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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-21593
---------
WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND, LLC
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 30-0046038
------------ ----------
(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 and Zip Code)
(412) 279-1760
(Registrant's Telephone Number, Including Area Code)
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.
X Yes ____ No
- -
Number of members units as of November 8, 2002: 4,222,870 Units.
PART 1 - Financial Information
Page No.
Item 1 Financial Statements
Report on Review by Independent Certified Public Accountants 3
Statements of Assets and Liabilities as of September 30, 2002 (unaudited) and 4
December 31, 2001
Statements of Operations, for the Periods July 1, 2002 through September 5
30, 2002 (unaudited) and January 1, 2002 through September 30, 2002
(unaudited)
Statements of Operations, for the Periods July 1, 2001 through September 6
30, 2001 (unaudited) and January 1, 2001 through September 30, 2001
(unaudited)
Statements of Changes in Net Assets for the Periods July 1, 2002 through 7
September 30, 2002 (unaudited) and January 1, 2002 through September 30,
2002 (unaudited)
Statements of Changes in Net Assets, for the Periods July 1, 2001 through 8
September 30, 2001 (unaudited) and January 1, 2001 through September 30,
2001 (unaudited)
Statements of Cash Flows, for the Periods July 1, 2002 through September 9
30, 2002 (unaudited) and January 1, 2002 through September 30, 2002
(unaudited)
Statements of Cash Flows, for the Periods July 1, 2001 through September 10
30, 2001 (unaudited) and January 1, 2001 through September 30, 2001
(unaudited)
Notes to Financial Statements 11
Item 2 Management's Discussion and Analysis of Financial Condition and 20
Results of Operations
Statement by Management Concerning Review of Interim Information by Independent 22
Certified Public Accountants
Statement by Management Concerning the Fair Presentation of Interim Financial 23
Information
2
REPORT ON REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Western Pennsylvania Adventure Capital Fund, LLC
We have reviewed the accompanying statement of assets and liabilities of Western
Pennsylvania Adventure Capital Fund, LLC as of September 30, 2002, and the
related statements of operations, changes in net assets, and cash flows for the
three and nine month periods ended September 30, 2002 and 2001. These financial
statements are the responsibility of the company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the statement of assets and liabilities as of December 31, 2001 and
the related statements of operations, changes in net assets, and cash flows for
the year then ended (not presented herein), and in our report dated March 21,
2002, we expressed an unqualified opinion on those financial statements.
Goff Backa Alfera & Company, LLC
Pittsburgh, November 8, 2002
3
Statements of Assets and Liabilities
As of
September 30, 2002 December 31, 2001
------------------ -----------------
Assets (unaudited)
------
Cash and Cash Equivalents $ 258,753 $ 292,699
Short Term Investments, Net 201,432 546,888
Receivables 18,856 17,169
Investment in Portfolio Companies 3,015,157 2,947,083
Prepaid/Deferred Taxes 17,040 57,000
Organization Costs 0 3,040
------------- -------------
Total Assets $ 3,511,238 $ 3,863,879
============= =============
Liabilities
-----------
Accounts Payable $ 0 $ 21,924
Accrued Liabilities 16,800 6,500
Accrued Income Taxes 0 9,701
------------- -------------
Total Liabilities $ 16,800 $ 38,125
============= =============
Net Assets
----------
Members' Equity
Outstanding 4,222,870 Units $ 3,494,438 0
Common Stock, Par Value $.01 Per Share,
Authorized 10,000,000 Shares, Issued and
Outstanding 4,224,870 Shares at
December 31, 2001 0 $ 44,749
Additional Paid in Capital 0 5,146,276
Syndication Costs 0 (149,220)
Retained Earnings 0 (1,089,486)
Treasury Stock - 250,000 Shares, at cost, 0 (126,565)
------------- -------------
At December 31, 2001
Net Assets Applicable to Shares/Units
Outstanding $ 3,494,438 $ 3,825,754
============= =============
Net Assets Value Per Share/Unit $ 0.83 $ 0.91
============= =============
See Accountant's Report and accompanying notes to financial statements.
4
Western Pennsylvania Adventure Capital Fund, LLC
Statements of Operations
For the Periods
July 1, 2002 January 1, 2002
through through
September 30, 2002 September 30, 2002
------------------ ------------------
(unaudited) (unaudited)
Revenues:
Interest $ 6,122 $ 21,547
Realized Gains 0 6,367
--------- ---------
Total Revenues 6,122 27,914
--------- ---------
Expenses:
General and Administration 4,500 13,500
Other Operating Expenses 48,835 117,365
--------- ---------
Total Expenses 53,335 130,865
--------- ---------
Unrealized Appreciation (Depreciation) -
Portfolio Companies (21,060) (185,685)
--------- ---------
Profit/(Loss) Before Income Tax (68,273) (288,636)
Income Tax Expense 0 41,600
--------- ---------
Net Income (Loss) $ (68,273) $(330,236)
========= =========
Earnings (Loss) Per Share/Unit $ (.02) $ (.08)
========= =========
See Accountant's Report and accompanying notes to financial statements.
5
Western Pennsylvania Adventure Capital Fund
Statements of Operations
For the Periods
July 1, 2001 January 1, 2001
through through
September 30, 2001 September 30, 2001
------------------ ------------------
(unaudited) (unaudited)
Revenues:
Interest $ 16,694 $ 52,714
Management Fees (6,250) 6,250
Realized Gains 0 189,195
---------- ------------
Total Revenues 10,444 248,159
---------- ------------
Expenses:
General and Administration 4,500 13,500
Other Operating Expenses 58,693 106,227
---------- ------------
Total Expenses 63,193 119,727
---------- ------------
Unrealized depreciation - Portfolio companies (94,498) (1,880,195)
Profit (Loss) Before Income Tax (147,247) (1,751,763)
Income Tax Expense (Benefit) (8,332) (308,947)
---------- ------------
Net Income (Loss) $ (138,915) $ (1,442,816)
========== ============
Earnings (Loss) Per Share $ (0.03) $ (0.34)
========== ============
See Accountant's Report and accompanying notes to financial statements.
6
Western Pennsylvania Adventure Capital Fund, LLC
Statements of Changes in Net Assets
For the Periods
July 1, 2002 January 1, 2002
through through
September 30, 2002 September 30, 2002
------------------ ------------------
(unaudited) (unaudited)
From Operations
Net Income (Loss) $ (68,273) $ (330,236)
Redemption of Dissenter's Shares 0 (1,080)
---------- ----------
Net Increase (Decrease) in Net Assets (68,273) (331,316)
Net Assets:
Beginning of Period 3,562,711 3,825,754
---------- ----------
End of Period $3,494,438 $3,494,438
========== ==========
See Accountant's Report and accompanying notes to financial statements.
7
Western Pennsylvania Adventure Capital Fund
Statements of Changes in Net Assets
For the Periods
July 1, 2001 January 1, 2001
through through
September 30, 2001 September 30, 2001
------------------ ------------------
(unaudited) (unaudited)
From Operations
Net Income (Loss) $ (138,915) $(1,442,816)
From Share Transactions:
Proceeds from Sale of Common Stock 0 36,400
---------- -----------
Net Increase (Decrease) in Net Assets (138,915) (1,406,416)
Net Assets:
Beginning of Period 4,066,534 5,334,035
---------- -----------
End of Period $3,927,619 $ 3,927,619
========== ===========
See Accountant's Report and accompanying notes to financial statements.
8
Western Pennsylvania Adventure Capital Fund, LLC
Statements of Cash Flows
For the Periods
July 1, 2002 January 1, 2002
through through
September 30, 2002 September 30, 2002
------------------ ------------------
(unaudited) (unaudited)
Cash Flow from Operating Activities:
Income (Loss) $ (68,273) $(330,236)
Change in Assets and Liabilities:
Organization Costs - Amortization 0 3,040
Receivables - (Increase) Decrease 2,125 (1,687)
Prepaid Taxes - (Increase) Decrease 0 39,960
Accounts Payable - Increase (Decrease) (3,062) (21,924)
Accrued Liabilities - Increase (Decrease) 1,500 599
--------- ---------
Net Cash Provided By (Used in) Operating Activities (67,710) (310,248)
--------- ---------
Cash Flow from Financing Activities:
Purchase Member's Units 0 (1,080)
--------- ---------
Cash Flow from Investing Activities:
Short Term Investments, Net of Redemptions (1,646) 345,456
Investment in Portfolio Companies (9,000) (68,074)
--------- ---------
Net Cash Provided by (Used in) Investing Activities (10,646) 277,382
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents (78,356) (33,946)
Cash and Cash Equivalents at Beginning of Period 337,109 292,699
--------- ---------
Cash and Cash Equivalents at End of Period $ 258,753 $ 258,753
========= =========
See Accountant's Report and accompanying notes to financial statements.
9
Western Pennsylvania Adventure Capital Fund
Statements of Cash Flows
For the Periods
July 1, 2001 January 1, 2001
through through
September 30, 2001 September 30, 2001
------------------ ------------------
(unaudited) (unaudited)
Cash Flow from Operating Activities:
Income (Loss) $ (138,915) $(1,442,816)
Change in Assets and Liabilities:
Organization Costs - Amortization 760 2,280
Receivables - Decrease 28,376 10,894
Prepaid Taxes - (Increase) Decrease 0 (54,394)
Accounts Payable - (Decrease) (405) (6,976)
Accrued Liabilities - Increase (Decrease) (8,676) 40,156
Deferred Taxes - (Decrease) 0 (292,447)
----------- -----------
Net Cash Provided By (Used in) Operating Activities (118,860) (1,743,303)
----------- -----------
Cash Flow from Financing Activities:
Proceeds from Sale of Common Stock 0 36,400
----------- -----------
Cash Flow from Investing Activities:
Short Term Investments, Net of Redemptions 296,414 67,526
Investment in Portfolio Companies (27,132) 1,138,973
----------- -----------
Net Cash Provided by (Used in) Investing Activities 269,282 1,206,499
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 150,422 (500,404)
Cash and Cash Equivalents at Beginning of Period 233,995 884,821
----------- -----------
Cash and Cash Equivalents at End of Period $ 384,417 $ 384,417
=========== ===========
Income Taxes Paid (Refunded) $ 344 $ (5,093)
See Accountant's Report and accompanying notes to financial statements.
10
Western Pennsylvania Adventure Capital Fund, LLC
Notes to Financial Statements
September 30, 2002
Note 1 - Summary of Significant Accounting Policies:
This summary of significant accounting policies of Western Pennsylvania
Adventure Capital Fund, LLC and its predecessor organization, the Western
Pennsylvania Adventure Capital Fund, a C Corporation (collectively and/or
individually 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, as Western Pennsylvania Adventure
Capital Fund (a C Corporation) 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.
As of February 28, 2002, the Western Pennsylvania Adventure Capital Fund (a C
Corporation) was merged into its wholly owned and heretofore inactive
subsidiary, the Western Pennsylvania Adventure Capital Fund, LLC (an LLC
organization). The Western Pennsylvania Adventure Capital Fund, LLC has
continued all of the operations of the Western Pennsylvania Adventure Capital
Fund (a C Corporation).
The Fund's Board of Directors, which is elected by the members (previously 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.
11
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 - Interim Financial Statements
The financial information included herein has been prepared from the books and
records without audit. The accompanying financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and the footnotes required by generally accepted accounting
principles for statements. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial condition, results of operations, changes in net
assets, and cash flows, have been included.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
These financial statements should be read in conjunction with the financial
statements and notes thereto for the period January 1, 2001 to December 31,
2001, contained in the Fund's 2001 Annual Report on Form 10-K.
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%.
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.
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.
12
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 March 31, 2001. The Fund sold 62,750 shares of its common stock
and closed the Third Offering.
Syndication Costs
Legal, accounting and other costs of $149,220 ($85,507 in 1998) incurred in
connection with the Fund's First Offering, Second Offering and Third Offering
have been capitalized and reported as a permanent reduction of net assets in
accordance with generally accepted accounting principles.
There were no syndication costs incurred in the three and nine month periods
ended September 30, 2002 and September 30, 2001.
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 or premium from face value and are redeemed at maturity at face value.
The difference represents interest income (expense) 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 (expense)
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 (expense) recognized on each individual
investment will increase over time as the carrying value of that investment
increases (decreases). The Fund records these investments net of remaining
unearned interest income (expense).
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
September 30, 2002 and December 31, 2001.
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.
13
Start-Up and Organization Costs
Costs incurred in connection with the start-up and organization of the Fund had
been deferred through March 31, 2002 and were being amortized ratably over a
period of 60 months beginning January 1, 1998. During the three month period
ended June 30, 2002, the Fund, as a result of the recent merger (See Note 2),
wrote off the remaining balance of $2,280 of deferred Start-Up and Organization
Costs. The balance of $3,040 at December 31, 2001 represents the remaining
portion of these costs subject to amortization at that time.
Earnings Per Share/Unit
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/unit.
Earnings per share/unit is computed using the weighted average number of
shares/units outstanding during the respective periods, adjusted for outstanding
stock options, if any. There are no other outstanding warrants, or other
contingently issuable shares/units.
The Fund's shareholders, at the annual meeting of shareholders held on November
17, 1999, approved a stock option plan which authorizes the granting of options
to purchase the Fund's common stock to directors, officers, employees, and
members of the advisory board of the Fund. 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.
On December 20, 2001, all of the directors returned their options to the Fund.
The Fund may grant options to the directors at a future date.
Income Taxes
The Fund has adopted the SFAS Standard No. 109, "Accounting for Income Taxes",
from its inception. SFAS 109 requires an asset and liability approach that
recognizes deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Fund's financial
statements or tax returns. In estimating future tax consequences, SFAS 109
generally considers all expected future events other than enactments of changes
in the tax law or rates. During the quarter ended December 31, 1999, the Fund
recognized unrealized appreciation on its portfolio companies, and accordingly,
began recognizing deferred taxes due to temporary timing differences in
accordance with SFAS 109. During the three month period ended June 30, 2001, the
Fund revalued a number of its investments in portfolio companies based on
current economic conditions and certain unfavorable developments at specific
portfolio companies. Accordingly, a previously recognized deferred tax liability
of $292,447 on previously recorded unrealized appreciation was reversed in the
three month period ended June 30, 2001, and a deferred tax asset of $57,000 was
recorded. There were no deferred taxes recognized in either the three month
period ended March 31, 2001, or the three month period ended September 30, 2001.
Deferred taxes of $39,960 recognized during the three month period ended March
31, 2002 relate to the partial reversal of the deferred tax asset recorded at
December 31, 2001, which will not be realized as a result of the merger
discussed in Note 2. There were no deferred taxes recognized during either the
three month period ended June 30, 2002, or the three month period ended
September 30, 2002.
The Fund, as a result of becoming an LLC as of February 28, 2002, is treated as
a "pass through" entity for income tax purposes. Any income tax liabilities
incurred by the Fund are allocated to members of the Fund annually for inclusion
in the members' individual income tax returns. The Fund remains responsible for
any Pennsylvania Capital Stock and Franchise Tax.
14
Note 2 - Merger
As of February 28, 2002, the Fund converted from the C Corporation to an LLC
Organization via merger of the C Corporation into its wholly owned and
previously inactive subsidiary - an LLC Organization. As a consequence, the LLC
assumed all assets and liabilities of the C Corporation and is continuing all
operations of the C Corporation.
Shareholders of the C Corporation have become members of the LLC, and hold the
same number of ownership units in the LLC equal to the number of shares that
they held in the C Corporation, with no change in ownership percentage of the
respective organizations.
Note 3 - Sale of Securities
During 1997, the Fund sold 2,104,333 shares of its common stock at $1.00 per
share, under an Offering Circular dated November 7, 1996 ("First Offering
Circular"). The proceeds were required to be deposited in an escrow account with
the Fund's escrow agent, PNC Bank, until such time as the escrow account reached
$1 million. At that time, the Fund was permitted to withdraw the funds from the
escrow account and begin to invest in portfolio securities.
As of July 11, 1997, the proceeds in the escrow account totaled $1,860,100. On
that date, the Fund withdrew substantially all of the funds from the escrow
account.
The funds released from escrow have been temporarily invested, pending
investment in Portfolio Securities, in cash equivalents, government securities,
and high quality debt securities. A portion of the funds released from escrow
were disbursed to pay accumulated obligations whose payment was deferred until
funds were released from escrow.
The Fund began offering for sale up to 2,750,000 shares of its Common Stock at
$1.45 per share, or a maximum of $3,987,500, under an Offering Circular dated
September 10, 1999 ("Second Offering Circular"). The Fund intends to use the
proceeds from this sale of securities primarily to invest in the equity and/or
debt securities of additional development stage companies located in western
Pennsylvania, and to make follow on investments, as appropriate, in existing
portfolio companies. The proceeds from this sale of securities have been
temporarily invested, pending investments in portfolio companies, in cash
equivalents, government securities, and high quality debt securities. A portion
of these proceeds may be used for normal operating expenses. The Fund sold
2,057,787 shares ($2,983,792) of its Common Stock under this Second Offering
Circular.
The Fund began offering for sale up to 875,000 shares of its Common Stock at
$1.60 per share, or a maximum of $1,400,000, under an Offering Circular dated
July 14, 2000 ("Third Offering Circular"). The Fund intends to use the proceeds
from this sale of securities primarily to invest in the equity and/or debt
securities of additional development stage companies located in western
Pennsylvania, and to make follow on investments, as appropriate, in existing
portfolio companies. The proceeds from this sale of securities will be
temporarily invested, pending investments in portfolio companies, in cash
equivalents, government securities, and high quality debt securities. A portion
of these proceeds may be 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 Circular, and closed the Third Offering as of March 31, 2001. As
of March 31, 2002, and December 31, 2001, $3,122,083 and $2,947,083,
respectively, were invested in Portfolio Securities, and the balance of the
funds remained invested in cash equivalents, government securities, and high
quality debt securities.
15
Note 4 - Investments in Portfolio Companies
On September 3, 2002, the Fund purchased $19,500 of GamesParlor, Inc. 12 percent
Promissory Notes (12% Notes) due June 30, 2004 and 156,000 shares of
GamesParlor, Inc. Common Stock at $0.01 per share or an investment of $1,560,
for a total investment of $21,060. In conjunction with this investment, the Fund
received 210,526 shares of Series A2 Preferred Stock which has similar
preferences to the Series A held by the Fund with the exception of the absence
of any liquidation preference included in the Series A Preferred Stock.
Note 5 - Co-Investor Agreement
On June 30, 1998, the Fund and the Urban Redevelopment Authority of Pittsburgh
("URA") entered into a co-investment agreement ("Agreement"). Under the terms of
this Agreement, the URA will create an escrow account of $1,000,000 to be used
for direct investment in certain select Fund's Portfolio Companies, located
within the City of Pittsburgh and meeting other criteria established by the URA.
The escrow account also will be used for payment of the Fund's investment and
management fees related to such investments. The URA will match, on a
dollar-for-dollar basis, the Fund's investment in Portfolio Companies, subject
to the limitations of the Portfolio Companies' location within the City of
Pittsburgh and such companies meeting the URA's criteria for funding.
The annual management fee payable to the Fund is $25,000. Further, the URA will
pay the Fund's investment advisor a transaction fee of five percent (5%) of the
URA's portion of its investment. All fees will be paid from the escrow account.
In addition, the URA, as part of the Agreement, has agreed to subordinate its
rights to any return on its investment until the private equity participants,
investing in each of the contemplated transactions, including the Fund, have
recovered their original investments in the portfolio companies. Thereafter, the
URA and all equity participants, including the Fund, will participate in all
future distributions in accordance with their investment.
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 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 or premium
from face value and are redeemed at maturity at face value. The discount/premium
from face value represents unearned interest income/expense 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 September 30, 2002 and December 31, 2001:
16
As of September 30, 2002
------------------------
Investment Face Value Carrying Value Market Value
- ---------- ---------- -------------- ------------
U.S. Government Securities $ 200,000 $ 201,432 $ 201,376
========== ============== ============
As of December 31, 2001
-----------------------
Investment Face Value Carrying Value Market Value
- ---------- ---------- -------------- ------------
U.S. Government Securities $ 550,000 $ 546,888 $ 548,965
========== ============== ============
Note 7 - Unrealized Appreciation
The Fund recognizes unrealized appreciation (depreciation) on its portfolio
companies when significant and material events have occurred that clearly
indicate that an adjustment to the carrying value of those investments is
appropriate. Unrealized appreciation (depreciation) was $(1,369,541) as of
September 30, 2002 and $(1,183,856) as of December 31, 2001. Unrealized
appreciation (depreciation) recognized in the three and nine month periods ended
September 30, 2002 was $(21,060) and $(185,685), respectively. Unrealized
appreciation (depreciation) recognized in the three and nine month periods ended
September 30, 2001 was $(94,498) and $(1,880,195), respectively.
Note 8 - Related Party Transactions
Accrued liabilities at September 30, 2002 and December 31, 2001 include $4,500
for Board of Directors fees and $2,000 for accounting services payable to a
consulting firm in which one of the Fund's officers is a significant
shareholder.
Note 9 - 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.
17
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.
On December 20, 2001, all of the directors returned their options to the Fund.
The Fund may grant options to the directors at a future date.
The stock option committee on July 12, 2002 granted options to purchase 50,000
units of its members' equity at an exercise price equal to the net asset value
per unit as of June 30, 2002 to each of the Fund's five directors (250,000 units
in the aggregate). These options vest immediately. The net asset value per unit
as of June 30, 2002 was $0.84 per unit.
Note 10 - Income Taxes
The following table summarizes the provision for Federal and state taxes on
income.
Current: 2002 2001
---- ----
Federal $(2,725) $ 33,000
State 4,365 7,500
------- ---------
1,640 40,500
======= =========
Deferred:
Federal 33,960 (281,901)
State 6,000 ( 67,546)
------- ---------
39,960 (349,447)
======= =========
Total $41,600 $(308,947)
======= =========
Deferred taxes of $39,960 recognized during the three month period ended March
31, 2002 relate to the partial reversal of the deferred tax asset recorded at
December 31, 2001, which will not be realized as a result of the merger
discussed in Note 2. There were no deferred taxes recognized during either the
three month period ended June 30, 2002 or the three month period ended September
30, 2002.
Note 11 - Realized Gains
In February, 2002, the Fund received $6,367, which represented the final
distribution of funds from the escrow account created from the acquisition of
the Fund's portfolio company, Applied Electro-Optics Corporation by AcceLight
Networks, Inc. These funds had been held in escrow for settlement of any claims
resulting from the transaction. The $6,367 has been recognized as realized gains
during the three month period ended March 31, 2002.
18
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.
Note 12 - 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 are included as part of members
equity as of September 30, 2002.
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 as a part of members equity as of September
30, 2002.
Note 13 - Subsequent Events
On October 21, 2002, the Fund purchased 106,666 shares of WorldDealer, Inc.
("WorldDealer") Series B Convertible Preferred Stock ("Series B") at $0.1875 per
share and 53,333 warrants to purchase WorldDealer common stock at $0.1875 per
share for a total investment of $20,000. The warrants expire as of December 31,
2005. The Series B is convertible into common stock on a 1:1 basis, and has
voting rights, liquidation preference, anti-dilution protection and pre-emptive
rights. This offering is continuing at this time.
WorldDealer develops web-based software for automotive retailers using an
application service provider delivery model.
On October 30, 2002, Webmedx, Inc., ("Webmedx") one of the Fund's portfolio
companies, held a meeting of its shareholders. At that meeting, the Webmedx
shareholders approved a new $12,000,000 financing round that included a
restructuring of the company's equity. Under the terms of this financing round;
(1) all outstanding Common Stock and outstanding options to purchase Common
Stock are converted into a reduced number of warrants to purchase Common Stock;
(2) all outstanding shares of Series A, B and C Preferred Stock are converted
into a reduced number of warrants to purchase Common Stock; (3) all outstanding
shares of Series D Preferred Stock are converted into a new class of Redeemable
Preferred Stock; and (4) 12,000,000 shares of new Series A Convertible Preferred
Stock are being offered for sale at $1.00 per share. The warrants are
exercisable at $3.50 per share for a five year period. The financing round is
continuing at this time.
At this time, the Fund anticipates recognizing a decline in the value of its
investments in Webmedx Series B and C Preferred Stock of $95,756 as unrealized
depreciation during the three month period ending December 31, 2002. The Fund
anticipates continuing to carry its investment in Webmedx Series D Preferred
Stock at historical cost, $50,000.
The Fund did not make an investment in new Series A Convertible Preferred Stock.
Webmedx provides software and services to diagnostic imaging segments of the
healthcare industries.
19
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Revenues for the three and nine month periods ending September 30, 2002 amounted
to $6,122 and $27,914, respectively. Interest income for the three and nine
month periods ending September 30, 2002 was $6,122 and $21,547, respectively.
The realized gains ($6,367), recognized in the three month period ending March
31, 2002, resulted from the receipt of funds released from the escrow account
created from the acquisition of Applied Electro-Optics Corporation, a portfolio
company, by AcceLight Networks, Inc. Revenues for the three month and nine month
periods ending September 30, 2001 amounted to $10,444 and $248,159,
respectively. The $248,159 includes $189,195 realized gain from the sale of
Medtrex Incorporated, one of the Fund's portfolio companies, which was
recognized in the three month period ended March 31, 2001. Interest income for
the three and nine month periods ending September 30, 2001 was $16,694 and
$52,714, respectively. The decline in interest income reflects both lower
interest rates and a reduction in short term investments due to additional
investments in portfolio companies.
General and administrative expenses for the three and nine month periods ending
September 30, 2002 amounted to $4,500 and $13,500, respectively, and consisted
of directors fees. These amounts are the same as the comparable periods of 2001.
Other operating expenses for the three and nine month periods ending September
30, 2002 amounted to $48,835 and $117,365101, respectively. Other operating
expenses for the three and nine month periods ended September 30, 2001 amounted
to $58,693 and $106,227, respectively. The increase in other operating expenses
in the nine month period ended September 30, 2002 compared with the nine month
period ended September 30, 2001 resulted from higher printing costs required in
connection with the merger (See Footnote 2 to the Financial Statements) and the
inclusion of Pennsylvania Capital Stock and Franchise Tax as other operating
expenses due to the Fund's status as a "pass-through" tax entity. The decrease
in other operating expenses in the three month period ended September 30, 2002
compared with the three month period ended September 30, 2001 resulted from
lower professional fees, legal and accounting. Professional fees for the three
and nine month periods ending September 30, 2002, amounted to $11,555 and
$45,606, respectively, compared with $26,486 and $49,974 respectively, for the
comparable periods of 2001.
The income tax expense for the three and nine month periods ending September 30,
2002 amounted to $0 and $41,600, respectively, primarily due to the elimination
of the previously recognized deferred tax asset partially offset by the current
recognition of a probable tax refund from a net operating loss carryback. Income
tax expense (benefit) for the three and nine month periods ending September 30,
2001 was ($8,332) and ($308,947), respectively. The (benefit) recognized in the
three and nine month periods ending September 30, 2001 reflects the recognition
of a portion of unrealized depreciation on investments in portfolio companies
during the three month period ending June 30, 2001. A tax benefit has been
recognized only to the extent of available net operating loss carrybacks and
previously recorded unrealized appreciation on investments in portfolio
companies since realization of additional tax benefits is not sufficiently
assured as to warrant recognition in the financial statements.
20
Financial Condition, Liquidity and Capital Resources
The Registrant, through its sale of Common Stock under the First Offering
Circular, raised $2,104,333 in 1997. The Registrant, through the sale of its
Common Stock under the Second Offering Circular, raised $2,983,792 in 1999 -
2000. The Registrant, through the sale of its Common Stock under the Third
Offering Circular, raised $100,400 in 2000-2001. As of September 30, 2002, the
Registrant held cash, cash equivalents, and short-term investments in high
quality commercial paper and U.S. Government securities of $460,185. Most of
this amount, except for normal operating expenses, is available for investment
in Portfolio Securities.
21
Statement by Management Concerning Review of Interim Financial Information
by Independent Certified Public Accountants
The September 30, 2002 financial statements included in this filing on Form 10-Q
have been reviewed by Goff Backa Alfera & Company, LLC, independent certified
public accountants, in accordance with established professional standards and
procedures for such review. The report of Goff Backa Alfera & Company, LLC
commenting on their review accompanies the financial statements included in Item
1 of Part I.
22
Statement by Management Concerning the Fair Presentation
Of Interim Financial Information
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments), which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods. The report of Goff Backa
Alfera & Company, LLC commenting upon their review accompanies the financial
statements included in Item 1 of Part I.
23
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
11 Computation of earnings per share/unit for the three and
nine month periods ended September 30, 2002 and
September 30, 2001
(b) Reports on Form 8-K
No reports were filed on Form 8-K by the Registrant during the
quarter covered by this report.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the 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, LLC
(Registrant)
Date: November 8, 2002 /s/ G. Richard Patton
---------------------
G. Richard Patton
President and Chief Executive Officer
and Director
Date: November 8, 2002 /s/ Alvin J. Catz
------------------
Alvin J. Catz
Chief Financial Officer, Treasurer and
Director
25