10-Q 1 mp1q204.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, 2004 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 Blvd., Suite 180 El Dorado Hills, California 95762 --------------------------------------- -------- (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 --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12B-2 of the Act). Yes No X --- --- 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. I. FINANCIAL INFORMATION Item 1. Financial Statements STATEMENTS OF NET ASSETS IN LIQUIDATION ---------------------------------------

The accompanying notes are an integral part of these financial statements. STATEMENTS OF INVESTMENTS IN LIQUIDATION ---------------------------------------

he accompanying notes are an integral part of these financial statements. STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION (unaudited) -------------------------------------------------------------

The accompanying notes are an integral part of these financial statements. STATEMENTS OF CHANGES IN 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 in the United States of America. These statements should be read in conjunction with the Annual Report on Form 10- K for the year ended December 31, 2003. 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 term expired on December 31, 2002, per the Partnership Agreement, and the Independent General Partners elected not to extend the term as provided in the Partnership Agreement. In December 2002, the Managing General Partners adopted a plan of liquidation. In anticipation of the liquidation and dissolution, the Individual General Partners, in March 2002 approved the retention of an independent third party to value the Partnership's private holdings and subsequently engaged the third party to seek buyers for those investments. One of those holdings was sold in 2002. No buyers were located for the remaining holdings. In October 2003, Acusphere, Inc., a private company in the biotechnology industry, conducted an initial public offering. Prior to the offering, the Partnership's shares were subject to a reverse split. Those shares were subject to a 180-day lock-up period which expired in April 2004. The Individual General Partners, acting as Trustee for the Partnership, directed the Managing General Partners to sell the Partnership's publicly traded holdings at the earliest possible time in light of existing market conditions. It is possible there will be no liquidity events or willing buyers for the remaining privately held assets. The Liquidating Trustee will consider a number of options, including abandonment of the assets, donations to an appropriate beneficiary or distribution to the Limited Partners. Upon dissolution of the Partnership, a final distribution will be made to Limited Partners. 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 of America, which may not equate to tax accounting. The cost of investments on a tax basis at June 30, 2004, and December 31, 2003, was $964,364 and $1,056,807, respectively. At June 30, 2004, and December 31, 2003, gross unrealized appreciation and depreciation on investments based on cost for federal income tax purposes were as follows:

New Accounting Pronouncements ----------------------------- 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. 4. Related Party Transactions -------------------------- Related party costs are included in investment expenses shown on the Statements of Changes in Net Assets in Liquidation. Related party costs for the six months ended June 30, 2004 and 2003, were as follows:

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. The Managing General Partners voted to cease paying management fees retroactive to January 1, 2004. Management fees due to the Managing General Partners were $0 and $5,049 and are included in due to related parties at June 30, 2004, and December 31, 2003, 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. 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 $3,847 at June 30, 2004. Amounts due from related parties were $7,266 at December 31, 2003. 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, 2004, the Partnership and affiliated partnerships had no indirect interest in non-transferable options. Retention bonuses were offered to and accepted by key employees of the Managing General Partners in late 2002. 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. 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 $953,750 and $247,500 at June 30, 2004, and December 31, 2003, and aggregate fair values of $1,561,460 and $644,057 at June 30, 2004, and December 31, 2003, respectively. The net unrealized gain at June 30, 2004, included gross gains of $919,038. The gross gains at December 31, 2003, were $396,533. Restricted Securities --------------------- At June 30, 2004, and December 31, 2003, restricted securities had aggregate costs of $10,614 and $767,530, respectively, and aggregate fair values of $0 and $411,335, respectively, representing 0.0 percent and 17.0 percent of the net assets of the Partnership, respectively. Significant purchases, sales and write-offs of equity investments during the six months ended June 30, 2004, were as follows: RedCell, Inc. (subsequently ConjuChem, Inc.) -------------------------------------------- The Partnership received $180,011 for payment of notes receivable from the company that had been written off in 1998. The payment was recorded as a realized gain. Prior to 1998, RedCell was acquired by another company, and the new entity was renamed ConjuChem, Inc. However, the notes receivable remained in RedCell's name. In February 2004, the remaining RedCell entity sold ConjuChem shares it had acquired in the acquisition to repay its remaining notes in full. Medical Science Partners II, L.P. --------------------------------- In June 2004, the Partnership wrote off its entire remaining investment in the venture capital limited partnership, realizing a loss of $50,671. Medical Science Partners II, L.P., terminated on December 31, 2003. In May 2004, the Partnership received notice from Medical Science Partners II that it will receive a final distribution from this investment consisting of shares in six privately held companies with a total fair value of $139,363 and $8,026 in cash. Other Equity Investments ------------------------ Other significant changes reflected in the Statements of Investments in Liquidation 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, 2003, Form 10-K. 6. Subsequent Events ----------------- In July 2004, the Partnership, through a series of transactions, sold 17,241 shares in LifeCell Corporation at an average price of $9.51 per share, for total gross proceeds of $164,039, with an expected realized gain of $122,960. As of June 30, 2004, LifeCell is valued at its then closing market price of $11.23 per share. Assuming the Partnership used the subsequent sale price of $9.51 per share as the market price for LifeCell as of June 30, 2004, the Partnerships unrealized appreciation on equity investments would have been $378,089 as compared to $556,757, which is reflected in the accompanying financial statements. As of August 11, 2004, the closing market price for LifeCell was $8.60, as compared with $11.23 at June 30, 2004. In August, 2004 the Partnership sold 14,338 shares of Acusphere Inc., for total gross proceeds of $86,796, with an expected realized gain of $14,877. 7. Cash and Cash Equivalents ------------------------- Cash and cash equivalents at June 30, 2004, and December 31, 2003, consisted of:

8. 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, 2004, there were no unfunded investment commitments to portfolio companies and venture capital limited partnerships. 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. 9. 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. Net asset value has been calculated in accordance with this provision of the Partnership Agreement. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The Partnership term expired on December 31, 2002, per the Partnership Agreement, and the Independent General Partners elected not to extend the term as provided in the Partnership Agreement. In December 2002, the Managing General Partners adopted a plan of liquidation. In anticipation of the liquidation and dissolution, the Individual General Partners, in March 2002 approved the retention of an independent third party to value the Partnership's private holdings and subsequently engaged the third party to seek buyers for those investments. One of those holdings was sold in 2002. No buyers were located for the remaining holdings. In October 2003, Acusphere, Inc., a private company in the biotechnology industry, conducted an initial public offering. Prior to the offering, the Partnership's shares were subject to a reverse split. Those shares were subject to a 180-day lock-up period. The Individual General Partners, acting as Trustee for the Partnership, directed the Managing General Partners to sell the Partnership's publicly traded holdings at the earliest possible time in light of existing market conditions. It is possible there will be no liquidity events or willing buyers for the remaining privately held assets. The Liquidating Trustee will consider a number of options, including abandonment of the assets, donations to an appropriate beneficiary or distribution to the Limited Partners. Upon dissolution of the Partnership, a final distribution will be made to Limited Partners. Liquidity and Capital Resources ------------------------------- The Partnership term expired on December 31, 2002, per the Partnership Agreement, and the Independent General Partners elected not to extend the term as provided in the Partnership Agreement. In December 2002, the Managing General Partners adopted a plan of liquidation. In anticipation of the liquidation and dissolution, the Individual General Partners, in March 2002 approved the retention of an independent third party to value the Partnership's private holdings and subsequently engaged the third party to seek buyers for those investments. One of those holdings was sold in 2002. No buyers were located for the remaining holdings. In October 2003, Acusphere, Inc., a private company in the biotechnology industry, conducted an initial public offering. Prior to the offering, the Partnership's shares were subject to a reverse split. Those shares were subject to a 180-day lock-up period which expired in April 2004. The Individual General Partners, acting as Trustee for the Partnership, directed the Managing General Partners to sell the Partnership's publicly traded holdings at the earliest possible time in light of existing market conditions. It is possible there will be no liquidity events or willing buyers for the remaining privately held assets. The Liquidating Trustee will consider a number of options, including abandonment of the assets, donations to an appropriate beneficiary or distribution to the Limited Partners. Upon dissolution of the Partnership, a final distribution will be made to Limited Partners. During the six months ended June 30, 2004, net cash used by operating activities totaled $155,882. The Partnership paid management fees of $0 to the Managing General Partners and reimbursed related parties for investment expenses of $78,446. In addition, $15,625 was paid to the Individual General Partners as compensation for their services. The Partnership paid other investment expenses of $65,593. Interest income of $3,782 was received. Cash and cash equivalents at June 30, 2004, were $351,637. A cash distribution of $1,036,308 was made in May 2004 to Limited Partners. Upon dissolution of the Partnership, a final distribution will be made to the Limited Partners. Results of Operations --------------------- Current quarter compared to corresponding quarter in the preceding year ----------------------------------------------------------------------- Net increase in partners' capital resulting from operations was $159,180 for the quarter ended June 30, 2004, compared to a net increase in partners' capital resulting from operations of $422,961 for the same period in 2003. Net unrealized appreciation on equity investments was $597,096 and $40,339 at June 30, 2004, and December 31, 2003, respectively. During the quarter ended June 30, 2004, the Partnership recorded an increase in net unrealized appreciation on equity investments of $265,853 compared to an increase in unrealized appreciation of $500,880 during the quarter ended June 30, 2003. The change in 2004 was primarily attributable to an increase in the publicly traded price of LifeCell Corporation. The change in 2003 was primarily attributable to the publicly traded price of Acusphere Inc. Total investment expenses were $57,495 for the quarter ended June 30, 2004, compared to $81,737 for the same period in 2003. The decrease is attributable to decreased management fees. 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 increase in partners' capital resulting from operations was $536,964 for the six months ended June 30, 2004, compared to a net increase in partners' capital resulting from operations of $260,412 for the same period in 2003. Net unrealized appreciation on equity investments was $478,118 and $40,339 at June 30, 2004, and December 31, 2003, respectively. During the six months ended June 30, 2004, the Partnership recorded an increase in net unrealized appreciation on equity investments of $556,757, compared to an increase in unrealized appreciation of $1,152,855 for the six months ended June 30, 2003. The change in 2004 was primarily attributable to an increase in the publicly traded price of LifeCell Corporation. The change in 2003 was primarily attributable to the publicly traded price of Acusphere Inc. Total investment expenses were $152,915 for the six months ended June 30, 2004, compared to $184,716 for the same period in 2003. The decrease is attributable to decreased management fees. Given the inherent risk associated with the business of the Partnership, the future performance of the portfolio company investments may significantly impact future operations. Item 4. Controls and Procedures The undersigned is responsible for establishing and maintaining disclosure controls and procedures for Technology Funding Medical Partners I, 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 Medical Partners I, L.P.'s disclosure controls and procedures are effective to ensure that information required to be disclosed by Technology Funding Medical Partners I, L.P. in this report is accumulated and communicated to Technology Funding Medical Partners I, 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 Partners III, L.P.'s internal controls or other factors that could significantly affect such controls subsequent to the date of their evaluation other than changes needed to maintain adequate separation of duties and responsibilities of personnel in the ordinary course of business, and there were no corrective actions with regard to significant deficiencies and material weaknesses. 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 June 30, 2004. 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 12, 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. Technology Funding Medical Partners I (a Delaware limited partnership) Page 1 of 23

TECHNOLOGY FUNDING MEDICAL PARTNERS I L P 10-Q