10-Q 1 mp1q301.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from N/A to N/A --- --- Commission File No. 814-124 TECHNOLOGY FUNDING MEDICAL PARTNERS I, L.P. ------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 94-3166762 ------------------------------- --------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2000 Alameda de las Pulgas, Suite 250 San Mateo, California 94403 --------------------------------------- -------- (Address of principal executive offices) (Zip Code) (650) 345-2200 -------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Limited Partnership Units Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- No active market for the units of limited partnership interests ("Units") exists, and therefore the fair value of such Units cannot be determined. I. FINANCIAL INFORMATION Item 1. Financial Statements 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 (unaudited) -----------------------------------

The accompanying notes are an integral part of these financial statements. STATEMENTS OF CASH FLOWS (unaudited) -----------------------------------

The accompanying notes are an integral part of these financial statements. NOTES TO FINANCIAL STATEMENTS (unaudited) ---------------------------------------- 1. Interim Financial Statements ---------------------------- In the opinion of the Managing General Partners, the accompanying interim financial statements reflect all adjustments necessary for the fair presentation of the financial position, results of operations, and cash flows for the interim periods presented. These statements should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2000. Allocation of income and loss to Limited and General Partners is based on cumulative income and loss. Adjustments, if any, are reflected in the current quarter balances. 2. Future of Partnership Operations -------------------------------- The General Partners have made loans to the Partnership to finance its recurring losses from on-going operations and have arranged broker loans on conventional terms secured by the publicly-traded shares owned by the Partnership. Without such loans the Partnership would have been required to liquidate additional investments. The Partnership Agreement provides that the Partnership will terminate December 31, 2002, unless extended for two additional two-year periods by the Individual General Partners. In June 2001, the Individual General Partners directed the Managing General Partners to proceed with the earliest reasonable termination of the Partnership after assessing the potential return on the Partnership's investments in relation to the costs of continued operation. The Managing General Partners are currently exploring alternatives for termination of the Partnership and the liquidation of its investments. There is no ready market for many of the Partnership's investments. The fair value of the Partnership's investments at September 30, 2001 may differ significantly from a value that would have been used had the ultimate proceeds from the liquidation of the investments been known. The uncertainties arising from these circumstances raise substantial doubt about the Partnership's ability to continue as a going concern. The accompanying interim financial statements do not include any adjustments that might result from the outcome of these uncertainties. The Partnership has been advised by its independent public accountants that should the uncertainties surrounding the Partnership's future operations remain unresolved at year-end, their report on those financial statements will be modified for that contingency. 3. 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 September 30, 2001 and December 31, 2000, was $2,877,811 and $3,187,729, respectively. At September 30, 2001 and December 31, 2000, gross unrealized appreciation and depreciation on investments based on cost for federal income tax purposes were as follows: September 30, December 31, 2001 2000 ------------ ------------ Unrealized appreciation $ 1,495,221 $1,068,550 Unrealized depreciation (1,143,086) (779,925) --------- --------- Net unrealized appreciation $ 352,135 $ 288,625 ========= =========

4. Related Party Transactions -------------------------- Related party costs are included in investment expenses shown on the Statements of Operations. Related party costs for the nine months ended September 30, 2001 and 2000, were as follows: 2001 2000 ------ ------ Management fees $112,339 $118,947 Individual General Partners' compensation 29,580 22,539 Reimbursable operating expenses 183,886 133,903

Certain reimbursable expenses have been accrued based upon interim estimates prepared by the Managing General Partners and are adjusted to actual costs periodically. Amounts due to related parties for such expenses were $23,239 and $520,544 at September 30, 2001 and December 31, 2000, respectively. Management fees due to the Managing General Partners were $11,895 and $118,948 at September 30, 2001 and December 31, 2000, respectively, and were included in due to related parties. 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 on their proportionate investments in the portfolio company. At September 30, 2001, the Partnership and affiliated partnerships had an indirect interest in non-transferable Endocare, Inc. options with a fair value of $207,619. 5. Equity Investments ------------------ All investments are valued at fair value as determined in good faith by the Managing General Partners. Marketable Equity Securities ---------------------------- Marketable equity securities had aggregate costs of $344,900 and $395,208 at September 30, 2001 and December 31, 2000, respectively, and aggregate fair values of $194,881 and $233,301 at September 30, 2001 and December 31, 2000, respectively. The net unrealized losses at September 30, 2001 and December 31, 2000, included gross gains of $0 and $9,250, respectively. Restricted Securities --------------------- At September 30, 2001 and December 31, 2000, restricted securities had aggregate fair values of $3,035,065 and $3,243,053, respectively, representing 131 percent and 115 percent, respectively, of the net assets of the Partnership. Adesso Healthcare Technology Services, Inc. ------------------------------------------- The company ceased operations during the quarter and the Partnership is not expecting any returns on it investments. Preferred shares and convertible notes totaling $162,925 were written off as of September 30, 2001. Axys Pharmaceuticals, Inc. -------------------------- In September 2001, the Partnership sold 10,000 common shares in the company for proceeds of $34,394 and realized a loss of $12,606. Curis, Inc. ----------- In September 2001, the Partnership sold 2,313 common shares in the company for proceeds of $13,762 and realized a loss of $13,271. deCODE Genetics, Inc. --------------------- In September 2001, the Partnership sold 4,887 common shares in the company for proceeds of $35,039 and realized a loss of $8,944. Inspire Pharmaceuticals, Inc. ----------------------------- In September 2001, the Partnership sold 9,309 common shares in the company for proceeds of $102,191 and realized a gain of $18,410. Periodontix, Inc. ----------------- The assets of the company have been acquired by Demegen, Inc. effective July 16, 2001. The Partnership is not expecting to receive any return on its investment. Prolinx, Inc. ------------- In May 2001, the company recapitalized and the Partnership's Preferred shares were converted into 197,436 common shares. The Partnership also converted a note, together with interest, totaling $27,355 into 30,394 Series A Preferred shares in conjunction with the recapitalization. Venture Capital Limited Partnership Investments ----------------------------------------------- In March and April 2001, the Partnership received stock distributions of deCODE Genetics, Inc. and Inspire Pharmaceuticals, Inc. with fair market values of $43,983 and $83,781, respectively. These distributions were recorded as a return of capital. In the nine months ended September 30, 2001, the Partnership recorded a $21,294 increase in fair value as a result of a net increase in the fair value of the underlying investments of the partnership, partially offset by decreases due to the above distributions. 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 included in the Partnership's December 31, 2000 Form 10-K. Subsequent Events ----------------- Subsequent to September 30, 2001, the Partnership sold its entire investment in CareCentric Solutions, Inc. for proceeds of $12,444 and realized a loss of $82,455. The fair value of the Partnership's investment in Endocare, Inc. increased by $282,720 as a result of an increase in the publicly traded market price on November 6, 2001. 6. Cash and Cash Equivalents ------------------------- Cash and cash equivalents at September 30, 2001 and December 31, 2000 consisted of: 2001 2000 ------ ------ Demand accounts $124,341 $36,873 Money market accounts 75 72 ------- ------ Total $124,416 $36,945 ======= ======

7. Short-Term Borrowings --------------------- The Partnership has a borrowing account with a financial institution. At September 30, 2001, the borrowing capacity of this account, which fluctuates based on the market value of the Partnership's Endocare shares pledged as collateral, was $1,281,178 and the outstanding balance was $970,593. The weighted-average interest rate for the nine months ended September 30, 2001 was 6.32 percent. Interest expense totaled $20,594 for the nine months ended September 30, 2001. At November 6, 2001, the borrowing capacity was $1,507,354 and the outstanding balance was $938,624. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources ------------------------------- The General Partners have made loans to the Partnership to finance its recurring losses from on-going operations and have arranged broker loans on conventional terms secured by the publicly-traded shares owned by the Partnership. Without such loans the Partnership would have been required to liquidate additional investments. The Partnership Agreement provides that the Partnership will terminate December 31, 2002, unless extended for two additional two-year periods by the Individual General Partners. In September 2001, the Individual General Partners directed the Managing General Partners to proceed with the earliest reasonable termination of the Partnership after assessing the potential return on the Partnership's investments in relation to the costs of continued operation. The Managing General Partners are currently exploring alternatives for termination of the Partnership and the liquidation of its investments. There is no ready market for many of the Partnership's investments. The fair value of the Partnership's investments at September 30, 2001 may differ significantly from a value that would have been used had the ultimate proceeds from the liquidation of the investments been known. The uncertainties arising from these circumstances raise substantial doubt about the Partnership's ability to continue as a going concern. The accompanying interim financial statements do not include any adjustments that might result from the outcome of these uncertainties. The Partnership has been advised by its independent public accountants that should the uncertainties surrounding the Partnership's future operations remain unresolved at year-end, their report on those financial statements will be modified for that contingency. 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 included in the Partnership's December 31, 2000 Form 10-K. 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 nine months ended September 30, 2001, net cash used by operating activities totaled $1,068,508 The Partnership paid management fees of $219,392 to the Managing General Partners and reimbursed related parties for investment expenses of $681,191. In addition, $29,580 was paid to the Individual General Partners as compensation for their services. The Partnership paid other investment expenses of $138,853. Interest and dividend income of $508 was received. During the nine months ended September 30, 2001, proceeds from equity investment sales were $185,386 and proceeds from short-term borrowings totaled $970,593. At September 30, 2001, the Partnership had no unfunded commitments. The Partnership has a borrowing account with a financial institution. At September 30, 2001, the borrowing capacity of this account, which fluctuates based on the market value of the Partnership's Endocare shares pledged as collateral, was $1,281,178 and the outstanding balance was $970,593. The weighted-average interest rate for the nine months ended September 30, 2001 was 6.32 percent. Interest expense totaled $20,594 for the nine months ended September 30, 2001. At November 6, 2001, the borrowing capacity was $1,507,354 and the outstanding balance was $938,624. Cash and cash equivalents at September 30, 2001, were $124,416. Results of Operations --------------------- Current quarter compared to corresponding quarter in the preceding year ----------------------------------------------------------------------- Net decrease in partners' capital resulting from operations was $91,105 for the quarter ended September 30, 2001, compared to a net decrease in partners' capital resulting from operations of $9,829 for the same period in 2000. Net unrealized appreciation on equity investments was $477,135 and $241,034 at September 30 and June 30, 2001, respectively. During the quarter ended September 30, 2001, the Partnership recorded an increase in net unrealized appreciation on equity investments of $236,101 compared to an increase in unrealized appreciation of $56,852 during the quarter ended September 30, 2000. The change in 2001 was primarily attributable to an increase in the publicly traded market price of Endocare, Inc. and the write off of Adesso Healthcare Technology Services, Inc. The increase in net unrealized appreciation on investments for the quarter ended September 30, 2000 was primarily due to increases in the values of portfolio companies in the biotechnology industry offset by decreases in the medical/diagnostic equipment industry. Total investment expenses were $148,475 for the quarter ended September 30, 2001, compared to $128,847 for the same period in 2000. The increase is primarily attributable to increased administrative and investor services activity and increased interest expense. Given the inherent risk associated with the business of the Partnership, the future performance of the portfolio company investments may significantly impact future operations. Current nine months compared to corresponding nine months in the preceding -------------------------------------------------------------------------- year ---- Net decrease in partners' capital resulting from operations was $509,318 for the nine months ended September 30, 2001, compared to a net decrease in partners' capital resulting from operations of $1,464,255 for the same period in 2000. Net unrealized appreciation on equity investments was $477,135 and $361,408 at September 30, 2001 and December 31, 2000, respectively. During the nine months ended September 30, 2001, the Partnership recorded an increase in net unrealized appreciation on equity investments of $115,727 compared to a decrease in unrealized appreciation of $1,138,468 for the nine months ended September 30, 2000. The change in 2001 was primarily attributable to an increase in the publicly traded price of Endocare, Inc. and the write off of Adesso Healthcare Technology Services, Inc., partially offset by a decrease in the fair value of Prolinx, Inc., a private portfolio company in the biotechnology industry. The decrease in net unrealized appreciation on investments for the quarter ended September 30, 2000 was primarily due to decreases in the market prices of publicly traded securities and in the fair value of privately held portfolio companies. Total investment expenses were $448,804 for the nine months ended September 30, 2001, compared to $395,151 for the same period in 2000. The increase is primarily attributable to increased administrative and investor services activity and increased interest expense, partially offset by decreased investment operations activity. II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) No reports on Form 8-K were filed by the Partnership during the quarter ended September 30, 2001. 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 MEDICAL PARTNERS I, L.P. By: TECHNOLOGY FUNDING INC. TECHNOLOGY FUNDING LTD. Managing General Partners Date: November 8, 2001 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.

TECHNOLOGY FUNDING MEDICAL PARTNERS I L P 10-Q