Item 1. Business
Western Pennsylvania Adventure Capital Fund, LLC (the “Registrant”) was incorporated in Pennsylvania on May 23, 1996 as Western Pennsylvania Adventure Capital Fund (a C Corporation). As of February 28, 2002, the Western Pennsylvania Adventure Capital Fund (a C Corporation) was merged into its wholly owned and heretofore inactive subsidiary, the Western Pennsylvania Adventure Capital Fund, LLC (an LLC organization). The Western Pennsylvania Adventure Capital Fund, LLC has continued all of the operations of the Western Pennsylvania Adventure Capital Fund (a C Corporation). 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 was 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.
Item 2. Properties
The Registrant does not own any properties.
Item 3.
Item 3. Legal Proceedings
There are no legal proceedings to which the Registrant is a party.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
The Registrant held an annual meeting of security holders on November 19, 2008. 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:
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, 2008.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
The Registrant’s Units are not traded on any national or regional securities exchange, and the Registrant has no intention of causing the units 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 February 16, 2009 as follows:
As of February 16, 2009, the Registrant had approximately 190 unitholders.
No dividends have been declared on the Registrant’s Common Units. Management does not have as a policy the regular payment of dividends to investors. Generally, Management may reinvest interest, dividends or other distributions received from Portfolio Companies and any proceeds realized from the sale of Portfolio Securities in other Portfolio Companies. Management may distribute a portion of these cash receipts to unitholders to help cover the unitholders’ personal income tax liabilities resulting from any allocation of income due to the Registrant’s status as a LLC organization. There are no dividend restrictions.
Item 6.
Item 6. Selected Financial Data
The Registrant was incorporated on May 23, 1996, and began active business operations in November, 1997.
WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND, LLC
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND, LLC
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND, LLC
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND, LLC
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND, LLC
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
WESTERN PENNSYLVANIA ADVENTURE CAPITAL FUND, LLC
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
Item 7.
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 2008 amounted to ($8,329) and consisted of realized losses on Portfolio Companies of $13,943 and interest income of $5,614. The realized losses consist of: the write off of accrued interest receivable on a note receivable from MindMatrix, Inc. of $21,704; (2) a realized gain on proceeds released from the escrow created on the sale of Syndesis Limited of $7,761.
Revenues in 2007 amounted to ($834,943) and consisted of realized losses on Portfolio Companies of $845,658 and interest income of $10,715. The realized losses consisted of: (1) the recognition of losses of $100,001 on the investment in Wishbox.com, and $120,000 on the investment in CompAS Controls as the Fund determined that there was no possibility of a recovery of any of its investment in these companies; (2) the recognition of a loss of $226,654 on the investment in Automated Cell, Inc., and $100,000 on the investment in Telemed Technologies International, Inc. due to the bankruptcy filings of these companies; (3) the recognition of a loss of $200,195 on the investment in Webmedx, Inc. as the Fund’s shares in Webmedx, Inc. were cancelled and retired as a part of that company’s recapitalization and reincorporation; and (4) the recognition of a loss of $124,567 on the sale of GamesParlor, Inc. These losses were partially offset by a gain of $25,759 on the sale of Syndesis Limited.
Revenues in 2006 amounted to $140,402 and consisted of realized gains on Portfolio Companies of $126,585 and interest earned of $13,817. The realized gain resulted from the receipt of escrowed funds relating to the Registrant’s sale of Neolinear, Inc. (“Neolinear”), one of the Registrant’s portfolio companies, to Cadence Design Systems, Inc. in April, 2004. The escrow account had been established to satisfy possible indemnity obligations of Neolinear.
General and Administrative expenses in 2008, 2007 and 2006 amounted to $12,000, $12,000 and $12,000, respectively, and consisted of directors fees.
Other Operating Expenses in 2008 included professional fees (legal and accounting) of $44,787, insurance $25,512, and other items of $22,678, primarily administrative and clerical support.
Other Operating Expenses in 2007 included professional fees (legal and accounting) of $53,030, insurance premiums of $24,820, and other items of $41,364, primarily administrative and clerical support.
Other Operating Expenses in 2006 included professional fees (legal and accounting) of $49,821, insurance premiums of $23,123, and other items of $28,119, primarily administrative and clerical support.
During 2008, the Registrant recognized unrealized depreciation on investments in Portfolio Companies as the Registrant reserved $296,435 against its investment in Akustica, Inc. The reserve represents the difference between the Registrant’s recorded carrying value and the current value based upon Akustica, Inc.’s most recent financing round.
During 2007, the Registrant recognized unrealized appreciation of $605,256 on investments in Portfolio Companies resulting from the reversal of previously recognized unrealized depreciation on those investments. Realized losses on those investments were recognized in 2007 resulting in a net effect on net income in 2007 of $(46,162). In addition, the Registrant recognized realized net losses of $194,241 on investments for which reserves had not been established in prior years.
During 2006, the Registrant recognized unrealized depreciation of $199,000 as it fully reserved its investment in Automated Cell, Inc., one of its portfolio companies. The Registrant believes that its investment in Automated Cell, Inc. will not result in any financial return.
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.
As of December 31, 2008, the Registrant had approximately $130,177 in cash and cash equivalents, and short term investments. Those funds were available for normal operating expenses and for investment in Portfolio Companies.
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 operating expenses, was available for investment in Portfolio Securities. At December 31, 2008, $1,804,393 was invested in nine Portfolio Companies. A portion of these funds have been used for operating expenses, distributions to members, losses on investments, syndication costs, and purchases of treasury stock. The balance of the funds has been temporarily invested in short-term high quality commercial paper and government securities.
Inflation
The Registrant does not believe that inflation will have any significant effect on the Registrant’s operations or financial position.
Critical Accounting Policies
The Fund’s significant accounting policies are described in Note 1 to the Financial Statements. Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and those that require management’s most difficult, complex or subjective judgments. The Fund considers the following accounting policy and related estimate to be critical:
Valuation of Investments in Portfolio Companies
Investments are stated at “value” as defined in the 1940 Act. 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.
All investments recorded at fair value are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by SFAS No. 157 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets are as follows:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 - Quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3 - Unobservable inputs for the asset or liability.
At December 31, 2008 all of our investments in portfolio companies were classified as Level 3 in the hierarchy, indicating a high level of judgment required in their valuation
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
Item 8.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Supplementary Financial Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of the Western Pennsylvania Adventure Capital Fund, LLC
We have audited the accompanying statements of assets and liabilities of the Western Pennsylvania Adventure Capital Fund, LLC (a Pennsylvania limited liability corporation) as of December 31, 2008 and 2007, and the related statements of operations, changes in net assets, and cash flows for the years ended December 31, 2008, 2007, and 2006. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, LLC as of December 31, 2008 and 2007, and the results of its operations, the changes in its net assets, and its cash flows for the years ended December 31, 2008, 2007, and 2006, in conformity with accounting principles generally accepted in the United States of America.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedules listed under item 15(a)(2) are presented for purposes of complying with the Securities and Exchange Commission’s rules and are not part of the basic financial statements. The schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
GOFF BACKA ALFERA & COMPANY, LLC.
Pittsburgh, Pennsylvania
February 16, 2009
Management’s Report On Internal Control Over Financial Reporting
We, the Chief Executive Officer and Chief Financial Officer of the Western Pennsylvania Adventure Capital Fund, LLC, are responsible for establishing and maintaining adequate internal control over financial reporting of the Company, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
With our participation, management evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008, using the criteria for effective internal control established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on its evaluations, management has concluded that internal control over financial reporting was effective as of December 31, 2008.
The Company’s financial statements included in this annual report have been audited by Goff Backa Alfera & Company, LLC, an independent registered public accounting firm. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
Western Pennsylvania Adventure Capital Fund, LLC
Statements of Assets and Liabilities
As of
See Independent Auditor’s Report and accompanying notes to financial statements.
Western Pennsylvania Adventure Capital Fund, LLC
Statements of Operations
For the Periods
See Independent Auditor’s Report and accompanying notes to financial statements.
Western Pennsylvania Adventure Capital Fund, LLC
Statements of Changes in Net Assets
For the Periods
See Independent Auditor’s Report and accompanying notes to financial statements.
Western Pennsylvania Adventure Capital Fund, LLC
Statements of Cash Flows
For the Periods
See Independent Auditor’s Report and accompanying notes to financial statements.
Western Pennsylvania Adventure Capital Fund, LLC
Notes to Financial Statements
December 31, 2008
Note 1 - Summary of Significant Accounting Policies:
This summary of significant accounting policies of Western Pennsylvania Adventure Capital Fund, LLC and its predecessor organization, the Western Pennsylvania Adventure Capital Fund, a C Corporation (collectively and/or individually 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 members (previously 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%.
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. No syndication costs were incurred in the three year period ended December 31, 2008.
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, U.S. Government securities, and municipal securities. These investments generally are purchased either at face value or at a discount or premium from face value and are redeemed at maturity at face value. Any discount or premium represents interest income (expense) 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 (expense) 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 (expense) recognized on each individual investment will increase over time as the carrying value of that investment increases (decreases). The Fund records these investments net of remaining unearned interest income (expense).
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” the Fund classifies all short term investments as available for sale.
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.
Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The adoption of SFAS No. 157 did not have a material impact on the fair value measurements of the Fund’s investments.
Start-Up and Organization Costs
Costs incurred in connection with the start-up and organization of the Fund had been deferred and were being amortized ratably over a period of 60 months beginning January 1, 1998. During the three month period ended June 30, 2002, the Fund, as a result of the merger (See Note 2), wrote off the remaining balance of $2,280 of deferred Start-Up and Organization Costs.
Earnings Per Share/Unit
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/unit.
Earnings per share/unit is computed using the weighted average number of shares/units outstanding during the respective periods, adjusted for outstanding stock/unit options. There are no other outstanding warrants, or other contingently issuable shares/units.
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 were granted to directors of the Fund under the terms of this stock option plan. On December 20, 2001, all of the directors returned their options to the Fund. The Fund may grant options to the directors at a future date.
The option committee on July 12, 2002 granted options to purchase 50,000 units of its members’ equity at an exercise price equal to the net asset value per unit as of June 30, 2002 to each of the Fund’s five directors (250,000 units in the aggregate). These options vest immediately. The net asset value per unit as of June 30, 2002 was $0.84 per unit. These options expired as of October 31, 2007.
The Fund’s members, at the annual meeting of members held on November 14, 2007, approved an option plan which authorized the granting of options to purchase 50,000 of the Fund’s units to each of the Fund’s Managers at the net asset value as of September 30, 2007. The options vest immediately and expire five years after date of issuance. These options were granted upon approval by the members at the aforementioned annual meeting. No options have been exercised as of December 31, 2008.
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, 2004, 2003 and 2002, the Fund recognized unrealized appreciation (depreciation) on its portfolio companies, and accordingly, recognized deferred taxes due to temporary timing differences in accordance with SFAS 109 until the Fund became a “pass through” entity for income tax purposes as of February 28, 2002. As a result of the merger discussed in Note 2, any remaining deferred taxes were reversed during the three month period ending March 31, 2002.
The Fund, as a result of becoming an LLC as of February 28, 2002, is treated as a “pass through” entity for income tax purposes, thus no income tax provision or related accruals is required. Any income tax liabilities incurred by the Fund are allocated to members of the Fund annually for inclusion in the members’ individual income tax returns. The Fund remains responsible for any Pennsylvania Capital Stock and Franchise Tax.
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 - Merger
As of February 28, 2002, the Fund converted from the C Corporation to an LLC Organization via merger of the C Corporation into its wholly owned and previously inactive subsidiary - an LLC Organization. As a consequence, the LLC assumed all assets and liabilities of the C Corporation and is continuing all operations of the C Corporation.
Shareholders of the C Corporation have become members of the LLC, and hold the same number of ownership units in the LLC equal to the number of shares they held in the C Corporation, with no change in ownership percentage of the respective organizations.
Note 3 - Sale of Securities
During 1997, the Fund sold 2,104,333 shares of its common stock at $1.00 per share, under an Offering Circular dated November 7, 1996 (“First Offering Circular”). The proceeds were required to be deposited in an escrow account with the Fund’s escrow agent, PNC Bank, until such time as the escrow account reached $1 million. At that time, the Fund was permitted to withdraw the funds from the escrow account and begin to invest in portfolio securities.
As of July 11, 1997, the proceeds in the escrow account totaled $1,860,100. On that date, the Fund withdrew substantially all of the funds from the escrow account.
The funds released from escrow 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 were 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, 2008, $1,804,393 ($1,766,023 at December 31, 2007) was invested in Portfolio Securities and the balance of the funds ($130,177) remained invested in cash equivalents, government securities, and high quality debt securities.
Note 4 - Investments in Portfolio Companies
As of December 31, 2008, the Fund had invested a total of $1,804,393 in nine Portfolio Companies ($1,766,023 in nine Portfolio Companies at December 31, 2007). Also, see Schedule 1 for additional information on investments in Portfolio Companies.
Akustica, Inc.
On February 19, 2008, the Fund purchased: (1) $36,064 of Akustica, Inc. 8% Bridge Notes, due July 10, 2008, and (2) 3,972 of Akustica, Inc. warrants to purchase Akustica Common Stock at $2.27 per share through January 10, 2015 at a cost of $0.0009 per warrant, or a total cost of $4.
On October 28, 2008, the Fund converted the 8% Bridge Notes ($36,064) and accrued interest ($1,723) into 138,897 shares of Akustica, Inc. Series C Preferred Stock.
Akustica, Inc. provides acoustic MicroElectroMechanical Systems (MEMS) products that enable innovation and cost performance advantages for hearing health, mobile phone and customer electronics manufacturers.
TimeSys Corporation
On April 16, 2008, the Fund purchased 4,462 shares of TimeSys Corporation Series A4 Preferred Stock at $0.5147 per share for a total investment of $2,296.
During the three month period ended September 30, 2008, TimeSys Corporation made an offer to shareholders of its Series B-1 and Series B-2 Preferred Stock to repurchase their shares at $0.01 per share. The repurchase was dependent upon receiving an affirmative vote of each class voting independently. In the event that a majority of the class voted to accept the offer, those shareholders who accepted the offer would receive cash at $0.01 per share, and those shareholders who declined to accept the offer would have their shares converted into an equal number of Common shares.
A majority of the Series B-1 declined to accept the offer, and the Fund retained its 14,285 shares of Series B-1 Preferred Stock. A majority of the Series B-2 accepted the offer, and the Fund’s 6,459 shares of Series B-2 Preferred Stock were converted into an equal number of shares of Common Stock.
TimeSys Corporation develops and markets software tools for embedded real time systems.
Other Portfolio Companies
The Fund had no additional equity or investment transactions during 2008 for the portfolio companies as follows:
Fidelity Flight Simulation Incorporated
Fidelity designs, manufactures and distributes full motion based flight simulators for pilot training.
MindMatrix, Inc.
MindMatrix offers a solution platform to vendors in the information technology industry to better communicate the value of their products to customers.
Precision Therapeutics, Inc.
PTI has developed a proprietary chemosensitivity assay designed to help select the appropriate therapy for cancer patients.
Quantapoint, Inc.
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.
Touchtown, Inc.
Touchtown, Inc. provides software for internet-based services to senior citizens and their resident facilities.
True Commerce, Inc.
True Commerce provides software and service to facilitate routine e-commerce transactions between large corporations and small suppliers.
WorldDealer, Inc.
WorldDealer develops web-based software for automotive retailers using an application service provider delivery model.
Fair Value Measurements
At December 31, 2008, all of our investments in portfolio companies above are categorized as Level 3 in the fair value hierarchy for SFAS No. 157 purposes because of the use of significant unobservable inputs. The components of change in the financial assets categorized as Level 3 for the year ended December 31, 2008 are as follows:
Note 5 - Short Term Investments
The Fund, pending investments in Portfolio Securities, temporarily invests its excess funds in short term high quality commercial paper, U.S. Government securities and municipal securities. These investments generally are purchased either at face value or at a discount or premium from face value and are redeemed at maturity at face value. Any discount or premium from face value represents unearned interest income or expense 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 available for sale in accordance with SFAS No. 115.
Short term investments consisted of the following:
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:
Note 7 - Stock/Unit 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.
On December 20, 2001, all of the directors returned their options to the Fund. The Fund may grant options to the directors at a future date.
The stock option committee on July 12, 2002 granted options to purchase 50,000 units of its members’ equity at an exercise price equal to the net asset value per unit as of June 30, 2002 to each of the Fund’s five directors (250,000 units in the aggregate). These options vest immediately. The net asset value per unit as of June 30, 2002 was $0.84 per unit. None of the options had been exercised and the options expired as of October 31, 2007.
The members, at the annual meeting of members held on November 14, 2007, approved the issuance of 50,000 options to each Manager issuable, on the same terms and conditions as the options that expired October 31, 2007. The options vest immediately, have an exercise price equal to the Fund’s net asset value as of September 30, 2007 ($0.45), and will expire five years after the date of issuance.
The Fund estimated the fair value of each stock option grant at the time of the grant using the Black Scholes option-pricing model. If a different option pricing model had been used, results may have been different. The assumptions used and resulting weighted-average grant-date estimates of fair value for options granted in 2007 are as follows:
Based upon these assumptions, the Fund recorded an expense of $14,750 during the fourth quarter of 2007.
There were no new options granted during the years ended December 31, 2008 and 2006.
No options were exercised during the years ended December 31, 2008, 2007 and 2006.
Note 8 - Income Taxes
The Fund, as a result of becoming an LLC as of February 28, 2002, is treated as a “pass through” entity for income tax purposes. Any income tax liabilities incurred by the Fund are allocated to members of the Fund annually for inclusion in the members’ individual income tax returns. The Fund remains responsible for any Pennsylvania Capital Stock and Franchise Tax.
There are no deferred tax asset or liability accounts, or related valuation allowances due to the Fund’s status as a “pass through” tax entity.
Note 9 - Related Party Transactions
Accrued liabilities as of December 31, 2008 and 2007, include $3,000 and $3,000, respectively, for Board of Directors fees, and $2,000 and $6,500, respectively, 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.
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 included as part of Members’ Equity.
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 included as part of Members’ Equity.
During 2008, the Fund incurred $18,000 ($18,000 in 2007) for accounting services payable to a consulting firm in which one of the Fund’s officers is a significant shareholder.
Note 10 - Realized Gains/Losses
During the three month period ended September 30, 2005, CoManage Corporation (“CoManage”), one of the Fund’s portfolio companies was acquired by Syndesis Limited (“Syndesis”), an Ontario, Canada based telecommunications company. Under the terms of the acquisition, shareholders of CoManage Series VI and VII Preferred Stock received Syndesis Class E Preferred Stock in exchange for their CoManage shares. All other shareholders of CoManage did not receive any shares of Syndesis. Accordingly, the Fund recognized a realized loss on its investments in CoManage Series I, II, IV and V Preferred Stock of $328,107 during the three month period ended September 30, 2005. The Fund’s investment in CoManage Series VI and VII Preferred Stock have been exchanged for Syndesis Class E Preferred Stock.
In May, 2006, the Fund received $126,585 released from the Neolinear escrow account, and recorded these funds as a realized gain.
During the three month period ending March 31, 2007, the Fund received $6,493, representing its share of the distributed proceeds from GamesParlor, Inc. (“GamesParlor”), one of the Fund’s portfolio companies, upon the sale by GamesParlor of its assets to Internet Chess Club, Inc. (“ICC”). On October 10, 2006, GamesParlor entered into an asset purchase agreement (“Agreement”) with ICC pursuant to which ICC would acquire substantially all of the assets of GamesParlor. In exchange for these assets, ICC agreed to pay $112,000 in cash, to assume certain liabilities of GamesParlor, and to issue shares of ICC common stock to GamesParlor’s two largest creditors.
As a result of this transaction, during the first quarter of 2007, the Fund recognized a realized loss of $124,567, representing the difference between its investment in GamesParlor of $131,060 and the aforementioned cash proceeds of $6,493. This investment was fully reserved in prior years. Accordingly, during the first quarter of 2007, the Fund reversed its unrealized loss of $131,060 recorded in prior years. This resulted in net income of $6,493 in the first quarter of 2007.
During the three month period ending June 30, 2007, the Fund received $20,483, net of $8,768 of foreign taxes withheld by the Canadian Revenue Agency upon the acquisition by Subex Azure of Syndesis Limited (a Canadian company), one of the Fund’s portfolio companies. Syndesis Limited previously had acquired CoManage Company, one of the Fund’s portfolio companies. A realized gain of $13,263 has been recognized as a result of this transaction. An additional portion of the acquisition price has been placed in an escrow account to satisfy potential future claims and/or liabilities. Any funds subsequently released from the escrow will be recognized as additional gain at that time.
During the three month period ending June 30, 2007, the Fund concluded that the accrued interest receivable of $2,654 on its note receivable from Automated Cell, Inc. ultimately will be uncollectible, and the Fund wrote off this receivable as a realized loss. The Fund’s investment in Automated Cell, Inc. of $199,000 remained fully reserved, and was recorded at no value in the Fund’s financial statements, pending final disposition of the company.
The realized loss of $120,000 recognized in the three month period ending September 30, 2007 resulted from the write off of the Fund’s investment in CompAS Controls, one of the Fund’s portfolio companies. The Fund deemed this investment as worthless since the company had ceased operations, discharged its employees, vacated its facilities, and its principals could not be located.
On August 31, 2007, Telemed Technologies International, Inc. (“Telemed”) filed in the United States Bankruptcy Court in the Western District of Pennsylvania a Voluntary Petition for Relief under Chapter 11 of the United States Bankruptcy Code. On the basis of that filing and Telemed’s current financial condition, the Fund has concluded that its investment in Telemed ($100,000) is worthless. Accordingly, during the three month period ending December 31, 2007, the Fund recognized a realized loss on its investment in Telemed.
On October 22, 2007, Webmedx, Inc. (“Webmedx”) notified its shareholders that it had entered into a merger agreement to effect a complete recapitalization and reincorporation. Under the terms of that agreement, each share of Webmedx common stock and redeemable preferred stock shall be cancelled and retired. Therefore, the Fund has concluded that its investment in Webmedx ($200,195) was worthless and should be written off as a realized loss. Of this amount, $150,195, had been fully reserved in prior years, and the Fund reversed its previously recorded unrealized loss, and has recognized an unrealized gain of $150,195. Accordingly, the net effect on net income in 2007 is a $50,000 loss.
On November 16, 2007, Automated Cell, Inc. filed for bankruptcy liquidation under Chapter 7 of the Bankruptcy Code in the United States Bankruptcy Court, Western District of Pennsylvania. On the basis of that filing, the Fund has concluded that it will not receive any proceeds from this liquidation and its investment in Automated Cell, Inc. is worthless. Accordingly, the Fund has recognized a realized loss on its investment in Automated Cell, Inc. of $224,000. As this investment had been fully reserved in prior years, the Fund has reversed its previously recorded unrealized loss, and has recognized an unrealized gain of $224,000. Accordingly, there is no effect on net income during the current year.
During the three month period ending March 31, 2008, the Fund received $7,761 released from the withheld escrow on the acquisition by Subex Azure of Syndesis Limited (a Canadian company), one of the Fund’s portfolio companies. As previous receipts of proceeds from this transaction had exceeded the Fund’s cost of investment, these proceeds were recorded as a realized gain.
During the three month period ended December 31, 2008, the Fund concluded that the accrued interest receivable of $21,704 on its note receivable from MindMatrix, Inc. ultimately will be uncollectible, and the Fund wrote off this receivable as a realized loss.
Realized gains and (losses) are summarized below:
Item 9.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A.
Item 9A. Controls and Procedures
The Chief Financial Officer of the Company conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report. Based on that evaluation, the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report. There were no significant changes in internal controls over financial reporting that occurred during the year ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
Item 9B.
Item 9B. Other Information
None
PART III
Item 10.
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.
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.
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 $100 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 18 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 1964 to 1969, Mr. Rooney was a medical systems sales representative with Litton Automated Business Systems in Philadelphia, where he was a member of the 100% Crest Club four of his five years. From 1969 to 1982, Mr. Rooney held positions of increasing responsibility at Sprint, starting as a sales representative in New York City and culminating as Senior Vice President of Sales for United Information Services Division in Kansas City and President of Online Systems in Pittsburgh. From 1982 to 1986, Mr. Rooney was Vice President of Sales for American Robot Corporation in Pittsburgh, a venture-backed company that manufactured hardware and software products for computer integrated manufacturing (CIM). His responsibilities included establishing relationships with the automotive, aerospace and electronics industries, including customers such as General Motors, Motorola, Ford, Apple Computer, Storage Technology and E.I. Dupont. 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 and an M.B.A. from Fordham University.
Mr. Rooney is an active private investor and currently has investments in 17 early stage, high technology companies in various industries.
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.
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.
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 2008.
Audit Committee and Audit Committee Financial Expert
Our Board of Directors functions as an audit committee and performs some of the same functions as an audit committee including: (1) selection and oversight of our independent accountant; (2) establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal controls and auditing matters; and (3) engaging outside advisors. We are not a “listed company” under SEC rules and are therefore not required to have an audit committee comprised of independent directors. Our board of directors does not have any independent director. Our board of directors has determined that each of its members is able to read and understand fundamental financial statements and has substantial business experience that results in that member’s financial sophistication. Accordingly, the board of directors believes that each of its members have the sufficient knowledge and experience necessary to fulfill the duties and obligations that an audit committee would have.
Item 11.
Item 11. Executive Compensation
No officer received any remuneration for serving as an officer of the Registrant in 2008 or 2007. Each director receives a $200 monthly fee. Generally, board of directors meetings are held bi-monthly. Compensation earned by directors in 2008 amounted to $12,000 ($12,000 in 2007).
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Registrant’s only class of security as of December 31, 2008, was Member Unit, $.01 par value.
All officers and directors, as a group, own 285,000 units or 6.7% of the total issued and outstanding units as of December 31, 2008.
Item 13.
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 2005, the Registrant incurred $18,000 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, subsequently exchanged for an equal number of members units, 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 nine remaining investments in Portfolio Companies that the Registrant made as of February 16, 2009. Directors’ investments in Portfolio Companies in excess of $60,000 as of February 16, 2009 were: G. Richard Patton - Akustica, Inc. $109,074; Philip J. Samson - Akustica, Inc. $78,887 and True Commerce, Inc. $60,007; and Douglas F. Schofield - Akustica, Inc. $97,018.
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 included as part of Members’ Equity.
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.
Item 14.
Item 14. Principal Accounting Fees and Services
Fees for professional services rendered by Goff Backa Alfera & Company, LLC for the audit of the Company’s annual financial statements, together with fees for tax services for 2008, 2007, and 2006 are shown below.
(a) Principally audits of year end financial statements and reviews of quarterly interim financial statements.
(b) Principally preparation of Federal and Pennsylvania Income Tax returns and periodic tax compliance assistance.
All audit and tax services were approved by the Board of Directors which serves as the Audit Committee, and meets with the auditors at least on an annual basis.
PART IV
Item 15.
Item 15. 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:
(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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, Western Pennsylvania Adventure Capital Fund, LLC has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:
Western Pennsylvania Adventure Capital Fund, LLC
(Registrant)
By:
/s/ G. Richard Patton
G. Richard Patton
President, Chief Executive Officer and Director
Date:
February 16, 2009
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:
Schedule 1
Western Pennsylvania Adventure Capital Fund, LLC
Investments in Securities of Unaffiliated Issuers
As of December 31, 2008
Western Pennsylvania Adventure Capital Fund, LLC
Investments in Securities of Unaffiliated Issuers
As of December 31, 2008
Western Pennsylvania Adventure Capital Fund, LLC
Investments in Securities of Unaffiliated Issuers
As of December 31, 2008
See footnotes on following page
Schedule 1
Footnotes
Western Pennsylvania Adventure Capital Fund, LLC
Investments in Securities of Unaffiliated Issuers
As of December 31, 2008
(1) Non-income producing securities
(2) Carries warrants for purchase of additional stock
(3) Acquired upon conversion of other securities of same company
(4) Received upon extension of preferred stock redemption date
(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 $2,362,883
(8) Unrealized appreciation has been recognized
(9) Unrealized depreciation has been recognized
(10) Received in exchange for other securities