10-Q 1 mp1q302.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, 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 Blvd., Suite 180 Eldorado 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 --- --- No active market for the units of limited partnership interests ("Units") exists, and therefore the fair 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 BALANCE SHEETS --------------

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

The accompanying notes are 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 subsequently engaged the third party to seek buyers for those investments. As of September 30, 2002, there were no definite buyers in place. The Managing General Partners expect that the Individual General Partners will not extend the life of the Partnership. Should the Partnership terminate at December 31, 2002, the audited financial statements of the partnership will be prepared on a liquidation basis. 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 Partnership terminate, 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 September 30, 2002 and December 31, 2001, was $2,290,848. At September 30, 2002 and December 31, 2001, gross unrealized appreciation and depreciation on investments based on cost for federal income tax purposes were as follows: September 30, December 31, 2002 2001 ------------- ------------ Unrealized appreciation $ 4,167 $ 386,084 Unrealized depreciation (1,683,862) (1,010,594) --------- --------- Net unrealized depreciation $(1,679,695) $ (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 nine months ended September 30, 2002 and 2001, were as follows: 2002 2001 ------ ------ Management fees $103,643 $112,339 Individual General Partners' compensation 22,500 29,580 Reimbursable operating expenses 183,402 183,886

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 $9,622 at September 30, 2002 and were netted against due from related parties. At December 31, 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 $41,566 and $8,123 at September 30, 2002 and December 31, 2001, respectively. 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, 2002, the Partnership and affiliated partnerships had an indirect interest in non-transferable Endocare, Inc. options with a fair value of $164,331. 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 September 30, 2002, and December 31, 2001, and aggregate fair values of $186,979 and $229,967 at September 30, 2002 and December 31, 2001, respectively. There were no gross gains at September 30, 2002 or December 31, 2001. Restricted Securities --------------------- At September 30, 2002 and December 31, 2001, restricted securities had aggregate fair values of $424,174 and $1,436,371 respectively, representing 17.3 percent and 35.9 percent, respectively, of the net assets of the Partnership. 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. Subsequent Events ----------------- In November 2002, the Partnership sold its entire investment in R2 Technology, Inc. for $209,670. 6. Cash and Cash Equivalents ------------------------- Cash and cash equivalents at September 30, 2002 and December 31, 2001, consisted of: 2002 2001 -------- --------- Demand accounts $ 34,141 $ 13,501 Money market accounts 1,786,528 2,365,299 --------- --------- Total $1,820,669 $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 September 30, 2002, 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 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 subsequently engaged the third party to seek buyers for those investments. As of September 30, 2002, there were no definite buyers in place. The Managing General Partners expect that the Individual General Partners will not extend the life of the Partnership. Should the Partnership terminate at December 31, 2002, the audited financial statements of the partnership will be prepared on a liquidation basis. 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 Partnership terminate, 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 nine months ended September 30, 2002, net cash used by operating activities totaled $563,964. The Partnership paid management fees of $105,916 to the Managing General Partners and reimbursed related parties for investment expenses of $216,845, In addition, $22,500 was paid to the Individual General Partners as compensation for their services. The Partnership paid other investment expenses of $241,215. Interest income of $22,512 was received. Cash and cash equivalents at September 30, 2002, were $1,820,669. 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 $473,627 for the quarter ended September 30, 2002, compared to a net decrease in partners' capital resulting from operations of $91,105 for the same period in 2001. Net unrealized depreciation on equity investments was $1,488,259 and $1,185,870 at September 30, 2002 and June 30, 2002, respectively. During the quarter ended September 30, 2002, the Partnership recorded an increase in net unrealized depreciation on equity investments of $302,389 compared to a decrease in unrealized depreciation of $236,101 during the quarter ended September 30, 2001. The change in 2002 was primarily attributable to a decrease in the publicly-traded price of Lifecell Corporation and decreases in the fair values of Accusphere, Inc., a private portfolio company in the biotechnology industry, and an investment in a venture capital limited partnership. The decrease in unrealized depreciation in 2001 was primarily due to an increase in the publicly-traded price of Endocare, Inc. and the write off of Adesso Healthcare Technology Services, Inc. During the quarter ended September 30, 2001, realized loss from equity investment write offs totaled $162,925. This amount related to the write off of Adesso Healthcare Technology Services, Inc. There were no write offs during the same period in 2002. Total investment expenses were $183,540 for the quarter ended September 30, 2002, compared to $148,475 for the same period in 2001. The increase is primarily attributable to increased professional fees. During the quarter ended September 30, 2002, the Partnership realized a gain from venture capital limited partnership investments of $5,833. There were no gains for the same quarter in 2001. The gains represent distributions from profits of venture capital limited partnership investments. Given the inherent risk associated with the business of the Partnership, the future performance of the portfolio company investments may significantly impact future operations. Current nine months compared to corresponding nine months in the preceding -------------------------------------------------------------------------- year ---- Net decrease in partners' capital resulting from operations was $1,551,477 for the nine months ended September 30, 2002, compared to a net decrease in partners' capital resulting from operations of $509,318 for the same period in 2001. Net unrealized depreciation on equity investments was $1,488,259 and $433,074 at September 30, 2002 and December 31, 2001, respectively. During the nine months ended September 30, 2002, the Partnership recorded an increase in net unrealized depreciation on equity investments of $1,055,185 compared to a decrease in unrealized depreciation of $115,727 for the nine months ended September 30, 2001. The increase in 2002 was primarily due to decreases in the fair values of private portfolio companies in the medical/biotechnology and medical/diagnostic equipment industries and an investment in a venture capital limited partnership, and a decrease in the publicly-traded price of Lifecell Corporation. 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. During the nine months ended September 30, 2001, realized loss from equity investment write offs totaled $162,925. This amount related to the write off of Adesso Healthcare Technology Services, Inc. There were no write offs during the same period in 2002. During the nine months ended September 30, 2002, the Partnership realized a gain from venture capital limited partnership investments of $5,833. There were no gains for the same time period in 2001. The gains represent distributions from profits of venture capital limited partnership investments. Total investment expenses were $524,637 for the nine months ended September 30, 2002, compared to $448,804 for the same period in 2001. The increase is primarily attributable to increased administrative and investor services activity and increased professional fees. Item 4. Procedures and Controls 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 Medical Partners I, L.P.'s internal controls or other factors that could significantly affect such controls subsequent to the date of their evaluation, and there were no corrective actions with regard to significant deficiencies and material weaknesses. CERTIFICATION ------------- I, Charles R. Kokesh, President, Chief Executive Officer, Chief Financial Officer and Chairman of Technology Funding Inc. and Managing General Partner of Technology Funding Limited, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Technology Funding Medical Partners I, L.P.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and I have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to me by others within the entity, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and c) presented in this quarterly report my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the Evaluation Date; 5. I have disclosed, based on my most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of my most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 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 II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) On July 8, 2002, the Partnership filed its Amended and Restated Limited Partnership Agreement on Form 8-K. On October 16, 2002, the Partnership filed Form 8-K pursuant to the SEC's Release No. 34-43069 regarding Commission Guidance on Mini- Tender Offers. No financial statements were filed. 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 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. CERTIFICATION ------------- In connection with the Technology Funding Medical Partners I, L.P. (the Partnership) Quarterly Report on Form 10-Q for the period ending September 30, 2002, as filed with the Securities and Exchange Commission (the Report), I Charles, R. Kokesh, President, Chief Executive Officer, Chief Financial Officer and Chairman of Technology Funding Inc. and Managing General Partner of Technology Funding Limited, certify, pursuant to 18 U.S.C. Section 1350, as added Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 15(d) of the Securities Exchange Act of 1934; and 2. To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership as of and for the period covered by the Report. Date: November 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

TECHNOLOGY FUNDING MEDICAL PARTNERS I L P 10-Q