10-Q 1 mp1q202.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 June 30, 2002 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) 1107 Investment Boulevard, Suite 180 El Dorado Hills, California 94403 --------------------------------------- -------- (Address of principal executive offices) (Zip Code) (916) 941-1400 -------------------------------------------------- (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 market value of such Units cannot be determined. Forward-Looking Statements -------------------------- The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe harbor for forward-looking statements made by or on behalf of the Partnership. The Partnership and its representatives may from time to time make written or oral statements that are "forward-looking", including statements contained in this report and other filings with the Securities and Exchange Commission, and reports to the Partnership's shareholders and news releases. All statements that express expectations, estimates, forecasts and projections are forward-looking statements within the meaning of the Act. In addition, other written or oral statements which constitute forward-looking statements may be made by or on behalf of the Partnership. Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", "projects", "forecasts", "may", "should", variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in or suggested by such forward-looking statements. The Partnership undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. PAGE> 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 ---------------------------- The accompanying unaudited financial statements included herein have been prepared in accordance with the requirements of Form 10-Q and, therefore, do not include all information and footnotes which would be presented were such financial statements prepared in accordance with generally accepted accounting principles. These statements should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2001. 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. 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. The results of operations for such interim periods are not necessarily indicative of results of operations to be expected for the full year. 2. Termination and Liquidation of the Partnership ---------------------------------------------- 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. In March 2002, the Individual General Partners approved the retention of an independent third party to value the Partnership's private holdings and reviewed a draft of the proxy statement related to the dissolution, liquidation and termination of the Partnership. As of June 30, 2002, the valuation of the Partnership's holdings has been completed and the proxy statement is in review with the Securities and Exchange Commission. The Managing General Partners expect to submit the proxy statement to allow the Limited Partners to vote on an early termination of the partnership before the end of 2002. Should the Limited Partners vote to dissolve the partnership, the audited financial statements of the partnership will be prepared on a liquidation basis rather than as a going concern. The accompanying interim financial statements do not include any adjustments that might result from a change to accounting on a liquidation basis. The Partnership has been advised by its independent public accountants that should the Limited Partners approve the early dissolution of the Partnership, their report on those financial statements will be modified for that matter. 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 June 30, 2002 and December 31, 2001, was $2,290,848. At June 30, 2002 and December 31, 2001, gross unrealized appreciation and depreciation on investments based on cost for federal income tax purposes were as follows: June 30, December 31, 2002 2001 ---------- ------------ Unrealized appreciation $ 58,202 $ 386,084 Unrealized depreciation (1,435,508) (1,010,594) --------- --------- Net unrealized depreciation $(1,377,306) $ (624,510) ========= =========

4. Related Party Transactions -------------------------- Related party costs are included in investment expenses shown on the Statements of Operations. Related party costs for the six months ended June 30, 2002 and 2001, were as follows: 2002 2001 ------ ------ Management fees $ 71,368 $76,655 Individual General Partners' compensation 14,000 19,957 Reimbursable operating expenses 150,166 123,862

Management fees are equal to 2 percent of the total Limited Partner capital contributions for the first year of Partnership operations through the sixth year. Beginning in the seventh year (May 2001), management fees declined by 10 percent per year from the initial 2 percent. 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 $11,895 at June 30, 2002, and were netted against due from related parties. At December 21, 2001, management fees of $11,895 were included in due to related parties. 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. 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 from related parties for such expenses were $26,895 and $8,123 at June 30, 2002 and December 31, 2001, repectively. 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 June 30, 2002, the Partnership and affiliated partnerships had an indirect interest in non-transferable Endocare, Inc. options with a fair value of $145,081. 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 $247,500 at June 30, 2002 and December 31, 2001. These securities had aggregate fair values of $254,499 and $229,967 at June 30, 2002 and December 31, 2001, respectively. Gross gains at June 30, 2002, were $6,999. At December 31, 2001, there were no gross gains. Restricted Securities --------------------- At June 30, 2002 and December 31, 2001, restricted securities had aggregate fair values of $659,043 and $1,436,371 respectively, representing 22.5 percent and 35.9 percent, respectively, of the net assets of the Partnership. There were no significant purchases or sales of equity investments during the six months ended June 30, 2002. 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, 2001 Form 10-K. 6. Cash and Cash Equivalents ------------------------- Cash and cash equivalents at June 30, 2002 and December 31, 2001, consisted of: 2002 2001 -------- --------- Demand accounts $ 36,003 $ 13,501 Money market accounts 1,994,333 2,365,299 --------- --------- Total $2,030,336 $2,378,800 ========= =========

7. Commitments and Contingencies ----------------------------- From time to time, the Partnership becomes 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 investment fundings, 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. At June 30, 2002, there were no unfunded investment commitments to portfolio companies and venture capital limited partnerships. Occasionally, 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 materially adverse effect on the results of operations and financial condition of the Partnership. 8. Financial Highlights --------------------

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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. In March 2002, the Individual General Partners approved the retention of an independent third party to value the Partnership's private holdings and reviewed a draft of the proxy statement related to the dissolution, liquidation and termination of the Partnership. As of June 30, 2002, the valuation of the Partnership's holdings has been completed and the proxy statement is in review with the Securities and Exchange Commission. The Managing General Partners expect to submit the proxy statement to allow the Limited Partners to vote on an early termination of the partnership before the end of 2002. Should the Limited Partners vote to dissolve the partnership, the audited financial statements of the partnership will be prepared on a liquidation basis rather than as a going concern. The accompanying interim financial statements do not include any adjustments that might result from a change to accounting on a liquidation basis. The Partnership has been advised by its independent public accountants that should the Limited Partners approve the early dissolution of the Partnership, their report on those financial statements will be modified for that matter. 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 included in the Partnership's December 31, 2001 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 six months ended June 30, 2002, net cash used by operating activities totaled $348,464. The Partnership paid management fees of $71,368 to the Managing General Partners and reimbursed related parties for investment expenses of $168,938. In addition, $14,000 was paid to the Individual General Partners as compensation for their services. The Partnership paid other investment expenses of $110,201. Interest income of $16,043 was received. Cash and cash equivalents at June 30, 2002, were $2,030,336. Future proceeds from investment sales and operating cash reserves are expected to be adequate to fund Partnership operations through the next twelve months. Results of Operations --------------------- Current quarter compared to corresponding quarter in the preceding year ----------------------------------------------------------------------- Net decrease in partners' capital resulting from operations was $1,062,548 for the quarter ended June 30, 2002, compared to a net increase in partners' capital resulting from operations of $706,231 for the same period in 2001. Net unrealized depreciation on equity investments was $1,185,870 and $304,670 at June 30 and March 31, 2002, respectively. During the quarter ended June 30, 2002, the Partnership recorded an increase in net unrealized depreciation on equity investments of $881,200 compared to a decrease in unrealized depreciation of $880,080 during the quarter ended June 30, 2001. The increase in depreciation in 2002 was primarily attributable to a decrease in the publicly traded market price of Lifecell Corporation and a decrease in the fair value of Acusphere, Inc., a private portfolio company in the biotechnology industry. The decrease in net unrealized depreciation for the quarter ended June 30, 2001, was primarily attributable to an increase in the publicly traded market prices of portfolio companies in the medical/diagnostic and pharmaceutical industries, partially offset by a decrease in the fair value of Prolinx, Inc., a private portfolio company in the biotechnology industry. Total investment expenses were $188,663 for the quarter ended June 30, 2002, compared to $175,029 for the same period in 2001. The increase is primarily attributable to increased administrative and investor services activity and increased professional fees related to the pending proxy statement. 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 six months compared to corresponding six months in the preceding ------------------------------------------------------------------------ year ---- Net decrease in partners' capital resulting from operations was $1,077,850 for the six months ended June 30, 2002, compared to a net decrease in partners' capital resulting from operations of $418,213 for the same period in 2001. Net unrealized depreciation on equity investments was $1,185,870 and $433,074 at June 30, 2002 and December 31, 2001, respectively. During the six months ended June 30, 2002, the Partnership recorded an increase in net unrealized depreciation on equity investments of $752,796 compared to an increase in unrealized depreciation of $120,374 for the six months ended June 30, 2001. The increase in net unrealized depreciation on investments for the six months ended June 30, 2002, was primarily due to a decrease in the fair value of Acusphere, Inc. The change in 2001 was primarily attributable to a decrease in the fair value of Prolinx, Inc., a private portfolio company in the biotechnology industry, partially offset by an increase in the publicly traded market price of Endocare, Inc. Total investment expenses were $341,097 for the six months ended June 30, 2002, compared to $300,329 for the same period in 2001. The increase is primarily attributable to increased administrative and investor services activity and increased professional fees related to the pending proxy statement. II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) A report on Form 8-K was filed by the Registrant on June 28, 2002, to report the appointment of Grant Thornton LLP as the Partnership's public accountants. No financial statements were filed. On July 8, 2002, the Partnership filed it Amended and Restated Limited Partnership Agreement on Form 8-K. CERTIFICATION ------------- The undersigned hereby certifies, to such officer's knowledge, that this report fully complies with the requirements of Section 15(d) of the Securities Exchange Act of 1934 and that the information contained in the report fairly presents, in all material respects, the financial condition and results of operation of the Partnership. Date: August 14, 2002 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 Limited 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: August 14, 2002 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