Milestone Matters - Fall 2001 Newsletter

IN MEMORIAM September 11, 2001

"Think deeply, move quickly and go where the money is..."

--Milestone I Portfolio Company CEO

Editor's Corner

Dear Friends, Investors and Associates,

As this is written, the country is several weeks removed from the horrific events of September 11, 2001 and many people, New Yorkers and Washingtonians in particular, are trying to cope with painful personal losses. Millions more must contend with the pervasive emotional and psychological effects.

All the bearish trends characteristic of the global economy, the U.S. business scene and the local private equity markets which were evident on September 10, 2001, have accelerated and the advent of a recession seems certain. To this mix we must add the specter of uncertainty as people wonder how the U.S. and its assorted allies will respond and, in turn, how our adversaries will react. We may be faced with an attenuated series of moves and countermoves over a period of years, none of which is operationally or psychologically definitive from an U.S. perspective.

Fortunate enough to be located in midtown Manhattan, my colleagues and I returned to work on September 12th. The office was full of people but one sensed that the engine of commerce was only in first gear. Peoples' minds and hearts were elsewhere. However with each day, one senses the reemergence of what, for want of a better term, we refer to as "normal life". Sometimes resumption is difficult but at Milestone we think it essential on two counts. First, getting back to the tasks at hand is therapeutic and second, we feel that moving forward is our contribution to a vast U.S. collective response...a mosaic of resolve to which millions of Americans are committed.

Having said this, we remain bullish on the future. I think that history supports our optimism. That is to say, when the U.S populace is united and becomes aroused and the energies of its government are focused and harnessed, the results can be awe-inspiring. At the time of the Pearl Harbor attack in December of 1941, the U.S. had an ill-trained standing Army of 300,000. By the end of 1944, we had in the field a fighting force of 12,000,000 soldiers. Although we have paid a horrible price, no one would dispute that Americans today are aroused, united and focused. It remains to be seen how the U.S. will fare in confronting a new kind of enemy...messianic, ubiquitous and yet faceless.

At Milestone, we are sensitive to the current sluggish business conditions and to the still skittish private equity markets. This means that we cannot rely on additional investments from other funds to support the growth of our companies. Therefore, we are taking a highly selective, deliberate, disciplined approach to committing capital, confident that, in due course, Milestone and its investors will be rewarded.

We will keep you abreast of developments over the coming months. Thanks again for your support of Milestone and please contact Todd or me with any questions or comments you may have.

Yours truly,

Edwin A. Goodman
General Partner
Milestone Venture Partners

Milestone Portfolio News:

Carparts Technologies, a leading developer of business software and enterprise channel solutions for automotive aftermarket companies, continues to build market share and gain momentum. The recent acquisitions of AutoNet International, Anderson BDG, and CR Computing Solutions have been successfully integrated. The Company's solutions are used by more than 2,500 leading aftermarket businesses, including tier one manufacturers, rebuilders, warehouse distributors, jobbers, and national chain retailers such as Midas, Meineke, Jiffy Lube and Tuffy. The company has recently won several $1 Million plus contracts, and seen its revenues increase 50% during Q3 despite market conditions. Management believes its last round of financing, $18 million led by St. Paul Venture Capital in March 2001, will take the Company to profitability in mid 2002.

Content Directions, Inc., a software and services firm dedicated to helping its clients use the Digital Object Identifier (DOI) to increase revenues and cut costs, reached important milestones recently. The DOI is equivalent to a UPC (bar code) in the physical world. For Internet-based resources such as digital content, it uniquely identifies digital objects, provides a permanent link to the publisher, and facilitates
e-commerce, rights management, and digital distribution. CDI recently assisted McGraw-Hill, its flagship customer, in registering the first DOI-enabled eBook to be distributed on the Internet. In addition, at the Frankfurt Book Fair in Germany in October, Harold McGraw III, chairman, president and CEO of The McGraw-Hill Companies publicly stated: "We're implementing DOI right now, and if you're not familiar with its capabilities, you need to find out about it. It's a standard that will contribute strongly to the development of the e-book marketplace and the market for all digital content, and deserves the support of the publishing community." Bob Bolick, Vice President and Director of New Business Development for McGraw-Hill, also recently stated
"The ability of the DOI to connect the viewer to multiple points of information on the Web…is a 'powertool' for marketing. And the fact that everyone in the value chain can be involved and benefit is tremendous."

Evaliant Media Resources On October 3, 2001, Evaliant Media Resources LLC, the leading international provider of online advertising data, acquired the Internet AdWatch™ division of Forrester Research, Inc. (Nasdaq: FORR). As part of the acquisition, Forrester took a minority equity position in Evaliant as well as a seat on its board of directors. Evaliant tracks online advertising for more than 100,000 brands and products on over 2,700 US Web sites and more than 2,300 international sites, including Canada, Asia, Europe and Latin America. Internet AdWatch tracks the online marketing efforts of more than 15,000 advertisers across more than 650 UK, French, and German Web sites. Internet AdWatch and Evaliant’s multinational clients will be the first to be able to monitor leading online ad markets around the world from a single source. Internet AdWatch will continue to be based in London and will operate as a division of Evaliant.

Sector Trends

New liquidity option for VC investors?

BD Coastal LLC, a joint venture between Bdirect Capital, a Boston VC-backed
Fund-of-Funds manager, and Coastal Capital Partners, a San Francisco creator of mortgage-backed securities has fashioned a new venture capital product. BD Coastal is offering investors in venture capital funds a way to realize liquidity without triggering a secondary sale of their venture LP interests. The procedure is based on securitization of an underlying basket of assets, in this case, LP interests in a number of venture partnerships. Essentially, the investor borrows against the perceived value of these assets, subject to a negotiated discount, in order to extract cash. Presumably, the advantages of this approach versus a direct secondary sale are (i) the generation of cash while postponing capital gains taxes, (ii) the preservation of additional upside potential, and (iii) continuing control over one's portfolio.

It is a complicated exercise but if successful, it will spread and make the risk/reward ratio of VC investing more attractive to investors by providing another option for liquidity at the discretion of the investor. The table below summarizes the Securitization option in contrast to a Secondary Sale.

INVESTING EXCEEDS '98 LEVELS

Venture Capital Investments in NY Metro Companies

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