10-K 1 d10k.txt FORM 10-K FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 ----------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) FOR THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission file number 000-21593 --------- Western Pennsylvania Adventure Capital Fund (Exact Name of Registrant as Specified in its Charter) Pennsylvania 25-1792727 ------------ ---------- (State or 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) (Zip Code) Registrant's Telephone Number, Including Area Code (412) 279-1760 -------------- Securities Registered Pursuant to Section 12 (b) of the Act: Name of Each Exchange on Title of Each Class Which Registered ------------------- ---------------- Common Stock, $.01 Par Value None ---------------------------- ---- Securities Registered Pursuant to Section 12 (g) of the Act: None 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. Yes X No --- --- Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) State the aggregate market value of the voting stock held by nonaffiliates of the registrant at March 21, 2002: $6,126,062 Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at March 21, 2002 ----- ----------------------------- Common stock, $.01 par value 4,224,870 Documents Incorporated by Reference: None 1 Western Pennsylvania Adventure Capital Fund Table of Contents
Page No. Part I Item 1. Business 3 Item 2. Properties 3 Item 3. Legal Proceedings 4 Item 4. Submission of Matters to a Vote of Security Holders 4 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 5 Item 6. Selected Financial Data 5 Item 7. Management's Discussion and Analysis of Financial Condition And Results of Operations 10 Item 8. Financial Statements and Supplementary Data 13 Item 9. Changes in and Disagreements with Accountants on Accounting And Financial Disclosure 33 Part III Item 10. Directors and Executive Officers of the Registrant 34 Item 11. Executive Compensation 37 Item 12. Security Ownership of Certain Beneficial Owners and Management 37 Item 13. Certain Relationships and Related Transactions 38 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 40
2 PART 1 Item I. Business ------------------ Western Pennsylvania Adventure Capital Fund (the "Registrant") was incorporated in Pennsylvania on May 23, 1996. The Registrant did not begin its primary business activities until November 17, 1997, at which time the Registrant made its first investment in an early stage development company in western Pennsylvania. During 1997, the Registrant concluded an offering of its common stock, par value $0.01 (the "Common Stock") under Regulation E of the Securities Act of 1933 (the "First Offering"). On September 10, 1999, the Registrant initiated a second offering of its Common Stock under Regulation E of the Securities Act of 1933 (the "Second Offering"). This Second Offering concluded January 31, 2000. On July 14, 2000, the Registrant initiated a third offering of its Common Stock under Regulation E of the Securities Act of 1933 (the "Third Offering"). This Third Offering has been extended through the earlier of March 31, 2001 or the sale of 875,000 shares of Common Stock. The Registrant intends to invest the net proceeds of the offerings primarily in the equity and/or debt securities (the "Portfolio Securities") of development stage companies located in western Pennsylvania (the "Portfolio Companies"). The Registrant is seeking to identify companies with annual sales of less than $1 million which, in the opinion of management, have the potential within five years to achieve annual sales of at least $5 million and an internal rate of return on invested capital in excess of 30%. However, the Registrant may invest in Portfolio Companies which have higher initial sales or which do not meet these specified financial targets if management of the Registrant otherwise believes that the investment offers the potential for long-term capital appreciation. The Registrant does not have a policy of investing any specified percentage of its assets in debt or equity securities, and may invest 100% of its assets in either type of security. The Registrant generally invests from $50,000 to $300,000 per Portfolio Company, but is not prohibited from making larger or smaller investments if management of the Registrant believes that it is in the interest of the Registrant to do so. For instance, the Registrant may make an initial investment within the above range and later find it necessary to make a "follow-on" investment if management determines that additional financing is required to enable a particular Portfolio Company to continue its operations or to complete an important contract or research and development project or other ongoing activity. Accordingly, although it is a policy of the Registrant to seek to diversify its investments (as to Portfolio Companies as well as types of industries), the Registrant is not prohibited from investing more than 10% of its funds available for investment in the Portfolio Securities of a single issuer or in Portfolio Companies engaged in a single industry. In certain circumstances, the Registrant may invest in particular Portfolio Companies on an installment, phase-in or staged basis with subsequent installments conditioned upon the Portfolio Company achieving specified performance milestones. The Registrant has no policy with respect to concentrating in a particular industry or group of industries nor with respect to investing in a company with any particular investing partner. The Registrant intends to invest all or substantially all of its available assets (except assets invested in short-term obligations) in companies which are headquartered or conduct significant operations in western Pennsylvania. Furthermore, except for short-term investments, the Registrant intends initially to invest only in Portfolio Companies which constitute "eligible portfolio companies" within the meaning of such term under the Investment Company Act of 1940, as amended (the "1940 Act"). Generally, "eligible portfolio companies" are companies the securities of which are not publicly-traded. However, the Registrant shall be permitted to make additional investments (including "follow-on" investments) of up to 30% of its assets in the Portfolio Securities of companies which are not "eligible portfolio companies" so long as they were "eligible portfolio companies" when the Registrant originally invested in them. Such investments may be made through the exercise of warrants, the conversion of convertible debt securities, the purchase of debt or equity securities from the issuer or any holder of such securities or in any other manner permitted under the applicable provisions of the 1940 Act and the investments policies of the Registrant. Item 2. Properties -------------------- The Registrant does not own any properties. 3 Item 3. Legal Proceedings --------------------------- There are no legal proceedings to which the Registrant is a party. Item 4. Submission of Matters to a Vote of Security Holders ------------------------------------------------------------- The Registrant held an annual meeting of security holders on October 21, 2001. Proxies for the meeting were solicited pursuant to Regulation 14A under The Securities Exchange Act of 1934. The following matters were voted on at that meeting. (a) Election of directors for terms of one year: G. Richard Patton For 2,885,745 shares, Against 0 shares, Withheld 0 shares --------- - - Alvin J. Catz For 2,885,745 shares, Against 0 shares, Withheld 0 shares --------- - - William F. Rooney For 2,885,745 shares, Against 0 shares, Withheld 0 shares --------- - - Philip Samson For 2,885,745 shares, Against 0 shares, Withheld 0 shares --------- - - Douglas F. Schofield For 2,885,745 shares, Against 0 shares, Withheld 0 shares --------- - - There were no other nominees. (b) Ratify appointment of Goff Backa Alfera & Company, LLC as the Registrant's independent certified public accountants for the fiscal year ending December 31, 2001. For 2,865,745 shares, Against 0 shares, Withheld 20,000 shares. --------- - ------ 4 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ------------------------------------------------------------------------------- The Registrant's Common Stock is not traded on any national or regional securities exchange, and the Registrant has no intention of causing the shares to be qualified for listing on the NASDAQ National Market or Small Cap systems. The Registrant is aware of the following trades in its Common Stock from May 23, 1996 (date of inception) through March 21, 2002 as follows:
Number Price Of Per Period Shares Share ------ ------ ----- Second Quarter 1998 10,000 $1.05 Second Quarter 1998 25,000 $1.05 Third Quarter 1998 10,000 $1.00 First Quarter 2000 8,000 $1.45 Fourth Quarter 2000 5,000 $1.45
As of March 21, 2002, the Registrant had approximately 190 shareholders. No dividends have been declared on the Registrant's Common Stock. Management does not have as a policy the regular payment of dividends to investors. Generally, Management intends to reinvest interest, dividends or other distributions received from Portfolio Companies and any proceeds realized from the sale of Portfolio Securities in other Portfolio Companies. There are no dividend restrictions. Item 6. Selected Financial Data --------------------------------- The Registrant was incorporated on May 23, 1996, and began active business operations in November, 1997.
January 1, 2001 January 1, 2000 January 1, 1999 Through Through Through December 31, 2001 December 31, 2000 December 31, 1999 ----------------------- ---------------------- ---------------------- Revenues $ 202,911 $ 274,234 $ 99,844 Net income (loss) $(1,544,681) $ 335,286 $ 100,378 Net income (loss) per share $ (0.37) $ .08 $ .04 Cash dividends $ 0 $ 0 $ 0 Total assets $ 3,863,879 $5,639,958 $3,099,817 Net assets applicable to shares outstanding $ 3,825,754 $5,334,035 $3,005,447 Net asset (deficit) value per share $ 0.91 $ 1.27 $ 1.06 Syndication costs $ 149,220 $ 149,220 $ 135,604
5
May 23, 1996 January 1, 1998 January 1, 1997 (Date of Inception) Through Through Through December 31, 1998 December 31, 1997 December 31, 1996 ---------------------- ---------------------- ------------------------ Revenues $ 99,467 $ 74,205 $ 0 Net income (loss) $ 3,049 $ 16,588 $ (106) Net income (loss) per share $ .00 $ .01 $ .00 Cash dividends $ 0 $ 0 $ 0 Total assets $2,068,514 $2,054,900 $ 15,418 Net assets applicable to shares outstanding $2,039,418 $2,036,369 $(38,773) Net asset (deficit) value per share $ .92 $ .92 $ (0.16) Syndication costs $ 85,507 $ 85,507 $ 41,167
6 WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Three Months Ended Three Months Ended ------------------ ------------------ March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31 1997 1997 1997 1997 1996 1996 1996 1996 Revenues $ 0 $ 0 $ 47,712 $ 26,493 $ 0 Net income (loss) $ (8,173) $ (5,516) $ 22,015 $ 8,262 $ (106) --------------No Activity-------------- Earnings (loss) per share $ (.03) $ (.02) $ .01 $ .00 $ .00 Cash dividends $ 0 $ 0 $ 0 $ 0 $ 0 Total assets $ 15,143 $ 15,133 $2,005,647 $2,054,900 $ 15,418 Net assets (deficit) $(79,427) $(90,883) $1,994,546 $2,036,369 $(38,773) Applicable to shares Outstanding Net asset (deficit) $ (.32) $ (.36) $ .86 $ .92 $ (.16) value per share Syndication costs $ 32,481 $ 5,940 $ 5,919 $ 0 $ 41,167
7 WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Three Months Ended Three Months Ended ------------------ ------------------ March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31 1999 1999 1999 1999 1998 1998 1998 1998 Revenues $ 19,828 $ 19,742 $ 21,571 $ 38,703 $ 24,979 $ 21,626 $ 25,103 $ 27,759 Net income (loss) $ (4,391) $ 640 $ (8,452) $ 112,581 $ 4,169 $ (9,609) $ 7,074 $ 1,415 Earnings (loss) per share $ .00 $ .00 $ (.01) $ .05 $ .00 $ .00 $ .00 $ .00 Cash dividends $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Total assets $2,064,146 $2,055,748 $2,052,663 $3,099,817 $2,070,117 $2,058,309 $2,061,369 $2,068,514 Net assets (deficit) $2,035,027 $2,035,667 $2,022,446 $3,005,447 $2,040,538 $2,030,929 $2,038,003 $2,039,418 applicable to shares outstanding Net asset (deficit) $ .92 $ .92 $ .91 $ 1.06 $ .92 $ .92 $ .92 $ .92 value per share Syndication costs $ 0 $ 0 $ 4,769 $ 45,328 $ 0 $ 0 $ 0 $ 0
8 WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Three Months Ended Three Months Ended ------------------ ------------------ March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31 2001 2001 2001 2001 2000 2000 2000 2000 Revenues $ 221,520 $ 16,205 $ 10,444 $ (45,258) $ 47,830 $ 82,571 $ 131,158 $ 12,675 Net income (loss) $ 121,478 $(1,425,379) $ (138,915) $ (437,812) $ 6,524 $ 21,486 $ 351,977 $ (44,701) Earnings (loss) per share $ .03 $ (0.34) $ (.03) $ (.03) $ .00 $ .01 $ .08 $ (.01) Cash dividends $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Total assets $5,865,227 $ 4,122,271 $3,974,275 $3,863,879 $5,154,918 $5,049,616 $5,632,474 $5,639,958 Net assets applicable $5,491,913 $ 4,066,534 $3,927,619 $3,825,754 $5,076,285 $4,966,695 $5,315,411 $5,334,055 to shares outstanding Net asset value per share $ 1.30 $ 0.91 $ 0.93 $ 0.91 $ 1.19 $ 1.19 $ 1.28 $ 1.27 Syndication costs $ 0 $ 0 $ 0 $ 0 $ 3,730 $ 5,950 $ 3,261 $ 675
9 Item 7. Management's Discussion and Analysis of Financial Condition and ----------------------------------------------------------------------- Results of Operations --------------------- Results of Operations --------------------- The Registrant was incorporated on May 23, 1996. The Registrant began, in late 1996, soliciting subscriptions for the purchase of a minimum of 1,000,000 shares and a maximum of 5,000,000 shares of its Common Stock through an Offering Circular dated November 7, 1996 under Regulation E of the Securities Act of 1933 (the "First Offering"). Under the terms of the First Offering, shares were being offered at $1.00 per share, with a minimum purchase of 10,000 shares per investor, subject to the discretion of the Registrant to accept subscriptions for fewer shares. The shares were being offered directly by the Registrant. There were no brokers, placement agents or other persons who received commissions or placement fees from the sale of shares under the First Offering. During 1997, the Registrant sold 2,104,333 shares of its Common Stock under the First Offering, closed the First Offering, and began the process of identifying and evaluating prospective Portfolio Companies. Most of 1997 was devoted to soliciting subscriptions under the Offering, start up activities, and organizational matters. The Registrant made its initial investment in a Portfolio Company in November, 1997. Through December 31, 1998, the Registrant had invested in eight Portfolio Companies. During 1999, the Registrant began soliciting subscriptions for the purchase of a maximum of 2,750,000 shares ($3,987,500) of its Common Stock under an Offering circular dated September 10, 1999 (the "Second Offering"). Under the terms of the Second Offering, shares were being offered at $1.45 per share, with a minimum purchase of 10,000 shares per investor, subject to the discretion of the Registrant to accept subscriptions for fewer shares. The shares were being offered directly by the Registrant. There were no brokers, placement agents or other persons who received commissions or placement fees from the sale of shares under the Second Offering. The Fund concluded the sale of shares of its Common Stock under the Second Offering on January 31, 2000. During the course of this Second Offering, the Fund accepted subscriptions to purchase 2,057,787 shares ($2,983,792) of which 1,426,237 shares ($2,068,045) were received subsequent to December 31, 1999. 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"). As of December 31, 2000, the Fund had received subscriptions to purchase 40,000 shares ($64,000). The Fund sold 62,750 shares of its Common Stock at $1.60 per share under the Third Offering Circular, and closed the Third Offering as of March 31, 2001. Revenues in 2001 amounted to $202,911 and consisted of interest earned on temporary investments of $53,335, interest earned on Portfolio Companies convertible debt of $18,423, management fees of $6,250 and net realized gains on sales of portfolio securities of $124,903. Revenues in 2000 amounted to $274,234 and consisted of interest earned on temporary investments of $140,968, interest earned on Portfolio Companies convertible debt of $26,139, management fees of $25,000 and realized gains on sale of portfolio securities of $82,127. Revenues in 1999 amounted to $99,844 and consisted of interest earned on temporary investments of $39,808, interest earned on Portfolio Companies convertible debt of $35,036 and management fees of $25,000. Interest earned on temporary investments increased significantly in 2000 as a result of the Registrant's sale of approximately $3,000,000 of its Common Stock under its Second Offering which closed January 31, 2000. Interest earned on temporary investments decreased in 2001 compared to 2000 due to a reduction in the amount of temporary investments. This reduction resulted from additional investments in Portfolio Securities. The decrease in interest earned on Portfolio Companies convertible debt in each year was the result of conversion of portions of these debts into equity securities of the Portfolio Companies. The decrease in management fees in 2001 resulted from the cancellation of the Registrant's co-investment agreement with the Urban Redevelopment Authority of Pittsburgh. Management fees in 2000 and 1999 included a full year's fees. The realized gains on sales of portfolio securities in 2001 consisted of a gain on sale of Medtrex Incorporated of $189,195 partially offset by a loss on sale of Laminar Software, Inc. of $64,292. The realized gain in 2000 10 resulted from receipt of the first portion of proceeds form the sale of Medtrex Incorporated. There were no realized gains in 1999. General and Administrative expenses in 2001, 2000 and 1999 amounted to $18,000, and consisted of directors fees. Other Operating Expenses in 2001 included professional fees (legal and accounting) of $110,325, insurance premiums of $23,742, and other items of $45,190, primarily administrative and clerical support. Other Operating Expenses in 2001 amounted to $179,257 compared with $202,375 in 2000 and $88,919 in 1999. Other Operating Expenses in 2000 included professional fees (legal and accounting) of $77,634, advisory board fees of $52,096, insurance premiums of $20,490, and other items of $52,155, primarily administrative and clerical support. Other Operating Expenses in 1999 included professional fees (legal and accounting) of $38,551, advisory board fees of $24,000 and other items of $26,368, primarily administrative and clerical support. The increases in professional fees and other items in 2000 compared with 1999 resulted from the increased business activity of the Registrant. The increase in professional fees in 2001 compared with 2000 resulted from both increased business activity of the Registrant and additional work required in connection with the formation of a new wholly owned subsidiary and the merger of the Registrant with its wholly owned subsidiary. The elimination of investment advisory fees in 2001 resulted from the Registrant's Board of Directors assuming full responsibility for these activities. Income Tax Expense (Benefit) for 2001, 2000 and 1999 of $(335,947), $256,967 and $56,230, respectively, represent Federal and Pennsylvania income taxes on the Registrant's pretax income (loss). The higher income taxes in 2000 compared with 1999 resulted from the substantially higher pretax income in those years. The income tax benefit in 2001 resulted primarily from the reversal of previously recognized taxes on unrealized appreciation on portfolio securities due to the recognition of unrealized depreciation on portfolio securities. During 2000 and 1999, the Registrant recognized unrealized appreciation of $538,394 and $163,731, respectively, on Portfolio Securities based upon subsequent financing rounds by several Portfolio Companies at significantly higher valuations than the related carrying values of those investments. During 2001, the Registrant recognized unrealized depreciation of $1,885,981 on Portfolio Securities based upon subsequent financing rounds by several Portfolio Companies at significantly lower valuations than the related carrying values of those investments and generally unfavorable economic conditions within certain industries within which the Registrant's Portfolio Companies operate. During 1997, the Registrant sold $2,104,333 of its Common Stock under the First Offering, and closed the First Offering. The Registrant closed the escrow account which had been used to accumulate the funds. A portion of these funds was disbursed to pay accumulated obligations whose payment was deferred until funds were withdrawn from escrow. During the year ending December 31, 1999, the Registrant sold $915,747 of its Common Stock under the Second Offering. The Second Offering closed January 31, 2000. The Registrant sold $2,983,792 of its Common Stock under the Second Offering. During the year ending December 31, 2000, the Registrant sold $64,000 of its Common Stock under the Third Offering. The Third Offering was extended through the earlier of March 31, 2001 or the date the Third Offering was fully subscribed. The Registrant sold $100,400 of its Common Stock under the Third Offering and closed the Third Offering on March 31, 2001. The balance of the funds from these offerings has been temporarily invested, pending investment in Portfolio Securities, in cash equivalents, government securities, and high quality debt securities. At December 31, 2001, the Registrant has invested $4,130,939 in twenty-four Portfolio Companies. As of December 31, 2001, the Registrant had approximately $839,587 in cash and cash equivalents, and short term investments. Those funds were available, except for a relatively small amount for normal operating expenses, for investment in Portfolio Companies. 11 Financial Condition, Liquidity and Capital Resources ---------------------------------------------------- The Registrant, through its sale of its Common Stock, raised $2,104,333 under the First Offering, $2,983,792 under the Second Offering, and $100,400 under the Third Offering. Most of this amount, except for normal operating expenses, is available for investment in Portfolio Securities. At December 31, 2001, $4,134,233 had been invested in twenty-four Portfolio Companies. The balance of the funds has been temporarily invested in short-term high quality commercial paper and government securities. These funds are available for future investments in Portfolio Companies. Inflation --------- The Registrant does not believe that inflation will have any significant effect on the Registrant's operations or financial position. 12 Item 8. Financial Statements and Supplementary Data ----------------------------------------------------- Index to Financial Statements and Supplementary Financial Data
Page No. Independent Auditor's Report 14 Financial Statements: Statements of Assets and Liabilities, December 31, 2001 and 2000 15 Statements of Operations for the Year ended December 31, 2001, for the Year ended December 31, 2000 and for the Year ended December 31, 1999 16 Statements of Changes in Net Assets for the Year ended December 31, 2001, for the Year ended December 31, 2000 and for the Year ended December 31, 1999 17 Statements of Cash Flows for the Year ended December 31, 2001, for the Year ended December 31, 2000 and for the Year ended December 31, 1999 18 Notes to Financial Statements 19
13 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Shareholders of the Western Pennsylvania Adventure Capital Fund We have audited the accompanying statements of assets and liabilities of the Western Pennsylvania Adventure Capital Fund (a Pennsylvania corporation) as of December 31, 2001 and 2000, and the related statements of operations, changes in net assets (deficit), and cash flows for the years ended December 31, 2001, 2000, and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Western Pennsylvania Adventure Capital Fund as of December 31, 2001 and 2000, and the results of its operations, the changes in its net assets, and its cash flows for the years ended December 31, 2001, 2000, and 1999, in conformity with U.S. generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedule listed under item 14(a)(2) is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Goff Backa Alfera & Company, LLC Pittsburgh, Pennsylvania March 21, 2002 14 Western Pennsylvania Adventure Capital Fund Statements of Assets and Liabilities As of
December 31, 2001 December 31, 2000 ----------------------- ----------------------- Assets ------ Cash and Cash Equivalents $ 292,699 $ 884,821 Short Term Investments, Net 546,888 728,551 Receivables 17,169 18,250 Investment in Portfolio Companies 2,947,083 3,999,650 Prepaid/Deferred Taxes 57,000 2,606 Organization Costs 3,040 6,080 ----------- ---------- Total Assets $ 3,863,879 $5,639,958 =========== ========== Liabilities ----------- Accounts Payable $ 21,924 $ 6,976 Accrued Liabilities 6,500 6,500 Accrued Income Taxes 9,701 0 ----------- ---------- Total Current Liabilities 38,125 13,476 Deferred Income Taxes 0 292,477 ----------- ---------- Total Liabilities $ 38,125 $ 305,923 =========== ========== Net Assets ---------- Common Stock, Par Value $.01 Per Share, Authorized 10,000,000 Shares, Issued and Outstanding 4,224,870 Shares (4,202,120 Shares at December 31, 2000) $ 44,749 $ 44,521 Additional Paid in Capital 5,146,276 5,110,104 Syndication Costs (149,220) (149,220) Retained Earnings (1,089,486) 455,195 Treasury Stock - 250,000 Shares (250,000 Shares (126,565) (126,565) at December 31, 2000) at cost ----------- ---------- Net Assets Applicable to Shares Outstanding $ 3,825,754 $5,334,035 =========== ========== Net Assets Value Per Share $ 0.91 $ 1.27 =========== ==========
See Independent Auditor's Report and accompanying notes to financial statements. 15 Western Pennsylvania Adventure Capital Fund Statements of Operations For the Periods
January 1, 2001 January 1, 2000 January 1, 1999 through through through December 31, 2001 December 31, 2000 December 31, 1999 ------------------------ ----------------------- ----------------------- Revenues: Interest $ 71,758 $167,107 $ 74,844 Management Fees 6,250 25,000 25,000 Realized Gains 124,903 82,127 0 ----------- -------- -------- Total Revenues 202,911 274,234 99,844 ----------- -------- -------- Expenses: General and Administration 18,000 18,000 18,000 Interest 301 0 48 Other Operating Expenses 179,257 202,375 88,919 ----------- -------- -------- Total Expenses 197,558 220,375 106,967 ----------- -------- -------- Unrealized Appreciation (1,885,981) 538,394 163,731 (Depreciation) - Portfolio Companies Profit (Loss) Before (1,880,628) 592,253 156,608 Income Tax Income Tax Expense (Benefit) (335,947) 256,967 56,230 ----------- -------- -------- Net Income (Loss) $(1,544,681) $335,286 $100,378 =========== ======== ======== Earnings (Loss) Per Share $(.37) $.08 $.04 =========== ======== ========
See Independent Auditor's Report and accompanying notes to financial statements. 16 Western Pennsylvania Adventure Capital Fund Statements of Changes in Net Assets For the Periods
January 1, 2001 January 1, 2000 January 1, 1999 through through through December 31, 2001 December 31, 2000 December 31, 1999 ------------------------ ------------------------ ------------------------ From Operations Net Income (Loss) $(1,544,681) $ 335,286 $ 100,378 From Share Transactions: Proceeds from Sale of Common Stock 36,400 2,132,044 915,748 Syndication Costs 0 (13,616) (50,097) Purchase of Treasury Stock 0 (125,126) 0 ----------- ---------- ---------- Net Increase in Net Assets Derived from Share Transactions 36,400 1,993,302 865,651 ----------- ---------- ---------- Net Increase (Decrease) In Net Assets (1,508,281) 2,328,588 966,029 Net Assets: Beginning of Period 5,334,035 3,005,447 2,039,418 ----------- ---------- ---------- End of Period $ 3,825,754 $5,334,035 $3,005,447 =========== ========== ==========
See Independent Auditor's Report and accompanying notes to financial statements. 17 Western Pennsylvania Adventure Capital Fund Statements of Cash Flows For the Periods
January 1, 2001 January 1, 2000 January 1, 1999 through through through December 31, 2001 December 31, 2000 December 31, 1999 ------------------------- ------------------------- ------------------------- Cash Flow from Operating Activities: Income (Loss) $(1,544,681) $ 335,286 $ 100,378 Change in Assets and Liabilities: Organization Costs - Decrease 3,040 3,040 3,040 Receivables-(Increase) Decrease 1,081 21,157 (32,954) Prepaid Taxes-(Increase) Decrease (54,394) (2,606) 2,440 Accounts Payable-Increase (Decrease) 14,948 (18,520) 11,100 Accrued Liabilities-Increase (Decrease) 9,701 (11,674) 3,474 Deferred Taxes-Increase (Decrease) (292,447) 241,747 50,700 ----------- ----------- ---------- Net Cash Provided by (Used in) (1,862,752) 568,430 138,178 Operating Activities ----------- ----------- ---------- Cash Flow from Financing Activities: Proceeds from sale of Common Stock 36,400 2,132,044 915,748 Payment of Syndication Costs 0 (13,616) (50,097) Purchase of Treasury Stock 0 (125,126) 0 ----------- ----------- ---------- Net Cash Provided by Financing Activities 36,400 1,993,302 865,651 ----------- ----------- ---------- Cash Flow from Investing Activities: Purchase of Short Term Investments, Net of Redemptions 181,663 (475,168) 641,577 Investments in Portfolio Companies, Net 1,052,567 (2,206,171) (930,802) ----------- ----------- ---------- Net Cash Provided by 1,234,230 (2,681,339) (289,225) (Used in) Investing Activities ----------- ----------- ---------- Net Increase (Decrease) in Cash and And Cash Equivalents: (592,122) (119,607) 714,604 Cash and Cash Equivalents at Beginning of Period 884,821 1,004,428 289,824 ----------- ----------- ---------- Cash and Cash Equivalents at End of Period $ 292,699 $ 884,821 $1,004,428 =========== =========== ========== Income Taxes Paid (Refunded) $ (1,638) $ 18,000 $ 2,916
See Independent Auditor's Report and accompanying notes to financial statements. 18 Western Pennsylvania Adventure Capital Fund Notes to Financial Statements December 31, 2001 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 U.S. 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. 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%. 19 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, at December 31, 2000 and December 31, 1999. 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. On July 14, 2000, the Fund began offering a total of 875,000 shares of its common stock, par value $0.01 at a price of $1.60 per share under Regulation E of the Securities Act of 1933 (the "Third Offering"). The Third Offering was extended through the earlier of March 31, 2001 or the date the Third Offering was fully subscribed. As of March 31, 2001, the Fund sold 62,750 shares of its common stock under the Third Offering and closed the Third Offering. Syndication Costs Legal, accounting and other costs of $149,220 incurred in connection with the Fund's First Offering, Second Offering and Third Offering have been capitalized and reported as a permanent reduction of net assets in accordance with U.S. generally accepted accounting principles by year as follows: Year ended December 31, 2001 $ 0 Year ended December 31, 2000 $13,616 Year ended December 31, 1999 $50,097 Year ended December 31, 1998 $ 0 Year ended December 31, 1997 $85,507 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 December 31, 2001 and 2000. 20 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 $3,040 ($6,080 at December 31, 2000) 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, adjusted for outstanding stock options. There are no other outstanding 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 authorized the granting of options to purchase the Fund's common stock to directors, officers, employees, and members of the advisory board of the Fund. Options to purchase 250,000 shares of the Fund's common stock have been granted to directors of the Fund under the terms of this stock option plan. 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 years ended December 31, 2001, 2000 and 1999, the Fund recognized unrealized appreciation (depreciation) on its portfolio companies, and accordingly, began recognizing deferred taxes due to temporary timing differences in accordance with SFAS 109. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes to those financial statements. Actual results could differ materially from these estimates. 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. 21 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 were 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 has used 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 have been used for normal operating expenses. As of December 31, 1999, the Fund had received subscriptions to purchase 631,550 shares ($915,747). The Fund sold 2,057,787 shares of its common stock at $1.45 per share under the Second Offering Circular, and closed the Second Offering as of January 31, 2000. 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 have been temporarily invested, pending investments in portfolio companies, in cash equivalents, government securities, and high quality debt securities. A portion of these proceeds have been used for normal operating expenses. As of December 31, 2000, the Fund had received subscriptions to purchase 40,000 shares ($64,000). The Fund sold 62,750 shares of its Common Stock at $1.60 per share under the Third Offering, and closed at the Third Offering as of March 31, 2001. As of December 31, 2001, $4,130,939 ($3,999,650 at December 31, 2000) was invested in Portfolio Securities and the balance of the funds ($839,587) remained invested in cash equivalents, government securities, and high quality debt securities. Note 3 - Investments in Portfolio Companies ------------------------------------------- As of December 31, 2001, the Fund had invested a total of $4,130,939 in twenty- four Portfolio Companies ($3,999,650 in twenty Portfolio Companies at December 31, 2000). Also, see Schedule 1 for additional information on investments in Portfolio Companies. AcceLight Networks, Inc. (Applied Electro-Optics Corporation) ------------------------------------------------------------- The Fund previously owned 393,074 shares of Applied Electro-Optics Corporation ("AEC") Class B Convertible Preferred Stock. On November 30, 2000, AEC merged with AcceLight Networks, Inc. ("AcceLight"). Under the terms of the merger, each AEC shareholder was scheduled to receive 0.544290 of one share of AcceLight Series A-1 Preferred Stock ("AcceLight A- 1") for each share of AEC capital stock, rounded to the nearest whole share. Further, 15 percent of the AcceLight A-1 due to be issued to AEC shareholders was to be held in an escrow account for one year to satisfy any AcceLight indemnification claims. Upon lapse of the escrow period, all shares not used to satisfy indemnification claims were to be released from the escrow account and distributed to AEC shareholders. 22 On March 6, 2001, the Fund received the initial distribution of 181,854 shares of AcceLight A-1, and on January 24, 2002, the Fund received an additional 32,092 shares of AcceLight A-1 representing the distribution from the escrow account. Accelight has developed a highly scalable, all-optical networking switch that enables network providers to deliver multiple services on a single platform offering capacity growth, service flexibility and reliability. Allegheny Child Care Academy, Inc. ---------------------------------- On April 9, 2001, the Fund exercised a portion of its pre-emptive rights and purchased 22,000 shares of Allegheny Child Care Academy, Inc. ("ACCA") Series D Preferred Stock ("Series D") at $2.9999 per share for a total investment of $65,998. At approximately the same time, other shareholders of the Fund exercised a portion of their pre-emptive rights and purchased 26,420 shares of Series D for a total investment of $79,257. ACCA sold a total of 2,950,522 shares of Series D for $7,770,395, including 90,120 shares via 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. Automated Cell, Inc. -------------------- On February 2, 2001, the Fund purchased $100,000 of Automated Cell, Inc. ("Automated") Mandatory Convertible Notes ("Mandatory Notes"). The Mandatory Notes bear interest at 10 percent per annum, have a maturity date of December 31, 2001 (See Note 12, Subsequent Events), and automatically convert into either: (a) the next financing round security if the next financing round equals at least $4,000,000 and occurs by December 31, 2001 or (b) a new Series A Preferred with standard terms at a $4,000,000 valuation if the aforementioned next financing round does not occur by December 31, 2001. The Mandatory Notes carry warrants to purchase the next financing round security at its issue price or, in the absence of the next financing round, the Series A Preferred. The number of warrants subject to purchase range from 20 percent to 40 percent of the amount of principal and accrued interest dependent upon the date of the next financing round. The warrants expire upon the earlier of 5 years, a change in control of the company, or an initial public offering. At approximately the same time, other shareholders in the Fund purchased $951,000 of Mandatory Notes. The total investment by the Fund, and by the Fund and its shareholders, represented an ownership interest of 4.61 percent and 48.41 percent, respectively, in the Mandatory Notes. Automated identifies, under contracts with pharmaceutical firms, the proteins that lead to cure of disease and shortens drug development efforts. Compas Controls, Inc. --------------------- On September 7, 2001, the Fund purchased 617,284 shares of Compas Controls, Inc. ("Compas") Series A Convertible Preferred Stock ("Compas A") at $0.1620 per share for a total investment of $100,000. At approximately the same time, other shareholders in the Fund purchased 895,741 shares for a total investment of $145,110. The Compas A is convertible into Common Stock and has anti-dilution protection and other typical preferences including liquidation, pre-emptive rights, voting rights and board representation. The total investment by the Fund and by the Fund and its shareholders, represented an ownership interest, on a fully diluted basis, of 4.47 percent and 10.49 percent, respectively. 23 e-Cruise, Inc. -------------- On January 5, 2001, the Fund purchased an additional 95,565 shares of e- Cruise, Inc. ("e-Cruise") Common Stock at $0.5232 for a total investment of $50,000 and received another 14,336 shares for legal fees paid by the Fund on behalf of e-Cruise. On May 31, 2001, the Fund purchased 192,308 shares of e-Cruise Series B Preferred Stock ("Series B") at $0.26 per share for a total investment of $50,000. At approximately the same time, other shareholders of the Fund purchased 163,462 shares of Series B for a total investment of $42,500. On October 25, 2001, the Fund purchased 9,615 shares of e-Cruise Series B at $0.26 per share for a total investment of $2,500, and committed to invest an additional $2,500 upon certain events. See Note 12, Subsequent Events. e-Cruise will provide online infomediary marketing content for cruise lines to potential passengers. Eldervision.Net --------------- On December 6, 2001, the Fund purchased 357,143 shares of Eldervision.Net ("Eldervision") Series B Preferred Stock ("Eldervision B") at $0.28 per share for a total investment of $100,000. At approximately the same time, other shareholders in the Fund purchased 204,286 shares for a total investment of $57,200. The Eldervision B is convertible into Common Stock and has anti- dilution protection and other typical preferences including liquidation, pre- emptive rights and voting rights. The total investment by the Fund, and by the Fund and its shareholders, including previous investments by Fund shareholders, represented an ownership interest, on a fully diluted basis, of 3.78 percent and 10.67 percent, respectively. Eldervision provides software for internet-based services to senior citizens and their resident facilities. GamesParlor, Inc. ----------------- On September 14, 2001, the Fund purchased $10,000 of GamesParlor, Inc. ("GamesParlor") Promissory Notes ("GP Notes"). The GP Notes bear interest at 12 percent per annum, mature in one year, and carry warrants for purchase of Common Stock at $0.475 per share for a ten year period. GamesParlor provides internet games services to enthusiasts of classic parlor games. Laminar Software, Inc. ---------------------- On June 15, 2001, the Fund purchased $53,594 of Laminar Software, Inc. ("Laminar") Convertible Promissory Notes ("Laminar Notes"). The Laminar Notes mature upon the earlier of December 31, 2001 or the closing of the next round financing, bear interest at 6 percent per annum, and are convertible into the next financing round security on the same terms and conditions, subject to a 20 percent price discount. At approximately the same time, other shareholders in the Fund purchased $146,984 of the Laminar Notes. Laminar raised $750,000 through the issuance of these Laminar Notes. 24 On November 8, 2001, Laminar sold all of its assets to Quest Software, Inc., and Laminar's shareholders elected to wind up the company and distribute the proceeds of sale. The Fund received: (a) $54,996 representing repayment of the principal amount of the Laminar Notes of $53,594, plus accrued interest of $1,402 and (b) $35,708 representing liquidation payments on the Fund's investment of $100,000 in Laminar Series A Preferred, resulting in a realized loss of $64,292. MediaSite, Inc. --------------- On April 25, 2001, the Fund purchased $25,000 of MediaSite, Inc. ("MediaSite") Bridge Loan Notes ("Bridge Notes"). The Bridge Notes bear interest at 8 percent per annum and mature upon the earlier of the sale of the company, an event of default, or March 31, 2002. Upon sale of the company, the Bridge Notes have a liquidation preference equal to five times their principal amount. MediaSite issued approximately $3,700,000 of Bridge Notes. On September 7, 2001, MediaSite sold substantially all of its assets to Sonic Foundry, Inc. ("Sonic Foundry") in exchange for 3,420,000 shares of Sonic Foundry common stock and the assumption of certain liabilities of MediaSite. Under the terms of this transaction, the Fund expects to receive 17,053 shares of Sonic Foundry common stock in settlement of and in exchange for its $25,000 of Bridge Notes, plus accrued interest, and its 80,000 shares of MediaSite Preferred Stock Series A and its 2,031 shares of MediaSite Preferred Stock Series B. The Fund has not received the Sonic Foundry common stock as of this date. Sonic Foundry is a leading developer and marketer of digital media software and services. Its products and services are used worldwide for multimedia development, internet streaming applications, broadcast solutions and digital content creation. Medtrex Incorporated -------------------- On January 19, 2000, Medtrex Incorporated ("Medtrex"), closed a transaction with the Ethicon division of Johnson & Johnson whereby Ethicon acquired all the assets of Medtrex and assumed certain liabilities. The proceeds of sale were placed in escrow pending claims against the escrow by the purchaser. The proceeds of sale, after settlement of claims against the escrow, were scheduled to be released in two installments - July, 2000 and January, 2001. On February 7, 2001, the Fund received its second and final distribution for the escrow account. This second distribution, which amounted to $189,195, has been recognized as realized gains in 2001. MindMatrix, Inc. ---------------- On June 5, 2001, the Fund placed in escrow, under control of its legal counsel, $100,000 for the purchase of MindMatrix, Inc. ("MindMatrix") Convertible Promissory Notes ("Notes"). The escrow was to be released to MindMatrix upon its raising of total of $750,000, including the Fund's $100,000, through the issuance of these Notes. The Notes mature upon the earlier of the next round financing or December 31, 2001, bear interest at 10 percent per annum, and are convertible into the same security as to be issued in the next round financing subject to a discount from 15 - 50 percent dependent upon the timing of the next round financing. On August 16, 2001, MindMatrix reached $756,000 in this financing round, the Fund authorized the release of its $100,000 being held in escrow, and MindMatrix closed its financing round. At approximately the same time, other shareholders of the Fund purchased $141,000 of the Notes. MindMatrix offers a solution platform to vendors in the information technology industry to better communicate the value of their products to customers. 25 Personity, Inc. (Network Projects, Inc.) ---------------------------------------- On August 6, 2001, Personity, Inc. ("Personity") issued $3,000,000 of Series A Preferred Stock at $1.219 per share (2,451,034 shares). This event triggered the conversion of the Fund's $100,000 of Subordinated Convertible Debentures ("Debentures"), plus accrued interest of $7,425, along with those of other debenture holders. Under the terms of the Debentures, the principal and accrued interest convert into shares of the Series A Preferred Stock at a 25 percent discount to the issue price. Accordingly, the Fund converted its Debentures and accrued interest into 117,500 shares of Series A Preferred Stock at a conversion price of $0.91425 per share. Personity, Inc. is developing technology to allow users of wireless communication devices to control real time access to all of their communication modes. Precision Therapeutics, Inc. ---------------------------- On January 2, 2001, the Fund purchased 208,334 shares of Precision Therapeutics, Inc. ("PTI") new Series B Convertible Preferred Stock ("Precision new B") at $0.24 per share for a total investment of $50,000. The Precision new B has voting and anti-dilution rights, liquidation and dividend preferences, certain other rights and preferences, and is convertible into common stock upon certain events. At approximately the same time, other shareholders in the Fund purchased 3,979,214 shares for a total investment of $955,011. On January 11, 2001, PTI closed ("First Closing") on the sale of $9,533,496 of Precision new B. Shareholders purchasing Precision new B in the First Closing received 5 year warrants to purchase additional Precision new B equal to 50 percent of their current purchase in the First Closing at $0.024 per share. The warrants will become void if PTI secures a firm written commitment of at least $4,000,000 from a biotech industry venture capital firm within 90 days after the First Closing and closes on that commitment within 135 days after the First Closing. In early April, 2001, PTI received a firm commitment of $4,000,000 from a biotech industry venture capital firm, thereby voiding the aforementioned warrants. As a condition of this financing, PTI reincorporated in Delaware through the merger of PTI with and into PTI Delaware and a wholly owned subsidiary of PTI with PTI Delaware being the survivor. The capital stock of PTI has been converted to capital stock of PTI Delaware as follows: Common - 1:1; Series A Preferred - 1 old converted into 2.5509 new; Series B Preferred - 1 old converted into 1.4745 new. In connection with the First Closing, PTI's outstanding convertible notes and accrued interest have been converted into Precision new B at $0.24, and all warrants that have been issued in connection with the outstanding convertible notes have been amended to make them exercisable at $0.024 per share. After conclusion of all of the aforementioned events, the total investment by the Fund, and by the Fund and its shareholders, represented an ownership interest of 0.80 percent and 11.32 percent, respectively, on a fully diluted basis. PTI has developed a proprietary chemosensitivity assay designed to help select the appropriate therapy for cancer patients. 26 Quantapoint, Inc. ----------------- On June 18, 2001, the Fund purchased 17,125 shares of Quantapoint, Inc. ("Quantapoint") Series C Preferred Stock ("Series C") at $1.46 per share for total investment of $25,000. At approximately the same time, other shareholders of the Fund purchased 61,995 shares of Series C for a total investment of $90,513. Quantapoint raised $4,000,000 from the sale of 2,739,726 shares of Series C. The total investment by the Fund, and by the Fund and its shareholders, including previously acquired shares, represented an ownership interest of 1.96 percent and 15.79 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. TimeSys Corporation ------------------- On April 27, 2001, the Fund purchased $50,000 of TimeSys Corporation ("TimeSys") Convertible Bridge Notes ("Convertible Notes"). The Convertible Notes mature on August 30, 2001, bear interest at 15 percent per annum, and are convertible, principal and interest, into the new Series A Preferred Stock financing expected to close approximately July 24, 2001. At approximately the same time, other shareholders in the Fund purchased $435,000 of these Convertible Notes. TimeSys issued a total of $835,000 of Convertible Notes. On July 24, 2001, TimeSys closed on the sale of 30,842,327 shares of its new Series A Preferred Stock ("Series A") at $0.2673 per share for a total investment of $8,244,154. The Series A is convertible into common stock and has liquidation and other preferences. Concurrent with this closing, both classes of previously outstanding preferred stock, "old" Series A and "old" Series B, were converted into new Series B Preferred Stock which also is convertible into common stock and has certain limited preferences. Also, at the same time, the existing Convertible Bridge Notes were converted principal ($835,000) and interest ($20,846) into Series A. The Fund had previously purchased 100,000 shares of "old" Series A Preferred Stock, 61,380 shares of "old" Series B Preferred Stock and $50,000 of Convertible Notes due August 30, 2001 with interest at 15 percent per annum. The Convertible Notes were convertible, principal and interest, into the Series A. On July 24, 2001, the Fund's "old" Series A and "old" Series B were converted into 142,857 shares of new Series B-1 Preferred Stock and 64,590 shares of new Series B-2 Preferred Stock. As of the same date, the Convertible Notes principal ($50,000) and interest ($1,687.50) were converted into 193,369 shares of new Series A Preferred Stock. TimeSys develops and markets software tools for embedded real time systems. True Commerce, Inc. -------------------- On November 7, 2001, the Fund purchased 115,000 shares of True Commerce, Inc. ("True Commerce") Class B Common Stock ("Common B") at $0.8696 per share for a total investment of $100,000. At approximately the same time, other shareholders in the Fund purchased 172,500 shares for a total investment of $150,006. The Common B has certain limited preferences. The investment by the Fund, and by the Fund and its shareholders, represented an ownership interest of 3.60 percent and 9.00 percent, respectively, on a fully diluted basis. True Commerce provides software and service to facilitate routine e-commerce transactions between large corporations and small suppliers. 27 Webmedx, Inc. ------------- On May 21, 2001, the Fund purchased 50,000 shares of Webmedx, Inc. ("Webmedx") Series D Convertible Preferred Stock ("Webmedx D") at $1.00 per share for a total investment of $50,000. At approximately the same time, other shareholders in the Fund purchased 492,487 shares of Webmedx D for a total investment of $492,487. Webmedx provides software and services to diagnostic imaging segments of the healthcare industries. WorldDealer, Inc. ------------------ On November 15, 2001, the Fund purchased 106,666.67 shares of WorldDealer, Inc. ("WorldDealer") Series B Preferred Stock ("WorldDealer B") at $0.375 for a total investment of $40,000. At approximately the same time, other shareholders in the Fund purchased 20,000 shares for a total investment of $10,000. The World Dealer B has voting rights, liquidation and dividends preferences, anti-dilution protection, and is convertible into common stock. In addition, the WorldDealer Series B carries warrants for the purchase of 1/2 share of Common Stock for each share of Series B at $0.375 per share through December 31, 2005. WorldDealer develops Web-based software for automotive retailers using an application service provider delivery model. Other Portfolio Companies ------------------------- The Fund had no additional equity transactions during 2001 for the portfolio companies as follows: CoManage Corporation - CoManage sells computer software that enables software providers to deliver extended network services onto network vendors equipment at client sites. Engito Corporation - Entigo provides software and installation services for E-Commerce systems to enable large, complex companies to sell to their distributors and buy from vendors through web-based communications Fidelity Flight Simulation Incorporated - FFS designs, manufactures and distributes full motion based flight simulators for pilot training. Interactive Information - Interactive Information produces interactive software used in patient education in physicians' offices and hospitals. NeoLinear, Inc. - NeoLinear produces computer aided design software for the semiconductor industry. Telemed Technologies International, Inc. - 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. USInterns.com, Inc. - USInterns provides internet student employment staffing solutions to employers. Wishbox.com - Wishbox provides a universal online gift registry for teenagers. 28 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. As of June 30, 2001, the URA notified the fund of its decision to terminate the Agreement, effective as of July 31, 2001. Through June 30, 2001, the URA had invested a total of $100,000, on its dollar-for-dollar matching basis in one portfolio company. Note 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 December 31, 2001 and December 31, 2000: As of December 31, 2001 ----------------------- Investment Face Value Carrying Value Market Value ---------- ------------ -------------- ------------ U.S. Government Securities $ 550,000 $ 546,888 $ 548,965 ============ ============= ============ As of December 31, 2000 ----------------------- Investment Face Value Carrying Value Market Value ---------- ------------ -------------- ------------ U.S. Government Securities $ 733,000 $ 728,551 $ 728,441 ============ ============== ============ 29 Note 6 - Unrealized Appreciation (Depreciation) ----------------------------------------------- The Fund recognizes unrealized appreciation (depreciation) on its portfolio companies when significant and material events have occurred that clearly indicates that an adjustment to the carrying value of those investments is appropriate. Unrealized appreciation (depreciation) has been recognized as follows: Year Ended December 31, 2001 - $(1,885,981) Year Ended December 31, 2000 - $ 538,394 Year Ended December 31, 1999 - $ 163,731 Year Ended December 31, 1998 - $ 0 Note 7 - 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. The stock option committee granted options to purchase 50,000 shares of its common stock at an exercise price of $1.45 per share to each of the Fund's five directors (250,000 shares in the aggregate), effective as of October 11, 1999. These options vest 50% upon issuance, and 25% in equal increments on the first and second anniversary dates of issuance. Note 8 - Income Taxes --------------------- The following table summarizes the provision for Federal and state taxes on income. Current: 2001 2000 1999 --------- -------- ------- Federal $ 6,000 $ 8,465 $ 0 State 7,500 6,755 5,530 --------- -------- ------- 13,500 15,220 5,530 ========= ======== ======= Deferred: Federal (281,901) 192,901 38,000 State ( 67,546) 48,846 12,700 --------- -------- ------- (349,447) 241,747 50,700 --------- -------- ------- Total $(335,947) $256,967 $56,230 ========= ======== ======= 30 The components of the deferred tax asset (liability), as reflected on the balance sheet, consist of the following: 2001 2000 --------- --------- Deferred tax liability: Unrealized appreciation $ 0 $(320,000) --------- --------- Deferred tax asset: Net operating loss 2,600 27,553 Unrealized depreciation on securities 782,400 0 Valuation allowance (728,000) 0 --------- --------- Net deferred tax asset (liability) $57,000 $(292,447) ========= ========= The Fund has provided a valuation allowance for the deferred tax asset since the recognition of the unrealized depreciation is not sufficiently assured due to the uncertainty of future capital gain income. The valuation allowance increased since December 31, 2000 by $728,000. The difference between the Federal statutory rate and the Fund's effective rate are as follows: 2001 2000 1999 ------ ---- ---- Federal statutory tax rate (35.0%) 35.0% 35.0% State income taxes (net of Federal benefit) (3.2%) 9.4% 8.8% Valuation allowance against deferred tax asset 38.5% 0.0% 0.0% Income tax at lower Federal marginal rate (18.2%) (1.0%) (7.9%) ------ (17.9%) 43.4% 35.9% ====== ==== ==== The deferred tax expense (benefit) results from the Fund's recognition of unrealized appreciation (depreciation) on Portfolio Securities. Note 9 - Related Party Transactions ----------------------------------- Accrued liabilities as of December 31, 2001 and 2000, include $4,500 for Board of Directors fees and $2,000 due to a consulting firm in which one of the Fund's officers is a significant shareholder. Under the terms of an investment advisory agreement, Enterprise served as the Fund's investment advisor, and received a one-time fee equal to 5% of the amount the Fund invested in a Portfolio Company for providing investment advisory and administrative services to the Fund. As of December 31, 1998, Enterprise ceased operations and no longer served as the Fund's investment advisor. Enterprise owned 106,101 shares of common stock of the Fund which it acquired at $.01 per share as founders stock in connection with its services in organizing the formation and development of the Fund. As a result of the merger of Enterprise with Ben Franklin, the shares previously owned by Enterprise were acquired by Innovation Works, the successor organization. (See Note 10.) During 2001, the Fund incurred $16,500 ($12,000 in 2000) for accounting services payable to a consulting firm in which one of the Fund's officers is a significant shareholder. 31 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 December 31, 2001 and 2000. As of December 31, 1997, the Fund repurchased 143,899 shares of its common stock from Enterprise at $0.01 per share. These shares also are shown as treasury stock as of December 31, 2001 and 2000. Note 11 - Realized Gains ------------------------ In January, 2000, the Fund sold its investment in Medtrex Incorporated ("Medtrex"), one of the Fund's portfolio companies. The proceeds of sale were placed in escrow pending claims against the escrow by the purchaser. On July 26, 2000, the Fund received its first distribution from its sale of its investment in Medtrex. The excess of the proceeds received ($234,604) on July 26, 2000, over the Fund's investment ($152,477) was recognized as realized gains during the year ended December 31, 2000. On February 7, 2001, the Fund received its second and final distribution from its sale of Medtrex on January 19, 2000. This second distribution, which amounted to $189,195, has been recognized as realized gains during the three month period ended March 31, 2001, and results in a total return to the Fund of $423,799 on an investment of $152,477. On November 8, 2001, Laminar sold all of its assets to Quest Software, Inc., and Laminar's shareholders elected to wind up the company and distribute the proceeds of sale. The Fund received: (a) $54,996 representing repayment of the principal amount of the Laminar Notes of $53,594, plus accrued interest at $1,402 and (b) $35,708 representing liquidation payments on the Fund's investment of $100,000 in Laminar Series A Preferred, resulting in a realized loss of $64,292. Note 12 - Subsequent Events --------------------------- The Fund holds $100,000 of Automated Cell, Inc. ("Automated") Mandatory Convertible Notes ("Mandatory Notes") that mature as of December 31, 2001. Automated has entered into negotiations with its Mandatory Notes holders, including the Fund, to create a new class of Series A Preferred Stock to be used for conversion of the Mandatory Notes. These negotiations are continuing as of this date. On January 15, 2002, the Fund purchased an additional 9,615 shares of e-Cruise, Inc. ("e-Cruise") Series B Preferred Stock ("Series B") at $0.26 per share for a total investment of $2,500. This investment fulfills the Fund's commitment for additional investment in e-Cruise. See Note 3, Investments in Portfolio Companies. The Fund holds $100,000 of MindMatrix, Inc. ("MindMatrix") Convertible Promissory Notes ("Notes") that mature as of December 31, 2001. The Fund, and the other holders of the Notes have the right, but not the obligation to convert principal and accrued interest into a new preferred stock with standard preferences and rights based upon a pre-determined valuation. In lieu of conversion, the Note holders may retain the Notes which will bear an interest rate of twelve percent per annum until the Notes are either paid or converted into a new preferred stock upon a subsequent financing event. As of this date, the Fund and the other holders of the Notes have continued to retain the Notes. At a special meeting of the Fund's shareholders, held on February 21, 2002, the Fund's shareholders approved the merger of the Fund into its recently formed and wholly owned subsidiary, Western Pennsylvania Adventure Capital Fund, LLC ("Fund-LLC"). The merger was effective as of February 28, 2002. The Fund-LLC is organized as a "pass-through" entity for income tax purposes, and accordingly, earnings (losses) incurred by the Fund-LLC after February 28, 2002 will be allocated to shareholders for inclusion on their respective income tax returns. The Fund does not expect to incur any material income tax liabilities as a direct result of the merger. 32 Item 9. Changes In and Disagreements with Accountants on Accounting and ------------------------------------------------------------------------- Financial Disclosure -------------------- None 33 PART III Item 10. Directors and Executive Officers of the Registrant The following table and text sets forth the names and ages of all directors and executive officers of the Registrant and their position and offices with the Registrant. All of the directors will serve until the next annual meeting of the stockholders and until their successors are elected and qualified or their earlier death, retirement, resignation or removal. Officers serve at the discretion of the Board of Directors. A brief description of the business experience of each director and executive officer during the past five years and an indication of directorships held by each director in other companies subject to the reporting requirements under the federal securities laws are also provided. There are no family relationships among directors and executive officers. Name Age Title Director Since G. Richard Patton 50 President, Chief Executive Officer June 1, 1996 and Director Alvin J. Catz 62 Chief Financial Officer, Treasurer June 1, 1996 and Director William F. Rooney 61 Secretary and Director June 1, 1996 Philip Samson 44 Director June 1, 1996 Douglas F. Schofield 56 Director June 1, 1996 G. Richard Patton, President, Chief Executive Officer and Director. Dr. Patton holds a Ph.D. in Strategic Management and an M.S. in Industrial Administration from the Krannert Graduate School of Management, Purdue University, and a B.S. in Chemistry from the University of Michigan. From 1978 - 1981, Dr. Patton was Vice President and Chief Administration Officer of the Mellon Institute in Pittsburgh and a senior staff member of the Energy Productivity Center in Washington, D.C. In 1976, Dr. Patton was the recipient of the first General Electric Award for Outstanding Research in the field of strategic planning. He has also been elected Distinguished Professor by several of the University of Pittsburgh Executive M.B.A. classes. In 1995 and 1996, he was selected as a finalist in the Inc. Magazine Entrepreneur of the Year award program. His publication topics and research interests include strategy development, mergers and acquisitions, divestment, turn around management and restructuring strategies, and entrepreneurship. Dr. Patton has been a faculty member of the University of Pittsburgh's Joseph M. Katz Graduate School of Business since 1976, and is currently an Associate Professor. He teaches in the area of strategic management, planning and control systems and entrepreneurship and new venture management in graduate and executive programs. He also taught at Carnegie Mellon University's Graduate School of Industrial Administration and at Chulalongkorn University's Graduate Institute of business Administration in Bangkok, Thailand. Dr. Patton is currently an active consultant, with clients that include Fortune 500 firms, family-owned firms, new ventures, and research and industry associates in the U.S., Europe and Asia. His consulting activities include executive development programs, strategy development, strategic planning systems design and development, competitive analysis, technology and market assessment and new venture analysis and start-up. He is also active in the venture capital area and has been associated with or consulted on the founding, financing and start-up of several new technology based companies. He also currently serves on the boards of several companies. 34 During the past five years, Dr. Patton has held investments in over 30 private placements, including for companies engaged in such diverse businesses as software design, fiber optics, corrugated container manufacture, copier distribution and medical device design and production. The total raised for these private placements from all investors has been in excess of $50 million. Alvin J. Catz, Chief Financial Officer, Treasurer and Director. Mr. Catz is currently a principal with Catz Consulting Associates, Inc. The firm offers services in the areas of finance/accounting and computers/data processing. He is actively involved in assisting new ventures in all aspects of their early stage development including business plans, financing, organizational, and other typical start-up related issues. Mr. Catz has over 30 years of diversified business and financial experience including management consulting, Fortune 500 corporation financial officer, and major certified public accounting firm management. Mr. Catz's background offers an unusual combination of major mature company experience and dynamic smaller growth company experience. This experience includes over five years as Corporate Controller with H.J. Heinz Company in Pittsburgh, Pennsylvania. As Corporate Controller, he was responsible for internal and external accounting and financial reporting, accounting/internal control systems, financial policies, and coordination of employee benefit plans. Prior to joining Heinz in 1974, Mr. Catz served as Assistant Corporate Controller for KDI Corporation ("KDI") in Cincinnati, Ohio, a conglomerate with interests in defense, recreation, manufacturing and distribution. During his five year association with KDI, its annual revenues grew from $15 million to $135 million. His earlier experience includes serving as a Group Financial Manager with Cincinnati Milacron, a major machine tool manufacturer based in Cincinnati, Ohio. He began his business career with Peat, Marwick, Mitchell & Co., a major certified public accounting firm. Mr. Catz has a Master of Business Administration degree in Advanced Business Economics from Xavier University, and a Bachelor of Business Administration degree in Accounting from the University of Pittsburgh. He is a Certified Public Accountant, and a member of the American Institute of Certified Public Accountants and the Pennsylvania Institute of Certified Public Accountants. He is a regular lecturer in the University of Pittsburgh's Graduate School of Business. In addition, he has taught Financial Management in the University of Pittsburgh's Graduate School of Business Management Program for Entrepreneurs. During the past five years, Mr. Catz has held investments in approximately 17 development stage companies in Western Pennsylvania. He has also assisted numerous development stage companies in their fund raising efforts, including assisting in the preparation of business plans and private placement memoranda. William F. Rooney, Secretary and Director. Mr. Rooney is an early stage investor and former Vice-President of Sales for Transline Communications Corporation, an international provider of voice and data services to the financial services industry between the U.S. and major financial service centers in Europe, a position he has held since 1995. Transline was acquired by Transaction Network Services, Inc., a NYSE Company, in January, 1999. Mr. Rooney has over 30 years of experience in the telecommunications industry including senior management and operating positions. From 1986 to 1994, Mr. Rooney was Vice-President of Sales for Republic Telcom Systems Corporation, a telecommunications company specializing in multiplexer products ("Republic Telcom"). In this capacity, he assisted Republic Telcom in the start-up phase and helped to raise funding through venture capital firms. Republic Telcom was successfully acquired by Netrix Corporation in 1994. Mr. Rooney holds a B.S. degree in Industrial Management from LaSalle University (1962) and an M.B.A. from Fordham University (1975). Mr. Rooney is an active private investor and currently has investments in eight early stage, high technology companies in various industries. 35 Philip Samson, Director. Mr. Samson is an independent business consultant. Mr. Samson's background includes several appointments within Mellon Bank. From 1981 to 1983, he worked for Mellon's Economics Department where he completed advanced financial modeling assignments. In 1983, he joined Mellon's Corporate Consulting Department where he managed a number of innovative projects including designing a corporate credit scoring system, an internal credit network, a retail bank strategy, and a profitability analysis and tactical plan for credit cards. Mr. Samson became Vice President of Mellon's Credit Card Department in 1989. In this capacity, he was responsible for five portfolio purchases, as well as structuring offerings that secured various affinity contracts. He also initiated numerous profit improvements programs, including line increases, incentive pricing, cross selling and related matters. Additionally, in 1985, Mr. Samson acted as an advisor to Peter Ueberroth (then Commissioner of Major League Baseball) to whom he contributed ideas which Mr. Ueberroth incorporated in his proposals to the baseball players and owners during the labor dispute in the summer of 1985. The Commissioner was credited with bringing a quick resolution to the dispute, with the baseball strike lasting only two days. In 1992 and 1993, Mr. Samson was extensively quoted in the financial and computer industry trade press, including a Fortune magazine article titled, "Computers That Learn By Doing," for his work involving the financial application of neural networks. Mr. Samson left Mellon Bank in 1993. In 1993 and 1994, Mr. Samson conceptualized, developed and implemented a 100% interest rebate credit card offered by a major financial institution. This innovative product has had a marked impact in the credit card industry. Since January, 1998, Mr. Samson has been a vice president and director of GamesParlor, Inc., a provider of internet games services to enthusiasts of classic parlor games. Philip J. Samson holds an M.B.A. from Pennsylvania State University and a Bachelor of Science degree in Engineering from the University of Maryland. Mr. Samson is an active private investor and currently has investments in approximately twenty early stage, high technology companies in various industries. Douglas F. Schofield, Director. Dr. Schofield currently conducts business through his own firm, Schofield Financial Counseling, providing financial advice to individuals and families, and administrative services to families in the handling of their financial affairs. Dr. Schofield has sought throughout his career to build a strong foundation in a variety of fields related to finance and planning. In addition to two years working in an analytic and planning capacity in the Federal Government (Transportation Department), Dr. Schofield has 12 years experience in the banking industry. At Mellon Bank in Pittsburgh, he managed the bank's investment strategy, managed foreign exchange trading worldwide, and planned the bank's statewide expansion through the acquisition of other banks. Thereafter, Dr. Schofield was employed by Equibank and worked with the Chairman in a special capacity raising capital for the bank. For the three years prior to forming his own firm, he worked as president in the firm of French, Schofield & Associates providing comprehensive financial advice to individuals and families. Dr. Schofield received a Bachelors degree from Yale University with honors, in 1967, with a major in Chemistry and Chemical Engineering. He then attended Harvard Business School and received an M.B.A. and a Doctorate in Strategic Planning. Dr. Schofield has taught M.B.A. courses at Atlanta University and at the University of Pittsburgh. He is the past President of the Harvard Business School Association of Pittsburgh and has held several chair positions, as well as served as trustee, for LaRoche College. During the past five years, Dr. Schofield has held investments in 20 development stage companies in diverse industries. In addition, he has consulted extensively with owners of closely-held companies during the past decade and has served on the boards of four such companies during this period. 36 Item 11. Executive Compensation No officer received any remuneration for serving as an officer of the Registrant in 2001 or 2000. Each director receives a $300 monthly fee. Generally, board of directors meetings are held monthly. Compensation earned by directors in 2001 amounted to $18,000 ($18,000 in 2000). Item 12. Security Ownership of Certain Beneficial Owners and Management The Registrant's only class of stock as of December 31, 2001, was Common Stock, $.01 par value. Name and Address Amount and Nature of % of Title of Class of Beneficial Owner Beneficial Ownership Class ---------------- ------------------------------- -------------------- ------ Common Stock G. Richard Patton 25,000 0.6% Scott Towne Center, Suite A-113 2101 Greentree Road Pittsburgh, PA 15220 Common Stock William F. Rooney 20,000 0.5% Scott Towne Center, Suite A-113 2101 Greentree Road Pittsburgh, PA 15220 Common Stock Alvin J. Catz 30,000 0.7% Scott Towne Center, Suite A-113 2101 Greentree Road Pittsburgh, PA 15220 Common Stock Philip J. Samson 30,000 0.7% Scott Towne Center, Suite A-113 2101 Greentree Road Pittsburgh, PA 15220 Common Stock Douglas F. Schofield 180,000 4.3% Scott Towne Center, Suite A-113 2101 Greentree Road Pittsburgh, PA 15220 Common Stock PNC Venture Corp. 333,330 7.9% PNC National Building 249 Fifth Avenue Pittsburgh, PA 15222 Common Stock National City Venture Corp. 333,300 7.9% 1965 East Sixth Street Cleveland, OH 44114 All officers and directors, as a group, own 285,000 shares or 6.7% of the total issued and outstanding shares as of December 31, 2001. 37 Item 13. Certain Relationships and Related Transactions --------------------------------------------------------- None of the officers and directors of the Registrant have had any direct or indirect material transactions involving the Registrant during the current reporting period. During 2001, the Registrant incurred $16,500 for accounting services payable to a consulting firm in which one of the Fund's officers is a significant shareholder. All of the officers and directors have purchased, either directly or as beneficially owned, Common Stock under either or both of the Registrant's First Offering Circular dated November 7, 1996 and Second Offering Circular dated September 10, 1999. Certain of the Registrant's directors have co-invested, along with the Registrant, in the twenty-two investments in Portfolio Companies that the Registrant has made as of March 16, 2001. Directors' investments in Portfolio Companies in excess of $60,000 as of March 16, 2001 were: Douglas F. Schofield - Webmedx, Inc. $85,599; Alvin J. Catz - Webmedx, Inc. $140,922; William F. Rooney - CoManage Corporation $78,000; and Philip J. Samson - Neo Linear $75,000, Entigo Corporation $85,000, Applied Electro-Optics Corporation $80,000, and GamesParlor, Inc. $271,500. Enterprise served as the Registrant's investment advisor through December 31, 1998, when it ceased operations, and was merged into Innovation Works, Inc. ("IW"). Enterprise screened potential Portfolio Companies and presented them to the Registrant's Board of Directors for investment consideration, conducted due diligence reviews of investment candidates as directed by the Board of Directors, and provided staff to manage the day-to-day operations of the Registrant including, portfolio management, preparing reports to stockholders and performing administrative services. In connection with its services in organizing the formation and development of the Registrant, Enterprise originally purchased 250,000 shares of Common Stock for $.01 per share. If all of the 5,000,000 Shares available for sale under the Offering Circular were sold, these shares would have represented 4.8% of the issued and outstanding shares of the Registrant. If less than 5,000,000 shares were sold, the Registrant had the right to repurchase from Enterprise for $.01 per share such number of shares as would result in Enterprise's ownership percentage being reduced to 4.8% of the then issued and outstanding shares of the Registrant. During 1997, the Registrant closed its Offering after having sold 2,104,333 shares of Common Stock. As of December 31, 1997, the Registrant exercised the aforementioned right and repurchased 143,899 shares of its Common Stock from Enterprise thereby reducing Enterprise's ownership to 106,101 shares or 4.8% of the total shares issued and outstanding of 2,210,434. IW acquired the 106,101 shares upon the merger of Enterprise into IW. On June 7, 2000, the Registrant purchased these shares from IW for $125,126. These shares are shown as treasury stock as of December 31, 2001 and 2000. Enterprise received a fee equal to 5% of the aggregate amount of assets invested by the Registrant in Portfolio Securities for providing investment advisory and administrative services to the Registrant. During 1998, Enterprise earned $37,500 of such fees. Enterprise also could have received compensation from investment partners or members of any investment consortium that invested with the Registrant in Portfolio Securities, all on such basis as such other parties and Enterprise agreed, provided that in no event, would Enterprise charge fees to such consortium members or investment partners at rates lower, or on terms otherwise more favorable, than were offered to the Registrant. Furthermore, none of the employees, officers or directors of Enterprise could receive any compensation from any Portfolio Company by reason of the Registrant or any other investor investing in such Portfolio Company's securities upon the recommendation of Enterprise. 38 Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the Fund's directors, certain officers and persons who own more than ten percent of the outstanding Common Stock of the Fund, to file with the Securities and Exchange Commission reports of changes in ownership of the Common Stock of the Fund held by such persons. Officers, directors and greater than ten percent shareholders are also required to furnish the Fund with copies of all forms they file under this regulation. To the Fund's knowledge, based solely on a review of the copies of such reports furnished to the Fund and representations that no other reports were required, all Section 16(a) filing requirements applicable to all of its officers and directors were complied with during fiscal 2001. 39 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K --------------------------------------------------------------------------- (a) (1) The following financial statements and supplemental data are included in Part II, Item 8:
Page No. Independent Auditor's Report 14 Financial Statements: Statements of Assets and Liabilities, December 31, 2001 and 2000 15 Statements of Operations for the Year ended December 31, 2001, for the Year ended December 31, 2000, and for the Year ended December 31, 1999 16 Statements of Changes in Net Assets for the Year ended December 31, 2001, for the Year ended December 31, 2000, and for the Year ended December 31, 1999 17 Statements of Cash Flows for the Year ended December 31, 2001, for the Year ended December 31, 2000, and for the Year ended December 31, 1999 18 Notes to Financial Statements 19 (2) All schedules other than Schedule 1 are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits included herein: *3 (a) - Articles of Incorporation **3 (b) - By-Laws Schedule 1 - Investments in Securities of Unaffiliated Issuers Schedule 11 - Computation of Net Income (Loss) Per Share (b) Reports on Form 8-K: No reports were filed on Form 8-K by the Registrant during the last quarter of the period covered by this report.
* Incorporated by reference to the Registrant's Form 10 filed with the Commission on October 21, 1996. ** Incorporated by reference to the Registrant's Notification on Form 1-E filed with the Commission on September 6, 1996. 40 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, 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) By: /s/ G. Richard Patton ----------------------------------------------- G. Richard Patton President, Chief Executive Officer and Director Date: March 21, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: /s/ Alvin J. Catz Chief Financial Officer, Date: March 21, 2002 -------------------------- Treasurer, and Director Alvin J. Catz /s/ William F. Rooney Secretary and Director Date: March 21, 2002 -------------------------- William F. Rooney /s/ Philip Samson Director Date: March 21, 2002 -------------------------- Philip Samson /s/ Douglas F. Schofield Director Date: March 21, 2002 -------------------------- Douglas F. Schofield 41 Schedule 1 Western Pennsylvania Adventure Capital Fund Investments in Securities of Unaffiliated Issuers As of December 31, 2001
Balance Held at Close of Period Value of Each Acquisition Number of Shares Item at Percent of Name of Issuer and Title of Issue Date Principal Amount of Bonds and Notes Close of Period Net Assets --------------------------------- ---- ----------------------------------- --------------- ---------- Common Shares Computer-Software/Firmware -------------------------- USInterns.com Inc. Sep-00 525,000 shares (1),(2),(9) $0 0.00% Internet/E-Commerce/Applications ------------------------------- Service Provider ---------------- e-Cruise inc. Dec-99 637,920 shares (1),(3),(9) $0 True Commerce Nov-01 115,000 shares (1) $100,000 Wishbox.com, Inc. Jun-00 44,445 shares (1),(9) $0 Subtotal Internet/E-Commerce Group $100,000 2.61% Subtotal-Common Shares $100,000 2.61% Preferred Shares Medical Products and Services ----------------------------- Precision Therapeutics, Inc. Series A Jun-01 283,031 shares (1),(3),(9) $46,065 Precision Therapeutics, Inc. Series B Jun-01 436,096 shares (1),(3) $104,206 Telemed Technologies International, Inc. Class A Dec-99 100,000 shares (1) $100,000 Webmedx Inc. Corporation Series B Jul-98 60,606 shares (1),(3),(9) $80,406 Webmedx Inc. Corporation Series B Nov-98 20,000 shares (1),(4) $200 Webmedx Inc. Corporation Series C Dec-99 15,150 shares (1),(9) $15,150 Webmedx Inc. Corporation Series D May-01 50,000 shares (1) $50,000 Subtotal Medical Group $396,027 10.35% Computer-Software/Firmware -------------------------- Compas Controls Series A Sep-01 617,284 shares (1) $100,000 Games Parlor Series A Jul-00 210,526 shares (1),(9) $0 Neo Linear Inc. Series A Feb-98 300,788 shares (1) $100,000 Neo Linear Inc. Series B Jun-99 161,992 shares (1),(3) $54,823 Neo Linear Inc. Series C Feb-00 103,336 shares (1),(3) $35,069 Neo Linear Inc. Series D Nov-00 104,225 shares (1) $50,000 MediaSite Inc. Series A Apr-98 80,000 shares (1),(9) $50,000 MediaSite Inc. Series B May-99 2,031 shares (1),(2),(9) $0 Quantapoint Inc. Series A Jun-99 116,000 shares (1) $99,423 Quantapoint Inc. Series B Feb-00 62,500 shares (1) $75,000 Quantapoint Inc. Series C Jun-01 17,125 shares (1) $25,000 TimeSys Corporation Series A Jul-01 193,369 shares (1),(3) $51,688 TimeSys Corporation Series B Jul-01 207,447 shares (1),(3),(9) $55,450 Subtotal Computer Group $696,453 18.20% Internet/E-Commerce/Applications -------------------------------- Service Provider ---------------- e-Cruise Series B May-01 423,077 shares (1),(3),(9) $0 Eldervision Series B Dec-01 357,143 shares (1) $100,000 Entigo Inc. Series B Apr-99 68,221 shares (1),(8) $163,731 Entigo Inc. Series D Dec-00 51,920 shares (1) $127,204 WorldDealer Series A Nov-00 100,000 shares (1),(9) $75,000 WorldDealer Series B Nov-01 106,666.67 shares (1),(2) $40,000 Subtotal Internet/E-Commerce Group $505,935 13.22% TeleCommunications ------------------ AcceLight Networks Series A1 Jan-01 213,946 shares (1),(10) $288,827 CoManage Corporation Series I Convertible Oct-98 100,000 shares (1),(8) $200,000 CoManage Corporation Series II Convertible Aug-99 39,487 shares (1),(2) $78,974 CoManage Corporation Series IV Convertible Sep-00 25,745 shares (1),(9) $51,490 Personity Series A1 Aug-01 117,500 shares (1),(3) $107,425 Subtotal TeleCommunications $726,716 19.00% Other ----- Allegheny Child Care Academy Series B Nov-98 59,269 shares (1) $105,955 Allegheny Child Care Academy Series C Sep-00 17,878 shares (1) $49,999 Allegheny Child Care Academy Series D Apr-01 22,000 shares (1) $65,998 Fidelity Flight Simulation Incorporated Series A Redeemable Aug-00 989.6767 shares (1) $99,343 Fidelity Flight Simulation Incorporated Series A Convertible Aug-00 1,032.326 shares (1) $657 Subtotal Other Group $321,952 8.42% Subtotal Preferred Shares $2,647,083 69.19% Bonds and Notes Medical Products and Services ----------------------------- Automated Cell Mandatory Convertible Notes Feb-01 $100,000 Notes (2),(3),(9) $75,000 Interactive Information Inc. Jan-99 $105,000 Notes (2),(9) $0 Subtotal Medical Group $75,000 1.96% Computer-Software/Firmware --------------------------- GamesParlor Notes Jul-01 $10,000 Notes (2),(9) $0 MediaSite Notes Apr-01 $25,000 Notes $25,000 MindMatrix Notes Jun-01 $100,000 Notes (2) $100,000 Subtotal Computer-Software/Firmware Group $125,000 Subtotal Bonds and Notes $200,000 5.23% Grand Total - Investments $2,947,083 77.03% =========== =====
See footnotes on following page Schedule 1 Footnotes Western Pennsylvania Adventure Capital Fund Investments in Securities of Unaffiliated Issuers As of December 31, 2001 (1) Non-income producing securities (2) Carries warrants for purchase of additional stock (3) Acquired upon conversion of other securities of same company (4) Acquired upon exercise of warrants (5) All securities held are restricted securities (6) All securities held are carried at historical cost except as otherwise noted (7) The aggregate cost of all securities for Federal income tax purposes is $4,130,939 (8) Unrealized appreciation has been recognized (9) Unrealized depreciation has been recognized (10) Acquired upon merger with existing portfolio company 42