<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 1998
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
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 25-1792727
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2000 Technology Drive, Suite 150
Pittsburgh, PA 15219-3109
(Address of Principal Executive Offices and Zip Code)
412-687-0977
(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
requirement for the past 90 days.
X Yes No
-------- --------
Number of shares outstanding of the issuer's Common Stock, par value $.01 per
share, as of November 2, 1998: 2,210,434 shares
1
<PAGE>
Part I -- Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements
Page No.
--------
<S> <C>
Report on Review by Independent Certified 3
Public Accountants
Statements of Assets and Liabilities, as 4
of September 30, 1998 (unaudited) and December 31, 1997
Statements of Operations, for the Periods 5
July 1, 1998 through September 30, 1998 (unaudited) and
January 1, 1998 through September 30, 1998 (unaudited)
Statements of Operations, for the Periods 6
July 1, 1997 through September 30, 1997 (unaudited) and
January 1, 1997 through September 30, 1997 (unaudited)
Statements of Changes in Net Assets, 7
for the Periods July 1, 1998 through September 30, 1998
(unaudited) and January 1, 1998 through September 30, 1998 (unaudited)
Statements of Changes in Net Assets (Deficit), 8
for the Periods July 1, 1997 through September 30, 1997
(unaudited) and January 1, 1997 through September 30, 1997 (unaudited)
Statements of Cash Flows, for the Periods 9
July 1, 1998 through September 30, 1998 (unaudited)
and January 1, 1998 through September 30, 1998 (unaudited)
Statements of Cash Flows, for the Periods 10
July 1, 1997 through September 30, 1997 (unaudited)
and January 1, 1997 through September 30, 1997 (unaudited)
Notes to Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial 20
Condition and Results of Operations
Statement by Management Concerning Review of Interim 21
Information by Independent Certified Public Accountants
Statement by Management Concerning the Fair 22
Presentation of Interim Financial Information
</TABLE>
2
<PAGE>
REPORT ON REVIEW BY INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
To the Board of Directors
Western Pennsylvania Adventure Capital Fund
We have reviewed the accompanying statement of assets and liabilities of Western
Pennsylvania Adventure Capital Fund as of September 30, 1998, and the related
statements of operations, changes in net assets, and cash flows for the three
and nine month periods ended September 30, 1998. 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, 1997 and
the related statements of operations, changes in net assets (deficit), and cash
flows for the year then ended (not presented herein), and in our report dated
March 27, 1998, we expressed an unqualified opinion on those financial
statements.
/s/ Goff, Ellenbogen, Backa & Alfera, LLC
- ------------------------------------------
Goff, Ellenbogen, Backa & Alfera, LLC
Pittsburgh, November 6, 1998
3
<PAGE>
Western Pennsylvania Adventure Capital Fund
Statements of Assets and Liabilities
As of
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------- ------------------
(unaudited)
<S> <C> <C>
Assets
------
Cash and Cash Equivalents $ 311,443 $ 368,618
Short Term Investments, Net 1,071,690 1,571,082
Investment in Portfolio Companies 662,477 100,000
Prepaid Taxes 2,820 -
Organization Costs 12,939 15,200
---------- ----------
Total Assets $2,061,369 $2,054,900
========== ==========
Liabilities
-----------
Accounts Payable $ 12,866 $ 10,011
Accrued Liabilities 10,500 8,520
---------- ----------
Total Liabilities $ 23,366 $ 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 18,116 16,482
Treasury Stock -- 143,899 Shares, at cost (1,439) (1,439)
---------- ----------
Net Assets Applicable to
Shares Outstanding $2,038,003 $2,036,369
========== ==========
Net Assets Value Per Share $0.92 $0.92
========== ==========
</TABLE>
See Accountant's Report and accompanying notes to financial statements.
4
<PAGE>
Western Pennsylvania Adventure Capital Fund
Statements of Operations
For the Periods
<TABLE>
<CAPTION>
July 1, 1998 January 1, 1998
through through
September 30, 1998 September 30, 1998
------------------- ------------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
Interest $18,853 $65,458
Management Fees 6,250 6,250
------- -------
Total Revenues 25,103 71,708
------- -------
Expenses:
General and Administration 3,171 23,850
Interest 49 99
Other Operating Expenses 14,510 41,545
------- -------
Total Expenses 17,730 65,494
------- -------
Profit Before Income Tax 7,373 6,214
Income Tax Expense 299 4,580
------- -------
Net Income $ 7,074 $ 1,634
======= =======
Earnings Per Share $ .00 $ .00
======= =======
</TABLE>
See Accountant's Report and accompanying notes to financial statements.
5
<PAGE>
Western Pennsylvania Adventure Capital Fund
Statements of Operations
For the Periods
<TABLE>
<CAPTION>
July 1, 1997 January 1,1997
through through
September 30, 1997 September 30, 1997
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues -- Interest Income $ 47,712 $ 47,712
Expenses:
General and Administrative 2,161 15,759
Interest 20,327 20,367
Operating Expenses 168 219
------- -------
Total Expenses 22,656 36,345
------- -------
Profit Before Income Taxes 25,056 11,367
Income Tax Expense 3,041 3,041
------- -------
Net Income $22,015 $ 8,326
======= =======
Earnings (Loss) Per Share $ 0.01 $ 0.01
======= =======
</TABLE>
See Accountant's Report and accompanying notes to financial statements.
6
<PAGE>
Western Pennsylvania Adventure Capital Fund
Statements of Changes in Net Assets
For the Periods
<TABLE>
<CAPTION>
July 1, 1998 January 1, 1998
through through
September 30, 1998 September 30, 1998
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
From Operations
Net Profit $ 7,074 $ 1,634
Net Assets:
Beginning of Period 2,036,369 2,030,929
---------- ----------
End of Period $2,038,003 $2,038,003
========== ==========
</TABLE>
See Accountant's Report and accompanying notes to financial statements.
7
<PAGE>
Western Pennsylvania Adventure Capital Fund
Statements of Changes in Net Assets (Deficit)
For the Periods
<TABLE>
<CAPTION>
July 1, 1997 January 1, 1997
through through
September 30, 1997 September 30, 1997
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
From Operations
Net Income $ 22,015 $ 8,326
From Share Transactions:
Proceeds from Sale of Common Stock 2,069,333 2,069,333
Syndication Costs (5,919) (44,340)
---------- ----------
Net Increase in Net Assets
Derived from Share Transactions 2,063,414 2,024,993
---------- ----------
Net Increase in Net Assets 2,085,429 2,033,319
Net Assets (Deficit):
Beginning of Period (90,883) (38,773)
---------- ----------
End of Period $1,994,546 $1,994,546
========== ==========
</TABLE>
See Accountant's Report and accompanying notes to financial statements.
8
<PAGE>
Western Pennsylvania Adventure Capital Fund
Statements of Cash Flows
For the Periods
<TABLE>
<CAPTION>
July 1, 1998 January 1, 1998
through through
September 30, 1998 September 30, 1998
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
Cash Flow from Operating Activities:
$ 7,074 $ 1,634
Income
Change in Assets and Liabilities:
Organization Costs -- Amortization 741 2,261
Prepaid Taxes -- Increase (1,817) (2,820)
Accounts Payable -- Increase (7,014) 2,855
(Decrease)
Accrued Liabilities -- Increase 3,000 1,980
--------- ---------
Net Cash Provided by (Used in)
Operating Activities 1,984 5,910
--------- ---------
Cash Flow from Investing Activities:
Redemption of Short Term Investments,
Net of Purchases 180,817 499,392
Investment in Portfolio Companies (210,927) (562,477)
--------- ---------
Net Cash Provided by (Used in)
Investing Activities (30,110) (63,085)
--------- ---------
Net Increase (Decrease) in Cash
and Cash Equivalents: (28,126) (57,175)
Cash and Cash Equivalents
at Beginning of Period 339,569 368,618
--------- ---------
Cash and Cash Equivalents
at End of Period $ 311,443 $ 311,443
========= =========
</TABLE>
See Accountant's Report and accompanying notes to financial statements.
9
<PAGE>
Western Pennsylvania Adventure Capital Fund
Statements of Cash Flows
For the Periods
<TABLE>
<CAPTION>
July 1, 1997 January 1, 1997
through through
September 30, 1997 September 30, 1997
------------------- --------------------
(unaudited) (unaudited)
<S> <C> <C>
Cash Flow from Operating Activities:
Net Income $ 22,015 $ 8,326
Change in Assets and Liabilities:
Accrued Interest Receivable -- Increase (1,032) (1,032)
Accounts Payable -- (Decrease) (96,409) (44,624)
Accrued Liabilities -- Increase 1,494 1,534
----------- -----------
Net Cash (Used in) Operating (73,932) (35,796)
Activities ----------- -----------
Cash Flow from Financing Activities:
Proceeds from Sale of Stock 2,069,333 2,069,333
Payment of Syndication Costs (5,919) (44,340)
Purchase of Short Term Investments (1,087,421) (1,087,421)
Organization Costs -- (Increase) (200) (200)
----------- -----------
Net Cash Provided by Financing 975,793 937,372
Activities ----------- -----------
Net Increase in Cash: 901,861 901,576
Cash at Beginning of Period 133 418
----------- -----------
Cash at End of Period $ 901,994 $ 901,994
=========== ===========
</TABLE>
See Accountant's Report and accompanying notes to financial statements.
10
<PAGE>
Western Pennsylvania Adventure Capital Fund
Notes to Financial Statements
September 30, 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 ("Board"), 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 by The Enterprise Corporation of Pittsburgh
("Enterprise"), the Fund's investment advisor. Enterprise screens potential
Portfolio Companies and presents them to the Fund's Board for investment
consideration, conducts due diligence reviews of investment candidates and
manages 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 are advisory only and are not
binding on the Fund or its Board of Directors. Enterprise is a private, non-
profit consulting firm founded in 1983 for the purpose of assisting
entrepreneurs in developing new businesses in western Pennsylvania.
Enterprise receives a fee equal to 5 percent 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 receive
compensation from investment partners or members of any investment consortium
that invests with the Fund in portfolio securities, all on such basis as such
other parties and Enterprise shall agree.
11
<PAGE>
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 complete 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 revenues 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, 1997 to December 31,
1997, contained in the Fund's 1997 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 "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 percent
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 percent.
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 percent of the then total shares issued and
outstanding (2,210,434 shares). The repurchased shares are presented as
Treasury Stock, at cost.
There were no transactions involving the Fund's Shares during the three and nine
month periods ending September 30, 1998, although there were transactions among
the Fund's shareholders during these periods.
12
<PAGE>
Syndication Costs
For the three and nine month periods ending September 30, 1997, legal and other
costs of $5,919 and $44,340, respectively, incurred in connection with the
Offering were capitalized and reported as a permanent reduction of net assets in
accordance with generally accepted accounting principles. No syndication costs
were incurred in the three and nine month periods ending September 30, 1998.
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 13
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").
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
A total of $15,200 has been incurred in connection with the start-up and
organization of the Fund. These costs have been deferred and are being
amortized ratably over a period of 60 months beginning January 1, 1998.
13
<PAGE>
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.
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 September 30, 1998 and December 31, 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. No shares were sold
during the three and nine month periods ending September 30, 1998.
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 September 30, 1998 and December 31,
1997, $662,477 and $100,000, respectively, were 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
- --------------------------------------------
On July 21, 1998, the Fund purchased 27,074 shares of Common Stock of Medtrex
Incorporated ("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
14
<PAGE>
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.
On July 31, 1998, the Fund purchased $100,000 of RadNet Corporation ("RadNet")
Convertible Notes ("Notes"). The Notes are convertible into the same equity,
and on the same terms, as RadNet will issue in its next securities offering. In
addition, the Notes carry warrants for the purchase of RadNet's Preferred Stock
equal to 1/3 of the value of the Notes. The warrants expire 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.
RadNet has developed and sells software to hospital radiology departments. The
software creates an electronic folder which includes film images, voice
dictation, text reports, and order status.
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.
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 does not occur by January 31, 1999. In addition,
the Convertible Notes carry 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
15
<PAGE>
allowing them to convert their existing "old" notes to "new" notes and 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.
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.
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.
16
<PAGE>
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.
17
<PAGE>
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 September 30, 1998 and December 31, 1997:
As of September 30, 1998
------------------------
<TABLE>
<CAPTION>
Investment Face Value Carrying Value Market Value
- ---------- ---------- -------------- ------------
<S> <C> <C> <C>
Commercial Paper $ 182,000 $ 181,467 $ 181,296
U.S. Government Securities 903,067 890,223 891,685
---------- ---------- ----------
Total $1,085,067 $1,071,690 $1,072,981
========== ========== ==========
</TABLE>
As of December 31, 1997
-----------------------
<TABLE>
<CAPTION>
Investment Face Value Carrying Value Market Value
- ---------- ---------- -------------- ------------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
Note 7 -- Related Party Transactions
- ------------------------------------
Accounts payable as of September 30, 1998, includes $10,000 payable to
Enterprise for investment advisory services. Accrued liabilities at September
30, 1998 includes $10,500 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).
18
<PAGE>
Note 8 -- Year 2000 Conversion
- ------------------------------
During 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. Further,
the Fund presently believes that these appropriate modifications and conversions
will not result in a significant expense to the Fund.
Note 9 -- Subsequent Events
- ---------------------------
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 October 1, 1998, the Board of Directors of RadNet Corporation ("RadNet"), one
of the Fund's Portfolio Companies, accepted an offer from the Hillman Company
("Hillman"), a venture capital firm. Under the terms of this offer, which is
subject to RadNet's shareholder approval by the end of November, 1998, RadNet
will issue to Hillman 1,818,182 shares of a newly created Series B Preferred
Stock at $1.65 per share for an aggregate consideration of $3,000,000. This
Series B Preferred Stock will: be convertible into Common Stock on a one-for-
one basis, have anti-dilution provisions, vote as a separate class, and entitle
Hillman to representation on RadNet's Board of Directors.
Upon closing of this offer, RadNet's $781,000 outstanding Convertible Notes (See
Note 3) would be converted into 473,333 shares of Series B Preferred Stock and
warrants would be issued to the note holders for purchase of 156,200 additional
shares of Series B Preferred Stock at $.01 per share. After these transactions,
the Fund, and the Fund and its shareholders, would have an equity ownership
interest in RadNet of 1.5 percent and 13.5 percent respectively, on a fully
diluted basis.
19
<PAGE>
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, 1998,
consisted of interest income and management fees of $25,103 and $71,708,
respectively. General and administrative expenses for the three and nine month
periods amounted to $3,171 and $23,850, respectively, and consisted primarily of
legal and accounting fees. Other operating expenses for the three and nine
month periods ending September 30, 1998 amounted to $14,510 and $41,545,
respectively, and included investment advisory and administrative services due
to Enterprise, the Fund's investment advisor of $10,000 and $27,500,
respectively, and Board of Directors fees of $3,000 and $10,500, respectively.
Revenues for the three and nine month periods ending September 30, 1997
consisted of interest income of $47,712, which represented interest earned on
escrowed funds, short term investment, and money market funds.
General and administrative expenses for the three and nine month periods ending
September 30, 1997 amounted to $2,161 and $15,759, respectively, and consisted
primarily of professional fees for the audit of the Registrant's financial
statements for the period from inception (May 23, 1996) through December 31,
1996, and the reviews of the Registrant's financial statements for the three and
six month periods ended June 30, 1997. Interest expense for the three and nine
month periods ending September 30, 1997 amounted to $20,327 and $20,367,
respectively, and consisted primarily of interest paid to subscribers, under the
Registrant's Offering Circular, whose funds were held in escrow for more than 90
days.
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
The Registrant, through its sale of Common Stock under the Offering, raised
$2,104,333 in 1997. As of September 30, 1998, the Registrant had invested
$662,477 in Portfolio Companies, and held cash, cash equivalents, and short-term
investments in high quality commercial paper and U.S. Government securities of
$1,383,133. Most of this amount, except for normal operating expenses, is
available for investment in Portfolio Securities.
20
<PAGE>
Statement by Management Concerning Review of Interim Financial
Information by Independent Certified Public Accountants
The September 30, 1998 financial statements included in this filing on Form 10-Q
have been reviewed by Goff, Ellenbogen, Backa & Alfera, LLC, independent
certified public accountants, in accordance with established professional
standards and procedures for such review. The report of Goff, Ellenbogen, Backa
& Alfera, LLC commenting on their reviews accompanies the financial statements
included in Item 1 of Part I.
21
<PAGE>
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,
Ellenbogen, Backa & Alfera, LLC commenting upon their reviews accompanies the
financial statements included in Item 1 of Part I.
22
<PAGE>
Part II -- Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
11 Computation of earnings per share for the three and nine month
periods ended September 30, 1998 and September 30, 1997
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
September 30, 1998.
23
<PAGE>
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
(Registrant)
/s/ G. Richard Patton
---------------------
Date November 6, 1998 G. Richard Patton
-------------------- President, Chief Executive Officer
and Director
/s/ Alvin J. Catz
-----------------
Date November 6, 1998 Alvin J. Catz
------------------ Chief Financial Officer, Treasurer
and Director
24
<PAGE>
Item 6 (a), Exhibit 11
Western Pennsylvania Adventure Capital Fund
Schedule of Computation of Earnings Per Common Share
For the Periods
<TABLE>
<CAPTION>
July 1, 1998 January 1, 1998
through through
September 30, 1998 September 30, 1998
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
Net Income $ 7,074 $ 1,634
========== ==========
Weighted Average Number of Common
Shares Outstanding 2,210,434 2,210,434
========== ==========
Earning per Common Share $ .00 $ .00
========== ==========
</TABLE>
<TABLE>
<CAPTION>
July 1, 1997 January 1, 1997
through through
September 30, 1997 September 30, 1997
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
Net Income $ 22,015 $ 8,326
========== ========
Weighted Average Number of
Common Shares Outstanding 1,988,626 835,911
========== ========
Earning per Common Share $ .01 $ .01
========== ========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF ASSETS AND LIABILITIES AT SEPTEMBER 30, 1998 AND THE STATEMENT OF
OPERATIONS FROM JANUARY 1, 1998 TO SEPTEMBER 30, 1998.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<INVESTMENTS-AT-COST> 1,734,167 1,734,167
<INVESTMENTS-AT-VALUE> 1,735,458 1,735,458
<RECEIVABLES> 0 0
<ASSETS-OTHER> 15,759 15,759
<OTHER-ITEMS-ASSETS> 311,443 311,443
<TOTAL-ASSETS> 2,061,369 2,061,369
<PAYABLE-FOR-SECURITIES> 0 0
<SENIOR-LONG-TERM-DEBT> 0 0
<OTHER-ITEMS-LIABILITIES> 23,366 23,366
<TOTAL-LIABILITIES> 23,366 23,366
<SENIOR-EQUITY> 0 0
<PAID-IN-CAPITAL-COMMON> 2,083,290 2,083,290
<SHARES-COMMON-STOCK> 2,210,434 2,210,434
<SHARES-COMMON-PRIOR> 2,210,434 2,210,434
<ACCUMULATED-NII-CURRENT> 18,853 65,458
<OVERDISTRIBUTION-NII> 0 0
<ACCUMULATED-NET-GAINS> 0 0
<OVERDISTRIBUTION-GAINS> 0 0
<ACCUM-APPREC-OR-DEPREC> 1,291 1,291
<NET-ASSETS> 2,038,003 2,038,003
<DIVIDEND-INCOME> 0 0
<INTEREST-INCOME> 18,853 65,458
<OTHER-INCOME> 6,250 6,250
<EXPENSES-NET> 17,730 65,494
<NET-INVESTMENT-INCOME> 7,074 1,634
<REALIZED-GAINS-CURRENT> 0 0
<APPREC-INCREASE-CURRENT> 2,108 1,291
<NET-CHANGE-FROM-OPS> 7,074 1,634
<EQUALIZATION> 0 0
<DISTRIBUTIONS-OF-INCOME> 0 0
<DISTRIBUTIONS-OF-GAINS> 0 0
<DISTRIBUTIONS-OTHER> 0 0
<NUMBER-OF-SHARES-SOLD> 0 0
<NUMBER-OF-SHARES-REDEEMED> 0 0
<SHARES-REINVESTED> 0 0
<NET-CHANGE-IN-ASSETS> 7,074 1,634
<ACCUMULATED-NII-PRIOR> 0 0
<ACCUMULATED-GAINS-PRIOR> 0 0
<OVERDISTRIB-NII-PRIOR> 0 0
<OVERDIST-NET-GAINS-PRIOR> 0 0
<GROSS-ADVISORY-FEES> 10,000 27,500
<INTEREST-EXPENSE> 49 99
<GROSS-EXPENSE> 17,730 65,494
<AVERAGE-NET-ASSETS> 2,034,466 2,037,186
<PER-SHARE-NAV-BEGIN> .92 .92
<PER-SHARE-NII> 0 0
<PER-SHARE-GAIN-APPREC> 0 0
<PER-SHARE-DIVIDEND> 0 0
<PER-SHARE-DISTRIBUTIONS> 0 0
<RETURNS-OF-CAPITAL> 0 0
<PER-SHARE-NAV-END> .92 .92
<EXPENSE-RATIO> .01 .03
<AVG-DEBT-OUTSTANDING> 0 0
<AVG-DEBT-PER-SHARE> 0 0
</TABLE>
