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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, 2001
-----------------
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 or 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 21, 2002: $6,126,062
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 21, 2002
----- -----------------------------
Common stock, $.01 par value 4,224,870
Documents Incorporated by Reference: None
1
Western Pennsylvania Adventure Capital Fund
Table of Contents
Page No.
Part I
Item 1. Business 3
Item 2. Properties 3
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote of Security Holders 4
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 5
Item 6. Selected Financial Data 5
Item 7. Management's Discussion and Analysis of Financial Condition And
Results of Operations 10
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes in and Disagreements with Accountants on Accounting
And Financial Disclosure 33
Part III
Item 10. Directors and Executive Officers of the Registrant 34
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial Owners and Management 37
Item 13. Certain Relationships and Related Transactions 38
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 40
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 21, 2001.
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 2,885,745 shares, Against 0 shares, Withheld 0 shares
--------- - -
Alvin J. Catz
For 2,885,745 shares, Against 0 shares, Withheld 0 shares
--------- - -
William F. Rooney
For 2,885,745 shares, Against 0 shares, Withheld 0 shares
--------- - -
Philip Samson
For 2,885,745 shares, Against 0 shares, Withheld 0 shares
--------- - -
Douglas F. Schofield
For 2,885,745 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, 2001.
For 2,865,745 shares, Against 0 shares, Withheld 20,000 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 21, 2002 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 21, 2002, 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, 2001 January 1, 2000 January 1, 1999
Through Through Through
December 31, 2001 December 31, 2000 December 31, 1999
----------------------- ---------------------- ----------------------
Revenues $ 202,911 $ 274,234 $ 99,844
Net income (loss) $(1,544,681) $ 335,286 $ 100,378
Net income (loss) per share $ (0.37) $ .08 $ .04
Cash dividends $ 0 $ 0 $ 0
Total assets $ 3,863,879 $5,639,958 $3,099,817
Net assets applicable to shares outstanding $ 3,825,754 $5,334,035 $3,005,447
Net asset (deficit) value per share $ 0.91 $ 1.27 $ 1.06
Syndication costs $ 149,220 $ 149,220 $ 135,604
5
May 23, 1996
January 1, 1998 January 1, 1997 (Date of Inception)
Through Through Through
December 31, 1998 December 31, 1997 December 31, 1996
---------------------- ---------------------- ------------------------
Revenues $ 99,467 $ 74,205 $ 0
Net income (loss) $ 3,049 $ 16,588 $ (106)
Net income (loss) per share $ .00 $ .01 $ .00
Cash dividends $ 0 $ 0 $ 0
Total assets $2,068,514 $2,054,900 $ 15,418
Net assets applicable to shares outstanding $2,039,418 $2,036,369 $(38,773)
Net asset (deficit) value per share $ .92 $ .92 $ (0.16)
Syndication costs $ 85,507 $ 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 Three Months Ended
------------------ ------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
2001 2001 2001 2001 2000 2000 2000 2000
Revenues $ 221,520 $ 16,205 $ 10,444 $ (45,258) $ 47,830 $ 82,571 $ 131,158 $ 12,675
Net income (loss) $ 121,478 $(1,425,379) $ (138,915) $ (437,812) $ 6,524 $ 21,486 $ 351,977 $ (44,701)
Earnings (loss) per share $ .03 $ (0.34) $ (.03) $ (.03) $ .00 $ .01 $ .08 $ (.01)
Cash dividends $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Total assets $5,865,227 $ 4,122,271 $3,974,275 $3,863,879 $5,154,918 $5,049,616 $5,632,474 $5,639,958
Net assets applicable $5,491,913 $ 4,066,534 $3,927,619 $3,825,754 $5,076,285 $4,966,695 $5,315,411 $5,334,055
to shares outstanding
Net asset value per share $ 1.30 $ 0.91 $ 0.93 $ 0.91 $ 1.19 $ 1.19 $ 1.28 $ 1.27
Syndication costs $ 0 $ 0 $ 0 $ 0 $ 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.
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"). As of December 31, 2000, the Fund
had received subscriptions to purchase 40,000 shares ($64,000). The Fund sold
62,750 shares of its Common Stock at $1.60 per share under the Third Offering
Circular, and closed the Third Offering as of March 31, 2001.
Revenues in 2001 amounted to $202,911 and consisted of interest earned on
temporary investments of $53,335, interest earned on Portfolio Companies
convertible debt of $18,423, management fees of $6,250 and net realized gains on
sales of portfolio securities of $124,903.
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. 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 2001 compared to 2000 due to a
reduction in the amount of temporary investments. This reduction resulted from
additional investments in Portfolio Securities. The decrease in interest earned
on Portfolio Companies convertible debt in each year was the result of
conversion of portions of these debts into equity securities of the Portfolio
Companies. The decrease in management fees in 2001 resulted from the
cancellation of the Registrant's co-investment agreement with the Urban
Redevelopment Authority of Pittsburgh. Management fees in 2000 and 1999
included a full year's fees. The realized gains on sales of portfolio
securities in 2001 consisted of a gain on sale of Medtrex Incorporated of
$189,195 partially offset by a loss on sale of Laminar Software, Inc. of
$64,292. The realized gain in 2000
10
resulted from receipt of the first portion of proceeds form the sale of Medtrex
Incorporated. There were no realized gains in 1999.
General and Administrative expenses in 2001, 2000 and 1999 amounted to $18,000,
and consisted of directors fees.
Other Operating Expenses in 2001 included professional fees (legal and
accounting) of $110,325, insurance premiums of $23,742, and other items of
$45,190, primarily administrative and clerical support. Other Operating
Expenses in 2001 amounted to $179,257 compared with $202,375 in 2000 and $88,919
in 1999. 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, advisory board fees of $24,000 and other items of
$26,368, primarily administrative and clerical support. The increases in
professional fees and other items in 2000 compared with 1999 resulted from the
increased business activity of the Registrant. The increase in professional
fees in 2001 compared with 2000 resulted from both increased business activity
of the Registrant and additional work required in connection with the formation
of a new wholly owned subsidiary and the merger of the Registrant with its
wholly owned subsidiary. The elimination of investment advisory fees in 2001
resulted from the Registrant's Board of Directors assuming full responsibility
for these activities.
Income Tax Expense (Benefit) for 2001, 2000 and 1999 of $(335,947), $256,967 and
$56,230, respectively, represent Federal and Pennsylvania income taxes on the
Registrant's pretax income (loss). The higher income taxes in 2000 compared
with 1999 resulted from the substantially higher pretax income in those years.
The income tax benefit in 2001 resulted primarily from the reversal of
previously recognized taxes on unrealized appreciation on portfolio securities
due to the recognition of unrealized depreciation on portfolio securities.
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. During
2001, the Registrant recognized unrealized depreciation of $1,885,981 on
Portfolio Securities based upon subsequent financing rounds by several Portfolio
Companies at significantly lower valuations than the related carrying values of
those investments and generally unfavorable economic conditions within certain
industries within which the Registrant's Portfolio Companies operate.
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 was extended through the earlier of March 31, 2001 or the
date the Third Offering was fully subscribed. The Registrant sold $100,400 of
its Common Stock under the Third Offering and closed the Third Offering on March
31, 2001. 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, 2001,
the Registrant has invested $4,130,939 in twenty-four Portfolio Companies.
As of December 31, 2001, the Registrant had approximately $839,587 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.
11
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
The Registrant, through its sale of its Common Stock, raised $2,104,333 under
the First Offering, $2,983,792 under the Second Offering, and $100,400 under the
Third Offering. Most of this amount, except for normal operating expenses, is
available for investment in Portfolio Securities. At December 31, 2001,
$4,134,233 had been invested in twenty-four Portfolio Companies. The balance of
the funds has 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.
12
Item 8. Financial Statements and Supplementary Data
- -----------------------------------------------------
Index to Financial Statements and Supplementary Financial Data
Page No.
Independent Auditor's Report 14
Financial Statements:
Statements of Assets and Liabilities, December 31, 2001 and 2000 15
Statements of Operations for the Year ended December 31, 2001,
for the Year ended December 31, 2000 and for the Year ended
December 31, 1999 16
Statements of Changes in Net Assets for the Year ended
December 31, 2001, for the Year ended December 31, 2000 and
for the Year ended December 31, 1999 17
Statements of Cash Flows for the Year ended December 31, 2001,
for the Year ended December 31, 2000 and for the Year ended
December 31, 1999 18
Notes to Financial Statements 19
13
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, 2001 and 2000, and the related statements of operations, changes in
net assets (deficit), and cash flows for the years ended December 31, 2001,
2000, and 1999. 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 U.S. 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, 2001 and 2000, and the results of its
operations, the changes in its net assets, and its cash flows for the years
ended December 31, 2001, 2000, and 1999, in conformity with U.S. generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule listed
under item 14(a)(2) is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. The schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
/s/ Goff Backa Alfera & Company, LLC
Pittsburgh, Pennsylvania
March 21, 2002
14
Western Pennsylvania Adventure Capital Fund
Statements of Assets and Liabilities
As of
December 31, 2001 December 31, 2000
----------------------- -----------------------
Assets
------
Cash and Cash Equivalents $ 292,699 $ 884,821
Short Term Investments, Net 546,888 728,551
Receivables 17,169 18,250
Investment in Portfolio Companies 2,947,083 3,999,650
Prepaid/Deferred Taxes 57,000 2,606
Organization Costs 3,040 6,080
----------- ----------
Total Assets $ 3,863,879 $5,639,958
=========== ==========
Liabilities
-----------
Accounts Payable $ 21,924 $ 6,976
Accrued Liabilities 6,500 6,500
Accrued Income Taxes 9,701 0
----------- ----------
Total Current Liabilities 38,125 13,476
Deferred Income Taxes 0 292,477
----------- ----------
Total Liabilities $ 38,125 $ 305,923
=========== ==========
Net Assets
----------
Common Stock, Par Value $.01 Per Share,
Authorized 10,000,000 Shares, Issued and
Outstanding 4,224,870 Shares (4,202,120
Shares at December 31, 2000) $ 44,749 $ 44,521
Additional Paid in Capital 5,146,276 5,110,104
Syndication Costs (149,220) (149,220)
Retained Earnings (1,089,486) 455,195
Treasury Stock - 250,000 Shares (250,000 Shares (126,565) (126,565)
at December 31, 2000) at cost ----------- ----------
Net Assets Applicable to Shares Outstanding $ 3,825,754 $5,334,035
=========== ==========
Net Assets Value Per Share $ 0.91 $ 1.27
=========== ==========
See Independent Auditor's Report and accompanying notes to financial statements.
15
Western Pennsylvania Adventure Capital Fund
Statements of Operations
For the Periods
January 1, 2001 January 1, 2000 January 1, 1999
through through through
December 31, 2001 December 31, 2000 December 31, 1999
------------------------ ----------------------- -----------------------
Revenues:
Interest $ 71,758 $167,107 $ 74,844
Management Fees 6,250 25,000 25,000
Realized Gains 124,903 82,127 0
----------- -------- --------
Total Revenues 202,911 274,234 99,844
----------- -------- --------
Expenses:
General and Administration 18,000 18,000 18,000
Interest 301 0 48
Other Operating Expenses 179,257 202,375 88,919
----------- -------- --------
Total Expenses 197,558 220,375 106,967
----------- -------- --------
Unrealized Appreciation (1,885,981) 538,394 163,731
(Depreciation) -
Portfolio Companies
Profit (Loss) Before (1,880,628) 592,253 156,608
Income Tax
Income Tax Expense (Benefit) (335,947) 256,967 56,230
----------- -------- --------
Net Income (Loss) $(1,544,681) $335,286 $100,378
=========== ======== ========
Earnings (Loss) Per Share $(.37) $.08 $.04
=========== ======== ========
See Independent Auditor's Report and accompanying notes to financial statements.
16
Western Pennsylvania Adventure Capital Fund
Statements of Changes in Net Assets
For the Periods
January 1, 2001 January 1, 2000 January 1, 1999
through through through
December 31, 2001 December 31, 2000 December 31, 1999
------------------------ ------------------------ ------------------------
From Operations
Net Income (Loss) $(1,544,681) $ 335,286 $ 100,378
From Share Transactions:
Proceeds from
Sale of Common Stock 36,400 2,132,044 915,748
Syndication Costs 0 (13,616) (50,097)
Purchase of Treasury Stock 0 (125,126) 0
----------- ---------- ----------
Net Increase in Net Assets
Derived from Share
Transactions 36,400 1,993,302 865,651
----------- ---------- ----------
Net Increase (Decrease)
In Net Assets (1,508,281) 2,328,588 966,029
Net Assets:
Beginning of Period 5,334,035 3,005,447 2,039,418
----------- ---------- ----------
End of Period $ 3,825,754 $5,334,035 $3,005,447
=========== ========== ==========
See Independent Auditor's Report and accompanying notes to financial statements.
17
Western Pennsylvania Adventure Capital Fund
Statements of Cash Flows
For the Periods
January 1, 2001 January 1, 2000 January 1, 1999
through through through
December 31, 2001 December 31, 2000 December 31, 1999
------------------------- ------------------------- -------------------------
Cash Flow from Operating Activities:
Income (Loss) $(1,544,681) $ 335,286 $ 100,378
Change in Assets and Liabilities:
Organization Costs - Decrease 3,040 3,040 3,040
Receivables-(Increase) Decrease 1,081 21,157 (32,954)
Prepaid Taxes-(Increase) Decrease (54,394) (2,606) 2,440
Accounts Payable-Increase (Decrease) 14,948 (18,520) 11,100
Accrued Liabilities-Increase (Decrease) 9,701 (11,674) 3,474
Deferred Taxes-Increase (Decrease) (292,447) 241,747 50,700
----------- ----------- ----------
Net Cash Provided by (Used in) (1,862,752) 568,430 138,178
Operating Activities ----------- ----------- ----------
Cash Flow from Financing Activities:
Proceeds from sale of Common Stock 36,400 2,132,044 915,748
Payment of Syndication Costs 0 (13,616) (50,097)
Purchase of Treasury Stock 0 (125,126) 0
----------- ----------- ----------
Net Cash Provided by
Financing Activities 36,400 1,993,302 865,651
----------- ----------- ----------
Cash Flow from Investing Activities:
Purchase of Short Term Investments,
Net of Redemptions 181,663 (475,168) 641,577
Investments in Portfolio Companies, Net 1,052,567 (2,206,171) (930,802)
----------- ----------- ----------
Net Cash Provided by 1,234,230 (2,681,339) (289,225)
(Used in) Investing Activities ----------- ----------- ----------
Net Increase (Decrease) in Cash and
And Cash Equivalents: (592,122) (119,607) 714,604
Cash and Cash Equivalents at
Beginning of Period 884,821 1,004,428 289,824
----------- ----------- ----------
Cash and Cash Equivalents at
End of Period $ 292,699 $ 884,821 $1,004,428
=========== =========== ==========
Income Taxes Paid (Refunded) $ (1,638) $ 18,000 $ 2,916
See Independent Auditor's Report and accompanying notes to financial statements.
18
Western Pennsylvania Adventure Capital Fund
Notes to Financial Statements
December 31, 2001
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 U.S.
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%.
19
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 was
extended through the earlier of March 31, 2001 or the date the Third Offering
was fully subscribed. As of March 31, 2001, the Fund sold 62,750 shares of its
common stock under the Third Offering and closed 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 U.S.
generally accepted accounting principles by year as follows:
Year ended December 31, 2001 $ 0
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, 2001 and 2000.
20
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 $3,040 ($6,080 at December 31, 2000)
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, 2001, 2000 and
1999, the Fund recognized unrealized appreciation (depreciation) on its
portfolio companies, and accordingly, began recognizing deferred taxes due to
temporary timing differences in accordance with SFAS 109.
Use of Estimates
The preparation of financial statements in conformity with U.S. 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.
21
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 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, 2000, the Fund had received subscriptions to purchase 40,000 shares
($64,000). The Fund sold 62,750 shares of its Common Stock at $1.60 per share
under the Third Offering, and closed at the Third Offering as of March 31, 2001.
As of December 31, 2001, $4,130,939 ($3,999,650 at December 31, 2000) was
invested in Portfolio Securities and the balance of the funds ($839,587)
remained invested in cash equivalents, government securities, and high quality
debt securities.
Note 3 - Investments in Portfolio Companies
- -------------------------------------------
As of December 31, 2001, the Fund had invested a total of $4,130,939 in twenty-
four Portfolio Companies ($3,999,650 in twenty Portfolio Companies at December
31, 2000). Also, see Schedule 1 for additional information on investments in
Portfolio Companies.
AcceLight Networks, Inc. (Applied Electro-Optics Corporation)
-------------------------------------------------------------
The Fund previously owned 393,074 shares of Applied Electro-Optics
Corporation ("AEC") Class B Convertible Preferred Stock.
On November 30, 2000, AEC merged with AcceLight Networks, Inc. ("AcceLight").
Under the terms of the merger, each AEC shareholder was scheduled to 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
was to 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 were to be released from the escrow account
and distributed to AEC shareholders.
22
On March 6, 2001, the Fund received the initial distribution of 181,854
shares of AcceLight A-1, and on January 24, 2002, the Fund received an
additional 32,092 shares of AcceLight A-1 representing the distribution from
the escrow account.
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 April 9, 2001, the Fund exercised a portion of its pre-emptive rights and
purchased 22,000 shares of Allegheny Child Care Academy, Inc. ("ACCA") Series
D Preferred Stock ("Series D") at $2.9999 per share for a total investment of
$65,998. At approximately the same time, other shareholders of the Fund
exercised a portion of their pre-emptive rights and purchased 26,420 shares
of Series D for a total investment of $79,257. ACCA sold a total of
2,950,522 shares of Series D for $7,770,395, including 90,120 shares via
exercise of pre-emptive rights.
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.
Automated Cell, Inc.
--------------------
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 (See Note 12, Subsequent Events), 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.
Compas Controls, Inc.
---------------------
On September 7, 2001, the Fund purchased 617,284 shares of Compas Controls,
Inc. ("Compas") Series A Convertible Preferred Stock ("Compas A") at $0.1620
per share for a total investment of $100,000. At approximately the same
time, other shareholders in the Fund purchased 895,741 shares for a total
investment of $145,110. The Compas A is convertible into Common Stock and
has anti-dilution protection and other typical preferences including
liquidation, pre-emptive rights, voting rights and board representation. The
total investment by the Fund and by the Fund and its shareholders,
represented an ownership interest, on a fully diluted basis, of 4.47 percent
and 10.49 percent, respectively.
23
e-Cruise, Inc.
--------------
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 and received another 14,336 shares for legal fees paid by the Fund on
behalf of e-Cruise.
On May 31, 2001, the Fund purchased 192,308 shares of e-Cruise Series B
Preferred Stock ("Series B") at $0.26 per share for a total investment of
$50,000. At approximately the same time, other shareholders of the Fund
purchased 163,462 shares of Series B for a total investment of $42,500.
On October 25, 2001, the Fund purchased 9,615 shares of e-Cruise Series B at
$0.26 per share for a total investment of $2,500, and committed to invest an
additional $2,500 upon certain events. See Note 12, Subsequent Events.
e-Cruise will provide online infomediary marketing content for cruise lines
to potential passengers.
Eldervision.Net
---------------
On December 6, 2001, the Fund purchased 357,143 shares of Eldervision.Net
("Eldervision") Series B Preferred Stock ("Eldervision B") at $0.28 per share
for a total investment of $100,000. At approximately the same time, other
shareholders in the Fund purchased 204,286 shares for a total investment of
$57,200. The Eldervision B is convertible into Common Stock and has anti-
dilution protection and other typical preferences including liquidation, pre-
emptive rights and voting rights. The total investment by the Fund, and by
the Fund and its shareholders, including previous investments by Fund
shareholders, represented an ownership interest, on a fully diluted basis, of
3.78 percent and 10.67 percent, respectively.
Eldervision provides software for internet-based services to senior citizens
and their resident facilities.
GamesParlor, Inc.
-----------------
On September 14, 2001, the Fund purchased $10,000 of GamesParlor, Inc.
("GamesParlor") Promissory Notes ("GP Notes"). The GP Notes bear interest at
12 percent per annum, mature in one year, and carry warrants for purchase of
Common Stock at $0.475 per share for a ten year period.
GamesParlor provides internet games services to enthusiasts of classic parlor
games.
Laminar Software, Inc.
----------------------
On June 15, 2001, the Fund purchased $53,594 of Laminar Software, Inc.
("Laminar") Convertible Promissory Notes ("Laminar Notes"). The Laminar
Notes mature upon the earlier of December 31, 2001 or the closing of the next
round financing, bear interest at 6 percent per annum, and are convertible
into the next financing round security on the same terms and conditions,
subject to a 20 percent price discount. At approximately the same time,
other shareholders in the Fund purchased $146,984 of the Laminar Notes.
Laminar raised $750,000 through the issuance of these Laminar Notes.
24
On November 8, 2001, Laminar sold all of its assets to Quest Software, Inc.,
and Laminar's shareholders elected to wind up the company and distribute the
proceeds of sale. The Fund received: (a) $54,996 representing repayment of
the principal amount of the Laminar Notes of $53,594, plus accrued interest
of $1,402 and (b) $35,708 representing liquidation payments on the Fund's
investment of $100,000 in Laminar Series A Preferred, resulting in a realized
loss of $64,292.
MediaSite, Inc.
---------------
On April 25, 2001, the Fund purchased $25,000 of MediaSite, Inc.
("MediaSite") Bridge Loan Notes ("Bridge Notes"). The Bridge Notes bear
interest at 8 percent per annum and mature upon the earlier of the sale of
the company, an event of default, or March 31, 2002. Upon sale of the
company, the Bridge Notes have a liquidation preference equal to five times
their principal amount. MediaSite issued approximately $3,700,000 of Bridge
Notes.
On September 7, 2001, MediaSite sold substantially all of its assets to Sonic
Foundry, Inc. ("Sonic Foundry") in exchange for 3,420,000 shares of Sonic
Foundry common stock and the assumption of certain liabilities of MediaSite.
Under the terms of this transaction, the Fund expects to receive 17,053
shares of Sonic Foundry common stock in settlement of and in exchange for its
$25,000 of Bridge Notes, plus accrued interest, and its 80,000 shares of
MediaSite Preferred Stock Series A and its 2,031 shares of MediaSite
Preferred Stock Series B. The Fund has not received the Sonic Foundry common
stock as of this date.
Sonic Foundry is a leading developer and marketer of digital media software
and services. Its products and services are used worldwide for multimedia
development, internet streaming applications, broadcast solutions and digital
content creation.
Medtrex Incorporated
--------------------
On January 19, 2000, Medtrex Incorporated ("Medtrex"), closed a transaction
with the Ethicon division of Johnson & Johnson whereby Ethicon acquired all
the assets of Medtrex and assumed certain liabilities. The proceeds of sale
were placed in escrow pending claims against the escrow by the purchaser.
The proceeds of sale, after settlement of claims against the escrow, were
scheduled to be released in two installments - July, 2000 and January, 2001.
On February 7, 2001, the Fund received its second and final distribution for
the escrow account. This second distribution, which amounted to $189,195,
has been recognized as realized gains in 2001.
MindMatrix, Inc.
----------------
On June 5, 2001, the Fund placed in escrow, under control of its legal
counsel, $100,000 for the purchase of MindMatrix, Inc. ("MindMatrix")
Convertible Promissory Notes ("Notes"). The escrow was to be released to
MindMatrix upon its raising of total of $750,000, including the Fund's
$100,000, through the issuance of these Notes. The Notes mature upon the
earlier of the next round financing or December 31, 2001, bear interest at 10
percent per annum, and are convertible into the same security as to be issued
in the next round financing subject to a discount from 15 - 50 percent
dependent upon the timing of the next round financing.
On August 16, 2001, MindMatrix reached $756,000 in this financing round, the
Fund authorized the release of its $100,000 being held in escrow, and
MindMatrix closed its financing round. At approximately the same time, other
shareholders of the Fund purchased $141,000 of the Notes.
MindMatrix offers a solution platform to vendors in the information
technology industry to better communicate the value of their products to
customers.
25
Personity, Inc. (Network Projects, Inc.)
----------------------------------------
On August 6, 2001, Personity, Inc. ("Personity") issued $3,000,000 of Series
A Preferred Stock at $1.219 per share (2,451,034 shares). This event
triggered the conversion of the Fund's $100,000 of Subordinated Convertible
Debentures ("Debentures"), plus accrued interest of $7,425, along with those
of other debenture holders. Under the terms of the Debentures, the principal
and accrued interest convert into shares of the Series A Preferred Stock at a
25 percent discount to the issue price. Accordingly, the Fund converted its
Debentures and accrued interest into 117,500 shares of Series A Preferred
Stock at a conversion price of $0.91425 per share.
Personity, Inc. 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 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. In early April,
2001, PTI received a firm commitment of $4,000,000 from a biotech industry
venture capital firm, thereby voiding the aforementioned warrants.
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.
26
Quantapoint, Inc.
-----------------
On June 18, 2001, the Fund purchased 17,125 shares of Quantapoint, Inc.
("Quantapoint") Series C Preferred Stock ("Series C") at $1.46 per share for
total investment of $25,000. At approximately the same time, other
shareholders of the Fund purchased 61,995 shares of Series C for a total
investment of $90,513. Quantapoint raised $4,000,000 from the sale of
2,739,726 shares of Series C. The total investment by the Fund, and by the
Fund and its shareholders, including previously acquired shares, represented
an ownership interest of 1.96 percent and 15.79 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.
TimeSys Corporation
-------------------
On April 27, 2001, the Fund purchased $50,000 of TimeSys Corporation
("TimeSys") Convertible Bridge Notes ("Convertible Notes"). The Convertible
Notes mature on August 30, 2001, bear interest at 15 percent per annum, and
are convertible, principal and interest, into the new Series A Preferred
Stock financing expected to close approximately July 24, 2001. At
approximately the same time, other shareholders in the Fund purchased
$435,000 of these Convertible Notes. TimeSys issued a total of $835,000 of
Convertible Notes.
On July 24, 2001, TimeSys closed on the sale of 30,842,327 shares of its new
Series A Preferred Stock ("Series A") at $0.2673 per share for a total
investment of $8,244,154. The Series A is convertible into common stock and
has liquidation and other preferences. Concurrent with this closing, both
classes of previously outstanding preferred stock, "old" Series A and "old"
Series B, were converted into new Series B Preferred Stock which also is
convertible into common stock and has certain limited preferences. Also, at
the same time, the existing Convertible Bridge Notes were converted principal
($835,000) and interest ($20,846) into Series A.
The Fund had previously purchased 100,000 shares of "old" Series A Preferred
Stock, 61,380 shares of "old" Series B Preferred Stock and $50,000 of
Convertible Notes due August 30, 2001 with interest at 15 percent per annum.
The Convertible Notes were convertible, principal and interest, into the
Series A. On July 24, 2001, the Fund's "old" Series A and "old" Series B
were converted into 142,857 shares of new Series B-1 Preferred Stock and
64,590 shares of new Series B-2 Preferred Stock. As of the same date, the
Convertible Notes principal ($50,000) and interest ($1,687.50) were converted
into 193,369 shares of new Series A Preferred Stock.
TimeSys develops and markets software tools for embedded real time systems.
True Commerce, Inc.
--------------------
On November 7, 2001, the Fund purchased 115,000 shares of True Commerce, Inc.
("True Commerce") Class B Common Stock ("Common B") at $0.8696 per share for
a total investment of $100,000. At approximately the same time, other
shareholders in the Fund purchased 172,500 shares for a total investment of
$150,006. The Common B has certain limited preferences. The investment by
the Fund, and by the Fund and its shareholders, represented an ownership
interest of 3.60 percent and 9.00 percent, respectively, on a fully diluted
basis.
True Commerce provides software and service to facilitate routine e-commerce
transactions between large corporations and small suppliers.
27
Webmedx, Inc.
-------------
On May 21, 2001, the Fund purchased 50,000 shares of Webmedx, Inc.
("Webmedx") Series D Convertible Preferred Stock ("Webmedx D") at $1.00 per
share for a total investment of $50,000. At approximately the same time,
other shareholders in the Fund purchased 492,487 shares of Webmedx D for a
total investment of $492,487.
Webmedx provides software and services to diagnostic imaging segments of the
healthcare industries.
WorldDealer, Inc.
------------------
On November 15, 2001, the Fund purchased 106,666.67 shares of WorldDealer,
Inc. ("WorldDealer") Series B Preferred Stock ("WorldDealer B") at $0.375 for
a total investment of $40,000. At approximately the same time, other
shareholders in the Fund purchased 20,000 shares for a total investment of
$10,000. The World Dealer B has voting rights, liquidation and dividends
preferences, anti-dilution protection, and is convertible into common stock.
In addition, the WorldDealer Series B carries warrants for the purchase of
1/2 share of Common Stock for each share of Series B at $0.375 per share
through December 31, 2005.
WorldDealer develops Web-based software for automotive retailers using an
application service provider delivery model.
Other Portfolio Companies
-------------------------
The Fund had no additional equity transactions during 2001 for the portfolio
companies as follows:
CoManage Corporation - CoManage sells computer software that enables software
providers to deliver extended network services onto network vendors equipment
at client sites.
Engito Corporation - 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 - FFS designs, manufactures and
distributes full motion based flight simulators for pilot training.
Interactive Information - Interactive Information produces interactive
software used in patient education in physicians' offices and hospitals.
NeoLinear, Inc. - NeoLinear produces computer aided design software for the
semiconductor industry.
Telemed Technologies International, Inc. - 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.
USInterns.com, Inc. - USInterns provides internet student employment staffing
solutions to employers.
Wishbox.com - Wishbox provides a universal online gift registry for
teenagers.
28
Note 4 - 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.
As of June 30, 2001, the URA notified the fund of its decision to terminate the
Agreement, effective as of July 31, 2001. Through June 30, 2001, the URA had
invested a total of $100,000, on its dollar-for-dollar matching basis in one
portfolio company.
Note 5 - 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, 2001 and December 31, 2000:
As of December 31, 2001
-----------------------
Investment Face Value Carrying Value Market Value
- ---------- ------------ -------------- ------------
U.S. Government Securities $ 550,000 $ 546,888 $ 548,965
============ ============= ============
As of December 31, 2000
-----------------------
Investment Face Value Carrying Value Market Value
- ---------- ------------ -------------- ------------
U.S. Government Securities $ 733,000 $ 728,551 $ 728,441
============ ============== ============
29
Note 6 - Unrealized Appreciation (Depreciation)
- -----------------------------------------------
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 (depreciation) has been recognized as
follows:
Year Ended December 31, 2001 - $(1,885,981)
Year Ended December 31, 2000 - $ 538,394
Year Ended December 31, 1999 - $ 163,731
Year Ended December 31, 1998 - $ 0
Note 7 - 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 8 - Income Taxes
- ---------------------
The following table summarizes the provision for Federal and state taxes on
income.
Current: 2001 2000 1999
--------- -------- -------
Federal $ 6,000 $ 8,465 $ 0
State 7,500 6,755 5,530
--------- -------- -------
13,500 15,220 5,530
========= ======== =======
Deferred:
Federal (281,901) 192,901 38,000
State ( 67,546) 48,846 12,700
--------- -------- -------
(349,447) 241,747 50,700
--------- -------- -------
Total $(335,947) $256,967 $56,230
========= ======== =======
30
The components of the deferred tax asset (liability), as reflected on the
balance sheet, consist of the following:
2001 2000
--------- ---------
Deferred tax liability:
Unrealized appreciation $ 0 $(320,000)
--------- ---------
Deferred tax asset:
Net operating loss 2,600 27,553
Unrealized depreciation on securities 782,400 0
Valuation allowance (728,000) 0
--------- ---------
Net deferred tax asset (liability) $57,000 $(292,447)
========= =========
The Fund has provided a valuation allowance for the deferred tax asset since the
recognition of the unrealized depreciation is not sufficiently assured due to
the uncertainty of future capital gain income. The valuation allowance
increased since December 31, 2000 by $728,000.
The difference between the Federal statutory rate and the Fund's effective rate
are as follows:
2001 2000 1999
------ ---- ----
Federal statutory tax rate (35.0%) 35.0% 35.0%
State income taxes (net of
Federal benefit) (3.2%) 9.4% 8.8%
Valuation allowance against
deferred tax asset 38.5% 0.0% 0.0%
Income tax at lower Federal
marginal rate (18.2%) (1.0%) (7.9%)
------
(17.9%) 43.4% 35.9%
====== ==== ====
The deferred tax expense (benefit) results from the Fund's recognition of
unrealized appreciation (depreciation) on Portfolio Securities.
Note 9 - Related Party Transactions
- -----------------------------------
Accrued liabilities as of December 31, 2001 and 2000, include $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.
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. 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 10.)
During 2001, the Fund incurred $16,500 ($12,000 in 2000) for accounting services
payable to a consulting firm in which one of the Fund's officers is a
significant shareholder.
31
Note 10 - 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, 2001 and 2000.
As of December 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, 2001 and 2000.
Note 11 - Realized Gains
- ------------------------
In January, 2000, the Fund sold its investment in Medtrex Incorporated
("Medtrex"), one of the Fund's portfolio companies. The proceeds of sale were
placed in escrow pending claims against the escrow by the purchaser. 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) was recognized as realized gains
during the year ended December 31, 2000. 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, has been recognized as
realized gains during the three month period ended March 31, 2001, and results
in a total return to the Fund of $423,799 on an investment of $152,477.
On November 8, 2001, Laminar sold all of its assets to Quest Software, Inc., and
Laminar's shareholders elected to wind up the company and distribute the
proceeds of sale. The Fund received: (a) $54,996 representing repayment of the
principal amount of the Laminar Notes of $53,594, plus accrued interest at
$1,402 and (b) $35,708 representing liquidation payments on the Fund's
investment of $100,000 in Laminar Series A Preferred, resulting in a realized
loss of $64,292.
Note 12 - Subsequent Events
- ---------------------------
The Fund holds $100,000 of Automated Cell, Inc. ("Automated") Mandatory
Convertible Notes ("Mandatory Notes") that mature as of December 31, 2001.
Automated has entered into negotiations with its Mandatory Notes holders,
including the Fund, to create a new class of Series A Preferred Stock to be used
for conversion of the Mandatory Notes. These negotiations are continuing as of
this date.
On January 15, 2002, the Fund purchased an additional 9,615 shares of e-Cruise,
Inc. ("e-Cruise") Series B Preferred Stock ("Series B") at $0.26 per share for a
total investment of $2,500. This investment fulfills the Fund's commitment for
additional investment in e-Cruise. See Note 3, Investments in Portfolio
Companies.
The Fund holds $100,000 of MindMatrix, Inc. ("MindMatrix") Convertible
Promissory Notes ("Notes") that mature as of December 31, 2001. The Fund, and
the other holders of the Notes have the right, but not the obligation to convert
principal and accrued interest into a new preferred stock with standard
preferences and rights based upon a pre-determined valuation. In lieu of
conversion, the Note holders may retain the Notes which will bear an interest
rate of twelve percent per annum until the Notes are either paid or converted
into a new preferred stock upon a subsequent financing event. As of this date,
the Fund and the other holders of the Notes have continued to retain the Notes.
At a special meeting of the Fund's shareholders, held on February 21, 2002, the
Fund's shareholders approved the merger of the Fund into its recently formed and
wholly owned subsidiary, Western Pennsylvania Adventure Capital Fund, LLC
("Fund-LLC"). The merger was effective as of February 28, 2002. The Fund-LLC
is organized as a "pass-through" entity for income tax purposes, and
accordingly, earnings (losses) incurred by the Fund-LLC after February 28, 2002
will be allocated to shareholders for inclusion on their respective income tax
returns. The Fund does not expect to incur any material income tax liabilities
as a direct result of the merger.
32
Item 9. Changes In and Disagreements with Accountants on Accounting and
- -------------------------------------------------------------------------
Financial Disclosure
- --------------------
None
33
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 50 President, Chief Executive Officer June 1, 1996
and Director
Alvin J. Catz 62 Chief Financial Officer, Treasurer June 1, 1996
and Director
William F. Rooney 61 Secretary and Director June 1, 1996
Philip Samson 44 Director June 1, 1996
Douglas F. Schofield 56 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.
34
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 17
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.
35
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 20 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 four such companies during this period.
36
Item 11. Executive Compensation
No officer received any remuneration for serving as an officer of the Registrant
in 2001 or 2000. Each director receives a $300 monthly fee. Generally, board of
directors meetings are held monthly. Compensation earned by directors in 2001
amounted to $18,000 ($18,000 in 2000).
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Registrant's only class of stock as of December 31, 2001, 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 6.7% of the total
issued and outstanding shares as of December 31, 2001.
37
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 2001, the Registrant incurred $16,500 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. $271,500.
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, 2001 and 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.
38
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 2001.
39
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 14
Financial Statements:
Statements of Assets and Liabilities, December 31, 2001 and 2000 15
Statements of Operations for the Year ended December 31, 2001, for
the Year ended December 31, 2000, and for the Year ended December
31, 1999 16
Statements of Changes in Net Assets for the Year ended
December 31, 2001, for the Year ended December 31, 2000, and
for the Year ended December 31, 1999 17
Statements of Cash Flows for the Year ended December 31, 2001,
for the Year ended December 31, 2000, and for the Year ended
December 31, 1999 18
Notes to Financial Statements 19
(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 (Loss) 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.
40
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 21, 2002
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 21, 2002
- -------------------------- Treasurer, and Director
Alvin J. Catz
/s/ William F. Rooney Secretary and Director Date: March 21, 2002
- --------------------------
William F. Rooney
/s/ Philip Samson Director Date: March 21, 2002
- --------------------------
Philip Samson
/s/ Douglas F. Schofield Director Date: March 21, 2002
- --------------------------
Douglas F. Schofield
41
Schedule 1
Western Pennsylvania Adventure Capital Fund
Investments in Securities of Unaffiliated Issuers
As of December 31, 2001
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),(9) $0 0.00%
Internet/E-Commerce/Applications
- -------------------------------
Service Provider
----------------
e-Cruise inc. Dec-99 637,920 shares (1),(3),(9) $0
True Commerce Nov-01 115,000 shares (1) $100,000
Wishbox.com, Inc. Jun-00 44,445 shares (1),(9) $0
Subtotal Internet/E-Commerce Group $100,000 2.61%
Subtotal-Common Shares $100,000 2.61%
Preferred Shares
Medical Products and Services
- -----------------------------
Precision Therapeutics, Inc. Series A Jun-01 283,031 shares (1),(3),(9) $46,065
Precision Therapeutics, Inc. Series B Jun-01 436,096 shares (1),(3) $104,206
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),(9) $80,406
Webmedx Inc. Corporation Series B Nov-98 20,000 shares (1),(4) $200
Webmedx Inc. Corporation Series C Dec-99 15,150 shares (1),(9) $15,150
Webmedx Inc. Corporation Series D May-01 50,000 shares (1) $50,000
Subtotal Medical Group $396,027 10.35%
Computer-Software/Firmware
- --------------------------
Compas Controls Series A Sep-01 617,284 shares (1) $100,000
Games Parlor Series A Jul-00 210,526 shares (1),(9) $0
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),(9) $50,000
MediaSite Inc. Series B May-99 2,031 shares (1),(2),(9) $0
Quantapoint Inc. Series A Jun-99 116,000 shares (1) $99,423
Quantapoint Inc. Series B Feb-00 62,500 shares (1) $75,000
Quantapoint Inc. Series C Jun-01 17,125 shares (1) $25,000
TimeSys Corporation Series A Jul-01 193,369 shares (1),(3) $51,688
TimeSys Corporation Series B Jul-01 207,447 shares (1),(3),(9) $55,450
Subtotal Computer Group $696,453 18.20%
Internet/E-Commerce/Applications
- --------------------------------
Service Provider
----------------
e-Cruise Series B May-01 423,077 shares (1),(3),(9) $0
Eldervision Series B Dec-01 357,143 shares (1) $100,000
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),(9) $75,000
WorldDealer Series B Nov-01 106,666.67 shares (1),(2) $40,000
Subtotal Internet/E-Commerce Group $505,935 13.22%
TeleCommunications
- ------------------
AcceLight Networks Series A1 Jan-01 213,946 shares (1),(10) $288,827
CoManage Corporation
Series I Convertible Oct-98 100,000 shares (1),(8) $200,000
CoManage Corporation
Series II Convertible Aug-99 39,487 shares (1),(2) $78,974
CoManage Corporation
Series IV Convertible Sep-00 25,745 shares (1),(9) $51,490
Personity Series A1 Aug-01 117,500 shares (1),(3) $107,425
Subtotal TeleCommunications $726,716 19.00%
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
Allegheny Child Care Academy Series D Apr-01 22,000 shares (1) $65,998
Fidelity Flight Simulation Incorporated
Series A Redeemable Aug-00 989.6767 shares (1) $99,343
Fidelity Flight Simulation Incorporated
Series A Convertible Aug-00 1,032.326 shares (1) $657
Subtotal Other Group $321,952 8.42%
Subtotal Preferred Shares $2,647,083 69.19%
Bonds and Notes
Medical Products and Services
- -----------------------------
Automated Cell Mandatory Convertible Notes Feb-01 $100,000 Notes (2),(3),(9) $75,000
Interactive Information Inc. Jan-99 $105,000 Notes (2),(9) $0
Subtotal Medical Group $75,000 1.96%
Computer-Software/Firmware
- ---------------------------
GamesParlor Notes Jul-01 $10,000 Notes (2),(9) $0
MediaSite Notes Apr-01 $25,000 Notes $25,000
MindMatrix Notes Jun-01 $100,000 Notes (2) $100,000
Subtotal Computer-Software/Firmware Group $125,000
Subtotal Bonds and Notes $200,000 5.23%
Grand Total - Investments $2,947,083 77.03%
=========== =====
See footnotes on following page
Schedule 1
Footnotes
Western Pennsylvania Adventure Capital Fund
Investments in Securities of Unaffiliated Issuers
As of December 31, 2001
(1) Non-income producing securities
(2) Carries warrants for purchase of additional stock
(3) Acquired upon conversion of other securities of same company
(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 $4,130,939
(8) Unrealized appreciation has been recognized
(9) Unrealized depreciation has been recognized
(10) Acquired upon merger with existing portfolio company
42