<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 June 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
Incorporation or Organization) Identification No.)
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 July 31, 2000: 4,162,120 Shares.
-1-
<PAGE>
PART 1 - Financial Information
<TABLE>
<CAPTION>
Page No.
<S> <C>
Item 1 Financial Statements
Report on Review by Independent Certified Public Accountants 3
Statements of Assets and Liabilities as of June 30, 2000 (unaudited) and December
31, 1999 4
Statements of Operations, for the Periods April 1, 2000 through June 30, 2000
(unaudited) and January 1, 2000 through June 30, 2000 (unaudited) 5
Statements of Operations, for the Periods April 1, 1999 through June 30, 1999
(unaudited) and January 1, 1999 through June 30, 1999 (unaudited) 6
Statements of Changes in Net Assets for the Periods April 1, 2000 through June 30,
2000 (unaudited) and January 1, 2000 through June 30, 2000 (unaudited) 7
Statements of Changes in Net Assets, for the Periods April 1, 1999 through June 30,
1999 (unaudited) and January 1, 1999 through June 30, 1999 (unaudited) 8
Statements of Cash Flows, for the Periods April 1, 2000 through June 30, 2000
(unaudited) and January 1, 2000 through June 30, 2000 (unaudited) 9
Statements of Cash Flows, for the Periods April 1, 1999 through June 30, 1999
(unaudited) and January 1, 1999 through June 30, 1999 (unaudited) 10
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 Information by Independent Certified Public 20
Accountants
Statement by Management Concerning the Fair Presentation of Interim Financial Information 21
</TABLE>
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<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 June 30, 2000, and the related
statements of operations, changes in net assets, and cash flows for the three
and six month periods ended June 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, Ellenbogen, Backa & Alfera, LLC
Pittsburgh, August 1, 2000
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<PAGE>
Western Pennsylvania Adventure Capital Fund
Statements of Assets and Liabilities
As of
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
Assets (unaudited)
------
<S> <C> <C>
Cash and Cash Equivalents $ 312,637 $1,004,428
Short Term Investments, Net 2,190,636 253,383
Receivables 37,230 39,407
Investment in Portfolio Companies 2,501,513 1,793,479
Organization Costs 7,600 9,120
---------- ----------
Total Assets $5,049,616 $3,099,817
========== ==========
Liabilities
-----------
Accounts Payable $ 4,047 $ 25,496
Accrued Liabilities 10,000 18,000
Accrued Income Taxes 18,174 174
---------- ----------
Total Current Liabilities 32,221 43,670
---------- ----------
Deferred Income Taxes 50,700 50,700
---------- ----------
Total Liabilities $ 82,921 $ 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 (145,284) (135,604)
Retained Earnings 147,919 119,909
Treasury Stock - 250,000 Shares
(143,899 Shares at December 31, 1999) (126,565) (1,439)
---------- ----------
Net Assets Applicable to Shares Outstanding $4,966,695 $3,005,447
========== ==========
Net Assets Value Per Share $ 1.19 $ 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>
April 1, 2000 January 1, 2000
through through
June 30, 2000 June 30, 2000
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
Interest $76,321 $117,901
Management Fees 6,250 12,500
------- --------
Total Revenues 82,571 130,401
------- --------
Expenses:
General and Administration 4,500 9,000
Other Operating Expenses 41,105 75,391
------- --------
Total Expenses 45,605 84,391
------- --------
Profit Before Income Tax 36,966 46,010
Income Tax Expense 15,480 18,000
------- --------
Net Income $21,486 $ 28,010
======= ========
Earnings Per Share $ 0.01 $ 0.01
======= ========
</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>
April 1, 1999 January 1, 1999
through through
June 30, 1999 June 30, 1999
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
Interest $13,492 $27,070
Management Fees 6,250 12,500
------- -------
Total Revenues 19,742 39,570
------- -------
Expenses:
General and Administration 4,200 8,400
Interest 48 48
Other Operating Expenses 13,599 32,868
------- -------
Total Expenses 17,847 41,316
------- -------
Profit (Loss) Before Income Tax 1,895 (1,746)
Income Tax Expense 1,255 2,005
------- -------
Net Income (Loss) $ 640 $(3,751)
======= =======
Earnings Per Share $ .00 $ .00
======= =======
</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>
April 1, 2000 January 1, 2000
through through
June 30, 2000 June 30, 2000
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
From Operations
Net Income $ 21,486 $ 28,010
From Share Transactions:
Proceeds from Sale of Common Stock -0- 2,068,044
Syndication Costs (5,950) (9,680)
Purchase of Treasury Stock (125,126) (125,126)
---------- ----------
Net Increase (Decrease) in Net Assets Derived from (131,076) 1,933,238
Share Transactions ---------- ----------
Net Assets:
Beginning of Period 5,076,285 3,005,447
---------- ----------
End of Period $4,966,695 $4,966,695
========== ==========
</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>
April 1, 1999 January 1, 1999
Through through
June 30, 1999 June 30, 1999
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
From Operations
Net Income (Loss) $ 640 $ (3,751)
Net Assets:
Beginning of Period 2,035,027 2,039,418
---------- ----------
End of Period $2,035,667 $2,035,667
========== ==========
</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>
April 1, 2000 January 1, 2000
through through
June 30, 2000 June 30, 2000
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Cash Flow from Operating Activities:
Income $ 21,486 $ 28,010
Changes in Assets and Liabilities:
Organization Costs - Amortization 760 1,520
Receivables - (Increase) Decrease 2,689 2,177
Accounts Payable - (Decrease) (16,692) (21,449)
Accrued Liabilities - Increase (Decrease) 20,980 10,000
--------- -----------
Net Cash Provided by Operating Activities 29,223 20,258
--------- -----------
Cash Flow from Financing Activities:
Proceeds from Sale of Common Stock 0 2,068,044
Payment of Syndication Costs (5,950) (9,680)
Purchase of Treasury Stock (125,126) (125,126)
--------- -----------
Net Cash Provided by (Used in) Financing Activities (131,076) 1,933,238
--------- -----------
Cash Flow from Investing Activities:
Short Term Investments, Net of Redemptions (175,715) (1,937,253)
Investment in Portfolio Companies (348,965) (708,034)
--------- -----------
Net Cash (Used in) Investing Activities (524,680) (2,645,287)
--------- -----------
Net (Decrease) in Cash and Cash Equivalents (626,533) (691,791)
Cash and Cash Equivalents at Beginning of Period 939,170 1,004,428
--------- -----------
Cash and Cash Equivalents at End of Period $ 312,637 $ 312,637
========= ===========
</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>
April 1, 1999 January 1, 1999
through through
June 30, 1999 June 30, 1999
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Cash Flow from Operating Activities:
Income (Loss) $ 640 $ (3,751)
Changes in Assets and Liabilities:
Organization Costs - Amortization 760 1,520
Receivables - (Increase) Decrease 2,864 (2,794)
Prepaid Taxes - Decrease 1,689 1,439
Accounts Payable - (Decrease) (13,238) (2,715)
Accrued Liabilities - Increase (Decrease) 4,200 (6,300)
--------- ---------
Net Cash (Used in) Operating Activities (3,085) (12,601)
--------- ---------
Cash Flow from Investing Activities:
Redemption of Short Term Investments, Net
of Purchases 229,262 357,285
Investment in Portfolio Companies (281,398) (407,398)
--------- ---------
Net Cash (Used in) Investing Activities (52,136) (50,113)
--------- ---------
Net (Decrease) in Cash and Cash Equivalents (55,221) (62,714)
Cash and Cash Equivalents at Beginning of Period
282,331 289,824
--------- ---------
Cash and Cash Equivalents at End of Period $ 227,110 $ 227,110
========= =========
</TABLE>
See Accountant's Report and accompanying notes to financial statements.
-10-
<PAGE>
Western Pennsylvania Adventure Capital Fund
Notes to Financial Statements
June 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.
Syndication Costs
Legal, accounting and other costs of $85,507 incurred in 1997 connection with
the 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 six month period ending June 30, 1999.
Legal, accounting and other costs of $59,777 ($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 June 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
$7,600 ($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 June 30, 2000, and December 31, 1999,
$2,501,513 and $1,793,479, respectively were invested in Portfolio Securities,
and the balance of the funds remained invested in cash equivalents, government
securities, and high quality debt securities.
-14-
<PAGE>
Note 3 - Investments in Portfolio Companies
-------------------------------------------
On April 10, 2000, the Fund purchased $50,000 of Precision Therapeutics, Inc.
("PTI)" Series III Subordinated Convertible Notes ("Series III Notes"). The
Series III Notes accrue interest at prime plus 3 percent, have a maturity date
of March 31, 2001, and are convertible (principal and interest) into Series B
Preferred Stock at $1.00 per share. The Series III Notes carry warrants, equal
to 35 percent of the principal amount, to purchase common stock at $1.00 per
share for a 10 year period. The Series III Notes automatically convert into the
next financing round security at the next round price and terms. At
approximately the same time, other shareholders in the fund purchased $546,500
of Series III Notes. The investment by the Fund and the combined investment by
the Fund and its shareholders represented an ownership interest of 2.5 percent
and 30.2 percent, respectively Series III Notes.
The Series I and Series II Notes ("Old Notes") had a maturity date of March 31,
2000. As of that date, PTI asked the noteholders to either convert the Old Notes
into Series B Preferred Stock at $1.00 per share or extend the maturity date
until March 31, 2001. The Fund elected to convert its $170,000 of Old Notes,
plus accrued interest of $21,937, into Series B Preferred Stock. The Fund's
investment in Series B Preferred Stock represents an ownership interest of 3.2
percent of that series.
PTI tests various chemotherapy agents on cancer cells grown from tumors removed
from cancer patients, measures their killing effectiveness and provides reports
to attending physicians.
On April 26, 2000, TimeSys closed on the sale of $3,700,000 of Series B
Convertible Preferred Stock ("Series B") at $10.00 per share. This financing
round served to fix the Series A Preferred conversion price at $7.00 per share.
In addition, this financing round triggered the pre-emptive rights provisions of
the Series A Preferred that will allow the Series A Preferred shareholders to
purchase their pro rata share of Series B at $10.00 per share.
On May 23, 2000, the Fund exercised its full pre-emptive right and purchased
6,138 shares of Series B at $10.00 per share for a total investment of $61,380.
At approximately the same time, other shareholders in the Fund exercised a
portion of their pre-emptive rights and purchased 12,877 shares of Series B for
a total investment of $128,770. A total of $240,150 was raised through the
exercise of pre-emptive rights. The total investment in both Series A Preferred
and Series B by the Fund, and by the Fund and its shareholders, represented an
ownership interest of 0.1 percent and 0.9 percent, respectively, on a fully
diluted basis.
TimeSys develops and markets software tools and services for embedded real time
systems.
On May 1, 2000, the Fund exercised its full pre-emptive right and purchased 922
shares of Allegheny Child Care Academy ("ACCA") Series B Preferred Stock ("B
Preferred") at $1.7877 per share for a total investment of $1,648. ACCA sold
114,273 shares of B Preferred, and raised $204,287, including 2,398 shares
($4,287) from the exercise of pre-emptive rights.
ACCA owns and operates children's day care centers primarily in central/inner
city locations with most of its clients welfare subsidized through state and
federal programs.
On June 14, 2000, the Fund purchased 44,445 shares of Wishbox.com ("Wishbox")
Common Stock at $2.25 per share for a total investment of $100,001. At
approximately the same time, other shareholders in the Fund purchased 88,667
shares for a total investment of $199,501. 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 0.73 percent and 4.32
percent, respectively, on a fully diluted basis.
Wishbox provides a universal online gift registry for teenagers.
-15-
<PAGE>
On June 30, 2000, the Fund purchased 100,000 shares of Laminar Software, Inc.
("Laminar") Series A Preferred Stock ("A Preferred") at $1.00 per share for a
total investment of $100,000. The A Preferred has voting rights, pre-emptive
rights, registration rights, and has dividend and liquidation preferences. The A
Preferred is convertible initially on a 1:1 basis. Approximately the same time,
other shareholders of the Fund purchased 575,000 shares 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 1.5 percent and 10.2 percent,
respectively, on a fully diluted basis.
Laminar develops, markets, and sells tools for monitoring the performance and
availability of e-commerce 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.
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
June 30, 2000 and December 31, 1999:
As of June 30, 2000
-------------------
Investment Face Value Carrying Value Market Value
---------- ---------- -------------- ------------
U.S. Government Securities $2,234,000 $2,190,636 $2,188,747
========== ========== ==========
As of December 31, 1999
-----------------------
Investment Face Value Carrying Value Market Value
---------- ---------- -------------- ------------
U.S. Government Securities $ 255,000 $ 253,383 $ 253,410
========== ========== ==========
-16-
<PAGE>
Note 6 - Unrealized Appreciation
--------------------------------
As of December 31, 1999, 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 December 31, 1999 as follows: CoManage $100,000 and Entigo
$63,731. No unrealized appreciation or depreciation was recognized in the six
month period ended June 30, 2000.
Note 7 - Related Party Transactions
-----------------------------------
Accrued liabilities at June 30, 2000 includes $4,500 for Board of Directors
fees.
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, 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 June 30, 2000.
Note 9 - Income Taxes
---------------------
The following table summarizes the provision for Federal and state taxes on
income.
Current 2000 1999
------- ---- ----
Federal $ 7,000 $ 0
State 11,000 2,005
------- -----
18,000 2,005
======= =====
Deferred
--------
Federal 0 0
State 0 0
------- ------
0 0
------- ------
Total $18,000 $2,005
======= ======
-17-
<PAGE>
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 June 30, 2000.
Note 11 - Subsequent Events
---------------------------
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 July 31, 2000.
On July 24, 2000, the Fund purchased 210,526 shares of GamesParlor, Inc.
("GamesParlor") Series A Preferred Stock ("Preferred") at $.475 per share for a
total investment of $100,000. The sale of Preferred is continuing at this time.
Games Parlor is a provider of internet games services to enthusiasts of classic
parlor games.
-18-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------
Results of Operations
---------------------
Revenues for the three and six month periods ending June 30, 2000 consisted of
interest income and management fees of $76,322 and $6,250, and $117,901 and
$12,500, 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.
General and administrative expenses for the three and six month periods amounted
to $4,500 and $9,000, 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 six month periods ended June 30, 2000 amounted to
$41,106 and $75,392, respectively. The increase in these expenses for the three
month period ended June 30, 2000 over the comparable period of 1999 is due to
advisory board fees of $17,000, and other administrative costs of $8,112
resulting from increased administrative/secretarial/clerical support. The
increase in these expenses for the six month period ended June 30, 2000 over the
comparable period of 1999 is due to advisory board fees of $29,000, and other
administrative costs of $11,161 resulting from increased
administrative/secretarial/clerical support.
Revenues for the three and six month periods ending June 30, 1999, consisted of
interest income and management fees of $13,492 and $6,250, and $27,070 and
$12,500, respectively. General and administrative expenses for the three and six
month periods amounted to $4,200 and $8,400, respectively, and consisted of
directors fees. Other operating expenses for the three and six month periods
ending June 30, 1999 amounted to $13,599 and $32,868, respectively, and included
$8,226 and $20,370, respectively, of legal and accounting 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 June
30, 2000, the Registrant had invested $2,337,782 in Portfolio Companies, and
held cash, cash equivalents, and short-term investments in high quality
commercial paper and U.S. Government securities of $2,528,227. 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 June 30, 2000 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 reviews. The report of Goff, Ellenbogen, Backa & Alfera, 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,
Ellenbogen, Backa & Alfera, 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 six month
periods ended June 30, 2000 and June 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
June 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:
Western Pennsylvania Adventure Capital Fund
(Registrant)
Date: August 1, 2000 /s/ G. Richard Patton
---------------------
G. Richard Patton
President and Chief Executive Officer and Director
Date: August 1, 2000 /s/ Alvin J. Catz
-----------------
Alvin J. Catz
Chief Financial Officer, Treasurer and Director
-23-
