<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 March 31, 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 May 10, 2000: 4,268,221 Shares.
1
<PAGE>
PART I - Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements
<S> <C> <C>
Page No.
Report on Review by Independent Certified 3
Public Accountants
Statements of Assets and Liabilities as of 4
March 31, 2000 (unaudited) and December 31, 1999
Statements of Operations, for the Periods 5
January 1, 2000 through March 31, 2000 (unaudited)
and January 1, 1999 through March 31, 1999 (unaudited)
Statements of Changes in Net Assets, for the 6
Periods January 1, 2000 through March 31, 2000 (unaudited)
and January 1, 1999 through March 31, 1999 (unaudited)
Statements of Cash Flows, for the Periods January 1, 2000 7
through March 31, 2000 (unaudited) and January 1, 1999
through March 31, 1999 (unaudited)
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial 17
Condition and Results of Operations
Statement by Management Concerning Review of Interim 19
Information by Independent Certified Public Accountants
Statement by Management Concerning the Fair 20
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 March 31, 2000 and 1999, and the
related statements of operations, changes in net assets, and cash flows for the
three month periods ended March 31, 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, May 10, 2000
3
<PAGE>
Western Pennsylvania Adventure Capital Fund
Statements of Assets and Liabilities
As of
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
--------------- ------------------
Assets (unaudited)
------
<S> <C> <C>
Cash and Cash Equivalents $ 939,170 $1,004,428
Short Term Investments, Net 2,014,921 253,383
Receivables 39,919 39,407
Investment in Portfolio Companies 2,152,548 1,793,479
Organization Costs 8,360 9,120
----------- ----------
Total Assets $ 5,154,918 $3,099,817
=========== ==========
Liabilities
-----------
Accounts Payable $ 20,739 $ 25,496
Accrued Liabilities 4,500 18,000
Accrued Income Taxes 2,694 174
----------- ----------
Total Current Liabilities 27,933 43,670
----------- ----------
Deferred Income Taxes 50,700 50,700
----------- ----------
Total Liabilities $ 78,633 $ 94,370
=========== ==========
Net Assets
----------
Common Stock, Par Value $.01 Per Share,
Authorized 10,000,000 Shares, Issued and
Outstanding 4,268,221 Shares (2,841,984
Shares at December 31, 1999) $ 44,121 $ 29,859
Additional Paid in Capital 5,046,504 2,992,722
Syndication Costs (139,334) (135,604)
Retained Earnings 126,433 119,909
Treasury Stock - 143,899 Shares, at cost (1,439) (1,439)
----------- ----------
Net Assets Applicable to Shares Outstanding $ 5,076,285 $3,005,447
=========== ==========
Net Assets Value Per Share $ 1.19 $ 1.06
=========== ==========
</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>
January 1, 2000 January 1, 1999
through through
March 31, 2000 March 31, 1999
-------------------- --------------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
Interest $41,580 $13,578
Management Fees 6,250 6,250
------- -------
Total Revenues 47,830 19,828
------- -------
Expenses:
General and Administration 4,500 4,200
Other Operating Expenses 34,286 19,269
------- -------
Total Expenses 38,786 23,469
------- -------
Profit (Loss) Before Income Tax 9,044 (3,641)
Income Tax Expense 2,520 750
------- -------
Net Income (Loss) $ 6,524 $(4,391)
======= =======
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 Changes in Net Assets
For the Periods
<TABLE>
<CAPTION>
January 1, 2000 January 1, 1999
through through
March 31, 2000 March 31, 1999
---------------------- ----------------------
(unaudited) (unaudited)
<S> <C> <C>
From Operations
Net Income (Loss) $ 6,524 $ (4,391)
From Share Transactions:
Proceeds from Sale of Common Stock 2,068,044 0
Syndication Costs (3,730) 0
---------- ----------
Net Increase in Net Assets Derived
From Share Transactions 2,064,314 0
---------- ----------
Net Increase (Decrease) in Net Assets 2,070,838 (4,391)
Net Assets:
Beginning of Period 3,005,447 2,039,418
---------- ----------
End of Period $5,076,285 $2,035,027
========== ==========
</TABLE>
See Accountant's Report and accompanying notes to financial statements.
6
<PAGE>
Western Pennsylvania Adventure Capital Fund
Statements of Cash Flows
For the Periods
<TABLE>
<CAPTION>
January 1, 2000 January 1, 1999
through through
March 31, 2000 March 31, 1999
-------------------- --------------------
(unaudited) (unaudited)
<S> <C> <C>
Cash Flow from Operating Activities:
Income (Loss) $ 6,524 $ (4,391)
Change in Assets and Liabilities:
Organization Costs - Amortization 760 760
Receivables - (Increase) (512) (5,658)
Prepaid Taxes - (Increase) 0 (250)
Accounts Payable - Increase (Decrease) (4,757) 10,523
Accrued Liabilities - (Decrease) (10,980) (10,500)
----------- ---------
Net Cash (Used in) Operating Activities (8,965) (9,516)
----------- ---------
Cash Flow from Financing Activities:
Proceeds from Sale of Common Stock 2,068,044 0
Payment of Syndication Costs (3,730) 0
----------- ---------
Net Cash Provided by Financing Activities 2,064,314 0
----------- ---------
Cash Flow from Investing Activities:
Short Term Investments, Net of Redemptions (1,761,538) 128,023
Investment in Portfolio Companies ( 359,069) (126,000)
----------- ---------
Net Cash Provided by (Used in)
Investing Activities (2,120,607) 2,023
----------- ---------
Net (Decrease) in Cash and Cash Equivalents (65,258) (7,493)
Cash and Cash Equivalents at Beginning of Period 1,004,428 289,824
----------- ---------
Cash and Cash Equivalents at End of Period $ 939,170 $ 282,331
=========== =========
</TABLE>
See Accountant's Report and accompanying notes to financial statements.
7
<PAGE>
Western Pennsylvania Adventure Capital Fund
Notes to Financial Statements
March 31, 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, other venture capital firms, private non-profit or for-
profit companies or foundations, and federal, state or local public, quasi-
public or publicly-supported economic development organizations, agencies or
authorities which provide investment capital or low interest or other financing
for economic development.
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 businesses in
western Pennsylvania. As of December 31, 1998, Enterprise ceased operations and
is no longer serving as the Fund's investment advisor. The Fund's Board of
Directors now performs these activities.
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.
8
<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 statements. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial condition, results of operations, changes in net
assets, and cash flows, have been included.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
These financial statements should be read in conjunction with the financial
statements and notes thereto for the period January 1, 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 "First Offering"). In connection with its services
in organizing the formation and development of the Fund, Enterprise purchased
250,000 shares of common stock for $.01 per share, which represented 4.8% of the
total potential outstanding shares of the Fund. The shares purchased by
Enterprise represented founder's shares. If less than 5,000,000 shares were
sold in the First Offering, the Fund had the right to repurchase from Enterprise
for $.01 per share such number of shares as would result in Enterprise's
ownership percentage in the Fund immediately following the First Offering being
4.8%.
During 1997, the Fund sold 2,104,333 shares of its common stock and closed the
First Offering. As of December 31, 1997, the Fund repurchased 143,899 shares of
its common stock from Enterprise, thereby reducing Enterprise's ownership to
106,101 shares, which represented 4.8% of the then total shares issued and
outstanding (2,210,434 shares). The repurchased shares are presented as
Treasury Stock, at cost.
On September 10, 1999, the Fund began offering a total of 2,750,000 shares of
its common stock, par value $.01, at a price of $1.45 per share under Regulation
E of the Securities Act of 1933 (the "Second Offering"). The Second Offering
was extended through January 31, 2000. The Fund sold 2,057,787 shares of its
common stock and closed the Second Offering.
Syndication Costs
Legal, accounting and other costs of $85,507 ($85,507 in 1998) incurred in
connection with the First Offering have been capitalized and reported as a
permanent reduction of net assets in accordance with generally accepted
accounting principles.
9
<PAGE>
Legal, accounting and other costs of $53,827 (none in 1998) 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. The Fund expects to incur additional syndication costs
in connection with the Second Offering during the second quarter of 2000.
Cash and Cash Equivalents
Cash and Cash Equivalents consist of cash in checking accounts and high quality
money market instruments having or deemed to have remaining maturities of
thirteen months or less.
Short Term Investments
The Fund's short term investments consist of high quality commercial paper and
U.S. Government securities. These investments generally are purchased at a
discount from face value and are redeemed at maturity at face value. The
difference represents interest income which will accrue over the period from
date of acquisition to date of maturity. The Fund uses the effective yield to
maturity method to recognize the accretion of interest income over the life of
each individual short term investment. This method produces a rate of return
which is constant over the period from acquisition to maturity. Using this
method, the interest income recognized on each individual investment will
increase over time as the carrying value of that investment increases. The Fund
records these investments net of remaining unearned interest income.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Fund has
classified all short term investments as held-to-maturity ("HTM") as of March
31, 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
Costs incurred in connection with the start-up and organization of the Fund have
been deferred and are being amortized ratably over a period of 60 months
beginning January 1, 1998. The balance of $8,360 ($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.
10
<PAGE>
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.
Income Taxes
The Fund has adopted the SFAS Standard No. 109, "Accounting for Income Taxes",
from its inception. SFAS 109 requires an asset and liability approach that
recognizes deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Fund's financial
statements or tax returns. In estimating future tax consequences, SFAS 109
generally considers all expected future events other than enactments of changes
in the tax law or rates. During the quarter ended December 31, 1999, the Fund
recognized unrealized appreciation on its portfolio companies, and accordingly,
began recognizing deferred taxes due to temporary timing differences in
accordance with SFAS 109. 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 ("First Offering
Circular"). The proceeds were required to be deposited in an escrow account
with the Fund's escrow agent, PNC Bank, until such time as the escrow account
reached $1 million. At that time, the Fund was permitted to withdraw the funds
from the escrow account and begin to invest in portfolio securities.
As of July 11, 1997, the proceeds in the escrow account totaled $1,860,100. On
that date, the Fund withdrew substantially all of the funds from the escrow
account.
The funds released from escrow have been temporarily invested, pending
investment in Portfolio Securities, in cash equivalents, government securities,
and high quality debt securities. A portion of the funds released from escrow
were disbursed to pay accumulated obligations whose payment was deferred until
funds were released from escrow.
The Fund began offering for sale up to 2,750,000 shares of its Common Stock at
$1.45 per share, or a maximum of $3,987,500, under an Offering Circular dated
September 10, 1999 ("Second Offering Circular"). The Fund intends to use the
proceeds from this sale of securities primarily to invest in the equity and/or
debt securities of additional development stage companies located in western
Pennsylvania, and to make follow on investments, as appropriate, in existing
portfolio companies. The proceeds from this sale of securities have been
temporarily invested, pending investments in portfolio companies, in cash
equivalents, government securities, and high quality debt securities. A portion
of these proceeds may be used for normal operating expenses. The Fund sold
2,057,787 shares ($2,983,792) of its Common Stock under this Second Offering
Circular. As of December 31, 1999, the Fund had received subscriptions to
purchase 631,550 shares ($915,747). As of March 31, 2000, and December 31, 1999,
$2,152,548 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.
11
<PAGE>
Note 3 - Investments in Portfolio Companies
- -------------------------------------------
During January, the Fund purchased 100,000 shares of Telemed Technologies
International, Inc. ("Telemed") Class A Convertible Preferred Stock ("Class A
Preferred") at $1.00 per share for a total investment of $100,000. The Class A
Preferred is convertible into common initially on a one preferred share equals
two common shares basis, (three common shares if milestone is not met) has
voting rights, and certain liquidation and redemption preferences. At
approximately the same time, the Fund's shareholders purchased 80,000 shares of
Class A Preferred for a total investment of $80,000. As a result of these
purchases and previous purchases of other Telemed securities, the Fund and the
Fund and its shareholders current ownership interest in Telemed is 1.1 percent
and 4.3 percent, respectively, on a fully diluted basis.
Telemed maintains a central monitoring center which monitors, in a real time
environment, heart activity for recent heart attack patients using devices
designed and distributed by Telemed.
On January 17, 2000, the Fund, via exercise of its pre-emptive rights, purchased
2,409 shares of Allegheny Child Care Academy, Inc. Series B Preferred Stock
("Series B") at $1.7877 for a total investment of $4,307, in connection with the
sale of approximately $500,000 of Series B to Kitty Hawk Capital Limited
Partnership. As of March 31, 2000, the Fund's investment and the combined
investment by the Fund and its shareholders represented an ownership interest of
0.8 percent and 2.7 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.
On January 19, 2000, Medtrex closed a transaction with the Ethicon division of
Johnson & Johnson whereby Ethicon would acquire all the assets of Medtrex and
assume certain liabilities, in exchange for approximately $7,100,000. Of this
total, approximately $700,000 is repayment of subordinated debt to shareholders,
which was repaid in February, 2000. The Fund's share of the subordinated debt
repaid was $39,000, including $13,000 of accrued interest income at a 50 percent
interest rate. The remainder, approximately $6,400,000, will be held in an
interest bearing escrow account, and if there are no claims by Ethicon against
this escrow account, approximately 60% will be dispersed to shareholders in mid-
July, 2000, and the remainder one year after the closing, i.e. January, 2001.
The cash payment, apart from the subordinated debt component, represents not
only payment for common stock, but also cash in lieu of exercising options or
warrants outstanding at the time of closing. The Fund's remaining investment in
Medtrex is $152,477.
The cash to be received in relation to stock and warrants is expected to equal
approximately 2.6 times the initial investment, i.e. a gain of approximately
160% on invested capital. This return could be significantly less than the
expected amount if there are substantial claims by Ethicon against the escrow.
Accordingly, no gain has been recognized in the financial statements because of
the uncertainty as to the ultimate realization of the amount.
The Fund concluded the sale of shares of its common stock under the Second
Offering Circular as of January 31, 2000. During the period, January 1, 2000
through January 31, 2000, the Fund received subscriptions to purchase 1,426,237
shares ($2,068,045). During the course of this Second Offering, the Fund
received subscriptions to purchase 2,057,787 shares ($2,983,792). 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
12
<PAGE>
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.
On February 7, 2000, the Fund, via exercise of its pre-emptive rights, purchased
$30,762 of a convertible bridge loan with Neo Linear. Neo Linear raised
$640,274 through this bridge loan. Under the terms of this bridge loan, the
principal plus interest at 14 percent per annum automatically converts into the
next financing round (defined as a minimum of $3,000,000 less the amount of the
bridge loan) security on the same terms and price as that security if the
financing round is completed by April 30, 2000. If the financing round is not
completed by April 30, 2000, lenders have the option of converting principal and
interest, plus an additional 30 percent of the principal amount into a new
series preferred stock at one-half the first round valuation. At approximately
the same time, other private investors in the Fund purchased $67,512 of this
convertible bridge loan. The investment by the Fund and the combined investment
by the Fund and its shareholders represented an ownership interest of 4.8
percent and 15.4 percent, respectively, of the outstanding convertible bridge
loan.
On March 17, 2000, Neo Linear closed on an additional round of equity financing
and merged Neo Linear, a Pennsylvania corporation, into its subsidiary, Neo
Linear, a Delaware Corporation. Under the terms of the merger, each shareholder
in Neo Linear (PA) received: one share of Neo Linear (Delaware) for each 40
shares of Neo Linear (PA); 0.2198746 shares of Neo Linear (Delaware) Series A
Preferred for each share of Neo Linear (PA) Convertible Preferred; and 3.3899760
shares of Neo Linear (Delaware) Series B Preferred for each share of Neo Linear
Series A-1 Preferred. The new investors, TVM IV GmbH and Co. and Intersouth
Partners, received 3,991,228 shares of Series C Convertible Preferred Stock
("Series C") for an investment of approximately $4,800,000. The aforementioned
bridge financing automatically converted into Series C as of March 17, 2000.
The investment by the Fund and the combined investment by the Fund and its
shareholders represented an ownership interest of 1.3 percent and 5.1 percent,
respectively, on a fully diluted basis.
Neo Linear produces computer aided design software for the semiconductor
industry.
On February 25, 2000, the Fund purchased 62,500 shares of Quantapoint, Inc.,
Series B Convertible Preferred Stock ("Series B Preferred") at $1.20 for a total
investment of $75,000. The Series B Preferred is convertible into common stock
on an initial 1:1 basis, has voting rights on an as converted basis, and has
liquidation and redemption preferences. Quantapoint sold 2,355,457 shares of
Series B Preferred for a total of $2,826,553. The investment by the Fund and
the combined investment by the Fund and its shareholders represented an
ownership interest of 2.6 percent and 25.2 percent, respectively, on a fully
diluted basis.
Quantapoint uses a 3D laser camera to measure "existing conditions" dimensions
of the interior or exterior of structures, and then converts the 3D data to 2D
drawings for building owners and architects.
On March 21, 2000, the Fund purchased $75,000 of e-Cruise, inc. ("e-Cruise")
Convertible Promissory Notes ("Notes"). The Notes accrue interest at 6.5
percent, have a maturity date of August 15, 2000 and automatically convert into
Series A Convertible Preferred Stock ("Series A") (the expected next security to
be offered for sale) at an approximately 23 percent discount to the Series A
offering price. If the Series A financing does not occur by May 31, 2000, the
conversion price is adjusted to the lesser of the aforementioned approximately
23 percent discount or $0.50 per share. If the Series A financing does not
occur by August 15, 2000, the Notes may, at the option of each holder, be
converted into Common Stock at $0.25 per share, or the holder may demand payment
of his Note.
13
<PAGE>
In all conversion events, accrued interest converts along with the principal
amount. At approximately the same time, other shareholders of the Fund have
purchased approximately $210,000 of these Notes. The sale of these Notes is
continuing as of this date.
e-Cruise will provide online infomediary marketing content for cruise lines to
potential passengers.
On March 24, 2000, the Fund purchased 20,000 shares of TimeSys Corporation
("TimeSys") Series A Convertible Preferred Stock ("Series A Preferred") at $5.00
per share for a total investment of $100,000. The Series A Preferred is
convertible into Common Stock on an initial 1:1 basis, has pre-emptive and
registration rights, and liquidation and redemption preferences. The Series A
Preferred conversion price will be fixed, based upon a discount of a maximum of
25 percent from the next security offering price, subject to a maximum
conversion price of $7.00 per share. At approximately the same time, other
shareholders in the Fund purchased $595,000 of the Series A Preferred. The
investment by the Fund and the combined investment by the Fund and its
shareholders represented 0.2 percent and 1.3 percent, respectively, on a fully
diluted basis.
TimeSys develops and markets software tools and services for embedded real time
systems.
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
March 31, 2000 and December 31, 1999:
14
<PAGE>
As of March 31, 2000
--------------------
Investment Face Value Carrying Value Market Value
- ---------- ---------- -------------- ------------
U.S. Government Securities $2,075,000 $2,014,921 $2,012,181
========== ========== ==========
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 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 three
month period ended March 31, 2000.
Note 7 - Related Party Transactions
- -----------------------------------
Accounts payable as of March 31, 2000, includes $10,000 payable to Enterprise
for investment advisory services and $3,000 for accounting services payable to a
consulting firm in which one of the Fund's officers is a significant
shareholder. Accrued liabilities at March 31, 1999 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 on November 17,
1999, approved a stock option plan authorizing the granting of options to
purchase the Fund's common stock to directors, officers, employees and members
of the advisory board of the Fund. Under the terms of the plan, the stock
option committee has authority to award options to eligible persons on the basis
of the nature of their duties, their present and potential contributions to the
success of the Fund and like factors.
The maximum number of options that may be granted under the plan is 500,000.
The exercise price is determined by the stock option committee at the time the
option is granted, but cannot be less than the fair market value of the Fund's
common stock on the date of grant. Each option will have a term, not in excess
of 10 years, as determined by the stock option committee. In general, each
option will become exercisable in 25 percent increments beginning on the first,
second, third and fourth anniversaries of the date of grant. Options may be
granted as either incentive stock options or nonqualified stock options.
15
<PAGE>
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 March 31, 2000.
Note 9 - Income Taxes
- ---------------------
The following table summarizes the provision for Federal and state taxes on
income.
Current: 2000 1999
------ -----
Federal $2,120 $ 0
State 400 750
------ -----
2,520 750
====== =====
Deferred:
Federal 0 0
State 0 0
------ -----
0 0
------ -----
Total $2,520 $ 750
====== =====
Note 10 - Subsequent Events
- ---------------------------
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 in the 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 into Series B Preferred Stock. This conversion is in process as of this
date.
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 at $10.00 per share. This financing round will
serve to fix the Series A Preferred conversion price at $7.00 per share. In
addition, this financing round triggers 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 Convertible Preferred Stock at $10.00
per share. The pre-emptive rights offering is continuing at this time.
TimeSys develops and markets software tools and services for embedded real time
systems.
16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Results of Operations
- ---------------------
Revenues for the three month period ending March 31, 2000 consisted of interest
income and management fees of $41,580 and $6,250, respectively. The increase in
interest income resulted primarily from the temporary investment of the funds
from the recently completed sale of securities under the Second Offering
Circular in U.S. Government securities and other short-term high-quality debt
instruments. General and administrative expenses for the three month period
ending March 31, 2000 amounted to $4,500, and consisted primarily of directors
fees. Other operating expenses for the three month period ending March 31, 2000
amounted to $34,286 and included $12,110 of legal and accounting fees, and
$12,000 of advisory board fees.
Revenues for the three month period ending March 31, 1999, consisted of interest
income and management fees of $13,578 and $6,250, respectively. General and
administrative expenses for the three month period amounted to $4,200, and
consisted primarily of directors fees. Other operating expenses for the three
month period ending March 31, 1999 amounted to $19,269 and included $12,144 of
legal and accounting fees.
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
The Registrant, through its sale of Common Stock under the First Offering
Circular, raised $2,104,333 in 1997. The Registrant, through the sale of its
Common Stock under the Second Offering Circular, raised $2,983,792 in 1999 -
2000. As of March 31, 2000, the Registrant had invested $2,152,548 in Portfolio
Companies, and held cash, cash equivalents, and short-term investments in high
quality commercial paper and U.S. Government securities of $2,954,091. Most of
this amount, except for normal operating expenses, is available for investment
in Portfolio Securities.
17
<PAGE>
Statement by Management Concerning Review of Interim Financial Information
by Independent Certified Public Accountants
The March 31, 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 review. The report of Goff, Ellenbogen, Backa
& Alfera, LLC commenting on their review accompanies the financial statements
included in Item 1 of Part I.
18
<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 review accompanies the
financial statements included in Item 1 of Part I.
19
<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 month
periods ended March 31, 2000 and March 31, 1999
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports were filed on Form 8-K by the Registrant during the
quarter covered by this report.
20
<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: May 10, 2000 s/ G. Richard Patton
--------------------------------------
G. Richard Patton
President and Chief Executive Officer
and Director
Date: May 10, 2000 s/ Alvin J. Catz
--------------------------------------
Alvin J. Catz
Chief Financial Officer, Treasurer and Director
21
<PAGE>
Item 6 (a), Exhibit 11
Western Pennsylvania Adventure Capital Fund
Schedule of Computation of Earnings Per Common Share
For the Periods
<TABLE>
<CAPTION>
January 1, 2000 January 1, 1999
through through
March 31, 2000 March 31, 1999
---------------- ----------------
(unaudited) (unaudited)
<S> <C> <C>
Net income (Loss) $ 6,524 $ (4,391)
========== ==========
Weighted Average Number of
Common Shares Outstanding 3,890,347 2,210,434
========== ==========
Earnings per Common Share $ 0.00 $ 0.00
========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF ASSETS AND LIABILITIES AT MARCH 31, 2000 AND THE STATEMENT OF
OPERATIONS FROM JANUARY 1, 2000 TO MARCH 31, 2000 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<INVESTMENTS-AT-COST> 4,003,738
<INVESTMENTS-AT-VALUE> 4,164,729
<RECEIVABLES> 39,919
<ASSETS-OTHER> 8,360
<OTHER-ITEMS-ASSETS> 939,170
<TOTAL-ASSETS> 5,154,918
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 78,633
<TOTAL-LIABILITIES> 78,633
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,046,504
<SHARES-COMMON-STOCK> 4,268,221
<SHARES-COMMON-PRIOR> 2,841,984
<ACCUMULATED-NII-CURRENT> 9,044
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 160,991
<NET-ASSETS> 5,076,285
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 41,580
<OTHER-INCOME> 6,250
<EXPENSES-NET> 38,786
<NET-INVESTMENT-INCOME> 6,524
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> (2,740)
<NET-CHANGE-FROM-OPS> 6,524
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,426,237
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2,070,838
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 12,000
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 38,786
<AVERAGE-NET-ASSETS> 4,040,866
<PER-SHARE-NAV-BEGIN> 1.06
<PER-SHARE-NII> .00
<PER-SHARE-GAIN-APPREC> .00
<PER-SHARE-DIVIDEND> .00
<PER-SHARE-DISTRIBUTIONS> .00
<RETURNS-OF-CAPITAL> .00
<PER-SHARE-NAV-END> 1.19
<EXPENSE-RATIO> .01
</TABLE>
