Item 1. BUSINESS - ------ --------
Technology Funding Venture Partners V, An Aggressive Growth Fund, L.P. (the Partnership or the Registrant) is a limited partnership organized under the laws of the State of Delaware on June 26, 1989. For the period from June 26, 1989, through May of 1990, the Partnership was inactive. The Partnership commenced selling Units of limited partnership interest (Units) in May of 1990. On January 2, 1991, the minimum number of Units required to commence Partnership operations (15,000) had been sold. The offering terminated with 400,000 Units sold on December 31, 1992. The Partnership's original contributed capital was $40,040,046 consisting of $40,000,000 from Limited Partners for 400,000 Units and $40,046 from the General Partners, Technology Funding Ltd. (TFL) and Technology Funding Inc. (TFI). The General Partners do not own any Units.
The principal investment objectives of the Partnership are long- term capital appreciation from venture capital investments in new and developing companies and preservation of Limited Partner capital through risk management and active involvement with such companies (portfolio companies). The Partnership's investments in portfolio companies primarily consist of equity securities such as common and preferred shares, but also include debt convertible into equity securities and warrants and options to acquire equity securities. Although venture capital investments offer the opportunity for significant gains, such investments involve a high degree of business and financial risk that can result in substantial losses. Among these are the risks associated with investment in companies in an early stage of development or with little or no operating history, companies operating at a loss or with substantial variations in operating results from period to period, and companies with the need for substantial additional capital to support expansion or to achieve or maintain a competitive position. Such companies may face intense competition, including competition from companies with greater financial resources, more extensive development, manufacturing, marketing and service capabilities, and a larger number of qualified managerial and technical personnel. There is no ready market for many of the Partnership's investments. The Partnership's investments in portfolio companies are generally subject to restrictions on sale because they were acquired from the issuer in private placement transactions or because the Partnership is an affiliate of the issuer.
The Partnership has elected to be a business development company under the Investment Company Act of 1940, as amended (the Act), and operates as a nondiversified investment company, as defined in the Act. The Partnership's term was extended for a two-year period to December 31, 2000, pursuant to unanimous approval by the Independent General Partners in 1998. The Partnership's term was extended for an additional two-year period to December 31, 2002, pursuant to unanimous approval by the Independent General Partners in 1999. On November 8, 2002, the Limited Partners approved an extension of the Partnership's term to December 31, 2004, and authorized additional one-year extensions to the term of the Partnership through December 31, 2006. At the March 12, 2004, meeting, the Independent General Partners approved an extension of the Partnership's term to December 31, 2006.
Item 2.
Item 2. PROPERTIES - ------ ----------
The Registrant has no material physical properties.
Item 3.
Item 3. LEGAL PROCEEDINGS - ------ -----------------
In October 2000, Kanematsu Corporation, a creditor of one of the Partnership's portfolio companies, initiated an arbitration proceeding against the Partnership, two affiliated partnerships, and a fourth co-investor. Kanematsu was seeking to recover $2,000,000, the purchase price in a contract by which the Partnership and the other entities were alleged to have agreed to purchase certain debt securities of the portfolio company from Kanematsu. The Partnership and affiliated partnerships asserted counterclaims against Kanematsu. On February 12, 2002, the Partnership, affiliated partnerships and the co-investor were awarded $4,000,000 and all of Kanematsu's claims were denied. The award is in full settlement of all claims and counterclaims. The Partnership recognized revenue and a receivable of $666,667 as of February 12, 2002, for its proportionate share of the award. Kanematsu immediately filed a petition to vacate the award, and on October 9, 2002, the United States District Court issued an order confirming the arbitration award. Kanematsu appealed the order but in early November 2002 paid a forbearance fee of $200,000 in exchange for an option to settle all liabilities. On November 29, 2002, Kanematsu agreed to settle for $3,999,999. A decision on the allocation of the proceeds between the Partnership, affiliates and co-investor was reached in January 2003; however, a dispute regarding the legal fees arose. On February 13, 2003, the Partnership received $774,298, representing its proportionate share of the settlement, plus accrued interest, less disputed legal fees. The Partnership recognized the additional revenue and receivable of $107,631 at December 31, 2002. In March 2003, the law firm remitted an additional amount of $193,830 to the Partnership, representing the settlement on the disputed legal fees.
From time to time, the Partnership is subject to routine litigation incidental to the business of the Partnership. Although there can be no assurances as to the ultimate disposition of these matters and the proceeding disclosed above, it is the opinion of the Managing General Partners, based upon the information available at this time, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the results of operations and financial condition of the Partnership.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------ ---------------------------------------------------
No matters were voted on by the Limited Partners in 2003.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER - ------ ------------------------------------------------------------- MATTERS -------
(a) There is no established public trading market for the Units. (b) At December 31, 2003, there were 6,639 record holders of Units. (c) The Registrant, being a partnership, does not pay dividends. Cash distributions, however, may be made to the partners pursuant to the Partnership Agreement.
Item 6.
Item 6. SELECTED FINANCIAL DATA - ------ -----------------------
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL - ------ ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS -----------------------------------
Liquidity and Capital Resources - -------------------------------
The Partnership operates as a business development company under the Investment Company Act of 1940 and makes venture capital investments in new and developing companies. The Partnership's financial condition is dependent upon the success of the portfolio companies. There is no ready market for many of the Partnership's investments. It is possible that some of its venture capital investments may be a complete loss or may be unprofitable and that others will appear likely to become successful, but may never realize their potential. The valuation of the Partnership's investments in securities for which there are no available market quotes is subject to the estimate of the Managing General Partners in accordance with the valuation guidance described in Note 1 to the financial statements. In the absence of readily obtainable market values, the estimated fair value of the Partnership's investments may differ significantly from the values that would have been used had a ready market existed.
During the year ended December 31, 2003, net cash used by operating activities totaled $900,533. The Partnership paid management fees of $88,746 to the Managing General Partners and reimbursed related parties for operating expenses of $1,528,159. In addition, $40,000 was paid to the Individual General Partners as compensation for their services. The Partnership paid interest of $6, other investment expenses of $324,650 and received interest income of $92,667.
In 2003, equity investments of $1,351,753 were funded to portfolio companies primarily in the medical, high tech/financial, biomedical and information technology industries. Proceeds from the sale of equity investments were $6,972,957, primarily related to the sale of Tessera Technologies, Inc. (formerly Tessera, Inc.) shares. Cash distributions of $115,249 were received from venture capital limited partnership investments.
Cash and cash equivalents at December 31, 2003, were $4,804,340. Cash reserves, interest income on short-term investments and future proceeds from investment sales are expected to be adequate to fund Partnership operations through the next twelve months.
Results of Operations - ---------------------
2003 compared to 2002 - ---------------------
The net increase in partners' capital resulting from operations was $2,560,991 compared to a decrease of $7,855,764 for the years ended December 31, 2003 and 2002, respectively.
Unrealized depreciation on equity investments was $8,717,486 and $14,777,967 at December 31, 2003 and 2002, respectively. During the year ended December 31, 2003, the net decrease in unrealized depreciation of $6,147,020 was attributable to the write-off of investments in Prolinx, Inc., Resolution Sciences Corporation and Pharmadigm, Inc. During the year ended December 31, 2002, the net increase in unrealized depreciation of $7,217,797 was due to decreases in the publicly traded prices of Endocare, Inc., Physiometrix, Inc. and Valentis, Inc. as well as decreases in the fair value of private portfolio companies in the medical, biotechnology, information technology and communications industries.
Unrealized depreciation on notes receivable investments was $60,896 and $147,435 at December 31, 2003 and 2002, respectively. During 2003, the Partnership recorded a decrease in unrealized depreciation of notes receivable of $86,539, primarily related to the payment of notes receivable by Avalon Vision Solutions, Inc. During the year ended December 31, 2002, the net decrease in unrealized depreciation of notes receivable of $5,386,013 was mainly attributable to the write-off of notes issued to Sutmyn Storage Corporation.
During 2003, net realized gain from sales of equity investments totaled $6,212,043, primarily the result of the Partnership's sale of its shares in Tessera Technologies, Inc. Net realized gain from sales of equity investments during the year ended December 31, 2002, was $1,432,231, primarily related to the sale of investments in Matrix Pharmaceutical, Inc., Lynk Systems, Inc., and R2 Technology, Inc.
Other income was $193,830 for the year ended December 31, 2003. In October 2000, Kanematsu Corporation, a creditor of one of the Partnership's portfolio companies, initiated an arbitration proceeding against the Partnership, two affiliated partnerships, and a fourth co-investor. Kanematsu was seeking to recover $2,000,000, the purchase price in a contract by which the Partnership and the other entities were alleged to have agreed to purchase certain debt securities of the portfolio company from Kanematsu. The Partnership and affiliated partnerships asserted counterclaims against Kanematsu. On February 12, 2002, the Partnership, affiliated partnerships and the co-investor were awarded $4,000,000 and all of Kanematsu's claims were denied. The award is in full settlement of all claims and counterclaims. The Partnership recognized revenue and a receivable of $666,667 as of February 12, 2002, for its proportionate share of the award. Kanematsu immediately filed a petition to vacate the award, and on October 9, 2002, the United States District Court issued an order confirming the arbitration award. Kanematsu appealed the order but in early November 2002 paid a forbearance fee of $200,000 in exchange for an option to settle all liabilities. On November 29, 2002, Kanematsu agreed to settle for $3,999,999 A decision on the allocation of the proceeds between the Partnership, affiliates and co-investor was reached in January 2003; however, a dispute regarding the legal fees arose. On February 13, 2003, the Partnership received $774,298, representing its proportionate share of the settlement, plus accrued interest, less disputed legal fees. The Partnership recognized the additional revenue and receivable of $107,631 at December 31, 2002. In March 2003, the law firm remitted an additional amount of $193,830 to the Partnership, representing the settlement on the disputed legal fees.
Investment expenses were $2,839,708 and $2,975,458 for 2003 and 2002, respectively. In 2002, the Managing General Partners billed the Partnership $89,786 and $23,249 for operating expenses incurred during 2001 and prior years, respectively. Had these expenses been billed in the prior years, the investment expenses for 2002 and 2001 would have been $2,862,423 and $2,566,105, respectively. The change from 2002 to 2001 is primarily attributable to increased administrative and investment service costs, partially offset by decreased professional and management fees.
During 2003, the Partnership recorded a realized loss from investment write-offs totaling $7,394,217, which represents the Partnership's investments in Resolution Sciences Corporation, Innergy Power Corporation, Periodontix, Inc., Pherin Pharmaceuticals, Inc., Pharmadigm, Inc. and Prolinx, Inc. During 2002, the Partnership recorded realized losses from investment write-offs of $5,446,528, which represents the Partnership's total investment in Sutmyn Storage Corporation. The fair value of these notes was reduced to zero during 2000 and it has been determined by the Managing General Partners that there will be no recovery on the notes as the company has ceased operations.
Net realized gain from venture capital limited partnerships totaled $115,249 and $27,832 in 2003 and 2002, respectively. The gains represented distributions from profits of venture capital limited partnerships.
Interest income was $126,774 and $163,645 for the years ended December 31, 2003 and 2002, respectively. The decrease was primarily the result of decreased short-term investments.
Given the inherent risk associated with the business of the Partnership, the future performance of the portfolio company investments may significantly impact future operations.
2002 compared to 2001 - ---------------------
The net decrease in partners' capital resulting from operations was $7,855,764 and $6,675,792 for the years ended December 31, 2002 and 2001, respectively.
Unrealized depreciation on equity investments was $14,777,967 and $7,560,170 at December 31, 2002 and 2001, respectively. During the year ended December 31, 2002, the net increase in unrealized depreciation of $7,217,797 was a result of decreases in the publicly traded prices of Endocare, Inc., Physiometrix, Inc. and Valentis, Inc. as well as decreases in the fair value of private portfolio companies in the medical, biotechnology, information technology and communications industries. During the year ended December 31, 2001, the net decrease in unrealized depreciation of $796,107 was partially attributable to decreases in the publicly traded prices of Physiometrix, Inc. and Valentis, Inc. and in the fair value of a private portfolio company in the biotechnology industry. These decreases were offset by equity investment sales and investment write-offs during 2001 which resulted in a $5,497,389 decrease in unrealized depreciation as the depreciation was realized upon sale.
Unrealized depreciation on notes receivable investments was $147,435 and $5,533,448 at December 31, 2002 and 2001, respectively. During the year ended December 31, 2002, the net decrease in unrealized depreciation of notes receivable of $5,386,013 was mainly attributable to the write-off of notes issued to Sutmyn Storage Corporation. During 2001, the Partnership recorded an increase in unrealized depreciation of notes receivable of $52,415, primarily related to the fair value of loans made to a portfolio company in the industrial/business automation industry.
Net realized gain from sales of equity investments during the year ended December 31, 2002, was $1,432,231, primarily related to the sale of investments in Matrix Pharmaceutical, Inc., Lynk Systems, Inc., and R2 Technology, Inc. During 2001, net realized loss from sales of equity investments totaled $914,464, primarily due to the Partnership's sale of its investments in AudioBasket.com, Inc. and Efficient Networks, Inc.
Other income was $774,298 for the year ended December 31, 2002. In October 2000, Kanematsu Corporation, a creditor of one of the Partnership's portfolio companies, initiated an arbitration proceeding against the Partnership, two affiliated partnerships, and a fourth co-investor. Kanematsu was seeking to recover $2,000,000, the purchase price in a contract by which the Partnership and the other entities were alleged to have agreed to purchase certain debt securities of the portfolio company from Kanematsu. The Partnership and affiliated partnerships asserted counterclaims against Kanematsu. On February 12, 2002, the Partnership, affiliated partnerships and the co-investor were awarded $4,000,000 and all of Kanematsu's claims were denied. The award is in full settlement of all claims and counterclaims. The Partnership recognized revenue and a receivable of $666,667 as of February 12, 2002, for its proportionate share of the award. Kanematsu immediately filed a petition to vacate the award, and on October 9, 2002, the United States District Court issued an order confirming the arbitration award. Kanematsu appealed the order but in early November 2002 paid a forbearance fee of $200,000 in exchange for an option to settle all liabilities. On November 29, 2002, Kanematsu agreed to settle for $3,999,999. A decision on the allocation of the proceeds between the Partnership, affiliates and co-investor was reached in January 2003; however, a dispute regarding the legal fees arose. On February 13, 2003, the Partnership received $774,298, representing its proportionate share of the settlement, plus accrued interest, less disputed legal fees. The Partnership recognized the additional revenue and receivable of $107,631 at December 31, 2002. In March 2003, the law firm remitted an additional amount of $193,830 to the Partnership.
Investment expenses were $2,975,458 and $2,476,319 for 2002 and 2001, respectively. In 2002, the Managing General Partners billed the Partnership $89,786 and $23,249 for operating expenses incurred during 2001 and prior years, respectively. Had these expenses been billed in the prior years, the investment expenses for 2002 and 2001 would have been $2,862,423 and $2,566,105, respectively. The change from 2002 to 2001 is primarily attributable to increased administrative and investment service costs, partially offset by decreased professional and management fees.
During 2002, the Partnership recorded realized losses from investment write-offs of $5,446,528, which represents the Partnership's total investment in Sutmyn Storage Corporation. The fair value of these notes was reduced to zero during 2000 and it has been determined by the Managing General Partners that there will be no recovery on the notes as the company has ceased operations. During 2001, the Partnership recorded a realized loss from investment write-offs of $4,909,913, which represents the Partnership's total investment in Adesso Healthcare Technology Services, Inc., eoSports, Inc., Ascent Logic Corporation and Positive Communications, Inc., all of which ceased operations during 2001.
Net realized gain from venture capital limited partnerships totaled $27,832 and $330,123 in 2002 and 2001, respectively. The gains represented distributions from profits of venture capital limited partnerships.
Interest income was $163,645 and $443,273 for the years ended December 31, 2002 and 2001, respectively. The decrease was primarily the result of decreased short-term investments.
Given the inherent risk associated with the business of the Partnership, the future performance of the portfolio company investments may significantly impact future operations.
New Accounting Pronouncement - ----------------------------
In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities, such as restructurings, involuntarily terminating employees, and consolidating facilities initiated after December 31, 2002. The implementation of SFAS No. 146 will not require the restatement of previously issued financial statements. The Partnership implemented early adoption of SFAS No. 146 to all applicable costs associated with exit or disposal activities incurred during 2003 and 2002. See Note 1 to the financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to recognize a liability at the inception of the guarantee for the fair value of obligations it has assumed under that guarantee and also requires more detailed disclosure in its financial statements with respect to such guarantees. FIN 45 is effective for guarantees issued or modified after December 31, 2002, and requires additional disclosure for existing guarantees. The adoption of FIN 45 did not have a material effect on the Partnership's results of operation or financial position. The Partnership has provided additional disclosure with respect to a guarantee by an affiliated partnership in Note 11 to the financial statements.
In December 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 03-4 (SOP 03-4), "Reporting Financial Highlights and Schedule of Investments by Nonregistered Investment Partnerships: An Amendment to the Audit and Accounting Guide 'Audits of Investment Companies' (the Guide) and AICPA Statement of Position 95-2 (SOP 95-2), 'Financial Reporting by Nonpublic Investment Partnerships.'" SOP 03-4 provides guidance on the application of certain provisions in the Accounting Guide and SOP 95-2 that are directed to the reporting by nonregistered investment partnerships of financial highlights and the schedule of investments. It amends certain provisions of the Guide and SOP 95-2 by adapting those provisions to nonregistered investment partnerships based on their differences in organizational structures from registered investment companies. SOP 03-4 is effective for annual financial statements issued for fiscal years ending after December 15, 2003. The adoption of SOP 03-4 did not have a material effect on the Partnership.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK - ------- ----------------------------------------------------------
The Partnership is subject to financial market risks, including changes in interest rates with respect to its investments in debt securities and interest-bearing cash equivalents as well as changes in marketable equity security prices. The Partnership does not use derivative financial instruments to mitigate any of these risks. The return on the Partnership's investments is generally not affected by foreign currency fluctuations.
The Partnership does not have a significant exposure to modest public market price fluctuations as the Partnership primarily invests in private business enterprises. However, should significant changes in market equity prices occur, there could be a longer-term effect on valuations of private companies, which could affect the carrying value and the amount and timing of gains realized on these investments. Since there is typically no public market for the Partnership's investments in private companies, the valuation of the investments is subject to the estimate of the Partnership's Managing General Partners. In the absence of a readily ascertainable market value, the estimated value of the Partnership's investments in private companies may differ significantly from the values that would be placed on the portfolio if a ready market existed. The Partnership's portfolio also includes common stocks in publicly traded companies. These investments are directly exposed to equity price risk, in that a hypothetical 10 percent change in these equity prices would result in a similar percentage change in the fair value of these securities. The Partnership's investments also include some debt securities. Since the debt securities are generally priced at a fixed rate, changes in interest rates do not directly impact interest income. The Partnership's debt securities are generally held to maturity or converted into equity securities of private companies.
Item 8.
Item 8. FINANCIAL STATEMENTS - ------ --------------------
The financial statements of the Registrant are set forth in Item 15.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING - ------ ----------------------------------------------------------- AND FINANCIAL DISCLOSURE ------------------------
None
Item 9A.
Item 9A. CONTROLS AND PROCEDURES - ------- -----------------------
The signing officer is responsible for establishing and maintaining disclosure controls and procedures for Technology Funding Venture Partners V, An Aggressive Growth Fund, L.P. Such officer has concluded (based upon his evaluation of these controls and procedures as of a date within 90 days of the filing of this report) that Technology Funding Venture Partners V, An Aggressive Growth Fund, L.P.'s disclosure controls and procedures are effective to ensure that information required to be disclosed by Technology Funding Venture Partners V, An Aggressive Growth Fund, L.P. in this report is accumulated and communicated to Technology Funding Venture Partners V, An Aggressive Growth Fund, L.P.'s management, including its principal executive officers as appropriate, to allow timely decisions regarding required disclosure.
The certifying officer also has indicated that there were no significant changes in Technology Funding Venture Partners V, An Aggressive Growth Fund, L.P.'s internal controls or other factors that could significantly affect such controls subsequent to the date of their evaluation, and there were no corrective actions with regard to significant deficiencies and material weaknesses.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------- --------------------------------------------------
As a partnership, the Registrant has no directors or executive officers. The Individual General Partners are responsible for the management and administration of the Partnership. The Individual General Partners consist of the two Independent General Partners and a representative from each of Technology Funding Ltd., a California limited partnership (TFL), and its wholly owned subsidiary, Technology Funding Inc., a California corporation (TFI). TFL and TFI are the Managing General Partners. Reference is made to the information regarding Individual General Partners and the Managing General Partners in the Registrant's Proxy Statement related to the Meeting of Limited Partners held on November 8, 2002, which information is incorporated herein by reference.
Code of Ethics - --------------
The Partnership's Code of Ethics applies to the Independent General Partners as well as Technology Funding corporate officers and employees. The Independent General Partners review and approve the Code of Ethics on an annual basis. The Code of Ethics is attached as an exhibit (see Item 15 - Exhibits) and is also available on the Partnership's web site, www.techfunding.com. Any amendments to, or waivers from, any provision of the Code that applies to any of the Independent General Partners or executive officers will be disclosed on the web site..
Audit Committee - ---------------
The Independent General Partners have established an Audit Committee of the Whole to oversee the accounting and financial reporting processes on behalf of the Independent General Partners. The Audit Committee of the Whole currently consists of all of the Independent General Partners for each Technology Funding partnership with John Muncaster acting as liaison with the Managing General Partners. The Independent General Partners are "independent" as defined by the Securities and Exchange Commission. The Independent General Partners have determined that the Audit Committee of the Whole does not currently have any member that would be considered an "audit committee financial expert" as that term is defined in Section 407 of the Sarbanes- Oxley Act of 2002. Given the anticipated termination date for the Partnership, the Independent General Partners have determined that the expense and the difficulty of recruiting a financial expert to serve on the Audit Committee outweigh any benefit to the Fund.
Item 11.
Item 11. EXECUTIVE COMPENSATION - ------- ----------------------
As a partnership, the Registrant has no officers or directors. In 2002, the Partnership incurred $168,151 in management fees. The fees are designed to compensate the Managing General Partners for General Partner Overhead incurred in performing management duties for the Partnership. General Partner Overhead (as defined in the Partnership Agreement) includes the General Partners' share of rent, utilities, property taxes and the cost of capital equipment and the general and administrative expenses paid by the Managing General Partners in performing their obligations to the Partnership. As compensation for their services, the Independent General Partners each receive $14,000 annually, plus $1,500 for each attended meeting of the Individual General Partners and committees thereof. For the year ended December 31, 2003, $40,000 of such fees were incurred. The Independent General Partners are reimbursed for all out-of-pocket expenses relating to attendance of the meetings, committees or otherwise of the Individual General Partners.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------- --------------------------------------------------------------
Not applicable. No Limited Partner beneficially holds more than 5 percent of the aggregate number of Units held by all Limited Partners, and neither the Managing General Partners nor any of their officers, directors or partners own any Units. The two Independent General Partners each own 20 Units. The Individual General Partners control the affairs of the Partnership pursuant to the Partnership Agreement.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------- ----------------------------------------------
The Registrant, or its investee companies, have engaged in no transactions with the Managing General Partners or their officers and partners other than as described above, in the notes to the financial statements, or in the Partnership Agreement.
Item 14.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES - ------- --------------------------------------
Fees Paid to Independent Public Accountants - -------------------------------------------
Audit Fees - ----------
The Partnership paid aggregate fees of approximately $68,926 and $57,850 to its independent public accountants, Grant Thornton LLP, for professional services rendered to the Partnership with respect to audits of the annual financial statements and reviews of the quarterly financial statements for the years ended December 31, 2003 and 2002, respectively.
Tax Fees - --------
The Partnership paid aggregate fees of approximately $15,888 and $6,500 to Grant Thornton LLP for tax-related services rendered to the Partnership for the years ended December 31, 2003 and 2002, respectively. These services included preparation of the Partnership's tax returns.
All Other Fees - --------------
The Partnership did not pay any fees to Grant Thornton LLP for services, other than the services referred to above, for the years ended December 31, 2003 and 2002, respectively.
Audit Committee Pre-Approval Policies and Procedures - ----------------------------------------------------
The Independent General Partners have established procedures for the pre-approval of auditing services and non-auditing services to be performed by the Partnership's independent public accountants. Such pre-approval can be given as part of the Independent General Partners' annual approval of the scope of the engagement of the independent public accountants or on an individual basis. Approved non-auditing services must be disclosed in the Partnership's periodic public reports. The Independent General Partners pre-approved all of the non-audit services provided by the independent public accountants in 2003.
PART IV
Item 15.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - ------- ---------------------------------------------------------------
(a) List of Documents filed as part of this Annual Report on Form 10-K
(1) Financial Statements - the following financial statements are filed as a part of this Report:
Report of Independent Certified Public Accountants as of and for the years ended December 31, 2003 and 2002 Report of Independent Public Accountants as of and for the years ended December 31, 2001 and 2000 Balance Sheets as of December 31, 2003 and 2002 Statements of Investments as of December 31, 2003 and 2002 Statements of Operations for the years ended December 31, 2003, 2002 and 2001 Statements of Partners' Capital for the years ended December 31, 2003, 2002 and 2001 Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 Notes to Financial Statements
(2) Financial Statement Schedules All schedules have been omitted because they are not applicable or the required information is included in the financial statements or the notes thereto.
(3) Exhibits
14.1 Code of Ethics for the Registrant 31.1 Section 302 Sarbanes-Oxley Certifications 32.1 Section 906 Sarbanes-Oxley Certifications
(b) Reports on Form 8-K
(1) On January 8, 2003, the Partnership filed its Amended and Restated Limited Partnership Agreement on Form 8-K.
(2) On December 17, 2003, the Partnership filed Form 8-K pursuant to the SEC's Release No. 34-43069 regarding Commission Guidance on Mini-Tender Offers.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS - --------------------------------------------------
To the Partners of Technology Funding Venture Partners V, an Aggressive Growth Fund, L.P.:
We have audited the accompanying balance sheets of Technology Funding Venture Partners V, an Aggressive Growth Fund, L.P. (a Delaware limited partnership) (the Fund), including the statement of investments, as of December 31, 2003 and 2002, and the related statements of operations, partners' capital, and cash flows for the years then ended. These financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Technology Funding Venture Partners V, an Aggressive Growth Fund, L.P. for the year ended December 31, 2001, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated March 15, 2002.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included physical inspection of securities owned as of December 31, 2003 and 2002. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Technology Funding Venture Partners V, an Aggressive Growth Fund, L.P as of December 31, 2003 and 2002, and the results of its operations, changes in partners' capital, and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Albuquerque, New Mexico /S/GRANT THORNTON LLP March 12, 2004
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - ----------------------------------------
To the Partners of Technology Funding Venture Partners V, An Aggressive Growth Fund, L.P.:
We have audited the accompanying balance sheets of Technology Funding Venture Partners V, An Aggressive Growth Fund, L.P. (a Delaware limited partnership) (the Fund), including the statements of investments, as of December 31, 2001 and 2000, and the related statements of operations, partners' capital, and cash flows for the years then ended. These financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included physical inspection of securities owned as of December 31, 2001 and 2000. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 Technology Funding Venture Partners V, An Aggressive Growth Fund, L.P. as of December 31, 2001 and 2000, and the results of its operations, changes in partners' capital and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.
Los Angeles, California /S/ARTHUR ANDERSEN LLP March 15, 2002
THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH TECHNOLOGY FUNDING VENTURE PARTNERS V, LP'S FILING ON FORM 10-K FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS FILING ON FORM 10-K.
BALANCE SHEETS - --------------
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF INVESTMENTS - -------------------------
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF OPERATIONS - ------------------------
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF PARTNERS' CAPITAL - -------------------------------
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF CASH FLOWS - ------------------------
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS - -----------------------------
1. Summary of Significant Accounting Policies ------------------------------------------
Organization - ------------
Technology Funding Venture Partners V, An Aggressive Growth Fund, L.P. (the Partnership or the Registrant) is a limited partnership organized under the laws of the State of Delaware on June 26, 1989. The purpose of the Partnership is to make venture capital investments in emerging growth companies. The Partnership elected to be treated as a business development company under the Investment Company Act of 1940, as amended (the Act), and operates as a nondiversified investment company, as defined in the Act. The Individual General Partners are responsible for the management and administration of the Partnership. The Managing General Partners are Technology Funding Ltd. (TFL) and Technology Funding Inc. (TFI), a wholly owned subsidiary of TFL. There are two Independent General Partners.
For the period from June 26, 1989, through May 1990, the Partnership was inactive. The Partnership commenced selling Units of limited partnership interest (Units) in May 1990. On January 2, 1991, the minimum number of Units required to commence Partnership operations (15,000) had been sold. The offering terminated with 400,000 Units sold on December 31, 1992. The Partnership's original contributed capital was $40,040,046, consisting of $40,000,000 from Limited Partners for 400,000 Units and $40,046 from General Partners. The General Partners do not own any Units. The Partnership's term was extended for a two-year period to December 31, 2000, pursuant to unanimous approval by the Independent General Partners in 1998. The Partnership's term was extended for an additional two-year period to December 31, 2002, pursuant to unanimous approval by the Independent General Partners in 1999. On November 8, 2002, the Limited Partners approved an extension of the Partnership's term to December 31, 2004, and authorized additional one-year extensions to the term of the Partnership through December 31, 2006. At the March 12, 2004, meeting, the Independent General Partners approved an extension of the Partnership's term to December 31, 2006.
Preparation of Financial Statements and Use of Estimates - --------------------------------------------------------
The accompanying financial statements have been prepared on the accrual basis of accounting. The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 income and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the estimate of fair value of investments, liabilities and contingencies. Because of the inherent uncertainty of valuation, the estimated fair value of investments may differ significantly from the values that would have been used had a ready market for investments existed, and the differences could be material.
Investments - -----------
Investments are carried at fair value.
Equity Investments ------------------
Under the direction and control of the Independent General Partners, the Managing General Partners are delegated the authority to establish valuation procedures and periodically apply such procedures to the Partnership's investment portfolio. In fulfilling this responsibility, the Managing General Partners periodically update and revise the valuation procedures used to determine fair value in order to reflect new events, changing market conditions, more experience with investee companies or additional information, any of which may require the revision of previous estimating procedures.
Unrestricted publicly traded securities are valued at the closing sales price or bid price that is available on a national securities exchange or over-the-counter market. Valuation discounts of 5 percent to 50 percent are applied to publicly traded securities subject to resale restrictions resulting from Rule 144 or contractual lock-ups, such as those commonly associated with underwriting agreements or knowledge of material non- public information.
The fair value of all other investments is determined in good faith by the Managing General Partners under the delegated authority of the Independent General Partners after consideration of available relevant information. There is no ready market for the Partnership's investments in private companies or unregistered securities of public companies. Fair value is generally defined as the amount the Partnership could reasonably expect to receive for an investment in an orderly disposition based on a current sale. Significant factors considered in the estimation of fair value include the inherent illiquidity of and lack of marketability associated with venture capital investments in private companies or unregistered securities, the investee company's enterprise value established in the last round of venture financing, changes in market conditions since the last round of venture financing or since the last reporting period, the value of a minority interest in the investee company, contractual restrictions on resale typical of venture financing instruments, the investee company's financial position and ability to obtain any necessary additional financing, the investee company's performance as compared to its business plan, and the investee company's progress towards initial public offering. The values determined for the Partnership's investments in these securities are based upon available information at the time the good faith valuations are made and do not necessarily represent the amount which might ultimately be realized, which could be higher or lower than the reported fair value.
At December 31, 2003 and 2002, the investment portfolio included private company investments totaling $5,282,394 and $6,225,942, respectively, whose fair values were established in good faith by the Managing General Partners in the absence of readily ascertainable market values. In addition, investments in publicly traded securities which have been subjected to a discount for legal or contractual restrictions as determined by the Managing General Partners amounted to $100,001 and $26,376 at December 31, 2003 and 2002, respectively. Because of the inherent uncertainty in the valuation, the values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material.
Venture capital limited partnership investments are valued based on the fair value of the underlying investments. Limited partnership distributions that are a return of capital reduce the cost basis of the Partnership's investment. Distributions from limited partnership cumulative earnings are reflected as realized gains by the Partnership.
In the case of an other-than-temporary decline in value below cost basis, an appropriate reduction in the cost basis is recognized as a realized loss with the new cost basis being adjusted to equal the fair value of the investment. Cost basis adjustments are reflected as "Realized loss from investment write-offs" or "Net realized loss from venture capital limited partnership investments" on the Statements of Operations.
Sales of equity investments are recorded on the trade date. The basis on which cost is determined in computing realized gains or losses is specific identification.
Notes Receivable ----------------
The fair value of notes receivable is determined in good faith by the Managing General Partners under the authority of the Independent General Partners. Fair value is generally defined as the amount the Partnership could reasonably expect to receive for the notes and accrued interest on the valuation date. The values determined for the Partnership's notes receivable are based upon available information at the time the good faith valuations are made and do not necessarily represent the amount which might ultimately be realized which could be higher or lower than the reported fair value. When the Managing General Partners' assessment of fair value indicates that future collectability of interest or principal is in doubt, notes are placed on nonaccrual status.
Cash and Cash Equivalents - -------------------------
Cash and cash equivalents are principally comprised of cash invested in demand accounts and money market instruments and are stated at cost plus accrued interest. The Partnership considers all money market and short- term investments with an original maturity of three months or less to be cash equivalents.
Provision for Income Taxes - --------------------------
No provision for income taxes has been made by the Partnership as the Partnership is not directly subject to taxation. The partners are to report their respective shares of Partnership income or loss on their individual tax returns.
The accompanying financial statements are prepared using accounting principles generally accepted in the United States which may not equate to tax accounting. The cost of investments on a tax basis at December 31, 2003 and 2002, was $15,338,777 and $22,445,400, respectively. At December 31, 2003 and 2002, gross unrealized appreciation and depreciation on investments based on cost for federal income tax purposes were as follows:
Net Decrease in Partners' Capital Resulting from Operations Per Unit - --------------------------------------------------------------------
Net decrease in partners' capital resulting from operations per Unit is calculated by dividing the weighted average number of Units outstanding of 400,000 for the years ended December 31, 2003, 2002 and 2001, into the total net decrease in partners' capital resulting from operations allocated to the Limited Partners. The Managing General Partners contributed 0.1 percent of total Limited Partner capital contributions and did not receive any Partnership Units.
New Accounting Pronouncement - ----------------------------
In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities, such as restructurings, involuntarily terminating employees, and consolidating facilities initiated after December 31, 2002. The implementation of SFAS No. 146 will not require the restatement of previously issued financial statements. The Partnership implemented early adoption of SFAS No. 146 to all applicable costs associated with exit or disposal activities incurred during 2003 and 2002.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to recognize a liability at the inception of the guarantee for the fair value of obligations it has assumed under that guarantee and also requires more detailed disclosure in its financial statements with respect to such guarantees. FIN 45 is effective for guarantees issued or modified after December 31, 2002, and requires additional disclosure for existing guarantees. The adoption of FIN 45 did not have a material effect on the Partnership's results of operation or financial position.
In December 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 03-4 (SOP 03-4), "Reporting Financial Highlights and Schedule of Investments by Nonregistered Investment Partnerships: An Amendment to the Audit and Accounting Guide 'Audits of Investment Companies' (the Guide) and AICPA Statement of Position 95-2 (SOP 95-2), 'Financial Reporting by Nonpublic Investment Partnerships.'" SOP 03-4 provides guidance on the application of certain provisions in the Accounting Guide and SOP 95-2 that are directed to the reporting by nonregistered investment partnerships of financial highlights and the schedule of investments. It amends certain provisions of the Guide and SOP 95-2 by adapting those provisions to nonregistered investment partnerships based on their differences in organizational structures from registered investment companies. SOP 03-4 is effective for annual financial statements issued for fiscal years ending after December 15, 2003. The adoption of SOP 03-4 did not have a material effect on the Partnership.
2. Related Party Transactions --------------------------
Related party costs are included in costs and expenses shown on the Statements of Operations. For the years ended December 31, 2003, 2002 and 2001, related party costs were as follows:
Management fees are 1 percent per annum of adjusted capital contributions. Management fees compensate the Managing General Partners solely for General Partner Overhead (as defined in the Partnership Agreement) incurred in supervising the operation and management of the Partnership and the Partnership's investments. Management fees due to the Managing General Partners were $78,622 and $11,413 and were included in due to related parties at December 31, 2003 and 2002, respectively.
The Partnership reimburses the Managing General Partners for certain operating expenses incurred in connection with the business of the Partnership. Reimbursable operating expenses paid by the Managing General Partners include expenses (other than Organizational and Offering Expenses and General Partner Overhead) such as administrative and investor services, investment operations, and computer services. At December 31, 2003 and 2002, amounts due to related parties for such expenses were $618,929 and $9,866, respectively.
The Managing General Partners allocate operating expenses incurred in connection with the business of the Partnership based on employee hours incurred. In 2002, the Managing General Partners billed the Partnership $89,786, $13,285 and $9,964 for operating expenses incurred during 2001, 2000 and prior years, respectively.
As compensation for their services, the Independent General Partners each receive $14,000 annually, plus $1,500 for each attended meeting of the Individual General Partners or committee thereof. The Independent General Partners are reimbursed for all out-of-pocket expenses relating to attendance of the meetings, committees or otherwise of the Individual General Partners. The two Independent General Partners each own 20 Units.
Under the terms of a computer service agreement, Technology Administrative Management, a division of TFL, charges the Partnership for its share of computer support costs. These amounts are included in computer services expenses.
The Partnership has a payable of $334,938 to an affiliated Partnership for the funding of an investment that was allocated between the Partnerships.
Retention bonuses were offered to and accepted by key employees of the Managing General Partners in late 2002. The expense for these bonuses, which were approved by the Independent General Partners during the September 2002 Individual General Partner meeting, was prepaid by the Partnership in October and December 2002. The amount of prepaid operating expenses was $371,570 and is being amortized over the remaining expected employment period. During 2003 and 2002, the partnership recognized $78,790 and $14,474 as operating expense related to the amortization of retention bonuses. The bonuses, incremented by annual salary increases, will be paid to those individuals who are still full-time employees of the Managing General Partners in April 2007. Upon the resignation of personnel no adjustment to the retention bonus amount previously paid by the Partnership to the Managing General Partners shall occur until a replacement person is hired.
Officers of the Managing General Partners occasionally receive stock options as compensation for serving on the Boards of Directors of portfolio companies. It is the Managing General Partners' policy that all such compensation be transferred to the investing partnerships. If the options are non-transferable, they are not recorded as an asset of the Partnership. Any profit from the exercise of such options will be transferred if and when the options are exercised and the underlying stock is sold by the officers. Any such profit is allocated amongst the Partnership and affiliated partnerships based upon their proportionate investments in the portfolio company. At December 31, 2003, the Partnership and affiliated partnerships had an indirect interest in non- transferable Endocare, Inc. and Physiometrix, Inc. options whose exercise price exceeded the current market value.
3. Allocation of Profits and Losses --------------------------------
In accordance with the Partnership Agreement (see Note 1), net profits and losses of the Partnership are allocated based on the beginning-of- year partners' capital balances as follows:
(a) Profits:
(i) First, to those partners with deficit capital account balances until such deficits have been eliminated;
(ii) Second, to the partners as necessary to offset net decrease in partners' capital resulting from operations and sales commissions previously allocated under (b)(ii) below; then
(iii)75 percent to the Limited Partners as a group in proportion to the number of Units, 5 percent to the Limited Partners in proportion to the Unit Months of each Limited Partner, and 20 percent to the Managing General Partners. Unit months are the number of half months a Unit would be outstanding if held from the date the original holder of such Unit was deemed admitted into the Partnership until the termination of the offering of Units.
(b) Losses:
(i) First, to the partners as necessary to offset the net profits previously allocated to the partners under (a)(iii) above; then
(ii) 99 percent to the Limited Partners and 1 percent to the Managing General Partners.
Losses allocable to Limited Partners in excess of their capital account balances will be allocated to the Managing General Partners. Net profit thereafter, otherwise allocable to those Limited Partners, is allocated to the Managing General Partners to the extent of such losses. For allocation purposes, the Units held by the Independent General Partners will be treated as Units held by Limited Partners.
Losses from unaffiliated venture capital limited partnership investments are allocated pursuant to section (b) above. Gains are allocated 99 percent to the Limited Partners and 1 percent to the Managing General Partners.
4. Equity Investments ------------------
All investments are valued at fair value as determined in good faith by the Managing General Partners. See Note 1-Investments.
Marketable Equity Securities - ----------------------------
At December 31, 2003 and 2002, marketable equity securities had aggregate costs of $1,843,114 and $1,844,774, respectively, and aggregate fair market values of $727,973 and $369,111, respectively. The net unrealized losses at December 31, 2003 and 2002, included gross gains of $102,754 and $22,809, respectively.
Restricted Securities - ---------------------
At December 31, 2003 and 2002, restricted securities had aggregate costs of $13,028,196 and $19,761,161, respectively, and aggregate fair market values of $5,425,851 and $6,458,857, respectively, representing 47.5 percent and 66.3 percent, respectively, of the net assets of the Partnership.
Significant purchases, sales and write-offs of equity investments during 2003 are as follows:
Acusphere, Inc. - ---------------
In April and June of 2003, the Partnership funded convertible secured notes of $537,267 and $144,622, respectively. In September 2003, Acusphere shares were subject to a reverse split, which converted the Partnership's 556,337 Preferred shares and convertible notes receivable into 181,683 common shares with a cost value of $1,725,614. On October 8, 2003, Acusphere conducted an initial public offering which priced at $14 per share. The Partnership's Acusphere shares are subject to a 180- day lock-up period.
Avalon Vision Solutions, Inc. - -----------------------------
In December 2003, the Partnership recognized proceeds of $117,734 from Avalon Vision Solutions, Inc. to retire it's notes receivable, including accrued interest. The proceeds are recorded as an other receivable, as the funds were not received until subsequent to year end. The Partnership recorded a realized loss of $85,020.
Capital Valley Ventures - -----------------------
In September 2003, the Partnership issued a secured non-recourse promissory note for $100,794 to the company with an interest rate of 4.25 percent. The note and accrued interest are due in September 2013. A $50,794 equity investment, which includes interest of $794, made in March 2002 was converted to debt and represents approximately half of this note.
CareCentric Solutions, Inc. - ---------------------------
On September 4, 2003, the company held a Special Meeting at which shareholders approved a merger with an investor group that had the effect of taking CareCentric private. The company has ceased reporting as a public company and its shares no longer trade on any exchange.
CellzDirect, Inc. - -----------------
In October 2003, the Partnership purchased 867,213 Series B preferred shares of the company for $335,000.
Innergy Power Corporation - -------------------------
In July 2003, the Partnership elected not to exercise a common stock warrant and wrote off the value of the warrant for a realized loss of $3,000. In August 2003, the Partnership received 9,760 Series C Preferred shares in lieu of $19,520 in accrued interest on a $244,000 promissory note due on December 31, 2003.
Impres Medical Inc. - -------------------
In August 2003, the Partnership issued a $315,344 convertible unsecured note to the company with an interest rate of 8% and a maturity date of June 2004. Warrants were also issued in conjunction with the note.
Periodontix, Inc. - -----------------
In September 2003, the Partnership wrote off its entire investment in Periodontix, Inc. for a realized loss of $937,327. In 2001, Periodontix, Inc.'s assets were acquired by Demegen, Inc., a publicly traded company in the pharmaceuticals industry. In 2003, Demegen was unsuccessful in efforts to raise additional capital and in April 2003 terminated its registration under Section 42(g) of the Securities Exchange Act of 1934 by filing a Form 15 with the SEC. The Partnership expects no return on its initial investment.
Pharmadigm, Inc. - ----------------
In December 2003, the Partnership wrote off its entire investment in the company, realizing a loss of $1,304,396. The Partnership expects no return in its investment after the company's two lead investors forced a cramdown in the last round of financing and other investors, including the Partnership, elected not to participate.
Pherin Pharmaceuticals, Inc. - ----------------------------
In March 2003, the Partnership wrote off its entire investment of $200,000 after Pherin Pharmaceuticals, Inc. ceased domestic operations. The Partnership does not expect any return on its investment.
Prolinx, Inc. - -------------
Prolinx, Inc. filed for bankruptcy in March 2003. The Partnership is unlikely to receive any proceeds from the liquidation and in March 2003 wrote off its entire investment in the company for a realized loss of $3,761,101.
Resolution Sciences Corporation - -------------------------------
Resolution Sciences Corporation filed for bankruptcy in February 2003. The Partnership is unlikely to receive any proceeds from the liquidation and in March 2003 wrote off its entire investment in the company for a realized loss of $1,188,393.
Tessera Technologies, Inc. (formerly Tessera, Inc.) - ---------------------------------------------------
In January 2003, Tessera, Inc., closed a corporate reorganization under which Tessera, Inc., became a wholly owned subsidiary of Tessera Technologies, Inc. The reorganization was intended to position the company for an initial public offering. On September 4, 2003, Tessera Technologies, Inc. filed a registration statement for a public offering. Under an agreement between Tessera Technologies and the Partnership, Tessera allowed the Partnership to sells its shares in the initial public offering on November 13, 2003. The Partnership liquidated its entire investment for proceeds of $6,853,652 and a realized gain of $6,297,152.
Virage, Inc. - ------------
In October 2003, the Partnership liquidated its investment in Virage, Inc. for proceeds of $1,571 and a realized loss of $89.
WorldRes.com, Inc. - ------------------
During the third quarter of 2003, WorldRes.com, Inc. repaid a convertible note issued by the Partnership. The Partnership received $150,867, including accrued interest on the note.
Venture Capital Limited Partnership Investments - -----------------------------------------------
During 2003, the Partnership received no stock distributions. Total cash distributions of $115,249, were received from O,W&W Pacrim Investments Limited, El Dorado Ventures III, L.P. and Spectrum Equity Investors, L.P. These distributions were recorded as realized gains.
In the year ended December 31, 2003, the Partnership recorded a $71,693 decrease in fair value, primarily as a result of the above activity and a net decrease in the fair value of the underlying investments of the partnerships.
Other Equity Investments - ------------------------
Other significant changes reflected in the Statements of Investments relate to market value fluctuations for publicly traded portfolio companies or changes in the fair value of private companies as determined in accordance with the policy described in Note 1 to the financial statements.
5. Subsequent Event ----------------
Subsequent to the year ended December 31, 2003, RedCell, Inc. notified the Partnership that it would repay $222,513 in notes receivable previously written off. That amount includes accrued interest through February 2004. In 1994, the Partnership purchased Series B Preferred shares in RedCell and two years later funded convertible notes receivable. RedCell was subsequently acquired by another company, and the new entity changed its name to ConjuChem, Inc. However, the notes receivable remained in RedCell's name. In 1998, the Partnership determined that any recovery on its investment, including the notes, was unlikely and wrote off its entire investment. In 2001, the remaining RedCell entity made a partial repayment of the notes receivable and issued new notes for the remainder. In February 2004, RedCell sold ConjuChem shares it had acquired in the acquisition in order to repay its remaining notes in full. The repayment to the Partnership will be reported in the first quarter 2004 financial statements as income from investments previously written off. The Partnership expects no further recovery on this investment.
6. Net (Increase) Decrease in Unrealized Depreciation of Equity ------------------------------------------------------------ Investments -----------
In accordance with the accounting policy as stated in Note 1, the Statements of Operations include a line item entitled "Net (increase) decrease in unrealized depreciation of equity investments." The table below discloses details of the changes:
7. Notes Receivable ----------------
Activity from January 1 through December 31 consisted of:
The interest rate on notes receivable at December 31, 2003, was 8.00 percent. All notes and accrued interest are due 2004.
8. Cash and Cash Equivalents -------------------------
Cash and cash equivalents at December 31, 2003 and 2002, consisted of:
9. Short-Term Borrowings ---------------------
In December 2001, the Partnership borrowed $1,200,000 from a commercial financial institution and pledged $1,200,000 in cash as collateral for the note. The 2001 note and accrued interest of $11,038 were repaid on March 15, 2002.
10. Distributions -------------
There was a $1,770,540 tax distribution to the General Partners during 2003.
11. Commitments and Contingencies -----------------------------
The Partnership is a party to financial instruments with off-balance- sheet risk in the normal course of its business. Generally, these instruments are commitments for future equity fundings, venture capital limited partnership investments, equipment financing commitments, or accounts receivable lines of credit that are outstanding but not currently fully utilized by a borrowing company. As they do not represent current outstanding balances, these unfunded commitments are properly not recognized in the financial statements. As of December 31, 2003 the Partnership had no such commitments.
In October 2000, Kanematsu Corporation, a creditor of one of the Partnership's portfolio companies, initiated an arbitration proceeding against the Partnership, two affiliated partnerships, and a fourth co- investor. Kanematsu was seeking to recover $2,000,000, the purchase price in a contract by which the Partnership and the other entities were alleged to have agreed to purchase certain debt securities of the portfolio company from Kanematsu. The Partnership and affiliated partnerships asserted counterclaims against Kanematsu. On February 12, 2002, the Partnership, affiliated partnerships and the co-investor were awarded $4,000,000 and all of Kanematsu's claims were denied. The award is in full settlement of all claims and counterclaims. The Partnership recognized revenue and a receivable of $666,667 as of February 12, 2002, for its proportionate share of the award. Kanematsu immediately filed a petition to vacate the award, and on October 9, 2002, the United States District Court issued an order confirming the arbitration award. Kanematsu appealed the order but in early November 2002 paid a forbearance fee of $200,000 in exchange for an option to settle all liabilities. On November 29, 2002, Kanematsu agreed to settle for $3,999,999. A decision on the allocation of the proceeds between the Partnership, affiliates and co-investor was reached in January 2003; however, a dispute regarding the legal fees arose. On February 13, 2003, the Partnership received $774,298, representing its proportionate share of the settlement, plus accrued interest, less disputed legal fees. The Partnership recognized the additional revenue and receivable of $107,631 at December 31, 2002. In March 2003, the law firm remitted an additional amount of $193,830 to the Partnership.
From time to time, the Partnership is subject to routine litigation incidental to the business of the Partnership. Although there can be no assurances as to the ultimate disposition of these matters and the proceeding disclosed above, it is the opinion of the Managing General Partners, based upon the information available at this time, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the results of operations and financial condition of the Partnership.
12. Financial Highlights --------------------
Pursuant to the Partnership Agreement, net profit shall be allocated first to those Partners with deficit capital account balances until such deficits have been eliminated. The net asset values shown above assume the Partnership is in liquidation. Upon liquidation, the General Partners would contribute capital equal to the amount of the Limited Partners deficit. As of December 31, 2003, the General Partners have a negative capital balance of $1,779,243. Upon liquidation, the General Partners would not be required to contribute cash to the Partnership, as the net asset value is greater than the General Partners' negative capital balance. Net asset value has been calculated in accordance with this provision of the Partnership Agreement.
SIGNATURES ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
TECHNOLOGY FUNDING VENTURE PARTNERS V, AN AGGRESSIVE GROWTH FUND, L.P.
By: TECHNOLOGY FUNDING INC. TECHNOLOGY FUNDING LTD. Managing General Partners
Date: March 15, 2004 By: /s/Charles R. Kokesh -------------------------------- Charles R. Kokesh President, Chief Executive Officer, Chief Financial Officer and Chairman of Technology Funding Inc. and Managing General Partner of Technology Funding Ltd.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Capacity Date --------- -------- ----
/s/Charles R. Kokesh President, Chief March 15, 2004 - ------------------------ Executive Officer, Charles R. Kokesh Chief Financial Officer and Chairman of Technology Funding Inc. and Managing General Partner of Technology Funding Ltd.
The above represents a majority of the Board of Directors of Technology Funding Inc. and the General Partners of Technology Funding Ltd.
Technology Funding Venture Partners V, L.P. 4:48 PM 03/16/04 (a Delaware limited partnership)
Page 1 of 53 Technology Funding Venture Partners V, L.P. (a Delaware limited partnership)