Ben Franklin/Progress Capital Fund, L.P.
(a limited partnership)
Consolidated Financial Statements
for the Years Ended
December 31, 2001, 2000 and 1999
Ben Franklin/Progress Capital Fund, L.P.
(a limited partnership)
Table of Contents
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Page(s)
Report of Independent Accountants 1
Consolidated Statements of Assets, Liabilities and Partners' Capital,
December 31, 2001 and 2000 2
Consolidated Schedules of Investments, December 31, 2001 and 2000 3 - 6
Consolidated Statements of Operations for the years ended December 31,
2001, 2000 and 1999 7
Consolidated Statements of Changes in Partners' Capital for the years ended
December 31, 2001 and 2000 8
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999 9
Notes to Consolidated Financial Statements 10 - 14
Report of Independent Accountants
To The Partners of
Ben Franklin/Progress Capital Fund, L.P.
(a limited partnership)
In our opinion, the accompanying consolidated statements of assets, liabilities
and partners' capital, including the consolidated schedules of investments, and
the related consolidated statements of operations, changes in partners' capital,
and cash flows present fairly, in all material respects, the financial position
of Ben Franklin/Progress Capital Fund, L.P., and its subsidiaries at December
31, 2001 and 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. These
consolidated financial statements are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits of these
consolidated statements in accordance with auditing standards generally accepted
in the United States of America, which require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. Our procedures included verification, by physical examination or
correspondence with the custodian, of investments owned as of December 31, 2001
and 2000. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
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February 26, 2002
Ben Franklin/Progress Capital Fund, L.P.
(a limited partnership)
Consolidated Statements of Assets, Liabilities and Partners' Capital
December 31, 2001 and 2000
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2001 2000
Assets:
Venture capital investments, at fair value
(cost $3,937,093 and $4,712,789, respectively) $ 4,258,482 $ 4,134,703
Cash and temporary investments 1,411,605 1,503,156
Interest receivable 65,108 95,458
Other assets 6,624 85,895
------------ ------------
Total assets $ 5,741,819 $ 5,819,212
============ ============
Liabilities:
Accrued expenses $ 20,000 $ 17,000
Distributions payable 889,503 -
------------ ------------
Total liabilities 909,503 17,000
------------ ------------
Net assets represented by partners' capital:
Contributed capital, net of syndication costs 5,424,565 5,424,565
Distributions to partners (2,900,000) (1,500,000)
Net operating income before changes in investment
valuation 243,094 212,465
Net realized (loss)/gain on investment 1,143,268 2,243,268
Net unrealized appreciation/(depreciation) on investments 921,389 (578,086)
------------ ------------
Total partners' capital 4,832,316 5,802,212
------------ ------------
Total liabilities and partners' capital $ 5,741,819 $ 5,819,212
============ ===========
See accompanying notes to consolidated financial statements.
-2-
Ben Franklin/Progress Capital Fund, L.P.
(a limited partnership)
Consolidated Schedule of Investments
December 31, 2001
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Unrealized
Fair Appreciation
Company Description Cost Value (Depreciation)
Alpine Medical LLC 10% - 12% convertible subordinated note $ 500,000 $ 500,000 $ -
Warrants to purchase 157,358
Class A units at $0.01 per unit - 1,400,000 1,400,000
American Compliance Systems 11% subordinated note with warrants to
purchase 27,529 shares of common stock
at $7.265 per share 400,000 400,000 -
Analytical Graphics, Inc. Warrants to purchase 57,374 shares of
common stock at $3.34 per share, - - -
AnswerNet, Inc. 12% subordinated note with warrants to
purchase 27,493 shares of common stock
at $9.09 per share 427,083 427,083 -
CEMA Technologies, Inc. 10% subordianted note 150,000 150,000 -
Warrants to purchase 48,533 shares of
Series G preferred stock at $0.01 per share - 163,074 163,074
Warrants to purchase 17,333 shares of
Series G preferred stock at $0.01
per share - 58,242 58,242
Warrants to purchase 44,000 shares of
Series H preferred stock at $0.01
per share - 147,843 147,843
Fiberlink Communications 12% subordinated note with warrants to
Corporation purchase 132,979 shares of common
stock at $1.88 per share 388,888 388,888 -
Homes for Living, Inc. 102,574 shares of convertible Series B
preferred stock 300,000 - (300,000)
Internet Capital Group, Inc.
(Nasdaq: ICGE) 12,412 shares of common stock 62,789 15,019 (47,770)
(continued)
See accompanying notes to consolidated financial statements.
- 3 -
Ben Franklin/Progress Capital Fund, L.P.
(a limited partnership)
Consolidated Schedule of Investments
December 31, 2001
- --------------------------------------------------------------------------------
Unrealized
Fair Appreciation
Company Description Cost Value (Depreciation)
Orthovita, Inc. Warrants to purchase 20,000 shares of
(Nasdaq: VITA) common stock at $10.50 per share $ - $ - $ -
Prima Facie, Inc. 7.5% subordinated note with warrants to
purchase 357,692 shares of Series E
convertible preferred stock at $1.30
per share 500,000 100,000 - *
8% convertible note with warrants to
purchase a number of shares of common
stock to be determined by a formula
based on Prima Facie, Inc.'s next
financing 200,000 - - *
Rankin Corporation 10% subordinated note with warrants to
purchase 191,832 shares of common
stock at $1.09 per share 258,333 258,333 -
RealTIME Media, Inc. 285,984 shares of Class A-1 Stock and
52,016 shares of Class A-2 Stock 650,000 150,000 (500,000)
917,684 shares of Series B preferred
stock 100,000 100,000 -
---------- ---------- --------
$3,937,093 $4,258,482 $921,389
========== ========== ========
* The reductions in fair value from the cost of the Prima Facia investment
have been recognized as realized losses in 2001 due to a bankruptcy settlement
agreement.
See accompanying notes to consolidated financial statements.
-4-
Ben Franklin/Progress Capital Fund, L.P.
(a limited partnership)
Consolidated Schedule of Investments
December 31, 2000
- --------------------------------------------------------------------------------
Unrealized
Fair Appreciation
Company Description Cost Value (Depreciation)
Alpine Medical LLC 10% - 12% convertible subordinated note
with warrants to purchase 157,358
Class A units at $0.01 per unit $ 500,000 $ 500,000 -
American Compliance Systems 11% subordinated note with warrants to
purchase 27,529 shares of common stock
at $7.265 per share 400,000 400,000 -
Analytical Graphics, Inc. Warrants to purchase 57,374 shares of
common stock at $3.34 per share, - - -
AnswerNet, Inc. 12% subordinated note with warrants to
purchase 27,493 shares of common stock
at $9.09 per share 500,000 500,000 -
CEMA Technologies, Inc. 10% subordinated note with warrants to
purchase 48,533 shares of Series G
preferred stock at $0.01 per share 300,000 300,000 -
Warrants to purchase 17,333 shares of
Series G preferred stock at $0.01
per share - - -
Warrants to purchase 44,000 shares of
Series H preferred stock at $0.01
per share - - -
Fiberlink Communications 12% subordinated note with warrants to
Corporation purchase 132,979 shares of common
stock at $1.88 per share 500,000 500,000 -
Homes for Living, Inc. 10% subordinated note with warrants to
purchase 12,500 shares of Class A
convertible preferred stock at $12.00
per share 300,000 300,000 -
Internet Capital Group, Inc.
(Nasdaq: ICGE ) 12,412 shares of common stock 62,789 44,703 (18,086)
(continued)
See accompanying notes to consolidated financial statements.
-5-
Ben Franklin/Progress Capital Fund, L.P.
(a limited partnership)
Consolidated Schedule of Investments
December 31, 2000
- --------------------------------------------------------------------------------
Unrealized
Fair Appreciation
Company Description Cost Value (Depreciation)
Orthovita, Inc. Warrants to purchase 20,000 shares of
(Nasdaq: VITA) common stock at $10.50 per share - - -
Prima Facie, Inc. 7.5% subordinated note with warrants to
purchase 357,692 shares of Series E
convertible preferred stock at $1.30
per share $ 500,000 $ 140,000 $ (360,000)
8% convertible note with warrants to
purchase a number of shares of common
stock to be determined by a formula
based on Prima Facie, Inc.'s next
financing 200,000 - (200,000)
Rankin Corporation 10% subordinated note with warrants to
purchase 191,832 shares of common
stock at $1.09 per share 300,000 300,000 -
RealTIME Media, Inc. 338,000 shares of Series A preferred
stock 650,000 650,000 -
The Translation Group Ltd. 125,000 shares of redeemable convertible
preferred stock with an 8% dividend 500,000 500,000 -
---------- ---------- ---------
$4,712,789 $4,134,703 $(578,086)
========== ========== =========
See accompanying notes to consolidated financial statements.
- 6 -
Ben Franklin/Progress Capital Fund, L.P.
(a limited partnership)
Consolidated Statements of Operations
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
2001 2000 1999
Revenue:
Interest income $ 342,617 $ 490,624 $ 346,113
Advisory fee income - 25,992 11,004
----------- ------------ ----------
342,617 516,616 357,117
----------- ------------ ----------
Operating expenses:
Management fee (Note 3) 271,500 271,500 271,500
Professional fees 31,642 28,912 15,490
Amortization of organization and start-up costs 6,612 6,642 6,582
Other 2,234 448 164
----------- ------------ ----------
311,988 307,502 293,736
----------- ------------ ----------
Net operating income before
change in investment valuation 30,629 209,114 63,381
----------- ------------ ----------
Net change in investment valuation:
Net realized gain/(loss) from investments (1,100,000) 1,974,074 269,194
Unrealized appreciation (depreciation) 1,499,475 (7,033,401) 6,455,315
----------- ------------ ----------
Net increase (decrease) in investment valuation 399,475 (5,059,327) 6,724,509
----------- ------------ ----------
Net increase (decrease) in partners' capital
resulting from operations $ 430,104 $(4,850,213) $6,787,890
=========== ============ ==========
See accompanying notes to consolidated financial statements.
- 7 -
Ben Franklin/Progress Capital Fund, L.P.
(a limited partnership)
Consolidated Statements of Changes in Partners' Capital
For the Years Ended December 31, 2001 and 2000
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Special
General Limited Limited
Partner Partner Partners Total
Balance as of December 31, 1999 $1,246,484 $1,393,976 $ 9,511,965 $12,152,425
Distributions to Partners (15,000) (165,000) (1,320,000) (1,500,000)
Net decrease in Partners' capital resulting
from operations (863,336) (574,263) (3,412,614) (4,850,213)
---------- ---------- ----------- -----------
Balance as of December 31, 2000 368,148 654,713 4,779,351 5,802,212
Distributions to Partners (14,000) (154,000) (1,232,000) (1,400,000)
Net increase in partners' capital resulting
from operations 76,558 50,923 302,623 430,104
---------- ---------- ----------- -----------
Balance as of December 31, 2001 $ 430,706 $ 551,636 $ 3,849,974 $ 4,832,316
========== ========== =========== ===========
See accompanying notes to consolidated financial statements.
- 8 -
Ben Franklin/Progress Capital Fund, L.P.
(a limited partnership)
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
2001 2000 1999
Cash flows from operating activities:
Net (decrease) increase in partners' capital resulting
from operations $ 430,104 $(4,850,213) $ 6,787,890
Net decrease (increase) in investment valuation (1,499,475) 5,059,327 (6,724,509)
Net realized loss from investments 1,100,000 - -
Amortization of organization and start-up costs 6,612 6,642 6,582
Amortization of deferred fees - (20,992) (11,274)
Changes in partnership assets and liabilities:
Other assets 72,659 25 (39,730)
Interest receivable 30,350 (55,267) (9,203)
Accrued expenses 3,000 2,000 4,300
----------- ----------- -----------
Net cash provided by operating activities 143,250 141,522 14,056
----------- ----------- -----------
Cash flows from investing activities:
Venture capital investments (100,000) (1,900,000) (1,900,000)
Proceeds from sale and repayment of venture
capital investments 375,696 2,463,600 1,594,195
----------- ----------- -----------
Net cash provided by (used in) investing activities 275,696 563,600 (305,805)
----------- ----------- -----------
Cash flows from financing activities:
Distributions to Partners (510,497) (1,500,000) -
Partners' contributions - 40,000 1,810,000
----------- ----------- -----------
Net cash (used in) provided by financing activities (510,497) (1,460,000) 1,810,000
----------- ----------- -----------
Net (decrease) increase in cash and
temporary investments (91,551) (754,878) 1,518,251
Cash and temporary investments at beginning of year 1,503,156 2,258,034 739,783
----------- ----------- -----------
Cash and temporary investments at end of year $ 1,411,605 $ 1,503,156 $ 2,258,034
=========== =========== ===========
Supplemental disclosure of noncash investing activity:
Satisfaction of indebtedness to
related party (Note 3) $ - $ - $ (500,000)
=========== =========== ===========
Sale of investment for receivable $ - $ 72,674 $ -
=========== =========== ===========
See accompanying notes to consolidated financial statements
- 9 -
Ben Franklin/Progress Capital Fund, L.P.
(a limited partnership)
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
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1. Organization and Operations
Ben Franklin/Progress Capital Fund, L.P. (the Partnership) was formed on
December 30, 1997 for the purpose of operating as a venture capital fund
providing primarily subordinated debt financing for early-stage,
technology-based companies in the Mid-Atlantic region. The Partnership
will be terminated on December 30, 2007, in accordance with the provisions
of the Partnership Agreement, unless extended by the General Partner, with
the consent of a majority of the Limited Partners, for up to three
additional, one-year periods.
The General Partner of the Partnership, Progress Capital, L.P., is
responsible for the management and operation of the Partnership, including
the appointment of an outside management company, if desired, to handle
the general and administrative functions of the Partnership.
The General Partner is also responsible for appointing an Advisory Board
(the Board) made up of between three and seven people. The Board, for all
periods presented herein, had five members. The duties of the Board
include consultation and advice concerning the Partnership's investment
strategy, discussions concerning potential conflicts of interest, referral
of investment opportunities to the Partnership and such other advice and
counsel as is requested by the General Partner in connection with the
Partnership's investments and other Partnership matters.
The Special Limited Partner in the Partnership is Ben Franklin Technology
Center of Southeastern Pennsylvania. The General Partner's interest in the
Partnership is 1% and the Limited Partners' interest, including the
Special Limited Partner, is 99%.
2. Summary of Significant Accounting Policies
(a) Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, BFPC Investment, Inc., a
Delaware C-corporation. All significant intercompany transactions and
accounts have been eliminated.
(b) Cash and Temporary Investments
Partnership cash is invested in a certificate of deposit with an
original maturity of less than 90 days and in an interest-bearing money
market fund at Progress Bank (Note 3). At times, bank deposits may be
in excess of federally insured limits.
- 10 -
Ben Franklin/Progress Capital Fund, L.P.
(a limited partnership)
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
(c) Valuation of Venture Capital Investments
Venture capital investments are recorded at fair value as determined in
good faith by the General Partner. If no public market exists for the
venture capital investments, fair value is determined by taking into
consideration the cost of the investments, subsequent developments
concerning the companies to which the investments relate, any financial
data and projections of such companies provided to the General Partner,
and such other factors as the General Partner may deem relevant. Due to
the inherent uncertainty of such valuation, these estimated fair values
may differ significantly from the values that would have been used had
a ready market for certain of these investments existed. The difference
could be material.
Generally, the Partnership records no value for warrants received in an
investment transaction with a private company due to the lack of
marketability and liquidity of such investment security, unless the
private company assures certain minimal value to the warrants.
The fair value of investments traded in the public market is determined
using the closing market price on the balance sheet date. Investments
traded in the public market that are restricted as to the sale of such
investments are generally discounted to reflect the lack of immediate
marketability.
Principal payments on the subordinated debt and redeemable preferred
shares continue through June 2005. Generally, interest on the
subordinated debt is payable monthly or quarterly.
(d) Partners' Capital
Limited and General Partners' Capital Contributions are recorded when
due.
Committed capital is reconciled to partners' capital at December 31,
2001 as follows:
Special
General Limited Limited
Partner Partner Partners Total
Committed capital $ 90,500 $1,000,000 $ 7,959,500 $ 9,050,000
Less amount not yet called (36,200) (402,700) (3,181,100) (3,620,000)
-------- ---------- ----------- -----------
Capital contributions 54,300 597,300 4,778,400 5,430,000
Distributions to partners (29,000) (319,000) (2,552,000) (2,900,000)
Syndication costs - (623) (4,812) (5,435)
Net realized gain from investments 198,860 136,672 807,736 1,143,268
Net unrealized appreciation on investments 162,852 108,165 650,372 921,389
Net operating income before changes in
investment valuation 43,694 29,122 170,278 243,094
-------- ---------- ----------- -----------
Balance as of December 31, 2001 $430,706 $ 551,636 $ 3,849,974 $ 4,832,316
======== ========== =========== ===========
-11-
Ben Franklin/Progress Capital Fund, L.P.
(a limited partnership)
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
Partnership profit and loss, in all cases, will be allocated to each
partner in accordance with the Partnership Agreement. Net profits will
be allocated in the following manner: first, to all Partners up to an
aggregate amount equal to previously allocated net losses; second, 100%
to the Limited Partners in proportion to their Capital Contribution
until they have been allocated an amount equal to 10% of their
aggregate Capital Contributions; third, 100% to the General Partner and
the Special Limited Partner until they have been allocated an amount
equal to 2.5% of the aggregate Capital Contributions of all Limited
Partners, with the General Partner and the Special Limited Partner
sharing such allocation 85% to the General Partner and 15% to the
Special Limited Partner; and fourth, 80% to the Partners in proportion
to their Partnership percentages and 20% to the General Partner. The
General Partner and the Special Limited Partner shall share such
allocation 85% to the General Partner and 15% to the Special Limited
Partner. Net loss shall be allocated first to offset any net income
previously allocated and then to the Partners in proportion to their
Partnership percentages.
(e) Syndication Costs
Syndication costs consist of fees and expenses incurred in connection
with the offering of limited partnership interests. Syndication costs
are presented in the accompanying financial statements as a reduction
of partners' capital.
(f) Income Taxes
A provision for income taxes is not included in the accompanying
financial statements, since Partnership earnings or losses are
allocated to the partners for inclusion in each partner's separate tax
return.
(g) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
As further discussed above, under Valuation of Venture Capital
Investments, the Partnership uses estimates to determine the fair value
of its investment portfolio. In many instances, there are no readily
ascertainable fair values for certain investments. In these instances,
management estimates fair value using current financial and operating
information available to them. The actual proceeds realized upon the
disposition of these investments could differ significantly from their
carrying values.
-12-
Ben Franklin/Progress Capital Fund, L.P.
(a limited partnership)
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
3. Related Parties
As permitted by the Partnership Agreement, the General Partner of the
Partnership, Progress Capital, L.P., has entered into an agreement with
Progress Capital Management, Inc. to provide management services to the
Partnership. Progress Capital, Inc., the general partner of Progress
Capital, L.P., and Progress Capital Management, Inc. are wholly-owned
subsidiaries of Progress Financial Corporation. Progress Capital
Management, Inc. receives a fee for performing these services as stated
in the Partnership Agreement. This fee is 3% of the aggregate Capital
Commitments of the Partnership for the first seven years of the
Partnership, 2.5% of the aggregate Capital Commitments of the
Partnership for the eighth year, 2.0% of the aggregate Capital
Commitments of the Partnership for the ninth year, and 1.5% of the
aggregate Capital Commitments of the Partnership for each year
thereafter. The fee is based on the committed capital as of the first
day of the quarter. The fee for 2001 and 2000 was $271,500 each year.
During 2000, the Partnership had investments in CEMA Technologies, Inc.
Prima Facie, Inc, RealTIME Media Inc., American Compliance Systems and
Alpine Medical LLC, to which Progress Financial Corporation has
provided credit facilities. During 2001, the Partnership had
investments in CEMA Technologies Inc., American Compliance Systems,
Fiberlink Communications Corporations, Answer Net Inc., Alpine Medical
LLC and Homes for Living, Inc., to which Progress Financial Corporation
has provided credit facilities.
The Partnership's cash and temporary investment balances at December
31, 2001 and 2000 are held in accounts with Progress Bank.
4. Financial Highlights
The following limited partner ratios are for the period ended December
31, 2001:
Operating expenses 5.76%
Incentive allocation 1.57%
----
Total expenses and incentive valuation 7.33%
====
Net operating income before change in investment valuation 0.46%
====
Total return before incentive allocation 7.89%
Less incentive allocation 1.57%
----
Total return after incentive allocation 6.32%
====
-13-
Ben Franklin/Progress Capital Fund, L.P.
(a limited partnership)
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
The ratios of net operating income before change in investment
valuation to average net assets, of operating expenses to average net
assets and total return are calculated for the Limited Partners,
including the Special Limited Partner, as a class. Net operating income
before change in investment valuation includes operating expenses as a
component but does not include the incentive allocation as a component.
Total return, which reflects the quarter-to-quarter change in net
assets, was calculated using returns, which have been geometrically
linked and utilize the average quarterly capital transactions. The
total expenses and incentive allocation and the total return after
incentive allocation adjust the operating expenses and total return
before incentive allocation calculations for the General Partner and
Special Limited Partner's carried interests.
5. Subsequent Event (Unaudited)
In February 2002, Alpine Medical LLC ("Alpine") was sold to a third
party for cash in a private transaction. In connection with this sale,
the Partnership collected the balance outstanding on the Alpine
subordinated note and the Partnership received $1,557,000 cash in
exchange for the stock of the Partnership's subsidiary, BFPC
Investment, Inc. The subsidiary's only assets were warrants to purchase
157,358 Class A units of Alpine.
-14-