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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
-----------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) FOR THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 000-21593
---------
Western Pennsylvania Adventure Capital Fund
(Exact Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
Pennsylvania 25-1792727
------------ ----------
(State of Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Scott Towne Center, Suite A-113
2101 Greentree Road, Pittsburgh, PA 15220-1400
- ------------------------------------ ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (412) 279-1760
--------------
Securities Registered Pursuant to Section 12 (b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ----------------
Common Stock, $.01 Par Value None
- ---------------------------- ----
Securities Registered Pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
-
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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.
( )
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant at March 22, 2000: $6,159,920
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 22, 2000
----- -----------------------------
Common stock, $.01 par value 4,248,221
Documents Incorporated by Reference: None
1
Western Pennsylvania Adventure Capital Fund
Table of Contents
Page No.
Part I
Item 1. Business 3
Item 2. Properties 3
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote of Security Holders 4
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 5
Item 6. Selected Financial Data 5
Item 7. Management's Discussion and Analysis of Financial Condition And 8
Results of Operations
Item 8. Financial Statements and Supplementary Data 10
Item 9. Changes in and Disagreements with Accountants on Accounting 26
And Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners and Management 30
Item 13. Certain Relationships and Related Transactions 31
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 33
2
PART 1
Item 1. Business
- ------------------
Western Pennsylvania Adventure Capital Fund (the "Registrant") was incorporated
in Pennsylvania on May 23, 1996. The Registrant did not begin its primary
business activities until November 17, 1997, at which time the Registrant made
its first investment in an early stage development company in western
Pennsylvania.
During 1997, the Registrant concluded an offering of its common stock, par value
$0.01 (the "Common Stock") under Regulation E of the Securities Act of 1933 (the
"First Offering"). On September 10, 1999, the Registrant initiated a second
offering of its Common Stock under Regulation E of the Securities Act of 1933
(the "Second Offering"). This Second Offering concluded January 31, 2000. The
Registrant intends to invest the net proceeds of the offerings primarily in the
equity and/or debt securities (the "Portfolio Securities") of development stage
companies located in western Pennsylvania (the "Portfolio Companies"). The
Registrant is seeking to identify companies with annual sales of less than $1
million which, in the opinion of management, have the potential within five
years to achieve annual sales of at least $5 million and an internal rate of
return on invested capital in excess of 30%. However, the Registrant may invest
in Portfolio Companies which have higher initial sales or which do not meet
these specified financial targets if management of the Registrant otherwise
believes that the investment offers the potential for long-term capital
appreciation. The Registrant does not have a policy of investing any specified
percentage of its assets in debt or equity securities, and may invest 100% of
its assets in either type of security.
The Registrant generally invests from $50,000 to $250,000 per Portfolio Company,
but is not prohibited from making larger or smaller investments if management of
the Registrant believes that it is in the interest of the Registrant to do so.
For instance, the Registrant may make an initial investment within the above
range and later find it necessary to make a "follow-on" investment if management
determines that additional financing is required to enable a particular
Portfolio Company to continue its operations or to complete an important
contract or research and development project or other ongoing activity.
Accordingly, although it is a policy of the Registrant to seek to diversify its
investments (as to Portfolio Companies as well as types of industries), the
Registrant is not prohibited from investing more than 10% of its funds available
for investment in the Portfolio Securities of a single issuer or in Portfolio
Companies engaged in a single industry. In certain circumstances, the Registrant
may invest in particular Portfolio Companies on an installment, phase-in or
staged basis with subsequent installments conditioned upon the Portfolio Company
achieving specified performance milestones.
The Registrant has no policy with respect to concentrating in a particular
industry or group of industries nor with respect to investing in a company with
any particular investing partner. The Registrant intends to invest all or
substantially all of its available assets (except assets invested in short-term
obligations) in companies which are headquartered or conduct significant
operations in western Pennsylvania. Furthermore, except for short-term
investments, the Registrant intends initially to invest only in Portfolio
Companies which constitute "eligible portfolio companies" within the meaning of
such term under the Investment Company Act of 1940, as amended (the "1940 Act").
Generally, "eligible portfolio companies" are companies the securities of which
are not publicly-traded. However, the Registrant shall be permitted to make
additional investments (including "follow-on" investments) of up to 30% of its
assets in the Portfolio Securities of companies which are not "eligible
portfolio companies" so long as they were "eligible portfolio companies" when
the Registrant originally invested in them. Such investments may be made through
the exercise of warrants, the conversion of convertible debt securities, the
purchase of debt or equity securities from the issuer or any holder of such
securities or in any other manner permitted under the applicable provisions of
the 1940 Act and the investments policies of the Registrant.
Item 2. Properties
- --------------------
The Registrant does not own any properties.
3
Item 3. Legal Proceedings
- ---------------------------
There are no legal proceedings to which the Registrant is a party.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
The Registrant held an annual meeting of security holders on November 17, 1999.
Proxies for the meeting were solicited pursuant to Regulation 14A under The
Securities Exchange Act of 1934. The following matters were voted on at that
meeting.
(a) Election of directors for terms of one year:
G. Richard Patton For 1,787,231 shares, Against 0 shares, Withheld 10,000 shares
--------- - ------
Alvin J. Catz For 1,787,231 shares, Against 0 shares, Withheld 10,000 shares
--------- - ------
William F. Rooney For 1,787,231 shares, Against 0 shares, Withheld 10,000 shares
--------- - ------
Philip Samson For 1,787,231 shares, Against 0 shares, Withheld 10,000 shares
--------- - ------
Douglas F. Schofield For 1,787,231 shares, Against 0 shares, Withheld 10,000 shares
--------- - ------
There were no other nominees.
(b) Adopt a Stock Option Plan which authorizes the grant of options to
purchase the Fund's common stock to directors, officers, employees and
members of the advisory board of the Fund.
For 1,677,231 shares, Against 40,000 shares, Withheld 80,000 shares.
--------- ------ ------
(c) Ratify appointment of Goff, Ellenbogen, Backa & Alfera, LLC as the
Registrant's independent certified public accountants for the fiscal
year ending December 31, 1999.
For 1,787,231 shares, Against 0 shares, Withheld 10,000 shares.
--------- - ------
4
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -------------------------------------------------------------------------------
The Registrant's Common Stock is not traded on any national or regional
securities exchange, and the Registrant has no intention of causing the shares
to be qualified for listing on the NASDAQ National Market or Small Cap systems.
The Registrant is aware of three trades in its Common Stock from May 23, 1996
(date of inception) through March 22, 2000 as follows:
Number Price
Of Per
Period Shares Share
------ ------ -----
Second Quarter 1998 10,000 $1.05
Second Quarter 1998 25,000 $1.05
Third Quarter 1998 10,000 $1.00
As of March 22, 2000, the Registrant had approximately 175 shareholders.
No dividends have been declared on the Registrant's Common Stock. Management
does not have as a policy the regular payment of dividends to investors.
Generally, Management intends to reinvest interest, dividends or other
distributions received from Portfolio Companies and any proceeds realized from
the sale of Portfolio Securities in other Portfolio Companies. There are no
dividend restrictions.
Item 6. Selected Financial Data
- ---------------------------------
The Registrant was incorporated on May 23, 1996, and began active business
operations in November, 1997.
January 1, 1999 January 1, 1998 January 1, 1997
Through Through Through
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
Revenues $ 99,844 $ 99,467 $ 74,205
Net income (loss) $ 100,378 $ 3,049 $ 16,588
Net income (loss) per share $ .04 $ .00 $ .01
Cash dividends $ 0 $ 0 $ 0
Total assets $ 3,099,817 $ 2,068,514 $ 2,054,900
Net assets applicable to shares outstanding $ 3,005,447 $ 2,039,418 $ 2,036,369
Net asset (deficit) value per share $ 1.06 $ .92 $ .92
Syndication costs $ 135,604 $ 85,507 $ 85,507
May 23, 1996
(Date of Inception)
Through
December 31, 1996
-----------------
Revenues
Net income (loss) $ 0
Net income (loss) per share $ (106)
Cash dividends $ .00
Total assets $ 0
Net assets applicable to shares outstanding $ 15,418
Net asset (deficit) value per share $ (38,773)
Syndication costs $ (0.16)
$ 41,167
5
WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
Three Months Ended Three Months Ended
------------------ ------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
1997 1997 1997 1997 1996 1996 1996 1996
Revenues $ 0 $ 0 $ 47,712 $ 26,493 $ 0
Net income (loss) $ (8,173) $ (5,516) $ 22,015 $ 8,262 $ (106)
--------No Activity--------
Earnings per share $ (.03) $ (.02) $ .01 $ .00 $ .00
Cash dividends $ 0 $ 0 $ 0 $ 0 $ 0
Total assets $ 15,143 $ 15,133 $2,005,647 $2,054,900 $ 15,418
Net assets (deficit) $(79,427) $(90,883) $1,994,546 $2,036,369 $(38,773)
Applicable to shares
Outstanding
Net asset (deficit) $ (.32) $ (.36) $ .86 $ .92 $(.16)
value per share
Syndication costs $ 32,481 $ 5,940 $ 5,919 $ 0 $ 41,167
6
WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
Three Months Ended Three Months Ended
------------------ ------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
1999 1999 1999 1999 1998 1998 1998 1998
Revenues $ 19,828 $ 19,742 $ 21,571 $ 38,703 $ 24,979 $ 21,626 $ 25,103 $ 27,759
Net income (loss) $ (4,391) $ 640 $ (8,452) $ 112,581 $ 4,169 $ (9,609) $ 7,074 $ 1,415
Earnings per share $ .00 $ .00 $ ( .01) $ .05 $ .00 $ .00 $ .00 $ .00
Cash dividends $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Total assets $2,064,146 $2,055,748 $2,052,663 $3,099,817 $2,070,117 $2,058,309 $2,061,369 $2,068,514
Net assets (deficit) $2,035,027 $2,035,667 $2,022,446 $3,005,447 $2,040,538 $2,030,929 $2,038,003 $2,039,418
applicable to shares
outstanding
Net asset (deficit) $ .92 $ .92 $ .91 $ 1.06 $ .92 $ .92 $ .92 $ .92
value per share
Syndication costs $ 0 $ 0 $ 4,769 $ 45,328 $ 0 $ 0 $ 0 $ 0
7
Item 7. Management's Discussion and Analysis of Financial Condition and
- -------------------------------------------------------------------------
Results of Operations
- ---------------------
Results of Operations
- ---------------------
The Registrant was incorporated on May 23, 1996. Its only activities in 1996
consisted of start-up and syndication. There were no revenues in 1996. Interest
charges and bank service fees amounted to $106, which resulted in a net loss of
$106.
The Registrant began, in late 1996, soliciting subscriptions for the purchase of
a minimum of 1,000,000 shares and a maximum of 5,000,000 shares of its Common
Stock through an Offering Circular dated November 7, 1996 under Regulation E of
the Securities Act of 1933 (the "First Offering"). Under the terms of the First
Offering, shares were being offered at $1.00 per share, with a minimum purchase
of 10,000 shares per investor, subject to the discretion of the Registrant to
accept subscriptions for fewer shares. The shares were being offered directly by
the Registrant. There were no brokers, placement agents or other persons who
received commissions or placement fees from the sale of shares under the First
Offering.
During 1997, the Registrant sold 2,104,333 shares of its Common Stock under the
First Offering, closed the First Offering, and began the process of identifying
and evaluating prospective Portfolio Companies. Most of 1997 was devoted to
soliciting subscriptions under the Offering, start up activities, and
organizational matters. The Registrant made its initial investment in a
Portfolio Company in November, 1997. Through December 31, 1998, the Registrant
had invested in eight Portfolio Companies.
During 1999, the Registrant began soliciting subscriptions for the purchase of a
maximum of 2,750,000 shares ($3,987,500) of its Common Stock under an Offering
circular dated September 10, 1999 (the "Second Offering"). Under the terms of
the Second Offering, shares were being offered at $1.45 per share, with a
minimum purchase of 10,000 shares per investor, subject to the discretion of the
Registrant to accept subscriptions for fewer shares. The shares were being
offered directly by the Registrant. There were no brokers, placement agents or
other persons who received commissions or placement fees from the sale of shares
under the Second Offering.
The Fund concluded the sale of shares of its Common Stock under the Second
Offering on January 31, 2000. During the course of this Second Offering, the
Fund accepted subscriptions to purchase 2,037,787 shares ($2,954,792) of which
1,406,237 shares ($2,039,045) were received subsequent to December 31, 1999.
Revenues in 1999 amounted to $99,844 and consisted of interest earned on
temporary investments of $39,808, interest earned on Portfolio Companies
convertible debt of $35,036 and management fees of $25,000. Revenues in 1998
amounted to $99,467, and consisted of interest earned on temporary investments
of $80,514, interest earned on Portfolio Companies convertible debt of $6,453
and management fees of $12,500. Revenues in 1997 amounted to $74,205, and
consisted entirely of interest earned on escrowed funds and on temporary
investments . Interest earned on temporary investments decreased in 1999
compared to 1998 due to a reduction in the amount of temporary investments. This
reduction resulted from additional investments in Portfolio Securities which
accounts for the offsetting increase in interest earned on Portfolio Companies
convertible debt in 1999 compared to 1998. Management fees in 1999 include a
full year's fees compared with one-half year's fees in 1998.The increase in
revenues in 1998 over 1997 was the result of interest being earned for the
entire 1998 calendar year versus interest being earned only for a portion of
1997 as funds were not released from escrow until July, 1997, and management
fees in 1998 of $12,500 received from the Urban Redevelopment Authority of
Pittsburgh ("URA") under a co-investment agreement signed June 30, 1998.
General and Administrative expenses in 1999 amounted to $18,000, and consisted
of directors fees. General and Administrative expenses in 1998 and 1997 were
$14,700 and $3,300, respectively, and consisted of directors fees. The 1999
versus 1998 increase resulted from directors attending additional meetings, and
the 1998 versus 1997 increase was due to the fact that directors began earning
fees only after the Registrant broke escrow in July, 1997.
Other Operating Expenses in 1999 amounted to $88,919 compared with $74,496 in
1998 and $28,730 in 1997. Other Operating Expenses in 1999 included professional
fees (legal and accounting) of $38,551, advisory board
8
fees of $24,000 and other items of $26,368. Other Operating Expenses in 1998
consisted of professional fees of $31,572, investment advisory fees of $37,500
and other items of $5,424. Other Operating Expenses in 1997 consisted of
professional fees of $20,802, investment advisory fees of $5,000 and other items
of $2,928. The increases in professional fees and other items resulted from the
increased business activity of the Registrant. The decrease in investment
advisory fees in 1999 resulted from the Registrant's advisor, The Enterprise
Corporation of Pittsburgh ceasing operations as of December 31, 1998. The
increase in advisory board fees in 1999 resulted from the creation of an
advisory board.
Interest expense in 1999 amounted to $48 while interest expense in 1998 amounted
to $99 compared with $20,367 in 1997. Interest expense in 1997 primarily
consisted of interest paid to subscribers. Under the terms of the Offering,
subscribers whose stock subscription funds remained in the Registrant's escrow
account for more than 90 days were paid the interest earned on their funds at
the time such funds were released from escrow. Income taxes for 1999, 1998 and
1997 of $56,230, $7,123 and $5,220, respectively, represent Federal and
Pennsylvania income taxes due on the Registrant's pretax income. The higher
income taxes in 1999 resulted from the substantially higher pretax income in
1999.
During 1999, the Registrant recognized unrealized appreciation of $163,731 on
Portfolio Securities based upon subsequent financing rounds by two Portfolio
Companies at significantly higher valuations than the related carrying values of
those investments. No such unrealized appreciation was recognized in 1998 or
1997.
During 1997, the Registrant sold $2,104,333 of its Common Stock under the First
Offering, and closed the First Offering. The Registrant closed the escrow
account which had been used to accumulate the funds. A portion of these funds
was disbursed to pay accumulated obligations whose payment was deferred until
funds were withdrawn from escrow. During the year ending December 31, 1999, the
Registrant sold $915,747 of its Common Stock under the Second Offering. The
Second Offering closed January 31, 2000. The balance of the funds from the First
Offering and the Second Offering has been temporarily invested, pending
investment in Portfolio Securities, in cash equivalents, government securities,
and high quality debt securities. At December 31, 1999, the Registrant has
invested $1,793,479 in twelve Portfolio Companies.
As of December 31, 1999, the Registrant had approximately $1,257,811 in cash and
cash equivalents, and short term investments. Those funds were available, except
for a relatively small amount for normal operating expenses, for investment in
Portfolio Companies. Subsequent to year end, the Registrant has invested
$100,000 in one additional Portfolio Company.
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
The Registrant, through its sale of its Common Stock, raised $2,104,333 under
the First Offering and $2,954,792 under the Second Offering. Most of this
amount, except for normal operating expenses, is available for investment in
Portfolio Securities. At December 31, 1999, $1,793,479 had been invested in
twelve Portfolio Companies. The balance of the funds have been temporarily
invested in short-term high quality commercial paper and government securities.
These funds are available for future investments in Portfolio Companies.
In 1998, the Registrant initiated a program to prepare its computer systems and
applications for the Year 2000. The Year 2000 issue is the result of computer
programs being written using two digits rather than four digits to define the
applicable year. Any of the Registrant's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculation. The Registrant
presently believes that, with appropriate modifications to existing software and
conversions to new software, the Year 2000 issue will not pose significant
problems for the Registrant's computer systems as so modified and converted.
Inflation
- ---------
The Registrant does not believe that inflation will have any significant effect
on the Registrant's operations or financial position.
9
Item 8. Financial Statements and Supplementary Data
- -----------------------------------------------------
Index to Financial Statements and Supplementary Financial Data
Page No.
Independent Auditor's Report 11
Financial Statements:
Statements of Assets and Liabilities, December 31, 1999 and 1998 12
Statements of Operations for the Year ended December 31, 1999, 13
for the Year ended December 31, 1998 and for the Year ended
December 31, 1997
Statements of Changes in Net Assets (Deficit) for the Year ended 14
December 31, 1999, for the Year ended December 31, 1998 and
for the Year ended December 31, 1997
Statements of Cash Flows for the Year ended December 31, 1999, 15
for the Year ended December 31, 1998 and for the Year ended
December 31, 1997
Notes to Financial Statements 16
10
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
of the Western Pennsylvania Adventure Capital Fund
We have audited the accompanying statements of assets and liabilities of the
Western Pennsylvania Adventure Capital Fund (a Pennsylvania corporation) as of
December 31, 1999 and 1998, and the related statements of operations, changes in
net assets (deficit), and cash flows for the years ended December 31, 1999, 1998
and 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Western Pennsylvania
Adventure Capital Fund as of December 31, 1999 and 1998, and the results of its
operations, the changes in its net assets, and its cash flows for the years
ended December 31, 1999, 1998 and 1997, in conformity with generally accepted
accounting principles.
Our audits referred to above included audits of the financial statement
schedules listed under Item 14(a)(2). In our opinion, those financial statement
schedules present fairly, in all material aspects, in relation to the financial
statements taken as a whole, the information required to be stated therein.
s/Goff, Ellenbogen, Backa & Alfera, LLC
March 22, 2000
11
Western Pennsylvania Adventure Capital Fund
Statements of Assets and Liabilities
As of
December 31, 1999 December 31, 1998
----------------------- -----------------------
Assets
------
Cash and Cash Equivalents $1,004,428 $ 289,824
Short Term Investments, Net 253,383 894,960
Receivables 39,407 6,453
Investment in Portfolio Companies 1,793,479 862,677
Prepaid Taxes 0 2,440
Organization Costs 9,120 12,160
---------- ----------
Total Assets $3,099,817 $2,068,514
========== ==========
Liabilities
-----------
Accounts Payable $ 25,496 $ 14,396
Accrued Liabilities 18,000 14,700
Accrued Income Taxes 174 0
---------- ----------
Total Current Liabilities 43,670 29,096
Deferred Income Taxes 50,700 0
---------- ----------
Total Liabilities $ 94,370 $ 29,096
========== ==========
Net Assets
----------
Common Stock, Par Value $.01 Per Share,
Authorized 10,000,000 Shares, Issued and
Outstanding 2,841,984 Shares (2,210,434
Shares at December 31, 1998) $ 29,859 $ 23,543
Additional Paid in Capital 2,992,722 2,083,290
Syndication Costs (135,604) (85,507)
Retained Earnings 119,909 19,531
Treasury Stock - 143,899 Shares at cost (1,439) (1,439)
---------- ----------
Net Assets Applicable to Shares Outstanding $3,005,447 $2,039,418
========== ==========
Net Assets Value Per Share $ 1.06 $ 0.92
========== ==========
See Independent Auditor's Report and accompanying notes to financial statements.
12
Western Pennsylvania Adventure Capital Fund
Statements of Operations
For the Periods
January 1, 1999 January 1, 1998 January 1, 1997
through through through
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
Revenues:
Interest $ 74,844 $86,967 $74,205
Management Fees 25,000 12,500 0
-------- ------- -------
Total Revenues 99,844 99,467 74,205
-------- ------- -------
Expenses:
General and Administration 18,000 14,700 3,300
Interest 48 99 20,367
Other Operating Expenses 88,919 74,496 28,730
-------- ------- -------
Total Expenses 106,967 89,295 52,397
-------- ------- -------
Unrealized Appreciation - 163,731 0 0
Portfolio Companies
Profit Before Income Tax 156,608 10,172 21,808
Income Tax Expense 56,230 7,123 5,220
-------- ------- -------
Net Income $100,378 $ 3,049 $16,588
======== ======= =======
Earnings Per Share $ .04 $ .00 $ .01
======== ======= =======
See Independent Auditor's Report and accompanying notes to financial statements.
13
Western Pennsylvania Adventure Capital Fund
Statements of Changes in Net Assets (Deficit)
For the Periods
January 1, 1999 January 1, 1998 January 1, 1997
through through through
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
From Operations
Net Income $ 100,378 $ 3,049 $ 16,588
From Share Transactions:
Proceeds from
Sale of Common Stock 915,748 0 2,104,333
Syndication Costs (50,097) 0 (44,340)
Purchase of Treasury Stock 0 0 (1,439)
---------- ---------- ----------
Net Increase in Net Assets
Derived from Share
Transactions 865,651 0 2,058,554
---------- ---------- ----------
Net Increase In Net
Assets 966,029 3,049 2,075,142
Net Assets (Deficit):
Beginning of Period 2,039,418 2,036,369 (38,773)
---------- ---------- ----------
End of Period $3,005,447 $2,039,418 $2,036,369
========== ========== ==========
See Independent Auditor's Report and accompanying notes to financial statements.
14
Western Pennsylvania Adventure Capital Fund
Statements of Cash Flows
For the Periods
January 1, 1999 January 1, 1998 January 1, 1997
through through through
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
Cash Flow from Operating Activities:
Income $ 100,378 $ 3,049 $ 16,588
Change in Assets and Liabilities:
Organization Costs-(Increase) Decrease 3,040 3,040 (200)
Receivables-(Increase) (32,954) (6,453) 0
Prepaid Taxes-(Increase) Decrease 2,440 (2,440) 0
Accounts Payable-Increase (Decrease) 11,100 4,385 (43,156)
Accrued Liabilities-Increase 3,474 6,180 8,496
Deferred Taxes-Increase 50,700 0 0
---------- --------- -----------
Net Cash Provided by (Used in)
Operating Activities 138,178 7,761 (18,272)
---------- --------- -----------
Cash Flow from Financing Activities:
Proceeds from sale of Common Stock 915,748 0 2,104,333
Payment of Syndication Costs (50,097) 0 (44,340)
Borrowing (Payment) of Demand
Note Payable 0 0 (1,000)
Purchase of Treasury Stock 0 0 (1,439)
---------- --------- -----------
Net Cash Provided by
Financing Activities 865,651 0 2,057,554
---------- --------- -----------
Cash Flow from Investing Activities:
Purchase of Short Term Investments,
Net of Redemptions 641,577 676,122 (1,571,082)
Investments in Portfolio Companies (930,802) (762,677) (100,000)
---------- --------- -----------
Net Cash (Used in) Investing Activities (289,225) (86,555) (1,671,082)
---------- --------- -----------
Net Increase (Decrease) in Cash and
And Cash Equivalents: 714,604 (78,794) 368,200
Cash and Cash Equivalents at
Beginning of Period 289,824 368,618 418
---------- --------- -----------
Cash and Cash Equivalents at
End of Period $1,004,428 $ 289,824 $ 368,618
========== ========= ===========
See Independent Auditor's Report and accompanying notes to financial statements.
15
Western Pennsylvania Adventure Capital Fund
Notes to Financial Statements
December 31, 1999
Note 1 - Summary of Significant Accounting Policies:
- ----------------------------------------------------
This summary of significant accounting policies of Western Pennsylvania
Adventure Capital Fund (the "Fund") is presented to assist in understanding the
Fund's financial statements. These accounting policies conform with generally
accepted accounting principles and have been consistently applied in the
preparation of the financial statements.
Nature of Operations
The Fund was incorporated on May 23, 1996, and began its primary business
activities in November, 1997. The Fund has been formed to become a Business
Development Company ("BDC") and to be subject to the applicable provisions of
the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund
invests primarily in the equity and/or debt securities of development stage
companies located in western Pennsylvania. The Fund seeks to make its
investments in conjunction with a consortium of investment partners such as
individual investors, other venture capital firms, private non-profit or for-
profit companies or foundations, and federal, state or local public, quasi-
public or publicly-supported economic development organizations, agencies or
authorities which provide investment capital or low interest or other financing
for economic development.
The Fund's Board of Directors, which is elected by the shareholders annually,
has responsibility for management of the Fund, including authority to select
portfolio securities for investment by the Fund. The Board is advised by the
officers of the Fund and, through December 31, 1998, had been advised by The
Enterprise Corporation of Pittsburgh ("Enterprise"), which served as the Fund's
investment advisor. Enterprise screened potential Portfolio Companies and
presented them to the Fund's Board for investment consideration, conducted due
diligence reviews of investment candidates and managed the day-to-day operations
of the Fund including, portfolio management, preparing reports to shareholders
and performing administrative services. The recommendations of Enterprise as to
investments were advisory only and were not binding on the Fund or its Board of
Directors. Enterprise was a private, non-profit consulting firm founded in 1983
for the purpose of assisting entrepreneurs in developing new businesses in
western Pennsylvania. As of December 31, 1998, Enterprise ceased operations and
is no longer serving as the Fund's investment advisor. The Fund's Board of
Directors now performs these activities.
Enterprise received a fee equal to 5% of the aggregate amount of assets invested
by the Fund in portfolio securities for providing investment advisory and
administrative services to the Fund. Enterprise may also have received
compensation from investment partners or members of any investment consortium
that invested with the Fund in portfolio securities, all on such basis as such
other parties and Enterprise may have agreed.
Basis of Presentation - Net Assets
During 1996, the Fund began offering a total of 5,000,000 shares of its common
stock, par value $.01, at a price of $1.00 per share under Regulation E of the
Securities Act of 1933 (the "First Offering"). In connection with its services
in organizing the formation and development of the Fund, Enterprise purchased
250,000 shares of common stock for $.01 per share, which represented 4.8% of the
total potential outstanding shares of the Fund. The shares purchased by
Enterprise represented founder's shares. If less than 5,000,000 shares were sold
in the First Offering, the Fund had the right to repurchase from Enterprise for
$.01 per share such number of shares as would result in Enterprise's ownership
percentage in the Fund immediately following the First Offering being 4.8%.
16
During 1997, the Fund sold 2,104,333 shares of its common stock and closed the
First Offering. As of December 31, 1997, the Fund repurchased 143,899 shares of
its common stock from Enterprise, thereby reducing Enterprise's ownership to
106,101 shares, which represented 4.8% of the then total shares issued and
outstanding (2,210,434 shares). The repurchased shares are presented as Treasury
Stock, at cost, at December 31, 1999 and December 31, 1998.
On September 10, 1999, the Fund began offering a total of 2,750,000 shares of
its common stock, par value $.01, at a price of $1.45 per share under Regulation
E of the Securities Act of 1933 (the "Second Offering"). The Second Offering was
extended through January 31, 2000. The Fund sold 2,037,787 shares of its common
stock and closed the Second Offering.
Syndication Costs
Legal, accounting and other costs of $85,507 ($85,507 in 1998) incurred in
connection with the First Offering have been capitalized and reported as a
permanent reduction of net assets in accordance with generally accepted
accounting principles.
Legal, accounting and other costs of $50,097 (none in 1998) incurred in
connection with the Second Offering have been capitalized and reported as a
permanent reduction in net assets in accordance with generally accepted
accounting principles. The Fund expects to incur additional syndication costs in
connection with the Second Offering during the first several months of 2000.
Cash and Cash Equivalents
Cash and Cash Equivalents consist of cash in checking accounts and high quality
money market instruments having or deemed to have remaining maturities of
thirteen months or less.
Short Term Investments
The Fund's short term investments consist of high quality commercial paper and
U.S. Government securities. These investments generally are purchased at a
discount from face value and are redeemed at maturity at face value. The
difference represents interest income which will accrue over the period from
date of acquisition to date of maturity. The Fund uses the effective yield to
maturity method to recognize the accretion of interest income over the life of
each individual short term investment. This method produces a rate of return
which is constant over the period from acquisition to maturity. Using this
method, the interest income recognized on each individual investment will
increase over time as the carrying value of that investment increases. The Fund
records these investments net of remaining unearned interest income.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Fund has
classified all short term investments as held-to-maturity ("HTM") as of December
31, 1999 and 1998.
Investments in Portfolio Companies
Investments are stated at value. Investments for which market quotations are
readily available are valued at the last trade price on or within one local
business day of the date of determination as obtained from a pricing source. If
no such trade price is available, such investments are valued at the quoted bid
price or the mean between the quoted bid and asked price on the date of
determination as obtained from a pricing source. Securities for which market
quotations are not readily available are valued at fair value in good faith
using methods determined by or under the direction of the Fund's Board of
Directors.
17
Start-Up and Organization Costs
Costs incurred in connection with the start-up and organization of the Fund have
been deferred and are being amortized ratably over a period of 60 months
beginning January 1, 1998. The balance of $9,120 ($12,160 at December 31, 1998)
represents the remaining portion of these costs subject to amortization.
Earnings Per Share
During 1997, the Fund adopted SFAS No. 128, "Earnings Per Share". Its
application is not expected to affect the calculations of basic and diluted
earnings per share.
Earnings per share is computed using the weighted average number of shares
outstanding during the respective periods. There are no outstanding stock
options, warrants, or other contingently issuable shares.
The Fund's shareholders, at the annual meeting of shareholders held on November
17, 1999, approved a stock option plan which authorizes the granting of options
to purchase the Fund's common stock to directors, officers, employees, and
members of the advisory board of the Fund.
Income Taxes
The Fund has adopted the SFAS Standard No. 109, "Accounting for Income Taxes",
from its inception. SFAS 109 requires an asset and liability approach that
recognizes deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Fund's financial
statements or tax returns. In estimating future tax consequences, SFAS 109
generally considers all expected future events other than enactments of changes
in the tax law or rates. During the quarter ended December 31, 1999, the Fund
recognized unrealized appreciation on its portfolio companies, and accordingly,
began recognizing deferred taxes due to temporary timing differences in
accordance with SFAS 109. There were no deferred taxes as of December 31, 1998.
Note 2 - Sale of Securities
- ---------------------------
During 1997, the Fund sold 2,104,333 shares of its common stock at $1.00 per
share, under an Offering Circular dated November 7, 1996 ("First Offering
Circular"). The proceeds were required to be deposited in an escrow account with
the Fund's escrow agent, PNC Bank, until such time as the escrow account reached
$1 million. At that time, the Fund was permitted to withdraw the funds from the
escrow account and begin to invest in portfolio securities.
As of July 11, 1997, the proceeds in the escrow account totaled $1,860,100. On
that date, the Fund withdrew substantially all of the funds from the escrow
account.
The funds released from escrow have been temporarily invested, pending
investment in Portfolio Securities, in cash equivalents, government securities,
and high quality debt securities. A portion of the funds released from escrow
were disbursed to pay accumulated obligations whose payment was deferred until
funds were released from escrow.
The Fund began offering for sale up to 2,750,000 shares of its Common Stock at
$1.45 per share, or a maximum of $3,987,500, under an Offering Circular dated
September 10, 1999 ("Second Offering Circular"). The Fund intends to use the
proceeds from this sale of securities primarily to invest in the equity and/or
debt securities of additional development stage companies located in western
Pennsylvania, and to make follow on investments, as appropriate, in existing
portfolio companies. The proceeds from this sale of securities will be
temporarily invested, pending investments in portfolio companies, in cash
equivalents, government securities, and high quality debt securities. A portion
of these proceeds may be used for normal operating expenses. As of December 31,
1999, the Fund had received subscriptions to purchase 631,550 shares ($915,747).
18
As of December 31, 1999, $1,793,479 ($862,677 at December 31, 1998) was invested
in Portfolio Securities and the balance of the funds remained invested in cash
equivalents, government securities, and high quality debt securities.
Note 3 - Investments in Portfolio Companies
- -------------------------------------------
As of December 31, 1999, the Fund had invested a total of $1,793,479 in twelve
Portfolio Companies ($862,677 in eight Portfolio Companies at December 31,
1998). Also, see Schedule 1 for additional information on investments in
Portfolio Companies.
On January 20, 1999, the Fund purchased $100,000 of Interactive Information,
Inc. ("Interactive") 4.57% Convertible Notes ("Convertible Notes"). The
Convertible Notes are convertible into the same equity, and on the same terms as
Interactive will issue in its next securities offering. If certain specified
conditions in connection with the next securities offering are not met, the
noteholders may elect to convert their Convertible Notes into either common
stock equal to 36.5625% ownership (based on total Convertible Notes - $585,000)
on a fully diluted basis, or a demand note with a significantly higher interest
rate. In addition, the Convertible Notes carry warrants, one warrant for each
three and one-third shares, for the purchase, at $.01 per share, of the same
equity as Interactive will issue in its next securities offering. The warrants
expire after ten years. At approximately the same time, other private investors
in the Fund purchased $330,000 of Interactive Convertible Notes.
Interactive sells an interactive software program for use in hospitals and
physicians' offices that educates patients on their disease and their
responsibility in the treatment regimen. The software modules have the potential
to lower health care costs through fewer hospital/physician visits.
On March 26, 1999, the Fund purchased $26,000 of Medtrex Incorporated
("Medtrex") subordinated notes. These subordinated notes were part of a $302,000
debt offering, all of which was purchased by existing shareholders of Medtrex.
The subordinated notes are due and payable, with interest, upon the earlier of
February 9, 2000 or upon the sale of or change in control of Medtrex. Interest
accrues equal to 50 percent of the face amount of the subordinated notes.
Medtrex designs, manufactures, and distributes electrosurgical instruments and
accessories for the hospital, surgery center, and physicians' office market.
On March 30, 1999, Allegheny Child Care Academy, Inc. ("ACCA") sold 559,375
shares of its Series B Preferred Stock ("Series B Preferred") to Kitty Hawk
Capital, a venture capital firm, at $1.7877 per share for a total of $1,000,000.
These shares were issued at the same price and with the same terms as those
acquired by the Fund in its investment in ACCA in November, 1998. Following this
investment, the Fund's investment and the total investment by the Fund and its
shareholders represented 0.9 percent ownership and 2.9 percent ownership,
respectively, on a fully diluted basis.
ACCA owns and operates children's day care centers primarily in central/inner
city locations with most of its clients welfare subsidized through state and
federal programs.
On April 6, 1999, the Fund purchased 68,221 shares of Entigo (formerly SegWay
Internet Technologies, Inc.) ("Entigo") Preferred Stock Series B ("Preferred B")
at $1.4658191 per share for a total investment of $100,000, which represented
approximately 0.8 percent ownership on a fully diluted basis. The Preferred B is
convertible into common stock, has voting rights, and has certain dividend and
liquidation preferences. At approximately the same time, other private investors
in the Fund purchased 266,963 shares of Preferred B for a total investment of
$391,319. The total investment by the Fund and the Fund's shareholders
represented 3.8 percent ownership on a fully diluted basis.
Entigo provides software and installation services for E-Commerce systems to
enable large, complex companies to sell to their distributors and buy from
vendors through web-based communications.
19
On April 22, 1999, the Fund exercised its pre-emptive rights and participated in
a $750,000 bridge financing by MediaSite, Inc. (formerly ISLIP Media Network,
Inc.) ("MediaSite"). Under the terms of this bridge financing, the Fund
purchased $2,546 of each of three debt securities as described herein. First, a
subordinated convertible note due June 30, 1999 with interest at 6 percent per
annum. This note is convertible, principal and interest, into the same security
as to be issued in the next subsequent financing at 96.5% of this next round
price. Second, a subordinated non-convertible note due June 30, 2000 with
interest at 6 percent per annum. Both notes carry warrants to purchase the next
round security at its issue price equal to 10 percent of the face amount of the
notes. The warrants expire after seven years. Third, a subordinated convertible
note due May 31, 1999 with interest at 10 percent per annum. This note is
convertible, principal and interest, into the same security as to be issued in
the next subsequent financing at the next subsequent financing round price.
During the three month period ending June 30, 1999, MediaSite closed on the sale
of 4,869,999 shares of its Series B preferred stock ("Series B") at $1.30 per
share for total consideration of $6,330,999. These shares were being offered
through Saturn Capital, Inc. which earned a 9 percent underwriting fee, plus
warrants to purchase 19,230 shares at $1.30 per share for each $100,000 of gross
proceeds received by MediaSite. The offering was continuing at that time, and an
additional $375,000 had been received and was being held in escrow pending a
second closing. The Series B is convertible into common stock on a one-for-one
basis, has voting rights with common stock on an as-converted basis, has board
representation rights, and liquidation preferences.
As a consequence of this closing, MediaSite repaid a portion of the
aforementioned bridge financing with the balance of the bridge financing
converted into Series B. The Fund received repayment of $5,117.59 representing
principal ($5,092.48) and interest ($25.11) on two notes, and converted its
third note (principal and interest) into 2,031 shares of Series B. In addition
to the 2,031 shares of Series B, the Fund received warrants to purchase 391
shares of Series B at $1.30 per share at any time through April 21, 2006. The
Fund and the Fund and its shareholders' investment in MediaSite represented
approximately 0.5 percent and 2.8 percent, respectively, on a fully diluted
basis.
MediaSite produces software to deliver network-based searchable digital and
audio libraries.
Effective June 14, 1999, the Fund committed to exercise its pre-emptive rights
to purchase its pro rata share of Neo Linear, Inc. ("Neo Linear") bridge
financing. Under this bridge financing, Neo Linear obtained commitments from its
current investors to purchase $1,194,682 of Convertible Promissory Notes
("Notes") due December 31, 1999, with interest at 14 percent per annum. Neo
Linear issued $597,341, or 50% of this amount and had the right to call the
balance of the commitments at any time prior to December 31, 1999. The Notes,
plus accrued interest, are convertible into, at the same price and on the same
terms, as the next round security, plus premium shares equal to 30% of the Note
principal at no additional cost. The Fund's pro rata share was $50,131. Of this
amount, $25,065.50 was paid on June 10, 1999, and balance of $25,065.50 was
subject to call by Neo Linear. The balance was called by Neo Linear and paid on
September 3, 1999.
Neo Linear produces computer aided design software for the semiconductor
industry.
On June 28, 1999, the Fund purchased $60,000 of Series II Subordinated
Convertible Notes ("Series II Notes") of Precision Therapeutics, Inc. ("PTI").
These Series II Notes bear interest at prime plus three percent, mature on March
31, 2000, and carry warrants to purchase common stock at $1.00 per share for 10
years equal to 35 percent of principal. In addition, the Series II Notes convert
into the same security, and at the same price and terms, as will be sold in the
next round financing. At approximately the same time, other private investors in
the Fund purchased $375,000 of Series II Notes. During this period, PTI sold
$2,242,500 of these Series II Notes. Accordingly, the Fund and the Fund and its
shareholders ownership of these Series II Notes constituted approximately 2.7
percent and 19.4 percent, respectively.
20
At approximately the same time, PTI made an offer to the holders of its existing
Subordinated Convertible Notes ("Series I Notes") to extend the maturity date
from June 30, 1999 to March 31, 2000 in exchange for an increase in warrant
coverage from 25 percent to 40 percent and an increase in interest rate from
approximately 5.5 percent to prime plus three percent. The Fund, which owns
$110,000 of Series I Notes accepted this offer and other private investors in
the Fund owning $647,500 of Series I Notes accepted their offers. Accordingly,
the Fund and the Fund and its shareholders' ownership of these Series I Notes,
following acceptance of this offer, constituted approximately 3.2 percent and
22.1 percent respectively.
PTI tests various chemotherapy agents on cancer cells grown from tumors removed
from cancer patients, measures their killing effectiveness and provides reports
to attending physicians.
On June 28, 1999, the Fund purchased 116,000 shares of Quantapoint, Inc.
(formerly K/2/T inc.) ("Quantapoint") Series A Preferred Stock ("Series A
Preferred") at $.8571 per share for a total investment of $99,423, which
represented approximately 2.7 percent ownership on a fully diluted basis. The
Series A Preferred is convertible into common stock at any time on an initial
one-for-one basis, has voting rights, and has certain dividend and liquidation
preferences. At approximately the same time, other private investors in the Fund
purchased 195,850 shares of Series A Preferred for a total investment of
$167,863. The total investment by the Fund and the Fund's shareholders
represented approximately 7.3 percent ownership on a fully diluted basis.
Quantapoint uses a 3D laser camera to measure "existing conditions" dimensions
of the interior or exterior of structures, and then converts the 3D data to 2D
drawings for building owners and architects.
During the quarter ended September 30, 1999, MediaSite closed on 4,869,999
shares for a total consideration of $6,330,999. The offering was continuing at
that time. The Series B is convertible into common stock on a one-for-one basis,
has voting rights with common stock on an as-converted basis, has board
representation rights, and liquidation preferences.
MediaSite produces software to deliver network-based searchable digital video
and audio libraries.
On August 12, 1999, the Fund purchased, via exercise of a portion of its pre-
emptive rights, 39,487 shares of CoManage Corporation ("CoManage") Series B
Preferred Stock ("B Preferred") at $2.00 per share for a total of $78,974. The B
Preferred is convertible into common stock, has voting rights, redemption and
liquidation preferences. In addition, the B Preferred carries warrants for the
purchase of 13,162 shares of common stock at $3.00 per share for a period of 3
years. At approximately the same time, other private investors in the Fund
purchased 21,322 shares of B Preferred for a total investment of $42,645. The
total investment by the Fund, and by the Fund and its shareholders represented
an ownership interest of 0.7 percent and 1.1 percent, respectively, on a fully
diluted basis.
CoManage is developing computer software to allow software providers to deliver
extended network services onto network vendors equipment at clients' sites.
On October 15, 1999, Applied Electro-Optics Corporation ("AEC") completed the
first closing on the sale of $1,497,000 of Convertible Promissory Notes
("Promissory Notes") due in eighteen months with interest at ten percent per
annum. The Promissory Notes, plus accrued interest, are convertible into, at the
same price and on the same terms, as the next round security, plus premium
shares equal to 30% of the Promissory Note principal at no additional cost. The
Fund and the Fund and its shareholders purchased $100,000 and $470,000,
respectively, and held an ownership interest of 6.7 percent and 31.4 percent,
respectively, of these Promissory Notes. A total of $1,777,000 of these
Promissory Notes were sold, and the sale concluded on December 7, 1999.
AEC is engaged in the design, development and manufacturing of motion-free laser
screening systems.
21
On October 29, 1999, Entigo closed on the sale to several venture capital firms
of 2,916,667 shares of Preferred Stock Series C ("Preferred C") at $2.40 per
share for a total of $7,000,000. The Preferred C is convertible into common
stock, has voting rights, and has dividend and liquidation preferences. The
investment by the Fund, and the combined investment by the Fund and its
shareholders, represents an ownership interest of 0.4 percent and 2.3 percent,
respectively, on a fully diluted basis.
Entigo provides software and installation services for E-Commerce systems to
enable large, complex companies to sell to their distributors and buy from
vendors through web-based communication.
On November 23, 1999, MediaSite had its final closing on its Series B stock
offer. A total of 7,081,514 shares were sold in this offering at $1.30 per share
for a total of $9,205,996. The investment by the Fund and the combined
investment by the Fund and its shareholders represented an ownership interest of
0.4 percent and 3.2 percent, respectively, on a fully diluted basis.
MediaSite produces software to deliver network-based searchable digital video
and audio libraries.
On December 9, 1999, the Fund purchased 400,000 shares of Common Stock
("Common") of e-Cruise, inc. ("e-Cruise") at $.25 per share for a total
investment of $100,000, which represented a 2.0 percent ownership interest on a
fully diluted basis. The Common has voting rights, however, it does not have any
special rights such as anti-dilution, pre-emptive, redemption or liquidation
rights. At approximately the same time, the Fund's shareholders purchased
1,240,000 shares for a total investment of $310,000. The total investment by the
Fund and the Fund's shareholders represented 8.6 percent on a fully diluted
basis.
e-Cruise will provide online infomediary marketing content for cruise lines to
potential passengers.
On December 13, 1999, the fund purchased, via exercise of a portion of its pre-
emptive rights, 15,150 shares of Webmedx, Inc. ("Webmedx") (formerly RadNet
Corporation) Series C Preferred Stock ("Series C") at $3.30 per share for a
total of $49,995. The Series C is convertible into common stock initially on a
1:1 basis, has voting rights, and redemption and liquidation preferences.
Webmedx held two closings on the sale of this Series C, January 14, 2000 and
February 25, 2000, and sold 3,333,333 shares of Series C. Following these
closings, the Fund and the Fund and its shareholders ownership interest in
Webmedx represented 1.1 percent and 13.0 percent, respectively, on a fully
diluted basis.
Note 4 - Rescission Offer
- -------------------------
The Fund's First Offering Circular authorized the Fund to sell shares through
July 31, 1997. In August, September, and October 1997, a total of 194,233 shares
of the Fund's common stock in the aggregate were offered and sold to residents
of the Commonwealth of Pennsylvania for $1.00 per share ($194,233 in the
aggregate). Consequently, the provisions of Section 201 of the Pennsylvania
Securities Act of 1972 relating to the registration of securities may not have
been complied with in connection with the offer or sale of these securities.
Accordingly, the Fund made an offer of rescission to all of the affected
shareholders. The offer of rescission expired January 30, 1998. None of the
affected shareholders elected to exercise the right of rescission.
Note 5 - Co-Investor Agreement
- ------------------------------
On June 30, 1998, the Fund and the Urban Redevelopment Authority of Pittsburgh
("URA") entered into a co-investment agreement ("Agreement"). Under the terms of
this Agreement, the URA will create an escrow account of $1,000,000 to be used
for direct investment in certain select Fund's portfolio companies, located
within the City of Pittsburgh and meeting other criteria established by the URA.
The escrow account also will be used for payment of the Fund's investment and
management fees related to such investments. The URA will match, on a
dollar-for-dollar basis, the Fund's investment in portfolio companies, subject
to the limitations of the portfolio companies' location within the City of
Pittsburgh and such companies meeting the URA's criteria for funding.
22
The annual management fee payable to the Fund is $25,000. Further, the URA will
pay the Fund's investment advisor a transaction fee of five percent (5%) of the
URA's portion of its investment. All fees will be paid from the escrow account.
In addition, the URA, as part of the Agreement, has agreed to subordinate its
rights to any return on its investment until the private equity participants,
investing in each of the contemplated transactions, including the Fund, have
recovered their original investments in the portfolio companies. Thereafter,
the URA and all equity participants, including the Fund, will participate in all
future distributions in accordance with their investment.
Note 6 - Short Term Investments
- -------------------------------
The Fund, pending investments in Portfolio Securities, temporarily invests its
excess funds in short term high quality commercial paper and U.S. Government
securities. These investments generally are purchased at a discount from face
value and are redeemed at maturity at face value. The discount from face value
represents unearned interest income and is recognized over the remaining term of
the security using the effective yield to maturity method. All of the short term
investments are classified as HTM in accordance with SFAS No. 115. The face
value, carrying value, and market value for HTM investments were as follows at
December 31, 1999 and December 31, 1998:
As of December 31, 1999
-----------------------
Investment Face Value Carrying Value Market Value
- ---------- ---------- -------------- ------------
U.S. Government Securities $ 255,000 $ 253,383 $ 253,410
========== ============ ============
As of December 31, 1998
-----------------------
Investment Face Value Carrying Value Market Value
- ---------- ---------- -------------- ------------
U.S. Government Securities $ 908,299 $ 894,960 $ 895,192
============ ============= ============
Note 7 - Unrealized Appreciation
- --------------------------------
As of December 31, 1999, the Fund's Board of Directors determined that
unrealized appreciation should be recognized on two of the Fund's investments in
Portfolio Companies based upon recent financing rounds at valuations
significantly higher than the Fund's carrying value in those specific Portfolio
Companies. Accordingly, the Fund has recognized unrealized appreciation in the
quarter ended December 31, 1999 as follows: CoManage $100,000 and Entigo
$63,731.
23
Note 8 - Stock Option Plan
- --------------------------
The shareholders, at the annual meeting of shareholders held on November 17,
1999, approved a stock option plan authorizing the granting of options to
purchase the Fund's common stock to directors, officers, employees and members
of the advisory board of the Fund. Under the terms of the plan, the stock option
committee has authority to award options to eligible persons on the basis of the
nature of their duties, their present and potential contributions to the success
of the Fund and like factors.
The maximum number of options that may be granted under the plan is 500,000. The
exercise price is determined by the stock option committee at the time the
option is granted, but cannot be less than the fair market value of the Fund's
common stock on the date of grant. Each option will have a term, not in excess
of 10 years, as determined by the stock option committee. In general, each
option will become exercisable in 25 percent increments beginning on the first,
second, third and fourth anniversaries of the date of grant. Options may be
granted as either incentive stock options or nonqualified stock options.
The stock option committee has determined to award options to purchase 50,000
shares of its common stock at an exercise price of $1.45 per share to each of
the Fund's five directors (250,000 shares in the aggregate). No options have
been granted as of December 31, 1999.
Note 9 - Income Taxes
- ---------------------
The following table summarizes the provision for Federal and state taxes on
income.
Current: 1999 1998 1997
---- ---- ----
Federal $ 0 $ 857 $3,013
State 5,530 6,266 2,207
------- ------ ------
5,530 7,123 5,220
======= ====== ======
Deferred:
Federal 38,000 0 0
State 12,700 0 0
------- ------ ------
50,700 0 0
------- ------ ------
Total $56,230 $7,123 $5,220
======= ====== ======
The difference between the Federal statutory rate and the Fund's effective rate
are as follows:
1999 1998 1997
---- ---- ----
Federal statutory tax rate 35.0% 35.0% 35.0%
State income taxes (net of
Federal benefit) 8.8 48.1 3.5
Income tax at lower Federal
marginal rate (7.9) (13.1) (14.6)
----- ----- -----
35.9% 70.0% 23.9%
===== ===== =====
The deferred taxes result from the Fund's recognition of unrealized appreciation
on Portfolio Securities.
24
Note 10 - Related Party Transactions
- ------------------------------------
Accounts payable as of December 31, 1999, includes $10,000 payable to Enterprise
for investment advisory services. Accrued liabilities at December 31, 1999
includes $18,000 for Board of Directors fees.
Accounts payable as of December 31, 1998, includes $10,000 payable to Enterprise
for investment advisory services. Accrued liabilities at December 31, 1998
includes $14,700 for Board of Directors fees.
Under the terms of an investment advisory agreement, Enterprise served as the
Fund's investment advisor, and received a one-time fee equal to 5% of the amount
the Fund invested in a Portfolio Company for providing investment advisory and
administrative services to the Fund. During 1999 and 1998, the Fund incurred $0
and $37,500, respectively, of fees payable to Enterprise. As of December 31,
1998, Enterprise ceased operations and no longer served as the Fund's investment
advisor. Enterprise owned 106,101 shares of common stock of the Fund which it
acquired at $.01 per share as founders stock in connection with its services in
organizing the formation and development of the Fund. As a result of the merger
of Enterprise with Ben Franklin, the shares previously owned by Enterprise are
now owned by Innovation Works, the successor organization.
During 1999, the Fund incurred $17,000 ($9,000 in 1998) for accounting services
payable to a consulting firm in which one of the Fund's officers is a
significant shareholder.
Note 11 - Interest on Escrow Funds
- ----------------------------------
Under the terms of the First Offering, any interest earned on any subscriptions
held in the escrow account for more than 90 days was to be paid to the
subscribers at the time funds were released from the escrow account. This
interest, which totaled $20,327, was paid to subscribers when the Fund withdrew
funds from escrow in July, 1997. Cash payments of interest amounted to $20,391
in 1997.
Note 12 - Year 2000 Conversion
- ------------------------------
In 1998, the Fund initiated a program to prepare its computer systems and
applications for the year 2000. The Year 2000 issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Fund's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations. The Fund presently believes
that, with appropriate modifications to existing software and conversions to new
software, the Year 2000 issue does not pose significant problems for the Fund's
computer systems as so modified and converted.
Note 13 - Subsequent Events
- ---------------------------
During January, the Fund purchased 100,000 shares of Telemed Technologies
International, Inc. ("Telemed") Class A Convertible Preferred Stock ("Class A
Preferred") at $1.00 per share for a total investment of $100,000. The Class A
Preferred is convertible into common initially on a one preferred share equals
two common shares basis, (three common shares if milestone is not met) has
voting rights, and certain liquidation and redemption preferences. At
approximately the same time, the Fund's shareholders purchased 80,000 shares of
Class A Preferred for a total investment of $80,000. As a result of these
purchases and previous purchases of other Telemed securities, the Fund and the
Fund and its shareholders current ownership interest in Telemed is 1.1 percent
and 4.3 percent, respectively, on a fully diluted basis.
Telemed maintains a central monitoring center which monitors, in a real time
environment, heart activity for recent heart attack patients using devices
designed and distributed by Telemed.
25
On January 19, 2000, Medtrex closed a transaction with the Ethicon division of
Johnson & Johnson whereby Ethicon would acquire all the assets of Medtrex and
assume certain liabilities, in exchange for approximately $7,100,000. Of this
total, approximately $700,000 is repayment of subordinated debt to shareholders,
which was repaid in February, 2000. The Fund's share of the subordinated debt
repaid was $39,000, including $13,000 of accrued interest income at a 50 percent
interest rate. The remainder, approximately $6,400,000, will be held in an
interest bearing escrow account, and if there are no claims by Ethicon against
this escrow account, approximately 60% will be dispersed to shareholders in mid-
July, 2000, and the remainder one year after the closing, i.e. January, 2001.
The cash payment, apart from the subordinated debt component, represents not
only payment for common stock, but also cash in lieu of exercising options or
warrants outstanding at the time of closing. The Fund's remaining investment in
Medtrex is $152,477.
The cash to be received in relation to stock and warrants is expected to equal
approximately 2.6 times the initial investment, i.e. a gain of approximately
160% on invested capital. This return could be significantly less than the
expected amount if there are substantial claims by Ethicon against the escrow.
Accordingly, no gain has been recognized in the financial statements because of
the uncertainty as to the ultimate realization of the amount.
The Fund concluded the sale of shares of its common stock under the Second
Offering Circular as of January 31, 2000. During the period, January 1, 2000
through January 31, 2000, the Fund received subscriptions to purchase 1,406,237
shares ($2,039,045). During the course of this Second Offering, the fund
received subscriptions to purchase 2,037,787 ($2,954,792). The Fund intends to
use the proceeds from this sale of securities primarily to invest in the equity
and/or debt securities of additional development stage companies located in
western Pennsylvania, and to make follow on investments, as appropriate, in
existing portfolio companies. The proceeds from this sale of securities will be
temporarily invested, pending investments in portfolio companies, in cash
equivalents, government securities, and high quality debt securities. A portion
of these proceeds may be used for normal operating expenses.
On February 7, 2000, the Fund, via exercise of its pre-emptive rights, purchased
$30,762 of a convertible bridge loan with Neo Linear. Neo Linear raised $640,274
through this bridge loan. Under the terms of this bridge loan, the principal
plus interest at 14 percent per annum automatically converts into the next
financing round (defined as a minimum of $3,000,000 less the amount of the
bridge loan) security on the same terms and price as that security if the
financing round is completed by April 30, 2000. If the financing round is not
completed by April 30, 2000, lenders have the option of converting principal and
interest, plus an additional 30 percent of the principal amount into a new
series preferred stock at one-half the first round valuation. At approximately
the same time, other private investors in the Fund purchased $67,512 of this
convertible bridge loan. The investment by the Fund and the combined investment
by the Fund and its shareholders represented an ownership interest of 4.8
percent and 15.4 percent, respectively, of the outstanding convertible bridge
loan.
Neo Linear produces computer aided design software for the semiconductor
industry.
On February 25, 2000, the Fund purchased 62,500 shares of Quantapoint, Inc.,
Series B Convertible Preferred Stock ("Series B") at $1.20 for a total
investment of $75,000. The Series B is convertible into common stock on an
initial 1:1 basis, has voting rights on an as converted basis, and has
liquidation and redemption preferences. As of this date, Quantapoint had sold
1,937,500 shares of Series B for a total of $2,325,000.
Quantapoint uses a 3D laser camera to measure "existing conditions" dimensions
of the interior or exterior of structures, and then converts the 3D data to 2D
drawings for building owners and architects.
Item 9. Changes In and Disagreements with Accountants on Accounting and
- -------------------------------------------------------------------------
Financial Disclosure
- --------------------
None
26
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table and text sets forth the names and ages of all directors and
executive officers of the Registrant and their position and offices with the
Registrant. All of the directors will serve until the next annual meeting of the
stockholders and until their successors are elected and qualified or their
earlier death, retirement, resignation or removal. Officers serve at the
discretion of the Board of Directors. A brief description of the business
experience of each director and executive officer during the past five years and
an indication of directorships held by each director in other companies subject
to the reporting requirements under the federal securities laws are also
provided. There are no family relationships among directors and executive
officers.
Name Age Title Director Since
G. Richard Patton 48 President, Chief Executive Officer June 1, 1996
and Director
Alvin J. Catz 61 Chief Financial Officer, Treasurer June 1, 1996
and Director
William F. Rooney 59 Secretary and Director June 1, 1996
Philip Samson 42 Director June 1, 1996
Douglas F. Schofield 54 Director June 1, 1996
G. Richard Patton, President, Chief Executive Officer and Director. Dr. Patton
holds a Ph.D. in Strategic Management and an M.S. in Industrial Administration
from the Krannert Graduate School of Management, Purdue University, and a B.S.
in Chemistry from the University of Michigan.
From 1978 - 1981, Dr. Patton was Vice President and Chief Administration Officer
of the Mellon Institute in Pittsburgh and a senior staff member of the Energy
Productivity Center in Washington, D.C. In 1976, Dr. Patton was the recipient
of the first General Electric Award for Outstanding Research in the field of
strategic planning. He has also been elected Distinguished Professor by several
of the University of Pittsburgh Executive M.B.A. classes. In 1995 and 1996, he
was selected as a finalist in the Inc. Magazine Entrepreneur of the Year award
program. His publication topics and research interests include strategy
development, mergers and acquisitions, divestment, turn around management and
restructuring strategies, and entrepreneurship.
27
Dr. Patton has been a faculty member of the University of Pittsburgh's Joseph M.
Katz Graduate School of Business since 1976, and is currently an Associate
Professor. He teaches in the area of strategic management, planning and control
systems and entrepreneurship and new venture management in graduate and
executive programs. He also taught at Carnegie Mellon University's Graduate
School of Industrial Administration and at Chulalongkorn University's Graduate
Institute of business Administration in Bangkok, Thailand.
Dr. Patton is currently an active consultant, with clients that include Fortune
500 firms, family-owned firms, new ventures, and research and industry
associates in the U.S., Europe and Asia. His consulting activities include
executive development programs, strategy development, strategic planning systems
design and development, competitive analysis, technology and market assessment
and new venture analysis and start-up. He is also active in the venture capital
area and has been associated with or consulted on the founding, financing and
start-up of several new technology based companies. He also currently serves on
the boards of several companies.
During the past five years, Dr. Patton has held investments in over 30 private
placements, including for companies engaged in such diverse businesses as
software design, fiber optics, corrugated container manufacture, copier
distribution and medical device design and production. The total raised for
these private placements from all investors has been in excess of $50 million.
Alvin J. Catz, Chief Financial Officer, Treasurer and Director. Mr. Catz is
currently a principal with Catz Consulting Associates, Inc. The firm offers
services in the areas of finance/accounting and computers/data processing. He is
actively involved in assisting new ventures in all aspects of their early stage
development including business plans, financing, organizational, and other
typical start-up related issues.
Mr. Catz has over 30 years of diversified business and financial experience
including management consulting, Fortune 500 corporation financial officer, and
major certified public accounting firm management. Mr. Catz's background offers
an unusual combination of major mature company experience and dynamic smaller
growth company experience. This experience includes over five years as Corporate
Controller with H.J. Heinz Company in Pittsburgh, Pennsylvania. As Corporate
Controller, he was responsible for internal and external accounting and
financial reporting, accounting/internal control systems, financial policies,
and coordination of employee benefit plans.
Prior to joining Heinz in 1974, Mr. Catz served as Assistant Corporate
Controller for KDI Corporation ("KDI") in Cincinnati, Ohio, a conglomerate with
interests in defense, recreation, manufacturing and distribution. During his
five year association with KDI, its annual revenues grew from $15 million to
$135 million. His earlier experience includes serving as a Group Financial
Manager with Cincinnati Milacron, a major machine tool manufacturer based in
Cincinnati, Ohio. He began his business career with Peat, Marwick, Mitchell &
Co., a major certified public accounting firm.
Mr. Catz has a Master of Business Administration degree in Advanced Business
Economics from Xavier University, and a Bachelor of Business Administration
degree in Accounting from the University of Pittsburgh. He is a Certified Public
Accountant, and a member of the American Institute of Certified Public
Accountants and the Pennsylvania Institute of Certified Public Accountants. He
is a regular lecturer in the University of Pittsburgh's Graduate School of
Business. In addition, he has taught Financial Management in the University of
Pittsburgh's Graduate School of Business Management Program for Entrepreneurs.
During the past five years, Mr. Catz has held investments in approximately 12
development stage companies in Western Pennsylvania. He has also assisted
numerous development stage companies in their fund raising efforts, including
assisting in the preparation of business plans and private placement memoranda.
28
William F. Rooney, Secretary and Director. Mr. Rooney is an early stage investor
and former Vice-President of Sales for Transline Communications Corporation, an
international provider of voice and data services to the financial services
industry between the U.S. and major financial service centers in Europe, a
position he has held since 1995. Transline was acquired by Transaction Network
Services, Inc., a NYSE Company, in January, 1999.
Mr. Rooney has over 30 years of experience in the telecommunications industry
including senior management and operating positions. From 1986 to 1994, Mr.
Rooney was Vice-President of Sales for Republic Telcom Systems Corporation, a
telecommunications company specializing in multiplexer products ("Republic
Telcom"). In this capacity, he assisted Republic Telcom in the start-up phase
and helped to raise funding through venture capital firms. Republic Telcom was
successfully acquired by Netrix Corporation in 1994.
Mr. Rooney holds a B.S. degree in Industrial Management from LaSalle University
(1962) and an M.B.A. from Fordham University (1975).
Mr. Rooney is an active private investor and currently has investments in eight
early stage, high technology companies in various industries.
Philip Samson, Director. Mr. Samson is an independent business consultant.
Mr. Samson's background includes several appointments within Mellon Bank. From
1981 to 1983, he worked for Mellon's Economics Department where he completed
advanced financial modeling assignments. In 1983, he joined Mellon's Corporate
Consulting Department where he managed a number of innovative projects including
designing a corporate credit scoring system, an internal credit network, a
retail bank strategy, and a profitability analysis and tactical plan for credit
cards. Mr. Samson became Vice President of Mellon's Credit Card Department in
1989. In this capacity, he was responsible for five portfolio purchases, as well
as structuring offerings that secured various affinity contracts. He also
initiated numerous profit improvements programs, including line increases,
incentive pricing, cross selling and related matters.
Additionally, in 1985, Mr. Samson acted as an advisor to Peter Ueberroth (then
Commissioner of Major League Baseball) to whom he contributed ideas which Mr.
Ueberroth incorporated in his proposals to the baseball players and owners
during the labor dispute in the summer of 1985. The Commissioner was credited
with bringing a quick resolution to the dispute, with the baseball strike
lasting only two days. In 1992 and 1993, Mr. Samson was extensively quoted in
the financial and computer industry trade press, including a Fortune magazine
article titled, "Computers That Learn By Doing," for his work involving the
financial application of neural networks.
Mr. Samson left Mellon Bank in 1993. In 1993 and 1994, Mr. Samson
conceptualized, developed and implemented a 100% interest rebate credit card
offered by a major financial institution. This innovative product has had a
marked impact in the credit card industry.
Since January, 1998, Mr. Samson has been a vice president and director of KO
Interactive, Inc., a computer game development company that he co-founded.
Philip J. Samson holds an M.B.A. from Pennsylvania State University and a
Bachelor of Science degree in Engineering from the University of Maryland.
Douglas F. Schofield, Director. Dr. Schofield currently conducts business
through his own firm, Schofield Financial Counseling, providing financial advice
to individuals and families, and administrative services to families in the
handling of their financial affairs.
29
Dr. Schofield has sought throughout his career to build a strong foundation in a
variety of fields related to finance and planning. In addition to two years
working in an analytic and planning capacity in the Federal Government
(Transportation Department), Dr. Schofield has 12 years experience in the
banking industry. At Mellon Bank in Pittsburgh, he managed the bank's investment
strategy, managed foreign exchange trading worldwide, and planned the bank's
statewide expansion through the acquisition of other banks. Thereafter, Dr.
Schofield was employed by Equibank and worked with the Chairman in a special
capacity raising capital for the bank. For the three years prior to forming his
own firm, he worked as president in the firm of French, Schofield & Associates
providing comprehensive financial advice to individuals and families.
Dr. Schofield received a Bachelors degree from Yale University with honors, in
1967, with a major in Chemistry and Chemical Engineering. He then attended
Harvard Business School and received an M.B.A. and a Doctorate in Strategic
Planning. Dr. Schofield has taught M.B.A. courses at Atlanta University and at
the University of Pittsburgh. He is the past President of the Harvard Business
School Association of Pittsburgh and has held several chair positions, as well
as served as trustee, for LaRoche College.
During the past five years, Dr. Schofield has held investments in 13 development
stage companies in diverse industries. In addition, he has consulted extensively
with owners of closely-held companies during the past decade and has served on
the boards of two such companies during this period.
Item 11. Executive Compensation
No officer received any remuneration for serving as an officer of the Registrant
in 1999 or 1998. Each director receives a $300 monthly fee. Generally, board of
directors meetings are held monthly. Compensation earned by directors in 1999
amounted to $18,000 ($14,700 in 1998).
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Registrant's only class of stock as of December 31, 1999, was Common Stock,
$.01 par value.
Name and Address Amount and Nature of % of
Title of Class of Beneficial Owner Beneficial Ownership Class
- -------------- ------------------- -------------------- -----
Common Stock G. Richard Patton 15,000 0.5%
Scott Towne Center, Suite A-113
2101 Greentree Road
Pittsburgh, PA 15220
Common Stock William F. Rooney 20,000 0.7%
Scott Towne Center, Suite A-113
2101 Greentree Road
Pittsburgh, PA 15220
Common Stock Alvin J. Catz 20,000 0.7%
Scott Towne Center, Suite A-113
2101 Greentree Road
Pittsburgh, PA 15220
Common Stock Philip J. Samson 20,000 0.7%
Scott Towne Center, Suite A-113
2101 Greentree Road
Pittsburgh, PA 15220
30
Name and Address Amount and Nature of % of
Title of Class of Beneficial Owner Beneficial Ownership Class
- -------------- ------------------- -------------------- -----
Common Stock Douglas F. Schofield 180,000 6.3%
Scott Towne Center, Suite A-113
2101 Greentree Road
Pittsburgh, PA 15220
Common Stock PNC Venture Corp. 333,330 11.7%
PNC National Building
249 Fifth Avenue
Pittsburgh, PA 15222
Common Stock National City Venture Corp. 333,300 11.7%
1965 East Sixth Street
Cleveland, OH 44114
All officers and directors, as a group, own 255,000 shares or 9.0% of the total
issued and outstanding shares as of December 31, 1999.
Item 13. Certain Relationships and Related Transactions
- ---------------------------------------------------------
None of the officers and directors of the Registrant have had any direct or
indirect material transactions involving the Registrant during the current
reporting period. During 1999, the Registrant incurred $17,000 for accounting
services payable to a consulting firm in which one of the Fund's officers is a
significant shareholder. All of the officers and directors have purchased,
either directly or as beneficially owned, Common Stock under either or both of
the Registrant's First Offering Circular dated November 7, 1996 and Second
Offering Circular dated September 10, 1999.
Certain of the Registrant's directors have co-invested, along with the
Registrant, in the thirteen investments in Portfolio Companies that the
Registrant has made as of March 22, 2000. Directors' investments in Portfolio
Companies in excess of $60,000 as of March 22, 2000 were: Douglas F. Schofield-
Webmedx, Inc. $85,599; Alvin J. Catz - Webmedx, $140,922; William F. Rooney -
CoManage Corporation $78,000; and Philip J. Samson - Neo Linear $75,000.
Enterprise has served as the Registrant's investment advisor. As of December 31,
1998, Enterprise ceased operations, and is no longer serving as the Fund's
investment advisor. Enterprise screened potential Portfolio Companies and
presented them to the Registrant's Board of Directors for investment
consideration, conducted due diligence reviews of investment candidates as
directed by the Board of Directors, and provided staff to manage the day-to-day
operations of the Registrant including, portfolio management, preparing reports
to stockholders and performing administrative services.
In connection with its services in organizing the formation and development of
the Registrant, Enterprise originally purchased 250,000 shares of Common Stock
for $.01 per share. If all of the 5,000,000 Shares available for sale under the
Offering Circular were sold, these shares would have represented 4.8% of the
issued and outstanding shares of the Registrant. If less than 5,000,000 shares
were sold, the Registrant had the right to repurchase from Enterprise for $.01
per share such number of shares as would result in Enterprise's ownership
percentage being reduced to 4.8% of the then issued and outstanding shares of
the Registrant. During 1997, the Registrant closed its Offering after having
sold 2,104,333 shares of Common Stock. As of December 31, 1997, the Registrant
exercised the aforementioned right and repurchased 143,899 shares of its Common
Stock from Enterprise thereby reducing Enterprise's ownership to 106,101 shares
or 4.8% of the total shares issued and outstanding of 2,210,434.
31
Enterprise received a fee equal to 5% of the aggregate amount of assets invested
by the Registrant in Portfolio Securities for providing investment advisory and
administrative services to the Registrant. During 1998, Enterprise earned
$37,500 ($5,000 in 1997) of such fees. Enterprise also could have received
compensation from investment partners or members of any investment consortium
that invested with the Registrant in Portfolio Securities, all on such basis as
such other parties and Enterprise agreed, provided that in no event, would
Enterprise charge fees to such consortium members or investment partners at
rates lower, or on terms otherwise more favorable, than were offered to the
Registrant. Furthermore, none of the employees, officers or directors of
Enterprise could receive any compensation from any Portfolio Company by reason
of the Registrant or any other investor investing in such Portfolio Company's
securities upon the recommendation of Enterprise.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Fund's
directors, certain officers and persons who own more than ten percent of the
outstanding Common Stock of the Fund, to file with the Securities and Exchange
Commission reports of changes in ownership of the Common Stock of the Fund held
by such persons. Officers, directors and greater than ten percent shareholders
are also required to furnish the Fund with copies of all forms they file under
this regulation. To the Fund's knowledge, based solely on a review of the copies
of such reports furnished to the Fund and representations that no other reports
were required, all Section 16(a) filing requirements applicable to all of its
officers and directors were complied with during fiscal 1999.
32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- ---------------------------------------------------------------------------
(a) (1) The following financial statements and supplemental data are included
in Part II, Item 8:
Page No.
Independent Auditor's Report 11
Financial Statements:
Statements of Assets and Liabilities, December 31, 1999 and 1998 12
Statements of Operations for the Year ended December 31, 1999, for 13
the Year ended December 31, 1998, and for the Year ended December
31, 1997
Statements of Changes in Net Assets (Deficit) for the Year ended 14
December 31, 1999, for the Year ended December 31, 1998, and
for the Year ended December 31, 1997
Statements of Cash Flows for the Year ended December 31, 1999, 15
for the Year ended December 31, 1998, and for the Year ended
December 31, 1997
Notes to Financial Statements 16
(2) All schedules other than Schedule 1 are omitted because they
are not applicable or the required information is shown in
the financial statements or notes thereto.
(3) Exhibits included herein:
*3 (a) - Articles of Incorporation
**3 (b) - By-Laws
***10.1 - Investment Advisory Agreement dated as of November 7,
1996, between the Registrant and Enterprise
Schedule 1 - Investments in Securities of Unaffiliated Issuers
Schedule 11 - Computation of Net Income Per Share
(b) Reports on Form 8-K:
No reports were filed on Form 8-K by the Registrant during the last
quarter of the period covered by this report.
* Incorporated by reference to the Registrant's Form 10 filed with the
Commission on October 21, 1996.
** Incorporated by reference to the Registrant's Notification on Form 1-E
filed with the Commission on September 6, 1996.
*** Incorporated by reference to the Registrant's Form 10-K filed with the
Commission on March 31, 1997.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, Western Pennsylvania Adventure Capital Fund has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized:
Western Pennsylvania Adventure Capital Fund
(Registrant)
By: /s/ G. Richard Patton
____________________________________________
G. Richard Patton
President, Chief Executive Officer and Director
Date: March 22, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
/s/ Alvin J. Catz Chief Financial Officer, Date: March 22, 2000
___________________________ Treasurer, and Director
Alvin J. Catz
/s/ William F. Rooney Secretary and Director Date: March 22, 2000
___________________________
William F. Rooney
/s/ Philip Samson Director Date: March 22, 2000
___________________________
Philip Samson
/s/ Douglas F. Schofield Director Date: March 22, 2000
___________________________
Douglas F. Schofield
34
Schedule 1
Western Pennsylvania Adventure Capital Fund
Investments in Securities of Unaffiliated Issuers
As of December 31, 1999
Balance Held at Close of Period Value of Each
Acquisition Number of Shares Item at Percent of
Name of Issuer and Title of Issue Date Principal Amount of Bonds and Notes Close of Period Net Assets
- --------------------------------- ---- ----------------------------------- --------------- ----------
Common Shares
Medical Products and Services
Medtrex Incorporated Jun-98 72,335 shares (1) $2,477 0.08%
Internet/E-Commerce
- -------------------
e-Cruise inc. Dec-99 400,000 shares (1) $100,000 3.33%
Subtotal-Common Shares $102,477 3.41%
Preferred Shares
Medical Products and Services
- -----------------------------
Medtrex Incorporated Series B Nov-97 232,558 shares (1) $100,000
Medtrex Incorporated Series B Jun-98 116,279 shares (1),(2) $50,000
Webmedx Inc. Corporation Series B Jul-98 60,606 shares (1),(3) $100,000
Webmedx Inc. Corporation Series B Nov-98 20,000 shares (1),(4) $200
Webmedx Inc. Corporation Series C Dec-99 15,150 shares (1) $49,995
Subtotal Medical Group $300,195 9.99%
Computer - Software
- -------------------
Neo Linear Inc. Feb-98 341,997 shares (1) $100,000
MediaSite Inc. Series A Apr-98 80,000 shares (1) $100,000
MediaSite Inc. Series B May-99 2,031 shares (1) $2,548
CoManage Corporation Series I Convertible Oct-98 100,000 shares (1),(8) $200,000
CoManage Corporation Series II Convertible Aug-99 39,487 shares (1) $78,974
Quantapoint Inc. Jun-99 116,000 shares (1) $99,423
Subtotal Computer Group $580,945 19.33%
Internet/E-Commerce Apr-99 66,221 shares (1),(8) $163,731 5.45%
- -------------------
Entigo Inc.
Other
- -----
Applied Electro-Optics Corporation Class A Convertible Aug-98 20,000 shares (1) $100,000
Allegheny Child Care Academy Series B Nov-98 55,938 shares (1) $100,000
Subtotal Other Group $200,000 6.65%
Subtotal Preferred Shares $1,244,871 41.42%
Bonds and Notes
Medical Products and Services
- -----------------------------
Medtrex Incorporated Mar-99 $26,000 Notes $26,000
Precision Therapeutics Inc. Subordinated Convertible Notes Mar-98 $100,000 Notes (2) $100,000
Precision Therapeutics Inc. Subordinated Convertible Notes Sep-98 $10,000 Notes (2) $10,000
Precision Therapeutics Inc. Subordinated Convertible Notes Jun-99 $60,000 Notes (2) $60,000
Interactive Information Inc. Jan-99 $100,000 Notes (2) $100,000
Subtotal Medical Group $296,000 9.85%
----
Computer - Software
- -------------------
Neo Linear Inc. Jun-99 $25,065 Notes (2) $25,065
Neo Linear Inc. Sep-99 $25,066 Notes (2) $25,066
Subtotal Computer Software Group $50,131 1.67%
Other
- -----
Applied Electro-Optics Corporation Oct-99 $100,000 Notes (2) $100,000 3.33%
Subtotal Bonds and Notes $446,131 14.84%
Grand Total - Investments $1,793,479 59.67%
=========== =====
Footnotes:
(1) Non-income producing securities
(2) Carries warrants for purchase of additional stock
(3) Acquired upon conversion of $100,000 of Convertible Promissory Notes
acquired July 1998
(4) Acquired upon exercise of warrants received upon purchase of Convertible
Promissory Notes
(5) All securities held are restricted securities
(6) All securities held are carried at historical cost except as otherwise noted
(7) The aggregate cost of all securities for Federal income tax purposes is
$1,629,749
(8) Unrealized appreciation has been recognized - total amount on all
appreciated securities $163,731
(9) No unrealized depreciation has been recognized