<PAGE>
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, 1998
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)
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.
<PAGE>
I. FINANCIAL INFORMATION
Item 1. Financial Statements
BALANCE SHEETS
- --------------
<TABLE>
<CAPTION>
(unaudited)
September 30, December 31,
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Equity investments(cost basis of
$4,507,638 and $5,011,218 in
1998 and 1997, respectively) $5,674,073 6,481,986
Cash and cash equivalents 49,736 157,137
Organizational costs (net of
accumulated amortization of
$40,000 and $34,000 in 1998
and 1997, respectively) -- 6,000
Other assets 1,370 1,268
--------- ---------
Total assets $5,725,179 6,646,391
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 27,026 29,213
Due to related parties 156,471 31,958
--------- ---------
Total liabilities 183,497 61,171
Commitments (Notes 3 and 6)
Partners' capital:
Limited Partners (Units
outstanding of 79,716
in both 1998 and 1997) 4,396,144 5,127,957
General Partners (20,897) (13,505)
Net unrealized fair value increase
from cost of equity investments 1,166,435 1,470,768
--------- ---------
Total partners' capital 5,541,682 6,585,220
--------- ---------
Total liabilities and
partners' capital $5,725,179 6,646,391
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Income:
Notes receivable interest $ -- -- -- 10,770
Short-term investment interest -- 14,506 696 56,964
Dividend income 3,982 -- 11,929 --
------- ------- --------- ---------
Total income 3,982 14,506 12,625 67,734
Costs and expenses:
Management fees 39,650 39,649 118,948 118,948
Individual General Partners'
compensation 12,560 7,951 27,928 23,287
Amortization of organizational costs 2,000 2,000 6,000 6,000
Operating expenses:
Administrative and investor services 109,294 43,507 214,854 154,624
Investment operations 15,923 23,142 44,386 52,207
Professional fees 6,478 8,649 21,700 22,539
Computer services 21,623 14,760 48,889 35,023
Expenses absorbed by General
Partners -- -- (62,535) --
------- ------- --------- ---------
Total operating expenses 153,318 90,058 267,294 264,393
------- ------- --------- ---------
Total costs and expenses 207,528 139,658 420,170 412,628
------- ------- --------- ---------
Net operating loss (203,546) (125,152) (407,545) (344,894)
Net realized (loss) gain from sales
of equity investments (331,260) -- (331,660) 1,156
------- ------- --------- ---------
Net realized loss (534,806) (125,152) (739,205) (343,738)
Change in net unrealized fair
value of equity investments (152,981) 955,983 (304,333) 1,045,522
------- ------- --------- ---------
Net (loss) income $(687,787) 830,831 (1,043,538) 701,784
======= ======= ========= =========
Net realized loss per Unit $ (7) (2) (9) (4)
======= ======= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
------------------------
1998 1997
------ ------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 696 56,964
Dividend income received 11,929 --
Cash paid to vendors (49,880) (83,494)
Cash paid to related parties (242,065) (344,596)
--------- ---------
Net cash used by operating activities (279,320) (371,126)
--------- ---------
Cash flows from investing activities:
Purchase of equity investments -- (894,962)
Proceeds from the sales of equity
investments 171,919 8,469
--------- ---------
Net cash provided (used)
by investing activities 171,919 (886,493)
--------- ---------
Net decrease in cash and
cash equivalents (107,401) (1,257,619)
Cash and cash equivalents at beginning
of year 157,137 1,985,053
--------- ---------
Cash and cash equivalents at September 30 $ 49,736 727,434
========= =========
Reconciliation of net (loss) income to
net cash used by operating activities:
Net (loss) income $(1,043,538) 701,784
Adjustments to reconcile net (loss) income
to net cash used by operating activities:
Amortization of organizational costs 6,000 6,000
Change in net unrealized fair value
of equity investments 304,333 (1,045,522)
Net realized loss (gain) from sales
of equity investments 331,660 (1,156)
Changes in:
Due to related parties 124,513 (17,354)
Other changes, net (2,288) (14,878)
--------- ---------
Net cash used by operating activities $ (279,320) (371,126)
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
- ----------------------------------------
1. General
-------
In the opinion of the Managing General Partners, the accompanying interim
financial statements reflect all adjustments necessary for a 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, 1997. 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. Financing of Partnership Operations
-----------------------------------
The Managing General Partners expect cash received from the future
liquidation of Partnership investments and short-term borrowings will
provide the necessary liquidity to fund Partnership operations. The
Partnership may be dependent upon the financial support of the Managing
General Partners to fund operations if future proceeds are not received
timely. The Managing General Partners have committed to support the
Partnership's working capital requirements through short-term advances as
necessary.
3. Related Party Transactions
--------------------------
Related party costs are included in costs and expenses shown on the
Statements of Operations. Related party costs for the nine months ended
September 30, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Management fees $118,948 118,948
Individual General Partners' compensation 27,928 23,287
Amortization of organizational costs 6,000 6,000
Reimbursable operating expenses 282,237 185,008
Expenses absorbed by General Partners (62,535) --
</TABLE>
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 $50,740 and $5,525 at September 30, 1998 and at December 31,
1997, respectively.
Pursuant to the Partnership Agreement, the Partnership shall reimburse the
Managing General Partners for operational costs incurred by the Managing
General Partners in conjunction with the business of the Partnership. The
Partnership may not pay nor reimburse the Managing General Partners for
operational costs that aggregate more than 3% of total Limited Partner
capital contributions of the Partnership in each year through the first
five years of operations after the termination of unit sales and 1.5% in
any year thereafter. For purposes of this limitation, the Partnership's
operating year begins May 3rd. For the nine months ended September 30,
1998, the Managing General Partners absorbed $62,535 in operating expenses.
No such expenses were absorbed for the nine months ended September 30,
1997.
The Managing General Partners allocate operating expenses incurred in
connection with the business of the Partnership based on employee hours
incurred. In the third quarter of 1998, the Managing General Partners
reevaluated allocations to the Partnership and determined that they had not
fully recovered allocable operating expenses, primarily salary and
benefits, as permitted by the Partnership Agreement. As a result, the
Partnership was charged additional operating expenses in the third quarter
of 1998 of $51,689 consisting of $7,719 for the nine months ended September
30, 1997 and $43,970 for prior years. Had the additional expenses been
recorded in prior years and had the limitation not been in effect, total
operating expenses for the three months ended September 30, 1998 and 1997
would have been $101,629 and $97,777, respectively, and total operating
expenses for the nine months ended September 30, 1998 and 1997 would have
been $278,140 and $272,112, respectively.
Management fees payable were $105,731 and $26,433 at September 30, 1998 and
December 31, 1997, respectively.
<PAGE>
4. Equity Investments
------------------
<TABLE>
A complete listing of the Partnership's equity investments at December 31, 1997 is in the 1997
Annual Report. Activity from January 1 through September 30, 1998 consisted of:
<CAPTION>
January 1 through
September 30, 1998
----------------------
Principal
Investment Amount or Cost Fair
Industry/Company Position Date Shares Basis Value
- ---------------- -------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $5,011,218 6,481,986
--------- ---------
Significant changes:
Medical/Biotechnology
- ---------------------
CV Therapeutics, Common
Inc. shares 11/96 26,455 (487,224) (240,211)
Prolinx, Series A
Inc. Preferred 05/95-
shares 09/96 400,000 0 168,000
Prolinx, Series B
Inc. Preferred
shares 07/97 192,308 0 128,847
Medical/Diagnostic Equipment
- ----------------------------
Endocare, Common 08/96-
Inc. shares 01/97 152,400 0 (146,790)
Lifecell Common share
Corporation warrant at
$4.13;
expiring 11/01 11/96 56,451 0 (37,258)
Pharmaceuticals
- ---------------
Axys Pharmaceuticals, Common
Inc. shares 12/95 9,464 0 (36,815)
Megabios Common 09/94-
Corporation shares 07/95 100,424 0 (620,318)
--------- ---------
Total significant changes (487,224) (784,545)
Other changes, net (16,356) (23,368)
--------- ---------
Total equity investments at September 30, 1998 $4,507,638 5,674,073
========= =========
</TABLE>
<PAGE>
Marketable Equity Securities
- ----------------------------
As of September 30, 1998, and December 31, 1997, marketable equity
securities had aggregate costs of $984,268 and $1,084,621, respectively,
and aggregate fair values of $942,938 and $1,180,687, respectively. The
net unrealized loss and gain at September 30, 1998, and December 31, 1997,
respectively, included gross gains of $125,483 and $391,042, respectively.
CV Therapeutics, Inc.
- ---------------------
In September 1998, the Partnership sold its investment in the company for
total proceeds of $157,011 and realized a loss of $330,213.
Prolinx, Inc.
- -------------
During 1998, the company had a new round of financing in which the
Partnership did not participate. The pricing of this round indicated an
increase in fair value of $296,847 for the Partnership's existing
investment.
Other Equity Investments
- ------------------------
Other significant changes reflected above relate to market value
fluctuations or discounts relating to selling restrictions for publicly
traded portfolio companies.
5. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at September 30, 1998, and December 31, 1997,
consisted of:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Demand accounts $ 1,190 3,470
Money-market accounts 48,546 153,667
------ -------
Total $49,736 157,137
====== =======
</TABLE>
6. Short-Term Borrowings
---------------------
The Partnership has a borrowing account with a financial institution. At
September 30, 1998, the borrowing capacity of this account, which
fluctuates based on collateral value, was $257,337; as of November 4, 1998
the borrowing capacity was $371,527. The weighted-average interest rate
for the nine months ended September 30, 1998 was 9%. Interest expense was
$845 for the nine months ended September 30, 1998. The Partnership's
investments in Megabios Corporation, CV Therapeutics, Inc. and Axys
Pharmaceuticals, Inc. are pledged as collateral.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
- -------------------------------
During the nine months ended September 30, 1998, net cash used by operating
activities totaled $279,320. The Partnership paid management fees of
$39,650 to the Managing General Partners and paid related parties $174,487
for operating expenses. In addition, $27,928 was paid to the Individual
General Partners as compensation for their services. The Partnership paid
other operating expenses of $49,880. Interest and dividend income of
$12,625 was received.
During the nine months ended September 30, 1998 the Partnership received
proceeds of $171,919 from equity investment sales.
The Partnership has a borrowing account with a financial institution. The
borrowing capacity of this account, which fluctuates based on collateral
value, totaled $257,337 at September 30, 1998. There were no borrowings
outstanding at September 30, 1998. The Partnership's investments in
Megabios Corporation, CV Therapeutics, Inc. and Axys Pharmaceuticals, Inc.
are pledged as collateral. The borrowing capacity for the account was
$371,527 at November 4, 1998.
Cash and cash equivalents at September 30, 1998, were $49,736. Future
proceeds from investment sales, interest income earned on short-term
investments and operating cash reserves along with Managing General
Partners' support 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 loss was $687,787 for the three months ended September 30, 1998,
compared to a net income of $830,831 for the same period in 1997. The
change was primarily due to a $1,108,964 decrease in net unrealized fair
value of equity investments, a $331,260 increase in net realized losses
from sales of equity investments and a $63,260 increase in operating
expenses.
The Partnership recorded a decrease in equity investment fair value of
$152,981 for the three months ended September 30, 1998 compared to an
increase of $955,983 for the same period in 1997. The 1998 decrease was
primarily due to decreases in the pharmaceuticals and medical/diagnostic
equipment industries. The 1997 increase was primarily due to increases in
the medical/diagnostic equipment industry.
Net realized loss from sales of equity investments during the three months
ended September 30, 1998 totaled $331,260 and primarily resulted from the
sale of CV Therapeutics, Inc. common shares.
Total operating expenses were $153,318 for the quarter ended September 30,
1998, compared to $90,058 for the same period in 1997. As disclosed in
Note 3 to the financial statements, operating expenses for the three months
ended September 30, 1998 include additional expenses of $51,689 related to
prior years which were not previously charged to the Partnership. Had the
additional expenses been recorded in prior years and had the operating
expenses limitation not been in effect, operating expenses for the quarters
ended September 30, 1998 and 1997 would have been $101,629 and $97,777,
respectively.
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 loss was $1,043,538 for the nine months ended September 30, 1998,
compared to net income of $701,784 during the same period in 1997. The
change was primarily due to a $1,349,855 decrease in the change in net
unrealized fair value of equity investments, a $332,816 increase in net
realized losses from sales of equity investments, and a $55,109 decrease in
total income.
During the nine months ended September 30, 1998, the Partnership recorded a
decrease in fair value of equity investments of $304,333 compared to a
$1,045,522 increase for the nine months ended September 30, 1997. The 1998
decrease was primarily due to decreases in the pharmaceutical and
medical/diagnostic equipment industries. The 1997 increase was primarily
due to increases in portfolio companies in the medical/diagnostic equipment
industries.
Net realized loss from the sale of equity investments during the nine
months ended September 30, 1998 totaled $331,660 and primarily resulted
from the sale of CV Therapeutics, Inc. common shares.
The Partnership recorded total income of $12,625 and $67,734 for the nine
months ended September 30, 1998 and 1997, respectively. The decrease was
mainly due to lower cash and cash equivalents balances.
Total operating expenses were $267,294 and $264,393 for the nine months
ended September 30, 1998 and 1997, respectively. As explained in Note 3 to
the financial statements, the Managing General Partners absorbed expenses
of $62,535 for the nine months ended September 30, 1998. Additionally,
operating expenses for the nine months ended September 30, 1998 include
additional expenses of $51,689 related to prior years which were not
previously charged to the Partnership. Had the additional expenses been
recorded in prior years and had the limitation not been in effect,
operating expenses for the nine months ended September 30, 1998 and 1997
would have been $278,140 and $272,112, respectively.
The Year 2000
- -------------
The widespread use of computer programs that rely on two-digit date
programs to perform computations and decision-making functions may cause
computer systems to malfunction in the year 2000 and lead to significant
business delays and disruptions.
The Managing General Partners have completed a preliminary assessment of
the internal financial, information and operating systems which it provides
to the Partnership. Implementation and testing of necessary system
modifications is in progress and will be completed well before December 31,
1999. The Managing General Partners are also monitoring the progress of
software vendors and third-party processors on which they rely, as well as
the progress of portfolio companies in which the Partnership has made
significant investments.
The Managing General Partners do not expect the cost of the internal system
modifications to be material to the Partnership's financial
statements.
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, 1998.
b) Financial Data Schedule for the nine months ended and as of September
30, 1998 (Exhibit 27).
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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.
Managing General Partner
Date: November 12, 1998 By: /s/Michael R. Brenner
-----------------------------------
Michael R. Brenner
Controller
<TABLE> <S> <C>
<ARTICLE>6
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FORM 10-Q AS OF SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<PERIOD-TYPE> 9-MOS
<INVESTMENTS-AT-COST> 4,507,638
<INVESTMENTS-AT-VALUE> 5,674,073
<RECEIVABLES> 0
<ASSETS-OTHER> 1,370
<OTHER-ITEMS-ASSETS> 49,736
<TOTAL-ASSETS> 5,725,179
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 183,497
<TOTAL-LIABILITIES> 183,497
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,375,247
<SHARES-COMMON-STOCK> 79,716
<SHARES-COMMON-PRIOR> 79,716
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,166,435
<NET-ASSETS> 5,541,682
<DIVIDEND-INCOME> 11,929
<INTEREST-INCOME> 696
<OTHER-INCOME> 0
<EXPENSES-NET> 420,170
<NET-INVESTMENT-INCOME> (405,745)
<REALIZED-GAINS-CURRENT> (331,660)
<APPREC-INCREASE-CURRENT> (304,333)
<NET-CHANGE-FROM-OPS> (1,043,538)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (1,043,538)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 118,948
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 420,670
<AVERAGE-NET-ASSETS> 6,063,451
<PER-SHARE-NAV-BEGIN> 64
<PER-SHARE-NII> (9)
<PER-SHARE-GAIN-APPREC> 0 <F1>
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 55
<EXPENSE-RATIO> 6.9
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
A zero value is used since the change in net unrealized fair value is
not allocated to General Partners and Limited Partners as it is not
taxable. Only taxable gains or losses are allocated in accordance with
the Partnership Agreement.
</FN>
</TABLE>
