR THE YEAR (78,866,635) 66,520,063 (103,406,744) -------------- -------------- ------------- CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 78,873,485 12,353,422 115,760,166 -------------- -------------- ------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 6,850 $ 78,873,485 $ 12,353,422 ============== ============== =============
The accompanying notes are an integral part of these financial statements.
MVC CAPITAL STATEMENT OF SHAREHOLDERS' EQUITY ADDITIONAL TOTAL COMMON PAID IN ACCUMULATED SHAREHOLDERS' STOCK CAPITAL DEFICIT EQUITY BALANCE AT NOVEMBER 1, 2000 $ 165,000 $ 311,485,000 $ (203,261) $ 311,446,739 Distributions - - (5,644,650) (5,644,650) Net decrease in net assets from operations - - (51,330,533) (51,330,533) ------------- ---------------- --------------- -------------- BALANCE AT OCTOBER 31, 2001 $ 165,000 $ 311,485,000 $ (57,178,444) $ 254,471,556 ------------- ---------------- --------------- -------------- BALANCE AT NOVEMBER 1, 2001 $ 165,000 $ 311,485,000 $ (57,178,444) $ 254,471,556 Distributions - - (728,690) (728,690) Net decrease in net assets from operations - - (58,356,389) (58,356,389) ------------- ---------------- --------------- -------------- BALANCE AT OCTOBER 31, 2002 $ 165,000 $ 311,485,000 $ (116,263,523) $ 195,386,477 ------------- ---------------- --------------- -------------- BALANCE AT NOVEMBER 1, 2002 $ 165,000 $ 311,485,000 $ (116,263,523) $ 195,386,477 Shares repurchased (347,400) (3,474) (2,891,443) - (2,894,917) Net decrease in net assets from operations - - (55,483,398) (55,483,398) ------------- ---------------- --------------- -------------- BALANCE AT OCTOBER 31, 2003 $ 161,526 $ 308,593,557 $ (171,746,921) $ 137,008,162 ------------- ---------------- --------------- --------------
The accompanying notes are an integral part of these financial statements.
MVC CAPITAL SELECTED PER SHARE DATA AND RATIOS FOR THE FOR THE FOR THE YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 31, 2003 OCTOBER 31, 2002 OCTOBER 31, 2001 Net asset value, beginning of year $ 11.84 $ 15.42 $ 18.88 Loss from investment operations: Net investment (loss) income (0.53) (0.19) 0.10 Net realized and unrealized loss on investments (2.89) (3.35) (3.22) ----------- --------- ----------- Total loss from investment operations (3.42) (3.54) (3.12) ----------- --------- ----------- Less distributions from: Net investment income - (0.04) (0.34) ----------- --------- ----------- Total distributions - (0.04) (0.34) ----------- --------- ----------- Capital share transactions Anti-dilutive effect of Share Repurchase Program 0.06 - - ----------- --------- ----------- Net asset value, end of year $ 8.48 $ 11.84 $ 15.42 =========== ========= =========== Market value, end of year $ 8.10 $ 7.90 $ 9.25 =========== ========= =========== Market discount -4.48% -33.28% -40.01% TOTAL RETURN - AT NAV (a) -28.38% -22.88% -15.99% TOTAL RETURN - AT MARKET (a) 2.53% -14.22% -17.26% RATIOS AND SUPPLEMENTAL DATA: Net assets, end of year (in thousands) $ 137,008 $ 195,386 $ 254,472 Ratios to average net assets: Expenses 7.01% (b) 3.02% 2.50% Net investment income -5.22% (b) -1.37% 0.56%
(a) Total annual return is historical and assumes changes in share price, reinvestments of all dividends and distributions, and no sales charge for the year. (b) The expense ratio for the year ended October 31, 2003 includes approximately $4.0 million of proxy/litigation fees and expenses. When these fees and expenses are excluded, the Fund's expense ratio is 4.52% and the net investment loss is - -2.74%. The accompanying notes are an integral part of these financial statements. MVC CAPITAL SCHEDULE OF INVESTMENTS OCTOBER 31, 2003
Date of Initial Description Shares/Principal Investment Cost Fair Value PREFERRED STOCKS-8.47% (a, b, d, g) (NOTE 6, 7, 8) TECHNOLOGY INVESTMENTS - 8.47% Actelis Networks, Inc. Series C 1,506,025 May 2001 $ 5,000,003 $ 1,000,000 * Blue Star Solutions, Inc.: Common Stock 49,474 May 2000 3,999,999 - Series C Preferred 74,211 May 2000 5,999,999 - * BlueStar Solutions Inc., Series D 4,545,455 Feb. 2002 3,000,000 1,500,000 * CBCA, Inc., Series E 5,729,562 Apr. 2002 11,999,995 500,000 DataPlay, Inc., Series D (e) 2,500,000 June 2001 7,500,000 - * Endymion Systems, Inc., Series A 7,156,760 June 2000 7,000,000 - * FOLIOFN, Inc., Series C 5,802,259 June 2000 15,000,000 - Ishoni Networks, Inc., Series C 2,003,607 Nov. 2000 10,000,003 - Lumeta Corporation, Series A 384,615 Oct. 2000 250,000 43,511 Lumeta Corporation, Series B 266,846 June 2002 156,489 156,489 MainStream Data, Series D 85,719 Aug. 2002 3,750,001 - * Phosistor Technologies, Inc., Series B (f) 6,666,667 Jan. 2002 1,000,000 - * ProcessClaims, Inc., Series C 6,250,000 June 2001 2,000,000 2,000,000 * ProcessClaims, Inc., Series D 849,257 May 2002 400,000 400,000 * ProcessClaims, Inc. Series E warrants, expire 12/31/05 (g) 873,362 May 2002 20 - * PTS Messaging, Inc., Series A-1 (f) 1,956,026 July 2000 11,569,939 -
* SafeStone Technologies PLC Series A Ordinary Shares 2,106,378 Dec. 2000 4,015,402 - ShopEaze Systems, Inc., Series B (f) 2,097,902 May 2000 6,000,000 - * Sonexis, Inc., Series C 2,590,674 June 2000 10,000,000 500,000 * Sygate Technologies, Inc., Series D 9,756,098 Oct. 2002 4,000,000 4,000,000 * Vendio Services, Inc., Common Stock (c) 10,476 June 2000 5,500,000 - * Vendio Services, Inc., Series A (c) 6,443,188 Jan. 2002 1,134,001 500,000 * Yaga, Inc., Series A 300,000 Nov. 2000 300,000 -
The accompanying notes are an intergral part of these financial statements. MVC CAPITAL SCHEDULE OF INVESTMENTS (CONTINUED) OCTOBER 31, 2003
Date of Initial Description Shares/Principal Investment Cost Fair Value * Yaga, Inc.: Series B 1,000,000 June 2001 $ 2,000,000 $ - Series B Warrants, expire 06/08/04 (g) 100,000 June 2001 - - * 0-In Design Automation, Inc., Series E 2,239,291 Nov. 2001 4,000,001 1,000,000 TOTAL PREFERRED STOCKS 125,575,852 11,600,000 DEBT INSTRUMENTS-9.10% (a, b) TECHNOLOGY INVESTMENTS - 9.10% Arcot Systems, Inc. (h) 10.0000%, 12/31/2005 5,050,000 Dec. 2002 5,012,500 2,000,000 Determine Software, Inc. 12.0000%, 01/31/2006 2,025,000 Feb. 2003 2,009,224 2,009,224 Determine Software, Inc., Series C Warrants (g) 2,229,955 Feb. 2003 - - Intergral Development Corporation (h) 10.0000%, 12/31/2005 4,488,888 Dec. 2002 4,455,555 3,500,000 Synhrgy HR Technologies 12.0000%, 01/03/2006 5,000,000 Dec. 2002 4,962,064 4,962,064 Synhrgy HR Technologies, Series B-1 Warrant (g) 43,750 Dec. 2002 - - ------------ ------------ TOTAL DEBT INSTRUMENTS 16,439,343 12,471,288 ------------ ------------ SUBORDINATED NOTES-0.00% (a, b, g) TECHNOLOGY INVESTMENTS - 0.00% DataPlay, Inc. (e) 6.000%, 05/15/2005 2,000,000 May 2002 2,000,000 - DataPlay, Inc. (e) 6.000%, 06/17/2005 500,000 June 2002 500,000 - DataPlay, Inc. (e) 6.000%, 09/24/2005 200,000 Sept. 2002 200,000 - DataPlay, Inc. (e) 6.000%, 08/16/2005 200,000 Aug. 2002 200,000 - DataPlay, Inc. (e) 6.000%, 08/26/2005 400,000 Aug. 2002 400,000 - DataPlay, Inc. (e) 6.000%, 09/03/2005 200,000 Sept. 2002 200,000 - DataPlay, Inc. (e) 6.000%, 06/27/2005 1,000,000 June 2002 1,000,000 - ------------ ------------ TOTAL SUBORDINATED NOTES 4,500,000 - ------------ ------------
The accompanying notes are an intergral part of these financial statements. MVC CAPITAL SCHEDULE OF INVESTMENTS (CONTINUED) OCTOBER 31, 2003
Date of Initial Fair Value/ Description Shares/Principal Investment Cost Market Value SHORT-TERM SECURITIES-82.65% (b) U.S. GOVERNMENT & AGENCY SECURITIES-82.65% (b) U.S. Treasury Bill 1.1000%, 11/06/2003 8,338,000 Aug. 2003 $ 8,337,016 $ 8,337,016 U.S. Treasury Bill 1.1000%, 11/13/2003 5,495,000 Aug. 2003 5,493,425 5,493,425 U.S. Treasury Bill 0.8550%, 11/20/2003 2,585,000 Aug. 2003 2,583,840 2,583,840 U.S. Treasury Bill 0.8400%, 12/26/2003 9,013,000 Sept. 2003 9,001,433 9,001,433 U.S. Treasury Bill 0.8600%, 01/02/2004 36,649,000 Oct. 2003 36,594,719 36,594,719 U.S. Treasury Bill 0.8000%, 01/08/2004 13,533,000 Oct. 2003 13,512,550 13,512,550 U.S. Treasury Bill 0.8500%, 01/15/2004 15,738,000 Oct. 2003 15,710,459 15,710,459 U.S. Treasury Bill 0.9200%, 01/22/2004 14,585,000 Oct. 2003 14,556,762 14,556,762 U.S. Treasury Bill 0.9600%, 01/29/2004 7,463,000 Oct. 2003 7,447,317 7,447,317 -------------- ------------ TOTAL U.S. GOVERNMENT & AGENCY SECURITIES 113,237,521 113,237,521 -------------- ------------ TOTAL SHORT-TERM SECURITIES 113,237,521 113,237,521 -------------- ------------ CASH AND CASH EQUIVALENTS-0.00% (b) MONEY MARKET FUNDS-0.00% (b) First American Prime Obligations Fund - Class S 6,850 Nov. 2002 6,850 6,850 -------------- ------------ TOTAL CASH AND CASH EQUIVALENTS 6,850 6,850 -------------- ------------ TOTAL INVESTMENTS-100.22% (b) $ 259,759,566 $ 137,315,659 ============== ============ The accompanying notes are an intergral part of these financial statements.
MVP Capital Schedule of Investments (Contined) October 31, 2003 (a) These securities are restricted from public sale without registration under the Securities Act of 1933. The Fund negotiates certain aspects of the method and timing of the dispostion of these investments, including registration rights and related costs. (b) Percentages are based on net assets of $137,008,162. (c) As defined in the Investment Company Act of 1940, at October 31, 2003, the Fund was considered to have a controlling interest in Vendio Services, Inc. (d) All of the Fund's preferred and common stock and debt investments are in eligible portfolio companies, as defined in the Investment Company Act of 1940, except SafeStone Technologies PLC. The Fund makes available significant managerial assistance to all of the portfolio companies in which it has invested. (e) Company in bankruptcy/liquidation. (f) Company in dissolution. (g) Non-income producing assets. (h) Also received warrants to purchase a number of shares of preferred stock to be determined upon exercise. * Affiliated Issuers (Total Market Value of $10,400,000): companies in which the Fund owns at least 5% of the voting securities. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MEVC DRAPER FISHER JURVETSON FUND I, INC. NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2003 1. ORGANIZATION AND BUSINESS PURPOSE meVC Draper Fisher Jurvetson Fund I, Inc., D/B/A MVC Capital (the "Fund"), is a Delaware corporation organized on December 2, 1999 which commenced operations on March 31, 2000. On December 2, 2002 the Fund announced that it would begin doing business under the name MVC Capital. The Fund's investment objective is to seek to maximize total return from capital appreciation and/or income. The Fund seeks to achieve its investment objective by providing equity and debt financing to companies that are, for the most part, privately owned ("Portfolio Companies"). The Fund's current investments in Portfolio Companies consist of senior and subordinated loans, venture capital, mezzanine and preferred instruments and private equity investments. The Fund has elected to be treated as a business development company under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The shares of the Fund commenced trading on the New York Stock Exchange, Inc. (the "NYSE") under the symbol MVC on June 26, 2000. The Fund had entered into an advisory agreement with meVC Advisers, Inc. (the "Former Advisor") which had entered into a sub-advisory agreement with Draper Fisher Jurvetson MeVC Management Co., LLC (the "Former Sub-Advisor"). On June 19, 2002, the Former Advisor resigned without prior notice to the Fund as the Fund's investment advisor. This resignation resulted in the automatic termination of the agreement between the Former Advisor and the Former Sub-Advisor to the Fund. As a result, the Fund's board internalized the Fund's operations, including management of the Fund's investments. Six of the seven members (excluding Mr. Tokarz) of the current Board were elected at the February 28, 2003 Annual Meeting of Stockholders (the "Current Board"), replacing the former Board of Directors of the Fund (the "Former Board") in its entirety. On March 6, 2003, the results of the election were certified by the Inspector of Elections, whereupon the Current Board terminated John M. Grillos, the Fund's previous CEO. Shortly thereafter, other members of the Fund's senior management team, who had previously reported to Mr. Grillos, resigned. Since these significant changes in the Board and management of the Fund, the Fund has operated in a transition mode and, as a result, no new portfolio investments were made from early March 2003 through the end of October 2003 (the end of the Fiscal Year). During this period, the Current Board explored various alternatives for a long-term management plan for the Fund, including the possibility of retaining an external investment advisor. However, the Current Board concluded that it was in the Fund's best interests to implement the proposed plan, as described in Note 12, and as voted on and approved by stockholders at the September 16, 2003 Special Meeting of Stockholders. Michael Tokarz, as described below, was elected to the Board at the September 16, 2003 Special Meeting of Stockholders effective November 6, 2003. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements: The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. VALUATION OF INVESTMENTS - Investments in non-publicly traded preferred and common stock are carried at fair value with the net change in unrealized appreciation or depreciation included in the determination of increases or decreases in net assets resulting from its operations. Cost is used to approximate fair value of these investments until developments affecting an investment provide a basis for valuing such investment at a value other than cost. The fair value of investments for which no market exists and for which the Current Board and/or the Fund's Valuation Committee have determined that the original cost of the investment is no longer an appropriate fair valuation will be determined on the basis of procedures established by the Former Advisor in good faith and approved by the Current Board. Valuations are based upon such factors as the financial and/or operating results of the most recent fiscal period, the performance of the company relative to planned budgets/forecasts, the issuer's financial condition and the markets in which it does business, the prices of any recent transactions or offerings regarding such securities or any proxy securities, any available analysis, media, or other reports or information regarding the issuer, or the markets or industry in which it operates, the nature of any restrictions on disposition of the securities and other analytical data. In the case of unsuccessful operations, the valuation may be based upon anticipated liquidation proceeds. Because of the inherent uncertainty of the valuation of portfolio securities which do not have readily ascertainable market values, the Fund's determination of fair value may significantly differ from the fair market value that would have been used had a ready market existed for the securities. Such values do not reflect brokers' fees or other normal selling costs which might become payable on disposition of such investments. Investments in securities that are publicly traded on an organized exchange are valued at their quoted closing market price, less a discount to reflect the estimated effects of restrictions on the sale of such securities ("Valuation Discount"), if applicable. Investments in companies whose securities are actively traded in the over the counter market are valued at the average closing of their Bid and Ask prices, less a Valuation Discount to reflect the estimated effects of restrictions on the sale of such securities, if applicable. If a reliable last bid and ask price are not available, market values for equity securities are determined based on the last reliable bid quotation available from a market maker in the security. Short-term investments, including cash equivalents, having maturities of 90 days or less are stated at amortized cost, which approximates fair value. Other fixed income securities are stated at fair value. Fair value of these securities is determined at the most recent bid or yield equivalent from dealers that make markets in such securities. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME - Investment transactions are accounted for on the trade date (the date the order to buy or sell is executed). The cost of securities sold is determined on a first-in, first-out basis, unless otherwise specified. Dividend income on investment securities is recorded on the ex-dividend date. Interest income, which includes accretion of discount and amortization of premium, if applicable, is recorded on the accrual basis. CASH AND CASH EQUIVALENTS - For the purpose of the Balance Sheet and Statement of Cash Flows, the Fund considers all money market and all highly liquid temporary cash investments purchased with an original maturity of three months or less to be cash equivalents. RESTRICTED SECURITIES - The Fund will invest in privately placed restricted securities. These securities may be resold in transactions exempt from registration or to the public if the securities are registered. Disposal of these securities may involve time-consuming negotiations and expense, and a prompt sale at an acceptable price may be difficult. INCOME TAXES - It is the policy of the Fund to meet the requirements for qualification as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund is not subject to income tax to the extent that it distributes all of its investment company taxable income and net realized gains for its taxable year. The Fund is also exempt from excise tax if it distributes most of its ordinary income and/or capital gains during each calendar year. RECLASSIFICATIONS - There have been no amounts which have had to be reclassified to conform to the current year presentation. 3. MANAGEMENT For the year ended October 31, 2003, the Fund has managed its operations and investments internally. Previously, from commencement of operations through June 19, 2002, the Fund was charged a management fee by the Former Advisor at an annual rate of 2.5% of the average weekly net assets of the Fund, paid monthly in arrears. A portion of this fee was also used to pay the Former Sub-Advisor. The Former Advisor had entered into a sub-advisory agreement with the Former Sub-Advisor in which the Former Advisor paid the Former Sub-Advisor an annual investment sub-advisory fee equal to 1.0% of the Fund's average weekly net assets, paid monthly in arrears. The sub-advisory fees were not an additional expense to the Fund. During the period November 1, 2001 to May 31, 2002, the Fund paid the Former Advisor $3.48 million in management fees who in turn distributed $1.51 million to the Former Sub-Advisor. During the year ended October 31, 2001, the Fund paid the Former Advisor $7.39 million in management fees who in turn distributed $2.96 million to the Former Sub-Advisor. The Former Advisor resigned without notice on June 19, 2002. As a result, the Fund's board internalized the Fund's operations, including management of the Fund's investments, and the Fund began to pay its expenses directly. The previous 2.5% expense cap, the maximum amount of compensation to be paid to the Former Advisor, was terminated at the time of the Former Advisor's resignation. The Fund determined that the Former Advisor had not paid certain vendors for services performed on behalf of the Fund, which it had agreed to pay. During the fiscal year ended October 31, 2003, the Fund paid or accrued $463,535 in expenses to those vendors. See Note 10, "Legal Proceedings" for a discussion of legal action against the Former Advisor by Millenco L.P., a stockholder of the Fund, to recover certain advisory fees paid by the Fund to the Former Advisor. 4. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS Income dividends and capital gain distributions, if any, are recorded on the ex-dividend date. Dividends and capital gain distributions, if any, are generally declared and paid annually. An additional distribution may be paid by the Fund to avoid imposition of federal income tax on any remaining undistributed net investment income and capital gains. Distributions can be made payable by the Fund either in the form of a cash distribution or a stock dividend. The amount and character of income and capital gain distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences are due primarily to differing treatments of income and gain on various investment securities held by the Fund, timing differences and differing characterizations of distributions made by the Fund. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications and may affect the allocation between net investment income, net realized gain (loss) and paid in capital. During the year ended October 31, 2003, the Fund's expenses exceeded its ordinary income and its capital losses exceeded its capital gains. As such, the Fund did not declare any dividends during the year ended October 31, 2003. On December 4, 2001, the Fund announced an ordinary income cash dividend of $0.044163 per share, payable on January 3, 2002, to stockholders of record at the close of business on December 10, 2001. In accordance with the Dividend Reinvestment Plan, the Dividend Distribution Agent purchased shares on the open market of the NYSE for those shareholders electing to take their distributions in the form of stock dividends. The total distribution amounted to $728,690. On December 6, 2000, the Fund announced an ordinary income cash dividend of $0.34210 per share, payable on January 3, 2001, to stockholders of record at the close of business on December 8, 2000. In accordance with the Dividend Reinvestment Plan, the Dividend Distribution Agent purchased shares on the open market of the NYSE for those shareholders electing to take their distributions in the form of stock dividends. The total distribution amounted to $5,644,650. 5. TRANSACTIONS WITH OTHER PARTIES The Fund is permitted to co-invest in certain Portfolio Companies with its affiliates subject to specified conditions set forth in an order obtained from the SEC. Under the terms of the order, Portfolio Companies purchased by the Fund and its affiliates are required to be approved by the Independent Directors and are required to satisfy certain conditions established by the SEC. On February 7, 2003, the Fund acquired various assets from Sand Hill Capital Holdings, Inc., the entity previously affiliated with the Fund's former President, William Del Biaggio III, for the Fund's operations, including but not limited to, furniture and systems hardware and software. The assets were purchased for $24,000. Through March 2002, Fleet Investment Advisors managed the Fund's cash portfolio under a sub-advisory agreement with the Former Advisor. Subsequently, the Former Advisor managed those assets until its resignation on June 19, 2002. From June 19, 2002 through March 27, 2003, the Fund's short term investment portfolio was managed internally by Fund employees. From March 28, 2003 through the current date, and at the Fund's direction, U.S. Bank National Association purchased 90-day U.S. Treasury Bills with the Fund's short term assets except that the Fund's cash balances, if not large enough to be invested in 90-day Treasury Bills, are swept into a designated money market account. On June 19, 2002, when meVC Advisers resigned as the Investment Advisor to the Fund, the Former Advisor's sub-advisory agreement with Draper Fisher Jurvetson MeVC Management Co., LLC (the "Former Sub-Advisor") was terminated automatically as a matter of contract construction. On June 20, 2002, the Board voted to internalize all investment management and administrative functions of the Fund. For the year ended October 31, 2002, the Fund paid meVC Advisers advisory fees amounting to $3.59 million and the Former Advisor paid the Former Sub-Advisor sub-advisory fees amounting to $1.58 million, or 1% of the 2.5% management fee. On June 26, 2002, the Fund acquired various assets from meVC Advisers necessary to run the Fund's information systems and web site, including but not limited to, website equipment, systems hardware and software, and intellectual property. The assets were purchased for $17,855. In June and July 2002, the Fund utilized the services of the Former Sub-Advisor as a temporary payroll agent to facilitate the payment of the Fund's employees. Former Management and the Former Board believed it was in the stockholders' best interest to maintain continuity of payroll while operations were initiated with the Fund's ongoing payroll vendor. During the year ended October 31, 2001, the Fund accrued and paid the Former Advisor $7.39 million in management fees who in turn distributed $2.96 million to the Former Sub-Advisor. 6. CONCENTRATION OF MARKET AND CREDIT RISK Financial instruments that subject the Fund to concentrations of market risk consist principally of preferred stocks, subordinated notes, and debt instruments, which represent approximately 17.57% of the Fund's net assets. As discussed in Note 7 and Note 8, investments consist of securities in companies with no readily determinable market values and as such are valued in accordance with the Fund's fair value policies and procedures. The Fund's investment strategy represents a high degree of business and financial risk due to the fact that the investments include entities with little operating history or entities that possess operations in new or developing industries. These investments are subject to restrictions on resale because they were acquired from the issuer in private placement transactions. At this time, the Fund's investments in short-term securities are in 90-day Treasury Bills, which are federally insured securities, except that the Fund's cash balances, if not large enough to be invested in 90-day Treasury Bills, are swept into a designated money market account. 7. PORTFOLIO INVESTMENTS FOR THE YEAR ENDED OCTOBER 31, 2003. During the year ended October 31, 2003, the Fund invested a total of approximately $21.95 million in new and existing Portfolio Companies. Approximately $19.95 million was invested in five new companies: BS Management Limited, Synhrgy HR Technologies, Inc., Integral Development Corporation, Arcot Systems, Inc., and Determine Software, Inc. Approximately $2.0 million was invested in two follow-on investments in CBCA, Inc. The current Board of Directors was elected at the Annual Meeting of Stockholders held on February 28, 2003. All investments made during the year ended October 31, 2003 were made under the supervision of the Former Board. There have been no new investments (other than short-term investments) made under the supervision of the Current Board. The Fund also had one portfolio company exit event with proceeds totaling approximately $40,000 and a realized loss totaling approximately $178,000 from the final disbursement of assets from EXP Systems, Inc., had one gain of $25,000 representing proceeds received from MediaPrise, Inc. in excess of the Fund's complete write-off of the investment in MediaPrise, Inc. during the fiscal year ended October 31, 2002, and had two return of capital disbursements from BS Management totaling approximately $2.7 million and a realized loss of approximately $322,000 and had a complete write-off of Cidera, Inc. of $3.75 million. The Fund also received early repayment of the infoUSA, Inc. promissory note with proceeds of $1,845,445, representing full repayment of the note and outstanding accrued interest. In connection with the Fund's $5.05 million Credit Facility with Arcot Systems, Inc., the Fund also received warrants to purchase shares of Series E Convertible Preferred Stock of Arcot Systems, Inc., equal to 3% of the outstanding common stock on a fully diluted basis, at an exercise price of approximately $0.97 per share, as adjusted. The warrants expire on December 31, 2009. In connection with the Fund's $5.05 million Credit Facility with Integral Development Corporation, the Fund also received warrants to purchase shares of Series C Convertible Preferred Stock of Integral Development Corporation (or a future round of Preferred Stock), equal to the number obtained by multiplying the outstanding common stock by 0.030928, at an exercise price equal to $0.70 per share. The warrants expire on December 31, 2009. As a result of the change in the composition of the Board of Directors, the Valuation Committee existing at the time of the change (the "Former Valuation Committee") was replaced, with the current Board electing new members to serve on this committee (the "Current Valuation Committee"). For the year ended October 31, 2003, the Former Valuation Committee and/or the Current Valuation Committee of the Board of Directors marked down the value of the Fund's investments in Actelis Networks, Inc. by $1.5 million, Arcot Systems, Inc. by $3.0 million, BlueStar Solutions, Inc. by $3.0 million, BS Management by $1.5 million, CBCA, Inc. by $11.5 million, Endymion Systems, Inc. by $2.0 million, Foliofn, Inc. by $3.0 million, Integral Development Corporation by $1.0 million, Ishoni Networks, Inc. by $2.5 million, Lumeta Corporation by approximately $237,000, Mainstream Data, Inc. by approximately $500,000, Phosistor Technologies, Inc. by $1.0 million, ProcessClaims, Inc. by approximately $940,000, PTS Messaging, Inc. (formerly Pagoo, Inc.) by approximately $170,000, SafeStone Technologies PLC by $1.5 million, Sonexis, Inc. by $6.5 million, Yaga, Inc. by $1.3 million, Vendio Services, Inc. (formerly AuctionWatch.com, Inc.) by approximately $600,000, 0-In Design Automation, Inc. by $3.0 million, and DataPlay Inc. by $2.25 million, and wrote-off all of the accrued interest from the DataPlay, Inc. Promissory Notes. At October 31, 2003, the fair value of all portfolio investments, exclusive of short-term securities, was $24.1 million with a cost of $146.5 million and at October 31, 2002 the fair value of all portfolio investments, exclusive of short-term securities, was $54.2 million with a cost of $133.9 million. At October 31, 2003, all of the Fund's investments in preferred stocks totaling $11.6 million (8.47% of net assets), investments in debt instruments totaling $12.5 million (9.10% of net assets), and investments in subordinated notes totaling $0, had been valued by the Valuation Committee of the Board of Directors, in the absence of readily ascertainable market values. Because of the inherent uncertainty of valuation, these values may differ significantly from the values that would have been used had a ready market for the investments existed and the differences could be material. FOR THE YEAR ENDED OCTOBER 31, 2002. During the year ended October 31, 2002, the Fund invested approximately $19,000,000 in four new companies, CBCA, Inc., Phosistor Technologies, Inc., Sygate, Inc. and 0-In Design Automation, Inc., made fourteen follow-on investments in AuctionWatch.com, Inc. (now Vendio Services, Inc.), BlueStar Solutions, Inc., DataPlay, Inc., IQdestination, Inc., Lumeta Corporation, ProcessClaims, Inc., and SafeStone PLC of approximately $10,006,000, had three portfolio company exit events with proceeds totaling approximately $9,955,000 and realized losses totaling approximately $14,834,000 in the sale of infoUSA.com to its parent entity, the disbursement of assets from EXP Systems, Inc., and the sale of Annuncio Software, Inc. to PeopleSoft, had one return of capital of approximately $2,430,000 from Pagoo, Inc. (now PTS Messaging, Inc.), and had four portfolio company write-offs with realized losses totaling approximately $18,637,000 in the irreversible dilution of equity in Personic Software, Inc., the filing of Chapter 7 of the US Code by InfoImage, Inc., the cessation of operations by IQdestination, Inc., and the cessation of operations by MediaPrise, Inc. At October 31 of 2002, all of the Fund's investments in preferred stocks totaling $50.1 million (25.6% of net assets) and investments in subordinated notes totaling $4.1 million (2.09% of net assets), had been valued by the Former Valuation Committee of the Board of Directors, in the absence of readily ascertainable market values. Because of the inherent uncertainty of valuation, these values may differ significantly from the values that would have been used had a ready market for the investments existed and the differences could be material. FOR THE YEAR ENDED OCTOBER 31, 2001. During the year ended October 31, 2001, the Fund invested approximately $28,200,000 in six new companies and made five follow-on investments in InfoImage, Inc., IQdestination, Inc., Pagoo.com, Inc. (now PTS Messaging, Inc.), Personic Software, Inc., and Yaga, Inc. of approximately $8,132,000. During the year ended October 31, 2001, there were no changes made or additions to the initial investments in Lumeta Corporation and MediaPrise, Inc. At October 31 of 2001, all of the Fund's investments in preferred stocks totaling $90.9 million (35.7% of net assets) had been valued by the Former Valuation Committee of the Board of Directors, in the absence of readily ascertainable market values. Because of the inherent uncertainty of valuation, these values may differ significantly from the values that would have been used had a ready market for the investments existed and the differences could be material. 8. COMMITMENTS AND CONTINGENCIES The Fund rents office space at 3000 Sand Hill Road, Menlo Park, CA 94025, under a lease which is scheduled to expire on October 31, 2005. Future payments under this lease, as of October 31, 2003, totaled $597,000, with annual minimum payments of $298,500. In January 2004, the Fund agreed to a buy-out of this lease for $232,835 effective January 31, 2004. On February 13, 2003, the Fund entered into a Directors & Officers/Professional Liability Insurance policy with a cost of approximately $1.4 million. The cost will be amortized over the life of the policy ending February 2004. At October 31, 2003, the balance of the cost as yet to be amortized was $424,735. 9. CERTAIN REPURCHASES OF EQUITY SECURITIES BY THE ISSUER During the year ended October 31, 2003, the Fund repurchased 347,400 of its shares at an average price of approximately $8.28, excluding brokerage fees for the transactions executed on the open market of the NYSE. The Fund ceased repurchasing shares after the Current Board was elected on February 28, 2003. The Fund's repurchase of shares was conducted according to a written plan for the purpose of satisfying the provisions set forth in Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 10. LEGAL PROCEEDINGS On February 20, 2002, Millenco LP ("Millenco"), a stockholder, filed a complaint in the United States District Court for the District of Delaware on behalf of the Fund against the Former Advisor. The complaint alleges that the fees received by the Former Advisor for the year prior to the filing of the complaint were excessive, in violation of Section 36(b) of the Investment Company Act. The Former Advisor's motions to dismiss the action or transfer it to California were both denied. The case is in discovery, which has been stayed temporarily for the purpose of settlement negotiations and mediation is scheduled to begin in April 2004. The Fund is monitoring this litigation inasmuch as any net recovery would accrue to the Fund. On April 3, 2002, Millenco filed a complaint against the Fund in the Court of Chancery, New Castle County, Delaware, seeking a judicial confirmation of the stockholder vote of March 27, 2002, rejecting new investment advisory agreements between the Fund and the Former Advisor and between the Fund and the Former Sub-Advisor. On April 5, 2002, Millenco moved to accelerate the trial of the case and later that day the Fund's Board of Directors acknowledged that the proposals for shareholder approval of the advisory and sub-advisory agreements had failed and that a stockholder's meeting would not be reconvened on this matter. On July 30, 2002, Millenco filed an amended complaint against the Fund and the Fund's Former Board in the Court of Chancery, New Castle County, Delaware, seeking to (i) invalidate the election of two of the Fund's former directors, John M. Grillos and Larry Gerhard, at the 2001 and 2002 Annual Meetings of Stockholders, to three-year terms expiring 2004 and 2005, respectively; and invalidate the election of former director Peter Freudenthal, at the 2001 Annual Meeting, to a three-year term expiring 2004; and (ii) require the Fund to hold a special Meeting of Stockholders, for the purpose of holding new elections to fill the board seats currently held by Mr. Grillos and Mr. Gerhard and the board seat vacated by Peter Freudenthal due to his resignation in June 2002. On December 19, 2002, the Court granted judgment for Millenco holding that the Former Board had breached its fiduciary duty of disclosure under Delaware law in connection with the 2001 and 2002 elections of directors and ordered the Fund to hold new elections for the seats held by directors Grillos and Gerhard and former director Freudenthal. The election was held on February 28, 2003, at which six members of the Fund's Current Board were elected. On February 6, 2003, the Fund filed a complaint against Millennium Partners, L.P., Millenco, L.P. and Karpus Management, Inc. (collectively "the stockholders") in the United States District Court for the Southern District of New York, alleging various violations of federal securities law primarily in connection with the ongoing proxy contest between Millenco and the Fund's Former Board. The complaint asked the Court for injunctive relief aimed at limiting the stockholders' voting rights at the February 28, 2003 annual meeting of stockholders. On February 24, 2003, after expedited discovery and an evidentiary hearing, the United States District Court for the Southern District of New York denied the Fund's motion for a preliminary injunction against the defendants, finding there was insubstantial likelihood of the Fund succeeding on any of the claims asserted. On March 27, 2003, the Fund voluntarily dismissed the lawsuit. On March 3, 2003, after the Annual Meeting, but prior to the transfer of control by the Former Board to the Current Board, John Grillos signed a document which purported to extend the maturity date of the Fund's $3 million loan to BS Management from March 2003 to September 2003 and to modify other terms of the loan which could result in the impairment of the Fund's rights as a lender and the collectability of the loan. The original March 2003 maturity date passed without payment to the Fund of any principal or interest on the loan. The Fund's Current Board believed that BS Management was a shell corporation without material assets apart from its interest in the loan and its proceeds. In May 2003, the Fund recovered approximately $70,000 of the original loan from an Irish stockbroker to which such money had been transferred by BS Management. In June 2003, the Fund sued BS Management and Oyster Technologies Investments Ltd., an Isle of Man company (which was a party to the March 3, 2003 amendment) in the United States District Court for the Northern District of California, asserting that the December 2002 loan agreement was breached and/or that the March 3, 2003 amendment was void and/or breached. In August 2003, the parties settled the litigation, and the Fund received $2,580,000, plus rights to the proceeds of sale of approximately 1,000,000 shares of Transware PLC, an Irish public company, which BS Management had purchased with some of the proceeds of the original loan. As of the date of the settlement, 453,000 Transware shares had been sold in open market transactions, resulting in proceeds to the Fund of approximately $29,000. Accordingly and after deducting approximately $55,000 in legal expenses, the Fund recovered a total of approximately $2,624,000 of the original $3,000,000 loan. Potential Fund proceeds from the remaining 550,000 shares of Transware stock are believed to have nominal value at best. On August 26, 2003, the Fund's lawsuit against BS Management and Oyster Technologies was dismissed with prejudice and the parties were all released from any obligations under the December 2002 agreement and March 2003 amendment. In 2003, a former officer and director who had been hired by the Former Board demanded severance pay of approximately $255,000, and threatened to sue the Fund for such severance, plus 10% interest and attorney's fees. The Fund rejected the demand and, in 2004, informed the former officer that if he sued, the Fund would oppose such lawsuit and take such affirmative legal action as may be appropriate to recover damages to the Fund caused by certain conduct of the former officer. No assurance can be given as to whether the former officer will sue the Fund or the outcome of such litigation. 11. TAX MATTERS ROCSOP ADJUSTMENT: During the year ended October 31, 2003, permanent differences, primarily due to net operating losses, resulted in a net decrease in accumulated net investment loss, a net increase in accumulated net realized loss on investment transactions and a corresponding decrease in additional paid-in capital. This reclassification had no effect on net assets. DISTRIBUTIONS TO SHAREHOLDERS: As of October 31, 2003, the components of accumulated earnings/(deficit) on a tax basis were as follows: TAX BASIS ACCUMULATED EARNINGS (DEFICIT) Accumulated capital and other losses (37,689,502) Unrealized appreciation/depreciation (122,443,907) Total tax basis accumulated deficit (160,133,409) Add: Paid in capital 297,141,571 Other temporary differences - Tax basis net assets 137,008,162 On October 31, 2003, the Fund had a net capital loss carryforward of $37,689,502 of which $33,469,122 will expire in the year 2010 and $4,220,380 will expire in the year 2011. To the extent future capital gains are offset by capital loss carryforwards, such gains will not be distributed. 12. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (UNAUDITED) The Fund held a Special Meeting of Stockholders on September 16, 2003 for the following purpose: To approve the proposed management plan of the Board of Directors (the "Proposed Plan") under which: (i) Michael Tokarz would be appointed Chairman of the Board of Directors and Portfolio Manager of the Fund; (ii) the Fund would adopt an amended investment objective whereby the Fund would seek to maximize total return from capital appreciation and/or income; (iii) the Fund would seek to achieve its investment objective primarily through senior and subordinated loans, venture capital, mezzanine and preferred instruments and private equity investments; and (iv) the Fund would conduct a tender offer of up to 25% of the Fund's outstanding shares at a price of 95% of the net asset value of such shares. Of the 16,152,600 shares outstanding and entitled to vote, 8,216,271 shares were represented at the meeting by proxy or in person. The number of votes cast for the proposed plan were 7,513,748, against the proposed plan were 658,236, and withheld were 44,287. There were no broker non-votes. 13. SUBSEQUENT EVENTS On November 6, 2003, Michael Tokarz assumed his new position as Chairman, Portfolio Manager and director of the Fund. As Portfolio Manager, Mr. Tokarz will be compensated by the Fund based upon his positive performance as the Portfolio Manager. Under the terms of his agreement with the Fund, the Fund will pay Mr. Tokarz an amount equal to the lesser of (a) 20% of the net income of the Fund for the fiscal year; and (b) the sum of (i) 20% of the net capital gains realized by the Fund in respect of the investments made during his tenure as Portfolio Manager; and (ii) the amount, if any, by which the Fund's total expenses for a fiscal year were less than two percent of the Fund's net assets (determined as of the last day of the period). Any payments to be made shall be calculated based upon the audited financial statements of the Fund for the applicable fiscal year and shall be paid as soon as practicable following the completion of such audit. On November 26, 2003, the Fund commenced a tender offer to acquire up to twenty-five percent (25%) of its outstanding shares of common stock at a per share cash purchase price equal to ninety-five percent (95%) of net asset value per share as of December 31, 2003, the day the offer expired. Based on a final count by the depositary for the tender offer, 3,859,558 shares, or 23.9% of the Fund's outstanding common stock, were tendered. Because less than 25% of the Fund's shares were tendered, the Fund purchased all shares tendered. Each share accepted for purchase was purchased at a price of $8.18 resulting in a total disbursement from the Fund of $31,571,184. Since completion of the tender offer, MVC has 12,293,042 shares of common stock outstanding. The anti-dilutive effect of the tender offer totaled $1,650,697 or approximately $0.134 per share for all remaining shares after the tender offer. Effective December 8, 2003, the Fund agreed to a lease for new office space in Purchase, New York, which is scheduled to expire on November 30, 2005. Future payments under this lease total $110,933, with annual minimum payments of $49,517 from December 8, 2003 through October 31, 2004, $56,682 from November 1, 2004 through October 31, 2005, and $4,734 from November 1, 2005 through November 30, 2005. The building at 287 Bowman Avenue, Purchase, New York is owned by Phoenix Capital Partners, LLC, an entity which is 97% owned by Mr. Tokarz. On December 29, 2003, the Current Valuation Committee marked up the Fund's investment in 0-In Design Automation, Inc. by $1.0 million to $2.0 million and marked up the Fund's investment in Sygate Technologies, Inc. by $1.5 million to $5.5 million. On December 30, 2003, Ishoni Networks, Inc. filed for bankruptcy in United States Bankruptcy Court, Northern District of California, San Jose Division. On January 21, 2004, the Fund reached an agreement with the property manager at 3000 Sand Hill Road, Menlo Park, California to terminate its lease at such location as a result of the property manager's ability to reach an agreement with a new tenant for the space. Under the terms of the agreement, the Fund will buy-out its lease directly from the property manager, for an amount equal to $232,835. As a result, the Fund expects to be able to recover approximately $250,000 of the remaining reserve established at October 31, 2003. On January 23, 2004, Synhrgy HR Technologies, Inc. repaid the balance of its original $5.0 million credit facility to the Fund. In conjunction with the repayment of the credit facility, the Fund also exercised its 43,750 warrants in a cashless transaction for a gain of approximately $40,000. REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Board of Directors and Shareholders of MVC Capital We have audited the accompanying balance sheet, including the schedule of investments, of MVC Capital (the "Fund") as of October 31, 2003, and the related statements of operations, shareholders' equity and cash flows, and the selected per share data and ratios for the year then ended. These financial statements and selected per share data and ratios are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and selected per share data and ratios based on our audit. The financial statements of the Fund for the period ended October 31, 2002 and all other prior periods were audited by other auditors whose report expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and selected per share data and ratios are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and selected per share data and ratios. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements and selected per share data and ratios referred to above present fairly, in all material respects, the financial position of the MVC Capital at October 31, 2003, and the results of its operations, the shareholders' equity and cash flows and the selected per share data and ratios for the year then ended, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP New York, New York January 9, 2004, except for Note 13 which date is January 23, 2004 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES On April 23, 2003, the Fund filed a report on Form 8-K advising that, on April 16, 2003, PricewaterhouseCoopers LLP ("PwC"), the Fund's independent accountants, had resigned. The reports of PwC on the financial statements of the Fund for the fiscal years ended October 31, 2001 and October 31, 2002 contain no adverse opinion or disclaimer and were not qualified or modified as to uncertainty, audit scope, or accounting principle. Further, during the past two fiscal years of the Fund and the subsequent interim period through April 16, 2003, there were no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of PwC would have caused them to make reference to the subject matter of the disagreement in connection with their reports on the financial statements. Exhibit 16 to this Form 10-K is a letter from PwC stating that it agrees with the above statements. On October 27, 2003, Ernst & Young, LLP ("Ernst & Young") was engaged by the Audit Committee of the Board of Directors as the Fund's new principal accountant. During the Fund's two most recent fiscal years, and any subsequent interim period prior to engaging Ernst & Young, the Fund (or anyone on its behalf) did not consult the newly engaged accountant regarding: (i) the application of accounting principles to a specified transaction, either completed or proposed, (ii) the type of audit opinion that might be rendered on the Fund's financial statements, (iii) either a written report was provided to the Fund or oral advice was provided that the new accountant concluded was an important factor considered by the Fund in reaching a decision as to the accounting, auditing or financial reporting issue, or (iv) any matter that was either the subject of a disagreement or a reportable event. ITEM 9A. CONTROLS AND PROCEDURES The Fund recognizes management's responsibility for establishing and maintaining adequate internal control over financial reporting for the Fund. Within the 90 days prior to the filing date of this annual report on Form 10-K, the Fund carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of management, including the individual who performs the functions of a Principal Executive Officer (the "CEO") and the individual who performs the functions of a Principal Financial Officer (the "CFO"). Based upon that evaluation, the CEO and the CFO have concluded that our disclosure controls and procedures are adequate and effective. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out the evaluation discussed above. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Reference is made to the information with respect to "directors and executive officers of the Registrant" to be contained in the Fund's proxy statement to be filed with the SEC, in connection with the Fund's annual meeting of shareholders to be held in 2004 (the "2004 Proxy Statement"), which information is incorporated herein by reference. The Fund has adopted a code of ethics that applies to the Fund's chief executive officer and chief financial officer/chief accounting officer, a copy of which can be obtained from the Fund's website (WWW.MVCCAPITAL.COM), free of charge. ITEM 11. EXECUTIVE COMPENSATION Reference is made to the information with respect to "executive compensation" to be contained in the Fund's 2004 Proxy Statement, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is made to the information with respect to "security ownership of certain beneficial owners and management" to be contained in the Fund's 2004 Proxy Statement, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As stated above in Item 1 (Business---Co-Investments and Follow-On Investments) and in Item 8 (Note 5 of the notes accompanying the financial statements in "Transactions with Other Parties"), the Fund co-invested in Portfolio Companies from time to time with affiliates of the Fund and the Former Sub-Advisor, including certain venture capital investment partnerships. The Fund's co-investments with such affiliates are subject to the terms and conditions of the exemptive order granted by the SEC, which relieves the Fund from certain provisions of the Investment Company Act and permits certain joint transactions with the investment partnerships. In accordance with the conditions of the order, the Fund has co-invested with certain affiliates of Draper Fisher Jurvetson in the following current Portfolio Companies of the Fund: Lumeta Corporation and Phosistor Technologies, Inc. As stated above in Item 2, "Properties", the Fund has leased property at 287 Bowman Avenue, Purchase, NY 10577 from Phoenix Capital Partners, LLC, an entity which is 97% owned by Mr. Tokarz. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Reference is made to the information with respect to "principal accounting fees and services" to be contained in the Fund's 2004 Proxy Statement, which information is incorporated herein by reference. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements Page(s) -------------------- ------ Balance Sheets October 31, 2003 and October 31, 2002 33 Statement of Operations For the Year Ended October 31, 2003, the Year Ended October 31, 2002, and the Year Ended October 31, 2001 34 Statement of Cash Flows For the Year Ended October 31, 2003, the Year Ended October 31, 2002, and the Year Ended October 31, 2001 35 Statement of Shareholders' Equity For the Year Ended October 31, 2003, the Year Ended October 31, 2002, and the Year Ended October 31, 2001 36 Selected Per Share Data and Ratios For the Year Ended October 31, 2003, the Year Ended October 31, 2002, and the Year Ended October 31, 2001 37 Schedule of Investments October 31, 2003 38-41 Notes to Financial Statements 42-51 Report of Independent Public Accountants 52
All other information required in the financial statement schedules has been incorporated in the financial statements or notes thereto or has been omitted since the information is not applicable, not present or not present in amounts sufficient to require submission of the schedule. (b) Reports on Form 8-K On December 2, 2002, the Fund filed one report on Form 8-K reporting the Fund's commencement of doing business under the name MVC Capital and to announce the hiring of an interim Chief Financial Officer. On March 11, 2003, the Fund filed a report on Form 8-K confirming the election results following the Annual Meeting of Shareholders, advising that John Grillos had been terminated as Chief Executive Officer of the Fund and that Robert S. Everett had been appointed as acting Chief Executive Officer. On March 17, 2003, the Fund filed a report on Form 8-K advising that Michael Stewart had resigned as acting Chief Financial Officer of the Fund, and that the filing of the Form 10-Q quarterly report for the period ended January 31, 2003 would be delayed, pending a full review of the portfolio valuation by the Current Valuation Committee appointed by the Board of Directors. On April 23, 2003, the Fund filed a report on Form 8-K advising that, on April 16, 2003, PricewaterhouseCoopers LLP ("PwC"), the Fund's independent accountants, had resigned. During the past two fiscal years of the Fund and the subsequent interim period through April 16, 2003, there have been no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of PwC would have caused them to make reference to the subject matter of the disagreement in connection with their reports on the financial statements. In addition, the report, as filed on Form 8-K, advised that a review of the Fund's portfolio valuation had been conducted and as a result of this review, the fair value of many of the Fund's holdings had been written down. On June 9, 2003, the Fund filed a report on Form 8-K announcing the Fund's new long term strategy, subject to shareholder approval, pursuant to which the Fund would: (i) be managed as a more traditional, mezzanine and buyout focused business development company with an increased dividend yield, (ii) conduct a tender offer for 25% of the Fund's outstanding shares at a price of 95% of the Fund's net asset value, and (iii) appoint Michael Tokarz, a private merchant banker and a former General Partner of Kohlberg Kravis Roberts & Co., as the Chairman of the Board and Portfolio Manager of the Fund. This Form 8-K also reported that the Fund would seek shareholder approval of the new long term strategy, even though such approval is not required. On July 22, 2003, the Fund filed a report on Form 8-K advising that the Fund had filed a preliminary proxy statement with the SEC asking the stockholders to approve the proposed management plan of the Board of Directors at a special meeting of stockholders to be held on Tuesday, September 16, 2003. In addition, the report, as filed on Form 8-K, advised that a review of the Fund's portfolio valuation had been conducted and as a result of this review, the fair value of certain holdings of the Fund had been written down. On September 19, 2003, the Fund filed a report on Form 8-K advising that the Fund's stockholders voted to implement the Board of Director's Proposed Plan concerning the amendment of the Fund's investment strategy, the approval of Michael Tokarz as the Chairman of the Board of Directors and Portfolio Manager of the Fund and the approval of a tender offer for up to 25% of the Fund's outstanding shares at a price of 95% of the Fund's net asset value. In addition, the report, as filed on Form 8-K, advised that Ernst & Young had been engaged as the Fund's new independent accountants. On October 7, 2003, the Fund filed a report on Form 8-K advising that the Fund had changed its office and principal place of business to 10 Rockefeller Plaza, Suite 815, New York, New York. On November 6, 2003, the Fund filed a report on Form 8-K advising that Michael Tokarz had assumed his new position as Chairman, Portfolio Manager and director of the Fund. In addition, the report, as filed on Form 8-K, advised that a review of the Fund's portfolio valuation had been conducted and as a result of this review, the fair value of certain of the Fund's holdings had been written down. (c) Exhibits Exhibit No. Exhibit ------------- --------- 3.2 Amended and Restated By-Laws. 10.1 Lease for 287 Bowman Avenue, Purchase, NY 10577. 10.2 Agreement between the Fund and Michael Tokarz. 16 Letter regarding change in certifying accountant. 23.1 Consent from PricewaterhouseCoopers LLP. 23.2 Consent from Ernst & Young LLP. 31 Rule 13a-14(a) Certifications. 32 Section 1350 Certification. (d) Financial Statement Schedules None Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date Signature Title - ------- ------------- ------ Date: January 29, 2004 /s/ Michael Tokarz Chairman and Director - ---------------------------- ------------------------- (Michael Tokarz)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date Signature Title - ------- ------------- ------ Date: January 29, 2004 /s/ Michael Tokarz Chairman and Director - ---------------------------- ------------------------- (Michael Tokarz) Date: January 29, 2004 /s/ Frances Spark Chief Financial Officer - ---------------------------- ------------------------- (Frances Spark) Date: January 29, 2004 /s/ Gerald Hellerman Director - ---------------------------- ------------------------- (Gerald Hellerman) Date: January 29, 2004 /s/ Robert C. Knapp Director - ---------------------------- ------------------------- (Robert C. Knapp) Date: January 29, 2004 /s/ Bruce W. Shewmaker Director - ---------------------------- ------------------------- (Bruce W. Shewmaker) Date: January 29, 2004 /s/ George Karpus Director - ---------------------------- ------------------------- (George Karpus) Date: January 29, 2004 /s/ Emilio Dominianni Director - ---------------------------- ------------------------- (Emilio Dominianni) Date: January 29, 2004 /s/ Terry Feeney Director - ---------------------------- ------------------------- (Terry Feeney)
EX-3.(II) 3 srz9404610v5.txt AMENDED AND RESTATED BY-LAWS FOURTH AMENDED AND RESTATED B Y L A W S OF MEVC DRAPER FISHER JURVETSON FUND I, INC. (A DELAWARE CORPORATION) TABLE OF CONTENTS PAGE Article 1 Offices ............................................................1 1.1 Principal Office............................................1 1.2 Additional Offices..........................................1 Article 2 Meeting of Stockholders.............................................1 2.1 Place of Meeting............................................1 2.2 Annual Meeting..............................................1 2.3 Special Meetings............................................2 2.4 Action Without a Meeting....................................3 2.5 Notice of Meetings..........................................3 2.6 Business Matter of a Special Meeting........................3 2.7 List of Stockholders........................................3 2.8 Organization and Conduct of Business........................4 2.9 Quorum and Adjournments.....................................4 2.10 Voting Rights...............................................4 2.11 Majority Vote...............................................4 2.12 Record Date for Stockholder Notice and Voting...............4 2.13 Proxies.....................................................5 2.14 Inspectors of Election......................................5 Article 3 Directors ..........................................................6 3.1 Number; Election; Tenure and Qualifications.................6 3.2 Vacancies...................................................7 3.3 Resignation and Removal.....................................7 3.4 Powers......................................................7 3.5 Place of Meetings...........................................7 3.6 Annual Meetings.............................................7 3.7 Regular Meetings............................................7 3.8 Special Meetings............................................8 3.9 Quorum and Adjournments.....................................8 3.10 Action Without Meeting......................................8 3.11 Telephone Meetings..........................................8 3.12 Waiver of Notice............................................8 3.13 Fees and Compensation of Directors..........................8 3.14 Rights of Inspection........................................9 3.15 Committees of Directors.....................................9 Article 4 Officers ..........................................................10 4.1 Officers Designated........................................10 4.2 Appointment of Officers....................................10 4.3 Subordinate Officers.......................................10 4.4 Removal and Resignation of Officers........................10 4.5 Vacancies in Offices.......................................10 4.6 Compensation...............................................10 -i- 4.7 The Chairman of the Board..................................10 4.8 The Vice Chairman..........................................11 4.9 The Chief Executive Officer................................11 4.10 The President..............................................11 4.11 The Vice President.........................................11 4.12 The Secretary..............................................11 4.13 The Assistant Secretary....................................12 4.14 The Chief Financial Officer................................12 4.15 Bond ......................................................12 4.16 Delegation of Authority....................................12 Article 5 Indemnification....................................................12 5.1 Right to Indemnification...................................12 5.2 Right to Advancement of Expenses...........................14 5.3 Right of Indemnitee to Bring Suit..........................14 5.4 Non-Exclusivity of Rights..................................15 5.5 Insurance..................................................15 5.6 Indemnification of Employees and Agents of the Corporation.15 5.7 Nature of Rights...........................................15 Article 6 Capital Stock......................................................15 6.1 Certificates for Shares....................................15 6.2 Signatures on Certificates.................................16 6.3 Transfer of Stock..........................................16 6.4 Registered Stockholders....................................16 6.5 Lost, Stolen or Destroyed Certificates.....................16 Article 7 Certain Transactions...............................................17 7.1 Transactions with Interested Parties.......................17 7.2 Quorum.....................................................17 Article 8 General Provisions.................................................17 8.1 Dividends..................................................17 8.2 Dividend Reserve...........................................17 8.3 Checks.....................................................18 8.4 Corporate Seal.............................................18 8.5 Fiscal Year................................................18 8.6 Execution of Corporate Contracts and Instruments...........18 8.7 Representation of Shares of Other Corporations.............18 Article 9 Amendments.........................................................18 -ii- FOURTH AMENDED AND RESTATED B Y L A W S OF MEVC DRAPER FISHER JURVETSON FUND I, INC. (A DELAWARE CORPORATION) ARTICLE 1 Offices 1.1 PRINCIPAL OFFICE. The initial registered office of the corporation shall be 1209 Orange Street, Wilmington, Delaware, and the name of the initial registered agent in charge thereof is The Corporation Trust Company. 1.2 ADDITIONAL OFFICES. The corporation may also have offices at such other places, either within or without the State of Delaware, as the board of directors may from time to time designate or the business of the corporation may require. ARTICLE 2 Meeting of Stockholders 2.1 PLACE OF MEETING. Meetings of stockholders may be held at such place, either within or without of the State of Delaware, as may be designated by or in the manner provided in these Bylaws, or, if not so designated, at the registered office of the corporation or the principal executive offices of the corporation. 2.2 ANNUAL MEETING. Annual meetings of stockholders shall be held each year at such date and time as shall be designated from time to time by the board of directors and stated in the notice of the meeting. At such annual meeting, the stockholders shall elect by a plurality vote the number of directors properly nominated and qualified for election to hold office until the next annual meeting of stockholders after their election. The stockholders shall also transact such other business as may properly be brought before the meetings. To be properly brought before the annual meeting, business must be either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors or the Chairman, Vice Chairman, Chief Executive Officer or President, (b) otherwise properly brought before the meeting by or at the direction of the board of directors or the Chairman, Vice Chairman, Chief Executive Officer or President, or (c) otherwise properly brought before the meeting by a stockholder of record. In addition to any other applicable requirements, for business to be properly brought before the annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered personally or deposited in the United States mail, or delivered to a common carrier for transmission to the recipient or actually transmitted by the person giving the notice by electronic means to the recipient or sent by other means of written communication, postage or delivery charges prepaid in all such cases, and received at the principal executive offices of the corporation, addressed to the attention of the Secretary of the corporation, not less than 60 days nor more than 90 days prior to the scheduled date of the meeting (regardless of any postponements, deferrals or adjournments of that meeting to a later date); PROVIDED, HOWEVER, that in the event that less than 70 days' notice or prior public disclosure of the date of the scheduled meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the earlier of (a) the close of business on the 10th day following the day on which such notice of the date of the scheduled annual meeting was mailed or such public disclosure was made, whichever first occurs, and (b) two days prior to the date of the scheduled meeting. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class, series and number of shares of the corporation that are owned beneficially by the stockholder, and (iv) any material interest of the stockholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 2.2; provided, however, that nothing in this Section 2.2 shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting. The Chairman (or such other person presiding at the meeting in accordance with these Bylaws) shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 2.2, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. 2.3 SPECIAL MEETINGS. Special meetings of the stockholders may be called for any purpose or purposes, unless otherwise prescribed by the statute or by the Certificate of Incorporation, only at the request of the Chairman, Vice Chairman, Chief Executive Officer or President or by a resolution duly adopted by a majority of the board of directors. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at any special meeting shall be limited to matters relating to the purpose or purposes stated in the notice of meeting. Any Stockholder owning at least fifteen percent (15%) of the outstanding common stock of the corporation may request that the board of directors call a special meeting of stockholders. The request shall be in writing and shall state the purpose(s) of the special meeting. The board of directors shall consider the stockholder's request at the next meeting of the board of directors following its receipt of the stockholder's request. If the board of directors determines to call a special meeting, within five (5) business days of the determination of the board of directors, the board of directors shall call such a meeting to be held at the corporation's principal office in the United States, on a date that shall be not more than sixty (60) nor less than ten (10) days after the record date of such meeting. Written notice of such meeting shall be sent not more than sixty (60) nor less than ten (10) days, or such greater time period required by applicable -2- law, before the date of such meeting to each stockholder entitled to vote at such meeting. The record date for such meeting shall be fixed by resolution of the board of directors on a date not preceding the date of such resolution. 2.4 ACTION WITHOUT A MEETING. Any action which may be taken at any annual or special meeting of the stockholders of this corporation may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action or actions so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Such consent or consents shall be delivered to the corporation by hand or certified mail, return receipt requested, to its principal executive office, or to an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. 2.5 NOTICE OF MEETINGS. Written notice of stockholders' meetings, stating the place, date and time of the meeting and, in the case of a special meeting, the purpose or purposes for which such special meeting is called, shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days prior to the meeting. When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; PROVIDED, HOWEVER, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. Whenever, under the provisions of Delaware law or of the Certificate of Incorporation or of these Bylaws, notice is required to be given to any stockholder it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his or her address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Whenever any notice is required to be given under the provisions of Delaware law or of the Certificate of Incorporation or of these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. 2.6 BUSINESS MATTER OF A SPECIAL MEETING. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice, except to the extent such notice is waived or is not required. 2.7 LIST OF STOCKHOLDERS. The officer in charge of the stock ledger of the corporation or the transfer agent shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, -3- for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, at a place within the city where the meeting is to be held, which place, if other than the place of the meeting, shall be specified in the notice of the meeting. The list shall also be produced and kept at the place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present in person thereat. 2.8 ORGANIZATION AND CONDUCT OF BUSINESS. The Chairman or, in his or her absence, Chief Executive Officer or, in their absence, such person as the board of directors may have designated or, in the absence of such a person, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, shall call to order any meeting of the stockholders and act as chairman of the meeting. In the absence of the Secretary of the corporation, the Secretary of the meeting shall be such person as the chairman appoints. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seems to him or her in order. 2.9 QUORUM AND ADJOURNMENTS. Except where otherwise provided by law or the Certificate of Incorporation or these Bylaws, the holders of at least a majority of the stock issued and outstanding and entitled to vote, present in person or represented in proxy, shall constitute a quorum at all meetings of the stockholders. The stockholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to have less than a quorum if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. At such adjourned meeting at which a quorum is present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If, however, a quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat who are present in person or represented by proxy shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. 2.10 VOTING RIGHTS. Unless otherwise provided in the Certificate of Incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder. 2.11 MAJORITY VOTE. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Certificate of Incorporation or of these Bylaws, a different vote is required in which case such express provision shall govern and control the decision of such question. 2.12 RECORD DATE FOR STOCKHOLDER NOTICE AND VOTING. (i) For purposes of determining the stockholders entitled to notice of any meeting or to vote, or entitled to receive payment of any dividend or other distribution, or entitled to exercise any right in respect of any -4- change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any other action. If the board of directors does not so fix a record date, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (ii) For purposes of determining the stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing such record date is adopted by the board of directors. If no record date has been fixed by the board of directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the board of directors is required under Delaware law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by hand or certified mail, return receipt requested, to its principal executive office, or to an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. If no record date has been fixed by the board of directors and prior action by the board of directors is required under Delaware law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be the close of business on the day on which the board of directors adopts the resolution taking such prior action. 2.13 PROXIES. Every person entitled to vote for directors or on any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the Secretary of the corporation. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, before the vote pursuant to that proxy, by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy executed by, or attendance at the meeting and voting in person by, the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of three years from the date of the proxy, unless otherwise provided in the proxy. 2.14 INSPECTORS OF ELECTION. The corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors of election to act at the meeting and make a written report thereof. The corporation may designate one or more persons to act as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of -5- stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. ARTICLE 3 Directors 3.1 NUMBER; ELECTION; TENURE AND QUALIFICATIONS. The board of directors of the corporation shall consist of not less than three (3) members nor more than seven (7) members. The Board shall be comprised of one class of directors. Each director shall hold office until the next annual meeting of stockholders after his/her election. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the board of directors at the annual meeting, by or at the direction of the board of directors, may be made by any nominating committee or person appointed by the board of directors; nominations may also be made by any stockholder of record of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 3.1. Such nominations, other than those made by or at the direction of the board of directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation. The Board or a Nominating Committee thereof shall determine the eligibility of any nominated candidate based on criteria determined by the Board or the Nominating Committee. To be timely, a stockholder's notice shall be delivered personally or deposited in the United States mail, or delivered to a common carrier for transmission to the recipient or actually transmitted by the person giving the notice by electronic means to the recipient or sent by other means of written communication, postage or delivery charges prepaid in all such cases, and received at the principal executive offices of the corporation addressed to the attention of the Secretary of the corporation not less than 60 days nor more than 90 days prior to the scheduled date of the meeting (regardless of any postponements, deferrals or adjournments of that meeting to a later date); provided, however, that, in the case of an annual meeting and in the event that less than 70 days' notice or prior public disclosure of the date of the scheduled meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the earlier of (a) the close of business on the 10th day following the day on which such notice of the date of the scheduled meeting was mailed or such public disclosure was made, whichever first occurs, or (b) two days prior to the date of the scheduled meeting. Such stockholder's notice to the Secretary shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class, series and number of shares of capital stock of the corporation that are owned beneficially by the person, (iv) a statement as to the person's citizenship, and (v) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder; and (b) as to the stockholder giving the notice, (i) the name and record address of the stockholder and (ii) the class, series and number of shares of capital stock of the corporation that are owned beneficially by the stockholder. The corporation or the Nominating -6- Committee may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as director of the corporation. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth herein. In connection with any annual meeting, the Chairman (or such other person presiding at such meeting in accordance with these Bylaws) shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Directors need not be stockholders. 3.2 VACANCIES. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election at which the term of the class to which they have been elected expires and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. In the event of a vacancy in the board of directors, the remaining directors, except as otherwise provided by law or these Bylaws, may exercise the powers of the full board of directors until the vacancy is filled. 3.3 RESIGNATION AND REMOVAL. Any director may resign at any time by delivering written notice to the corporation at its principal place of business or to the Chairman, Vice Chairman, Chief Executive Officer, President or Secretary. Such resignation shall be effective upon receipt of such notice unless the notice specifies such resignation to be effective at some other time or upon the happening of some other event. Any director or the entire board of directors may be removed, but only for cause, and only upon the affirmative vote of the holders of at least seventy-five percent (75%) of shares then entitled to vote at an election of directors, unless otherwise specified by law or the Certificate of Incorporation. 3.4 POWERS. The business of the corporation shall be managed by or under the direction of the board of directors which may exercise all such powers of the corporation and do all such lawful acts and things which are not by statute or by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders. 3.5 PLACE OF MEETINGS. The board of directors may hold meetings, both regular and special, either within or without the State of Delaware. 3.6 ANNUAL MEETINGS. The annual meetings of the board of directors shall be held immediately following the annual meeting of stockholders, and no notice of such meeting shall be necessary to the board of directors, provided a quorum shall be present. The annual meetings shall be for the purposes of organization, and an election of officers and the transaction of other business. 3.7 REGULAR MEETINGS. Regular meetings of the board of directors may be held without notice at such time and place as may be determined from time to time by the board of directors. -7- 3.8 SPECIAL MEETINGS. Special meetings of the board of directors may be called by the Chairman, Vice Chairman, Chief Executive Officer, President, Secretary, any Vice President or by a majority of the board of directors upon one (1) day's notice to each director and can be delivered either personally, or by telephone, express delivery service (so that the scheduled delivery date of the notice is at least one (1) day in advance of the meeting), telegram or facsimile or electronic mail transmission, and on five (5) day's notice, by mail. The notice need not describe the purpose of the special meeting. 3.9 QUORUM AND ADJOURNMENTS. At all meetings of the board of directors, a majority of the directors then in office shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may otherwise be specifically provided by law or the Certificate of Incorporation. If a quorum is not present at any meeting of the board of directors, the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting at which the adjournment is taken, until a quorum shall be present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved of by at least a majority of the required quorum for that meeting. 3.10 ACTION WITHOUT MEETING. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting, if all members of the board of directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board of directors or committee. 3.11 TELEPHONE MEETINGS. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any member of the board of directors or any committee may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.12 WAIVER OF NOTICE. Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. 3.13 FEES AND COMPENSATION OF DIRECTORS. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the board of directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, for service performed as directors, including the expenses incurred in connection with their attendance at meetings of the board of directors, and may be paid a fixed sum for attendance at each meeting of the board of directors and/or a fixed or variable salary for their service as a director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. -8- 3.14 RIGHTS OF INSPECTION. Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders and its other books and records for a purpose reasonably related to his or her position as a director. 3.15 COMMITTEES OF DIRECTORS. (i) The board of directors may, by resolution passed by a majority of the entire board of directors, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The board of directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. (ii) In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. (iii) Any such committee, to the extent provided in the resolution of the board of directors, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of dissolution, removing or indemnifying directors or amending the Bylaws of the corporation; and, unless the resolution or the Certificate of Incorporation expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock or to adopt a certificate of ownership and merger. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. (iv) Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. -9- ARTICLE 4 Officers 4.1 OFFICERS DESIGNATED. The officers of the corporation shall be chosen by the board of directors and shall be a Chief Executive Officer, a Secretary and a Chief Financial Officer or Treasurer. The board of directors may also appoint a Chairman, a Vice Chairman, a President, a Chief Operating Officer, a Chief Technical Officer, one or more Vice Presidents, and one or more assistant Secretaries. Any number of offices may be held by the same person, except as otherwise provided in the Certificate of Incorporation or these Bylaws. 4.2 APPOINTMENT OF OFFICERS. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 4.3 or 4.5 of this Article 4, shall be chosen in such manner and shall hold their offices for such terms as are prescribed by these Bylaws or determined by the board of directors. Each officer shall hold his or her office until his or her successor is elected and qualified or until his or her earlier resignation or removal. This Section does not create any rights of employment or continued employment. The corporation may secure the fidelity of any or all of its officers or agents by bond or otherwise. 4.3 SUBORDINATE OFFICERS. The board of directors may appoint, and may empower the Chairman, Vice Chairman, Chief Executive Officer and/or President to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the Bylaws or as the board of directors may from time to time determine. 4.4 REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the board of directors, at any regular or special meeting of the board of directors, or, except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 4.5 VACANCIES IN OFFICES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointment to that office. 4.6 COMPENSATION. The salaries of all officers of the corporation shall be fixed from time to time by the board of directors and no officer shall be prevented from receiving a salary because such officer is also a director of the corporation. 4.7 THE CHAIRMAN OF THE BOARD. The Chairman, if such an officer be elected, shall, if present, perform such other powers and duties as may be assigned to such officer from time to time by the board of directors. In the absence of an appointed Chief Executive Officer, the Chairman shall be deemed to function in the capacity of the Chief Executive Officer. -10- 4.8 THE VICE CHAIRMAN. The Vice Chairman, if such an officer be elected, shall, if present, perform such other powers and duties as may be assigned to such officer from time to time by the Chairman, if such an officer be elected, or by the board of directors. If there is no Chairman, the Vice Chairman shall also fulfill the duties of that position. If there is neither a Chairman nor a Chief Executive Officer, the Vice Chairman shall also be the Chief Executive Officer of the corporation and shall have the powers and duties prescribed in Section 4.9 of this Article 4. 4.9 THE CHIEF EXECUTIVE OFFICER. Subject to such supervisory powers, if any, as may be given by the board of directors to the Chairman and/or the Vice Chairman, if there be such either such officer, the Chief Executive Officer shall preside at all meetings of the stockholders and in the absence of the Chairman, or, if there be none, at all meetings of the board of directors, shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the board of directors are carried into effect. He or she shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the board of directors to some other officer or agent of the corporation. 4.10 THE PRESIDENT. The President shall, in the event there be no Chief Executive Officer or Chairman or in the absence of the Chief Executive Officer or in the event of his or her disability or refusal to act, perform the duties of the Chief Executive Officer, and when so acting, shall have the powers of and subject to all the restrictions upon the Chief Executive Officer. The President shall perform such other duties and have such other powers as may from time to time be prescribed for him or her by the board of directors, the Chairman, the Vice Chairman, the Chief Executive Officer or these Bylaws. 4.11 THE VICE PRESIDENT. The Vice President (or in the event there be more than one, the Vice Presidents in the order designated by the directors, or in the absence of any designation, in the order of their election), shall, in the absence of the President or in the event of his or her disability or refusal to act, perform the duties of the President, and when so acting, shall have the powers of and subject to all the restrictions upon the President. The Vice President(s) shall perform such other duties and have such other powers as may from time to time be prescribed for them by the board of directors, the President, the Vice Chairman, the Chairman or these Bylaws. 4.12 THE SECRETARY. The Secretary shall attend all meetings of the board of directors and the stockholders and record all votes and the proceedings of the meetings in a book to be kept for that purpose and shall perform like duties for the standing committees, when required. The Secretary shall give, or cause to be given, notice of all meetings of stockholders and special meetings of the board of directors, and shall perform such other duties as may from time to time be prescribed by the board of directors, the Chairman, the Vice Chairman or the Chief Executive Officer, under whose supervision he or she shall act. The Secretary shall have custody of the seal of the corporation, and the Secretary, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it, and, when so affixed, the seal may be attested by his or her signature or by the signature of such Assistant Secretary. The board of directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing thereof by his or her signature. The Secretary shall keep, or cause to be kept, at the principal executive office or -11- at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same and the number and date of cancellation of every certificate surrendered for cancellation. 4.13 THE ASSISTANT SECRETARY. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order designated by the board of directors (or in the absence of any designation, in the order of their election), shall, in the absence of the Secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as may from time to time be prescribed by the board of directors. 4.14 THE CHIEF FINANCIAL OFFICER. The Chief Financial Officer (or Treasurer if the chief financial and accounting officer has such title) shall have the custody of the Corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors. The Chief Financial Officer shall disburse the funds of the corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the Chief Executive Officer and the board of directors, at its regular meetings, or when the board of directors so requires, an account of all his or her transactions as Chief Financial Officer and of the financial condition of the corporation. 4.15 BOND. If required by the board of directors, any officer shall give the corporation a bond in such sum and with such surety or sureties and upon such terms and conditions as shall be satisfactory to the board of directors, including without limitation a bond for the faithful performance of the duties of such officer's office and for the restoration to the corporation of all books, papers, vouchers, money and other property of whatever kind in such officer's possession or under such officer's control and belonging to the corporation. 4.16 DELEGATION OF AUTHORITY. The board of directors may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof. ARTICLE 5 Indemnification 5.1 RIGHT TO INDEMNIFICATION. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director or an officer of the corporation or is or was serving at the request of the corporation as a director, officer or trustee of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer or trustee or in any other capacity while serving as a -12- director, officer or trustee, shall be indemnified and held harmless by the corporation to the fullest extent authorized by the General Corporation Law of Delaware, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than such law permitted the corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith; provided, however, that, except as provided in Section 5.3 hereof with respect to proceedings to enforce rights to indemnification, the corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the board of directors of the corporation. Notwithstanding the foregoing, no indemnification shall be provided hereunder to an officer or director: (a) who shall have been adjudicated, by the court or other body before which the proceeding was brought, to be liable to the corporation or its stockholders by reason of such officer's or director's willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office (collectively, "disabling conduct"); or (b) with respect to any proceeding disposed of (whether by settlement, pursuant to a consent decree or otherwise) without an adjudication by the court or other body before which the proceeding was brought that such officer or director was liable to corporation or its stockholders by reason of disabling conduct, unless there has been a determination that such officer or director did not engage in disabling conduct by: (i) at least a majority of those directors who are neither "interested persons" of the corporation (as such term is defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended ("1940 Act") nor are parties to the proceeding based upon a review of readily available facts (as opposed to a full trial-type inquiry); or (ii) written advice of independent legal counsel based upon a review of readily available facts (as opposed to a full trial-type inquiry); -13- provided, however, that indemnification shall be provided hereunder to a director or officer with respect to any proceeding in the event of (1) a final decision on the merits by the court or other body before which the proceeding was brought that the director or officer was not liable by reason of disabling conduct, or (2) the dismissal of the proceeding by the court or other body before which it was brought for insufficiency of evidence of any disabling conduct with which such director or officer has been charged. For purposes of this Section 5.1, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 5.2 RIGHT TO ADVANCEMENT OF EXPENSES. In addition to the right to indemnification conferred in Section 5.1 hereof, an indemnitee shall also have the right to be paid by the corporation the expenses (including attorney's fees) incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the General Corporation Law of Delaware requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section 5.2 or otherwise; and provided, further, that (a) such director or officer shall have provided appropriate security for such undertaking, (b) the corporation is insured against losses arising out of any such advance payments, or (c) either a majority of the directors who are neither "interested persons" of the corporation (as such term is defined in Section 2(a)(19) of the 1940 Act) nor parties to the proceeding, or independent legal counsel by means of written advice, shall have determined, based upon a review of the readily available facts (as opposed to a trial-type inquiry or full investigation), that there is reason to believe that such director or officer will be found entitled to indemnification under this Article 5. 5.3 RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under Section 5.1 or 5.2 hereof is not paid in full by the corporation within sixty (60) days after a written claim has been received by the corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty (20) days, the indemnitee may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the General Corporation Law of Delaware. Neither the failure of the corporation (including -14- its directors who are not parties to such action, a committee of such directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the General Corporation Law of Delaware, nor an actual determination by the corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article 5 or otherwise shall be on the corporation. 5.4 NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification and to the advancement of expenses conferred in this Article 5 shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Certificate of Incorporation, these Bylaws, any agreement, vote of stockholders or directors or otherwise. 5.5 INSURANCE. The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of Delaware. 5.6 INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION. The corporation may, to the extent authorized from time to time by the board of directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of the corporation to the fullest extent of the provisions of this Article 5 with respect to the indemnification and advancement of expenses of directors and officers of the corporation. 5.7 NATURE OF RIGHTS. The rights conferred upon indemnitees in this Article 5 shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer or trustee and shall inure to the benefit of the indemnitee's heirs, executors and administrators. Any amendment, alteration or repeal of this Article 5 that adversely affects any right of an indemnitee or its successors shall be prospective only and shall not limit or eliminate any such right with respect to any proceeding involving any occurrence or alleged occurrence of any action or omission to act that took place prior to such amendment or repeal. ARTICLE 6 Capital Stock 6.1 CERTIFICATES FOR SHARES. The shares of the corporation shall be represented by certificates or shall be uncertificated. Certificates shall be signed by, or in the name of the corporation by, the Chairman, the Vice Chairman, the Chief Executive Officer, the President or a Vice President and by the Chief Financial Officer, the Treasurer, the Secretary or an Assistant -15- Secretary of the corporation. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. Certificates may be issued for partly paid shares and in such case upon the face or back of the certificates issued to represent any such partly paid shares, the total amount of the consideration to be paid therefor, and the amount paid thereon shall be specified. Within a reasonable time after the issuance or transfer of uncertificated stock, the corporation shall send to the registered owner thereof a written notice containing the information required by the General Corporation Law of the State of Delaware or a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 6.2 SIGNATURES ON CERTIFICATES. Any or all of the signatures on a certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. 6.3 TRANSFER OF STOCK. Upon surrender to the corporation or the transfer agent of the corporation of a certificate of shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Upon receipt of proper transfer instructions from the registered owner of uncertificated share, such uncertificated shares shall be canceled and issuance of new equivalent uncertificated shares or certificated shares shall be made to the person entitled thereto and the transaction shall be recorded upon the books of the corporation. 6.4 REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a percent registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. 6.5 LOST, STOLEN OR DESTROYED CERTIFICATES. The board of directors may direct that a new certificate or certificates be issued to replace any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing the issue of a new certificate or certificates, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of the lost, stolen or destroyed certificate or certificates, or his or her legal representative, to advertise the same in such manner as it shall require, and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. -16- ARTICLE 7 Certain Transactions 7.1 TRANSACTIONS WITH INTERESTED PARTIES. No contract or transaction between the corporation and one or more of its directors or officers, or between the corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board of directors or committee thereof which authorizes the contract or transaction or solely because the vote or votes of such director or officer are counted for such purpose, if: (a) the material facts as to such person's relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board of directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (b) the material facts as to such person's relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (c) the contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee thereof, or the stockholders. 7.2 QUORUM. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes the contract or transaction. ARTICLE 8 General Provisions 8.1 DIVIDENDS. Dividends upon the capital stock of the corporation, subject to any restrictions contained in the General Corporation Law of the State of Delaware or the provisions of the Certificate of Incorporation, if any, may be declared by the board of directors at any regular or special meeting. Dividends may be paid in cash, in property or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. 8.2 DIVIDEND RESERVE. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. -17- 8.3 CHECKS. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the board of directors may from time to time designate. 8.4 CORPORATE SEAL. The board of directors may, by resolution, adopt a corporate seal. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the word "Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced. The seal may be altered from time to time by the board of directors. 8.5 FISCAL YEAR. The fiscal year of the corporation shall be fixed by resolution of the board of directors. 8.6 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS. The board of directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The Chief Executive Officer, the President or any Vice President or the Secretary or any Assistant Secretary of this corporation is authorized to vote, represent and exercise on behalf of this corporation all rights incident to any and all shares of any corporation or corporations standing in the name of this corporation. The authority herein granted to said officers to vote or represent on behalf of this corporation any and all shares held by this corporation in any other corporation or corporations may be exercised either by such officers in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officers. ARTICLE 9 Amendments The board of directors is expressly empowered to adopt, amend or repeal these Bylaws, provided, however, that any adoption, amendment or repeal of these Bylaws by the board of directors shall require the approval of at least sixty-six and two-thirds percent (66-2/3%) of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any resolution providing for adoption, amendment or repeal is presented to the board). The stockholders shall also have power to adopt, amend or repeal these Bylaws, provided, however, that in addition to any vote of the holders of any class or series of stock of this corporation required by law or by the Certificate of Incorporation of this corporation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then outstanding shares of the stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required for such adoption, amendment or repeal by the stockholders of any provisions of these Bylaws. EX-10 4 srz9580301v2.txt EXHIBIT 10.1--LEASE FOR 287 BOWMAN AVENUE LEASE AGREEMENT BETWEEN PHOENIX CAPITAL PARTNERS, LLC, AS LESSOR, AND MVC CAPITAL, AS LESSEE. Premises: RIVERVIEW AT PURCHASE 287 BOWMAN AVENUE PURCHASE, NEW YORK 10577 Prepared By: THE LAW OFFICES OF STEVEN C. HIRSCH, ESQ. 585 STEWART AVENUE SUITE 430 GARDEN CITY, NEW YORK 11530 (516) 227-1117 TABLE OF CONTENTS ARTICLE 1 - DEMISE AND TERM OF DEMISE ........................................1 ARTICLE 2 - RENT .............................................................2 ARTICLE 3 - TAXES AND COMMON AREA MAINTENANCE CHARGES ........................3 ARTICLE 4 - USE OF DEMISED PREMISES .........................................10 ARTICLE 5 - POSSESSION AND CONDITION OF DEMISED PREMISES ....................14 ARTICLE 6 - UTILITIES, CLEANING, ETC. .......................................14 ARTICLE 7 - REPAIR AND MAINTENANCE ..........................................20 ARTICLE 8 - LESSOR'S WORK; LESSEE'S WORK ....................................22 ARTICLE 9 - COMPLIANCE WITH LAWS ............................................23 ARTICLE 10 - RIGHTS RESERVED TO LESSOR .......................................23 ARTICLE 11 - INSURANCE .......................................................25 ARTICLE 12 - DAMAGE OR DESTRUCTION ...........................................27 ARTICLE 13 - CURING DEFAULTS; FEES AND EXPENSES ..............................30 ARTICLE 14 - DEFAULT PROVISIONS ..............................................31 ARTICLE 15 - MEASURE OF DAMAGES IN EVENT OF DEFAULT ..........................36 ARTICLE 16 - INDEMNIFICATION .................................................38 ARTICLE 17 - MECHANIC'S AND OTHER LIENS ......................................39 ARTICLE 18 - CONDEMNATION ....................................................40 ARTICLE 19 - COVENANT OF QUIET ENJOYMENT .....................................41 ARTICLE 20 - WAIVER OF COUNTERCLAIM AND JURY TRIAL ...........................41 ARTICLE 21 - NOTICES .........................................................42 ARTICLE 22 - WAIVERS AND SURRENDERS TO BE IN WRITING .........................42 ARTICLE 23 - RIGHTS CUMULATIVE ...............................................43 ARTICLE 24 - CONVEYANCE; LIABILITY OF PARTIES ................................44 ARTICLE 25 - CHANGES AND ALTERATIONS BY LESSEE ...............................45 ARTICLE 26 - CERTIFICATE OF LESSEE ...........................................47 ARTICLE 27 - ASSIGNMENTS, SUBLEASES AND MORTGAGES ............................47 ARTICLE 28 - SUBORDINATION ...................................................51 ARTICLE 29 - SURRENDER; REMOVAL OF LESSEE'S PROPERTY .........................52 ARTICLE 30 - RENEWAL TERM ....................................................53 ARTICLE 31 - THIS ARTICLE HAS BEEN INTENTIONALLY OMITTED .....................55 ARTICLE 32 - BROKERS .........................................................55 ARTICLE 33 - RIGHT OF FIRST OFFER ............................................55 ARTICLE 34 - DEFINITIONS .....................................................57 ARTICLE 35 - MISCELLANEOUS ...................................................62 LIST OF EXHIBITS TO LEASE EXHIBIT "A" THE METES AND BOUNDS DESCRIPTION OF THE PROPERTY EXHIBIT "B" THE FLOOR PLANS OF DEMISED PREMISES EXHIBIT "C" BUILDING RULES AND REGULATIONS EXHIBIT "D" CLEANING SPECIFICATIONS EXHIBIT "E" This Exhibit Has Been Intentionally Omitted EXHIBIT "F" This Exhibit Has Been Intentionally Omitted EXHIBIT "G" STANDARD REQUIREMENTS FOR ALTERATIONS TO BE PERFORMED BY LESSEES AGREEMENT OF LEASE, dated as of December , 2003, between PHOENIX CAPITAL PARTNERS, LLC, having an office at 287 Bowman Avenue, Purchase, New York 10577 (hereinafter referred to as "Lessor") and MVC CAPITAL, having an office at 287 Bowman Avenue, Purchase, New York 10577 (hereinafter referred to as "Lessee"); W I T N E S S E T H WHEREAS, Lessor, is the owner in fee simple absolute of the land and all the improvements erected thereon located in Purchase in the Town of Harrison, County of Westchester, State of New York and more particularly described in EXHIBIT "A" annexed hereto (the "Property"); WHEREAS, Lessor desires to lease to Lessee, and Lessee desires to hire from Lessor, a portion of the Third (3rd) Floor in the building known as RiverView at Purchase and located at 287 Bowman Avenue, Purchase, New York 10577 on the Property and which the parties hereto agree shall be deemed to consist of One Thousand, Six Hundred and Fifty (1,650) rentable square feet (hereinafter referred to as the "Demised Premises") and as more particularly described on the floor plans annexed hereto as EXHIBIT "B" and made a part hereof; and NOW, THEREFORE, in consideration of the foregoing and of the covenants, conditions and agreements hereinafter set forth, Lessor and Lessee agree as follows: ARTICLE 1 - DEMISE AND TERM OF DEMISE SECTION 1.01.A. Lessor, in consideration of the rents hereinafter reserved and of the terms, covenants, conditions and agreements herein contained on the part of Lessee to be paid, observed and fulfilled, does hereby demise and lease the Demised Premises to Lessee and Lessee hereby hires the same from Lessor; subject to all present and future zoning ordinances, laws, regulations, requirements and orders, including building restrictions and regulations, and all other present and future ordinances, laws, regulations, requirements and orders of all departments, boards, bureaus, commission and bodies, of any municipal, county, state or federal governments now or hereafter having or acquiring jurisdiction of the Demised Premises; Taxes (as hereinafter defined) not yet due and payable; all other present and future covenants, easements and restrictions affecting the Property and the Demised Premises and the revocable nature of any restriction, easement, agreement, ordinance or right affecting the Property and the Demised Premises. B. The Demised Premises are demised and leased unto Lessee, for a term ("Term") commencing on the Commencement Date (as hereinafter defined) and expiring at noon on November 30, 2005 (the "Expiration Date"), unless the same shall sooner terminate or be extended pursuant to any of the terms, covenants, conditions or agreements of this Lease or pursuant to law. As used herein, the "Commencement Date" shall mean December 8, 2003, PROVIDED, HOWEVER, that the Commencement Date shall not occur unless and until Lessor delivers to Lessee the Demised Premises in vacant, broom clean condition and free of tenancies. ARTICLE 2 - RENT SECTION 2.01. Lessee shall pay to Lessor, or to such other person as Lessor may from time to time designate, at the address specified in or pursuant to Section 2.04, during the Term, fixed rent ("Fixed Rent"), over and above the other and additional payments to be made by Lessee as hereinafter provided, as follows: A. During and in respect of the period from Commencement Date through November 30, 2004 (both dates inclusive), an amount equal to Fifty-Five Thousand, Two Hundred and Seventy-Five and 00/100 ($55,275.00) Dollars (inclusive of electric) payable in equal monthly installments of Four Thousand, Six Hundred and Six and 25/100 ($4,606.25) Dollars (inclusive of electric); and B. During and in respect of the period from December 1, 2004 through November 30, 2005 (both dates inclusive), an amount equal to Fifty-Six Thousand, Eight Hundred and Nine and 56/100 ($56,809.56) Dollars (inclusive of electric) payable in equal monthly installments of Four Thousand, Seven Hundred and Thirty-Four and 13/100 ($4,734.13) Dollars (inclusive of electric). SECTION 2.02.A. Fixed Rent shall be paid in equal monthly installments on the first day of each and every month during the Term without any set off or deduction whatsoever; PROVIDED HOWEVER, that if Fixed Rent shall be payable for any period prior to the first day of the first full month during the Term, then such Fixed Rent shall be paid in a proportionate amount for the number of days in such period and paid as and when the first equal monthly installment is payable as aforesaid. Notwithstanding the foregoing, Lessee shall pay the first monthly installment of Fixed Rent upon execution of this Lease. 2 SECTION 2.03. If Lessee shall fail to pay as and when due under this Lease any Additional Rent (as hereinafter defined), and such failure shall not be remedied within the grace period (if any) applicable thereto under this Lease, Lessor shall have all of the rights and remedies provided in this Lease as in the case of default in the payment of the Fixed Rent, including any rights available to Lessor at law or in equity and shall be entitled interest on any unpaid Fixed Rent and Additional Rent at the maximum legal rate from and after the end of the grace period following notice of the date such payments were due until the date payment is made. Except as otherwise specifically provided in this Lease, the Fixed Rent and Additional Rent shall be paid without notice, demand, credit, abatement, deduction or setoff of any kind whatsoever. The Fixed Rent and Additional Rent are sometimes referred to collectively herein as "Rent." SECTION 2.04. Lessee shall pay the Rent to Lessor in lawful money of the United States of America which shall be legal tender for all debts, public and private, at the time of payment, at the office of Lessor set forth above, or to such other person or persons and/or at such other place or places as Lessor may designate from time to time by notice to Lessee. Such payments may be by check of Lessee, subject to collection, payable to the order of Lessor or to such other person or persons as Lessor may designate from time to time by notice to Lessee; any such payment shall be deemed made upon receipt thereof, subject to collection. SECTION 2.05. Any obligation of Lessee for payment of Rent which shall have accrued with respect to any period during or prior to the Term shall survive the expiration or termination of this Lease for a period of Two (2) years. ARTICLE 3 - TAXES AND COMMON AREA MAINTENANCE CHARGES SECTION 3.01. As used herein: A. "Lessor's Statement" shall mean an instrument containing a computation of any Additional Rent payable by Lessee to Lessor pursuant to this Article. B. "Common Area Maintenance Charges" shall mean all actual costs and expenses of whatever kind or nature, whether or not herein specifically mentioned or now contemplated, which are incurred by Lessor or Lessor's agents in connection with the use, operation, repair or maintenance of the Building and/or Property, including, but not limited to the following: (1) premiums and other charges for insurance which Lessor is required or permitted to maintain hereunder including, but not limited to, general comprehensive liability insurance covering bodily injury, personal injury (including death), property 3 damage, public liability, non-hired automobile insurance, sign insurance, plate glass insurance and any other insurance incurred by Lessor for the Building and/or Property; (2) costs and expenses of performing repairs in or to the Building and/or Property and the sidewalks and curbs adjacent thereto; (3) costs and expenses of performing repairs or resurfacing of the parking lots and any adjacent facilities; (4) costs and expenses of landscaping and maintaining the grounds of the Building and/or Property; (5) costs and expenses of snow and ice removal and/or treatment; (6) costs and expense of rubbish, garbage and other refuse removal; (7) fees and disbursements payable to any person to furnish management, repair or other services regarding the Building and/or Property, except that, in the case of any such person who is affiliated with Lessor, such fees shall not exceed that which is customary or reasonable in the industry for similar buildings in Westchester County; (8) cost and expenses of performing repairs to all structural walls, roofs, and plate glass doors and windows, if any, which are not expressly made part of the Building, Property or the Demised Premises; (9) cost of refurbishing the common areas and modernizing and replacing equipment servicing the common areas, including but not limited to regular painting of non-tenanted areas at the Building and/or Property; (10) cost and expense of maintenance and repairs of the structural elements of the Building and/or Property; (11) costs and expenses of performing repairs and maintenance of lighting and lighting fixtures; (12) repair and maintenance of all or any part of the sprinkler system installed in any part of the Building and/or Property; (13) cost of utilities, such as electricity, water and sewer; depreciation of the capital cost of all items required to be capitalized pursuant to this Lease, including but not limited to, machinery, equipment (including on-site sewage, lighting and power facilities) and vehicles used in connection with the operation and maintenance of the common areas as determined by Lessor for federal income tax purposes but utilizing the straight-line method of computing depreciation and the normal useful lives; (14) costs and expenses of performing repairs and maintenance of all heating, ventilating and air conditioning equipment installed in any part of the Building, including but not limited to that portion contained within the Demised Premises; (15) cost and expense of performing repairs and maintenance of utility lines, sanitary and storm sewer lines and culverts and drainage facilities; (16) costs and expenses of providing and maintaining security, if any; (17) costs and expenses of providing and maintaining traffic control, if any; (18) labor costs and expenses of part and/or full time personnel employed at the Property in connection with the operation of the Building at or below the grade of building manager; (19) costs and expenses of providing holiday and other decorations to the Building and/or Property; (20) costs and expenses of performing repairs and maintenance of all elevators in any part of the Building and/or Property; (21) cost and expense of providing and maintaining porter and matron service at the Building and/or Property, if any; (22) cost and expense of providing and performing 4 cleaning and related services; (23) cost and expense of providing window washing; (24) cost and expense of all supplies; (25) wages, salaries, disability benefits, pensions, hospitalization, retirement plans and group insurance respecting service and maintenance employees of Lessor; (26) cost and expense of all uniforms and working clothes for such employees and the cleaning thereof; (27) cost and expense imposed on Lessor pursuant to law or to any collective bargaining agreement with respect to such employees; (28) cost and expense of providing and maintaining worker's compensation insurance, payroll, social security, unemployment and other taxes now in effect or hereinafter imposed with respect to such employees; (29) cost of all sales, utility and use taxes and other taxes of like import now in effect or hereinafter imposed; (30) cost and expense of all maintenance and service contracts for the Building and/or Property; (31) cost of all other normal operating expenses of repair, operation, and maintenance of the Building and/or Property; (32) cost and expense of providing and maintaining loading dock and mail personal, if any; (33) cost and expense of all professional and consulting fees, including legal and audit fees and all costs and disbursements incurred in connection therewith; (34) such cost and expenses shall be subject to Lessor's overhead and administrative cost of [FIVE (5%)] percent; and (35) the cost of any capital equipment or capital expenditures only to the extent specifically provided for in Section 3.01.C. hereof; PROVIDED, HOWEVER, that the following items shall be excluded from Common Area Maintenance Charges: (1) leasing commissions; (2) cost of repairs or replacements incurred by reason of fire or other casualty (to the extent the same is or would have been covered by insurance required to be maintained by Lessor herein), or caused by the exercise of the right of eminent domain (to the extent same is covered by any condemnation award) less any cost incurred by Lessor in obtaining such insurance proceeds or condemnation award; (3) costs incurred in performing work or furnishing services to or for individual tenants (including Lessee) at such tenant's expense; (4) debt service on any mortgages now or hereafter encumbering the Building and/or Property; (5) the cost of performing or furnishing services for tenants other than Lessee at Lessor's expense, to the extent that such work or service Lessor is obligated to furnish to or for Lessee at Lessor's expense and (6) the cost of attorneys' fees incurred in connection with negotiating and drafting leases with other tenants, or in connection with disputes with other tenants; (7) costs incurred in the sale or refinancing of the Building and/or Property; (8) interest or penalties due to Lessor's violations of law; (9) advertising and promotional expenses; (10) depreciation; (11) leasehold improvements made for other tenants; and (12) Taxes. C.1. If Lessor shall purchase any item of capital equipment or make any capital expenditure intended to result in savings or reductions in the Common 5 Area Maintenance Charges and which Lessor reasonably believes shall provide Lessee with the benefit of a savings or reduction in such common area maintenance charges based upon the advice of Lessor's consultants, then the costs for same shall be included in the Common Area Maintenance Charges, to the extent hereinafter set forth. Lessor shall deliver to Lessee, promptly following Lessee's request, a copy of any concluded studies conducted by Lessor which show anticipated savings or reductions in such Common Area Maintenance Charges as a result of any planned capital expenditure or purchase of capital equipment. The costs of capital equipment or capital expenditures are so to be included in the Common Area Maintenance Charges in which the costs are incurred and in any subsequent years, on a straight-line basis, to the extent that such items are amortized over such period of time as reasonably can be estimated at the time in which such savings or reductions in such Common Area Maintenance Charges are expected to equal Lessor's costs for such capital equipment or capital expenditure, with an interest factor equal to two percent (2%) above the interest rate payable on United States Treasury securities having a maturity comparable to the period of amortization at the time Lessor incurred said costs. If Lessor shall lease any such item of capital equipment designed to result in savings or reductions in any common area maintenance charges, then the rentals and other costs paid pursuant to such leasing shall be included in such common area maintenance charges for the year in which they were incurred. 2. If Lessor shall purchase any item of capital equipment or make any other capital expenditure in order to comply with Legal Requirements, Insurance Requirements or Environmental Laws (as those terms are hereinafter defined) or in order to benefit or increase the safety and security of the Building or Property tenants and/or invitees, then the costs for same shall be included in common area maintenance charges for the year in which the costs are incurred and subsequent years, on a straight-line basis, amortized over the useful life of such items, with an interest factor equal to two percent (2%) above the interest rate payable on United States Treasury securities having a maturity comparable to the useful life of such items at the time Lessor incurred said costs. If Lessor shall lease any such item of capital equipment to comply with Legal Requirements, Insurance Requirements, Environmental Laws or to increase safety and security then the rentals and other costs paid pursuant to such leasing shall be included in common area maintenance charges for the year in which they were incurred. D. Lessor shall have the absolute right, at all times during the Term and any Renewal Term, (as hereinafter defined) to increase, reduce, alter or otherwise modify the way in which it uses, operates, repairs, or maintains the Building and/or the Property and the cost thereof. Nothing contained herein shall require Lessor to incur or provide any particular service or charge in 6 connection with its use, operation, repair or maintenance of the Building and/or Property, it being agreed and understood that the items described in Section 3.01.B. are by way of illustration only and shall not obligate Lessor thereto, except that Lessor shall maintain the Building and Property in such condition as is otherwise provided for herein. E. The term "Taxes" shall mean all such taxes, assessments, use and occupancy taxes in respect of this Lease and any subleases made hereunder, water and sewer charges, rates and rents, water and other meter charges and all such other charges, taxes, levies and sums of every kind or nature whatsoever, general and special, extraordinary as well as ordinary, whether or not now within the contemplation of the parties, as shall or may during or in respect of the Term (or any period prior to the Term for which Fixed Rent is payable) be assessed, levied, charged or imposed upon or become a lien on the Property, Building, or Demised Premises, or any part thereof, or anything appurtenant thereto, or the sidewalks, streets or roadways in front of, adjacent to or appurtenant to the Property, Building or Demised Premises (and which have a basis related in any way to the Property, Building, or Demised Premises and/or the use or manner of use thereof), or which, if imposed on Lessee or in respect of the Property, Building or Demised Premises and if not paid by Lessee, would be collectible from Lessor, or which have been so assessed, levied, charged or imposed prior to the Term (but, in the last-mentioned case, only with respect to a period falling within the Term); PROVIDED, HOWEVER, that, except if and to the extent otherwise provided in the succeeding sentence, "Taxes" shall not mean federal, state or local income taxes, franchise, excise, gift, transfer, capital stock, estate, succession or inheritance taxes or penalties or interest for late payment of any tax in respect of which Lessee shall have duly made payment of Additional Rent as herein provided, or any increase in Taxes directly attributable to Lessor's Initial Building Renovation. If, at any time during the Term, the methods of taxation prevailing at the commencement of the Term shall be altered so that, in lieu of or as a substitution in whole or in part for the taxes, assessments, levies, impositions or charges now or hereafter levied, assessed or imposed on real estate and the improvements thereon, shall be levied, assessed or imposed any tax or other charge on or in respect of the Property, Building and/or Demised Premises or the rents, income or gross receipts of Lessor therefrom (including any county, town, municipal, state or federal levy), then such tax or charge shall be deemed a Tax, but only to the extent that such Tax would be payable if the Property, Building or Demised Premises, or the rent, income or gross receipts received therefrom, were the only property of Lessor subject to such Tax, and Lessee shall pay and discharge the same as herein provided in respect of the payment of Taxes. 7 F. The term "School Tax Base" shall mean the amount of Taxes as hereinabove defined, imposed, levied, assessed and/or collected on the Property, for the second half of the 2003/2004 School Tax and the first half of the 2004/2005 School Tax and "City Tax Base" shall mean the amount of Taxes as hereinabove defined, imposed, levied, assessed and/or collected on the Property for the 2004 City, County and State Tax. G. The term "School Tax Year" shall mean each period of twelve (12) consecutive months commencing as of the first day of July of each such period; and "City Tax Year" shall mean each period of twelve (12) consecutive months commencing as of the first day of January of each such period, in which any part of the term of this Lease shall occur, or such other periods of twelve (12) months as may be adopted as the fiscal year for real estate tax purposes. SECTION 3.02.A. Lessee shall pay to Lessor, as Additional Rent, during or in respect of the period from the Commencement Date to the Expiration Date (both dates inclusive) for each School Tax Year and City Tax Year or portion thereof, its proportionate share ("Lessee's Proportionate Share", as hereinafter defined) of increases in Taxes which will be imposed, levied, assessed or collected on the Property, and/or Building of which the Demised Premises are a part, for such School Tax Year and/or City Tax Year, as the case may be, over the respective tax bases regardless of whether such increase results from a higher tax rate and/or an increase in the assessed valuation of either the Property or Building or any other tax. Reasonable fees and expenses, if any, incurred in obtaining any reduction in assessed valuation from the tentative assessment to the final assessment shall also be considered an increase in Taxes for the purpose of this provision. Such payments shall be made by Lessee as Additional Rent in equal monthly installments during the applicable tax year together with the payment of Fixed Rent. Copies of tax bills applicable to the School Tax Base and the City Tax Base, as the case may be, and to any such applicable tax year shall be made available by Lessor for inspection by Lessee during normal business hours. In the event of any reduction in Taxes after final assessment and with respect to which Lessee has paid its proportionate share, any such reduction, less fees and expenses incurred to obtain such reduction shall be refunded in proportionate amounts to Lessee. B. If Lessor obtains a reduction of either the School Tax Base or City Tax Base by final determination of legal proceedings or otherwise, then: (i) the School Tax Base or City Tax Base shall be correspondingly revised, (ii) all Tax payments theretofore paid or payable hereunder shall be recomputed on the basis of such reduction, (iii) Lessee shall pay to Lessor as Additional Rent, within thirty (30) days after receipt of a bill therefor, any deficiency between the 8 amount of such Tax payments theretofore computed and the amount thereof due as a result of such recomputations and (iv) all future Tax payments shall be computed using the revised School Tax Base and City Tax Base. SECTION 3.03.A. Lessee shall pay to Lessor, as Additional Rent, during or in respect of the period from the Commencement Date to the Expiration Date (both dates inclusive) for each calendar year or portion thereof, Lessee's Proportionate Share of the increases in the Common Area Maintenance Charges over the Base Common Area Maintenance Charges (as hereinafter defined). Such payments shall be made by Lessee as Additional Rent in equal monthly installments during the applicable calendar year together with the payment of Fixed Rent. B. The term "Base Common Area Maintenance Charges" shall mean the Common Area Maintenance Charges in effect for the calendar year ending December 31, 2003. SECTION 3.04.A. At any time hereafter and from time to time, Lessor may furnish to Lessee a Lessor's Statement setting forth (i) Lessor's actual Common Area Maintenance Charges (or any one or more items thereof) and/or actual Taxes for a period which shall have expired only if a final statement has not been previously rendered, and/or (ii) Lessor's reasonable estimate of Common Area Maintenance Charges and/or Taxes for a succeeding period. Within Thirty (30) days next following rendition of each such Lessor's Statement, Lessee shall pay to Lessor the entire amount, if any, shown on such Lessor's Statement as being due with respect to any period which shall have expired. In addition, Lessee shall pay to Lessor, on the first day of each month following rendition of each such Lessor's Statement, on account of the estimated Additional Rent thereafter payable, a proportionate sum of the total Additional Rent shown upon such Lessor's Statement as being Lessor's reasonable estimate for a succeeding period on an annual basis (it being agreed that Lessor's estimate shall in any event be deemed reasonable if it is based on actual Common Area Maintenance Charges (or any one or more items thereof) and/or actual Taxes for a period which shall have expired immediately prior thereto, so that one month prior to the end of such period, Lessee's Proportionate Share of the increase shall be paid in full, and Lessee shall continue to pay Additional Rent on such basis until receipt of a subsequent Lessor's Statement. Such Additional Rent shall be due and payable at the same time as each monthly installment of Fixed Rent. B. A reconciliation shall be made upon each Lessor's Statement as follows: Lessee shall be debited with any Common Area Maintenance Charges and/or Taxes payable as shown on such Lessor's Statement, and credited with the 9 aggregate of the total amount, if any, paid by Lessee in accordance with the provisions of the preceding paragraph on account of the estimated Additional Rent, for the period or item in question, and, within thirty (30) days next following rendition of such Lessor's Statement, Lessee shall pay Lessor the amount of any net debit balance shown thereon or Lessor shall apply against the next ensuing installments of Fixed Rent the net credit balance shown thereon. C. Without limiting the preceding provisions of Section 3.04, it is understood that Lessor shall furnish a Lessor's Statement, for each calendar year falling wholly or partially within the Term. SECTION 3.05. A. Lessor's failure to render Lessor's Statements with respect to any period shall not prejudice Lessor's right to render a Lessor's Statement with respect to that or any subsequent period. The obligations of Lessor and Lessee under the provisions of this Article with respect to Additional Rent shall survive the expiration or any sooner termination of the Term. B. Each Lessor's Statement shall be conclusive and binding upon Lessee unless within ninety (90) days after receipt of such Lessor's Statement, Lessee shall notify Lessor that it disputes the reasonableness or correctness of Lessor's Statement, specifying the respects in which Lessor's Statement is claimed to be unreasonable or incorrect. Pending the determination of such dispute by agreement or otherwise, Lessee shall pay Additional Rent in accordance with the applicable Lessor's Statement, and such payment will be without prejudice to Lessee's position. SECTION 3.06. Lessee shall pay and discharge, or cause to be paid and discharged, the following items, regardless of to whom or how incurred, all taxes and assessments, if any, which shall or may during the Term be charged, levied, assessed or imposed upon, or become a lien upon, the personal property of Lessee used in the operation of the Demised Premises and which, if not paid by Lessee, would be collectible from Lessor. ARTICLE 4 - USE OF DEMISED PREMISES SECTION 4.01.A. Subject to the provisions of this Article, Lessee shall have the right to use the Demised Premises for general and executive office purposes and for no other purposes. 10 B. From and after the Commencement Date, Lessor does hereby grant unto Lessee the privilege and a license to Seven (7) non-reserved parking spaces in the parking area located on the Property for a period to be coterminous with the Term of this Lease. Lessee agrees that Lessor shall have the right, in its sole and absolute discretion, upon thirty (30) days written notice to Lessee, to change the location of all parking spaces in the event that Lessor determines to change the area, level, location and arrangement of parking areas and other facilities; to build multistory parking facilities; to temporarily restrict parking by lessees, their officers, agents and employees; and to close all or any portion of said areas or facilities to such extent as may be legally sufficient to prevent a dedication thereof or the accrual of any right to any person or the public therein; to close temporarily all or any portion of the parking areas or facilities to discourage non-customer parking. The license and privilege hereby granted shall apply only to those duly registered and operating private passenger motor vehicle(s) owned and operated by Licensee or Licensee's employees, invitees and contractors and shall not be transferable to any other person or used for any other purpose other than as herein provided. SECTION 4.02. Lessee shall not use or occupy the Demised Premises in any manner or suffer or permit the Demised Premises or any part thereof to be used in any manner, or do or suffer or permit anything to be done in the Demised Premises, or bring anything into the Demised Premises or suffer or permit anything to be brought into the Demised Premises, which would in any way do any of the following: (a) violate any of the provisions of the Mortgage (as hereinafter defined) or Superior Lease (as hereinafter defined); (b) violate any Legal Requirements, Insurance Requirements or Environmental Laws (as such terms are hereinafter defined); (c) make void or voidable any insurance policy then in force with respect to the Demised Premises, Building or Property; (d) make unobtainable from insurance companies authorized to do business in the State of New York and rated by Best's Insurance Rating Service with a rating at least equal to A:XII, at standard rates without any special premium or charge, any fire or other casualty insurance with extended coverage, or rental, liability or boiler insurance, or other insurance provided for in Section 11.01 or otherwise may be required to be furnished by Lessor under the terms of the Mortgage or Superior Lease with respect to the Demised Premises; (e) cause physical damage to the Demised Premises, Building or Property, or any part thereof; (f) constitute a public or private nuisance; (g) substantially impair the appearance or character of the Demised Premises, Building or Property; (h) discharge or cause the discharge of objectionable substances, fumes, vapors or odors from the 11 Demised Premises not otherwise in compliance with Legal Requirements, Insurance Requirements and Environmental Laws; (i) cause Lessee to default in the observance and performance of any of its other obligations to be observed and performed under this Lease; (j) unreasonably interfere with the effectiveness or accessibility of the utility, mechanical, electrical and other systems installed or located anywhere at the Demised Premises, or (k) violate any of the Building's Rules and Regulations annexed hereto as EXHIBIT "C," as same may be amended from time to time. SECTION 4.03. If any governmental license or permit shall be required for the proper and lawful conduct of Lessee's business in the Demised Premises or any part thereof, then Lessee, at its sole cost and expense, shall duly procure and thereafter maintain such license or permit and submit the same to inspection by Lessor. Lessee shall, at all times, comply with the terms and conditions of each such license or permit, but in no event shall failure to procure and maintain same by Lessee affect Lessee's obligations hereunder. Lessee shall not use or occupy the Demised Premises, or suffer or permit anyone to use or occupy the Demised Premises, in violation of any certificate of occupancy issued for the Building or Property. SECTION 4.04. Lessor shall obtain a certificate(s) of occupancy required for Lessee's occupancy of the Demised Premises upon the Commencement Date. SECTION 4.05. Lessee shall not place, or suffer, or permit anyone to place a load upon any floor of the Building that exceeds the floor load per square foot that such floor was designed to carry and which is allowed by certificate, rule, regulation, permit or law, nor shall Lessee overload, or suffer, or permit anyone to overload any wall, roof, land surface, pavement, landing or equipment on the Demised Premises. SECTION 4.06. Lessee shall not use, or suffer, or permit anyone to use, on or across the Demised Premises, Building or Property, any equipment having caterpillar-type tracks or tires, or any other equipment which would be damaging to the Demised Premises, Building or Property or any road surface or blacktopping thereon. SECTION 4.07. A. Lessee shall not release, discharge or dispose of, or permit, or suffer any release, discharge or disposal of any Hazardous Material at the Demised Premises in violation of any Environmental Law (as hereinafter defined). Lessee shall not permit or suffer the manufacture, generation, storage, transmission or presence of any Hazardous Material over or upon the Demised Premises in violation of any Environmental Law. B. Lessee shall: (i) promptly, upon learning thereof, notify Lessor of any violation of, or non-compliance with, potential violation of or non-compliance with, or liability or potential liability under, any Environmental Law concerning the Demised Premises, (ii) promptly make (and 12 deliver to Lessor copies of) all reports or notices that Lessee is required to make under any Environmental Law concerning the Demised Premises and maintain in current status all permits and licenses required under any Environmental Law concerning the Demised Premises, (iii) immediately comply with any orders, actions or demands of any Governmental Authority (as herein defined) with respect to the discharge, clean-up or removal of Hazardous Materials at or from the Demised Premises due to a breach of a covenant set forth in Section 4.07.A, (iv) pay when due the cost of removal of, treatment of, or the taking of remedial action with respect to, any Hazardous Material on the Demised Premises which is required by an Environmental Law due to a breach of a covenant set forth in Section 4.07.A, (v) keep the Demised Premises free of any lien imposed pursuant to any Environmental Law in respect of a breach of a covenant set forth in Section 4.07.A, (vi) from time to time, upon the request of Lessor, execute such affidavits, certificates and statements concerning Lessee's knowledge and belief concerning the presence of Hazardous Materials on the Demised Premises and (vii) otherwise comply with all Environmental Laws concerning the Demised Premises. SECTION 4.08.A. Lessor shall include Lessee's name on any internal Building directory and on the floor directional signs. Other than the foregoing, Lessee shall not place or suffer to be placed or maintain any sign, awning or canopy upon or outside the Demised Premises or in the Building; nor shall Lessee place at the store front any sign, decoration, lettering or advertising matter of any kind without first obtaining Lessor's written approval and consent in each instance. In the event that Lessor gives its consent hereunder, all signs shall be of a size, color and design as is approved in writing by Lessor and shall be installed where designated by Lessor and maintained in good condition, repair and appearance at all times, according to Lessor's standards and the laws of the municipality having jurisdiction over such signs. If Lessor shall deem it necessary to remove any sign in order to paint or to make any repairs, alterations or improvements in or upon the Demised Premises or any part thereof, Lessor shall have the right to do so, provided the same be removed and replaced at Lessor's cost and expense unless having been occasioned by fault of Lessee. Lessor shall have the right, with or without notice to Lessee, to remove any signs (paper or otherwise) installed by Lessee in violation of this paragraph and to charge Lessee the cost of such removal without liability to Lessee for such removal. SECTION 4.09 No property, other than such as might normally be brought upon or kept in the Demised Premises as incidental to the reasonable use of the Demised Premises for the purposes herein permitted, will be brought upon or kept in the Demised Premises. 13 ARTICLE 5- POSSESSION AND CONDITION OF DEMISED PREMISES SECTION 5.01. Lessee accepts the Demised Premises in their "AS IS" state and condition on the Commencement Date and without any representation or warranty (except as expressly set forth herein), express or implied, in fact or by law, by Lessor, and without recourse to Lessor, as to title thereto, the nature, condition or usability thereof or as to the use or occupancy which may be made thereof. SECTION 5.02. If delivery of possession to the Demised Premises to Lessee is delayed by reason of Unavoidable Delays (as hereinafter defined), then this Lease and the validity thereof shall not be affected thereby and Lessee shall not be entitled to terminate this Lease, to claim actual or constructive eviction, partial or total, or to be compensated for loss or injury suffered as a result thereof, nor shall the same be construed in any way to extend the Term, PROVIDED, HOWEVER, that, notwithstanding the provisions of Article 1, the Commencement Date shall be deemed to occur only if and when possession of the Demised Premises is made available to Lessee. SECTION 5.03. The provisions of this Article shall be considered an express provision to the contrary pursuant to New York REAL PROPERTY LAW Section 223-(a) governing delivery of possession of the Demised Premises and any law providing for such a contingency in the absence of such express agreement now or hereafter enacted shall have no application in such case to the extent inconsistent with this Lease. ARTICLE 6- UTILITIES, CLEANING, ETC. SECTION 6.01.A. During the Term hereof and any Renewal Term, Lessor shall furnish to Lessee, during Normal Working Hours (as hereinafter defined: (i) necessary elevator facilities; (ii) heat to the Demised Premises when and as required by law; (iii) water for ordinary lavatory purposes for the Demised Premises, but if Lessee uses or consumes water for any other purposes or in unusual quantities (of which fact Lessor shall be the sole judge), Lessor may install a water meter at Lessee's expense in good working order and repair to register such water consumption and Lessee shall pay for water consumed as shown on said meter as Additional Rent as and when bills are rendered; (iv) air conditioning and/or cooling for the Demised Premises through the Building's air conditioning and/or cooling system (the "Building's AC System"); (v) ventilation for the Demised Premises; and (vi) electricity for Building lighting and normal Building equipment and other incidental equipment (hereinafter collectively referred to as the "Utility Service"). B. Except as otherwise specifically provided for in this Lease, Lessor represents and warrants that Lessee shall have access (by elevator) to the Demised Premises Twenty-Four (24) hours a day, Seven (7) days a week. 14 C.1. The Building's AC System shall be capable of substantially meeting the following maximum performance specifications: Inside Condition Outside Condition (DEGREES) (DEGREES) ---------------- ------------------ Cooling Season 78(degree)F dry bulb 95(degree)F dry bulb 50% RH 75(degree)F wet bulb Heating Season 0(degree)F 72(degree)F dry bulb 2. The foregoing performance standards shall be inapplicable where the Demises Premises are occupied by more than an average of one person for each 200 square feet of Lessee's floor space or if Lessee installs and operates machines and appliances, the installed electrical load of which when combined with the load of all lighting fixtures and all occupancy factors exceeds four (4) watts of connected load per square foot of Lessee's floor space in any one room or other area or in any area used other than for offices. If due to use of the Demised Premises in a manner exceeding the aforementioned occupancy and electrical load criteria, or due to rearrangement of partitioning after the initial preparation of the Demised Premises, interference with normal operation of the air conditioning in the Demised Premises results, necessitating changes in the air conditioning system servicing the Demised Premises, such changes shall be made by Lessor upon written notice to Tenant and Tenant's sole cost and expense. Tenant agrees to keep all windows closed, and to lower and close window coverings when necessary because of the sun's position whenever the said air conditioning system is in operation, and Lessee agrees at all times to cooperate fully with Lessor and to abide by all the regulations and requirements which Lessor may prescribe for the proper functioning and protection of the said air conditioning system. Lessor, throughout the Term, shall have free and unrestricted access to any and all air conditioning facilities in the Demised Premises. SECTION 6.02. During the Term hereof and any Renewal Term, Lessor shall furnish to Lessee cleaning services for the Demised Premises, Monday through Friday, in accordance with the Cleaning Specifications annexed hereto as EXHIBIT "D". 15 SECTION 6.03.A. If Lessee uses the Demised Premises outside Normal Working Hours and such use constitutes Extraordinary Use (as hereinafter defined), Lessee agrees to pay to Lessor, overtime charges to cover Lessor's actual expenses for electricity for lighting and normal Building Equipment (as hereinafter defined) and other incidental equipment, extra building maintenance, building employee overtime, furnishing water for lavatories, air cooling, heat, ventilation, wear and tear, etc ("Overtime Charge"). B.1 Lessor shall furnish such overtime service to Lessee provided that (i) Lessee pays to Lessor as Additional Rent the Overtime Charge therefore, which Overtime Charge will be billed to Lessee along with Lessee's next monthly installment of Fixed Rent if such service shall have been furnished to Lessee prior to the fifteenth (15th) day of the month or along with the subsequent monthly installment of Fixed Rent if such service shall have been furnished to Lessee after the fifteenth (15th) day of the month, and (ii) that Lessee's request shall be received by Lessor by not later than 2:00 P.M. on the day for which after hours service is requested (and by not later than 2:00 P.M. on the day preceding any requested before-hours service) Notwithstanding anything contained to the contrary in this Article 6, Lessee shall not be required to pay Overtime Charges for intermittent use of the Demised Premises outside Normal Working Hours, unless such use shall be on a scale and frequency so as to constitute the regular operation of Lessee's business outside Normal Working Hours ("Extraordinary Use"). In no event, however, shall Lessor be obligated to supply heating or air conditioning outside of Normal Working Hours unless Lessee shall request and pay for the same as provided in this Article 6. In the event that Lessee and any other tenant in the Building shall request Overtime Services, then, to the extent that the Building Equipment permits same, Lessee and such other tenants shall pay their proportionate share of the Overtime Charges. 2. Lessee agrees that the Overtime Charges, may from time to time, be increased by Lessor, with not less than thirty (30) days prior written notice to Lessee, if the rates at which Lessor purchases electrical energy from the public utility corporation supplying electrical current to the Building of which the Demised Premises are a part shall be increased, or any tax is imposed upon Lessor's receipt from the sale or resale of electrical energy by any Federal, State or Municipal Authority, or any charges incurred or taxes payable by Lessor in connection therewith shall be increased. The Overtime Charges shall be 16 increased by an amount equal to the product of the respective hourly rate times the percentage increase in the rates at which Lessor purchases electrical energy from the public utility corporation as aforesaid. SECTION 6.04.A. Lessee acknowledges and agrees that Lessor shall furnish electrical current to Lessee ("Electric Service") for use in the Demised Premises based on the method of including the use thereof within the Fixed Rent and, accordingly, Lessee agrees that the Fixed Rent provided for in Article 2 of this Lease has been increased to compensate Lessor for supplying Electric Service on the basis of Two and 50/100 Dollars ($2.50) per square foot per annum for each square foot contained in the Demised Premises (hereinafter referred to as the "Base Charge") payable in equal monthly installments commencing on the Commencement Date. By the execution of this Lease, Lessee acknowledges and agrees that the Base Charge shall not be contestable by Lessee at a future date and shall only be increased by Lessor at a future date in accordance with this Section. Lessor will furnish electricity to Lessee through presently installed electrical facilities for Lessee's reasonable use. B.1. Lessee shall make no substantial alterations or additions to the initial lighting, electrical appliances or office equipment if the connected electrical load, when combined with the load of all lighting fixtures and all occupancy factors exceeds four (4) watts per square foot of installed ceiling area, without first obtaining written consent from Lessor in each instance. Lessor warrants that the electrical facilities servicing the Demised Premises is in good working order and can accommodate a normal office installation with associated office machinery and equipment, PROVIDED, HOWEVER, that the connected electrical load, when combined with the load of all lighting fixtures and all occupancy factors does not exceed four (4) watts per square foot of installed ceiling area. Lessee agrees that at all times its use of Electric Service shall not exceed the capacity or overload any of the central and appurtenant installations for Electric Service including, but not limited to all wires, feeders, risers, electrical boxes, switches, outlets, connections, and cables located in the Property, Building, or Demised Premises or any other mechanical equipment spaces located therein. Lessee's use of Electric Service shall not interfere with the use thereof by other occupants of the Property, or Building and shall be of such a nature, as determined by Lessor in its sole judgment and discretion, so as not cause permanent damage or injury to the Demised Premises or the Building of which the Demised Premises are a part, or cause or create a dangerous or hazardous condition or entail excessive or unreasonable alterations, repairs or expense, or interfere with or disturb other tenants or occupants. 17 2. If at any time prior to or during the Term or any Renewal Term of this Lease, subject to the restrictions contained elsewhere in this Lease: (i) Lessee installs substantial additional or substituted lighting, electrical appliances, office equipment or otherwise increases its use of Electric Service so that the connected electrical load, when combined with the load of all lighting fixtures and all occupancy factors exceeds four (4) watts per square foot of installed ceiling area, and/or; (ii) subject to the provisions of Article 8 of this Lease, electrical feeders, risers, wiring or other electrical facilities serving the Demised Premises shall be installed by Lessor, Lessee or others, on behalf of Lessee or any person claiming through or under Lessee in addition to the feeders, risers, wiring or other electrical facilities necessary to serve the lighting fixtures, electrical appliances, office equipment and electrical receptacles initially located in the Demised Premises so that the connected electrical load, when combined with the load of all lighting fixtures and all occupancy factors exceeds four (4) watts per square foot of installed ceiling area; then the Fixed Rent shall be increased by an amount determined by the electrical engineer selected by Lessor who shall certify the amount of the Additional Rent to be increased in writing to Lessor and Lessee. Following any such determination and certification by the electrical engineer, this Lease shall automatically be modified by increasing the Additional Rent by an amount equal to (i) the product of the Base Charge times the percentage increase in Lessee's use of electrical current over that for Lessee's initially installed lighting, electrical appliances and office equipment and/or (ii) the product of the Base Charge times the percentage increase in the potential additional electrical energy made available to Lessee annually based upon the estimated capacity of such additional electrical feeders, risers, wiring or other electrical facilities, as the case may be. As evidence of such modification such electrical engineer's certification shall be delivered by Lessor to Lessee and also appended hereto. Any such increase shall be effective as of the date of the first use by Lessee of such additional service and retroactive to such date if necessary. In addition, Lessee shall pay to Lessor, as Additional Rent, within ten (10) days of the date of a notice therefore from Lessor, the total Cost (as hereinafter defined) to Lessor of the additional electrical feeders, risers, wiring, or other electrical facilities serving the Demised Premises. C. If, at any time or times after the date of this Lease, the rates at which Lessor purchases electrical energy from the public utility corporation supplying electrical current to the Building of which the Demised Premises are a part shall be increased, or any tax is imposed upon Lessor's receipt from the 18 sale or resale of electrical energy or gas or telephone service to Lessee by any Federal, State or Municipal Authority, or any charges incurred or taxes payable by Lessor in connection therewith shall be increased, the Additional Rent shall be increased by an amount equal to the product of the Base Charge times the percentage increase in the rates at which Lessor purchases electrical energy from the public utility corporation as aforesaid, over those rates in effect on the date of the calculation of the Base Charge. The rates in effect on the date of the calculation of the Base Charge is more particularly set forth on EXHIBIT "E" annexed hereto and made a part hereof. Following any such rate increase or other charge, this Lease shall automatically be modified by increasing the Additional Rent for the remainder of the term hereof in accordance with this Subsection and, as evidence of such modification, documentation of such rate increase or other charge shall be delivered by Lessor to Lessee and also appended hereto. Any such increase in the Additional Rent shall be effective as of the date of any such increase in cost or other charge to Lessor and shall be retroactive to such date if necessary. D. Notwithstanding anything contained to the contrary in this Article 6, Lessor shall have the right, at its option, to conduct a survey of the Demised Premises by an electrical engineer of Lessor's choosing at any time during the term of this Lease in order to determine Lessee's actual use of electrical current therein. In the event that Lessor's survey provided for in the preceding sentence shall indicate that Lessee's use of electrical current then exceeds that at the time of Lessee's initial installation of its lighting fixtures, electrical appliances and office equipment, Lessee, upon receipt of notice from Lessor, shall pay to Lessor an increase in Fixed Rent equal to an amount determined by multiplying the Base Charge times the percentage increase in Lessee's use of electrical current over that for Lessee's initially installed lighting, electrical appliances and office equipment. Any such increase shall be payable in accordance with the terms of this Article 6 and shall be effective as of the date of Lessee's first increased use of electrical current and shall be retroactive to such date, if necessary. SECTION 6.05. Lessor reserves the right to stop, interrupt and/or suspend Utility Service and/or Electric Service when necessary by reason of accident or for repairs, alterations, replacements or improvements necessary or desirable in the judgement of Lessor for as long as may be reasonably required 19 by reason thereof. The repairs, alterations, replacements or improvements shall be done with a minimum of inconvenience to Lessee and upon reasonable advance notice to Lessee (except that a lesser notice appropriate under the circumstances shall be given in the event of an emergency) and Lessor shall use its best efforts to pursue same with due diligence. SECTION 6.06. The Lessor shall in no way be liable for any loss, damage, or expense which Lessee may incur as a result of the change, at any time, of the character or quality of Electric Service or Utility Service or any failure of or defect in Electric Service or Utility Service by reason of any public or private utility company then supplying such service to the Property, Building or the Demised Premises and Lessee agrees to hold the Lessor harmless and to indemnify it from and against any loss, liability or damage to Lessee or a third party in connection therewith due to the negligent acts or omissions of Lessee and its agents, employees, contractors, subcontractors, officers and directors. This indemnity shall survive the expiration or other termination of this Lease. ARTICLE 7- REPAIR AND MAINTENANCE SECTION 7.01.A. Subject to the provisions of Section 7.02 hereof, Lessee shall, during the Term of this Lease and any Renewal Term, at Lessee's sole cost and expense, take good care of, maintain and make all repairs, (other than structural) in the Demised Premises, and the fixtures and equipment therein and appurtenances thereto, including but not limited to, internal doors and entrances, door checks, internal signs, floor covering, interior walls, columns and partitions; and lighting, heating, hot water, plumbing and sewerage facilities, sprinkler system and sprinkler heads; and variable air volume boxes and controls, thermostats and light switches, supplemental air conditioning units, if any, located within the Demised Premises and serving only the Demised Premises. B. If Lessee refuses or neglects to clean, maintain or make repairs or otherwise fails to perform any of Lessee's repairs or maintenance obligations hereunder, Lessor shall have the right, but shall not be obligated, to make such repairs or perform on behalf of and for the account of Lessee. All sums so paid by Lessor in connection with the payment or performance by it or any of the obligations of Lessee hereunder and all actual and reasonable costs, expenses and disbursements paid in connection therewith or enforcing or endeavoring to 20 enforce any right under or in connection with this Lease, or pursuant to law, together with interest thereon at the maximum legal rate from the respective dates of the making of such payment, shall constitute Additional Rent payable by Lessee under this Lease and shall be paid by Lessee to Lessor upon demand by Lessor. The provisions of this Section shall survive the expiration or other termination of this Lease. SECTION 7.02. Lessor shall not be required to make any repairs or improvements of any kind upon the Demised Premises except for necessary structural repairs to the Building, Building Equipment, or for damage caused by a casualty or Lessor's negligent acts, excluding Lessee's property. Lessor shall during the Term of this Lease and any Renewal Term, maintain and repair all common areas and other facilities in or about the Property and/or the Building, exclusive of interior doors, door frames, door checks, windows and window frames. Lessor shall have the right to construct, maintain and operate lighting and other facilities on all said areas and improvements; to police the same; to change the area, level, location and arrangement of parking areas and other facilities; to build multistory parking facilities; to restrict parking by Lessee's, their officers, directors, agents and employees, to enforce parking charges (by operation of meters and otherwise); and to close all or any portion of said areas or facilities to such extent as may be legally sufficient to prevent a dedication thereof or the accrual of any right to any person or the public therein; to close temporarily all or any portion of the parking areas or facilities to discourage non-visitor parking. Lessor shall operate and maintain the common areas in such manner as Lessor in its discretion shall determine, and Lessor shall have full right and authority to employ and discharge all personnel with respect thereto. If Lessor shall designate an employee or lessee parking area or areas, Lessee and its employees shall use only such areas for parking and Lessee shall cooperate fully with Lessor in enforcing this covenant. SECTION 7.03. "Repairs" as used herein shall mean all repairs, replacements, renewals, alterations, additions and betterments. All contracts between Lessee and others for installations, maintenance, and repairs and alterations involving the Demised Premises, including maintenance agreements, shall be subject to the prior written approval of Lessor, not to be unreasonably withheld or delayed. 21 SECTION 7.04. Lessor shall not be required to make any repairs or replacements to the common areas occasioned by the act or negligence of Lessee, its agents, employees, invitees, customers, licensees, or contractors, except to the extent that Lessor is reimbursed therefor under any policy of insurance permitting waiver of liability and containing a waiver of subrogation, except as otherwise provided in this Article and Article 12 of this Lease. ARTICLE 8- LESSOR'S WORK; LESSEE'S WORK SECTION 8.01. Lessee acknowledges that Lessor shall have no obligation whatsoever to perform any build-out or similar work to Demised Premises, and Lessee agrees to accept same in "AS IS" physical order and condition on the Commencement Date and without any representation or warranty, express or implied, in fact or by law, by Lessor, and without recourse to Lessor, as to the nature, condition or usability thereof or as to the use or occupancy which may be made thereof. SECTION 8.02 Following the Commencement Date, Lessee shall build-out and fully equip the Demised Premises with all trade and operating fixtures and equipment, plumbing, lighting and other fixtures and equipment, furniture, furnishings, floor covering, and any and all other items necessary for the proper operation of Lessee's business ("Lessee's Work"). All trade and operating fixtures and equipment, plumbing, lighting and other fixtures and equipment, furniture, furnishings, fixtures, floor covering, and any and all other items necessary for the proper operation of Lessee's business installed by Lessee shall be new or completely reconditioned and shall not be subject to liens, conditional sales contracts, security agreements or chattel mortgages. Lessee shall complete or cause to be completed all of Lessee's Work required on Lessee's part to be performed in and at the Demised Premises under this Lease pursuant to Lessor's STANDARD REQUIREMENTS FOR ALTERATIONS TO BE PERFORMED BY LESSEES' annexed hereto as EXHIBIT "G" and made a part hereof. SECTION 8.03. Other than Lessee's Work, Lessee shall not do any construction, work or alterations to the Demised Premises, nor shall Lessee install any items other than Lessee's trade fixtures without first: (1) obtaining Lessor's written consent AND (2) complying with all of the terms, covenants and conditions contained in Lessor's STANDARD REQUIREMENTS FOR ALTERATIONS TO BE PERFORMED BY LESSEES', as may be amended from time to time. 22 ARTICLE 9- COMPLIANCE WITH LAWS SECTION 9.01. Lessor represents that the Demised Premises, the Building and Property will comply with all Legal Requirements, Environmental Laws and Insurance Requirements as of the Commencement Date. SECTION 9.02. Throughout the Term of this Lease, Lessee shall promptly comply with all Legal Requirements, Environmental Laws and Insurance Requirements whether or not such compliance involves structural repairs or changes or be required on account of any particular use to which the Demised Premises, or any part, may be put by Lessee, other than general office use, and whether or not any such Legal Requirements, Environmental Laws, or Insurance Requirements be of a kind not now within the contemplation of the parties hereto. Compliance by Lessee with Legal Requirements, Environmental Laws, and Insurance Requirements shall be at Lessee's sole cost and expense. Lessee shall not contest the application or validity of any such Legal Requirements, Environmental Laws, or Insurance Requirements without the prior written consent of Lessor in each such instance. Any repair or change required under this Section shall be deemed a repair for the purposes of Article 7. With respect to actions necessary to comply with Legal Requirements, Insurance Requirements and Environmental Laws which due to their nature, can only be taken by Lessor, Lessor, at Lessee's expense, will cooperate with Lessee in facilitating such compliance. ARTICLE 10- RIGHTS RESERVED TO LESSOR SECTION 10.01. Lessee shall permit Lessor, Lessor's agents, and its invitees to enter the Demised Premises, or any part thereof, at all reasonable times provided same does not unreasonably interfere with Lessee's business and a representative of Lessee is present for the purposes of (a) inspecting the same, (b) curing Events of Default of Lessee (after Ten (10) days notice to Lessee, except that no notice shall be required in case of an emergency), (c) showing the same to mortgagees, appraisers, or prospective lenders, purchasers or lessees, (d) observing the performance by Lessee of its obligations under this Lease, (e) performing any act or thing which Lessor may be obligated or have the right to do under this Lease or otherwise, and (f) any other reasonable purpose. Lessor and any providers of Utility Services or other services shall have the right to maintain existing utility, mechanical, electrical and other systems and to enter upon the Demised Premises to make such repairs and alterations therein 23 or in or to the Demised Premises as may, in the opinion of Lessor, be deemed necessary or advisable. Lessor shall not be liable for inconvenience, annoyance, disturbance or loss of business to Lessee or any sublessee by reason of making any repairs or the performance of any work, or on account of bringing materials, tools, supplies and equipment into or through the Demised Premises during the course thereof and the obligations of Lessee under this Lease shall not be affected thereby. The rights provided in this Article shall be exercised so as to minimize interference with the use and occupancy of the Demised Premises by Lessee. Nothing contained in this Article shall impose, or shall be construed to impose on Lessor any obligation to maintain the systems referred to in this Article or the Demised Premises or anything appurtenant thereto, or to make repairs or alterations thereof or thereto, or to create any liability for any failure to do so. SECTION 10.02.A. Without abatement or diminution in rent, Lessor reserves and shall have the following additional rights: (a) to change the street address and/or the name of the Building of which the Demised Premises are a part and/or the Property and/or the locations of entrances, passageways, doors, doorways, corridors, elevators, stairs, toilets, or other public parts of the Building and/or Property without liability to Lessee, (b) to approve in writing all sources furnishing construction work, painting, decorating, repairing, maintenance and any other work in or about the Demised Premises, (c) to erect, use and maintain pipes and conduits in and through the Demised Premises, (d) to charge to Lessee any expense including overtime cost incurred by Lessor in the event that repairs, alterations, decorating or other work in the Demised Premises are made or done after ordinary business hours at Lessee's request, (e) to immediately enter and alter, renovate, and redecorate the Demised Premises (without reduction or abatement of rent or incurring any liability to Lessee for compensation), if during the last four (4) months of the term or of a renewal term Lessee shall have removed all or substantially all of Lessee's property therefrom, and (f) to grant to anyone the exclusive right to conduct any particular business or undertaking in the Building of which the Demised Premises are a part. B. Lessor may exercise any or all of the foregoing rights hereby reserved to Lessor without being deemed guilty of an eviction, actual or constructive, or disturbance or interruption of Lessee's use or possession and without being liable in any manner toward Lessee and without limitation or abatement of rent or other compensation, and such acts shall have no effect on this Lease. 24 ARTICLE 11- INSURANCE SECTION 11.01. A. Lessee shall obtain and keep in full force and effect during the Term, and during any earlier period of time when Lessee or Lessee's agents, employees, or contractors may enter the Demised Premises at its own cost and expense: (1) commercial general liability insurance (with a contractual liability endorsement covering the matters set forth in Article 16) having a combined single limit of not less than Three Million ($3,000,000.00) Dollars protecting Lessor, any Lessor's agent which is acting as a property manager for the Property, the holder of any Mortgage, or lessor under any Superior Lease and Lessee as insureds (and naming each such person as an insured party or as an additional insured) against any and all claims for bodily injury, death or property damage occurring, during the Term and during any earlier period of time when Lessee or Lessee's agents, employees, or contractors may enter the Demised Premises; (2) insurance (herein sometimes referred to as "Lessee's fire (casualty) insurance") against loss or damage by any and all risks and hazards to Lessee's Property (as hereinafter defined) for the full replacement value thereof (including coverages which are currently sometimes referred to as "all risk" with coverage written on a replacement cost basis); (3) workers' compensation and employees liability insurance in accordance with the laws of the State of New York and all Governmental Authorities having jurisdiction over the Demised Premises and/or the Property; and (4) Lessee shall insure and keep insured in the name of Lessee, with the name of Lessor included as an additional insured, at Lessee's expense, broad form boiler insurance in the amount of at least Five Hundred Thousand ($500,000.00) Dollars, only if there is a steam boiler, steam generator, or any other combustible device, mechanism or appliance in, on, adjoining or beneath the Demised Premises, for the exclusive use of the Lessee. Lessee shall further insure, at Lessor's request, against any other peril generally insured against by a business of Lessee's type. 25 B. Said insurance is to be written in form and substance reasonably satisfactory to Lessor by an insurance company, licensed to do business in the State of New York, which shall be rated by Best's Insurance Rating Service with at least a rating equal to A:XII. Lessee shall procure, maintain and place such insurance and pay all premiums and charges therefor and upon failure to do so Lessor may, but shall not be obligated to, procure, maintain and place such insurance or make such payments, and in such event Lessee agrees to pay the amount thereof plus interest at the maximum legal rate then prevailing, to Lessor on demand as Additional Rent. If Lessee has other locations that it owns or leases, said policy shall include an aggregate per location endorsement. Lessee shall cause to be included in all such insurance policies (i) a provision to the effect that the same will not be canceled or modified except upon not less than thirty (30) days prior written notice to the Lessor, and (ii) a provision to the effect that the naming of any person other than Lessee as an insured shall not obligate such person to pay any premium. Each such Lessee's fire (casualty) insurance policy shall contain an agreement by the insurer that the act or omission of one insured will not invalidate the policy as to any other insured. Not less than ten (10) days prior to the Commencement Date the original insurance policies or appropriate certificates and paid receipts therefor, (together with a photocopy of the policy, if Lessor shall so request) shall be deposited with Lessor. Any renewals or endorsements thereto shall also be deposited with Lessor, not less than ten (10) days prior to the expiration date of the policy being renewed, replaced or endorsed, to the end that said insurance shall be in full force and effect at all times during the Term. SECTION 11.02. Lessee agrees to use reasonable efforts to include in each of its insurance policies (insuring the Demised Premises and Lessor's property therein, against loss occasioned by fire or other casualty) a waiver of the insurer's right of subrogation against the Lessor, or if such waiver should be unobtainable or unenforceable, (a) an express agreement that such policy shall not be invalidated if the insured waives or has waived before the casualty the right of recovery against any party responsible for a casualty covered by the policy, or (b) any other form of permission for the release of the other party, or (c) the inclusion of the Lessor as an additional insured. Lessee, upon request from Lessor from time to time, will furnish evidence of the nature of the insurance arrangements made concerning the subject matter of this Section. 26 SECTION 11.03. As long as both parties' fire (casualty) insurance policies then in force include the waiver of subrogation or agreement or permission to release liability referred to in Section 11.02 or name the other party as an additional insured, each party hereby waives (and agrees to cause any other permitted occupants of the Demised Premises to execute and deliver to the other party written instruments waiving) any right of recovery against the other party, the holder of the Mortgage, or Superior Lease, and any servants, employees, agents or contractors of the other party, or of any such lessor or holder, or of any such other tenants or occupants, for any loss occasioned by fire or other casualty, that is an insured risk under Lessee's fire (casualty) insurance policies. In the event that at any time either party's fire (casualty) insurance carriers shall not include such or similar provisions in the other party's fire (casualty) insurance policies, the waivers set forth in the foregoing sentence shall be deemed of no further force and effect. During any period when either party fails to maintain such fire (casualty) insurance, for the purposes of the first sentence of this Section there shall be deemed to be in effect such fire (casualty) insurance meeting the requirements of such sentence. SECTION 11.04. Nothing contained in this Lease shall (i) relieve Lessee of any liability to Lessor or to its insurance carriers which Lessee may have under law or the provisions of this Lease in connection with any damage to the Demised Premises by fire or other casualty; (ii) impose upon Lessor any duty to procure or maintain any kinds of insurance or any particular amounts or limits of any such kinds of insurance. SECTION 11.05. Lessor shall insure the Building with all risk insurance coverage in such amounts so as to avoid co-insurance and Lessor agrees that such policies shall contain a waiver of subrogation in favor of Lessee. ARTICLE 12 - DAMAGE OR DESTRUCTION SECTION 12.01. If the Demised Premises or any part thereof shall be damaged by fire or other casualty, Lessee shall give prompt notice thereof to Lessor and Lessor shall proceed (subject to the provisions of this Article) with reasonable diligence to repair or cause to be repaired such damage. Except as provided in Section 12.05, the Fixed Rent shall be abated proportionately to the extent that the Demised Premises shall have been rendered Untenantable (as hereinafter defined), such abatement to be from the date of such damage or destruction to the date the Demised Premises shall no longer be Untenantable. 27 SECTION 12.02. If the Demised Premises shall be totally damaged or the whole of the Demised Premises shall be rendered Untenantable by fire or other casualty, and Lessor has not terminated this Lease pursuant to Section 12.03 and Lessor has not completed the making of the required repairs and restored and rebuilt the Demised Premises and/or access thereto within one (1) year from the date of such damage or destruction to the condition the Demised Premises were in on the date preceding such casualty (except for Lessee's Property), and such additional time after such date, as shall equal the aggregate period Lessor may have been delayed in doing so by Unavoidable Delays or adjustment of insurance, Lessee may serve notice on Lessor of its intention to terminate this Lease and if within thirty (30) days thereafter, Lessor shall not have substantially completed the making of the required repairs and restored and rebuilt the Demised Premises to the condition the Demised Premises were in on the date preceding such casualty (except for Lessee's Property), then in such events, this Lease shall terminate on the expiration of such thirty (30) day period as if such termination date were the Expiration Date, and the Fixed Rent and Additional Rent shall be apportioned as of such date of sooner termination and any prepaid portion of Fixed Rent and Additional Rent for any period after such date shall be refunded by Lessor to Lessee. SECTION 12.03.A. If the Demised Premises shall be totally damaged or the whole or substantially all of the Demised Premises shall be rendered Untenantable by fire or other casualty or if the Demised Premises shall be so damaged by fire or other casualty that substantial alteration or reconstruction shall, in Lessor's reasonable opinion, be required, then and in such events Lessor may, at its option, terminate this Lease and the Term and estate hereby granted by giving Lessee not less than thirty (30) days, nor more than sixty (60) days, notice of such termination, within ninety (90) days after the date of such damage. In the event that such notice of termination shall be given, this Lease and the Term and estate hereby granted shall terminate as of the date provided in such notice of termination (whether or not the Term shall have commenced) with the same effect as if that were the Expiration Date, and the Fixed Rent and Additional Rent shall be apportioned as of such date of sooner termination, and any prepaid portion of Fixed Rent and Additional Rent for any period after such date shall be refunded by Lessor to Lessee. B. If the Demised Premises shall be totally damaged or the whole or substantially all of the Demised Premises shall be rendered untenantable by fire or other casualty, and Lessor has not terminated this Lease as provided in Section 12.03.A., Lessor shall notify Lessee, within ninety (90) days after such 28 fire or other casualty, as to the estimated period of time necessary to complete the required repairs and restore and rebuild the Demised Premises to the level of demising walls. If such Lessor's estimate exceeds one (1) year, from the date of such notice, or if Lessor falls to deliver such notice, then in such events, Lessee may serve on Lessor, within thirty (30) days of its receipt of Lessor's notice, or the expiration of the ninety (90) days after such fire or other casualty, as the case may be, (time being of the essence with respect thereto), notice of its intention to terminate this Lease on a date which shall be not more than thirty (30) days from the date of Lessee's notice. If Lessee gives notice of its intention to cancel this Lease as provided herein, then in such events, this Lease shall terminate on the expiration of such thirty (30) day period as if such termination date were the Expiration Date, and the Fixed Rent and Additional Rent shall be apportioned as of such date of sooner termination and any prepaid portion of Fixed Rent and Additional Rent for any period after such date shall be refunded by Lessor to Lessee. Lessee's failure to notify Lessor within the thirty (30) day period shall be deemed a waiver of the right to terminate this Lease. SECTION 12.04. Lessor shall not be liable for any inconvenience or annoyance to Lessee or injury to the business of Lessee resulting in any way from such damage by fire or other casualty or the repair thereof. SECTION 12.05. Lessee shall restore all improvements made by Lessee to the Demised Premises, at Lessee's sole cost and expense. Nothing herein contained shall relieve Lessee from any liability to the Lessor or to its insurers in connection with any damage to the Property, Building or Demised Premises by fire or other casualty if Lessee shall be legally liable in such respect. Notwithstanding any of the foregoing provisions of this Article, if by reason of some action or inaction on the part of Lessee or any of its employees, agents, officers, directors or contractors, Lessor or the holder of the Mortgage or Superior Lease shall be unable to collect all of the insurance proceeds (including rent insurance proceeds) applicable to damage or destruction of the Demised Premises by fire or other cause, then, without prejudice to any other remedy which may be available against Lessee, the abatement of Fixed Rent provided for in this Article shall not be effective to the extent of the uncollected insurance proceeds. 29 SECTION 12.06. This Lease shall be considered an express agreement to the contrary pursuant to New York REAL PROPERTY LAW Section 227 governing any case of damage to or destruction of the Demised Premises or any part thereof by fire or other casualty, and any law providing for such a contingency in the absence of such express agreement, now or hereafter enacted, shall have no application in such case to the extent inconsistent with this Lease. SECTION 12.07. Lessee shall, at its own cost and expense, remove all of Lessee's property from the Demised Premises as Lessor shall require in order to repair and restore the Demised Premises and Lessor shall not be obligated to commence repairs or restoration of the Demised Premises until such property has been removed by Lessee from the damaged portion of the Demised Premises. Should Lessee neglect, fail, or refuse to remove its aforesaid property within thirty (30) days after such damage or destruction, the provisions for abatement of Fixed Rent contained herein shall be suspended and of no force and effect whatsoever until Lessee has completed such removal. In no event shall the Lessor be required to repair or replace Lessee's merchandise, trade fixtures, furniture, furnishings, inventory and equipment. ARTICLE 13 - CURING DEFAULTS; FEES AND EXPENSES SECTION 13.01. If Lessee shall default in the full and prompt performance of any covenant contained herein and to be performed on Lessee's part, Lessor, after ten (10) days notice to Lessee (except that a lesser notice appropriate to the circumstances shall be required in case of an emergency), without being under any obligation to do so and without thereby waiving such default may perform such covenant for the account and at the expense of Lessee and may enter upon the Demised Premises for any such purpose and take all action thereon as may be necessary therefor. All sums so paid by Lessor in connection with the payment or performance by it of any of the obligations of Lessee hereunder and all actual and reasonable costs, expenses and disbursements paid in connection therewith or enforcing or endeavoring to enforce any right under or in connection with this Lease, or pursuant to law, together with interest thereon at the maximum legal rate from the respective dates of the making of each such payment, shall constitute Additional Rent payable by Lessee under this Lease and shall be paid by Lessee to Lessor upon demand by Lessor. The provisions of this Section shall survive the expiration or other termination of this Lease. 30 ARTICLE 14 - DEFAULT PROVISIONS SECTION 14.01. A. If any one or more of the following events shall happen and shall not have been cured within any applicable grace period herein provided: (1) if default shall be made in the due and punctual payment of Fixed Rent or Additional Rent payable by Lessee under this Lease when and as the same shall become due and payable, and such default shall continue for a period of five (5) days after written notice thereof from Lessor to Lessee (provided that no such notice shall be required if, during the period of one (1) year immediately preceding the date of default, there shall have been two (2) or more defaults in the due and punctual payment of Fixed Rent or Additional Rent payable by Lessee under this Lease when and as the same shall have been due and payable); or (2) if default shall be made by Lessee in performance of, or compliance with, any of the covenants, agreements or conditions contained in this Lease and either (i) in the case of a default or a contingency which can with due diligence be cured within thirty (30) days, such default shall continue for a period of thirty (30) days after written notice thereof from Lessor to Lessee, or (ii) in the case of a default or a contingency which cannot with due diligence be cured within thirty (30) days, Lessee shall fail, after written notice thereof from Lessor, to proceed promptly and with all due diligence to commence to cure the same and thereafter to prosecute the curing of such default with all due diligence (it being intended that, in connection with a default which is not susceptible of being cured with due diligence within thirty (30) days the time of Lessee within which to cure the same shall be extended for such period as may be necessary for the curing thereof with all due diligence); or (3) if Lessee shall file a voluntary petition seeking an order or relief under Title 11 of the United States Code or similar law of any jurisdiction applicable to Lessee, or Lessee shall be adjudicated a debtor, bankrupt or insolvent, or shall file any petition or answer seeking, consenting to or acquiescing in any order for relief, reorganization, arrangement, composition, adjustment, winding-up, liquidation, dissolution or similar relief with respect to Lessee or its debts under the present or any future bankruptcy act or any other 31 present or future applicable federal, state or other statute or law, or shall file an answer admitting or failing to deny the material allegations of a petition against it for any such relief or shall generally not, or shall be unable to, pay its debts as they become due or shall admit in writing in any filing with any court or Governmental Authority its insolvency or its inability to pay its debts as they become due, or shall make a general assignment for the benefit of creditors or shall seek or consent or acquiesce in the appointment of any trustee, receiver, examiner, assignee, sequestrator, custodian or liquidator or similar official of Lessee or of all or any part of Lessee's property or if Lessee shall take any action in furtherance of or authorizing any of the foregoing; or if Lessee shall call a meeting of, or propose any form of arrangement, composition, extension or adjustment with, its creditors holding a majority in amount of Lessee's outstanding indebtedness; or (4) if any case, proceeding or other action shall be commenced or instituted against Lessee, seeking to adjudicate lessee a bankrupt or insolvent, or seeking an order for relief against Lessee as debtor, or reorganization, arrangement, composition, adjustment, winding-up, liquidation, dissolution or similar relief with respect to Lessee or its debts under the present or any future bankruptcy act or any other present or future applicable federal, state or other statute or law, or seeking appointment of any trustee, receiver, examiner, assignee, sequestrator, custodian or liquidator or similar official of Lessee or of all or part of Lessee's property, which either (i) results in the entry of an order for relief, adjudication of bankruptcy or insolvency or such an appointment or the issuance or entry of any other order having similar effect or (ii) remains undismissed for a period of ninety (90) days; or if any case, proceeding or other action shall be commenced or instituted against Lessee seeking issuance of a warrant of execution, attachment restraint or similar process against Lessee or any of Lessee's property which results in the taking or occupancy of the Demised Premises or an attempt to take or occupy the Demised Premises which shall not have been vacated, discharged, or stayed or bonded pending appeal within ninety (90) days after the entry thereof; or 32 (5) if any event shall occur or any contingency shall arise whereby this Lease or the estate hereby granted to the unexpired balance of the Term would, by operation of law or otherwise, devolve upon or pass to any person other than Lessee, except as is expressly permitted under Article 27, or if default shall be made by Lessee in the performance of, or compliance with, the covenants, agreements and conditions set forth in Article 27; or (6) if Lessee's (other than Lessee herein named) obligations under this Lease shall have been guaranteed by any person other than Lessee and such person shall default in observance or performance of any term, covenant or condition to be observed or performed by such person under the instrument or agreement containing such guarantee; or (7) if any financial statement or other information furnished to Lessor by Lessee in connection with this Lease is materially false or misleading; or (8) if Lessee shall default in the observance or performance of any term, covenant or condition on Lessee's part to be observed or performed under the provisions of Section 35.09; or (9) if Lessee is the subject of a Chapter 11 reorganization under the Bankruptcy Reform Act of 1978 and such reorganization is not confirmed within eighteen (18) months from the time of filing of a voluntary or involuntary petition thereunder (it being understood that in such event Lessee consents to the termination of the automatic stay provisions of Section 362 of such Act); then and in any such event (hereinafter sometimes called an "Event of Default") Lessor may give written notice ("Termination Notice") to Lessee specifying such Event of Default or Events of Default and stating that this Lease and the Term shall expire and terminate on the date specified in the Termination Notice, which shall be at least seven (7) days after the giving of the Termination Notice, and on the date specified therein this Lease and the Term and all rights of Lessee under this Lease shall expire and terminate, it being the intention of 33 the Lessor and Lessee hereby to create conditional limitations, and Lessee shall remain liable as provided in Article 15 and in accordance with those provisions of this Lease which are specifically stated herein to survive the expiration or other termination of this Lease. B. Notwithstanding the provisions of Section 14.01.A, if there shall be an Event of Default at any time or from time to time under the provisions of subdivision (1) of Section 14.01.A, Lessor may, in lieu of giving a Termination Notice, at any time after the occurrence of any such Event of Default and during the continuance thereof, institute an action for the recovery of the Fixed Rent and/or Additional Rent in respect of which an Event of Default shall have occurred and be continuing. Neither the commencement of any such action for the recovery of Fixed Rent and/or Additional rent nor the prosecution thereof shall be deemed a waiver of Lessor's right to give a Termination Notice in respect of any such Event of Default during the continuance thereof and Lessor may, notwithstanding the commencement and prosecution of any such action, give a Termination Notice and terminate this Lease pursuant to Section 14.01.A at any time during the continuance of such Event of Default. C. If, at any time, (i) Lessee shall be comprised of two or more persons, or (ii) Lessee's obligations under this Lease shall have been guaranteed by any person other than Lessee, or (iii) Lessee's interest in this Lease shall have been assigned, the word "Lessee", as used in subdivisions (4), (5) and (9) of Section 14.01.A, shall be deemed to mean any one or more of the persons primarily or secondarily liable for Lessee's obligations under this Lease. Any monies received by Lessor from or on behalf of Lessee during the pendency of any proceeding of the types referred to in said subdivisions (4), (5) and (9) of Section 14.01.A shall be deemed paid as compensation for the use and occupation of the Demised Premises and the acceptance of any such compensation by Lessor shall not be deemed an acceptance of rent or a waiver on the part of Lessor of any rights under Section 14.01. SECTION 14.02. In the event that this Lease shall be terminated as provided in this Article, Lessor or Lessor's agents may, immediately, or at any time thereafter, without further notice, enter upon and re-enter the Demised Premises and possess and repossess itself thereof, by summary proceedings, ejectment or otherwise, and have, hold and enjoy the Demised Premises and the right to receive all income of and from the same. No re-entry by Lessor pursuant to this Article shall be deemed an acceptance of a surrender of this Lease nor shall it absolve or discharge Lessee from any liability under this Lease. 34 SECTION 14.03. In the event that this Lease shall be terminated as provided in this Article, Lessor may, at any time or from time to time thereafter, relet the Demised Premises or any part thereof, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Term) and on such conditions (which may include concessions or free rent, which shall, however, be amortized over the entire term for the purpose of determining damages under Article 15) as Lessor may determine, to any tenant which it may deem suitable and satisfactory and for any use and purpose it may deem appropriate and may collect and receive the rents therefor. Lessor shall use commercially reasonable methods in making such reletting. Lessor, at its option, may make such repairs, alterations, additions, improvements, decorations and other physical changes in and to the Demised Premises as Lessor considers advisable or necessary in connection with any such reletting or proposed reletting, without relieving Lessee of any liability under this Lease or otherwise affecting any such liability. Lessor shall in no way be responsible or liable for any failure to relet the Demised Premises, or any part thereof, or for any failure to collect any rent due upon such reletting. Lessor shall not in any event be required to pay Lessee (but shall credit Lessee, to the extent set forth in Article 15, with) any sums received by Lessor on a reletting of the Demised Premises, or any part thereof, whether or not in excess of the rent reserved in this Lease. SECTION 14.04. Lessee, on its own behalf and on behalf of all persons claiming through or under Lessee including all creditors, does hereby waive any and all rights and privileges, so far as is permitted by law, which Lessee and all such persons might otherwise have under any present or future law, to (i) the service of any notice of intention to re-enter or institute legal proceedings to that end, excluding service of process, (ii) redeem the Demised Premises, (iii) re-enter or repossess the Demised Premises, or (iv) restore the operation of this Lease, after Lessee shall have been dispossessed by a judgment or by warrant of any court or judge, or after any re-entry by Lessor or after any expiration or termination of this Lease and the Term, whether such dispossess, re-entry, expiration or termination shall be by operation of law or pursuant to the provisions of this Lease. The words "re-enter," "re-entry" and "re-entered" as used in this Lease shall not be deemed to be restricted to their technical legal meanings. 35 SECTION 14.05. In the event the Lessee shall dispute the validity or amount, or the time or manner of payment of, any rent claimed by Lessor to be due from Lessee under this Lease, Lessee shall nevertheless pay the same and such payment may be without prejudice to Lessee's position if Lessee so requests at the time of payment. If the dispute shall be finally determined in Lessee's favor by a court of competent jurisdiction, Lessor shall within a reasonable period of time not to exceed sixty (60) days pay Lessee the amount of Lessee's overpayment of such rent. Lessee's failure to observe and perform the provisions of this Section shall be deemed a default under subdivision (1) of Section 14.01.A. ARTICLE 15 - MEASURE OF DAMAGES IN EVENT OF DEFAULT SECTION 15.01. A. In the event that this Lease be terminated pursuant to Article 14 as a result of an Event of Default on the part of the Lessee and whether or not the Demised Premises be relet, Lessor shall be entitled to retain all monies, if any, paid by Lessee to Lessor, whether as advance rent or otherwise, but such monies shall be credited by Lessor against any rent due at the time of such termination, or at Lessor's option, against any damages payable by Lessee, and Lessor shall be entitled to recover from Lessee, and Lessee shall pay to Lessor the following: (a) All rent to the date upon which this Lease and the Term shall have terminated, and (b) All expenses reasonably incurred by Lessor in recovering possession of the Demised Premises (including summary proceedings), restoring the Demised Premises to good order and condition, maintaining the Demised Premises in good order and condition while vacant, altering or otherwise preparing the same for reletting, and in reletting the Demised Premises (including brokerage commissions, administrative costs and legal expenses), the same to be paid by Lessee to Lessor on demand, and (c) The amount by which the rent which, but for the termination of this Lease, would have been payable under this Lease from the date of termination to the Expiration Date exceeds the rental and other income, if any, collected by Lessor in respect of the Demised Premises, or any part thereof, subject nevertheless to the provisions of Section 14.03, said amount to be due and payable by Lessee to Lessor on the several days on which the rent reserved in this Lease would have become due and payable for the period which otherwise would have constituted the unexpired portion of the Term (that is to say, upon each of such days Lessee shall pay to Lessor the amount of deficiency then existing). 36 B. Whether or not Lessor shall have collected any monthly deficiencies aforesaid, Lessor shall be entitled to recover from Lessee on demand, as and for liquidated damages, a lump sum payment equal to the amount by which the Fixed Rent and Additional Rent payable hereunder for the period which otherwise would have constituted the unexpired portion of the Term (due account being taken of amounts, if any, collected under clause [c] of Section 15.01.A, and conclusively presuming the Additional Rent to be the same as was payable for the year immediately preceding such termination or re-entry and thereafter increasing by five (5%) percent per annum) exceeds the then rental value of the Demised Premises for the same period both discounted at a rate equal to then applicable Treasury Rate to present value. If the Demised Premises or any part thereof be relet by Lessor for the unexpired portion of the Term, or any part thereof, before presentation of proof of such liquidated damages to any court, commission or tribunal, the amount of rent reserved upon such reletting shall be deemed PRIMA FACIE to be the fair and reasonable rental value for the part or the whole of the Demised Premises so relet during the term of the reletting. Nothing herein contained shall limit or prejudice the right of the Lessor to prove for and obtain as damages by reason of such termination an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved, whether or not such amount be greater or less than the amount of liquidated damages referred to above (due account to be taken, however, of the amounts, if any, collected under this Article 15). SECTION 15.02. In no event shall Lessee be entitled to receive any excess of the rental and other income collected by Lessor in respect of the Demised Premises over the sums payable by Lessee to Lessor hereunder. In no event shall Lessee be entitled in any suit for the collection of damages pursuant to this Article to a credit in respect of any such rental and other income, except to the extent that such rental and other income is allocable to the portion of the Term in respect of which such suit is brought and is actually received by Lessor prior to the entry of judgment in such suit. SECTION 15.03. Separate actions may be maintained by Lessor against Lessee from time to time to recover any damages which, at the commencement of any such action, have then or theretofore become due and payable to Lessor under Article 14, without waiting until the end of the Term and without prejudice to Lessor's right to collect damages thereafter. 37 ARTICLE 16 - INDEMNIFICATION SECTION 16.01. Notwithstanding that joint or concurrent liability may be imposed upon either party by statute, ordinance, rule, regulation, order or court decision, and notwithstanding any insurance furnished by either party pursuant hereto or otherwise, Lessee shall and does hereby indemnify and hold Lessor and its agents, officers, directors, and employees, harmless from and against any and all loss, liability, fines, suits, claims, obligations, damages, penalties, demands and actions, and costs and reasonable expenses of any kind or nature (including architects', engineers' and attorneys' fees) due to or arising out of any of the following: (a) any work or thing done in, on or about the Demised Premises, Building or the Property or any part thereof or any use, possession, occupation, condition, operation, maintenance, repair or management of the Demised Premises, Building or the Property or any part thereof, by Lessee or anyone claiming through or under Lessee or the respective employees, agents, licensees, contractors, servants or sublessees of Lessee or any such person; (b) any act or omission on the part of Lessee or any person claiming through or under Lessee, or the respective employees, agents, licensees, invitees, contractors, servants or sublessees of Lessee or any such person; or (c) any accident or injury to any person (including death) or damage to property (including loss of property) occurring in, on, or about the Demised Premises, Building or the Property or any part thereof, due to the act or omission by Lessee, its employees, agents, licensees, invitees, contractors or servants. The provisions of this Section 16.01 shall survive the expiration or termination of this Lease. Any sums payable by Lessee to Lessor under this Section 16.01 shall be due and payable on demand. SECTION 16.02. Lessor and Lessor's agents, officers, directors, and employees shall not be liable for any of the following, however caused, other than by wilful or negligent acts: (a) failure of any Utility Service, (b) damage to Lessee's property on the Demised Premises caused by or resulting from any cause whatsoever, including explosion, falling plaster, vermin, smoke, gasoline, oil, Hazardous Materials, steam, gas, electricity, earthquake, subsidence of land, hurricane, tornado, flood, wind or similar storms or disturbances or water, rain, ice or snow which may be upon, or leak or flow from, any street, road, parking lot, sewer, gas main or subsurface area, or from any part of the Property, or leakage of gasoline, oil or other substances from pipes, pipelines, 38 appliances, storage tanks, sewers or plumbing works in or at the Property, or from any other place, or from the breaking of any electrical wire or the breaking, bursting or leaking of water or Hazardous Materials from any plumbing or sprinkler system, or any other pipe or storage tanks in, on, under or about the Property, (c) interference with light or other incorporeal hereditaments, and (d) loss by theft or otherwise of Lessee's Property or the property of any person claiming through or under Lessee. Any employees of Lessor to whom any property shall be entrusted by or on behalf of Lessee shall be deemed to be acting as Lessee's agents with respect to such property and neither Lessor nor Lessor's agents shall be liable for any loss or for damage to any such property by theft or otherwise. This Section 16.02 shall not be construed as a provision for indemnification. SECTION 16.03. Except as otherwise provided for in this Lease, Lessor shall and does hereby indemnify and hold harmless Lessee and Lessee's agents from and against any and all loss, liability, fines, suits, claims, obligations, damages, penalties, demands and actions, and costs and reasonable expenses of any kind or nature (including architects' and attorneys' fees) due to or arising out of the breach of this Lease, negligence or willful misconduct of Lessor, its agents, officers, directors and employees. In case of any obligation of Lessor to indemnify Lessee pursuant to this Section, such obligation shall be subject to and conditioned upon (x) the receipt by Lessor of prompt written notice of the claim with respect to which indemnification is sought and (y) Lessor's having had reasonable opportunity to conduct the defense of such claim in such manner as it deems appropriate, with the full cooperation of Lessee, and using counsel reasonably acceptable to Lessor. ARTICLE 17 - MECHANIC'S AND OTHER LIENS SECTION 17.01. If any mechanic's, laborer's or materialman's lien shall be at any time be filed against the Demised Premises, Building or Property, or any part thereof with respect to any work done, or caused to be done, or labor or materials furnished, or caused to be furnished, by Lessee or anyone claiming through or under Lessee, Lessee, within thirty (30) days after notice of the filing thereof, shall cause the same to be discharged of record by payment, deposit, bond, order of a court of competent jurisdiction or otherwise. If Lessee shall fail to cause such lien to be discharged within the period aforesaid, then, in addition to any other right or remedy, Lessor may, but shall not be obligated to, discharge the same by bonding proceedings, if permitted by law (and if not so permitted, by deposit in court). Any amount so paid by Lessor, including all costs and expenses paid by Lessor in connection therewith, 39 together with interest thereon at the maximum legal rate from the respective dates of Lessor's so paying any such amount, cost or expense, shall constitute Additional Rent payable by Lessee under this Lease and shall be paid by Lessee to Lessor on demand. ARTICLE 18 - CONDEMNATION SECTION 18.01. If the whole of the Demised Premises, or such part thereof as will render the remainder Untenantable, shall be acquired or condemned for any public or quasi-public use or purpose, this Lease and the Term shall end as of the date of vesting of title in the condemning authority with the same effect as if said date were the Expiration Date. If only a part of the Demised Premises shall be so acquired or condemned then, except as otherwise provided in this Article, this Lease and the Term shall continue in force and effect but, from and after the date of the vesting of title, the Fixed Rent shall be an amount which bears the same ratio to the Fixed Rent payable immediately prior to such condemnation pursuant to this Lease as the value of the untaken portion of the Demised Premises (appraised after taking and repair of any damage to the Demised Premises pursuant to this Section) bears to the value of the entire Demised Premises immediately before the taking. The value of the Demised Premises before and after the taking shall be determined for the purposes of this Section by an independent licensed appraiser chosen by Lessor. If more than sixty (60%) percent of the total area of the Building included in the Demised Premises immediately prior to acquisition or condemnation is so acquired or condemned, or if by reason of such acquisition or condemnation, Lessee no longer has reasonable means of access to the Demised Premises, then in such event, either party, may give notice to the other party within sixty (60) days next following the date upon which Lessee have received notice of vesting of title, thirty (30) days notice of termination of this Lease. In the event any such thirty (30) day notice of termination is given by Lessor or Lessee, this Lease and the Term shall terminate upon the expiration of said thirty (30) days with the same effect as if that date were the Expiration Date. If a part of the Demised Premises shall be so acquired or condemned, and the Term shall not be terminated pursuant to the provisions of this Section, Lessor, at Lessor's expense, shall restore that part of the Demised Premises not so acquired or condemned to a self-contained unit. In the event of any termination of this Lease and the Term pursuant to the provisions of this Section, the Fixed Rent and Additional Rent shall be apportioned as of the date of sooner termination and any prepaid portion of the Fixed Rent and Additional Rent for any period after such date shall be refunded by Lessor to Lessee, subject to the claims, if any, of Lessor against Lessee hereunder or otherwise. 40 SECTION 18.02. In the event of any acquisition or condemnation of all or part of the Demised Premises for any public or quasi-public use or purpose, Lessor shall be entitled to receive the entire award for such acquisition or condemnation, Lessee shall have no claim against Lessor or the condemning authority for the value of any unexpired portion of the Term and Lessee hereby expressly assigns to Lessor all of its right, title and interest in and to any such award, and also agrees to execute any and all further documents that may be required in order to facilitate the collection thereof by Lessor. Nothing contained in this Section shall be deemed to prevent Lessee from making a separate claim in any condemnation proceeding for moving expenses and for the value of any Lessee's Property which would be removable at the end of the Term pursuant to the provisions hereof, directly against any governmental authority authorized to exercise the power of eminent domain, provided that applicable statutes permit such awards and any award to Lessor is not diminished or adversely affected thereby. SECTION 18.03. The terms "condemnation" and "acquisition" as used in this Article shall include any agreement in lieu of or in anticipation of the exercise of the power of eminent domain between Lessor and/or any Superior Mortgage and any governmental authority authorized to exercise the power of eminent domain. ARTICLE 19 - COVENANT OF QUIET ENJOYMENT SECTION 19.01. If and so long as no Event of Default shall have occurred and be continuing, Lessor covenants and agrees that Lessee may peaceably and quietly enjoy the Demised Premises and Lessee's possession of the Demised Premises will not be disturbed by Lessor, its successors and assigns, subject, however, to the terms of this Lease (including those set forth in Sections 24.01 and 24.02), the Mortgage, Superior Lease and any and/or all other agreements and any amendments thereto, to which this Lease is subordinated. ARTICLE 20 - WAIVER OF COUNTERCLAIM AND JURY TRIAL SECTION 20.01. In the event that Lessor shall commence any summary or other proceedings or action for non-payment of rent hereunder, Lessee shall not interpose any counterclaim of any nature or description in such proceeding or action, unless such non-interposition would effect a waiver of Lessee's right to assert such claim against Lessor in a separate action or proceeding. The parties hereto waive a trial by jury on any and all issues arising in any action or proceeding between them or their successors under or in any way connected with this Lease or any of its provisions, any negotiations in connection therewith, the relationship of Lessor and Lessee, or Lessee's use or occupation of the Demised Premises, including any claim of injury or any emergency or other statutory remedy with respect thereto. The provisions of this Article shall survive the expiration or other termination of this Lease. 41 ARTICLE 21 - NOTICES SECTION 21.01. A. Except as otherwise expressly provided in this Lease, any bills, statements, notices, demands, requests, consents or other communications given or required to be given under this Lease shall be effective only if rendered or given in writing and (a) If to Lessee, then, at the option of Lessor, (i) addressed to Lessee's address as set forth in this Lease, with copies thereof to [SCHULTE ROTH & ZABEL, 919 THIRD AVENUE, NEW YORK, NEW YORK 10022, ATTENTION: GEORGE SILFEN, ESQ.,] or to such other address as Lessee may designate as its new address for such purpose by notice given to Lessor in accordance with the provisions of this Section, or (ii) delivered personally to Lessee, or (iii) by overnight courier, (b) If to Lessor, sent by personal delivery or overnight courier, addressed to Lessor at Lessor's address as set forth in this Lease, with copies thereof to Steven C. Hirsch, Esq., 585 Stewart Avenue, Suite 430, Garden City, New York 11530, or to such other address as Lessor may designate as its new address for such purpose by notice given to Lessee in accordance with the provisions of this Section. B. Any such bill, statement, notice, demand, request, consent or other communication shall be deemed to have been rendered or given: (i) on the date delivered, if delivered to Lessee personally, or by overnight courier and (ii) on the expiration of five (5) days after mailing, if mailed to Lessor or Lessee as provided in this Section. Any notice by a party signed by counsel for such party shall be deemed a notice signed by such party. ARTICLE 22 - WAIVERS AND SURRENDERS TO BE IN WRITING SECTION 22.01. The receipt of full or partial rent by Lessor with knowledge of any breach of this Lease by Lessee or of any default on the part of the Lessee in the observance or performance of any of the provisions or covenants of this Lease shall not be deemed to be a waiver of any such provision, covenant or breach of this Lease PROVIDED, HOWEVER, that acceptance of a payment of rent shall be valid PRO TANTO. No waiver or modification by 42 Lessor, unless in writing, and signed by Lessor, shall discharge or invalidate any provision or covenant or affect the right of Lessor to enforce the same in the event of any subsequent breach or default. The failure on the part of Lessor to insist in any one or more instances upon the strict performance of any of the provisions or covenants of this Lease, or to enforce any covenant or provision herein contained or to exercise any right, remedy or election herein contained consequent upon a breach of any provision of this Lease, shall not affect or alter this Lease or be construed as a waiver or relinquishment for the future of such one or more provisions or covenants or of the right to insist upon strict performance or to exercise such right, remedy or election, but the same shall continue and remain in full force and effect with respect to any existing or subsequent breach, act or omission, whether of a similar nature or otherwise. The receipt by Lessor of any rent or any other sum of money or any other consideration hereunder paid by Lessee after the termination, in any manner, of the Term, or after the giving by Lessor of the Termination Notice, shall not reinstate, continue or extend the Term, or destroy, or in any manner impair the efficacy of any such Termination Notice, as may have been given hereunder by Lessor to Lessee prior to the receipt of any such rent, or other sum of money or other consideration, unless so agreed to in writing and signed by Lessor. Neither acceptance of the keys or any other act or thing done by Lessor or any agent or employee shall be deemed to be an acceptance of a surrender of the Demised Premises, or any part thereof, excepting only an agreement in writing signed by Lessor. No payment by Lessee or receipt by Lessor of a lesser amount than the correct rent shall be deemed to be other than a payment on account, nor shall any endorsement or statement on any check, as distinguished from any letter accompanying such check or payment, be deemed to effect or evidence an accord and satisfaction, and Lessor may accept such check or payment without prejudice to Lessor's right to recover the balance or pursue any other remedy in this Lease provided. ARTICLE 23- RIGHTS CUMULATIVE SECTION 23.01. Each right and remedy of Lessor shall be cumulative and to the extent permitted by law, the exercise or beginning of the exercise by Lessor of any one or more of the rights or remedies of such party shall not preclude the simultaneous or later exercise by Lessor of any or all other rights or remedies; PROVIDED, HOWEVER, that this sentence shall not be construed to entitle Lessor to satisfaction of more than one remedy in respect of a particular breach. In the event of any breach or threatened breach by Lessee or any persons claiming through or under Lessee of any of the agreements, terms, covenants or conditions contained in this Lease, Lessor shall be entitled to enjoin such breach or threatened breach (if entitled to do so at law or in equity or by statue or otherwise) and shall have the right to invoke any right or remedy allowed by law or in equity or by statute or otherwise as if re-entry, summary proceedings or other specific remedies were not provided for in this Lease. 43 ARTICLE 24- CONVEYANCE; LIABILITY OF PARTIES SECTION 24.01. The term "Lessor" as used herein shall mean and include only the owner or owners at the time in question of the Lessor's interest in this Lease so that in the event of any transfer or transfers (by operation of law or otherwise) of Lessor's entire interest in this Lease, Lessor herein named (and in the case of any subsequent transfers or conveyances, the then transferor) shall be and hereby is automatically freed and relieved, from and after the date of such transfer or conveyance, of all liability in respect of the performance of any covenants or obligations on the part of the Lessor contained in this Lease thereafter to be performed, provided that the transferee shall be deemed to have assumed and agreed to perform subject to the limitation of this Article (and without further agreement between or among the parties or their successors in interest, and/or the transferee) and only during and in respect of the transferee's period of ownership, all of the terms, covenants and conditions in this Lease contained on the part of Lessor to be performed, which terms, covenants, and conditions shall be deemed to "run with the land", it being intended hereby that the terms, covenants and conditions contained in this Lease on the part of the Lessor to be performed shall, subject as aforesaid, be binding on Lessor, its successors and assigns, only during and in respect of their respective successive periods of ownership. SECTION 24.02. In the event of a breach by Lessor of any provisions, covenants or obligations of this Lease to be performed by Lessor, the monetary liability of Lessor in relation to any such breach shall be limited to the equity of Lessor in the Demised Premises, and Lessee shall look only to Lessor's equity in the Demised Premises for the performance and observance of the terms, covenants, conditions and obligations of this Lease to be performed or observed by Lessor and for the satisfaction of Lessee's remedies for the collection of any award, judgment or other judicial process requiring the payment of money by Lessor in the event of a default in the full and prompt payment and performance of any Lessor's obligations hereunder and in no event shall any of the partners constituting Lessor (the "Partners"), nor the partners, shareholders, officers or directors of Lessor or the Partners shall be liable for the performance of Lessor's obligations under this Lease, nor shall any of the Partners assets be liable to any levy, execution, restraint, award, claim of any kind whatsoever arising out of, or in any way related to this Lease. 44 SECTION 24.03. The term "Lessee" as used in this Lease shall mean and include Lessee named herein and, during and in respect of their respective successive periods of ownership, each subsequent owner or owners of the leasehold estate created by this Lease. For all purposes of this Lease and without affecting the rights of, and obligations between, Lessee herein named and any transferee, notwithstanding any transfer (by operation or law or otherwise) of title to the leasehold estate created by this Lease by Lessee herein named or by any subsequent owner of such estate and notwithstanding the assumption by any transferee of the obligations of the Lessee hereunder, Lessee herein named, as between Lessor and Lessee herein named, shall remain primarily liable as primary obligor and not as a surety, for the full and prompt payment and performance of Lessee's obligations hereunder and, without limiting the generality of the foregoing or of Article 28, shall remain fully and directly responsible and liable to Lessor for all acts and omissions on the part of any transferee subsequent to it in violation of any obligation of this Lease. ARTICLE 25- CHANGES AND ALTERATIONS BY LESSEE SECTION 25.01.A. Lessee shall have no right to make any alteration, change, additions or improvement, structural or otherwise (an "Alteration"), to the Demised Premises or any appurtenances thereto without the prior written consent of Lessor in each instance, which consent shall not be unreasonably withheld. B. If Lessor shall grant its consent to the making of an Alteration, then the same shall (i) be performed at the sole cost and expense of Lessee, (ii) be performed in a good and workmanlike manner, and in compliance with all applicable Legal Requirements (including existing zoning requirements), Insurance Requirements and Environmental Laws, (iii) be consistent with the use of the Demised Premises provided for herein, (iv) not in any way render the Demised Premises other than a complete, self containing operating unit, (v) in the case of a structural alteration, be performed in accordance with plans and specifications approved prior to the commencement of any work by the appropriate Governmental Authorities and by Lessor, (vi) be of such nature so as not to lessen the fair market value of the Demised Premises, and (vii) be performed under the supervision of a licensed architect approved by Lessor and in accordance with Lessor's STANDARD REQUIREMENTS FOR ALTERATIONS TO BE PERFORMED BY LESSEES', as may be amended from time to time. 45 SECTION 25.02.A. Any and all Alterations made in accordance with Section 25.01 shall immediately become the property of Lessor, PROVIDED, HOWEVER, that if, in accordance with the provisions of Sections 25.02.B and 29.02, Lessee shall have the option to and shall remove its trade fixtures, provided that same are not affixed to or such removal would otherwise damage the Demised Premises, then the same shall cease to be property of the Lessor upon removal. B. Unless Lessor shall otherwise expressly indicate in writing at the time of granting its consent to the making of a proposed Alteration, Lessee shall, as and when provided in Section 29.02, restore the affected portion of the Demised Premises to the state or condition thereof existing prior to the making of such Alteration. C. Any and all contractors to be involved in performing work shall be subject to Lessor's prior approval, which shall not be unreasonably withheld. D. Prior to commencing any work at the Demised Premises, Lessee shall furnish Lessor with evidence reasonably satisfactory to Lessor of such insurance as Lessor may require and such insurance shall be in full force and effect during such work and will cover, by endorsement or otherwise, the risk during the course of such work. E. In the event of any Alteration as provided for in this Article, the Rent payable hereunder shall not be reduced or abated in any manner whatsoever. F. No Alterations shall involve the removal of any fixtures, equipment or other property in the Demised Premises which are not Lessee's property, unless Lessor's prior written consent is first obtained and unless such fixtures, equipment or other property shall be promptly replaced, at Lessee's expense and free of superior title, liens and claims, with fixtures, equipment or other property (as the case may be) of like utility and at least equal value (which replaced fixtures, equipment or other property shall thereupon become the property of Lessor), unless Lessor shall otherwise expressly consent in writing. SECTION 25.03. Notwithstanding anything herein to the contrary, Lessor shall have the option of performing any and all Alterations pursuant to Article 25 of this Lease on Lessee's behalf and at Lessee's Cost. 46 ARTICLE 26 - CERTIFICATE OF LESSEE SECTION 26.01. Lessee agrees at any time and from time to time, within twenty (20) days after request by Lessor, to execute, acknowledge and deliver a statement certifying (i) the Commencement Date hereunder, (ii) that this Lease is unmodified and in full force and effect (or if there have been modifications, that the Lease is in full force and effect as modified and stating the modifications), (iii) the dates to which the Fixed Rent and Additional Rent have been paid, and (iv) whether or not to the knowledge of the signer of such statement (a) Lessor is in default in keeping, observing or performing any term, covenant, agreement, provision, condition or limitation contained in this Lease and, if in default, specifying each such default, (b) either party is holding any funds under this Lease in which the other has an interest (and, if so, specifying the party holding such funds and the nature and amount thereof), and (c) there is any amount then due and payable to Lessee by Lessor, it being intended that any such statement delivered pursuant to this Section may be relied upon by Lessor, any mortgagee, superior lessor or any person who may and does become a mortgagee, superior lessee, any person who may and does become a purchaser or assignee of Lessor's interest in this Lease or the mortgagee's interest in any mortgage or the lessor's interest in the Superior Lease. ARTICLE- 27 ASSIGNMENTS, SUBLEASES AND MORTGAGES SECTION 27.01.A. Except as otherwise specifically provided in this Article, neither this Lease, nor the Term and estate hereby granted, nor any part thereof, nor the interest of Lessee in any sublease or the rental thereunder, shall be assigned, mortgaged, pledged, encumbered or otherwise transferred by Lessee or Lessee's legal representatives or successors in interest, by operation of law or otherwise, and neither the Demised Premises, nor any part thereof, nor any Lessee's Property, shall be encumbered in any manner by reason of any act or omission on the part of Lessee or anyone claiming under or through Lessee, or shall be sublet or be used or occupied or permitted to be used or occupied or utilized for desk or storage space by anyone other than Lessee or for any purpose other than as specifically permitted by this Lease, without the prior written consent of Lessor in each case, which consent shall not be unreasonably withheld, conditioned or delayed. If Lessee is other than a public company, a transfer (including any issuance of stock) of an aggregate of fifty (50%) percent or more stock, partnership interest or other equity interest in Lessee by any party or parties in interest shall be deemed an assignment of this Lease. 47 B. If Lessee herein named is a corporation, upon at least Sixty (60) days prior notice to Lessor, this Lease in its entirety may be assigned without Lessor's consent to a corporation into which Lessee merges or consolidates, or which controls, is controlled by or under common control with Lessee, so long as the Demised Premises continue to be used for the use described in Article 4 of this Lease; the transfer is not principally for the purpose of transferring the leasehold estate created hereby; the net worth of the assignee is at least equal to or in excess of the net worth of Lessee at the time of execution of this Lease and immediately prior to such assignment or the assignee can otherwise secure and guaranty the payment to Lessor or all rent and any other amounts due from Lessee pursuant to this Lease in a manner reasonably satisfactory to Lessor; the assignee assumes by documents satisfactory to Lessor all of Lessee's obligations to be performed under this Lease, and; provided such assignment shall be subject to all of the other terms and conditions of this Lease. SECTION 27.02. If this Lease be assigned, whether or not in violation of the provisions of this Lease, Lessor may collect rent from the assignee, and Lessor shall be entitled to receive, as Additional Rent, one half of all of the excess consideration paid to Lessee in connection with such assignment as shall for any period exceed the aggregate of the Rents payable under this Lease (the "Excess Consideration"). Such Excess Consideration shall be reduced by the reasonable cost of tenant improvements, brokerage commissions and attorneys' fees and disbursements reasonably incurred by Lessee for such assignment, and the net amount thereof shall be paid to Lessor either: (i) in a lump sum, (ii) or allocated to such period on a straight line basis over the term of such assignment if paid in installments, as the case may be, promptly after receipt thereof by Lessee. The provisions of the preceding sentence shall be in full force and effect notwithstanding that Lessee has sought the protection of any provisions of the bankruptcy law (as hereinafter defined) or if a petition has been filed against Lessee under such bankruptcy law. If the Demised Premises or any part thereof be sublet or be used or occupied by anybody other than Lessee, whether or not in violation of this Lease, Lessor may, after default by Lessee and expiration of Lessee's time to cure such default, if any, collect rent from the sublessee or occupant. In either event, Lessor may apply the net amount collected to the rents herein reserved, but no such assignment, subletting, occupancy or collection shall be deemed a waiver of any of the provisions of Section 27.01, or the acceptance of the assignee, sublessee or occupant as tenant, or a release of Lessee from the further performance by Lessee of Lessee's obligations under this Lease. The consent by Lessor to an assignment, mortgaging or subletting pursuant to any provision of this Lease shall not in any way be considered to relieve Lessee from obtaining the express consent of 48 Lessor for any other or further assignment, mortgaging or subletting. References in this Lease to use or occupancy by anyone other than Lessee shall not be construed as limited to sublessees and those claiming under or through sublessees but as including also licensees and other claiming under or through Lessee, immediately or remotely. The listing of any name other than that of Lessee on any door of the Demised Premises or on any sign on the Demised Premises, or otherwise, shall not operate to vest in the person so named any right or interest in this Lease or in the Demised Premises, or be deemed to constitute, or serve as a substitute for, any prior consent of Lessor required under this Article, and it is understood that any such listing shall constitute a privilege extended by Lessor which shall be revocable at Lessor's will by notice to Lessee. Lessee agrees to pay to Lessor any reasonable counsel fees incurred by Lessor in connection with any proposed assignment of Lessee's interest in this Lease or any proposed subletting of the Demised Premises or any part thereof. Neither any assignment of Lessee's interest in this Lease nor any subletting, occupancy or use of the Demised Premises or any part thereof by any person other than Lessee as provided in this Article, nor any application of any such rent as provided in this Article shall, under any circumstances, relieve Lessee herein named of its obligations fully to observe and perform the terms, covenants and conditions of this Lease on Lessee's part to be observed and performed. SECTION 27.03. A. Notwithstanding anything contained in Sections 27.01 and 27.02, in the event that, at any time or from time to time during the Term, Lessee desires to sublet all or any part of the Demised Premises, Lessee shall notify Lessor of such desire and shall: (i) submit to Lessor in writing the name and address of the proposed subtenant, a reasonably detailed statement of the proposed subtenant's business, reasonably detailed financial references for the proposed subtenant and any other information reasonably requested by Lessor, and (ii) submit to Lessor a copy of the proposed sublease. B. If a proposed assignment or sublease requires Lessor's consent, then upon receipt of such notice, Lessor shall thereupon have the option and right, exercisable within Ten (10) days of receipt of such notice from Lessee, to terminate this Lease with respect to the portion to be assigned or subleased effective as of a date specified by Lessor in such notice which date shall not be later than Thirty (30) days after the date of Lessor's notice. 49 C. If within thirty (30) days after Lessee shall have requested the consent of Lessor to any assignment or subletting under this Article, and shall have submitted all items required hereby, Lessor does not exercise its option to terminate this Lease, the term of the proposed assignment or sublease may commence upon Lessor's consent, which consent may not be unreasonably withheld, it being agreed that if within such thirty (30) day period Lessor does not advise Lessee that such consent is granted, such consent shall be deemed granted by Lessor. Lessor, however, shall not in any event be obligated to consent to the proposed sublease or the commencement of the term unless: (i) in the reasonable judgment of Lessor the proposed subtenant is of a character and financial worth such as is in keeping with the standards of Lessor in those respects for the Demised Premises, and the nature of the proposed subtenant's business and its reputation are in keeping with the character of the Demised Premises and the use thereof, (ii) the purpose for which the proposed subtenant intends to use the portion of the Demised Premises sublet to it are uses expressly permitted by and not expressly prohibited by this Lease; (iii) the proposed sublease shall prohibit any assignment or subletting; (iv) no Event of Default shall have occurred and be continuing and (v) Lessee shall reimburse Lessor for all reasonable costs that may be incurred by Lessor in connection with the said sublease, including the costs of making investigations as to the acceptability of a proposed subtenant and legal costs incurred in connection with the granting of any requested consent. D. With respect to each and every subletting authorized by the provisions of this Article it is further agreed and understood between Lessor and Lessee that: (i) the subletting shall be, and each such sublease shall expressly provide that is, subject and subordinate at all times and in all respects, to this Lease, (ii) no subletting shall be for a term ending later than one day prior to the Expiration Date originally provided for herein and that part, if any, of the proposed term of any sublease which shall extend beyond a date one day prior to the Expiration Date originally provided for herein (or any sooner date of the expiration of the term or termination of this Lease) is hereby deemed to be a nullity, (iii) there shall be delivered to Lessor, within ten (10) days after the commencement of the term of the proposed sublease, notice of such commencement and a fully executed copy of the proposed sublease (unless previously submitted) and (iv) Lessee shall pay to Lessor, as Additional Rent, one half of all of the Excess Consideration. 50 E. Anything herein contained to the contrary notwithstanding: (i) Lessee shall not advertise but may list its space for subletting or assignment, and may list its space at a rental rate lower than the rental rate then being paid by Lessee to Lessor only with respect to subletting (but not assignment) and (ii) No assignment or subletting shall be made to any person or entity which shall at that time otherwise be a tenant, sub-tenant or other occupant of any part of the Property or which shall within the prior Four (4) months have been negotiating with Lessor to become such a tenant, sub-tenant or occupant of the Property. ARTICLE 28 - SUBORDINATION SECTION 28.01. This Lease, and all rights of Lessee hereunder, are and shall be subject and subordinate in all respects to (a) all present and future ground leases, overriding leases and underlying leases and/or grants of term of the Property, the Building, the Building Equipment and/or any appurtenance thereto of which Lessor has notified Lessee (collectively, the "Superior Lease"), (b) all mortgages and building loan agreements, including leasehold mortgages, deeds of trust, and building loan agreements, which may now or hereafter affect the Property, the Building, the Building Equipment and/or any appurtenance thereto, of which Lessor has notified Lessee (collectively, the "Mortgage"), whether or not the Mortgage shall also cover other land and/or buildings, and (c) each and every advance made or hereafter to be made under the Mortgage and to all renewals, modifications, replacements, substitutions and extensions of any Superior Lease and the Mortgage and spreaders and consolidations of the Mortgage. The provisions of this Section shall be self-operative and no further instrument of subordination shall be required. In confirmation of such subordination, Lessee shall promptly execute and deliver, at its own cost and expense, an instrument in recordable form to evidence such subordination. If, in connection with the obtaining, continuing or renewing of financing for which the Demised Premises or the interest of the lessee under the Superior Lease represents collateral in whole or in part, a bank, insurance company or other lender shall request reasonable modifications of this Lease as a condition of such financing, Lessee will not unreasonably withhold or delay its consent thereto, provided that such modifications do not increase the monetary obligations of Lessee under this Lease or materially increase the other obligations of Lessee hereunder or materially and adversely affect the rights of Lessee under this Lease. Lessor represents that as of the date hereof, the Property is not encumbered by a Superior Lease or Mortgage. 51 SECTION 28.02. If at any time prior to the expiration of the Term, the holder of the Mortgage shall become the owner of the Demised Premises as a result of foreclosure of its mortgage or by reason of an assignment of the lessee's interest under any such lease or conveyance of the Demised Premises, Lessee agrees, at the election and upon demand of any owner of the Demised Premises, or of the holder of any Mortgage or Superior Lease (including a leasehold mortgage) in possession of the Demised Premises, to attorn, from time to time, to any such owner, or lessee, upon the then executory terms and conditions of this Lease, provided that such owner, holder or lessee, as the case may be, shall then be entitled to possession of the Demised Premises. No such owner, holder or lessee shall be liable for any previous acts or omission of Lessor under this Lease (except that this provision shall not be construed to relieve such person from any obligation thereafter to be performed), nor shall such owner holder or Lessee be subject to any offset which shall have theretofore accrued to Lessee against Lessor, or be bound by any previous modification of this Lease, not expressly provided for in this Lease, entered into after the date of the Mortgage, or Superior Lease, or by any previous prepayment of more than one month's Fixed Rent. The foregoing provisions of this Section shall enure to the benefit of any such owner, holder or lessee, shall apply notwithstanding that, as a matter of law, this Lease may terminate upon the termination of the Superior Lease, or the foreclosure (including judgment of foreclosure and sale) of the Mortgage, shall be self-operative upon any such demand, and no further instrument shall be required to give effect to said provisions. Lessee, however, upon demand of any such owner, holder or lessee, agrees to execute, from time to time, instruments in confirmation of the foregoing provisions of this Section, acknowledging such attornment and setting forth the terms and conditions of its tenancy. Nothing contained in this Section shall be construed to impair any right otherwise exercisable by any such owner, holder or lessee. ARTICLE 29 - SURRENDER; REMOVAL OF LESSEE'S PROPERTY SECTION 29.01. On the last day of the Term or on the earlier termination of the Term, Lessee shall peaceably and quietly leave, surrender and deliver the Demised Premises to Lessor, together with (a) all alterations, changes, additions and improvements, which may have been made upon the Demised Premises, and (b) except for Lessee's Property, all fixtures and articles of personal property of any kind or nature which Lessee may have installed or affixed on, in, or to the Demised Premises for use in connection with the operation and maintenance of the Demised Premises (whether or not said property be deemed to be fixtures), all of the foregoing to be surrendered in good, substantial and sufficient repair, order and condition, reasonable use, wear and tear, and damage by fire or other casualty, excepted, and free of occupants and sublessees. SECTION 29.02. On or prior to the Expiration Date or any earlier termination of this Lease, Lessee shall remove Lessee's Property, and any items referred to in clauses (a) or (b) of Section 29.01, which Lessor shall request Lessee to remove (unless Lessor shall have waived such right as to any item referred to in clause (a) of Section 29.01 at the time of the granting of consent with respect thereto under Article 25), and Lessee shall pay or cause to be paid the cost of repairing or remedying any damage caused thereby, provided that no item of Lessee's Property may be removed if its removal would impair the integrity (structural or otherwise) of the Building or Building Equipment. All property not so removed shall be deemed abandoned and may either be retained by Lessor as its property or disposed of, without accountability, at Lessee's sole cost, expense and risk, in such manner as Lessor may see fit. 52 SECTION 29.03. If the Demised Premises are not surrendered in accordance with the provisions of this Article upon the expiration or termination of this Lease, Lessor shall have all rights given at law or in equity, in the case of holdovers, to remove Lessee and anyone claiming through or under Lessee. In any event, Lessee shall and does hereby indemnify Lessor against all loss or liability arising from delay by Lessee in so surrendering the Demised Premises, including any claims made by any succeeding lessees founded on such delay. Lessee expressly waives, for itself and for any person claiming through or under Lessee (including creditors), any rights which lessee or any such person may have under the provisions of any law in connection with any holdover summary proceedings which Lessor may institute to enforce the provisions of this Article. Lessee's obligations under this Article shall survive the expiration or termination of this Lease. SECTION 29.04. Lessee acknowledges the extreme importance to Lessor that possession of the Demised Premises be surrendered at the expiration or sooner termination of this Lease. In the event that Lessee fails to vacate the Demised Premises at the expiration or sooner termination of this Lease, or fails to notify Lessor of its option to extend this Lease for the Extension Term (as hereinafter defined), Lessee shall be obligated to pay Lessor damages in an amount equal to Two Hundred (200%) percent of the annual Fixed Rent and Additional Rent provided for on the day preceding the Expiration Date for such period of time that Lessee holds over on a per diem basis. ARTICLE 30 - RENEWAL TERM SECTION 30.01. Lessee named herein, shall have the right, at its option, to extend this Lease for a term ("Renewal Term") of Five (5) years (to commence on the Expiration Date originally provided for herein and to end at noon on the Fifth (5th) anniversary of such Expiration Date originally provided for herein) by giving Lessor notice of such election at any time but not less than Six (6) months prior to the Expiration Date originally provided for herein (time being of the essence with respect thereto), and upon the giving of such notice this Lease thereupon shall, subject to the provisions of Section 30.02, be automatically extended for the Renewal Term with the same force and effect as if the Renewal Term had been originally included in the Term, without the execution of any further instrument. SECTION 30.02. Any notice of election to exercise the option to extend as hereinbefore provided must be in writing and sent to Lessor as provided in Article 21. Neither the option granted to Lessee in this Article to extend the Term, nor the exercise of such option by Lessee, named herein shall prevent Lessor from exercising any option or right granted or reserved to Lessor in this 53 Lease to terminate this Lease, and the effective exercise of any such right of termination by Lessor shall terminate any such renewal or extension and any right of Lessee to any such renewal or extension, whether or not Lessee shall have exercised any such option to extend the Term. Any such option or right on the part of Lessor to terminate this Lease pursuant to the provisions hereof shall continue during any Renewal Term. SECTION 30.03. All of the terms, covenants and conditions of this Lease shall continue in full force and effect during the Renewal Term except that (i) the Fixed Rent for the Renewal Term shall be as provided in Section 30.04 (all other rent and charges payable by Lessee remaining unaffected), and (b) there shall be no further privilege of extension of this Lease beyond the Renewal Term. SECTION 30.04. During the Renewal Term, Lessee shall pay to Lessor annual Fixed Rent, at the same times and in the same manner as in the Term originally provided for, as follows: A. During and in respect of the period from December 1, 2005 through November 30, 2006 (both dates inclusive), an amount equal to Fifty-Eight Thousand, Three Hundred and Ninety and 08/100 ($58,390.08) Dollars (inclusive of electric) payable in equal monthly installments of Four Thousand, Eight Hundred and Sixty-Five and 84/100 ($4,865.84) Dollars (inclusive of electric); and B. During and in respect of the period from December 1, 2006 through November 30, 2007 (both dates inclusive), an amount equal to Sixty Thousand, Eighteen and 00/100 ($60,018.00) Dollars (inclusive of electric) payable in equal monthly installments of Five Thousand, One and 50/100 ($5,001.50) Dollars (inclusive of electric); and C. During and in respect of the period from December 1, 2007 through November 30, 2008 (both dates inclusive), an amount equal to Sixty-One Thousand, Six Hundred and Ninety-Four and 76/100 ($61,694.76) Dollars (inclusive of electric) payable in equal monthly installments of Five Thousand, One Hundred and Forty-One and 23/100 ($5,141.23) Dollars (inclusive of electric). 54 D. During and in respect of the period from December 1, 2008 through November 30, 2009 (both dates inclusive), an amount equal to Sixty-Three Thousand, Four Hundred and Twenty-One and 80/100 ($63,421.80) Dollars (inclusive of electric) payable in equal monthly installments of Five Thousand, Two Hundred and Eighty-Five and 50/100 ($5,285.50) Dollars (inclusive of electric); and E. During and in respect of the period from December 1, 2009 through November 30, 2010 (both dates inclusive), an amount equal to Sixty-Five Thousand, Two Hundred and 68/100 ($65,200.68) Dollars (inclusive of electric) payable in equal monthly installments of Five Thousand, Four Hundred and Thirty-Three and 39/100 ($5,433.39) Dollars (inclusive of electric). ARTICLE 31- THIS ARTICLE HAS BEEN INTENTIONALLY OMITTED ARTICLE 32- BROKERS SECTION 32.01. Lessee and Lessor each represent that in connection with this Lease it dealt with no broker, other than FMB Real Estate Services, Inc. (the "Brokers") nor has Lessee or Lessor had any correspondence or other communication in connection with this Lease with any other person who is a broker, and that so far as Lessee and Lessor are aware the Brokers are the only brokers who negotiated this Lease. Each party hereby indemnifies the other party and holds it harmless from any and all loss, cost, liability, claim, damage, or expense (including court costs and attorneys' fees) arising out of any inaccuracy of the above representation. Lessor agrees to pay the Brokers all commissions due for its services pursuant to a separate written agreement. ARTICLE 33- RIGHT OF FIRST OFFER SECTION 33.01.A. From and after the Commencement Date, Lessor agrees that prior to offering for lease any contiguous space on the Third (3rd) floor of the Building (subject to the rights of other lessees), it shall give Lessee notice of and the right to, at its option, expand the Demised Premises herein to include all such additional space (the "Additional Space") with occupancy to commence on the Additional Space Commencement Date (as hereinafter defined) and to end on the Expiration Date originally provided for herein. 55 B. Lessee shall, within Ten (10) days after receipt of the notice from Lessor that the Additional Space will become available for hire, notify Lessor of its intention to lease the Additional Space (time being of the essence with respect thereto). Lessee's failure to notify Lessor within the Ten (10) day period shall be deemed a waiver of the right to hire the Additional Space. In the event that Lessee shall elect to hire the Additional Space, same shall be deemed added to and a part of the Demised Premises, with the same force and effect as if originally so demised under this Lease as of the Additional Space Commencement Date. C. Lessee shall have the right to inspect the Additional Space prior to exercising its rights herein. Lessee agrees to accept the Additional Space in its "AS IS" state and condition on the Additional Space Commencement Date without any representation or warranty, express or implied, in fact or by law, by Lessor, and without recourse to Lessor, as to title thereto, the nature, condition or usability thereof or as to the use or occupancy which may be made thereof. D. As used herein the "Additional Space Commencement Date" shall be the date which is the sooner of: (1) the date specified in Lessor's notice or (2) the date which on which Lessee occupies all or a part of the Additional Space. SECTION 33.02. Any notice of election to exercise the right to expand the Demised Premises as hereinbefore provided must be in writing and sent to Lessor as provided in Article 21. In addition, if prior to the exercise of the right to expand the Demised Premises, Lessee herein named shall have assigned this Lease, no notice by the then Lessee of election to exercise an option to expand shall be valid unless joined in or consented to in writing by Lessee herein named (which consent, in order for the exercise of such right to be effective, shall be delivered to Lessor at or prior to the time of the exercise of the right as to which consent of Lessee herein named had been given). Neither the right granted to Lessee in this Article to expand the Demised Premises, nor the exercise of such right by Lessee, shall prevent Lessor from exercising any option or right granted or reserved to Lessor in this Lease to terminate this Lease, and the effective exercise of any such right of termination by Lessor shall terminate any such renewal or extension and any right of Lessee to any such renewal or extension, whether or not Lessee shall have exercised any such right to expand the Demised Premises. Any such option or right on the part of Lessor to terminate this Lease pursuant to the provisions hereof shall apply to the Additional Space. 56 SECTION 33.03.A. All of the terms, covenants and conditions of this Lease applicable to the Demised Premises as originally constituted shall be applicable to the Demised Premises including the Additional Space, except that the annual Fixed Rent provided for in Article 2 shall be increased by the product of the Fair Market Rent as determined in Section 33.03.C hereof and the gross square footage of the Additional Space, and Lessee agrees to pay such amount from and after the Additional Space Commencement Date. B. During and in respect of the Term hereof, Lessee's Proportionate Share shall be increased by the gross square footage of all Additional Space that Lessee occupies in the Building. C. As used herein "Fair Market Rent" shall mean the annual rate equal to the annual fair rental value of the Additional Space (without deduction for the cash value of free rent and leasehold improvements), which non-equity tenants are then receiving in connection with a lease for comparable space in the Building on the Additional Space Commencement Date with a term equal to the term of this Lease and otherwise containing the same provisions as this Lease contains, as reasonably determined by Lessor. SECTION 33.04. If Lessee shall effectively exercise its right to hire the Additional Space, Lessor and Lessee, upon demand of either, shall execute and deliver to each other duplicate originals of an instrument, duly acknowledged, setting forth (i) that the Demised Premises have been expanded to include the Additional Space, (ii) the amount of such Additional Space, (iii) the annual Fixed Rent payable during the Term, (iv) that such Additional Space is upon and subject to all of the terms, covenants, conditions and limitations contained herein, and (v) Lessee's Proportionate Share as increased by the Additional Space. ARTICLE 34- DEFINITIONS SECTION 34.01 For the purposes of this Lease and all agreements supplemental to this Lease, unless the context otherwise requires: (a) "Additional Rent" shall mean all sums of money, other than Fixed Rent, as shall become due from and payable by Lessee hereunder. 57 (b) "Building" shall mean the building, structures and improvements, and related facilities, including paved areas and all parking lots adjacent and/or appurtenant thereto (other than "Building Equipment", as such term is herein defined) known as RiverView at Purchase and located at 287 Bowman Avenue, Purchase, New York 10577, now or hereafter erected, constructed or situated on the land underlying or appurtenant to the Building or any part thereof, together with all alterations, additions and improvements thereto and all restorations and replacements thereof. (c) "Building Equipment" shall mean all machinery, systems, apparatus, facilities, equipment and fixtures of every kind whatsoever now or hereafter belonging, attached to and used exclusively (whether or not same constitute fixtures), or procured for exclusive use, in connection with the operation or maintenance of the Building and/or Property, including water, sewer and gas connections, all heating, electrical, lighting, and power equipment, engines, furnaces, boilers, pumps, tanks, dynamos, motors, generators, conduits, plumbing, cleaning, fire prevention, refrigeration, ventilating, air cooling, air conditioning equipment and apparatus, cranes, elevators, escalators, ducts and compressors and any and all replacements thereof and additions thereto; but excluding, however, (i) Lessee's Property, (ii) property of any sublessee which sublessee may be authorized to remove from the Building upon and subject to the terms and conditions of its sublease and this Lease, (iii) property of contractors servicing the Building, and (v) improvements for water, gas, and electricity and other similar equipment or improvements owned by any public utility company or any governmental agency or body. (d) "Cost" shall mean that Lessor will perform all such services on a "cost plus" basis, whereby Cost shall include, but not be limited to, the cost of sub-contractors, material, equipment rental, transportation and delivery items, permits, fees, taxes, insurance's, debris removal, demolition, safety protection, labor, supervision, construction management, purchasing, expediting and material handling, and shall also include a contingency, based on the complexity of the work to be performed, of up to five percent (5%) of the total of all such items otherwise included within such definition (the "Trades"). In addition, with respect to Lessor's Work as provided for in Article 8 of this Lease or Alterations as provided for in Article 25 of this Lease, Cost shall also include Lessor's fee for acting as project manager. 58 (e) "Environmental Laws" shall mean any and all Federal, state, local, or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees or requirements of any Governmental Authority regulating, relating to or imposing liability or standards of conduct concerning environmental conditions at the Demised Premises, Building or Property as now or may at any time hereafter be in effect, including but not limited to and without limiting the generality of the foregoing, The Clean Water Act also known as the Federal Water Pollution Control Act, 88 U.S.C. Section 1251 ET SEQ., the Toxic Substance Control Act, 15 U.S.C. Section 2601 ET SEQ., the Clean Air Act, 42 U.S.C. Section 7401 ET SEQ., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Section 186 ET SEQ., the Safe Drinking Water Act, 42 U.S.C. Section 300f ET SEQ., the Surface Mining Control and Reclamation Act, Section 1201 ET SEQ., 80 U.S.C. Section 1201 ET SEQ., the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. Section 9601 ET SEQ., the Superfund Amendment and Reauthorization Act of 1986 ("SARA"), Public Law 99-499, 100 Stat. Section 1818, the Emergency Planning and Community Right to Know Act, 42 U.S.C. Section 1101 ET SEQ., the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. Section 6901 ET SEQ., and the Occupational Safety and Health Act as amended ("OSHA"), 29 U.S.C. Section 655 and Section 657, together with any amendments thereto, regulations promulgated thereunder and all substitutions thereof. (f) "Hazardous Material" shall mean (i) Any hazardous, toxic or dangerous waste, substance or material defined as such in (or for the purpose of) CERCLA, SARA, RCRA, or any other Environmental Law as now or at any time hereafter in effect; (ii) any other waste, substance or material that exhibits any of the characteristics enumerated in 40 C.F.R. Sections 261.20 through 261.24, inclusive, and those extremely hazardous substances listed under Section 902 of SARA that are present in threshold planning or reportable quantities as defined under SARA and toxic or hazardous chemical substances that are present in quantities that exceed exposure standards as those terms are defined under Section 6 and 8 of OSHA and 29 C.F.R. Part 1910; (iii) any asbestos or asbestos containing substances whether or not the same are defined as hazardous, toxic, dangerous waste, a dangerous substance or dangerous material in any Environmental Law; (iv) "Red Label" flammable materials; (v) all Laboratory Waste and by-products; and (vi) all biohazardous materials. 59 (g) "Insurance Requirements" shall mean the rules, regulations, orders and other requirements of any insurance rating or regulatory organization having jurisdiction of, and which are applicable to, the Demised Premises and of any liability, casualty, or other insurance policy which either Lessor or Lessee is required hereunder to maintain or may maintain hereunder. (h) "Legal Requirements" shall mean the requirements of every statute, law, ordinance, regulation, rule requirement, order or directive, now or hereafter made by any Federal, state or local government or any department, political subdivision, bureau, agency, office or officer thereof, or any other governmental authority having jurisdiction (a "Governmental Authority") with respect to and applicable to (i) the Demised Premises and appurtenances thereto, and/or (ii) the condition, equipment, maintenance, use or occupation of the Demised Premises, including the making of an alteration or addition in or to any structure upon, connected with or appurtenant to the Demised Premises. (i) "Lessee's Delays" shall mean any and all delays caused by or attributable to any action or failure or refusal of Lessee to perform a duty of, Lessee or any person claiming through or under Lessee, or any agent, servant, employee, director, shareholder, contractor or invitee of Lessee or any such person. (j) "Lessee's Property" shall mean all articles of personal property and fixtures and other property, which have been installed or affixed on, in or to, or brought into, the Demised Premises, at the expense of Lessee or any permitted sublessee of Lessee or other permitted occupant of the Demised Premises and without any credit or allowance by Lessor, which are not replacements or any property of Lessor (whether any such replacement is made at Lessee's expense or otherwise), and which do not constitute alterations, changes, additions, or improvements to the Demised Premises or any appurtenances thereto. (k) "Lessee's Proportionate Share" shall mean a fraction the numerator of which is equal to the rental square footage that Lessee occupies in the Demised Premises, and the denominator of which is equal to the total rental square footage of the Building as it presently exists or may hereinafter be increased or enlarged. As of the Commencement Date, the total rentable square footage of the Building shall be deemed to consist of One Hundred and Twenty Thousand (120,000), the total rentable square footage of the Demised Premises shall be deemed to consist of One Thousand, Six Hundred and Fifty 60 (1,650) square feet, and Lessee's Proportionate Share shall be deemed to be One and Thirty-Eight Hundredths (1.38%) percent. Lessee and Lessor agree that Lessee's Proportionate Share is not based upon any particular method of measuring the Demised Premises and/or the Building and represents an agreed upon percentage and shall not be contestable by Lessee at a future date. (l) "Lessor's Agents" shall be deemed to include agents, servants, employees, directors, officers, shareholders and contractors of Lessor. (m) "Normal Working Hours" shall mean only those between the hours of 8:00 A.M. and 6:00 P.M., Monday through Friday, exclusive of New Years Day, the day designated as the legal holiday for the celebration of Washington's Birthday, Memorial Day, Fourth of July, Labor Day, Thanksgiving Day and Christmas Day and all union holidays. (n) "Unavoidable Delays" shall mean any and all delays beyond Lessor's reasonable control, including Lessee's Delays, governmental restrictions, governmental preemption, strikes, labor disputes, lockouts, shortages of labor and materials, enemy action, civil commotions, riot, insurrection and fire, other casualty and other acts of God. (o) "Untenantable" shall mean actual inability to use space in the Demised Premises for the purposes permitted by Section 4.01. SECTION 34.02. For the purposes of this Lease and all agreements supplemental to this Lease, unless the context otherwise requires: (a) The terms "include", "including", and "such as" shall be construed as if followed by the phrase "without being limited to". (b) Whenever this Lease provides that Lessee shall pay Lessor interest at the "maximum legal rate" then interest shall be payable at the highest rate of interest permitted at the relevant time by applicable law to be paid by Lessee without impairing the validity or enforceability of this Lease and without incurring any civil or criminal penalty. 61 (c) The term "obligations of this Lease" and words of similar import, shall mean the covenants to pay Fixed Rent and Additional Rent and all of the other covenants and conditions contained in this Lease. Any provision in this Lease that one party or the other or both shall do or not do or shall cause or permit or not cause or permit a particular act, condition or circumstance shall be deemed to mean that such party so covenants or both parties so covenant, as the case may be. (d) The term "repair" shall be deemed to include restoration and replacement as may be necessary to achieve and/or maintain good working order and condition. (e) Reference to "substantially complete" and words of similar import shall be deemed to mean, with regard to construction work, completion but for such minor details of work, the non-completion of which would not materially interfere with the utility of the affected space and a certificate of occupancy has been issued by the Governmental Authority having jurisdiction over the Demised Premises. (f) Reference to "termination of this Lease" includes expiration or earlier termination of the Term or cancellation of this Lease pursuant to any of the provisions of this Lease or to law. Upon the termination of this Lease, the Term and estate hereby granted by this Lease shall end at noon on the date of termination as if such date were the date of expiration of the Term and neither party shall have any further liability or obligation to the other after such termination (i) except as shall be expressly provided for in this Lease, and (ii) except for such obligations as by their nature or under the circumstances can only be, or by the provisions of this Lease, may be, performed after such termination, and, in any event, unless expressly otherwise provided in this Lease, any liability for a payment which shall have accrued to or with respect to any period ending at the time of termination shall survive the termination of this Lease. ARTICLE 35- MISCELLANEOUS SECTION 35.01. This Lease shall be governed in all respects by the laws of the State of New York applicable to leases made and to be performed wholly therein. SECTION 35.02. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, single or plural, as the identity of the person or persons or entity or entities in question may require. The term "person" shall be deemed to include individuals, corporations, partnerships, joint ventures, firms, associations and other entities. SECTION 35.03. All provisions of this Lease shall be deemed and construed to be "conditions" as well as "covenants", as though the words specifically expressing or importing covenants and conditions were used in each separate provision hereof. 62 SECTION 35.04. If any provision of this Lease or application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such provision or provisions to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and every provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. SECTION 35.05. The article headings in this Lease are inserted only as a matter of convenience and reference and are not to be given any effect whatsoever in construing this Lease. SECTION 35.06. This Lease contains the entire agreement between the parties regarding the Demised Premises and shall not be modified in any manner except by an instrument in writing executed by the parties or their respective successors in interest. No waiver or modification by either party or any provision or covenant of this Lease shall be deemed to have been made unless such waiver is expressed in writing and signed by the party against whom such waiver or modification is sought. SECTION 35.07. Lessee agrees with Lessor that Lessee will not record this Lease or any memorandum of this Lease without the prior written consent of Lessor. SECTION 35.08. The covenants, agreements, terms, provisions and conditions contained in this Lease shall apply to and inure to the benefit of and be binding upon Lessor and Lessee and their respective successors and assigns, except as otherwise provided for herein. SECTION 35.09. Upon request of Lessor, but not more often than once each fiscal or calendar year, as the case may be, Lessee and any such person shall submit to Lessor true, correct, current and complete financial statements of Lessee and its affiliates, if any. SECTION 35.10. Solely for the purposes of a proceeding under the present or future federal bankruptcy act or any other present or future applicable federal, state or other statute or law (a "bankruptcy law"), the following terms and conditions have been agreed upon by Lessor and Lessee: 63 (a) In the event of a default by Lessee under this Lease continuing after the filing of a voluntary or involuntary petition (a "pre-petition default") under any bankruptcy law, a period exceeding thirty (30) days for curing such default shall in no event be deemed reasonable. (b) In order to be deemed adequate assurance by Lessee for the cure of any pre-petition default, Lessee, or the trustee, as the case may be, must (i) deposit with a banking institution selected by Lessor securities, in negotiable form, issued by the United States of America, with a fair market value, at all relevant times, equal to twice the amount of rent due or the cost, as estimated by Lessor of curing the pre-petition default, as the case may be, or (ii) grant to Lessor a security interest or lien, which shall be superior to any and all claims and liens, on any of Lessee's property that is valued at liquidation at twice the amount of such rent or cost. (c) In order to be deemed adequate assurance by Lessee, with respect to the payment of rent due after the filing of a voluntary or involuntary petition under any bankruptcy law, Lessee must (i) deposit with a banking institution selected by Lessor securities in negotiable form, issued by the United States of America, with a fair market value, at all relevant times, of not less than four (4) months' rent, or (ii) grant a security interest or lien, which shall be superior to any and all claims and liens, in any of Lessee's property that is valued at liquidation at not less than six (6) months' rent. SECTION 35.11. Lessee represents and warrants: (i) that it is a corporation duly organized in its state of incorporation and authorized to do business in the State of New York; (ii) that it has all requisite authority to execute and to enter into this Lease and that the execution of this Lease will not constitute a violation of any internal by-law, agreement or other rule of governance, and (iii) that the individual executing this Lease on behalf of Lessee is so authorized and Lessee shall supply Lessor with a verified resolution or similar written documentation evidencing such authority upon or prior to Lessee's execution of this Lease. 64 IN WITNESS WHEREOF, the parties to this Lease have executed the same on the day and in the year first above written. PHOENIX CAPITAL PARTNERS, LLC, (Lessor) By: FMB Asset Management I, LLC, a Member By: /s/ Frank M. Boccanfuso -------------------------------------- Name: Frank M. Boccanfuso Title: Managing Member MVC CAPITAL, (Lessee) By: /s/ Jaclyn Shapiro -------------------------------------- Name: Jaclyn Shapiro Title: Assistant Secretary STATE OF NEW YORK ) )SS.: COUNTY OF WESTCHESTER ) On this 6th day of January, 2004, before me, the undersigned, personally appeared FRANK BOCCANFUSO, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person on behalf of which the individual(s) acted, executed the instrument. /s/ Ralph D. Amicucci Notary Public STATE OF NEW YORK ) )SS.: COUNTY OF NEW YORK ) On this 30th day of December, 2003, before me, the undersigned, personally appeared Jaclyn Shapiro, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s)is(are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person on behalf of which the individual(s) acted, executed the instrument. /s/ Henry B. Trattner Notary Public EX-10 5 srz9505054v18.txt EXHIBIT 10.2--AGMT BET. FUND AND M. TOKARZ AGREEMENT This AGREEMENT (this "Agreement") dated as of November 1, 2003, is between meVC Draper Fisher Jurvetson Fund I, Inc. (the "Company") and Michael Tokarz ("Tokarz") (each, a "Party" and together, the "Parties"). WHEREAS, the Company desires to engage the services of Tokarz and Tokarz desires to be engaged by the Company. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. ENGAGEMENT AND ACCEPTANCE. The Company hereby engages Tokarz, and Tokarz hereby agrees to perform services for the Company as described in Section 2, in accordance with the terms and conditions hereof, for a term commencing as of November 1, 2003, and continuing until October 31, 2005, or such later date as mutually agreed to by the parties (the "Management Term"). 2. DUTIES DURING THE MANAGEMENT TERM. During the Management Term, Tokarz will serve in the capacity of (a) Chairman of the Company, the most senior executive officer of the Company; provided that, in the event he is not duly elected as a Director of the Company at the Company's 2004 Annual Meeting, he shall continue to function as the senior most executive officer of the Company (but under a different title to be determined by the Board of Directors); and (b) Portfolio Manager. Tokarz shall report solely and directly to the Board of Directors of the Company (the "Board"). Subject to the oversight of the Board, Tokarz will be responsible for management of the Company's operations and business affairs, including but not limited to (i) implementing the Company's investment objectives and strategies as set forth in the Company's registration statement, as such objectives and strategies have been amended or may be amended, by the Board; and (ii) retaining staff and office space and procuring services as appropriate and reasonably necessary to carry out the business of the Company. Tokarz will have such authority and responsibilities as are customarily performed by one holding such positions in the same or similar businesses or enterprises as those of the Company. During the Management Term, the Company will establish office space at a location and on such terms as is approved by the Board. Following the expiration of the Management Term, Tokarz shall not be a director, officer or employee of the Company and shall have none of the authority or responsibilities described in this Section 2. 3. COMPENSATION. 3.1 For his services hereunder, following the completion of any Fiscal Year in which any portion of the Management Term is in effect, the Company will pay Tokarz an amount equal to the lesser of (a) 20% of the Company's net income for the Fiscal Year; or (b) the sum of (i) 20% of the net capital gains realized by the Company during the Management Term with respect to Tokarz Investments, less any amounts previously paid to Tokarz pursuant to this sub-clause (b)(i); and (ii) the amount, if any, by which the Company's total expenses for the Compensation Period were less than two percent of the Company's net assets as of the last day of the Compensation Period. Any payments to be made under this Section 3.1 shall be calculated based upon the completed audited financials of the Company for the applicable Fiscal Year and shall be paid as soon as practicable following the completion of such audit. Payments under this Section 3.1 are referred to herein as "Compensation." For purposes of this Agreement: (a) "Fiscal Year" means a fiscal year of the Company, which is currently a 12-month period ending on October 31; and (b) "Compensation Period" means (i) the applicable Fiscal Year, and (ii) if the Management Term is terminated other than on the last day of a Fiscal Year, the period from the commencement of such Fiscal Year through the date of such termination; and (c) "Tokarz Investment" means an investment made by the Company during the Management Term, other than investments pending at the commencement of the Management Term and any investments made during the Management Term by the Company over the written objection of Tokarz. 3.2 In the event net capital gains are realized on Tokarz Investments disposed of after the Management Term, Tokarz will be eligible to receive a percentage of the net realized capital gains from each Tokarz Investment that is disposed of after the end of the Management Term in accordance with the schedule set forth in Exhibit A hereto (the "Post Term Payments"). The Post Term Payments, if any, shall be payable following the Company's receipt of the audited financial statements for the Fiscal Year in which the Tokarz Investment realized such a net capital gain. 3.3 Compensation shall be calculated by the Company based on the Company's audited financial statements for the applicable Fiscal Year and shall be paid to Tokarz promptly after the Company's receipt of such audited financial statements. The aggregate amount of Compensation and Post Term Payments shall not exceed (a) 20% of the net capital gains realized by the Company with respect to Tokarz Investments plus (b) the amount, if any, by which the Company's total expenses for the last Fiscal Year of the Management Term were less than two percent of the Company's net assets as of the last day of the Management Term (the "Limitation"). Following the first anniversary of the termination of the Management Term, and at least once every Fiscal Year thereafter, the Company shall determine, on a cumulative basis, based on the audited financial statements for the Company, whether the aggregate amount of Compensation and Post Term Payments exceeded the Limitation (the "Excess"). Tokarz shall return to the Company within 30 business days of a request therefor an amount equal to the Excess (but in no event greater than an amount equal to the aggregate Compensation and the Post Term Payments). 3.4 During the Management Term, Tokarz shall be entitled to receive reimbursement for all reasonable and appropriate business expenses incurred by him in connection with his duties under this Agreement in accordance with the policies of the Company as in effect from time to time. 3.5 Tokarz may direct a portion of the Compensation and the Post Term Payments to active employees of the Company designated by Tokarz as part of their compensation packages during their employment. For the avoidance of doubt, Tokarz may not require the Company to direct or cause to be paid a portion of the Compensation or the Post Term Payments to any individual who is no longer an employee or officer of the Company at the time of such payment. This paragraph shall not affect Tokarz's obligation to return the Excess in accordance with Section 3.3 herein. -2- 3.6 Notwithstanding the foregoing, in the event of a termination of Tokarz's services during the Management Term, the Company's obligation to continue to pay Compensation and Post Term Payments as set forth in this Section 3 shall terminate except as provided for in Section 4 of this Agreement. 3.7 The Company agrees at all times to remain qualified as a "regulated investment company" as defined in Section 851 ET SEQ of the Internal Revenue Code of 1986, as amended, and to take all steps and actions necessary to maintain such status, including, without limitation to make such elections, registrations, investments and distributions necessary to maintain status as a regulated investment company. The Company agrees that if it shall fail to qualify as a regulated investment company for any reason, net income of the Company for purposes of this Section 3 shall nonetheless be calculated as if the Company were at all times qualified as a regulated investment company. 4. TERMINATION. 4.1 If the Management Term is terminated by the Company without Cause, by Tokarz for Good Reason, or due to Tokarz's death or Disability, Tokarz shall be entitled to (i) Compensation through the date of such termination determined in accordance with Section 3.1, (ii) Post Term Payments in accordance with Section 3.2, and (iii) reimbursement, pursuant to Section 3.4, of business expenses incurred by him to the date of such termination. 4.2 If, in the first Fiscal Year of the Management Term, the Management Term is terminated by Tokarz without Good Reason, Tokarz shall only be entitled to (i) Compensation through the date of such termination determined in accordance with Section 3.1; (ii) Post-Term Payments in accordance with Section 3.2, PROVIDED THAT, NOTWITHSTANDING THE SCHEDULE IN EXHIBIT A, any such payments respecting a Tokarz Investment shall equal 16% of the net capital gains realized on that Tokarz Investment; and (iii) reimbursement, pursuant to Section 3.4, of expenses incurred by him to the date of such termination. 4.3 If this agreement is terminated by the Company for Cause, the Company's only obligation to Tokarz shall be (i) Compensation through the date of such termination determined in accordance with Section 3.1; and (ii) reimbursement, pursuant to Section 3.4, of expenses incurred by him to the date of such termination. 4.4 Unless otherwise agreed to, in writing, by the Parties, upon the termination of the Management Term for any reason, Tokarz shall be deemed to have contemporaneously resigned (i) if a member, from the Board or any other board to which he has been appointed or nominated by or on behalf of the Company; and (ii) from all his positions with as an officer or employee of the Company. 4.5 For the purposes of this Agreement, "Cause" means (i) commission of a felony by Tokarz that affects the Company materially or is related, directly or indirectly, to the performance of any of Tokarz's duties or obligations hereunder, (ii) acts of dishonesty by Tokarz resulting or intending to result in personal gain or enrichment at the material expense of the Company, (iii) conduct by Tokarz in connection with his duties hereunder that is fraudulent, unlawful, or grossly negligent, or (iv) conduct which -3- constitutes a violation of applicable employment, labor or securities laws or related regulations (including but not limited to those of the New York Stock Exchange). 4.6 For the purposes of this Agreement, "Good Reason" means, without Tokarz's consent, (i) a material adverse reduction in Tokarz's responsibilities, position or duties or (ii) the Company's material breach of the Agreement. The Company shall have thirty (30) days after receipt of notice from Tokarz in writing specifying the deficiency to cure the deficiency that would result in Good Reason. 4.7 This Agreement may be terminated by either Party at any time upon at least thirty (30) days' written notice to the other Party. 5. RESTRICTIONS AND OBLIGATIONS OF TOKARZ. 5.1 CONFIDENTIALITY. (a) During the course of Tokarz's services under this Agreement and in connection with carrying out his duties hereunder, Tokarz will have access to certain material non-public information relating to the Company which is not readily available from sources outside the Company. The confidential and proprietary information, in any material respect, of the Company are among its most valuable assets, including but not limited to, information about business contacts, transactions, contracts, intellectual property, finances, personnel, clients, investment and competitive strategies, frameworks, or models, sales, financial, marketing, training and technical programs. The Company invested, and continues to invest, considerable amounts of time and money in its process, technology, know-how, obtaining and developing the goodwill of its customers, its other external relationships, its data systems and data bases, and all the information described above (hereinafter collectively referred to as "Confidential Information"), and any misappropriation or unauthorized disclosure of Confidential Information in any form would irreparably harm the Company. Tokarz acknowledges that such Confidential Information constitutes valuable, highly confidential, special and unique property of the Company. Tokarz shall hold in a fiduciary capacity for the benefit of the Company all Confidential Information which shall have been obtained by Tokarz in connection with his services under this Agreement which shall not be or become public knowledge (except for any information that is public information, other than information that becomes public information as a result of acts by Tokarz or representatives of Tokarz in violation of this Agreement). Confidential Information shall not include specific items which have become publicly available other than through Tokarz's unauthorized disclosure. Except as required by law or an order of a court or governmental agency with jurisdiction, Tokarz shall not, during the Management Term or at any time thereafter, disclose any Confidential Information, directly or indirectly, to any person or entity for any reason or purpose whatsoever, nor shall Tokarz use it in any way, except in the course of his services under this Agreement or to enforce any rights or defend any claims hereunder or under any other agreement to which Tokarz is a party, provided that such disclosure is relevant to the enforcement of such rights or defense of such claims and is only disclosed in the formal proceedings related thereto. Tokarz shall take all reasonable steps to safeguard the Confidential Information and to protect it against disclosure, misuse, espionage, loss and theft. Tokarz understands and agrees that Tokarz shall acquire no rights to any such Confidential Information. -4- (b) All files, records, documents, drawings, specifications, data, computer programs, evaluation mechanisms and analytics and similar items relating thereto or to the business of the Company, as well as all investor lists, specific customer information, compilations of product research and marketing techniques of the Company whether prepared by Tokarz or otherwise coming into Tokarz's possession in connection with his services under this Agreement, shall remain the exclusive property of the Company, and Tokarz shall not remove any such items from the premises of the Company, except in furtherance of Tokarz's duties under this Agreement. (c) As requested by the Company and at the Company's expense, from time to time and upon the termination of his services under this Agreement, Tokarz will promptly deliver to the Company all copies and embodiments, in whatever form, of all Confidential Information in Tokarz's possession or within his control (including, but not limited to, memoranda, records, notes, plans, photographs, manuals, notebooks, documentation, program listings, flow charts, magnetic media, disks, diskettes, tapes and all other materials containing any Confidential Information) irrespective of the location or form of such material. If requested by the Company, Tokarz will provide the Company with written confirmation that all such materials have been delivered to the Company as provided herein. 5.2 NON-SOLICITATION OR HIRE OF EMPLOYEES. During the Management Term and for a period of 12 months following the termination of the Management Term (for any reason), Tokarz shall not directly or indirectly solicit or attempt to solicit, any employee of the Company or any person who was an employee of the Company during the 12-month period immediately prior to the relevant date to terminate such employee's employment relationship with the Company in order, in either case, to enter into a similar relationship with Tokarz, or any other person or any entity in competition with the business of the Company. The Company realizes that, during the Management Term, Tokarz will recruit other professionals to be employed by the Company and that certain of these professionals will be individuals with whom Tokarz has an existing or prior professional relationship and/or individuals who will agree to be employed by the Company because of the opportunity to work with Tokarz (collectively, "Tokarz Recruits"). Notwithstanding anything in this Section 5.2 to the contrary, neither the resignation of the Tokarz Recruits from the Company nor Tokarz's subsequent hiring of, or association with, a Tokarz Recruit, shall constitute, in and of itself, a breach of the Agreement without further evidence of a solicitation by Tokarz. 5.3 PROPERTY. Tokarz acknowledges that all originals and copies of materials, records and documents generated by him or coming into his possession during his employment by the Company and prepared or received in connection with carrying out his responsibilities for the Company are the sole property of the Company ("Company Property"). During the Term, and at all times thereafter, Tokarz shall not remove, or cause to be removed, from the premises of the Company, copies of any record, file, memorandum, document, computer related information or equipment, or any other item relating to the business of the Company, except in furtherance of his duties under the Agreement. When Tokarz's employment with the Company terminates, or upon request of the Company at any time, Tokarz shall promptly deliver to the Company all copies of Company Property in his possession or control. -5- 5.4 REMEDIES; SPECIFIC PERFORMANCE. The Parties acknowledge and agree that Tokarz's breach or threatened breach of any of the restrictions set forth in this Section 5 will result in irreparable and continuing damage to the Company for which there may be no adequate remedy at law and that the Company shall be entitled to equitable relief, including specific performance and injunctive relief as remedies for any such breach or threatened or attempted breach. Tokarz hereby consents to the grant of an injunction (temporary or otherwise) against Tokarz or the entry of any other court order against Tokarz prohibiting and enjoining him from violating, or directing him to comply with any provision of this Section 5. Tokarz also agrees that such remedies shall be in addition to any and all remedies, including damages, available to the Company against him for such breaches or threatened or attempted breaches. In addition, without limiting the Company's remedies for any breach of any restriction on Tokarz set forth in this Section 5, except as required by law, Tokarz shall not be entitled to any payments set forth in Section 3.2 hereof if Tokarz breaches the covenants applicable to Tokarz contained in this Section 5. Tokarz will immediately return to the Company any such payments previously received under Section 3.2 and upon such a breach, and, in the event of such breach, the Company will have no obligation to pay any of the amounts that remain payable by the Company under Section 3.2. 6. CERTAIN UNDERSTANDINGS AND AGREEMENTS 6.1 The Company realizes that Tokarz has an extensive background in effecting corporate transactions for himself and his affiliated entities, in participation with others, and on behalf of others. The Company realizes that, due to the extent of his background, Tokarz has a variety of business interests and relationships with respect to such transaction activities that are ongoing. The Company understands that Tokarz is not prepared to terminate these interests, relationships or activities in order to enter into this Agreement. After due consideration of these factors and in consideration of the powers conferred under Section 122(17) of the Delaware General Corporation Law, the Company has determined that the benefits to the Company from Tokarz's services under this Agreement outweigh any detriment to the Company from the pursuit by Tokarz of such other interests, relationships or activities while serving under this Agreement. Accordingly, the Company and Tokarz have reached the agreements contained in this Section 6. 6.2 During the Management Term, Tokarz shall not be required to devote his full business time and attention to his duties under this Agreement, but shall devote such time as he believes, in his judgment, is necessary to fulfill his obligations under this Agreement. In this regard, the Company has determined to rely on Tokarz's professionalism and his determination with such matters and any such determination shall not subject Tokarz to any liability under this Agreement, although the Company retains the right to terminate this Agreement as provided herein. 6.3 The Company realizes that in the course of his activities during the Management Term, Tokarz may identify, develop or become aware of investment opportunities that are suitable for the Company ("Opportunities"). Opportunities may also be suitable investments for Tokarz or other entities in which Tokarz has an interest or others with whom Tokarz has a relationship (collectively, "Other Parties"). Tokarz agrees that any Opportunities that come to him from a director, officer or employee of the Company or which are submitted to him during the Management Term in his capacity as a officer or director of the Company or which are primarily investments in debt securities -6- (including debt securities, and any mezzanine investment, including mezzanine investments with an equity component) shall be Opportunities of the Company ("Company Opportunities"), and Tokarz will not pursue any such Company Opportunity with any Other Parties, unless (i) Tokarz shall have determined that such Company Opportunity is not suitable for the Company and (ii) the Board shall have concurred with such determination. With respect to all other Opportunities other than Company Opportunities, Tokarz shall have no obligation to offer such Opportunity to the Company and shall use his own judgment in determining whether to allocate such Opportunity to the Company or to Other Parties, and Tokarz shall have no liability to the Company with respect to any such allocation. Notwithstanding the foregoing, Tokarz may pursue a Company Opportunity on behalf of both the Company and the Other Parties, subject to compliance with applicable law, regulation and any applicable order granted by the Securities and Exchange Commission. 7. OTHER PROVISIONS. 7.1 NOTICES. Any notice or other communication required or which may be given hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid, and shall be deemed given when so delivered personally, telegraphed, telexed, or sent by facsimile transmission or, if mailed, four (4) days after the date of mailing, as follows: (a) If the Company, to: Robert Knapp C/O Millennium Partners L.P. 666 Fifth Avenue New York, NY 10103 and Schulte Roth & Zabel LLP 919 Third Avenue New York, NY 10022 Attention: Kenneth S. Gerstein, Esq. Telephone: (212) 756-2000 Fax: (212) 593-5955 (a) If Tokarz, to: Michael Tokarz The Tokarz Group, LLC Riverview at Purchase 287 Bowman Purchase, NY 10577 and -7- Wildman, Harrold, Allen & Dixon LLP 225 W. Wacker Drive Chicago, Illinois 60606 Attention: John L. Eisel, Esq. Telephone: (312) 201-2000 Fax: (312) 201-2555 7.2. ENTIRE AGREEMENT. This Agreement contains the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral, with respect thereto. 7.3 REPRESENTATIONS AND WARRANTIES BY TOKARZ. Tokarz represents and warrants that he is not a party to or subject to any restrictive covenants, legal restrictions or other agreements in favor of any entity or person which would in any way preclude, inhibit, impair or limit Tokarz's ability to perform his obligations under this Agreement, including, but not limited to, non-competition agreements, non-solicitation agreements or confidentiality agreements. 7.4 WAIVER AND AMENDMENTS. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms and conditions hereof may be waived, only by a written instrument signed by the Parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any right, power or privilege hereunder, nor any single or partial exercise of any right, power or privilege hereunder, preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. 7.5 GOVERNING LAW, DISPUTE RESOLUTION AND VENUE. This Agreement shall be governed and construed in accordance with the laws of the State of New York applicable to agreements made and not to be performed entirely within such state, without regard to conflicts of laws principles. The Parties hereto irrevocably agree to submit to the jurisdiction and venue of the courts of the State of New York, in any action or proceeding brought with respect to or in connection with the Agreement. 7.6 ASSIGNABILITY BY THE COMPANY AND TOKARZ. This Agreement, and the rights and obligations hereunder, may not be assigned by the Parties without written consent signed by the Parties. This Agreement shall not bind successors of the Company unless agreed to in writing by Tokarz. 7.7 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 7.8 HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning of terms contained herein. 7.9 SEVERABILITY. If any term, provision, covenant or restriction of this Agreement, or any part thereof, is held by a court of competent jurisdiction of any foreign, federal, state, county or local government or any other governmental, regulatory or administrative agency or authority to be invalid, void, unenforceable or against public policy for any reason, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected or impaired or invalidated. Tokarz acknowledges that the restrictive covenants contained in Section 5 are a condition of this Agreement and are reasonable and valid in temporal scope and in all other respects. -8- 7.10 JUDICIAL MODIFICATION. If any court determines that any of the covenants in Section 5, or any part of any of them, is invalid or unenforceable, the remainder of such covenants and parts thereof shall not thereby be affected and shall be given full effect, without regard to the invalid portion. If any court or arbitrator determines that any of such covenants, or any part thereof, is invalid or unenforceable because of the geographic or temporal scope of such provision, such court or arbitrator shall reduce such scope to the minimum extent necessary to make such covenants valid and enforceable. 7.11 TAX WITHHOLDING. The Company or other payor is authorized to withhold from any benefit provided or payment due hereunder, the amount of withholding taxes due any federal, state or local authority in respect of such benefit or payment and to take such other action as may be necessary in the opinion of the Board to satisfy all obligations for the payment of such withholding taxes. IN WITNESS WHEREOF, the Parties hereto, intending to be legally bound hereby, have executed this Agreement as of the day and year first above mentioned. /s/ Michael Tokarz ------------------------------------ Michael Tokarz MEVC DRAPER FISHER JURVETSON FUND I, INC. By: /s/ Robert S. Everett -------------------------------- Name: Robert S. Everett Title: Chief Executive Officer Time of Disposition Tokarz % of Net Gains following termination of the Management Term - ----------------------------------------- --------------------------------- Prior to the first anniversary of the 19% termination of the Management Term On or after the first anniversary of the 18% termination of the Management Term and prior to the second anniversary of the termination of the Management Term On or after the second anniversary of the 17% termination of the Management Term and prior to the third anniversary of the termination of the Management Term On or after the third anniversary of the 16% termination of the Management Term -10- EX-16 6 srz-exhibit16.txt LETTER FROM PRICEWATERHOUSECOOPERS [LOGO] PricewaterhouseCoopers LLP 125 High Street Boston, MA 02110-1707 Telephone (617) 530-5000 Facsimile (617) 530-5001 January 28, 2004 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Commissioners: We have read the statements made by meVC Draper Fisher Jurvetson Fund I, Inc. pursuant to Item 9 of form 10-K, as dated January 28, 2004. We agree with the statements concerning our Firm in such Form 10-K. Very truly yours, /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP EX-23 7 srzexhibit23-1.txt EXHIBIT 23.1 (PRICEWATERHOUSECOOPERS LLP) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the reference to our Firm in Item #6 of Form 10-K (000-28405) of meVC Draper Fisher Jurvetson Fund Inc. dated January 29, 2004 which appear in this Form 10-K. PricewaterhouseCoopers LLP Boston, Massachusetts January 29, 2004 EX-23 8 srzexhibit23-2.txt EXHIBIT 23.2 (ERNST & YOUNG LLP) CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Financial Data" and "Changes In and Disagreements with Accountants on Accounting and Financial Disclosures" in the Form 10-K and to the use of our report on MVC Capital dated January 23, 2004 in this Registration Statement (Form 10-K No. 000-28405) of MeVC Draper Fisher Jurvetson Fund Inc. D/B/A MVC Capital. ERNST & YOUNG LLP New York, New York January 29, 2004 EX-31 9 srz-exhibit31.txt TOKARZ/SPARK CERTIFICATIONS EXHIBIT 31 RULE 13A-14(A) CERTIFICATIONS I, Michael Tokarz, certify that: 1. I have reviewed this annual report on Form 10-K of meVC Draper Fisher Jurvetson Fund I, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financing reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal control over financial reporting which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: January 29, 2004 /s/ Michael Tokarz -------------------------------------- Michael Tokarz In the capacity of the officer who performs the functions of Principal Executive Officer meVC Draper Fisher Jurvetson Fund I, Inc. I, Frances Spark, certify that: 1. I have reviewed this annual report on Form 10-K of meVC Draper Fisher Jurvetson Fund I, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financing reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal control over financial reporting which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: January 29, 2004 /s/ Frances Spark ----------------------------------------- Frances Spark In the capacity of the officer who performs the functions of Principal Financial Officer meVC Draper Fisher Jurvetson Fund I, Inc. EX-32 10 srz-exhibit32.txt SECTION 1350 CERTIFICATION EXHIBIT 32 CERTIFICATION 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 meVC Draper Fisher Jurvetson Fund I, Inc., a Delaware corporation (the "Registrant"), certifies that: 1. The Registrant's annual report on Form 10-K for the period ended October 31, 2003 (the "Form 10-K") 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-K 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 meVC Draper Fisher Jurvetson Fund I, Inc. . /S/ MICHAEL TOKARZ - ------------------------------ Michael Tokarz Date: January 29, 2004 Frances Spark, in the capacity of the officer who performs the functions of Principal Financial Officer, of meVC Draper Fisher Jurvetson Fund I, Inc., a Delaware corporation (the "Registrant"), certifies that: 1. The Registrant's annual report on Form 10-K for the period ended October 31, 2003 (the "Form 10-K") 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-K 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 meVC Draper Fisher Jurvetson Fund I, Inc. . /S/ FRANCES SPARK - ---------------------------- Frances Spark Date: January 29, 2004 -----END PRIVACY-ENHANCED MESSAGE-----