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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, 1998
-----------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) FOR THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 000-21593
---------
Western Pennsylvania Adventure Capital Fund
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 25-1792727
------------ ----------
(State of Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Scott Towne Center, Suite A-113
2101 Greentree Road, Pittsburgh, PA 15220-1400
- ------------------------------------ ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (412) 279-1760
--------------
Securities Registered Pursuant to Section 12 (b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ----------------
Common Stock, $.01 Par Value None
- ---------------------------- ----
Securities Registered Pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
-
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
( )
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant at March 24, 1999:
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 24, 1999
----- -----------------------------
Common stock, $.01 par value 2,210,434
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 3
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 8
Item 8. Financial Statements and Supplementary Data 10
Item 9. Changes in and Disagreements with Accountants on Accounting 23
And Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 24
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners and Management 27
Item 13. Certain Relationships and Related Transactions 28
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 29
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
"Offering"). The Registrant intends to invest the net proceeds of the Offering
primarily in the equity and/or debt securities (the "Portfolio Securities") of
development stage companies located in western Pennsylvania (the "Portfolio
Companies"). The Registrant is seeking to identify companies with annual sales
of less than $1 million which, in the opinion of management, have the potential
within five years to achieve annual sales of at least $5 million and an internal
rate of return on invested capital in excess of 30%. However, the Registrant may
invest in Portfolio Companies which have higher initial sales or which do not
meet these specified financial targets if management of the Registrant otherwise
believes that the investment offers the potential for long-term capital
appreciation. The Registrant does not have a policy of investing any specified
percentage of its assets in debt or equity securities, and may invest 100% of
its assets in either type of security.
The Registrant generally invests from $50,000 to $250,000 per Portfolio Company,
but is not prohibited from making larger or smaller investments if management of
the Registrant believes that it is in the interest of the Registrant to do so.
For instance, the Registrant may make an initial investment within the above
range and later find it necessary to make a "follow-on" investment if management
determines that additional financing is required to enable a particular
Portfolio Company to continue its operations or to complete an important
contract or research and development project or other ongoing activity.
Accordingly, although it is a policy of the Registrant to seek to diversify its
investments (as to Portfolio Companies as well as types of industries), the
Registrant is not prohibited from investing more than 10% of its funds available
for investment in the Portfolio Securities of a single issuer or in Portfolio
Companies engaged in a single industry. In certain circumstances, the Registrant
may invest in particular Portfolio Companies on an installment, phase-in or
staged basis with subsequent installments conditioned upon the Portfolio Company
achieving specified performance milestones.
The Registrant has no policy with respect to concentrating in a particular
industry or group of industries nor with respect to investing in a company with
any particular investing partner. The Registrant intends to invest all or
substantially all of its available assets (except assets invested in short-term
obligations) in companies which are headquartered or conduct significant
operations in western Pennsylvania. Furthermore, except for short-term
investments, the Registrant intends initially to invest only in Portfolio
Companies which constitute "eligible portfolio companies" within the meaning of
such term under the Investment Company Act of 1940, as amended (the "1940 Act").
Generally, "eligible portfolio securities" 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.
ITEM 3. LEGAL PROCEEDINGS
- ---------------------------
There are no legal proceedings to which the Registrant is a party.
3
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
The Registrant held an annual meeting of security holders on December 7, 1998.
Proxies for the meeting were solicited pursuant to Regulation 14A under The
Securities Exchange Act of 1934. The following matters were voted on at that
meeting.
(a) Election of directors for terms of one year:
G. Richard Patton For 1,865,333 shares, Against 0 shares, Withheld
--------- -
0 shares
-
Alvin J. Catz For 1,865,333 shares, Against 0 shares, Withheld 0
--------- - -
shares
William F. Rooney For 1,865,333 shares, Against 0 shares, Withheld 0
--------- - -
shares
Philip Samson For 1,865,333 shares, Against 0 shares, Withheld 0
--------- - -
shares
Douglas F. Schofield For 1,865,333 shares, Against 0 shares, Withheld 0
--------- - -
shares
There were no other nominees.
(b) Authorize issuance by the Registrant in an offering of up to 2,789,566
additional shares of its Common Stock at a price determined by the Board of
Directors of not less than the greater of the Registrant's current net
asset value or $1.00 per share.
For 1,865,333 shares, Against 0 shares, Withheld 0 shares.
--------- - -
(c) Ratify appointment of Goff, Ellenbogen, Backa & Alfera, LLC as the
Registrant's independent certified public accountants for the fiscal year
ending December 31, 1998.
For 1,855,333 shares, Against 0 shares, Withheld 10,000 shares.
--------- - ------
4
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -------------------------------------------------------------------------------
The Registrant's Common Stock is not traded on any national or regional
securities exchange, and the Registrant has no intention of causing the shares
to be qualified for listing on the NASDAQ National Market or Small Cap systems.
The Registrant is aware of three trades in its Common Stock from May 23, 1996
(date of inception) through March 24, 1999 as follows:
Number Price
of per
PERIOD Shares Share
------ ------ -----
Second Quarter 1998 10,000 $1.05
Second Quarter 1998 25,000 $1.05
Third Quarter 1998 10,000 $1.00
As of March 24, 1999, the Registrant had approximately 85 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.
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 per share $ .00 $ .01 $ .00
Cash dividends $ 0 $ 0 $ 0
Total assets $ 2,068,514 $ 2,054,900 $ 15,418
Net asset (deficit) applicable to shares $ 2,039,418 $ 2,036,369 $ (38,773)
outstanding
Net asset (deficit) value per share $ .92 $ .92 $ (0.16)
Syndication costs $ 85,507 $ 85,507 $ 41,167
5
WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND
SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
Three Months Ended Three Months Ended
------------------ ------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
1997 1997 1997 1997 1996 1996 1996 1996
Revenues $ 0 $ 0 $ 47,712 $ 26,493 $ 0
Net income (loss) $ (8,173) $ (5,516) $ 22,015 $ 8,262 $ (106)
--------------No Activity-----------
Earnings per share $ (.03) $ (.02) $ .01 $ .00 $ .00
Cash dividends $ 0 $ 0 $ 0 $ 0 $ 0
Total assets $ 15,143 $ 15,133 $2,005,647 $2,054,900 $ 15,418
Net assets (deficit) $(79,427) $(90,883) $1,994,546 $2,036,369 $(38,773)
Applicable to shares
Outstanding
Net asset (deficit) $ (.32) $ (.36) $ .86 $ .92 $ (.16)
value per share
Syndication costs $ 32,481 $ 5,940 $ 5,919 $ 0 $ 41,167
6
WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND
SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
Three Months Ended
------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
1998 1998 1998 1999
Revenues $ 24,979 $ 21,626 $ 25,103 $ 27,759
Net income (loss) $ 4,169 $ (9,609) $ 7,074 $ 1,415
Earnings per share $ .00 $ .00 $ .00 $ .00
Cash dividends $ 0 $ 0 $ 0 $ 0
Total assets $2,070,117 $2,058,309 $2,061,369 $2,068,514
Net assets (deficit) $2,040,538 $2,030,929 $2,038,003 $2,039,418
applicable to shares
outstanding
Net asset (deficit) $ .92 $ .92 $ .92 $ .92
value per share
Syndication costs $ 0 $ 0 $ 0 $ 0
7
Item 7. Management's Discussion and Analysis of Financial Condition and
- -------------------------------------------------------------------------
Results of Operations
- ---------------------
RESULTS OF OPERATIONS
- ---------------------
The Registrant was incorporated on May 23, 1996. Its only activities in 1996
consisted of start-up and syndication. There were no revenues in 1996.
Interest charges and bank service fees amounted to $106, which resulted in a net
loss of $106.
The Registrant began, in late 1996, soliciting subscriptions for the purchase of
a minimum of 1,000,000 shares and a maximum of 5,000,000 shares of its Common
Stock through an Offering Circular dated November 7, 1996 under Regulation E of
the Securities Act of 1933 (the "Offering"). Under the terms of the 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
Offering.
During 1997, the Registrant sold 2,104,333 shares of its Common Stock under the
Offering, closed the 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. In 1998, the Registrant invested in seven
Portfolio Companies. Subsequent to December 31, 1998, the Registrant has
invested in one additional Portfolio Company and has reached a decision to
invest in one other Portfolio Company.
Revenues in 1998 amounted to $99,467, and consisted of interest earned on
temporary investments in high quality commercial paper, and government
securities of $80,514, interest earned on Portfolio Companies convertible debt
of $6,453 and management fees received of $12,500. Revenues in 1997 amounted to
$74,205, and consisted entirely of interest earned on escrowed funds and on
temporary investments in high quality commercial paper and government
securities. The increase in revenues in 1998 over 1997 was the result of
interest being earned for the entire 1998 calendar year versus interest being
earned only for a portion of 1997 as funds were not released from escrow until
July, 1997, and management fees in 1998 of $12,500 received from the Urban
Redevelopment Authority of Pittsburgh ("URA") under a co-investment agreement
signed June 30, 1998.
General and Administrative expenses in 1998 amounted to $46,273 and consisted of
professional fees of $31,573 and directors fees of $14,700. General and
Administrative expenses in 1997 amounted to $24,102 and consisted of
professional fees and $3,300 in directors fees. The increase in professional
fees resulted from higher legal fees and fees paid for internal accounting
services. Other Operating Expenses in 1998 amounted to $42,923 compared with
$7,928 in 1997. The increase was due primarily to investment advisor fees
incurred with The Enterprise Corporation of Pittsburgh ("Enterprise"). In 1998,
these fees amounted to $37,500 versus $5,000 in 1997. Under the terms of an
investment advisory agreement, Enterprise served as the Registrant's investment
advisor, and received a one-time fee equal to 5% of the amount the Registrant
invested in a Portfolio Company for providing investment advisory and
administrative services to the Registrant. As of December 31, 1998, Enterprise
ceased operations, and is no longer serving as the Registrant's investment
advisor.
Interest expense in 1998 amounted to $99 compared with $20,367 in 1997. Interest
expense in 1997 primarily consisted of interest paid to subscribers. Under the
terms of the Offering, subscribers whose stock subscription funds remained in
the Registrant's escrow account for more than 90 days were paid the interest
earned on their funds at the time such funds were released from escrow. Income
taxes for 1998 and 1997 of $7,123 and $5,220, respectively, represent Federal
and Pennsylvania income taxes due on the Registrant's pretax income. The higher
income taxes in 1998 resulted from the taxable status of the Registrant's assets
in Pennsylvania for the entire 1998 calendar year compared with the portion of
the 1997 calendar year following breaking of escrow in July, 1997.
During 1997, the Registrant sold $2,104,333 of its Common Stock under the
Offering, and closed the 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. The balance of the funds was temporarily invested,
pending investment in Portfolio Securities, in cash
8
equivalents, government securities, and high quality debt securities. At
December 31, 1998, the Registrant has invested $862,677 in eight Portfolio
Companies.
As of December 31, 1998, the Registrant had approximately $1,184,784 in cash and
cash equivalents, and short term investments. Those funds were available,
except for a relatively small amount for normal operating expenses, for
investment in Portfolio Companies. Subsequent to year end, the Registrant has
invested $100,000 in a new Portfolio Company.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
The Registrant, through its sale of its Common Stock under the Offering, raised
$2,104,333. Most of this amount, except for normal operating expenses, is
available for investment in Portfolio Securities. At December 31, 1998,
$862,677 had been invested in eight Portfolio Companies. The balance of the
funds have been temporarily invested in short-term high quality commercial paper
and government securities. These funds are available for future investments in
Portfolio Companies.
In 1998, the Registrant initiated a program to prepare its computer systems and
applications for the Year 2000. The Year 2000 issue is the result of computer
programs being written using two digits rather than four digits to define the
applicable year. Any of the Registrant's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculation. The Registrant
presently believes that, with appropriate modifications to existing software and
conversions to new software, the Year 2000 issue will not pose significant
problems for the Registrant's computer systems as so modified and converted.
INFLATION
- ---------
The Registrant does not believe that inflation will have any significant effect
on the Registrant's operations or financial position.
9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------
Index to Financial Statements and Supplementary Financial Data
Page No.
Independent Auditor's Report 11
Financial Statements:
Statements of Assets and Liabilities, December 31, 1998 and 1997 12
Statements of Operations for the Year ended December 31, 1998, 13
for the Year ended December 31, 1997 and for the Period from
May 23, 1996 (Date of Inception) to December 31, 1996
Statements of Changes in Net Assets (Deficit) for the Year ended 14
December 31, 1998, for the Year ended December 31, 1997
and for the Period from May 23, 1996 (Date of Inception) to
December 31, 1996
Statements of Cash Flows for the Year ended December 31, 1998, 15
for the Year ended December 31, 1997 and for the Period from May
23, 1996 (Date of Inception) to December 31, 1996
Notes to Financial Statements 16
10
[LETTERHEAD APPEARS HERE]
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, 1998 and 1997, and the related statements of operations, changes in
net assets (deficit), and cash flows for the years ended December 31, 1998 and
1997 and the period from May 23, 1996 (Date of Inception) to December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Western Pennsylvania
Adventure Capital Fund as of December 31, 1998 and 1997, and the results of its
operations, the changes in its net assets, and its cash flows for the years
ended December 31, 1998 and 1997, and the period from May 23, 1996 (Date of
Inception) to December 31, 1996 in conformity with generally accepted accounting
principles.
Our audits referred to above included audits of the financial statement
schedules listed under Item 14(a)(2). In our opinion, those financial statement
schedules present fairly, in all material aspects, in relation to the financial
statements taken as a whole, the information required to be stated therein.
/s/ Goff, Ellenbogen, Backa & Alfera, LLC
March 24, 1999
11
WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND
STATEMENTS OF ASSETS AND LIABILITIES
AS OF
December 31, 1998 December 31, 1997
------------------ ------------------
Assets
------
Cash and Cash Equivalents $ 289,824 $ 368,618
Short Term Investments, Net 894,960 1,571,082
Interest Receivable 6,453 0
Investment in Portfolio Companies 862,677 100,000
Prepaid Taxes 2,440 --
Organization Costs 12,160 15,200
---------- ----------
Total Assets $2,068,514 $2,054,900
========== ==========
Liabilities
-----------
Accounts Payable $ 14,396 $ 10,011
Accrued Liabilities 14,700 8,520
---------- ----------
Total Liabilities $ 29,096 $ 18,531
========== ==========
Net Assets
----------
Common Stock, Par Value $.01 Per Share,
Authorized 10,000,000 Shares, Issued and
Outstanding 2,210,434 Shares $ 23,543 $ 23,543
Additional Paid in Capital 2,083,290 2,083,290
Syndication Costs (85,507) (85,507)
Retained Earnings 19,531 16,482
Treasury Stock - 143,899 Shares, at cost (1,439) (1,439)
---------- ----------
Net Assets Applicable to Shares Outstanding $2,039,418 $2,036,369
========== ==========
Net Assets Value Per Share $0.92 $0.92
========== ==========
See Independent Auditor's Report and accompanying notes to financial statements.
12
WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND
STATEMENTS OF OPERATIONS
FOR THE PERIODS
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:
Interest $86,967 $74,205 $ 0
Management Fees 12,500 0 0
------- ------- -----
Total Revenues 99,467 74,205 0
------- ------- -----
Expenses:
General and Administration 46,273 24,102 0
Interest 99 20,367 24
Other Operating Expenses 42,923 7,928 82
------- ------- -----
Total Expenses 89,295 52,397 106
------- ------- -----
Profit (Loss) Before Income Tax 10,172 21,808 (106)
Income Tax Expense 7,123 5,220 0
------- ------- -----
Net Income (Loss) $ 3,049 $16,588 $(106)
======= ======= =====
Earnings Per Share $.00 $.01 $.00
======= ======= =====
See Independent Auditor's Report and accompanying notes to financial statements.
13
WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND
STATEMENTS OF CHANGES IN NET ASSETS (DEFICIT)
FOR THE PERIODS
JANUARY 1, 1998 JANUARY 1, 1997 (DATE OF INCEPTION)
THROUGH THROUGH THROUGH
December 31, 1998 December 31, 1997 December 31, 1996
----------------------- ------------------------ ------------------------
From Operations
Net Income (Loss) $ 3,049 $ 16,588 $ (106)
From Share Transactions:
Proceeds from
Sale of Common Stock 0 2,104,333 2,500
Syndication Costs 0 (44,340) (41,167)
Purchase of Treasury Stock 0 (1,439) 0
---------- ---------- --------
Net Increase (Decrease) in
Net Assets Derived from
Share Transactions 0 2,058,554 (38,667)
---------- ---------- --------
Net Increase (Decrease)
In Net Assets 3,049 2,075,142 (38,773)
Net Assets (Deficit):
Beginning of Period 2,036,369 (38,773) 0
---------- ---------- --------
End of Period $2,039,418 $2,036,369 $(38,773)
========== ========== ========
See Independent Auditor's Report and accompanying notes to financial statements.
14
WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND
STATEMENTS OF CASH FLOWS
FOR THE PERIODS
May 23, 1996
JANUARY 1, 1998 JANUARY 1, 1997 (DATE OF INCEPTION)
THROUGH THROUGH THROUGH
December 31, 1998 December 31, 1997 December 31, 1996
------------------------- ------------------------- -------------------------
Cash Flow from Operating Activities:
Income (Loss) $ 3,049 $ 16,588 $ (106)
Change in Assets and Liabilities:
Organization Costs-(Increase) Decrease 3,040 (200) (15,000)
Interest Receivable-(Increase) (6,453) 0 0
Prepaid Taxes-(Increase) (2,440) 0 0
Accounts Payable-Increase (Decrease) 4,385 (43,156) 53,167
Accrued Liabilities-Increase 6,180 8,496 24
--------- ----------- --------
Net Cash Provided by (Used in)
Operating Activities 7,761 (18,272) 38,085
--------- ----------- --------
Cash Flow from Financing Activities:
Proceeds from sale of Common Stock 0 2,104,333 2,500
Payment of Syndication Costs 0 (44,340) (41,167)
Borrowing (Payment) of Demand
Note Payable 0 (1,000) 1,000
Purchase of Treasury Stock 0 (1,439) 0
--------- ----------- --------
Net Cash Provided by (Used in)
0 2,057,554 (37,667)
Financing Activities --------- ----------- --------
Cash Flow from Investing Activities:
Purchase of Short Term Investments,
Net of Redemptions 676,122 (1,571,082) 0
Investments in Portfolio Companies (762,677) (100,000) 0
--------- ----------- --------
Net Cash Used in Investing Activities (86,555) (1,671,082) 0
--------- ----------- --------
Net Increase (Decrease) in Cash and
And Cash Equivalents: (78,794) 368,200 418
Cash and Cash Equivalents at
368,618 418 0
Beginning of Period --------- ----------- --------
Cash and Cash Equivalents at
End of Period $ 289,824 $ 368,618 $ 418
========= =========== ========
See Independent Auditor's Report and accompanying notes to financial statements.
15
WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 1 - Summary of Significant Accounting Policies:
- ----------------------------------------------------
This summary of significant accounting policies of Western Pennsylvania
Adventure Capital Fund (the "Fund") is presented to assist in understanding the
Fund's financial statements. These accounting policies conform with generally
accepted accounting principles and have been consistently applied in the
preparation of the financial statements.
NATURE OF OPERATIONS
The Fund was incorporated on May 23, 1996, and began its primary business
activities in November, 1997. The Fund has been formed to become a Business
Development Company ("BDC") and to be subject to the applicable provisions of
the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund
invests primarily in the equity and/or debt securities of development stage
companies located in western Pennsylvania. The Fund seeks to make its
investments in conjunction with a consortium of investment partners such as
individual investors, 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 has 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 has been a private, non-profit consulting firm founded in
1983 for the purpose of assisting entrepreneurs in developing new businesses in
western Pennsylvania.
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 "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 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 Offering being 4.8%.
During 1997, the Fund sold 2,104,333 shares of its common stock and closed the
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, 1998 and December 31, 1997.
16
SYNDICATION COSTS
Legal, accounting and other costs of $85,507 ($85,507 in 1997) incurred in
connection with the Offering have been capitalized and reported as a permanent
reduction of net assets in accordance with generally accepted accounting
principles.
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, 1998 and 1997.
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 $12,160 ($15,200 at December 31,
1997) represents the remaining portion of these costs subject to amortization.
EARNINGS PER SHARE
During 1997, the Fund adopted SFAS No. 128, "Earnings Per Share". Its
application is not expected to affect the calculations of basic and diluted
earnings per share.
Earnings per share is computed using the weighted average number of shares
outstanding during the respective periods. There are no outstanding stock
options, warrants, or other contingently issuable shares.
17
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. As of December 31, 1998 and 1997, the Fund had no
significant temporary or permanent differences, and, therefore, it did not have
any deferred taxes.
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 ("Offering Circular").
The proceeds were required to be deposited in an escrow account with the Fund's
escrow agent, PNC Bank, until such time as the escrow account reached $1
million. At that time, the Fund was permitted to withdraw the funds from the
escrow account and begin to invest in portfolio securities.
As of July 11, 1997, the proceeds in the escrow account totaled $1,860,100. On
that date, the Fund withdrew substantially all of the funds from the escrow
account.
The funds released from escrow have been temporarily invested, pending
investment in Portfolio Securities, in cash equivalents, government securities,
and high quality debt securities. A portion of the funds released from escrow
were disbursed to pay accumulated obligations whose payment was deferred until
funds were released from escrow. As of December 31, 1998, $862,677 (at December
31, 1997, $100,000) was invested in Portfolio Securities, and the balance of the
funds remained invested in cash equivalents, government securities, and high
quality debt securities.
NOTE 3 - INVESTMENTS IN PORTFOLIO COMPANIES
- -------------------------------------------
As of December 31, 1998, the Fund had invested a total of $862,677 in eight
Portfolio Companies ($100,000 in one Portfolio Company at December 31, 1997).
Also, see Schedule 1 for additional information on investments in Portfolio
Companies.
On February 23, 1998, the Fund purchased 341,997 shares of Neo Linear, Inc.
("Neo Linear") Convertible Preferred Stock at $.2924 per share for a total
investment of $100,000. At approximately the same time, other private investors
in the Fund purchased approximately $333,000 of Neo Linear Convertible Preferred
Stock.
As of December 31, 1998, the Fund's investment, and the combined investment of
the Fund and that of other private investors in the Fund, in Neo Linear
represented 2.1 percent ownership and 9.2 percent ownership, respectively, on a
fully diluted basis. Neo Linear produces computer aided design software for the
semiconductor industry.
In March 1998, the Fund purchased $100,000 of Precision Therapeutics, Inc.
("PTI") Subordinated Convertible Notes ("Convertible Notes"). The Convertible
Notes are convertible into the same equity, and on the same terms, as PTI will
issue in its next securities offering or into common stock at $1.00 per share if
the next securities offering did not occur by January 31, 1999. In addition,
the Convertible Notes carried warrants for the purchase of PTI's common stock.
Subsequent to this offering, PTI accepted an offer from another investor on
terms more favorable to that investor. Consequently, PTI extended this more
favorable offer to its existing noteholders allowing them to convert their
existing "old" notes to "new" notes and to purchase additional new notes.
Under the terms of the "new" notes: (1) the warrant coverage has been increased
from 15 percent to a minimum of 25 percent, increasing to 30 percent or 35
percent upon certain events, (2) the life of the warrant has been extended from
three years to ten years; and (3) the time requirement for the next securities
offering has been extended from January 31, 1999 to June 30, 1999.
18
On September 1, 1998, the Fund converted all of its "old" notes to "new" notes
and purchased an additional $10,000 of "new" notes thereby increasing the Fund's
total investment in Convertible Notes to $110,000. At approximately the same
time, other private investors in the Fund converted all of their "old" notes and
purchased additional "new" notes increasing their total investment in
Convertible Notes to $515,000. The Fund's investment in these Convertible
Notes, and the Fund and its shareholders' investment in these Convertible Notes
represent approximately 3.2 percent and 18.2 percent, respectively, of the total
outstanding Convertible Notes.
PTI tests various chemotherapy agents on cancer cells grown from tumors removed
from cancer patients, measures their killing effectiveness, and provides reports
to attending physicians.
On April 20, 1998, the Fund purchased 80,000 shares of ISLIP Media Network, Inc.
("ISLIP") Series A Preferred Stock at $1.25 per share for a total investment of
$100,000, which represents approximately 0.7 percent ownership on a fully
diluted basis. At approximately the same time, other private investors in the
Fund purchased $250,000 of ISLIP Series A Preferred Stock. The total
investment, including shares already owned by private investors in the Fund,
represents approximately 3.0 percent ownership of ISLIP on a fully diluted
basis.
ISLIP develops and supplies products and services that create and deliver
network-based searchable digital video and audio libraries.
As of December 31, 1997, the Fund owned 232,558 shares of Medtrex Incorporated
("Medtrex") Series B Preferred Stock ("Preferred Stock"). On June 11, 1998, the
Fund purchased an additional 116,279 shares of Medtrex Preferred Stock at $.43
per share for a total investment of $50,000, increasing the Fund's investment in
Medtrex to $150,000 representing 348,837 shares of Preferred Stock. At
approximately the same time, other private investors in the Fund purchased an
additional 204,094 shares of Medtrex Preferred Stock increasing their investment
to $271,360 representing 631,073 shares of Preferred Stock. As a result of
these transactions, the Fund's investment represented approximately 5.5 percent
ownership of Medtrex on a fully diluted basis, and the Fund's and the private
investors in the Fund's combined investment represented approximately 15.1
percent ownership of Medtrex on a fully diluted basis. These shares carry
warrants exercisable at $.01 for a period of 10 years. The warrants are
exercisable on the basis of five warrants per share, reducible to 4:1 or 3:1
upon the achievement of certain milestones.
On June 23, 1998, the Fund purchased 45,261 shares of Medtrex Common Stock at
$.0342 per share for a total investment of $1,550, as its pro rata portion of a
block of founder's shares returned to Medtrex and available for purchase by
Medtrex shareholders.
On July 21, 1998, the Fund purchased an additional 27,074 shares of Common Stock
of Medtrex at $.0342 per share for a total of $927. This represents the Fund's
pro rata portion of the balance of a founder's block of shares available for
purchase by Medtrex shareholders which was not purchased by existing
shareholders under their pro rata rights. At approximately the same time, other
private investors in the Fund also purchased additional shares of Medtrex Common
Stock.
After this transaction, the Fund owns 72,335 shares of Medtrex Common Stock and
348,837 shares of Medtrex Series B Preferred Stock. The total investment by the
Fund in Medtrex Common Stock and Series B Preferred Stock represents
approximately 5.9 percent ownership on a fully diluted basis, and the total
investment by the Fund and other private investors in the Fund represents
approximately 17.3 percent ownership on a fully diluted basis.
Medtrex designs, manufactures, and distributes electrosurgical instruments and
accessories for the hospital, surgery center, and physicians' office market.
19
On July 31, 1998, the Fund purchased $100,000 of RadNet Corporation ("RadNet")
Convertible Notes ("Notes"). The Notes were convertible into the same equity,
and on the same terms as RadNet would issue in its next securities offering. In
addition, the Notes carried warrants for the purchase of RadNet's Preferred
Stock equal to 1/3 of the value of the Notes. The warrants would have expired
after 10 years. In this same offering, other private investors in the Fund
purchased $430,000 of these Notes. Accordingly, the Fund's investment in these
Notes, and the Fund and its shareholders' investment in these Notes represent
approximately 12.8 percent and 67.9 percent, respectively, of the total
outstanding Notes. In addition, the Fund's shareholders' investment in RadNet
Preferred Stock represents approximately 16.0 percent ownership interest on a
fully diluted basis.
On December 11, 1998, RadNet closed on the sale to the Hillman Companies
("Hillman"), a venture capital group, of 1,818,182 shares of a newly created
Series B Preferred Stock ("Series B") at $1.65 per share for an aggregate
consideration of $3,000,000. This Series B is convertible into Common Stock on
a one-for-one basis, has antidilution provisions, votes as a separate class, and
entitles Hillman to representation on RadNet's Board of Directors.
Under the terms of the $781,000 previously outstanding Notes, those Notes were
automatically converted into the same equity, and on the same terms as RadNet
would issue in its next securities offering - the aforementioned Hillman
financing. The Fund and the Funds' shareholders converted $100,000 and
$430,000, respectively, of these Notes. In addition, the Notes carried warrants
for the purchase at $.01 per share of the same equity equal to 1/3 of the value
of the Notes. In connection with the closing of this financing, the Fund
exercised its warrants and purchased 20,000 shares of Series B at $.01 per share
for a total consideration of $200. After these transactions, the Fund, and the
Fund and its shareholders, have equity ownership interests in RadNet of 1.6
percent and 14.0 percent respectively, on a fully diluted basis.
On August 14, 1998, the Fund purchased 20,000 shares of Class A Convertible
Preferred Stock of Applied Electro-Optics Corporation ("AEC") at $5.00 per share
for a total investment of $100,000, which represented approximately 3.8 percent
ownership on a fully diluted basis. At approximately the same time, other
private investors in the Fund purchased $425,935 of AEC Class A Convertible
Preferred Stock. The total investment, including shares already owned by
private investors in the Fund, represents approximately 36.7 percent ownership
of AEC on a fully diluted basis.
AEC is engaged in the design, development and manufacturing of motion-free laser
scanning systems.
On October 1, 1998, the Fund purchased 100,000 shares of CoManage Corporation
("CoManage") Series I Convertible Preferred Stock ("Series I Preferred") at
$1.00 per share for a total investment of $100,000, which represented
approximately 1.0 percent ownership on a fully diluted basis. The Series I
Preferred is convertible into common stock on a one-for-one basis, and has
dividend and liquidation preferences, certain anti-dilution provisions, and
voting rights. At approximately the same time, other private investors in the
Fund purchased $50,000 of Series I Preferred. The total investment by the Fund
and the Funds' shareholders represented 1.5 percent ownership on a fully diluted
basis.
CoManage is developing computer software to allow service providers to deliver
extended network services onto network vendors equipment at clients' sites.
On November 16, 1998, the Fund purchased 55,938 shares of Allegheny Child Care
Academy, Inc. ("ACCA") Series B Preferred Stock ("Series B Preferred") at
$1.7877 per share for a total investment of $100,000, which represented
approximately a 0.9 percent ownership on a fully diluted basis. The Series B
Preferred is convertible into common stock on a one-for-one basis, has dividend
and liquidation preferences, and certain anti-dilution provisions. At
approximately the same time, other private investors in the Fund purchased
129,684 shares of Series B Preferred for a total of $231,832. The total
investment by the Fund and the Fund's shareholders represented 3.2 percent
ownership on a fully diluted basis.
ACCA owns and operates children's day care centers primarily in central/inner
city locations with most of its clients welfare subsidized through state and
federal programs.
20
NOTE 4 - RESCISSION OFFER
- -------------------------
The Fund's Offering Circular authorized the Fund to sell shares through July 31,
1997. In August, September, and October 1997, a total of 194,233 shares of the
Fund's common stock in the aggregate were offered and sold to residents of the
Commonwealth of Pennsylvania for $1.00 per share ($194,233 in the aggregate).
Consequently, the provisions of Section 201 of the Pennsylvania Securities Act
of 1972 relating to the registration of securities may not have been complied
with in connection with the offer or sale of these securities.
Accordingly, the Fund made an offer of rescission to all of the affected
shareholders. The offer of rescission expired January 30, 1998. None of the
affected shareholders elected to exercise the right of rescission.
NOTE 5 - CO-INVESTOR AGREEMENT
- ------------------------------
On June 30, 1998, the Fund and the Urban Redevelopment Authority of Pittsburgh
("URA") entered into a co-investment agreement ("Agreement"). Under the terms
of this Agreement, the URA will create an escrow account of $1,000,000 to be
used for direct investment in certain select Fund's Portfolio Companies, located
within the City of Pittsburgh and meeting other criteria established by the URA.
The escrow account also will be used for payment of the Fund's investment and
management fees related to such investments. The URA will match, on a dollar-
for-dollar basis, the Fund's investment in Portfolio Companies, subject to the
limitations of the Portfolio Companies' location within the City of Pittsburgh
and such companies meeting the URA's criteria for funding.
Note 6 - Short Term Investments
- -------------------------------
The Fund, pending investments in Portfolio Securities, temporarily invests its
excess funds in short term high quality commercial paper and U.S. Government
securities. These investments generally are purchased at a discount from face
value and are redeemed at maturity at face value. The discount from face value
represents unearned interest income and is recognized over the remaining term of
the security using the effective yield to maturity method. All of the short term
investments are classified as HTM in accordance with SFAS No. 115. The face
value, carrying value, and market value for HTM investments were as follows at
December 31, 1998 and December 31, 1997:
As of December 31, 1998
-----------------------
INVESTMENT FACE VALUE CARRYING VALUE MARKET VALUE
- ---------- ---------- -------------- ------------
Commercial Paper $ 0 $ 0 $ 0
U.S. Government Securities 908,299 894,960 895,192
---------- ---------- ----------
Total $ 908,299 $ 894,960 $ 895,192
========== ========== ==========
As of December 31, 1997
-----------------------
INVESTMENT FACE VALUE CARRYING VALUE MARKET VALUE
- ---------- ---------- -------------- ------------
Commercial Paper $ 943,000 $ 929,252 $ 926,176
U.S. Government Securities 652,000 641,830 641,703
---------- ---------- ----------
Total $1,595,000 $1,571,082 $1,567,879
========== ========== ==========
21
NOTE 7 - RELATED PARTY TRANSACTIONS
- -----------------------------------
Accounts payable as of December 31, 1998, includes $10,000 payable to Enterprise
for investment advisory services. Accrued liabilities at December 31, 1998
includes $14,700 for Board of Directors fees.
Accounts payable as of December 31, 1997, includes $6,439 payable to Enterprise
for investment advisory and administrative services ($5,000) and for the
repurchase of 143,899 shares of the Fund's Common Stock from Enterprise
($1,439).
Under the terms of an investment advisory agreement, Enterprise served as the
Fund's investment advisor, and received a one-time fee equal to 5% of the amount
the Fund invested in a Portfolio Company for providing investment advisory and
administrative services to the Fund. During 1998 and 1997, the Fund incurred
$37,500 and $5,000, respectively, of fees payable to Enterprise. As of December
31, 1998, Enterprise ceased operations and is no longer serving as the Fund's
investment advisor. Enterprise owns 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.
During 1998, the Fund incurred $9,000 for accounting services payable to a
consulting firm in which one of the Fund's officers is a significant
shareholder.
NOTE 8 - INTEREST ON ESCROW FUNDS
- ---------------------------------
Under the terms of the Offering, any interest earned on any subscriptions held
in the escrow account for more than 90 days was to be paid to the subscribers at
the time funds were released from the escrow account. This interest, which
totaled $20,327, was paid to subscribers when the Fund withdrew funds from
escrow in July, 1997. Cash payments of interest amounted to $20,391 in 1997.
NOTE 9 - YEAR 2000 CONVERSION
- -----------------------------
In 1998, the Fund initiated a program to prepare its computer systems and
applications for the year 2000. The Year 2000 issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Fund's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations. The Fund presently
believes that, with appropriate modifications to existing software and
conversions to new software, the Year 2000 issue will not pose significant
problems for the Fund's computer systems as so modified and converted.
NOTE 10 - SUBSEQUENT EVENTS
- ---------------------------
On January 20, 1999, the Fund purchased $100,000 of Interactive Information,
Inc. ("Interactive") 4.57% Convertible Notes ("Convertible Notes"). The
Convertible Notes are convertible into the same equity, and on the same terms as
Interactive will issue in its next securities offering. If certain specified
conditions in connection with the next securities offering are not met, the
noteholders may elect to convert their Convertible Notes into either common
stock equal to 30.3125% ownership (based on total Convertible Notes - $485,000)
on a fully diluted basis, or a demand note with a significantly higher interest
rate. In addition, the Convertible Notes carry warrants, one warrant for each
three and one-third shares, for the purchase, at $.01 per share, of the same
equity as Interactive will issue in its next securities offering. The warrants
expire after ten years. At approximately the same time, other private investors
in the Fund purchased $330,000 of Interactive Convertible Notes.
Interactive sells an interactive software program for use in hospitals and
physicians' offices that educates patients on their disease and their
responsibility in the treatment regimen. The software modules have the
potential to lower health care costs through fewer hospital/physician visits.
22
At the Fund's Board of Directors meeting on February 15, 1999, the Board
approved the purchase of $100,000 of Preferred Stock Series B ("Preferred B") of
Signal Internet Technologies ("Signal"). The Preferred B is convertible into
common stock, and has certain dividend and liquidation preferences. This
transaction has not closed.
Signal 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.
Medtrex Incorporated ("Medtrex"), one of the Fund's Portfolio Companies, is in
the process of raising additional funds through the sale of $302,000 of
subordinated notes to its existing shareholders. These subordinated notes will
be due and payable, with interest, upon the earlier of one year from date of
issue or upon the sale of or change in control of Medtrex. Interest will accrue
equal to 50 percent of the face amount of the subordinated notes.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None
23
None
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 47 President, Chief Executive Officer June 1, 1996
and Director
Alvin J. Catz 60 Chief Financial Officer, Treasurer June 1, 1996
and Director
William F. Rooney 58 Secretary and Director June 1, 1996
Philip Samson 41 Director June 1, 1996
Douglas F. Schofield 53 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 Vide President and Chief Administration Officer
of the Mellon Institute in Pittsburgh and a senior staff member of 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.
24
During the past five years, Dr. Patton has invested in over 20 private
placements, including 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 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 25 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 invested in approximately ten
development stage companies in western Pennsylvania. He has also assisted
numerous development stage companies in their fundraising 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 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 its founding in 1995.
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 Telecom Systems Corporation, a
telecommunications company specializing in multiplexer products ("Republic
Telecom"). In this capacity, he assisted Republic Telecom in the start-up phase
and helped to raise funding through venture capital firms. Republic Telecom 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
approximately ten early stage, high technology companies in various industries.
25
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.
Mr. Samson has been a Vice President and Director with KO Interactive, a
computer game company, since its inception in January, 1998.
Philip J. Samson holds an M.B.A. from Pennsylvania State University and a
Bachelor of Science degree in Engineering from the University of Maryland.
DOUGLAS SCHOFIELD, DIRECTOR. Dr. Schofield currently conducts business through
his own firm, Schofield Financing 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 invested in approximately ten
development stage companies in diverse industries. In addition, he has
consulted extensively with owners of closely-held companies during the past
decade and has served on the boards of two such companies during this period.
26
ITEM 11. EXECUTIVE COMPENSATION
No officer received any remuneration for serving as an officer of the Registrant
in 1998 or 1997. Each director receives a $300 meeting attendance fee effective
as of July 11, 1997, the date the Fund withdrew funds from its escrow account.
Generally, meetings are held monthly. Compensation earned by directors in 1998
amounted to $14,700 ($3,300 in 1997).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Registrant's only class of stock as of December 31, 1998, was Common Stock,
$.01 par value.
NAME AND ADDRESS AMOUNT AND NATURE OF % OF
Title of Class OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
- ---------------- ------------------------------- -------------------- ------
Common Stock G. Richard Patton $ 15,000 0.7%
Scott Towne Center, Suite A-113
2101 Greentree Road
Pittsburgh, PA 15220
Common Stock William F. Rooney $ 10,000 0.5%
Scott Towne Center, Suite A-113
2101 Greentree Road
Pittsburgh, PA 15220
Common Stock Alvin J. Catz $ 20,000 0.9%
Scott Towne Center, Suite A-113
2101 Greentree Road
Pittsburgh, PA 15220
Common Stock Philip J. Samson $ 20,000 0.9%
Scott Towne Center, Suite A-113
2101 Greentree Road
Pittsburgh, PA 15220
Common Stock Douglas F. Schofield $ 10,000 0.5%
Scott Towne Center, Suite A-113
2101 Greentree Road
Pittsburgh, PA 15220
Common Stock PNC Venture Corp. $333,330 15.1%
PNC National Building
249 Fifth Avenue
Pittsburgh, PA 15222
Common Stock National City Venture Corp. $333,300 15.1%
1965 East Sixth Street
Cleveland, OH 44114
All officers and directors, as a group, own 75,000 shares or 3.4% of the total
issued and outstanding shares as of December 31, 1998.
27
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 1998, the Registrant incurred $9,000 for accounting
services payable to a consulting firm in which one of the Fund's officers is a
significant shareholder. During 1997, all of the officers and directors
purchased Common Stock under the Registrant's Offering Circular dated November
7, 1996.
Certain of the Registrant's directors have co-invested, along with the
Registrant, in the nine investments in Portfolio Companies that the Registrant
has made as of March 24, 1999. Directors' investments in Portfolio Companies in
excess of $60,000 as of March 24, 1999 were: Douglas F. Schofield - RadNet
Corporation $85,599; Alvin J. Catz - RadNet Corporation $76,500.
Enterprise has served as the Registrant's investment advisor. As of December
31, 1998, Enterprise ceased operations, and is no longer serving as the Fund's
investment advisor. Enterprise screened potential Portfolio Companies and
presented them to the Registrant's Board of Directors for investment
consideration, conducted due diligence reviews of investment candidates as
directed by the Board of Directors, and provided staff to manage the day-to-day
operations of the Registrant including, portfolio management, preparing reports
to stockholders and performing administrative services.
In connection with its services in organizing the formation and development of
the Registrant, Enterprise originally purchased 250,000 shares of Common Stock
for $.01 per share. If all of the 5,000,000 Shares available for sale under the
Offering Circular were sold, these shares would have represented 4.8% of the
issued and outstanding shares of the Registrant. If less than 5,000,000 shares
were sold, the Registrant had the right to repurchase from Enterprise for $.01
per share such number of shares as would result in Enterprise's ownership
percentage being reduced to 4.8% of the then issued and outstanding shares of
the Registrant. During 1997, the Registrant closed its Offering after having
sold 2,104,333 shares of Common Stock. As of December 31, 1997, the Registrant
exercised the aforementioned right and repurchased 143,899 shares of its Common
Stock from Enterprise thereby reducing Enterprise's ownership to 106,101 shares
or 4.8% of the total shares issued and outstanding of 2,210,434.
Enterprise received a fee equal to 5% of the aggregate amount of assets invested
by the Registrant in Portfolio Securities for providing investment advisory and
administrative services to the Registrant. During 1998, Enterprise earned
$37,500 ($5,000 in 1997) of such fees. Enterprise also could have received
compensation from investment partners or members of any investment consortium
that invested with the Registrant in Portfolio Securities, all on such basis as
such other parties and Enterprise agreed, provided that in no event, would
Enterprise charge fees to such consortium members or investment partners at
rates lower, or on terms otherwise more favorable, than were offered to the
Registrant. Furthermore, none of the employees, officers or directors of
Enterprise could receive any compensation from any Portfolio Company by reason
of the Registrant or any other investor investing in such Portfolio Company's
securities upon the recommendation of Enterprise.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Fund's
directors, certain officers and persons who own more than ten percent of the
outstanding Common Stock of the Fund, to file with the Securities and Exchange
Commission reports of changes in ownership of the Common Stock of the Fund held
by such persons. Officers, directors and greater than ten percent shareholders
are also required to furnish the Fund with copies of all forms they file under
this regulation. To the Fund's knowledge, based solely on a review of the
copies of such reports furnished to the Fund and representations that no other
reports were required, all Section 16(a) filing requirements applicable to all
of its officers and directors were complied during fiscal 1998.
28
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- ---------------------------------------------------------------------------
(a) (1) The following financial statements and supplemental data are included
in Part II, Item 8:
Page No.
Independent Auditor's Report 11
Financial Statements:
Statements of Assets and Liabilities, December 31, 1998 and 1997 12
Statements of Operations for the Year ended December 31, 1998, for 13
the Year ended December 31, 1997, and for the Period from May 23,
1996 (Date of Inception) to December 31, 1996
Statements of Changes in Net Assets (Deficit) for the Year ended 14
December 31, 1998, for the Year ended December 31, 1997, and
for the Period from May 23, 1996 (Date of Inception) to
December 31, 1996
Statements of Cash Flows for the Year ended December 31, 1998, 15
for the Year ended December 31, 1997, and for the Period from
May 23, 1996 (Date of Inception) to December 31, 1996
Notes to Financial Statements 16
(2) All schedules other than Schedule 1 are omitted because they
are not applicable or the required information is shown in the
financial statements or notes thereto.
(3) Exhibits included herein:
*3 (a) - Articles of Incorporation
**3 (b) - By-Laws
***10.1 - Investment Advisory Agreement dated as of November 7,
1996, between the Registrant and Enterprise
Schedule 1 - Investments in Securities of Unaffiliated Issuers
Schedule 11 - Computation of Net Income Per Share
(b) Reports on Form 8-K:
One report on Form 8-K has been filed by the Registrant during the
last quarter of the period covered by this report. This Form 8-K was
filed on February 19, 1999 to report under Item 5, Other Events, the
cessation of operations by Enterprise, the Fund's investment advisor.
* Incorporated by reference to the Registrant's Form 10 filed with the
Commission on October 21, 1996.
** Incorporated by reference to the Registrant's Notification on Form 1-E filed
with the Commission on September 6, 1996.
*** Incorporated by reference to the Registrant's Form 10-K filed with the
Commission on March 31, 1997.
29
Exhibit 11
WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND
SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE
FOR THE PERIODS
MAY 23, 1996
JANUARY 1, 1998 JANUARY 1, 1997 (DATE OF INCEPTION)
THROUGH THROUGH THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -------------------
Net income (Loss) $ 3,049 $ 16,588 $ (106)
========== ========== ========
Weighted Average Number of
Common Shares Outstanding 2,210,434 1,218,376 250,000
========== ========== ========
Earnings per Common Share $ 0.00 $ 0.01 $ 0.00
========== ========== ========
30
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 24, 1999
_____________________________
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 24, 1999
- ----------------------- Treasurer, and Director ______________
Alvin J. Catz
/s/ William F. Rooney Secretary and Director Date: March 24, 1999
- ------------------------ ______________
William F. Rooney
/s/ Philip Samson Director Date: March 24, 1999
- ------------------------ ______________
Philip Samson
/s/ Douglas F. Schofield Director Date: March 24, 1999
- ------------------------- ______________
Douglas F. Schofield
31
Schedule 1
Western Pennsylvania Adventure Capital Fund
Investments in Securities of Unaffiliated Issuers
As of December 31, 1998
Balance Held at Close of Period
Acquisition Number of Shares
Name of Issuer and Title of Issue Date Principal Amount of Bonds and Notes
- --------------------------------- ---- -----------------------------------
Common Shares
Medical Products and Services
- -----------------------------
Medtrex Incorporated Jun-98 72,335 shares (1)
Preferred Shares
Medical Products and Services
- -----------------------------
Medtrex Incorporated Series B Nov-97 232,558 shares (1)
Medtrex Incorporated Series B Jun-98 116,279 shares (1),(2)
RadNet Corporation Series B Jul-98 60,606 shares (1),(3)
RadNet Corporation Series B Nov-98 20,000 shares (1),(4)
Subtotal Medical Group
Computer - Software
- -------------------
Neo Linear Inc. Feb-98 341,997 shares (1)
Islip Media Network Inc. Series A Apr-98 80,000 shares (1)
CoManage Corporation Series I Convertible Oct-98 100,000 shares (1)
Subtotal Computer Group
Other
- -----
Applied Electro-Optics Corporation Class A Convertible Aug-98 20,000 shares (1)
Allegheny Child Care Academy Series B Nov-98 55,938 shares (1)
Subtotal Other Group
Subtotal Preferred Shares
Bonds and Notes
Medical Products and Services
- -----------------------------
Precision Therapeutics Inc. Subordinated Convertible Notes Mar-98 $100,000 Notes (2)
Precision Therapeutics Inc. Subordinated Convertible Notes Sep-98 $10,000 Notes (2)
Subtotal Medical Group
Grand Total - Investments
Value of Each
Item at Percent of
Name of Issuer and Title of Issue Close of Period Net Assets
- --------------------------------- ----------------- ----------
Medical Products and Services
- ----------------------------- $2,477 0.12%
Medtrex Incorporated ------------------
Medical Products and Services
- ----------------------------- 100,000
Medtrex Incorporated Series B
50,000
Medtrex Incorporated Series B
100,000
RadNet Corporation Series B
200
RadNet Corporation Series B ------------------
Subtotal Medical Group 250,200 12.27%
------------------
Computer - Software
- -------------------
Neo Linear Inc. 100,000
Islip Media Network Inc. Series A 100,000
CoManage Corporation Series I Convertible 100,000
------------------
Subtotal Computer Group
300,000 14.71%
Other ------------------
- -----
Applied Electro-Optics Corporation Class A Convertible
100,000
Allegheny Child Care Academy Series B
100,000
Subtotal Other Group ------------------
Subtotal Preferred Shares 200,000 9.81%
------------------
750,200 36.79%
------------------
Medical Products and Services
- -----------------------------
Precision Therapeutics Inc. Subordinated Convertible Notes
Precision Therapeutics Inc. Subordinated Convertible Notes 100,000
Subtotal Medical Group 10,000
------------------
Grand Total - Investments
110,000 5.39%
-----
------------------
$862,677 42.30%
================== ======
See footnotes on following page
Schedule 1
Footnotes
Western Pennsylvania Adventure Capital Fund
Investments in Securities of Unaffiliated Issuers
As of December 31, 1998
(1) Non-income producing securities
(2) Carries warrants for purchase of additional stock
(3) Acquired upon conversion of $100,000 of Convertible Promissory Notes
acquired July 1998
(4) Acquired upon exercise of warrants received upon purchase of Convertible
Promissory Notes
(5) All securities held are restricted securities
(6) All securities held are carried at historical cost
(7) Tax basis in all securities is equal to carrying values as shown on this
schedule
(8) No unrealized appreciation or unrealized depreciation has been recognized