TECHNOLOGY FUNDING VENTURE PARTNERS V, AN AGGRESSIVE GROWTH FUND, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
1994 ANNUAL REPORT
Dear Venture Partners V Investor:
During 1994, Venture Partners V continued to grow, both through the
addition of nine new companies and one private venture limited
partnership as well as through the development of more mature
investments. Spanning the biotechnology, medical, industrial and
business automation, and communications industries, the 1994 additions
to the portfolio were: Avalon Imaging, Bolder Technology, CV
Therapeutics, Khepri Pharmaceuticals, Megabios, Positive
Communications, R2 Technology, RedCell, Unitech Telecom, and Spectrum
Equity Investors, L.P.
Developments at the Partnership's active portfolio companies are
outlined here and discussed in more detail in the Portfolio Review
section of this report. During 1994, two portfolio companies--UroMed
Corporation and TheraTx, Inc.--completed initial public offerings
(IPOs). The Partnership sold a major portion of its shares in the two
companies during the fourth quarter for significant gains. Also during
1994, the Partnership sold its remaining shares in EROX Corporation and
OrthoLogic for small gains.
In early 1994, Medical Composite Technology (MCT) was acquired by
Everest & Jennings [ASE: EJ], the third-largest supplier of wheelchairs
worldwide. In addition, during 1994 five portfolio companies completed
new financing rounds to sustain growth. As a result, the Partnership
received shares in the public company. While the Partnership achieved
overall growth in 1994, several companies experienced setbacks.
Operations at Oculon were significantly curtailed during the fourth
quarter after its products failed to demonstrate conclusive
effectiveness in clinical trials. At year-end, Transphase Systems,
designer of power-saving thermal energy storage systems for large
industrial users, had fallen behind in repayment of its Partnership
loan, primarily because of action taken by one of its utility
customers, which claimed damages due to Transphase missing milestones
as well as system performance issues. The Partnership may restructure
the loan to allow for the customer problems to be resolved.
SRG Holdings experienced weak sales and failed to close a needed
private placement during 1994, leading to a workforce reduction. The
company faces a strong challenge in building its business in 1995.
Also attempting to recover from disappointing sales in 1994 is the
Partnership's retail investment, Yes! Entertainment. Finally, Coded
Communications Corporation, which early in the year achieved trading
status on the NASDAQ system, was delisted from trading at the end of
the year because of a drop in the company's net worth.
Having raised $40 million, Venture Partners V has invested $19.6
million in a growing portfolio of 33 individual companies and 5 other
venture limited partnerships. Of these, only one company has failed to
date. The Partnership plans to expand its portfolio further through
additional investments over the next several years. As discussed in
the Portfolio Review section of this report, the Partnership's
portfolio contains several companies that are poised for potential exit
opportunities over the next two to three years as well as a number of
young companies that are just beginning to develop into mature
organizations.
We hope that this Annual Report, with its enclosed Portfolio Review and
Financial Highlights, increases your understanding of the portfolio and
your investment.
For the General Partners,
Frank R. Pope
General Partner
Technology Funding Ltd.
<PAGE>
1994 PORTFOLIO REVIEW
With 9 new additions in 1994, the Venture Partners V portfolio included
$19.6 million invested or committed in 33 companies and 5 venture
limited partnerships at December 31, 1994. A large portion of the
portfolio focuses on the medical and pharmaceuticals industries.
Arcturus Pharmaceutical Corporation, a developer of dermatological
therapeutics, continued to make progress in its clinical trials of
dermatological therapeutics that incorporate innovative drug-delivery
technology. In October, the company filed with the FDA for an
Investigational New Drug study covering its first-generation
immunosuppressant. Clinical studies of the company's topical delivery
system for an antihistamine is now in Phase II, with Phase III expected
to be completed by spring of 1995. In May 1994, the company entered
into a strategic agreement with TransCanaDerm, Inc., covering
production and marketing of several of that company's dermatological
products in China. In the short term, Arcturus will rely on
formulations and compounds that have been widely available in the West,
via access to TransCanaDerm, which has 40 years of experience in
marketing dermatological products. Introduction of Arcturus products
will be the long-term plan.
Ascent Logic Corporation, maker of electronic system design software
primarily for the defense industry, has experienced longer-than-
anticipated sales cycles due to the complexity of the company's
products that requires training potential users prior to finalizing a
sale. In efforts to target commercial markets, the company continued
to develop new unbundled systems engineering products over the past
year. Although the initial release of these products received
considerable interest from the financial services industry, the company
is having more difficulty than originally anticipated in developing
business in the commercial, rather than defense-related, market for its
suite of systems design tools. In addition, it now appears that the
defense market is much smaller than the company had anticipated at the
beginning of 1994. During the first quarter of 1995, the company had a
new round of equity financing in which the Partnership did not
participate. Based upon the General Partners' opinion, the Partnership
recorded a decrease of $253,564 at December 31, 1994 in the fair value
of its existing investments.
Avalon Imaging, Inc. became part of the Partnership portfolio in
December 1994. The industrial automation company designs and
manufactures industrial vision systems used primarily to inspect molds
in plastics injection molding machines. Already a leader in its niche
for plastic injection molding, the company expects to leverage its
technology base to go after additional markets, such as metal injection
molding, on both the domestic and international fronts.
Biex, Inc., a developer of estrogen-based medical diagnostics for early
detection of the onset of labor, completed its initial, "proof of
concept" trials for its labor detection diagnostic with better than
expected results. The diagnostic is significantly more accurate in
predicting whether a woman will go into early labor or will reach full
term than any current alternative methods. As a result, the Biex
product could fit in exceptionally well in a managed-care program by
allowing obstetricians to segment out high-risk patient care from
standard care treatment and reduce healthcare costs associated with
premature births. The high degree of accuracy in the initial trials
helped attract a fourth-quarter financing round with a new investor at
a 35-percent increase in the value of the company's stock and is
expected to lead to a pre-marketing approval of the product in 1996.
The Partnership participated in a $1.4 million financing round in
October 1994, the pricing of which indicated an increase in fair value
of $44,872 in the Partnership's current Biex investment.
Bolder Technology was added to the Partnership portfolio in September
and October 1994 with a total investment of $550,000. The company
designs and manufactures advanced, rechargeable thin metal film (TMF)
batteries. Bolder's batteries deliver significantly more power at a
smaller size and can recharge faster than any commercial technology.
The company has signed an agreement to initially provide limited
quantities of batteries to a large power tool manufacturer. Initial
tests have been quite positive. The company is also in the midst of
discussions with several other potential corporate partners for a
variety of applications. The major challenge facing the company is to
achieve large-scale production capability for meeting its contracts.
Circadian, Inc. [NASDAQ: CKDN] partners with private doctor practices,
multi-doctor medical groups, and managed care groups to provide a
comprehensive asthma management program within existing medical
practices. The company closed a multifaceted collaboration in 1994
with Glaxo, which will invest or loan $5 million to facilitate opening
new centers. Additionally, Glaxo will pay a per-patient fee for access
to outcomes data that Circadian is tracking on Airways patients. Glaxo
has a significant effort and focus on marketing asthma drugs, and they
see the Airways program as a vehicle for enhancing their sales.
Circadian's hardware and diagnostic sales operations continued to
improve and become profitable over the past year. In June 1994, the
company announced a joint venture with Allergy Clinics of America
(ACA), the largest provider of comprehensive care for asthma and
allergy patients, to open 15 Airways Asthma Centers. During the fourth
quarter, ACA was acquired under terms that negated the Circadian joint
venture.
Coded Communications Corporation [NASDAQ: CODE], a maker of wireless
equipment used in land-based mobile radio communications systems,
expanded further into the commercial satellite services business in
mid-1994 by acquiring a 40 percent stake in Domestic Satellite
Philippines Inc. (DOMSAT), a provider of satellite-based communications
services in the Philippines. In addition, Coded's satellite
communications division, ComViSat, booked its first customer order,
valued at more than $2.5 million, in the third quarter of 1994. The
company has been pursuing very large equipment orders, the timing of
which can have a profound effect on quarterly financial reporting. In
December, the company's stock was delisted from the NASDAQ SmallCap
Market because its net shareholders' equity had fallen below $1
million. Given the timing of the event, the Partnership recorded a
decrease in fair value of $705,669 to reflect the publicly traded
market price at December 31, 1994. Coded is actively pursuing
financing as well as other options in order to achieve NASDAQ listing
compliance. Following the end of 1994, the company retained the Bank
of Boston as the financial advisor in connection with a contemplated
private placement. Coded remains firmly planted in the fleet
management industry, providing wireless data networks, automatic
vehicle location systems, mobile computer terminals, and network
software through distributors in the U.S. and Europe.
CV Therapeutics, added to the Venture Partners V portfolio in March
1994, is dedicated to discovery and development of novel, cost-
effective treatments for chronic cardiovascular disease, using new
tools of molecular cardiology combined with the clinical cardiology
expertise of its founders. The company's initial products involve CVT-
1, a novel inhibitor of cholesterol absorption, which should offer
significantly reduced toxicity and side effects compared to existing
drugs. CV Therapeutics is also developing inhibiting antisense
compounds for restenosis, the reclosure of arteries that commonly
occurs following angioplasty. Early in 1994, the company closed a
$16.6 million private placement designed to provide resources through
1995. Plans for CVT-1 remained on target throughout the year. A
multiple-dose trial was completed in June 1994 showing no clinically
significant side effects. Formulations were completed in November for
both liquid and tablet. The company's manufacturing process was
refined and put in place to meet demand for the Phase II multicenter
clinical trials begun in late 1994. Parameters of the CVT-1 Phase IIA
dose-finding study have been set and 15 investigative sites have been
selected. Patient enrollment will begin in January 1995.
During the first quarter of 1994, the Partnership sold its remaining
holdings in EROX Corporation [NASDAQ: EROX] for total proceeds of
$193,437 and a realized gain of $83,437. In 1993, the Partnership had
sold 90,000 shares for a realized gain of $56,313. A developer of
pheromone technology-based fragrances, EROX had launched its new
fragrance RealmTM in 1993 with a marketing concentration on direct
marketing television spots called "infomercials."
Intelliwire, a spin-off of portfolio company Physiometrix, Intelliwire
is making some progress on its steerable guidewires and balloon
catheter and is about to begin animal trials on the product. Also
under development are a rapid-exchange guide wire and catheter system
that does not interfere with the very strong patents that apply to
competing products. Intelliwire's design also has distinct advantages
over existing products, particularly with respect to ease of use.
Intelliwire is a minor investment for the Partnership, which does not
intend to invest in future rounds.
Khepri Pharmaceuticals was added to the portfolio in November 1994.
Khepri Pharmaceuticals is an early-stage biopharmaceutical company
focused on the discovery and development of novel drugs based on
proteases and protease inhibitors. Based in South San Francisco,
California, Khepri was formed in September 1992 to exploit a new
understanding of the role of proteases in human disease. Initial
disease targets are small cell lung cancer, asthma, and diseases
characterized by tissue destruction such as rheumatoid arthritis,
osteoporosis, and stroke. Khepri is in discussions with potential
corporate partners to support the development and marketing of its
protease-based drug programs.
Lynk Systems is a provider of third-party processing of financial
transactions. The company's initial focus has been on debit
transactions conducted through its "scrip" terminals, which are similar
to automated teller machines. Instead of cash, the system issues a
coupon that is used to make a purchase. The company significantly
expanded its installed base of scrip terminals over the past year and
aggressively pursued the credit transaction processing market. Several
large credit institutions, including the Commercial Bank of Georgia and
MasterCard, formed agreements with Lynk during 1994, in part because of
the company's advantage of providing both credit and debit services in
one package. Lynk invested in setting up the infrastructure to develop
the credit business throughout most of 1994. Entering 1995, the
company anticipates that recurring revenues will begin to surpass
overhead associated with the development of this second market during
early 1995.
Medical Composite Technology (MCT) was acquired by Everest & Jennings
International [AMEX: EJ] in January 1994. The Partnership's holdings
in MCT were exchanged for 592,717 unrestricted shares of Everest &
Jennings common stock. Everest & Jennings, which is engaged in the
design, manufacture and marketing of wheelchairs, homecare beds and
other durable medical equipment, is in the midst of a turnaround, and
the new management team has done an excellent job of stabilizing the
company. During this process, the company has kept a relatively low
profile, and the stock market has yet to recognize the significant new
potential of the company. At this point, the company is starting to
realize the benefits of cost controls, improved product deliveries and
improvement in operating efficiencies. Moving into its second year of
merged operations E&J is continuing to post improved financial
performance. If the company is successful in rolling out innovative
new products designed by MCT, it is hoped that E&J's stock price will
improve in 1995.
Megabios Corporation, a first-stage biotechnology company specializing
in gene therapy, was added to the Partnership's portfolio in September
1994. Following that investment, the company has hired a full-time
CEO, raised an additional $1 million in a equity financing, and moved
into a new, larger facility. Megabios has focused on completing its
management team and was negotiating at year end with a highly rated
candidate to head research and development. The company has
demonstrated the ability to deliver gene-based therapeutic agents
through a number of routes of administration including aerosol,
intravenous, and direct injection. Megabios has formed is first major
partnership, with Glaxo, in the field of fighting cystic fibrosis, and
is broadening its technology platform to collaborate with additional
corporate partners in the coming years.
Molecular Geriatrics Corporation (MGC) closed a $10.4 million private
placement in April 1994. The company is in partnering discussions with
several pharmaceutical companies regarding development efforts for
MGC's Alzheimer's therapeutics. Progress also continues in developing
a definitive diagnostic that could ultimately provide a swift diagnosis
of Alzheimer's at lower cost and also provide utility in monitoring the
progress of the disease. An IPO planned for late December was
postponed due to the departure of D. Blech Co. from the investor
group. The company is instead raising $1.7 million from private
investors to fund further development of Alzheimer's diagnostics and
therapeutics. In addition, the company is seeking partners for its
Alzheimer diagnostic drug screening technology and has received
interest from several drug companies.
Oculon Corporation was a major portfolio disappointment in 1994. At
the end of 1994, the developer of cataracts diagnostics and therapeutic
Oculon experienced a series of negative developments. Citing personal
reasons, the company's experienced and respected CEO submitted his
resignation. An equally difficult problem arose regarding the
company's clinical trials. Oculon was running two trials in parallel
for its initial lead compound, OC-2, which is designed to prevent post-
surgical cataracts. One of the trials was a formal Phase II study; the
second was a smaller, informal study designed to provide the company
with early efficacy data. The company found that OC-2 demonstrated no
efficacy in preventing or even inhibiting development of post-surgical
cataracts. Consequently, both studies have been halted and all OC-2
development efforts have been canceled. As a result, the General
Partners have determined that there has been a permanent decline in the
value of the Partnership's investment. Accordingly, the Partnership
has written off its investment of $460,000, of which $350,000 was
outstanding as of January 1, 1994. Oculon's board is currently
evaluating options for proceeding with the company.
In January 1994, the Partnership sold all of its holdings in OrthoLogic
Corporation [NASDAQ: OLGC] for total proceeds of $19,079 and a realized
gain of $8,578. The company had gone public in January 1993.
Oxford GlycoSystems Group PLC, an established leader in the growing
field of carbohydrate technology, is the sole supplier of
instrumentation for the separation, analysis, and sequencing of
carbohydrate molecules. Oxford's GlycoPrep isolates and purifies
carbohydrate molecules, and its RAAM product is the only carbohydrate
sequencer currently on the market. The company's sophisticated
instruments, biochemical products, and contract services are used by
drug developers and manufacturers. In 1994, research product sales and
instrument sales each increased by more than 50 percent over the
preceding year, with biochemicals registering a smaller gain.
Carbohydrate library development, the highly detailed cataloguing of
carbohydrate configurations, continues as a priority in the company's
research program. With market conditions continuing to preclude an
IPO, the company has been seeking an acquisition in the instruments
area to support instrument sales and has acquired the electrophoresis
business from Millipore. In parallel, Oxford is closing a $7.5 million
financing as of late March 1995.
Paradigm Biosciences, Inc., an early-stage developer of human
therapeutics for age-related immunosuppression, trauma-induced
immunosuppression, and certain autoimmune disorders, announced
encouraging preliminary results from the mid-year clinical trials of
its influenza vaccine technology. The company, whose technology
utilizes a novel approach to treating immune disorders that relies on
the body's own chemistry, began potential partnering discussions with a
leading vaccine developer for the design of an improved influenza
vaccine and with other pharmaceutical companies to develop a portfolio
of vaccine products. The company continues to refine selection of its
first candidate for clinical study and has narrowed its choices to
three significant fields. Paradigm will file a company-sponsored
clinical study in May 1995 involving the pro-hormone, DHEAS. It has
also structured a relationship for supply of DHEAS with Kaneko, a
Japanese drug company.
Periodontix, Inc. is an early-stage biotechnology firm attempting to
develop the first therapeutic agents and treatments for periodontitis
and gingivitis. In August 1994, the company moved into permanent
headquarters and laboratories in Watertown, Massachusetts. The company
has synthesized and evaluated antimicrobial activity of a number of new
peptides based on the natural histatin proteins found in saliva. The
company has identified two that have good antimicrobial activity even
against the microorganism associated with periodontal disease. In
addition, the company has good leads on several more peptides that are
being synthesized under contract prior to evaluation by Periodontix in
1995. Periodontix has discovered that there are both active and
inactive forms of the peptide molecules that have been under study.
Further analysis of the distinguishing characteristics is currently
under way, and the company expects to begin clinical studies of its
peptide compounds in early 1995. Scientific work continues on a
contract basis with Dr. Frank Oppenheim, the inventor, at Boston
University, an institution recognized for its experience with delivery
systems and biocompatible materials.
PHERIN Corporation, a developer of therapeutics to treat disorders such
as sexual dysfunction, received its first patent in April 1994 to
protect the design and delivery of specific pheromones to a site in the
nasal cavity called the vomeronasal organ. The company is developing a
number of proprietary, synthetic derivatives of pheromones called
vomeropherins. The nasally administered vomeropherin appears to offer
several advantages, including quick delivery to the central nervous
system, rapid action, and fewer side effects. The first testing began
in 1994 on an anxiolytic in a small, pre-clinical trial. In the fourth
quarter, the company recently hired a medical director to plan and
launch clinical trials. In late 1993, PHERIN completed a $1.5 million
equity round in which the Partnership did not participate. Based upon
the General Partners' assessment of the round, the Partnership recorded
a decrease in fair value of $500,000 for its PHERIN holdings.
During 1994, Physiometrix, Inc., a developer of neuromonitoring
systems, had a reverse stock split and closed two rounds of financing.
The pricing of the second round, in which the Partnership did not
participate, indicated an increase in fair value of $1,579,912 for the
Partnership's existing investment. The financings should allow the
company to accelerate the market roll-out of its initial product, the
HydroDot NeuroMonitoring System, as well as new product development.
The NeuroSave Digital Archiving system is slated for market launch in
the first quarter of 1995. Additional disposable products for the
cardiology market have, or are close to, receiving FDA approval and
will be launched through corporate partners in the same time frame. To
support its development into an operating company, Physiometrix is
relocating most of its operation to Boston, Massachusetts, retaining a
downscaled facility on the West Coast for development activities.
In September 1994, Positive Communication, a nationwide distributor of
pagers and paging services, was added to the Partnership portfolio.
The company wholesales pagers to retail chains and functions as a
reseller of paging airtime to resulting subscribers from its pager
sales. As a reseller, Positive buys airtime at wholesale rates from
major carriers and directly resells the service to customers. The
company targets its products and services at the retail consumer
market, which is the most rapidly growing segment of the general paging
market.
R2 Technology was added to the Partnership portfolio in May 1994. The
early-stage medical equipment company is developing computerized
mammography systems that assist radiologists in significantly improving
the diagnoses of mammograms. In July, the company announced a contract
with Lockheed to assess the feasibility of using Lockheed's neural
network, a computer architecture capable of learning from experience,
to aid in the detection of breast cancer in its earliest stages. R2
has developed two separate systems for displaying its output for
reading mammograms and is testing them in collaborations with the Palo
Alto Clinic in northern California. The prototype sample of its
light-box viewing system continued to detect about 50 percent of
previously undetected cancers in the test samples being used for
evaluation in 1994. The company has had ongoing discussions with
several FDA consultants in preparation for its clinical trials filing
and is beginning discussions with insurance companies and health plan
providers regarding the reimbursablity of computed mammography
technology.
RedCell, Inc., a first-stage biotechnology company seeking to become a
leader in the growing field of red cell-mediated therapy, joined the
Partnership portfolio in late 1994. The company's "anchorage"
technology capitalizes on the unique physiology of red blood cells and
their continuous delivery to the body's tissues and organs through the
vascular system, using these cells as the basis for treatment of
diseases. The "anchor" comprising the basis of RedCell's technology is
a synthetic, organic molecule constructed to function much like an
adapter that connects other physiological elements, including
therapeutic drugs. Following the end of the year, the Partnership
participated in a $4.5 million financing with new investors.
SRG Holdings is a third-stage company that manufactures and distributes
fluid sealing consumables such as hoses, rubber gaskets, and packing
systems. SRG's goal has been to capitalize on the fragmented fluid-
sealing components sector of the maintenance, repair, and operations
(MRO) industry by creating the first national value-added distribution
system. In 1994, the company added a chief operations officer to
oversee formulation of a new operations plan and opened a facility in
Baton Rouge, Louisiana, considered an essential location in the
creation of its national network. On a negative note, an important
private placement failed to close, leading the company to institute a
reduction in its workforce and tighter inventory cost savings programs.
Having secured consolidated purchasing agreements with key suppliers,
however, the company enters 1995 focused on achieving profitability and
positive cash flow. During 1994, the Partnership issued convertible
notes totaling $173,141 to the company.
In early 1994, Tessera completed a new round of financing at a lower
valuation; the Partnership did not participate. In late 1994, another
round of financing was completed with a new investor; this financing
was at a higher valuation than the prior round, but equal to the
Partnership's cost basis. Formerly IST Associates, Tessera is
developing a multichip module technology.
TheraTx, Inc. [NASDAQ: THTX], a provider of therapy services in skilled
nursing facilities, had a highly successful year in 1994 that featured
steady expansion of its network of rehabilitation centers and a June 23
IPO. In May, TheraTx acquired PersonaCare, a larger organization whose
business complemented that of TheraTx. The combined assets made
TheraTx the premier sub-acute care provider in the country. The
integration of the broad range of sub-acute programs offered by
PersonaCare has proceeding smoothly. The company's IPO was at $12 per
share; the average cost of the Partnership's TheraTx holdings was $2.36
per share. The Partnership's warrants and preferred shares were
converted to 264,146 common shares in TheraTx at the IPO. Of these,
54,104 shares were sold into the offering, resulting in a realized gain
of $442,355 to the Partnership. By year end, an additional 129,000
shares had been sold raising the realized gain total for 1994 to
$2,594,804. In addition, the Partnership still held 81,042 shares at
year end with a December 31, 1994 value of over $1.5 million. In 1994,
TheraTx secured a $65 million revolving credit line that enabled it to
repay $14 million of existing debt, adding to $17 million of debt
previously retired from IPO proceeds. The arrangement also helped
finance another large acquisition made following year end. In January
1995, TheraTx acquired five skilled nursing facilities and an assisted
living facility in Florida previously managed by Southern Management
Services, Inc. as well as a national medical supply distribution
business with more than 1,000 customers nationwide and distribution
centers in five states.
Unitech Telecom was added to the Partnership portfolio in May 1994.
The Partnership issued a $100,000 convertible note receivable to the
company and received warrants to purchase 36,364 common shares at an
exercise price of $2.75 per share, expiring in May 1999. With offices
in Oakland, California, and Beijing and Hangzhou, China, Unitech is a
developer of telecommunications devices focused on the vast and rapidly
growing telecommunications market opportunity in China. Unitech's
products are currently used by over 17 Chinese telecommunications
companies, including municipalities of several large Chinese cities.
In July 1994, the company obtained a majority position in its joint
venture with Hangzhou PTT, Hangzhou Unitel. Unitech's goal is to
provide a "total solution" for local loop telephony systems. The
company is working with a number of vendors with complementary products
and plans to offer wireless transmission solutions in the future.
Unitech has begun testing Panasonic's Personal Handyphone System (PHS)
technology and has signed a joint development agreement with Panasonic
to integrate Unitech products with the PHS technology. Unitech is
looking at other wireless technologies as well.
UroMed Corporation [NASDAQ: URMD], a developer of medical devices for
use in urology and gynecology, completed its IPO on March 9, 1994 at
$8.00 per share, raising $40 million. The company's Reliance insert is
a balloon-tipped, single-use soft and expandable plug device used to
treat female urinary incontinence, which is said to affect 8.5 million
women in the U.S. At mid-year, UroMed received notice from the FDA
that the product would likely require a Pre-Market Approval (PMA)
filing when it was hoped that a less time-consuming 510(k) approval
route would suffice. Uncertainty over the issue coupled with generally
down market for medical issues caused the stock price to reach a low of
$3.00 in October and again in December. In late December, UroMed
signed an important $21 million distributorship agreement for the
Reliance Insert in Germany and moved into an expanded facility in
preparation for the planned launch. The company's stock price closed
1994 at an improved $5.50 per share. The Partnership shares, which
were converted into UroMed common stock at the IPO, were acquired for
an average of $1.59 per share. By year end, the Partnership, which
invested a total of $525,000 in UroMed in 1992, had sold 150,000 shares
for proceeds of $761,918. Following year end, the Partnership sold its
remaining shares for additional proceeds of $1,023,996.
For Velocity Development Corporation, a software publisher specializing
in the consumer software sector, 1994 was a pivotal year in terms of
redirection. A strong management team completed in early 1994
successfully shipped new software products and made progress toward
developing innovative new products through key relationships with major
manufacturers. Velocity's list of licensing and development
relationships now includes Time-Warner, Disney, Sony, Silicon
Graphics/Nintendo, Creative Labs, Apple and Sega. During 1994,
Velocity Development concluded an agreement with a major entertainment
conglomerate to provide networked computer games for forthcoming
virtual reality amusement parks. Velocity began discussions with a
major computer manufacturer and an interactive network company
concerning an on-line games "channel" that Velocity will develop.
Also, an agreement was reached with a leading multimedia hardware
vendor to bundle certain Velocity products with a forthcoming
multimedia hardware product. Velocity received a mid-year acquisition
offer from SoftKey. In the third quarter, the Partnership issued
$500,000 in convertible notes and received warrants for common shares
as part of a bridge financing round that strengthened Velocity's
negotiating position and provided time to review alternative financing
strategies. After weighing the benefits of selling its position to
SoftKey, the Partnership made the decision in late 1994 to increase its
stake in Velocity, making an additional $1,000,000 investment that,
together with the prior notes and interest, were converted into
12,572,652 Series A Preferred shares with a total cost basis of
$2,068,674. This investment was matched by an equity investment of
approximately $5 million by SoftKey. With these added resources and a
management team that has demonstrated its ability to generate value
despite adversity, Velocity is well positioned for future growth in the
information technology market. Coincident with the latest financing,
Velocity Development became a Delaware corporation now called Velocity,
Incorporated.
Yes! Entertainment Corporation is a second-stage consumer products firm
that specializes in interactive storytelling toys for children. The
most popular to date has been a talking stuffed animal called the TV
Teddy, Tell Me a Story players and books, and Pop-Up Sound Books.
Although the company did not expand to the extent anticipated in 1994,
Yes! Entertainment introduced two new Yes! Interactive Books and an
extension of the company's Princess of the Flowers line of products.
The company also executed a license agreement with the Walt Disney
Company to use Mickey Mouse and Winnie the Pooh characters in the
company's Come To Life product line. In May 1994, the company
completed a new financing round in which the Partnership did not
participate. The pricing of this round occurred at a lower price per
share and resulted in a decrease of $487,500 in the fair value of the
Partnership's referred stock holdings.
VENTURE CAPITAL PARTNERSHIPS
Colorado Venture Management Equity Fund IV, L.P., a $5.1 million
private venture capital limited partnership managed by the Boulder,
Colorado-based firm of Colorado Venture Management (CVM). The fund is
focused on start-up and early-stage ventures in services and
technology-based businesses and is expected to provide Venture Partners
V with an early view and access to new investment opportunities in the
Colorado area. During 1994, the fund placed a total of $2.02 million in
its first seven portfolio company investments, including Avalon Imaging
(a direct investment of Venture Partners V). As each of these
investments is in a very early stage of development, near-term
liquidity events are not currently expected from the fund.
El Dorado Ventures III, L.P. is a $41.6 million private venture capital
limited partnership managed by El Dorado Ventures, Inc., a venture firm
with Cupertino and Pasadena, California-based offices. The fund, which
focuses on early-stage investment opportunities in California, added 6
new companies to its portfolio during 1994. Total partners' capital
was increased by $5.7 million during the year by fund performance. To
date, El Dorado Ventures III has invested $17 million in 15 companies.
O,W&W Pacrim Investments, Ltd., is a Singapore-based $10 million
venture capital fund that was added to the portfolio in May 1993. The
fund will actively seek investments in the Pacific Rim, North America,
and Europe. This investment provides the Partnership with the
opportunity to further diversify capital in early-stage deals and
increases the likelihood of referrals for direct investment
opportunities. During 1994, OW&W added two new companies to its
portfolio, which now contains 11 active companies in locations
including Malaysia, Taiwan, Singapore, the Cayman Islands, Hong Kong,
the British Virgin Islands, and the United States. These investments
cover a spectrum from high technology to consumer/retail products and
services.
Spectrum Equity Investors, L.P. is a $100 million private venture
capital limited partnership focused specifically on early- to later-
stage companies in the communications industry. The businesses in
which it will invest include cellular telephones, pagers, specialized
mobile radio, specialty publishing and cable television. In 1994, the
fund completed its first three portfolio company investments.
Trinity Ventures IV, L.P. is a $45 million private venture capital
limited partnership managed by Trinity Ventures of San Mateo,
California. The fund is focused on investments in the software,
consumer, and healthcare industries and provides the Partnership with
an excellent referral base for investment opportunities. To date,
Trinity Ventures IV has invested a total of $12.7 million across 11
investment companies, 10 of which are still active.
<PAGE>
FINANCIAL HIGHLIGHTS
Cash and cash equivalents at December 31, 1994 were $11,371,533, down
from $16,187,289 at the end of 1993. In 1994, the Partnership
purchased or issued equity investments and notes receivable totaling
$8,642,432. Proceeds from sale of investments of $3,287,569 were
received along with repayments of notes receivable of $1,247,037.
During 1994, investment cost basis increased by $6.0 million primarily
due to new investments, partially offset by stock sales with a cost
basis of $.8 million and note repayments as discussed above, as well as
a $.5 million write-down related to Oculon. Fair value of investments
increased by $5.2 million primarily due to new investments funded.
The Partnership recorded a net income of $1,221,882 in 1994 compared to
$1,261,084 in 1993. The 1994 net income was mainly due to realized
gains from sale of equity investments of $3,209,979, partially offset
by a net operating loss of $689,890.
The net operating loss consisted of operating expenses of $800,000 and
management fees of $796,201, both of which were consistent with the
prior year; the Partnership also recognized interest income of
$943,311.
<PAGE>
SELECTED FINANCIAL DATA
FOR THE YEAR ENDED AND AS OF DECEMBER 31,
1994 1993 1992
Cash and cash equivalents $11,371,533 16,187,289 23,437,348
Total investments--cost basis 18,063,968 12,066,459 5,899,163
Total investments--fair value 20,420,915 15,180,488 7,123,199
Total liabilities (86,393) (123,688) (553,119)
Net assets 32,513,456 31,291,574 30,030,490
Cumulative distributions
paid to date (887,950) (887,950) (887,950)
Net operating loss (689,890) (503,124) (3,511,985)
Net realized gains from sale
of investments 3,209,979 65,814 --
Realized losses from investment
write-downs (541,125) (187,887) --
Net realized income (loss) 1,978,964 (628,909) (3,516,642)
Change in net unrealized fair value:
Equity investments (314,082) 1,933,993 1,297,036
Secured notes receivable (443,000) (44,000) (73,000)
Net income (loss) ) 1,221,882 1,261,084 (2,292,606)
Net realized income (loss) per Unit 5 (2) (16)
The comments in this letter and portfolio overview reflect the General
Partners' views. These items have not been reviewed or approved by the
Partnership's auditors. Copies of the complete 10-K Report filed with
the Securities and Exchange Commission are available upon request.
Incorporated by reference hereto is the Audited Financial Statements
contained in the Partnership's Annual Report on Form 10K filed with the
Securities and Exchange Commission on March 17, 1995.
