<PAGE>
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, 2000
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 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 shares outstanding of the issuer's Common Stock, par value $.01 per
share, as of October 23, 2000: 4,162,120 Shares.
-1-
<PAGE>
PART 1 - Financial Information
<TABLE>
<CAPTION>
Page No.
Item 1 Financial Statements
<S> <C> <C>
Report on Review by Independent Certified Public Accountants 3
Statements of Assets and Liabilities as of September 30, 2000 (unaudited) and 4
December 31, 1999
Statements of Operations, for the Periods July 1, 2000 through September 30, 2000 5
(unaudited) and January 1, 2000 through September 30, 2000 (unaudited)
Statements of Operations, for the Periods July 1, 1999 through September 30, 1999 6
(unaudited) and January 1, 1999 through September 30, 1999 (unaudited)
Statements of Changes in Net Assets for the Periods July 1, 2000 through September 7
30, 2000 (unaudited) and January 1, 2000 through September 30, 2000 (unaudited)
Statements of Changes in Net Assets, for the Periods July 1, 1999 through September 8
30, 1999 (unaudited) and January 1, 1999 through September 30, 1999 (unaudited)
Statements of Cash Flows, for the Periods July 1, 2000 through September 30, 2000 9
(unaudited) and January 1, 2000 through September 30, 2000 (unaudited)
Statements of Cash Flows, for the Periods July 1, 1999 through September 30, 1999 10
(unaudited) and January 1, 1999 through September 30, 1999 (unaudited)
Notes to Financial Statements 11
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 19
Statement by Management Concerning Review of Interim Financial Information by Independent 20
Certified Public Accountants
Statement by Management Concerning the Fair Presentation of Interim Financial Information 21
</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, 2000, and the related
statements of operations, changes in net assets, and cash flows for the three
and nine month periods ended September 30, 2000 and 1999. 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, 1999 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 22, 2000, we expressed an unqualified opinion on those financial
statements.
Goff Backa Alfera & Company, LLC
Pittsburgh, November 6, 2000
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<PAGE>
Western Pennsylvania Adventure Capital Fund
Statements of Assets and Liabilities
As of
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------- -------------------
(unaudited)
<S> <C> <C>
Assets
Cash and Cash Equivalents $ 576,812 $1,004,428
Short Term Investments, Net 1,388,758 253,383
Receivables 47,229 39,407
Investment in Portfolio Companies 3,612,835 1,793,479
Organization Costs 6,840 9,120
---------- ----------
Total Assets $5,632,474 $3,099,817
========== ==========
Liabilities
-----------
Accounts Payable $ 4,634 $ 25,496
Accrued Liabilities 6,555 18,000
Accrued Income Taxes 20,174 174
---------- ----------
Total Current Liabilities 31,363 43,670
---------- ----------
Deferred Income Taxes 285,700 50,700
---------- ----------
Total Liabilities $ 317,063 $ 94,370
========== ==========
Net Assets
----------
Common Stock, Par Value $.01 Per Share, $ 44,121 $ 29,859
Authorized 10,000,000 Shares, Issued and
Outstanding 4,162,120 Shares (2,841,984 Shares
at December 31, 1999)
Additional Paid In Capital 5,046,504 2,992,722
Syndication Costs (148,545) (135,604)
Retained Earnings 499,896 119,909
Treasury Stock - 250,000 Shares (126,565) (1,439)
---------- ----------
(143,899 Shares at December 31, 1999)
Net Assets Applicable to Shares Outstanding $5,315,411 $3,005,447
========== ==========
Net Assets Value Per Share $ 1.28 $ 1.06
========== ==========
</TABLE>
See Accountant's Report and accompanying notes to financial statements.
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<PAGE>
Western Pennsylvania Adventure Capital Fund
Statements of Operations
For the Periods
<TABLE>
<CAPTION>
July 1, 2000 January 1, 2000
through through
September 30, 2000 September 30, 2000
----------------------- -----------------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
Interest $ 42,781 $160,682
Management Fees 6,250 18,750
Realized Gains on Portfolio Securities 82,127 82,127
-------- --------
Total Revenues 131,158 261,559
-------- --------
Expenses:
General and Administration 4,500 13,500
Other Operating Expenses 64,075 139,466
-------- --------
Total Expenses 68,575 152,966
-------- --------
Unrealized Appreciation - Portfolio Companies 538,394 538,394
Profit Before Income Tax 600,977 646,987
Income Tax Expense 249,000 267,000
-------- --------
Net Income $351,977 $379,987
======== ========
Earnings Per Share $ 0.08 $ 0.09
======== ========
</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, 1999 January 1, 1999
through through
September 30, 1999 September 30, 1999
----------------------- -----------------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
Interest $15,321 $ 42,391
Management Fees 6,250 18,750
------- --------
Total Revenues 21,571 61,141
------- --------
Expenses:
General and Administration 4,200 12,600
Interest 0 48
Other Operating Expenses 25,448 58,316
------- --------
Total Expenses 29,648 70,964
------- --------
Profit (Loss) Before Income Tax (8,077) (9,823)
Income Tax Expense 375 2,380
------- --------
Net Income (Loss) $(8,452) $(12,203)
======= ========
Earnings Per Share $( .01) $( .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, 2000 January 1, 2000
Through Through
September 30, 2000 September 30, 2000
--------------------------- ---------------------------
(unaudited) (unaudited)
<S> <C> <C>
From Operations
Net Income $ 351,977 $ 379,987
From Share Transactions:
Proceeds from Sale of Common Stock -0- 2,068,044
Syndication Costs (3,261) (12,941)
Purchase of Treasury Stock -0- (125,126)
---------- ----------
Net Increase in Net Assets Derived from 348,716 2,309,964
Share Transactions ---------- ----------
Net Assets:
Beginning of Period 4,966,695 3,005,447
---------- ----------
End of Period $5,315,411 $5,315,411
========== ==========
</TABLE>
See Accountant's Report and accompanying notes to financial statements.
-7-
<PAGE>
Western Pennsylvania Adventure Capital Fund
Statements of Changes in Net Assets
For the Periods
<TABLE>
<CAPTION>
July 1, 1999 January 1, 1999
Through Through
September 30, 1999 September 30, 1999
--------------------------- ---------------------------
(unaudited) (unaudited)
<S> <C> <C>
From Operations
Net Income $ (8,452) $ (12,203)
From Share Transactions:
Syndication Costs 4,769 4,769
---------- ----------
Net Increase in Net Assets Derived
From Share Transactions 4,769 4,769
---------- ----------
Net (Decrease) in Net Assets (13,221) (16,972)
Net Assets:
Beginning of Period 2,035,667 2,039,418
---------- ----------
End of Period $2,022,446 $2,022,446
========== ==========
</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, 2000 January 1, 2000
through through
September 30, 2000 September 30, 2000
--------------------------- ---------------------------
(unaudited) (unaudited)
Cash Flow from Operating Activities:
<S> <C> <C>
Income $ 351,977 $ 379,987
Changes in Assets and Liabilities:
Organization Costs - Amortization 760 2,280
Receivables - Decrease (9,999) (7,822)
Accounts Payable - Increase (Decrease) 587 (20,862)
Accrued Liabilities - Increase (Decrease) (1,445) 8,555
Deferred Taxes - Increase 235,000 235,000
----------- -----------
Net Cash Provided by Operating Activities 576,880 597,138
----------- -----------
Cash Flow from Financing Activities:
Proceeds from Sale of Common Stock 0 2,068,044
Payment of Syndication Costs (3,261) (12,941)
Purchase of Treasury Stock 0 (125,126)
----------- -----------
Net Cash Provided by (Used in) Financing Activities (3,261) 1,929,977
----------- -----------
Cash Flow from Investing Activities:
Short Term Investments, Net of Redemptions 801,878 (1,135,375)
Investment in Portfolio Companies (1,111,322) (1,819,356)
----------- -----------
Net Cash (Used in) Investing Activities (309,444) (2,954,731)
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 264,175 (427,616)
Cash and Cash Equivalents at Beginning of Period 312,637 1,004,428
----------- -----------
Cash and Cash Equivalents at End of Period $ 576,812 $ 576,812
=========== ===========
</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, 1999 January 1, 1999
through through
September 30, 1999 September 30, 1999
--------------------------- ---------------------------
(unaudited) (unaudited)
Cash Flow from Operating Activities:
<S> <C> <C>
Income $ (8,452) $ (12,203)
Changes in Assets and Liabilities:
Organization Costs - Amortization 760 2,280
Receivables - (Increase) (13,559) (16,353)
Prepaid Taxes - (Increase) Decrease (800) 639
Accounts Payable - Increase 5,936 3,221
Accrued Liabilities - Increase (Decrease) 4,200 (2,100)
--------- ---------
Net Cash (Used in) Operating Activities (11,915) (24,516)
--------- ---------
Cash Flow from Investing Activities:
Redemption of Short Term Investments, Net
Of Purchases 121,535 484,459
Investment in Portfolio Companies (104,039) (517,076)
--------- ---------
Net Cash Provided By (Used in) Investing Activities 17,496 (32,617)
--------- ---------
Cash Flow from Financing Activities:
Syndication Costs (4,769) (4,769)
--------- ---------
Net Cash (Used in) Financing Activities: (4,769) (4,769)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 812 (61,902)
Cash and Cash Equivalents at Beginning of Period 227,110 289,824
--------- ---------
Cash and Cash Equivalents at End of Period $ 227,922 $ 227,922
========= =========
</TABLE>
See Accountant's Report and accompanying notes to financial statements.
-10-
<PAGE>
Western Pennsylvania Adventure Capital Fund
Notes to Financial Statements
September 30, 2000
Note 1 - Summary of Significant Accounting Policies:
----------------------------------------------------
This summary of significant accounting policies of Western Pennsylvania
Adventure Capital Fund (the "Fund") is presented to assist in understanding the
Fund's financial statements. These accounting policies conform with generally
accepted accounting principles and have been consistently applied in the
preparation of the financial statements.
Nature of Operations
The Fund was incorporated on May 23, 1996, and began its primary business
activities in November 1997. The Fund has been formed to become a Business
Development Company ("BDC") and to be subject to the applicable provisions of
the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund
invests primarily in the equity and/or debt securities of development stage
companies located in western Pennsylvania. The Fund seeks to make its
investments in conjunction with a consortium of investment partners such as
individual investors, private non-profit or for-profit companies or foundations,
and federal, state or local public, quasi-public or publicly-supported economic
development organizations, agencies or authorities which provide investment
capital or low interest or other financing for economic development.
The Fund's Board of Directors, which is elected by the shareholders annually,
has responsibility for management of the Fund, including authority to select
portfolio securities for investment by the Fund. The Board is advised by the
officers of the Fund and, through December 31, 1998 had been advised by The
Enterprise Corporation of Pittsburgh ("Enterprise"), which served as the Fund's
investment advisor. Enterprise screened potential Portfolio Companies and
presented them to the Fund's Board for investment consideration, conducted due
diligence reviews of investment candidates and managed the day-to-day operations
of the Fund including, portfolio management, preparing reports to shareholders
and performing administrative services. The recommendations of Enterprise as to
investments were advisory only and were not binding on the Fund or its Board of
Directors. Enterprise was a private, non-profit consulting firm founded in 1983
for the purpose of assisting entrepreneurs in developing new business in western
Pennsylvania. As of December 31, 1998, Enterprise ceased operations and is no
longer serving as the Fund's investment advisor. The Fund's Board of Directors
now performs these activities.
Enterprise received a fee equal to 5% of the aggregate amount of assets invested
by the Fund in portfolio securities for providing investment advisory and
administrative services to the Fund. Enterprise may also have received
compensation from investment partners or members of any investment consortium
that invested with the Fund in portfolio securities, all on such basis as such
other parties and Enterprise may have agreed.
Basis of Presentation - 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.
-11-
<PAGE>
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, 1999 to December 31,
1999, contained in the Fund's 1999 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% 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 percent 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 $0.01, at a price of $1.45 per share under
Regulation E of the Securities Act of 1933 (the "Second Offering"). The Second
Offering was extended through January 31, 2000. The Fund sold 2,057,787 shares
of its common stock and closed the Second Offering.
On July 14, 2000, the Fund began offering a total of 875,000 shares of its
common stock, par value $0.01, at a price of $1.60 per share under Regulation E
of the Securities Act of 1933 (the "Third Offering"). No shares have been sold
as of September 30, 2000.
Syndication Costs
Legal, accounting and other costs of $85,507 incurred in 1997 connection with
the First Offering have been capitalized and reported as a permanent reduction
of net assets in accordance with generally accepted accounting principles. No
syndication costs were incurred in the nine month period ending September 30,
1999.
Legal, accounting and other costs of $63,038 ($50,097 in 1999) incurred in
connection with the Second Offering have been capitalized and reported as a
permanent reduction in 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.
-12-
<PAGE>
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
September 30, 2000 and December 31, 1999.
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. The
balance of $6,840 ($9,120 at December 31, 1999) represents the remaining portion
of these costs subject to amortization.
Earnings Per Share
During 1997, the Fund adopted SFAS No. 128, "Earnings Per Share". Its
application is not expected to affect the calculations of basic and diluted
earnings per share.
Earnings per share is computed using the weighted average number of shares
outstanding during the respective periods. There are no outstanding stock
options, warrants, or other contingently issuable shares.
The Fund's shareholders, at the annual meeting of shareholders held on November
17, 1999, approved a stock option plan which 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.
-13-
<PAGE>
Income Taxes
The Fund has adopted the SFAS 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. There were no deferred taxes prior to the quarter ended December
31, 1999.
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.
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. As of December 31, 1999, the Fund had received subscriptions to
purchase 631,550 shares ($915,747). As of September 30, 2000, and December 31,
1999, $3,612,835 and $1,793,479, respectively, including unrealized
appreciation, were invested in Portfolio Securities, and the balance of the
funds remained invested in cash equivalents, government securities, and high
quality debt securities.
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. No shares have
been sold as of September 30, 2000.
-14-
<PAGE>
Note 3 - Investments in Portfolio Companies
-------------------------------------------
On July 24, 2000, the Fund purchased 210,526 shares of GamesParlor, Inc.
("GamesParlor") Series A Preferred Stock ("A Preferred") at $0.475 per share for
a total investment of $100,000. The A Preferred offering by GamesParlor is
continuing at this time. Two directors of the Fund own 28.31 percent of
GamesParlor on a fully diluted basis assuming sale of 1,265,000 shares of A
Preferred, the full offering, based on previous investments and conversion of
existing debt.
In conjunction with this investment, a director assigned a note payable from
GamesParlor for services rendered of $5,000 to the Fund. The note payable bears
interest at 6.60 percent per annum, matures on July 30, 2000, and is convertible
into 10,525 shares of A Preferred.
GamesParlor provides internet games services to enthusiasts of classic parlor
games.
On July 26, 2000, the Fund received its first distribution of $234,604 from its
sale of its investment in Medtrex Incorporated ("Medtrex"). The proceeds of the
sale are to be distributed by the buyer in two installments with the second
installment scheduled for January, 2001. The distributions are subject to
contingency claims during this period. The Fund made its initial investment in
Medtrex in November, 1997, and the total investment amounted to $152,477.
On August 10, 2000, the Fund purchased 47,785 shares of Series A Preferred Stock
("Series A") of e-Cruise, Inc. ("e-Cruise") at $0.52 cents per share for a total
investment of $25,001. The total investment by the Fund, and by the Fund and its
shareholders, including shares previously owned by the Fund and its shareholders
and shares acquired by the Fund and its shareholders upon conversion of the
Convertible Promissory Notes ("Notes") as described below, represented an
ownership interest of 2.52 percent and 8.37 percent, respectively, on a fully
diluted basis.
Concurrent with this event, e-Cruise's existing Notes, in accordance with their
existing terms, were converted, principal and accrued interest, into Series A.
The Fund, and the Fund and its shareholders currently own 237,920 shares and
920,203 shares, respectively, of e-Cruise Series A.
e-Cruise will provide online infomediary marketing content for cruise lines to
potential passengers.
On August 28, 2000, the Fund purchased 989.6767 shares of Fidelity Flight
Simulation Incorporated ("FFS") Redeemable Preferred Stock ("Redeemable") and
1032.326 shares of Convertible Preferred Stock ("Preferred") for a total
investment of $100,000. The investment has been allocated as $99,343 for the
Redeemable and $657 for the Convertible. At approximately the same time, other
shareholders in the Fund purchased 5,690.641 shares of Redeemable and 5,935.8719
shares of Convertible for a total investment of $575,000. The total investment
by the Fund, and by the Fund and its shareholders, represented an ownership
interest of 4.34 percent and 29.31 percent, respectively, on a fully diluted
basis.
FFS develops low cost motion based flight simulators for pilot training.
On September 6, 2000, the Fund purchased 17,878 shares of Allegheny Child Care
Academy ("ACCA") Series C Preferred Stock at $2.7967 per share for a total
investment of $49,999. At approximately the same time, other shareholders in
the Fund purchased 36,599 shares for a total investment of $102,356. The total
investment by the Fund, and by the Fund and its shareholders, including shares
previously purchased by Fund shareholders, represented an ownership interest of
1.04 percent and 3.39 percent, respectively on a fully diluted basis.
ACCA owns and operates children's day care centers primarily in central/inner
city locations with most of its clients welfare subsidized through state and
federal programs.
-15-
<PAGE>
On September 6, 2000, the Fund purchased 525,000 shares of USInterns.com, Inc.
("USInterns") Common Stock ("Common") at $0.32 per share and Warrants to
purchase 525,000 Common for five years at $0.48 per share for a total investment
of $168,000. The Common offering by USInterns is continuing at this time.
USInterns provides internet student employment staffing solutions to employers.
On September 22, 2000, the Fund purchased 100,000 shares of Applied Electro-
Optics Corporation ("AEC") Class B Convertible Preferred Stock ("Class B") at
$1.50 per share for a total investment of $150,000. At approximately the same
time, other shareholders in the Fund purchased 595,192 shares for a total
investment of $892,788. The total investment by the Fund, and by the Fund and
its shareholders, including shares previously purchased by Fund shareholders and
shares acquired by the Fund and its shareholders upon conversion of Convertible
Notes as described below, represented an ownership interest of 4.59 percent and
29.66 percent, respectively on a fully diluted basis.
Concurrent with this event, AEC's existing Convertible Notes, in accordance with
their existing terms, were converted, principal, accrued interest, and a premium
of 30 percent of principal, into Class B. The Fund held $100,000 of these
Convertible Notes which have been converted into 93,074 shares of Class B. At
approximately the same time, other shareholders of the Fund converted $816,443
of Convertible Notes into 759,786 shares of Class B.
AEC is engaged in the design, development and manufacturing of motion-free laser
screening systems.
On September 22, 2000, the Fund exercised its pre-emptive right and purchased
25,745 shares of CoManage Corporation ("CoManage") Series IV Convertible
Preferred Stock ("Series IV") at $5.1429 for a total investment of $132,404.
The Series IV offering by CoManage is continuing at this time.
CoManage is developing computer software to allow software providers to deliver
extended network services onto network vendors equipment at clients' sites.
Note 4 - Co-Investor Agreement
------------------------------
On June 30, 1998, the Fund and the Urban Redevelopment Authority of Pittsburgh
("URA") entered into a co-investment agreement ("Agreement"). Under the terms
of this Agreement, the URA will create an escrow account of $1,000,000 to be
used for direct investment in certain select Fund's Portfolio Companies, located
within the City of Pittsburgh and meeting other criteria established by the URA.
The escrow account also will be used for payment of the Fund's investment and
management fees related to such investments. The URA will match, on a dollar-
for-dollar basis, the Fund's investment in Portfolio Companies, subject to the
limitations of the Portfolio Companies' location within the City of Pittsburgh
and such companies meeting the URA's criteria for funding.
The annual management fee payable to the Fund is $25,000. Further, the URA will
pay the Fund's investment advisor a transaction fee of five percent (5%) of the
URA's portion of its investment. All fees will be paid from the escrow account.
In addition, the URA, as part of the Agreement, has agreed to subordinate its
rights to any return on its investment until the private equity participants,
investing in each of the contemplated transactions, including the Fund, have
recovered their original investments in the Portfolio Companies. Thereafter,
the URA and all equity participants, including the Fund, will participate in all
future distributions in accordance with their investment.
-16-
<PAGE>
Note 5 - Short Term Investments
-------------------------------
The Fund, pending investments in Portfolio Securities, temporarily invests its
excess funds in short term high quality commercial paper and U.S. Government
securities. These investments generally are purchased at a discount from face
value and are redeemed at maturity at face value. The discount from face value
represents unearned interest income and is recognized over the remaining term of
the security using the effective yield to maturity method. All of the short
term investments are classified as HTM in accordance with SFAS No. 115. The
face value, carrying value, and market value for HTM investments were as follows
at September 30, 2000 and December 31, 1999:
As of September 30, 2000
------------------------
Investment Face Value Carrying Value Market Value
---------- ---------- -------------- ------------
U.S. Government Securities $1,410,000 $1,388,758 $1,387,962
========== ========== ==========
As of December 31, 1999
-----------------------
Investment Face Value Carrying Value Market Value
---------- ---------- -------------- ------------
U.S. Government Securities $ 255,000 $ 253,383 $ 253,410
========== ========== ==========
Note 6 - Unrealized Appreciation
--------------------------------
As of September 30, 2000, the Fund's Board of Directors determined that
unrealized appreciation should be recognized on two of the Fund's investments in
Portfolio Companies based upon recent financing rounds at valuations
significantly higher than the Fund's carrying value in those specific Portfolio
Companies. Accordingly, the Fund has recognized unrealized appreciation in the
quarter ended September 30, 2000 as follows: CoManage $438,394 and TimeSys
$100,000. The Fund previously recognized unrealized appreciation in the quarter
ended December 31, 1999 as follows: CoManage $100,000 and Entigo $63,731.
Note 7 - Related Party Transactions
-----------------------------------
Accrued liabilities at September 30, 2000 includes $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.
Accounts payable as of December 31, 1999, includes $10,000 payable to Enterprise
for investment advisory and administrative services. Accrued liabilities at
December 31, 1999 includes $18,000 for Board of Directors fees.
Note 8 - Stock Option Plan
--------------------------
The shareholders, at the annual meeting of shareholders held 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,
-17-
<PAGE>
as determined by the stock option committee. In general, each option will become
exercisable in 25 percent increments beginning on the first, second, third and
fourth anniversaries of the date of grant. Options may be granted as either
incentive stock options or nonqualified stock options.
The stock option committee has determined to award 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). No options have
been granted as of September 30, 2000.
Note 9 - Income Taxes
---------------------
The following table summarizes the provision for Federal and state taxes on
income.
<TABLE>
<CAPTION>
Current 2000 1999
------- -------- ------
<S> <C> <C>
Federal $ 24,000 $ 0
State 8,000 2,380
-------- ------
32,000 2,380
======== ======
Deferred
--------
Federal 179,000 0
State 56,000 0
-------- ------
235,000 0
-------- ------
Total $267,000 $2,380
======== ======
</TABLE>
Note 10 - Treasury Stock
------------------------
On June 7, 2000, the Fund purchased 106,101 shares of its Common Stock
previously owned by Innovation Works, Inc. for $125,126. These shares are shown
as treasury stock as of September 30, 2000.
-18-
<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, 2000
consisted of interest income of $42,781, and $160,682, respectively, management
fees of $6,250 and $18,750, respectively, and realized gains on portfolio
securities of $82,127 and $82,127, respectively. The increase in interest
income over the comparable periods of 1999 is a result of the Fund's temporary
investment of funds raised during the sale of its Common stock during the period
September, 1999 through January, 2000. A total of $2,983,792 was raised from
the sale of 2,057,787 shares of Common Stock. A substantial portion of these
funds have been temporarily invested in money market funds and U.S. Government
Securities, pending investment in Portfolio Securities. The realized gain on
portfolio securities resulted from the sale of the Fund's investment in Medtrex
Incorporated. During the three month period ending September 30, 2000, the Fund
received its first distribution of proceeds of sale $234,604, with a second
distribution scheduled for January, 2001.
General and administrative expenses for the three and nine month periods
amounted to $4,500 and $13,500, respectively, and consisted of directors fees.
These amounts are similar to those of the comparable periods of 1999. Other
operating expenses for the three and nine month periods ended September 30, 2000
amounted to $64,075 and $139,466, respectively. The increase in these expenses
for the three month period ended September 30, 2000 over the comparable period
of 1999 is due to increased legal and accounting fees of $18,258, other
administrative costs of $14,317 resulting from increased
administrative/secretarial/clerical support and directors and officers liability
insurance of $19,500. The increase in these expenses for the nine month period
ended September 30, 2000 over the comparable period of 1999 is due to advisory
board fees of $41,000, other administrative costs resulting from increased
administrative/secretarial/clerical support and directors and officers liability
insurance of $19,500.
Revenues for the three and nine month periods ending September 30, 1999,
consisted of interest income and management fees of $15,321 and $6,250, and
$42,391 and $18,750, respectively. General and administrative expenses for the
three and nine month periods amounted to $4,200 and $12,600, respectively, and
consisted of directors fees. Other operating expenses for the three and nine
month periods ending September 30, 1999 amounted to $25,448 and $58,316,
respectively, and included $7,630 and $28,000, respectively, of legal and
accounting fees and $12,000 of advisory board fees.
Financial Condition, Liquidity and Capital Resources
----------------------------------------------------
The Registrant, through its sale of Common Stock under the Offering, raised
$2,104,333 in 1997. The Registrant, through its sale of Common Stock under the
Second Offering Circular raised $2,983,792 through January 31, 2000. As of
September 30, 2000, the Registrant had invested $2,915,708 in Portfolio
Companies, and held cash, cash equivalents, and short-term investments in high
quality commercial paper and U.S. Government securities of $1,965,570. Most of
this amount, except for normal operating expenses, is available for investment
in Portfolio Securities.
-19-
<PAGE>
Statement by Management Concerning Review of Interim Financial Information
by Independent Certified Public Accountants
The September 30, 2000 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 reviews. The report of Goff Backa Alfera & Company, LLC
commenting on their reviews accompanies the financial statements included in
Item 1 of Part I.
-20-
<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 Backa
Alfera & Company, LLC commenting upon their reviews accompanies the financial
statements included in Item 1 of Part I.
-21-
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Lists of Exhibits
11 Computation of earnings per share for the three and nine
month periods ended September 30, 2000 and September 30,
1999
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended
September 30, 2000
-22-
<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:
<TABLE>
<S> <C>
Western Pennsylvania Adventure Capital
Fund (Registrant)
Date: November 6, 2000 s/G. Richard Patton
President and Chief Executive Officer and Director
Date: November 6, 2000 s/Alvin J. Catz
Chief Financial Officer, Treasurer and Director
</TABLE>
23
