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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, 2000
-----------------
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 16, 2001: $6,723,392
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 16, 2001
----- -----------------------------
Common stock, $.01 par value 4,202,120
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 7
Item 7. Management's Discussion and Analysis of Financial
Condition And Results of Operations 10
Item 8. Financial Statements and Supplementary Data 12
Item 9. Changes in and Disagreements with Accountants on
Accounting And Financial Disclosure 32
Part III
Item 10. Directors and Executive Officers of the Registrant 33
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners and Management 36
Item 13. Certain Relationships and Related Transactions 37
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 39
2
PART 1
Item I. 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. On
July 14, 2000, the Registrant initiated a third offering of its Common Stock
under Regulation E of the Securities Act of 1933 (the "Third Offering"). This
Third Offering has been extended through the earlier of March 31, 2001 or the
sale of 875,000 shares of Common Stock. 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 $300,000 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 October 18, 2000.
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 2,795,851 shares, Against 0 shares,
--------- -
Withheld 0 shares
-
Alvin J. Catz For 2,795,851 shares, Against 0 shares,
--------- -
Withheld 0 shares
-
William F. Rooney For 2,795,851 shares, Against 0 shares,
--------- -
Withheld 0 shares
-
Philip Samson For 2,795,851 shares, Against 0 shares,
--------- -
Withheld 0 shares
-
Douglas F. Schofield For 2,795,851 shares, Against 0 shares,
--------- -
Withheld 0 shares
-
There were no other nominees.
(b) Ratify appointment of Goff Backa Alfera & Company, LLC as the
Registrant's independent certified public accountants for the fiscal
year ending December 31, 2000.
For 2,785,851 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 the following trades in its Common Stock from May 23,
1996 (date of inception) through March 16, 2001 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
First Quarter 2000 8,000 $1.45
Fourth Quarter 2000 5,000 $1.45
As of March 16, 2001, the Registrant had approximately 190 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, 2000 January 1, 1999 January 1, 1998
Through Through Through
December 31, 2000 December 31, 1999 December 31, 1998
----------------- ----------------- -----------------
Revenues $ 274,234 $ 99,844 $ 99,467
Net income (loss) $ 335,286 $ 100,378 $ 3,049
Net income (loss) per share $ .08 $ .04 $ .00
Cash dividends $ 0 $ 0 $ 0
Total assets $ 5,639,958 $ 3,099,817 $ 2,068,514
Net assets applicable to shares outstanding $ 5,334,035 $ 3,005,447 $ 2,039,418
Net asset (deficit) value per share $ 1.27 $ 1.06 $ .92
Syndication costs $ 149,220 $ 135,604 $ 85,507
5
May 23, 1996
January 1, 1997 (Date of Inception)
Through Through
December 31, 1997 December 31, 1996
----------------- -----------------
Revenues $ 74,205 $ 0
Net income (loss) $ 16,588 $ (106)
Net income (loss) per share $ .01 $ .00
Cash dividends $ 0 $ 0
Total assets $ 2,054,900 $ 15,418
Net assets applicable to shares outstanding $ 2,036,369 $ (38,773)
Net asset (deficit) value per share $ .92 $ (0.16)
Syndication costs $ 85,507 $ 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
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 (loss) 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
7
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 (loss) 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
8
WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
Three Months Ended
------------------
March 31 June 30 Sept. 30 Dec. 31
2000 2000 2000 2000
Revenues $ 47,830 $ 82,571 $ 131,158 $ 12,675
Net income (loss) $ 6,524 $ 21,486 $ 351,977 $ (44,701)
Earnings (loss) per share $ .00 $ .01 $ .08 $ (.01)
Cash dividends $ 0 $ 0 $ 0 $ 0
Total assets $5,154,918 $5,049,616 $5,632,474 $5,639,958
Net assets applicable $5,076,285 $4,966,695 $5,315,411 $5,334,055
to shares outstanding
Net asset value per share $ 1.19 $ 1.19 $ 1.28 $ 1.27
Syndication costs $ 3,730 $ 5,950 $ 3,261 $ 675
9
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. 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 2,057,787 shares ($2,983,792) of which
1,426,237 shares ($2,068,045) were received subsequent to December 31, 1999.
Revenues in 2000 amounted to $274,234 and consisted of interest earned on
temporary investments of $140,968, interest earned on Portfolio Companies
convertible debt of $26,139, management fees of $25,000 and realized gains on
sale of portfolio securities of $82,127. 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. Interest earned on
temporary investments increased significantly in 2000 as a result of the
Registrant's sale of approximately $3,000,000 of its Common Stock under its
Second Offering which closed January 31, 2000. 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. The
decrease in interest earned on Portfolio Companies convertible debt in 2000
compared to 1999 was the result of conversion of portions of these debts into
equity securities of the Portfolio Companies. Management fees in 2000 and 1999
included a full year's fees compared with one-half year's fees in 1998. The
management fees are received from the Urban Redevelopment Authority of
Pittsburgh ("URA") under a co-investment agreement signed June 30, 1998.
General and Administrative expenses in 2000 and 1999 amounted to $18,000, and
consisted of directors fees. General and Administrative expenses in 1998 were
$14,700 and consisted of directors fees.
Other Operating Expenses in 2000 amounted to $202,375 compared with $88,919 in
1999 and $74,496 in 1998. Other Operating Expenses in 2000 included professional
fees (legal and accounting) of $77,634, advisory board fees of $52,096,
insurance premiums of $20,490, and other items of $52,155, primarily
administrative and clerical support. Other Operating Expenses in 1999 included
professional fees (legal and accounting) of $38,551,
10
advisory board fees of $24,000 and other items of $26,368, primarily
administrative and clerical support. Other Operating Expenses in 1998 consisted
of professional fees of $31,572, investment advisory fees of $37,500 and other
items of $5,424. The year to year 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 during the year, and the increase in 2000 reflects a full year's
activity.
Interest expense amounted to $48 in 1999, and $99 in 1998. Income taxes for
2000, 1999 and 1998 of $256,967, $56,230 and $7,123, respectively, represent
Federal and Pennsylvania income taxes due on the Registrant's pretax income. The
higher income taxes in 2000 and 1999 resulted from the substantially higher
pretax income in those years.
During 2000 and 1999, the Registrant recognized unrealized appreciation of
$538,394 and $163,731, respectively, on Portfolio Securities based upon
subsequent financing rounds by several Portfolio Companies at significantly
higher valuations than the related carrying values of those investments. No such
unrealized appreciation was recognized in 1998.
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 Registrant sold $2,983,792 of its
Common Stock under the Second Offering. During the year ending December 31,
2000, the Registrant sold $64,000 of its Common Stock under the Third Offering.
The Third Offering has been extended through the earlier of March 31, 2001 or
the date the Third Offering is fully subscribed. The Third Offering is
continuing at this time. The balance of the funds from these offerings has been
temporarily invested, pending investment in Portfolio Securities, in cash
equivalents, government securities, and high quality debt securities. At
December 31, 2000, the Registrant has invested $3,999,650 in twenty Portfolio
Companies.
As of December 31, 2000, the Registrant had approximately $1,613,372 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 $2,983,792 under the Second Offering, and has raised
$64,000 under the Third Offering. Most of this amount, except for normal
operating expenses, is available for investment in Portfolio Securities. At
December 31, 2000, $3,999,650 had been invested in twenty 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.
Inflation
- ---------
The Registrant does not believe that inflation will have any significant effect
on the Registrant's operations or financial position.
11
Item 8. Financial Statements and Supplementary Data
- -----------------------------------------------------
Index to Financial Statements and Supplementary Financial Data
Page No.
Independent Auditor's Report 13
Financial Statements:
Statements of Assets and Liabilities, December 31, 2000 and 1999 14
Statements of Operations for the Year ended December 31, 2000, for the
Year ended December 31, 1999 and for the Year ended December 31, 1998 15
Statements of Changes in Net Assets for the Year ended December 31,
2000, for the Year ended December 31, 1999 and for the Year ended December 31, 1998 16
Statements of Cash Flows for the Year ended December 31, 2000, for the
Year ended December 31, 1999 and for the Year ended December 31, 1998 17
Notes to Financial Statements 18
12
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, 2000 and 1999, and the related statements of operations, changes in
net assets (deficit), and cash flows for the years ended December 31, 2000, 1999
and 1998. 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, 2000 and 1999, and the results of its
operations, the changes in its net assets, and its cash flows for the years
ended December 31, 2000, 1999, and 1998, 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 Backa Alfera & Company, LLC
March 16, 2001
13
Western Pennsylvania Adventure Capital Fund
Statements of Assets and Liabilities
As of
December 31, 2000 December 31, 1999
----------------- -----------------
Assets
------
Cash and Cash Equivalents $ 884,821 $1,004,428
Short Term Investments, Net 728,551 253,383
Receivables 18,250 39,407
Investment in Portfolio Companies 3,999,650 1,793,479
Prepaid Taxes 2,606 0
Organization Costs 6,080 9,120
---------- ----------
Total Assets $5,639,958 $3,099,817
========== ==========
Liabilities
-----------
Accounts Payable $ 6,976 $ 25,496
Accrued Liabilities 6,500 18,000
Accrued Income Taxes 0 174
---------- ----------
Total Current Liabilities 13,476 43,670
Deferred Income Taxes 292,447 50,700
---------- ----------
Total Liabilities $ 305,923 $ 94,370
========== ==========
Net Assets
----------
Common Stock, Par Value $.01 Per Share,
Authorized 10,000,000 Shares, Issued and
Outstanding 4,202,120 Shares (2,841,984 $ 44,521 $ 29,859
Shares at December 31, 1999)
Additional Paid in Capital 5,110,104 2,992,722
Syndication Costs (149,220) (135,604)
Retained Earnings 455,195 119,909
Treasury Stock - 250,000 Shares (143,899 Shares (126,565) (1,439)
at December 31, 1999) at cost ---------- ----------
Net Assets Applicable to Shares Outstanding $5,334,035 $3,005,447
========== ==========
Net Assets Value Per Share $ 1.27 $ 1.06
========== ==========
See Independent Auditor's Report and accompanying notes to financial statements.
14
Western Pennsylvania Adventure Capital Fund
Statements of Operations
For the Periods
January 1, 2000 January 1, 1999 January 1, 1998
through through Through
December 31, 2000 December 31, 1999 December 31, 1998
----------------- ----------------- -----------------
Revenues:
Interest $ 167,107 $ 74,844 $ 86,967
Management Fees 25,000 25,000 12,500
Realized Gains 82,127 0 0
--------- --------- ---------
Total Revenues 274,234 99,844 99,467
--------- --------- ---------
Expenses:
General and Administration 18,000 18,000 14,700
Interest 0 48 99
Other Operating Expenses 202,375 88,919 74,496
--------- --------- ---------
Total Expenses 220,375 106,967 89,295
--------- --------- ---------
Unrealized Appreciation - 538,394 163,731 0
Portfolio Companies
Profit Before Income Tax 592,253 156,608 10,172
Income Tax Expense 256,967 56,230 7,123
--------- --------- ---------
Net Income $ 335,286 $ 100,378 $ 3,049
========= ========= =========
Earnings Per Share $ .08 $ .04 $ .00
========= ========= =========
See Independent Auditor's Report and accompanying notes to financial statements.
15
Western Pennsylvania Adventure Capital Fund
Statements of Changes in Net Assets
For the Periods
January 1, 2000 January 1, 1999 January 1, 1998
through through Through
December 31, 2000 December 31, 1999 December 31, 1998
----------------- ----------------- -----------------
From Operations
Net Income $ 335,286 $ 100,378 $ 3,049
From Share Transactions:
Proceeds from
Sale of Common Stock 2,132,044 915,748 0
Syndication Costs (13,616) (50,097) 0
Purchase of Treasury Stock (125,126) 0 0
----------- ----------- -----------
Net Increase in Net Assets
Derived from Share
Transactions 1,993,302 865,651 0
----------- ----------- -----------
Net Increase In Net
Assets 2,328,588 966,029 3,049
Net Assets:
Beginning of Period 3,005,447 2,039,418 2,036,369
----------- ----------- -----------
End of Period $ 5,334,035 $ 3,005,447 $ 2,039,418
=========== =========== ===========
See Independent Auditor's Report and accompanying notes to financial statements.
16
Western Pennsylvania Adventure Capital Fund
Statements of Cash Flows
For the Periods
January 1, 2000 January 1, 1999 January 1, 1998
through through through
December 31, 2000 December 31, 1999 December 31, 1998
----------------- ----------------- -----------------
Cash Flow from Operating Activities:
Income $ 335,286 $ 100,378 $ 3,049
Change in Assets and Liabilities:
Organization Costs - Decrease 3,040 3,040 3,040
Receivables-(Increase) Decrease 21,157 (32,954) (6,453)
Prepaid Taxes-(Increase) Decrease (2,606) 2,440 (2,440)
Accounts Payable-Increase (Decrease) (18,520) 11,100 4,385
Accrued Liabilities-Increase (Decrease) (11,674) 3,474 6,180
Deferred Taxes-Increase 241,747 50,700 0
----------- ---------- ----------
Net Cash Provided by Operating Activities 568,430 138,178 7,761
----------- ---------- ----------
Cash Flow from Financing Activities:
Proceeds from sale of Common Stock 2,132,044 915,748 0
Payment of Syndication Costs (13,616) (50,097) 0
Purchase of Treasury Stock (125,126) 0 0
----------- ---------- ----------
Net Cash Provided by
Financing Activities 1,993,302 865,651 0
----------- ---------- ----------
Cash Flow from Investing Activities:
Purchase of Short Term Investments,
Net of Redemptions (475,168) 641,577 676,122
Investments in Portfolio Companies, Net (2,206,171) (930,802) (762,677)
----------- ---------- ----------
Net Cash (Used in) Investing Activities (2,681,339) (289,225) (86,555)
----------- ---------- ----------
Net Increase (Decrease) in Cash and
And Cash Equivalents: (119,607) 714,604 (78,794)
Cash and Cash Equivalents at
Beginning of Period 1,004,428 289,824 368,618
----------- ---------- ----------
Cash and Cash Equivalents at
End of Period $ 884,821 $1,004,428 $ 289,824
=========== ========== ==========
See Independent Auditor's Report and accompanying notes to financial statements.
17
Western Pennsylvania Adventure Capital Fund
Notes to Financial Statements
December 31, 2000
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%.
18
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, 2000 and December 31, 1999.
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 2,057,787 shares of its common
stock and closed the Second Offering.
On July 14, 2000, the Fund began offering a total of 875,000 shares of its
common stock, par value $0.01 at a price of $1.60 per share under Regulation E
of the Securities Act of 1933 (the "Third Offering"). The Third Offering has
been extended through the earlier of March 31, 2001 or the date the Third
Offering is fully subscribed. As of December 31, 2000, the Fund had sold 40,000
shares of its common stock under the Third Offering.
Syndication Costs
Legal, accounting and other costs of $149,220 incurred in connection with the
Fund's First Offering, Second Offering and Third Offering have been capitalized
and reported as a permanent reduction of net assets in accordance with generally
accepted accounting principles by year as follows:
Year ended December 31, 2000 $13,616
Year ended December 31, 1999 $50,097
Year ended December 31, 1998 $ 0
Year ended December 31, 1997 $85,507
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, 2000 and 1999.
19
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.
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 $6,080 ($9,120 at December 31, 1999)
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, adjusted for outstanding stock
options. There are no other outstanding 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 authorized the granting of options
to purchase the Fund's common stock to directors, officers, employees, and
members of the advisory board of the Fund. Options to purchase 250,000 shares of
the Fund's common stock have been granted to directors of the Fund under the
terms of this stock option plan.
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 years ended December 31, 2000 and 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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes
to those financial statements. Actual results could differ materially from these
estimates.
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.
20
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 were 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 has used 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 have been
temporarily invested, pending investments in portfolio companies, in cash
equivalents, government securities, and high quality debt securities. A portion
of these proceeds have been used for normal operating expenses. As of December
31, 1999, the Fund had received subscriptions to purchase 631,550 shares
($915,747). The Fund sold 2,057,787 shares of its common stock at $1.45 per
share under the Second Offering Circular, and closed the Second Offering as of
January 31, 2000.
The Fund began offering for sale up to 875,000 shares of its Common Stock at
$1.60 per share, or a maximum of $1,400,000, under an Offering Circular dated
July 14, 2000 ("Third 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 have been used for normal operating expenses. As of December
31, 2000, the Fund had received subscriptions to purchase 40,000 shares
($64,000).
As of December 31, 2000, $3,999,650 ($1,793,479 at December 31, 1999) was
invested in Portfolio Securities and the balance of the funds ($1,257,811)
remained invested in cash equivalents, government securities, and high quality
debt securities.
Note 3 - Investments in Portfolio Companies
- -------------------------------------------
As of December 31, 2000, the Fund had invested a total of $3,999,650 in twenty
Portfolio Companies ($1,793,479 in twelve Portfolio Companies at December 31,
1999). Also, see Schedule 1 for additional information on investments in
Portfolio Companies.
AcceLight Networks, Inc. (Applied Electro-Optics Corporation)
------------------------------------------------------------
On April 5, 2000, Applied Electro-Optics Corporation ("AEC") declared a
10:1 stock split for common shares.
On September 22, 2000, the Fund purchased 100,000 shares of AEC Class B
Convertible Preferred Stock ("Class B") at $1.50 per share for a total
investment of $150,000. At approximately the same time, other shareholders
in the Fund purchased 595,192 shares for a total investment of $892,788.
The total investment by the Fund, and by the Fund and its shareholders,
including shares previously purchased by Fund shareholders and shares
acquired by the Fund and its shareholders upon conversion of Convertible
Notes as described below, represented and ownership interest of 4.59
percent and 29.66 percent, respectively on a fully diluted basis.
21
Concurrent with this event, AEC's existing Convertible Notes, in
accordance with their existing terms, were converted, principal, accrued
interest, and a premium of 30 percent of principal, into Class B. The Fund
held $100,000 of these Convertible Notes which have been converted, along
with interest of $9,611, into 93,074 shares of Class B. At approximately
the same time, other shareholders of the Fund converted $816,443 of
Convertible Notes into 759,786 shares of Class B.
On November 30, 2000, AEC merged with AcceLight Networks, Inc.
("AcceLight"). Under the terms of the merger, each AEC shareholder will
receive 0.544290 of one share of AcceLight Series A-1 Preferred Stock
("AcceLight A-1") for each share of AEC capital stock, rounded to the
nearest whole share. Further, 15 percent of the AcceLight A-1 due to be
issued to AEC shareholders will be held in an escrow account for one year
to satisfy any AcceLight indemnification claims. Upon lapse of the escrow
period, all shares not used to satisfy indemnification claims will be
released from the escrow account and distributed to AEC shareholders.
Accelight has developed a highly scalable, all-optical networking switch
that enables network providers to deliver multiple services on a single
platform offering capacity growth, service flexibility and reliability.
Allegheny Child Care Academy, Inc.
----------------------------------
On January 17, 2000, the Fund, via exercise of its pre-emptive right,
purchased 2,409 shares of Allegheny Child Care Academy, Inc. ("ACCA")
Series B Preferred Stock ("ACCA Series B") at $1.7877 for a total
investment of $4,307, in connection with ACCA's sale of approximately
$500,000 of ACCA Series B to Kitty Hawk Capital Limited Partnership. As of
March 31, 2000, the total investment by the Fund, and by the Fund and its
shareholders, represented an ownership interest of 0.8 percent and 2.7
percent, respectively, on a fully diluted basis.
On May 1, 2000, the Fund exercised its full pre-emptive right and
purchased 922 shares of ACCA Series B at $1.7877 per share for a total
investment of $1,648. ACCA sold 114,273 shares of ACCA Series B, and
raised $204,287, including 2,398 shares ($4,287) from the exercise of pre-
emptive rights.
On September 6, 2000, the Fund purchased 17,878 shares of ACCA Series C
Preferred Stock at $2.7967 per share for a total investment of $49,999. At
approximately the same time, other shareholders in the Fund purchased
36,599 shares for a total investment of $102,356. The total investment by
the Fund, and by the Fund and its shareholders, including shares
previously acquired, represented an ownership interest of 1.04 percent and
3.39 percent, 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.
CoManage Corporation
--------------------
On September 22, 2000, the Fund exercised its pre-emptive right and
purchased 25,745 shares of CoManage Corporation ("CoManage") Series IV
Convertible Preferred Stock ("Series IV") at $5.1429 for a total
investment of $132,404. At approximately the same time, other shareholders
in the Fund purchased 42,888 shares for a total investment of $220,572.
The total investment by the Fund, and by the Fund and its shareholders,
including shares previously acquired, represented an ownership interest of
0.59 percent and 1.00 percent, respectively, on a fully diluted basis.
CoManage sells computer software that enables software providers to
deliver extended network services onto network vendors equipment at client
sites.
22
e-Cruise, Inc.
-------------
On March 21, 2000, the Fund purchased $75,000 of e-Cruise, inc.
("e-Cruise") Convertible Promissory Notes ("e-Cruise Notes"). The Notes
accrue interest at 6.5 percent, have a maturity date of August 15, 2000
and automatically convert into Series A Convertible Preferred Stock
("e-Cruise Series A") (the expected next security to be offered for sale)
at an approximately 23 percent discount to the e-Cruise Series A offering
price. If the e-Cruise Series A financing does not occur by May 31, 2000,
the conversion price is adjusted to the lesser of the aforementioned
approximately 23 percent discount or $0.50 per share. If the e-Cruise
Series A financing does not occur by August 15, 2000, the e-Cruise Notes
may, at the option of each holder, be converted into Common Stock at $0.25
per share, or the holder may demand payment of his note.
In all conversion events, accrued interest converts along with the
principal amount. At approximately the same time, other shareholders of
the Fund purchased approximately $210,000 of the e-Cruise Notes.
On August 10, 2000, the Fund purchased 47,785 shares of e-Cruise Series A
at $0.5232 per share for a total investment of $25,001. The total
investment by the Fund, and by the Fund and its shareholders, including
shares previously acquired by the Fund and its shareholders and shares
acquired by the Fund and its shareholders upon conversion of the e-Cruise
Notes as described below, represented an ownership interest of 2.52
percent and 8.37 percent, respectively, on a fully diluted basis.
Concurrent with this event, the e-Cruise Notes, in accordance with their
existing terms, were converted, principal and accrued interest, into
e-Cruise Series A. The Fund, and the Fund and its shareholders, currently
own 237,920 shares and 920,203 shares, respectively, of e-Cruise Series A.
e-Cruise will provide online infomediary marketing content for cruise
lines to potential passengers.
Entigo Corporation
------------------
On December 13, 2000, the Fund purchased 51,920 shares of Entigo
Corporation ("Entigo") Series D Convertible Preferred Stock ("Entigo
Series D") at $2.45 per share for a total investment of $127,204. At
approximately the same time, other shareholders of the Fund purchased
99,100 shares for a total investment of $242,795. The total investment by
the Fund and by the Fund and its shareholders including shares previously
acquired, represented an ownership interest of 1.97 percent and 0.46
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 communications.
Fidelity Flight Simulation Incorporated
---------------------------------------
On August 28, 2000, the Fund purchased 989.6767 shares of Fidelity Flight
Simulation Incorporated ("FFS") Redeemable Preferred Stock ("Redeemable")
and 1032.326 shares of Convertible Preferred Stock ("Convertible") for a
total investment of $100,000. The investment has been allocated as $99,343
for the Redeemable and $657 for the Convertible. At approximately the same
time, other shareholders in the Fund purchased 5,690.641 shares of
Redeemable and 5,935.8719 shares of Convertible for a total investment of
$575,000. The total investment by the Fund, and by the Fund and its
shareholders, represented an ownership interest of 4.34 percent and 29.31
percent, respectively, on a fully diluted basis.
FFS designs, manufactures and distributes full motion based flight
simulators for pilot training.
23
GamesParlor, Inc.
----------------
On July 24, 2000, the Fund purchased 210,526 shares of GamesParlor, Inc.
("GamesParlor") Series A Preferred Stock ("GamesParlor Series A") at
$0.475 per share for a total investment of $100,000. At approximately the
same time, other shareholders in the Fund purchased 60,000 shares of
GamesParlor Series A for a total investment of $28,500.
In conjunction with this investment, a director assigned a note payable
from GamesParlor for services rendered of $5,000 to the Fund. The note
payable bears interest at 6.60 percent per annum, matures on July 30,
2000, and is convertible into 10,525 shares of GamesParlor Series A.
GamesParlor provides internet games services to enthusiasts of classic
parlor games.
Laminar Software, Inc.
---------------------
On June 30, 2000, the Fund purchased 100,000 shares of Laminar Software,
Inc. ("Laminar") Series A Preferred Stock ("Laminar Series A") at $1.00
per share for a total investment of $100,000. The Laminar Series A has
voting rights, pre-emptive rights, registration rights, and has dividend
and liquidation preferences. The Laminar Series A is convertible initially
on a 1:1 basis. Approximately the same time, other shareholders of the
Fund purchased 575,000 shares for a total investment of $575,000. The
total investment by the Fund, and by the Fund and its shareholders,
represented an ownership interest of 1.5 percent and 10.2 percent,
respectively, on a fully diluted basis.
Laminar develops, markets, and sells tools for monitoring the performance
and availability of e-commerce sites.
Medtrex Incorporated
--------------------
On January 19, 2000, Medtrex Incorporated ("Medtrex"), closed a
transaction with the Ethicon division of Johnson & Johnson whereby Ethicon
would acquire all the assets of Medtrex and assume certain liabilities.
See Footnote 12, Realized Gains, for additional information regarding the
sale of Medtrex.
NeoLinear, Inc.
--------------
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 was not completed by April 30, 2000, lenders had 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.
24
On March 17, 2000, Neo Linear closed on an additional round of equity
financing and merged Neo Linear, a Pennsylvania corporation, into its
subsidiary, Neo Linear, a Delaware Corporation. Under the terms of the
merger, each shareholder in Neo Linear (PA) received: one share of Neo
Linear (Delaware) for each 40 shares of Neo Linear (PA); 0.2198746 shares
of Neo Linear (Delaware) Series A Preferred for each share of Neo Linear
(PA) Convertible Preferred; and 3.3899760 shares of Neo Linear (Delaware)
Series B Preferred for each share of Neo Linear Series A-1 Preferred. The
new investors, TVM IV GmbH and Co. and Intersouth Partners, received
3,991,228 shares of Series C Convertible Preferred Stock ("Series C") for
an investment of approximately $4,800,000. The aforementioned bridge
financing automatically converted into Series C as of March 17, 2000. The
interest earned on the convertible debt held by the Fund ($8,998) was
converted into Series C upon the closing of this financing round. The
investment by the Fund, and the investment by the Fund and its
shareholders, represented an ownership interest of 1.3 percent and 5.1
percent, respectively, on a fully diluted basis.
On October 23, 2000, at a special meeting of shareholders, NeoLinear's
shareholders approved a 4:1 split of the stock of the company.
On November 1, 2000, the Fund purchased 104,225 shares of Series D
Preferred Stock at $0.48 per share for a total investment of $50,000. At
approximately the same time, other shareholders of the Fund purchased
404,912 shares for a total investment of $194,358. The total investment by
the Fund, and by the Fund and its shareholders, including shares
previously acquired, represented an ownership interest of 0.97 percent and
4.05 percent, respectively, on a fully diluted basis.
Neo Linear produces computer aided design software for the semiconductor
industry.
Network Projects, Inc.
---------------------
On November 8, 2000, the Fund purchased $100,000 of Network Projects, Inc.
("NPI") Subordinated Convertible Debentures ("NPI Debentures"). The NPI
Debentures bear interest at a rate of 10 percent compounded annually and
mature on November 8, 2003. The principal and accrued interest
automatically convert into the same security as NPI will issue in its next
financing round at a discount price ranging from 10 percent to 25 percent
dependent upon the period of time elapsed between this round and the next
financing round.. At approximately the same time, other shareholders of
the Fund purchased $100,000 of NPI Debentures. The investment by the Fund,
and by the Fund and its shareholders, represented an ownership interest of
8.70 percent and 17.39 percent, respectively, of the NPI Debentures.
NPI is developing technology to allow users of wireless communication
devices to control real time access to all of their communication modes.
Precision Therapeutics, Inc.
---------------------------
On April 10, 2000, the Fund purchased $50,000 of Precision Therapeutics,
Inc. ("PTI)" Series III Subordinated Convertible Notes ("Series III
Notes"). The Series III Notes accrue interest at prime plus 3 percent,
have a maturity date of March 31, 2001, and are convertible (principal and
interest) into Series B Preferred Stock at $1.00 per share. The Series III
Notes carry warrants, equal to 35 percent of the principal amount, to
purchase common stock at $1.00 per share for a 10 year period. The Series
III Notes automatically convert into the next financing round security at
the next round price and terms. At approximately the same time, other
shareholders in the fund purchased $546,500 of Series III Notes. The
investment by the Fund, and by the Fund and its shareholders, represented
an ownership interest of 2.5 percent and 30.2 percent, respectively of
Series III Notes.
25
The Series I and Series II Notes ("Old Notes") had a maturity date of
March 31, 2000. As of that date, PTI asked the noteholders to either
convert the Old Notes into Series B Preferred Stock at $1.00 per share or
extend the maturity date until March 31, 2001. The Fund elected to convert
its $170,000 of Old Notes, plus accrued interest of $21,937, into Series B
Preferred Stock. The Fund's investment in Series B Preferred Stock
represents an ownership interest of 3.2 percent of that series.
PTI has developed a proprietary chemosensitivity assay designed to help
select the appropriate therapy for cancer patients.
Quantapoint, Inc.
----------------
On February 25, 2000, the Fund purchased 62,500 shares of Quantapoint,
Inc. ("Quantapoint"), Series B Convertible Preferred Stock ("Quantapoint
B") at $1.20 for a total investment of $75,000. The Quantapoint 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.
Quantapoint sold 2,355,457 shares of Quantapoint B for a total of
$2,826,553. The investment by the Fund, and by the Fund and its
shareholders, represented an ownership interest of 2.6 percent and 25.2
percent, respectively, 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.
Telemed Technologies, International, Inc.
----------------------------------------
During January, 2000, the Fund purchased 100,000 shares of Telemed
Technologies International, Inc. ("Telemed") Class A Convertible Preferred
Stock ("Telemed A") at $1.00 per share for a total investment of $100,000.
The Telemed A 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 Telemed A for a total investment of $80,000.
The investment by the Fund, and by the Fund and its shareholders,
including shares previously acquired, represented an 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.
TimeSys Corporation
-------------------
On March 24, 2000, the Fund purchased 20,000 shares of TimeSys Corporation
("TimeSys") Series A Convertible Preferred Stock ("TimeSys A") at $5.00
per share for a total investment of $100,000. The TimeSys A is convertible
into Common Stock on an initial 1:1 basis, has pre-emptive and
registration rights, and liquidation and redemption preferences. The
TimeSys A conversion price will be fixed, based upon a discount of a
maximum of 25 percent from the next security offering price, subject to a
maximum conversion price of $7.00 per share. At approximately the same
time, other shareholders in the Fund purchased $595,000 of the TimeSys A.
The investment by the Fund, and by the Fund and its shareholders,
represented 0.2 percent and 1.3 percent, respectively, on a fully diluted
basis. On April 26, 2000, TimeSys closed on the sale of $3,700,000 of
Series B Convertible Preferred Stock ("TimeSys B") at $10.00 per share.
This financing round served to fix the TimeSys A conversion price at $7.00
per share. In addition, this financing round triggered the pre-emptive
rights provisions of the TimeSys A that will allow the TimeSys A
shareholders to purchase their pro rata share of TimeSys B at $10.00 per
share.
26
On May 23, 2000, the Fund exercised its full pre-emptive right and
purchased 6,138 shares of TimeSys B at $10.00 per share for a total
investment of $61,380. At approximately the same time, other shareholders
in the Fund exercised a portion of their pre-emptive rights and purchased
12,877 shares of TimeSys B for a total investment of $128,770. A total of
$240,150 was raised through the exercise of pre-emptive rights. The total
investment in both TimeSys A and TimeSys B by the Fund, and by the Fund
and its shareholders, represented an ownership interest of 0.1 percent and
0.9 percent, respectively, on a fully diluted basis.
TimeSys develops and markets software tools and services for embedded real
time systems.
USInterns.com, Inc.
------------------
On September 6, 2000, the Fund purchased 525,000 shares of USInterns.com,
Inc. ("USInterns") Common Stock ("Common") at $0.32 per share and Warrants
to purchase 525,000 Common for five years at $0.48 per share for a total
investment of $168,000. At approximately the same time, other shareholders
in the Fund purchased 1,206,875 shares of Common and Warrants to purchase
1,206,875 Common for a total investment of $386,200. The total investment
by the Fund, and by the Fund and its shareholders, represented an
ownership interest of 3.20 percent and 10.57 percent, respectively, on a
fully diluted basis.
USInterns provides internet student employment staffing solutions to
employers.
Wishbox.com
-----------
On June 14, 2000, the Fund purchased 44,445 shares of Wishbox.com
("Wishbox") Common Stock at $2.25 per share for a total investment of
$100,001. At approximately the same time, other shareholders in the Fund
purchased 88,667 shares for a total investment of $199,501. The total
investment by the Fund, and by the Fund and its shareholders, including
shares previously purchased by Fund shareholders, represented an ownership
interest of 0.73 percent and 4.32 percent, respectively, on a fully
diluted basis.
Wishbox provides a universal online gift registry for teenagers.
WorldDealer, Inc.
----------------
On November 14, 2000, the fund purchased, subject to certain
contingencies, 100,000 shares of WorldDealer, Inc. ("WorldDealer") Series
A Preferred Stock ("WorldDealer Series A") at $1.00 per share for a total
investment of $100,000. The WorldDealer Series A has voting rights,
liquidation and dividends preferences, anti-dilution protection, and is
convertible into common stock. WorldDealer sold $826,500 of WorldDealer
Series A. The total investment by the Fund, and by the Fund and its
shareholders, including shares previously acquired, represented an
ownership interest of 1.88 percent and 3.75 percent, respectively, on a
fully diluted basis.
The Fund's investment was placed in an escrow account until the
satisfactory completion of the aforementioned contingencies. Those
contingencies were satisfied and the Fund's investment was released from
escrow on January 8, 2001. The Fund's investment in WorldDealer has been
classified as Investment in Portfolio Companies at December 31, 2000.
WorldDealer develops Web-based software for automotive retailers using an
application service provider delivery model.
27
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.
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, 2000 and December 31, 1999:
As of December 31, 2000
-----------------------
Investment Face Value Carrying Value Market Value
- ---------- ---------- -------------- ------------
U.S. Government Securities $ 733,000 $ 728,551 $ 728,441
========== ============== ============
As of December 31, 1999
-----------------------
Investment Face Value Carrying Value Market Value
- ---------- ---------- -------------- ------------
U.S. Government Securities $ 255,000 $ 253,383 $ 253,410
========== ============= ============
28
Note 7 - Unrealized Appreciation
- --------------------------------
The Fund recognizes unrealized appreciation (depreciation) on its portfolio
companies when significant and material events have occurred that clearly
indicates that an adjustment to the carrying value of those investments is
appropriate. Unrealized appreciation has been recognized as follows:
Year Ended December 31, 2000 - $538,394
Year Ended December 31, 1999 - $163,731
Year Ended December 31, 1998 - $ 0
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 granted 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), effective as of October 11, 1999.
These options vest 50% upon issuance, and 25% in equal increments on the first
and second anniversary dates of issuance.
Note 9 - Income Taxes
- ---------------------
The following table summarizes the provision for Federal and state taxes on
income.
Current: 2000 1999 1998
---- ---- ----
Federal $ 8,465 $ 0 $ 857
State 6,755 5,530 6,266
-------- ------- ------
15,220 5,530 7,123
======== ======= ======
Deferred:
Federal 192,901 38,000 0
State 48,846 12,700 0
-------- ------- ------
241,747 50,700 0
-------- ------- ------
Total $256,967 $56,230 $7,123
======== ======= ======
29
The difference between the Federal statutory rate and the Fund's effective rate
are as follows:
2000 1999 1998
---- ---- ----
Federal statutory tax rate 35.0% 35.0% 35.0%
State income taxes (net of
Federal benefit) 9.4% 8.8% 48.1%
Income tax at lower Federal
marginal rate (1.0%) (7.9%) (13.1%)
----- ----- ------
43.4% 35.9% 70.0%
====== ===== ======
The deferred taxes result from the Fund's recognition of unrealized appreciation
on Portfolio Securities.
Note 10 - Related Party Transactions
- ------------------------------------
Accounts payable as of December 31, 1999, includes $10,000 payable to Enterprise
for investment advisory services. Accrued liabilities as of December 31, 2000,
includes $4,500 for Board of Directors fees and $2,000 due to a consulting firm
in which one of the Fund's officers is a significant shareholder. Accrued
liabilities at December 31, 1999 includes $18,000 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 1998, the Fund incurred $37,500 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 were acquired by
Innovation Works, the successor organization. (See Note 11.)
During 2000, the Fund incurred $12,000 ($17,000 in 1999) for accounting services
payable to a consulting firm in which one of the Fund's officers is a
significant shareholder.
Note 11 - Treasury Stock
- ------------------------
On June 7, 2000, the Fund purchased 106,101 shares of its Common Stock
previously owned by Innovation Works, Inc. for $125,126. These shares are shown
as treasury stock as of December 31, 2000.
As of Deember 31, 1997, the Fund repurchased 143,899 shares of its common stock
from Enterprise at $0.01 per share. These shares also are shown as treasury
stock as of December 31, 2000 and December 31, 1999.
Note 12 - Realized Gains
- ------------------------
On January 19, 2000, Medtrex Incorporated ("Medtrex"), one of the Fund's
portfolio companies, 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 was 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, has been held in an
interest bearing escrow account, and if there are no claims by Ethicon against
this escrow account, approximately 60% was scheduled to 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, represented 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 was $152,477.
30
The cash to be received in relation to stock and warrants was 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.
On July 26, 2000, the Fund received its first distribution from its sale of its
investment in Medtrex. The excess of the proceeds received ($234,604) on July
26, 2000, over the Fund's investment ($152,477) has been recognized as realized
gains during the year ended December 31, 2000.
Note 13 - Subsequent Events
- ---------------------------
On January 2, 2001, the Fund purchased 208,334 shares of Precision Therapeutics,
Inc. ("PTI") new Series B Convertible Preferred Stock ("Precision new B") at
$0.24 per share for a total investment of $50,000. The Precision new B has
voting and anti-dilution rights, liquidation and dividend preferences, certain
other rights and preferences, and is convertible into common stock upon certain
events. At approximately the same time, other shareholders in the Fund purchased
3,979,214 shares for a total investment of $955,011. On January 11, 2001, PTI
closed ("First Closing") on the sale of $9,533,496 of Precision new B.
Shareholders purchasing Precision new B in the First Closing received 5 year
warrants to purchase additional Precision new B equal to 50 percent of their
current purchase in the First Closing at $0.024 per share. The warrants will
become void if PTI secures a firm written commitment of at least $4,000,000 from
a biotech industry venture capital firm within 90 days after the First Closing
and closes on that commitment within 135 days after the First Closing.
As a condition of this financing, PTI reincorporated in Delaware through the
merger of PTI with and into PTI Delaware and a wholly owned subsidiary of PTI
with PTI Delaware being the survivor. The capital stock of PTI has been
converted to capital stock of PTI Delaware as follows: Common - 1:1; Series A
Preferred - 1 old converted into 2.5509 new; Series B Preferred - 1 old
converted into 1.4745 new.
In connection with the First Closing, PTI's outstanding convertible notes and
accrued interest have been converted into Precision new B at $0.24, and all
warrants that have been issued in connection with the outstanding convertible
notes have been amended to make them exercisable at $0.024 per share.
After conclusion of all of the aforementioned events, the total investment by
the Fund, and by the Fund and its shareholders, represented an ownership
interest of 0.80 percent and 11.32 percent, respectively, on a fully diluted
basis.
PTI has developed a proprietary chemosensitivity assay designed to help select
the appropriate therapy for cancer patients.
On January 5, 2001, the Fund purchased an additional 95,565 shares of e-Cruise,
Inc. ("e-Cruise") Common Stock at $0.5232 for a total investment of $50,000.
e-Cruise will provide online infomediary marketing content for cruise lines to
potential passengers.
31
On February 2, 2001, the Fund purchased $100,000 of Automated Cell, Inc.
("Automated") Mandatory Convertible Notes ("Mandatory Notes"). The Mandatory
Notes bear interest at 10 percent per annum, have a maturity date of December
31, 2001, and automatically convert into either: (a) the next financing round
security if the next financing round equals at least $4,000,000 and occurs by
December 31, 2001 or (b) a new Series A Preferred with standard terms at a
$4,000,000 valuation if the aforementioned next financing round does not occur
by December 31, 2001. The mandatory Notes carry warrants to purchase the next
financing round security at its issue price or, in the absence of the next
financing round, the Series A Preferred. The number of warrants subject to
purchase range from 20 percent to 40 percent of the amount of principal and
accrued interest dependent upon the date of the next financing round. The
warrants expire upon the earlier of 5 years, a change in control of the company,
or an initial public offering. At approximately the same time, other
shareholders in the Fund purchased $951,000 of Mandatory Notes. The total
investment by the Fund, and by the Fund and its shareholders, represented an
ownership interest of 4.61 percent and 48.41 percent, respectively, in the
Mandatory Notes.
Automated identifies, under contracts with pharmaceutical firms, the proteins
that lead to cure of disease and shortens drug development efforts.
On February 7, 2001, the Fund received its second and final distribution from
its sale of Medtrex on January 19, 2000. This second distribution, which
amounted to $189,195, results in a total return to the Fund of $423,799 on an
investment of $152,477.
Item 9. Changes In and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
- --------------------
None
32
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 49 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 60 Secretary and Director June 1, 1996
Philip Samson 43 Director June 1, 1996
Douglas F. Schofield 55 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.
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.
33
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 16
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.
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.
34
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
GamesParlor, Inc., a provider of internet games services to enthusiasts of
classic parlor games.
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.
Mr. Samson is an active private investor and currently has investments in
approximately twenty early stage, high technology companies in various
industries.
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.
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 18 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.
35
Item 11. Executive Compensation
No officer received any remuneration for serving as an officer of the Registrant
in 2000 or 1999. Each director receives a $300 monthly fee. Generally, board of
directors meetings are held monthly. Compensation earned by directors in 2000
amounted to $18,000 ($18,000 in 1999).
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Registrant's only class of stock as of December 31, 2000, 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 25,000 0.6%
Scott Towne Center, Suite A-113
2101 Greentree Road
Pittsburgh, PA 15220
Common Stock William F. Rooney 20,000 0.5%
Scott Towne Center, Suite A-113
2101 Greentree Road
Pittsburgh, PA 15220
Common Stock Alvin J. Catz 30,000 0.7%
Scott Towne Center, Suite A-113
2101 Greentree Road
Pittsburgh, PA 15220
Common Stock Philip J. Samson 30,000 0.7%
Scott Towne Center, Suite A-113
2101 Greentree Road
Pittsburgh, PA 15220
Common Stock Douglas F. Schofield 180,000 4.3%
Scott Towne Center, Suite A-113
2101 Greentree Road
Pittsburgh, PA 15220
Common Stock PNC Venture Corp. 333,330 7.9%
PNC National Building
249 Fifth Avenue
Pittsburgh, PA 15222
Common Stock National City Venture Corp. 333,300 7.9%
1965 East Sixth Street
Cleveland, OH 44114
All officers and directors, as a group, own 285,000 shares or 6.8% of the total
issued and outstanding shares as of December 31, 2000.
36
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 2000, the Registrant incurred $12,000 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 twenty-two investments in Portfolio Companies that the
Registrant has made as of March 16, 2001. Directors' investments in Portfolio
Companies in excess of $60,000 as of March 16, 2001 were: Douglas F. Schofield -
Webmedx, Inc. $85,599; Alvin J. Catz - Webmedx, Inc. $140,922; William F.
Rooney-CoManage Corporation $78,000; and Philip J. Samson - Neo Linear $75,000,
Entigo Corporation $85,000, Applied Electro-Optics Corporation $80,000, and
GamesParlor, Inc. $226,000.
Enterprise served as the Registrant's investment advisor through December 31,
1998, when it ceased operations, and was merged into Innovation Works, Inc.
("IW"). 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.
IW acquired the 106,101 shares upon the merger of Enterprise into IW. On June 7,
2000, the Registrant purchased these shares from IW for $125,126. These shares
are shown as treasury stock as of December 31, 2000.
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 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.
37
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 2000.
38
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 13
Financial Statements:
Statements of Assets and Liabilities, December 31, 2000 and 1999 14
Statements of Operations for the Year ended December 31, 2000, for the
Year ended December 31, 1999, and for the Year ended December 31, 1998 15
Statements of Changes in Net Assets for the Year ended December 31,
2000, for the Year ended December 31, 1999, and for the Year ended
December 31, 1998 16
Statements of Cash Flows for the Year ended December 31, 2000, for the
Year ended December 31, 1999, and for the Year ended December 31, 1998 17
Notes to Financial Statements 18
(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
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.
39
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 16, 2001
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 16, 2001
Alvin J. Catz Treasurer, and Director
s/William F. Rooney__________________________________ Secretary and Director Date: March 16, 2001
William F. Rooney
s/Philip Samson______________________________________ Director Date: March 16, 2001
Philip Samson
s/Douglas F. Schofield_______________________________ Director Date: March 16, 2001
Douglas F. Schofield
40
Schedule 1
Western Pennsylvania Adventure Capital Fund
Investments in Securities of Unaffiliated Issuers
As of December 31, 2000
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
Computer-Software/Firmware
- --------------------------
USInterns.com Inc. Sep-00 525,000 shares (1),(2) $ 168,000 3.15%
Internet/E-Commerce/Applications
- --------------------------------
Service Provider
----------------
e-Cruise inc. Dec-99 400,000 shares (1) $ 100,000
Wishbox.com, Inc. Jun-00 44,4445 shares (1) $ 100,001
Subtotal Internet/E-Commerce Group $ 200,001 3.75%
Subtotal-Common Shares $ 368,001 6.90%
Preferred Shares
Medical Products and Services
- -----------------------------
Precision Therapeutics, Inc. Series B Jun-98 191,937 shares (1),(3) $ 191,937
Telemed Technologies International,
Inc. Class A Dec-99 100,000 shares (1) $ 100,000
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 $ 442,132 8.29%
Computer-Software/Firmware
- --------------------------
Games Parlor Series A Jul-00 210,526 shares (1) $ 100,000
Neo Linear Inc. Series A Feb-98 300,788 shares (1) $ 100,000
Neo Linear Inc. Series B Jun-99 161,992 shares (1),(3) $ 54,823
Neo Linear Inc. Series C Feb-00 103,336 shares (1),(3) $ 35,069
Neo Linear Inc. Series D Nov-00 104,225 shares (1) $ 50,000
MediaSite Inc. Series A Apr-98 80,000 shares (1) $ 100,000
MediaSite Inc. Series B May-99 2,031 shares (1) $ 2,548
Laminar Software Inc. Series A Jun-00 100,000 shares(1) $ 100,000
Quantapoint Inc. Series A Jun-99 116,000 shares (1) $ 99,424
Quantapoint Inc. Series B Feb-00 62,500 shares (1) $ 75,000
TimeSys Corporation Series A Mar-00 20,000 shares (1),(8) $ 200,000
TimeSys Corporation Series B May-00 6,138 shares (1) $ 61,380
Subtotal Computer Group $ 978,244 18.34%
Internet/E-Commerce/Applications
- --------------------------------
Service Provider
---------------
e-Cruise Series A Mar-00 190,135 shares (1),(3) $ 75,000
e-Cruise Series A Aug-00 47,785 shares (1) $ 25,001
Entigo Inc. Series B Apr-99 68,221 shares (1),(8) $ 163,731
Entigo Inc. Series D Dec-00 51,920 shares (1) $ 127,204
WorldDealer Series A Nov-00 100,000 shares (1) $ 100,000
Subtotal Internet/E-Commerce Group $ 490,936 9.20%
TeleCommunications
- ------------------
CoManage Corporation Series I Convertible Oct-98 100,000 shares (1),(8) $ 514,290
CoManage Corporation Series II Convertible Aug-99 39,487 shares (1),(2),(8) $ 203,078
CoManage Corporation Series IV Convertible Sep-00 25,745 shares (1) $ 132,404
Applied Electro-Optics Corporation Class
A Convertible Aug-98 20,000 shares (1) $ 100,000
Applied Electro-Optics Corporation Class B
Convertible Sep-00 193,074 shares (1),(3) $ 259,611
Subtotal TeleCommunications $1,209,383 22.67%
Other
- ----
Allegheny Child Care Academy Series B Nov-98 59,269 shares (1) $ 105,955
Allegheny Child Care Academy Series C Sep-00 17,878 shares (1) $ 49,999
Fidelity Flight Simulation Incorporated
Series A Redeemable Aug-00 989.6767 shares (1) $ 99,343
Fidelity Flight Simulation Incorporated
Series A Convertible Aug-00 1032.326 shares (1) $ 657
Subtotal Other Group $ 255,954 4.80%
Subtotal Preferred Shares $3,376,649 63.30%
Bonds and Notes
Medical Products and Services
- -----------------------------
Precision Therapeutics Inc.
Subordinated Convertible Notes Apr-00 $50,000 Notes (2) $ 50,000
Interactive Information Inc. Jan-99 $105,000 Notes (2) $ 105,000
Subtotal Medical Group $ 155,000 2.91%
TeleCommunications
- ------------------
Network Projects, Inc. Nov-00 $100,000 Notes $ 100,000 1.87%
Subtotal Bonds and Notes $ 255,000 4.78%
Grand Total - Investments $3,999,650 74.98%
See footnotes on following page
Schedule 1
Footnotes
Western Pennsylvania Adventure Capital Fund
Investments in Securities of Unaffiliated Issuers
As of December 31, 2000
(1) Non-Income producing securities
(2) Carries warrants for purchase of additional stock
(3) Acquired upon convention convertible rates
(4) Acquired upon exercise of warrants
(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
$3,297,525
(8) Unrealized appreciation has been recognized
(9) No unrealized depreciation has been recognized