<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 June 30, 2000
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)
June 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Equity investments (cost basis of
$3,346,009 and $3,336,595 in 2000
and 1999, respectively) $4,330,118 5,516,024
Cash and cash equivalents 276 175,990
Other assets 2,459 1,043
--------- ---------
Total assets $4,332,853 5,693,057
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 28,244 35,528
Due to related parties 133,465 35,731
Short-term borrowings 6,418 2,646
--------- ---------
Total liabilities 168,127 73,905
Commitments and contingencies
(Notes 3 and 6)
Partners' capital:
Limited Partners (79,716 Units
outstanding) 4,176,615 5,616,497
General Partners (11,889) 2,655
--------- ---------
Total partners' capital 4,164,726 5,619,152
--------- ---------
Total liabilities and
partners' capital $4,332,853 5,693,057
========= =========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
STATEMENTS OF OPERATIONS (unaudited)
-----------------------------------
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Dividend income $ 3,978 3,946 7,966 7,978
--------- ------- --------- -------
Total income 3,978 3,946 7,966 7,978
Costs and expenses:
Management fees 39,648 39,649 79,298 79,298
Individual General Partners'
compensation 11,732 8,914 16,822 18,549
Operating expenses:
Administrative and investor services 46,707 74,722 67,640 126,797
Investment operations 37,687 14,370 45,630 27,013
Professional fees 12,210 23,004 34,849 29,568
Computer services 9,660 8,676 18,293 20,877
Interest expense 156 5,188 3,772 9,811
--------- ------- --------- -------
Total operating expenses 106,420 125,960 170,184 214,066
--------- ------- --------- -------
Total costs and expenses 157,800 174,523 266,304 311,913
--------- ------- --------- -------
Net operating loss (153,822) (170,577) (258,338) (303,935)
Net realized loss from sales
of equity investments -- -- (768) --
Realized losses from investment
write-downs -- (182,176) -- (182,176)
--------- ------- --------- -------
Net realized loss (153,822) (352,753) (259,106) (486,111)
Change in net unrealized fair
value of equity investments (3,566,569) 135,167 (1,195,320) 375,061
--------- ------- --------- -------
Net loss $(3,720,391) (217,586) (1,454,426) (111,050)
========= ======= ========= =======
Net loss per Unit $ (46.00) (2.63) (18.06) (1.38)
========= ======= ========= =======
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
-----------------------------------
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
------------------------------------
2000 1999
------ ------
<S> <C> <C>
Cash flows from operating activities:
Dividend income received $ 7,966 7,978
Cash paid to vendors (82,698) (97,703)
Cash (paid to) advanced by related
parties, net (90,800) 112,903
Interest paid on short-term borrowings (3,772) --
--------- -------
Net cash (used) provided by operating
activities (169,304) 23,178
--------- -------
Cash flows from investing activities:
Distributions from venture capital
limited partnerships 20,864 --
Purchase of equity investments (31,046) --
--------- -------
Net cash used by investing activities (10,182) --
--------- -------
Cash flows from financing activities:
Proceeds from (repayments of) short-term
borrowings, net 3,772 (20,189)
--------- -------
Net cash provided (used) by financing
activities 3,772 (20,189)
--------- -------
Net (decrease) increase in cash and
cash equivalents (175,714) 2,989
Cash and cash equivalents at beginning
of year 175,990 387
--------- -------
Cash and cash equivalents at June 30 $ 276 3,376
========= =======
Reconciliation of net loss to net
cash used by operating activities:
Net loss $(1,454,426) (111,050)
Adjustments to reconcile net loss to
net cash (used) provided
by operating activities:
Change in net unrealized fair value
of equity investments 1,195,320 (375,061)
Net realized loss from sales of equity
investments 768 --
Realized losses from investment
write-downs -- 182,176
Changes in:
Accounts payable and accrued expenses (7,284) 2,045
Due to related parties 97,734 330,741
Other changes, net (1,416) (5,673)
--------- -------
Net cash (used) provided by operating
activities $ (169,304) 23,178
========= =======
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
----------------------------------------
1. General
-------
Interim Financial Statements
----------------------------
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, 1999. 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.
Valuation of Investments
------------------------
Investments are valued at fair value as required by the Investment Company
Act of 1940.
Under the direction and control of the Independent General Partners, the
Managing General Partners are delegated the authority to establish
valuation procedures and periodically apply such procedures to the
Partnership's venture capital investment portfolio. In fulfilling this
responsibility, the Managing General Partners periodically update and
revise the valuation procedures used to determine fair value in order to
reflect new events, changing market conditions, more experience with
investee companies, or additional information, any of which may require the
revision of previous estimating procedures. Any change in fair value which
results from the revision in estimating procedures is reported as a change
in accounting estimate. The valuation procedures have been revised and
updated by the Managing General Partners, and have been reflected in the
June 30, 2000 financial statements. A change in accounting estimate of
$4,932,070 was recognized during the quarter ended June 30, 2000 to reflect
the revisions to the valuation procedures and is included in the "Change in
net unrealized fair value" on the Statement of Operations.
The fair value of investments in publicly traded securities is considered
to be the amount which the company may reasonably expect to receive if sold
on the valuation date. Unrestricted securities are valued at the five-day
average closing sales price or bid/ask price that is available on a
national securities exchange or over-the-counter market. Valuation
discounts of 5% to 50% are applied to securities subject to resale
restrictions resulting from Rule 144, contractual lock-ups such as those
commonly associated with underwriting agreements, or knowledge of material
non-public information and also to unrestricted securities when the number
of shares held by the Partnership and its affiliates is substantial in
relation to the average trading volume.
The fair value of all other investments is determined in good faith by the
Managing General Partners under the delegated authority of the Independent
General Partners after consideration of available, relevant information.
There is no ready market for the Partnership's investments in private
companies or unregistered securities of public companies. Fair value is
generally defined as the amount the Partnership could reasonably expect to
receive for an investment in an orderly disposition on a current sale.
Inherent in the good faith determination of fair value of these investments
is the selection of a reasonable period for orderly disposition. As the
Partnership nears the end of its life, the available period for disposition
necessarily shortens. Other significant factors considered in the
estimation of fair value include the inherent illiquidity of and lack of
marketability associated with venture capital investments in private
companies or unregistered securities, the investee company's enterprise
value established in the last round of venture financing, changes in market
conditions since the last round of venture financing or since the last
reporting period, the value of a minority interest in the investee company,
contractual restrictions on resale typical of venture financing
instruments, the investee company's financial position and ability to
obtain any necessary additional financing, the investee company's
performance as compared to its business plan, and the investee company's
progress towards initial public offering. The values determined for the
Partnership's investments in these securities are based upon available
information at the time the good faith valuations are made and do not
necessarily represent the amount which might ultimately be realized which
could be higher or lower than the reported fair value.
At June 30, 2000 and December 31, 1999, the investment portfolio included
investments totaling $1,772,909 and $3,219,348, respectively, whose fair
values were established in good faith by the Managing General Partners in
the absence of readily ascertainable market values. In addition,
investments in publicly traded securities which have been subjected to a
discount for legal, contractual or practical restrictions as determined by
the Managing General Partners amounted to $2,226,134 and $1,961,014 at June
30, 2000 and December 31, 1999, respectively. Because of the inherent
uncertainty in the valuation, the values may differ significantly from the
values that would have been used had a ready market for the securities
existed, and the differences could be material.
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 six months ended
June 30, 2000 and 1999, were as follows:
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Management fees $ 79,298 79,298
Individual General Partners' compensation 16,822 18,549
Reimbursable operating expenses 92,414 119,991
</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 $93,816 and $22,515 at June 30, 2000 and at December 31,
1999, 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.
Initially the Partnership could not reimburse the Managing General Partners
for operational costs that totaled 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. The limitation decreased from 3% to 1.5% on May 3,
2000. For purposes of this limitation, the Partnership's operating year
begins May 3rd. During the quarters ended June 30, 2000 and 1999, no
operational expenses were absorbed by the General Partners.
Management fees payable were $39,649 and $13,216 at June 30, 2000 and
December 31, 1999, 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 June 30, 2000, the Partnership and affiliated
partnerships had an indirect interest in non-transferable Endocare, Inc.
options with a fair value of $217,789.
<PAGE>
4. Equity Investments
------------------
<TABLE>
At June 30, 2000, equity investments consisted of:
June 30, 2000
Principal ----------------------
Amount or
Industry (1)/ Investment Shares as of Cost Fair
Company Position Date June 30, 2000 Basis Value
------------- -------- ---------- -------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Medical/Biotechnology--34.0%
----------------------------
Acusphere, Preferred 1995-
Inc. (a) shares 1997 215,635 $ 706,251 647,209
Biex, Inc. (a) (b) Preferred
shares 1997 120,000 300,000 60,000
ConjuChem Inc. Preferred
(a) share
warrant at
exercise aggregate
price TBD; purchase
expiring price
2001 1996 $24,291 0 0
Prolinx, Inc. Preferred 1995-
(a) shares 1998 592,308 688,461 710,770
--------- ---------
1,694,712 1,417,979
--------- ---------
Medical/Diagnostic Equipment--55.2%
-----------------------------------
Endocare, Common 1996-
Inc. (b) shares 1997 152,400 466,000 1,389,736
Endocare, Common share
Inc. (b) warrant at $3.00;
expiring 2001 1996 30,000 0 228,570
LifeCell Preferred 1996-
Corporation shares (2) 1997 2,666 247,500 478,396
LifeCell Common share
Corporation warrant at $4.13;
expiring 2001 1996 56,451 2,500 115,832
R2 Technology, Preferred 1994-
Inc. (a) shares 1996 117,134 134,268 85,721
R2 Technology, Preferred
Inc. (a) share warrant
at $2.00;
expiring
2000 1995 2,417 0 732
--------- ---------
850,268 2,298,987
--------- ---------
Health Information System--3.1%
-------------------------------
ADESSO Specialty
Services Preferred 1997-
Organization Inc.(a) shares 2000 13,753 131,048 115,525
Simione Central
Holdings, Inc. Common
(a) shares 1999 6,312 94,899 13,600
--------- ---------
225,947 129,125
--------- ---------
Pharmaceuticals--4.9%
---------------------
Axys
Pharmaceuticals, Common
Inc. shares 1995 9,464 125,000 53,358
Periodontix, Preferred 1993-
Inc. (a) shares 1996 167,000 234,000 150,300
Valentis, Common 1994-
Inc. shares 1995 -- -- --
--------- ---------
359,000 203,658
--------- ---------
Environmental--0.1%
-------------------
Triangle
Biomedical
Sciences, Common
Inc. (a) shares 1999 366 10,248 2,562
Triangle Common
Biomedical share
Sciences, warrant
Inc. (a) at $28.00;
expiring
2009 1999 366 366 92
--------- ---------
10,614 2,654
--------- ---------
Venture Capital Limited Partnership Investments--6.7%
-----------------------------------------------------
Medical Science Limited
Partners II, L.P. Partnership
(a) Interests various $250,000 205,468 277,715
--------- ---------
205,468 277,715
--------- ---------
Total equity investments-104.0% $3,346,009 4,330,118
========= =========
Legend and footnotes:
-- No investment held at end of period.
0 Investment active with a carrying value or fair value of zero.
(a) Equity security acquired in a private placement transaction; resale may be subject to
certain selling restrictions.
(b) Portfolio company is an affiliate of the Partnership; resale may be subject to certain
selling restrictions.
(1) Represents the total fair value of a particular industry segment as a percentage of
Partners' Capital at 6/30/00.
(2) The Partnership has no income-producing equity investments except for LifeCell
Corporation Preferred shares.
</TABLE>
All investments are valued at fair value as determined in good faith by the
Managing General Partners. See Note 1--Valuation of Investments.
Significant purchases and sales of investments during the six months ended
June 30, 2000 are as follows:
Acusphere, Inc.
---------------
In April 2000, the company completed a new round of financing at a higher
valuation. The Partnership did not participate in the round.
ADESSO Specialty Services Organization, Inc.
--------------------------------------------
In March 2000, the Partnership purchased 1,848 Series E Preferred shares
for $31,046.
Prolinx, Inc.
-------------
In June 2000, the company completed a new round of financing at a higher
valuation. The Partnership did not participate in the round.
Marketable Equity Securities
----------------------------
Marketable equity securities had aggregate costs of $375,000 and aggregate
fair values of $647,586 at June 30, 2000. The net unrealized loss at June
30, 2000, included gross gains of $344,228.
5. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at June 30, 2000, and December 31, 1999,
consisted of:
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Demand accounts $206 175,922
Money-market accounts 70 68
--- -------
Total $276 175,990
=== =======
</TABLE>
6. Short-Term Borrowings
---------------------
The Partnership has a borrowing account with a financial institution. At
June 30, 2000, the borrowing capacity of this account, which fluctuates
based on collateral value, was $1,571,148 and the outstanding balance was
$6,418. The weighted-average interest rate for the six months ended June
30, 2000 was 9.5%. Interest expense was $3,772 for the six months ended
June 30, 2000. The Partnership's investments in Axys Pharmaceuticals, Inc.
and Endocare, Inc. are pledged as collateral.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition, 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 on 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. 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, 2000, net cash used by operating
activities totaled $169,304. The Partnership paid management fees of
$52,865 to the Managing General Partners and paid related parties $21,113
for operating expenses. In addition, $16,822 was paid to the Individual
General Partners as compensation for their services. The Partnership paid
other operating expenses of $82,698 and interest on borrowings of $3,772.
Dividend income of $7,966 was received.
The Partnership funded an equity investment of $31,046 to a portfolio
company in the health information system industry. Cash distributions of
$20,864 were received from venture capital limited partnership investments.
Net proceeds from short-term borrowings were $3,772.
The Partnership has a borrowing account with a financial institution. The
borrowing capacity of this account which fluctuates based on collateral
value was $1,571,148 and the outstanding balance was $6,418 at June 30,
2000. The Partnership's investments in Axys Pharmaceuticals, Inc. and
Endocare, Inc. are pledged as collateral.
Cash and cash equivalents at June 30, 2000, were $276. Future proceeds
from investment sales 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 losses were $3,720,391 and $217,586 for the quarters ended June 30,
2000 and 1999, respectively. The increase in net loss was primarily due to
a $3,701,736 decrease in the net unrealized fair value of equity
investments.
The Partnership recorded a decrease in equity investment fair value of
$3,566,569 for the quarter ended June 30, 2000 compared to an increase of
$135,167 for the same period in 1999. The 2000 decrease was primarily due
to a decrease in fair value of $4,392,070 for the change in accounting
estimate discussed in Note 1 to the financial statements. This change was
partially offset by increases in portfolio companies in the biotechnology
industry. The 1999 increase was primarily due to an increase in the
medical/diagnostic equipment industries, partially offset by a decrease in
the environmental industry.
Total operating expenses were $106,420 for the quarter ended June 30, 2000,
compared to $125,960 for the same period in 1999. In the second quarter of
2000, the Managing General Partners billed the Partnership an additional
$36,071 for investment management expenses incurred by the General Partners
in 1998 and 1999, but not previously billed to the Partnership. If these
expenses had been billed in prior years, operating expenses for the three
months ended June 30, 2000 and 1999 would have been $70,349 and $129,572,
respectively. The decrease is attributable to decreased investment
activity and the related administrative costs.
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 losses were $1,454,426 and $111,050 for the six months ended June 30,
2000 and 1999, respectively. The increase in net loss was primarily due to
a $1,570,381 increase in the net unrealized fair value of equity
investments, a $182,176 decrease in realized losses from investment write-
downs and a $43,882 decrease in total operating expenses.
During the six months ended June 30, 2000, the Partnership recorded a
decrease in fair value of equity investment of $1,195,320, compared to an
increase of $375,061 in the corresponding period in 1999. The 2000
decrease was primarily due to a decrease in fair value of $4,392,070 for
the change in accounting estimate discussed in Note 1 to the financial
statements. This change was partially offset by increases in portfolio
companies in the biotechnology and medical/diagnostic equipment industries.
The 1999 increase was primarily due to increases in the medical/diagnostic
equipment industry, partially offset by decreases in the environmental and
pharmaceutical industries.
Realized losses from investment write-downs totaled $182,176 for the six
months ended June 30, 1999 and related to a portfolio company in the health
information services industry. There were no write-downs in the
corresponding period of 2000.
Total operating expenses were $170,184 for the quarter ended June 30, 2000,
compared to $214,066 for the same period in 1999. In the second quarter of
2000, the Managing General Partners billed the Partnership an additional
$36,071 for investment management expenses incurred by the General Partners
in 1998 and 1999, but not previously billed to the Partnership. If these
expenses had been billed in prior years, operating expenses for the six
months ended June 30, 2000 and 1999 would have been $134,113 and $221,248,
respectively. The decrease is attributable to decreased investment
activity and the related administrative costs.
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, 2000.
(b) Financial Data Schedule for the six months ended and as of June 30,
2000 (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: August 14, 2000 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
