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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 1997
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
incorporation or organization) Identification No.)
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)
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 if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
No active market for the units of limited partnership interests
("Units") exists, and therefore the market value of such Units
cannot be determined.
Documents incorporated by reference: Portions of the Prospectus
dated May 3, 1993, forming a part of Registration Statement No.
33-54002, as modified by Cumulative Supplement No. 4 dated January
4, 1995, filed pursuant to Rule 424(c) of the General Rules and
Regulations under the Securities Act of 1933 are incorporated by
reference in Parts I and III hereof. Portions of the Prospectus
of Technology Funding Venture Capital Fund VI, LLC, as revised
January 22, 1998, forming a part of the December 5, 1997 Pre-
effective Amendment No. 1 to the Form N-2 Registration Statement
No. 333-23913 dated July 11, 1997, and incorporated by reference
in part III hereof.
PART I
Item 1. BUSINESS
- ------ --------
Technology Funding Medical Partners I, L.P. (the
"Partnership") is a limited partnership organized under
the laws of the State of Delaware on September 3, 1992,
and was inactive until it commenced the sale of Units in
May of 1993. The purpose of the Partnership is to make
venture capital investments in emerging growth companies
as described in the "Introductory Statement" and
"Business of the Partnership" sections of the Prospectus
dated May 3, 1993. The Partnership has elected to be a
business development company under the Investment Company
Act of 1940, as amended (the "Act"), and operates as a
non-diversified investment company as that term is
defined in the Act. Additional characteristics of the
Partnership's business are discussed in the "Risk
Factors" and "Conflicts of Interest" sections of the
Prospectus, which sections are also incorporated herein
by reference. The Partnership Agreement provides that
the Partnership will terminate December 31, 2002, subject
to the right of the Individual General Partners to extend
the term for up to two additional two-year periods.
Item 2. PROPERTIES
- ------ ----------
The Registrant has no material physical properties.
Item 3. LEGAL PROCEEDINGS
- ------ -----------------
There are no material pending legal proceedings to which
the Registrant is party or of which any of its property
is the subject, other than ordinary routine litigation
incidental to the business of the Partnership.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
No matter was submitted to a vote of the holders of
units of limited partnership interests ("Units") during
1997.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
- ------ -------------------------------------------------
STOCKHOLDER MATTERS
-------------------
(a) There is no established public trading market for the
Units.
(b) At December 31, 1997, there were 833 record holders
of Units.
(c) The Registrant, being a partnership, does not pay
dividends. Distributions of cash and securities,
however, may be made to the partners in the
Partnership pursuant to the Registrant's Partnership
Agreement.
Item 6. SELECTED FINANCIAL DATA
- ------ -----------------------
For the Years Ended and As of December 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
Interest income $ 73,349 178,979 245,800 132,394 16,706
Dividend income 136 -- -- -- --
Net operating loss (480,820) (410,597) (328,499) (188,769) (113,431)
Net realized gain (loss) from
sales of equity investments 1,168 (1,876) -- -- --
Net realized loss (479,652) (412,473) (328,499) (188,769) (113,431)
Change in net unrealized
fair value of
equity investments 1,101,284 377,961 (8,447) -- --
Net income (loss) 621,632 (34,512) (336,976) (188,769) (113,431)
Net realized loss
per Unit (6) (5) (4) (4) (12)
Total assets 6,646,391 6,019,828 6,057,701 4,876,769 2,597,416
Distributions declared -- -- 77,789 132,394 16,706
Distributions declared
per Unit (1) -- -- 1 3 2
(1) Calculation is based on distributions declared to Limited Partners divided by weighted
average number of Units outstanding during the year.
Refer to the financial statement notes entitled "Summary of Significant Accounting
Policies" and "Allocation of Profits and Losses" for a description of the method of
calculation of net realized income (loss) per Unit.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------ -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
- -----------------------------------
Liquidity and Capital Resources
- -------------------------------
During 1997, net cash used by operating activities
totaled $478,611. The Partnership paid management fees
of $145,380 to the Managing General Partners and paid
related parties $263,204 for operating expenses. In
addition, $31,804 was paid to the Individual General
Partners as compensation for their services. The
Partnership paid other operating expenses of $100,938 and
received $62,715 in interest and dividend income.
During 1997, the Partnership purchased $1,357,786 in
equity investments mostly in the biotechnology and
medical/diagnostic equipment industries. At December 31,
1997, the Partnership was not committed to fund any
additional investments.
Cash and cash equivalents at December 31, 1997, were
$157,137. 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
- ---------------------
1997 compared to 1996
- ---------------------
Net income was $621,632 for 1997 compared to net loss of
$34,512 in 1996. The increase to net income was
primarily due to a $723,323 increase in the change in net
unrealized fair value of equity investments. This change
was partially offset by a $105,630 decrease in interest
income.
The Partnership recorded an increase in equity investment
unrealized fair value of $1,101,284 in 1997, compared to
an increase of $377,961 in 1996. The 1997 increase was
primarily attributable to increases in portfolio
companies in the pharmaceuticals and biotechnology
industries.
The Partnership recorded management fees of $158,597 for
the years ended December 31, 1997 and 1996. Management
fees are equal to two percent of total Limited Partner
capital contributions for the first year of Partnership
operations through the sixth year.
The Partnership recorded interest income of $73,349 and
$178,979 for the years ended December 31, 1997 and 1996,
respectively. The decrease was mainly due to lower cash
and cash equivalents balances in 1997 resulting from new
and follow-on investments.
Total operating expenses were $355,904 and $391,841 for
1997 and 1996, respectively. Included in 1997 operating
expenses are the costs of the Partnership's relocation of
its administrative and investor service operations to
Santa Fe, New Mexico. As disclosed in Note 3 to the
financial statements, a determination was made in 1996
that certain operational costs paid directly by the
Partnership, which had previously been absorbed by the
General Partners, were not subject to the 3% operational
expense reimbursement limitation. Accordingly, $128,120
was reimbursed by the Partnership to the General
Partners.
Given the inherent risk associated with the business of
the Partnership, the future performance of the portfolio
company investments may significantly impact future
operations.
1996 compared to 1995
- ---------------------
Net loss was $34,512 for 1996 compared to $336,976 in
1995. The decrease in net loss was primarily due to a
$386,438 increase in change in net unrealized fair value
of equity investments and a $45,537 decrease in
management fees. These changes were partially offset by
a $66,821 decrease in interest income and a $61,251
increase in total operating expenses.
The Partnership recorded an increase in equity investment
fair value of $377,961 in 1996, compared to a decrease of
$8,477 in 1995. The 1996 increase was primarily
attributable to increases in portfolio companies in the
pharmaceuticals industry, partially offset by decreases
in the biotechnology industry.
The Partnership recorded management fees of $158,597 and
$204,134 for the years ended December 31, 1996 and 1995,
respectively. Management fees are equal to two percent
of total Limited Partner capital contributions for the
first year of Partnership operations through the sixth
year. Pursuant to the Partnership Agreement, a full
first year fee is paid to the Managing General Partners
as each additional Limited Partner is admitted to the
Partnership, regardless of the date the Limited Partner
is admitted. Management fees were higher in 1995 due to
Unit sales.
The Partnership recorded interest income of $178,979 and
$245,800 for the years ended December 31, 1996 and 1995,
respectively. The decrease was mainly due to lower cash
and cash equivalents balances in 1996 resulting from new
and follow-on investments.
Total operating expenses were $391,841 and $330,590 for
1996 and 1995, respectively. As disclosed in Note 3 to
the financial statements, a determination was made in
1996 that certain operational costs paid directly by the
Partnership, which had previously been absorbed by the
General Partners, were not subject to the 3% operational
expense reimbursement limitation. Accordingly, $128,120
was reimbursed by the Partnership. In 1995, operating
cost allocations to the Partnership were reevaluated,
resulting in $52,403 of additional expenses in 1995 of
which $25,790 related to prior years. If the $25,790 had
been recorded in prior years, operating expenses (before
expenses absorbed by General Partners and expenses
previously absorbed by General Partners of $128,120)
would have been $317,731 and $382,758 for 1996 and 1995,
respectively. The 1995 amount was higher due to the
recognition of the $89,086 contingent liability at
December 31, 1994, which was reflected in 1995 operating
expenses based on additional Units sold in 1995.
The Year 2000
- -------------
The Managing General Partner is currently reviewing the
Partnership's information systems in anticipation of the
potential computer software problems associated with the
Year 2000. The Year 2000 issue exists because many
computer software programs use only two digits to
identify a year in the date field and were developed
without considering the impact of the upcoming change in
the century. The Managing General Partner currently
expects to complete the necessary critical software
conversion modifications in 1999, and does not anticipate
any material adverse impact on the financial position or
results of operations of the Partnership, as a result of
the Year 2000 issue.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
The financial statements of the Registrant are set forth
in Item 14.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ------ ------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
As a partnership, the Registrant has no directors or
executive officers. The Management Committee is
responsible for the management and administration of the
Partnership. The members of the Management Committee
consist of three Individual General Partners and a
representative from each of Technology Funding Ltd., a
California limited partnership ("TFL"), and its wholly-
owned subsidiary, Technology Funding Inc., a California
corporation ("TFI"). TFL and TFI are the Managing
General Partners. Information concerning the ownership
of TFL and the business experience of the key officers of
TFI and the partners of TFL is incorporated by reference
from the sections entitled "Management of the Partnership
- - The Managing General Partners" and "Management of the
Partnership - Key Personnel of the Managing General
Partners" in the Prospectus as modified by Cumulative
Supplement No. 4 dated January 4, 1996, which are
incorporated herein by reference. Changes in this
information that have occurred since the date of the
Prospectus are included in the Technology Funding Venture
Capital Fund VI, LLC Prospectus as revised January 22,
1998, forming a part of the December 5, 1997 Pre-
effective Amendment No 1 to the Form N-2 Registration
Statement No 333-23913 dated July 11, 1997, which are
incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
- ------- ----------------------
As a partnership, the Registrant has no officers or
directors. In 1997, the Partnership incurred $158,597 in
management fees. The fees are designed to compensate the
Managing General Partners for General Partner Overhead
incurred in performing management duties for the
Partnership through December 31, 1997. General Partner
Overhead (as defined in the Partnership Agreement)
includes the General Partners' share of rent and
utilities, and certain salaries and benefits paid by the
Managing General Partners in performing their obligations
to the Partnership. As compensation for their services,
the Individual General Partners each receive $6,000
annually beginning on the Commencement Date, plus $1,000
for each attended meeting of the Individual General
Partners, and related expenses. For the year ended
December 31, 1997, $31,804 of such fees were paid.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- ------- ---------------------------------------------------
MANAGEMENT
- ----------
Not applicable. No Limited Partner beneficially holds
more than 5% of the aggregate number of Units held by all
Limited Partners, and neither the General Partners nor
any of their officers, directors or partners own any
Units. The three Individual General Partners each own 20
Units. The Individual General Partners control the
affairs of the Partnership pursuant to the Partnership
Agreement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
The Registrant, or its investee companies, have engaged
in no transactions with the General Partners or their
officers and partners other than as described above, in
the notes to the financial statements, or in the
Partnership Agreement.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
- ------- -------------------------------------------------------
FORM 8-K
--------
(a) List of Documents filed as part of this Annual
Report on Form 10-K
(1) Financial Statements - the following financial
statements are filed as a part of this Report:
Independent Auditors' Report
Balance Sheets as of December 31, 1997
and 1996
Statements of Operations for the years
ended December 31, 1997, 1996 and 1995
Statements of Partners' Capital for the years
ended December 31, 1997, 1996 and 1995
Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995
Notes to Financial Statements
(2) Financial Statement Schedules
All schedules have been omitted because they
are not applicable or the required information
is included in the financial statements or the
notes thereto.
(3) Exhibits
Registrant's Amended and Restated Limited
Partnership Agreement (incorporated by
reference to Exhibit A to Registrant's
Prospectus dated May 3, 1993, included in
Registration Statement No. 33-54002 filed
pursuant to Rule 424(b) of the General Rules
and Regulations under the Securities Act of
1933).
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant
during the year ended December 31, 1997.
(c) Financial Data Schedule for the year ended and as of
December 31, 1997 (Exhibit 27).
INDEPENDENT AUDITORS' REPORT
----------------------------
The Partners
Technology Funding Medical Partners I, L.P.:
We have audited the accompanying balance sheets of Technology
Funding Medical Partners I, L.P. (a Delaware limited partnership)
as of December 31, 1997 and 1996, and the related statements of
operations, partners' capital, and cash flows for each of the
years in the three-year period ended December 31, 1997. These
financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our
procedures included confirmation of certain securities owned, by
correspondence with the individual investee companies, and a
physical examination of those securities held by a safeguarding
agent as of December 31, 1997 and 1996. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of
Technology Funding Medical Partners I, L.P. as of December 31,
1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended
December 31, 1997, in conformity with generally accepted
accounting principles.
Albuquerque, New Mexico /S/KPMG Peat Marwick LLP
March 25, 1998
BALANCE SHEETS
- --------------
December 31,
--------------------
1997 1996
------- -------
ASSETS
Equity investments (cost basis of
$5,011,218 and $3,649,974 in 1997
and 1996, respectively) $6,481,986 4,019,458
Cash and cash equivalents 157,137 1,985,053
Organizational costs (net of accumulated
amortization of $34,000 and $26,000
in 1997 and 1996, respectively) 6,000 14,000
Other assets 1,268 1,317
--------- ---------
Total assets $6,646,391 6,019,828
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 29,213 27,548
Due to related parties 31,958 28,692
--------- ---------
Total liabilities 61,171 56,240
Commitments and subsequent events
(Notes 3, 5 and 8)
Partners' capital:
Limited Partners
(Units outstanding of 79,716
for both 1997 and 1996) 5,127,957 5,602,813
General Partners (13,505) (8,709)
Net unrealized fair value increase
from cost of equity investments 1,470,768 369,484
--------- ---------
Total partners' capital 6,585,220 5,963,588
--------- ---------
Total liabilities and partners'
capital $6,646,391 6,019,828
========= =========
See accompanying notes to financial statements.
STATEMENTS OF OPERATIONS
- ------------------------
For the Years Ended December 31,
------------------------------------
1997 1996 1995
------- ------ -------
Income:
Interest income $ 73,349 178,979 245,800
Dividend income 136 -- --
--------- ------- -------
Total income 73,485 178,979 245,800
Costs and expenses:
Management fees 158,597 158,597 204,134
Individual General
Partners' compensation 31,804 31,138 31,575
Amortization of
organizational costs 8,000 8,000 8,000
Operating expenses:
Administrative and
investor services 210,039 154,880 252,565
Investment operations 69,447 62,721 78,333
Computer services 45,699 38,897 29,172
Professional fees 30,719 61,233 48,478
Expenses absorbed by
General Partners -- (54,010) (77,958)
Expenses previously
absorbed by General
Partners -- 128,120 --
--------- ------- -------
Total operating
expenses 355,904 391,841 330,590
--------- ------- -------
Total costs and
expenses 554,305 589,576 574,299
--------- ------- -------
Net operating loss (480,820) (410,597) (328,499)
Net realized gain (loss)
from sales of equity
investments 1,168 (1,876) --
--------- ------- -------
Net realized loss (479,652) (412,473) (328,499)
Change in net unrealized fair
value of equity investments 1,101,284 377,961 (8,477)
--------- ------- -------
Net income (loss) $ 621,632 (34,512) (336,976)
========= ======= =======
Net realized loss per Unit $ (6) (5) (4)
========= ======= =======
See accompanying notes to financial statements.
STATEMENTS OF PARTNERS' CAPITAL
- -------------------------------
For the years ended December 31, 1997, 1996 and 1995:
Net Unrealized
Fair Value (Decrease)
Limited General Increase from Cost of
Partners Partners Equity Investments Total
-------- -------- ------------------ -----
Partners' capital,
December 31, 1994 $4,780,868 (1,382) -- 4,779,486
Sales of partnership
interests 1,865,844 1,868 -- 1,867,712
Syndication fees (233,326) (1,007) -- (234,333)
Distributions of Offering
Period income (77,011) (778) -- (77,789)
Change in net unrealized fair
value of equity investments -- -- (8,477) (8,477)
Net realized loss (325,214) (3,285) -- (328,499)
--------- ------ --------- ---------
Partners' capital,
December 31, 1995 6,011,161 (4,584) (8,477) 5,998,100
Change in net unrealized fair
value of equity investments -- -- 377,961 377,961
Net realized loss (408,348) (4,125) -- (412,473)
--------- ------ --------- ---------
Partners' capital,
December 31, 1996 5,602,813 (8,709) 369,484 5,963,588
Change in net unrealized fair
value of equity investments -- -- 1,101,284 1,101,284
Net realized loss (474,856) (4,796) -- (479,652)
--------- ------ --------- ---------
Partners' capital,
December 31, 1997
$5,127,957 (13,505) 1,470,768 6,585,220
========= ====== ========= =========
See accompanying notes to financial statements.
STATEMENTS OF CASH FLOWS
- ------------------------
For the Years Ended December 31,
--------------------------------
1997 1996 1995
------ ------ ------
Cash flows from operating activities:
Interest received $ 62,579 160,695 245,373
Dividends received 136 -- --
Cash paid to vendors (100,938) (111,299) (92,428)
Cash paid to related parties (440,388) (480,081) (466,503)
--------- --------- ---------
Net cash used by operating activities (478,611) (430,685) (313,558)
--------- --------- ---------
Cash flows from investing activities:
Purchases of equity investments (1,357,786) (1,533,007) (819,131)
Proceeds from sales of equity
investments 8,481 -- --
--------- --------- ---------
Net cash used by investing activities (1,349,305) (1,533,007) (819,131)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from sales of limited
partnership interests -- -- 1,865,844
General Partners' capital contribution -- -- 1,868
Distributions of Offering Period income -- -- (123,713)
Payments for syndication fees and
organizational costs -- -- (234,333)
--------- --------- ---------
Net cash provided by financing
activities -- -- 1,509,666
--------- --------- ---------
Net (decrease) increase in cash and
cash equivalents (1,827,916) (1,963,692) 376,977
Cash and cash equivalents
at beginning of year 1,985,053 3,948,745 3,571,768
--------- --------- ---------
Cash and cash equivalents
at end of year $ 157,137 1,985,053 3,948,745
========= ========= =========
Reconciliation of net income (loss)
to net cash used by operating
activities:
Net income (loss) $ 621,632 (34,512) (336,976)
Adjustments to reconcile net income
(loss) to net cash used by operating
activities:
Amortization of organizational costs 8,000 8,000 8,000
Change in net unrealized fair value
of equity investments (1,101,284) (377,961) 8,477
Net realized (gain) loss from sales
of equity investments (1,168) 1,876 --
Changes in:
Accounts payable and accrued expenses 1,665 1,433 899
Due to related parties 3,266 (10,794) 7,343
Other, net (10,722) (18,727) (1,301)
--------- --------- ---------
Net cash used by operating activities $ (478,611) (430,685) (313,558)
========= ========= =========
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
1. Summary of Significant Accounting Policies
------------------------------------------
Organization
- ------------
Technology Funding Medical Partners I, L.P. (the "Partnership") is
a limited partnership organized under the laws of the State of
Delaware on September 3, 1992. The purpose of the Partnership is
to make venture capital investments in emerging growth companies.
The Partnership elected to be a business development company under
the Investment Company Act of 1940, as amended (the "Act"), and
operates as a non-diversified investment company as that term is
defined in the Act. The Managing General Partners are Technology
Funding Ltd. ("TFL"), and Technology Funding Inc. ("TFI"), a
wholly-owned subsidiary of TFL. There are also three Individual
General Partners. A wholly-owned subsidiary of TFI, Technology
Funding Securities Corporation ("TFSC"), was the dealer-manager for
the offering.
For the period from September 3, 1992, through May 3, 1993, the
Partnership was inactive. The Partnership's registration statement
was declared effective by the Securities and Exchange Commission on
May 3, 1993, and the Partnership began selling units of limited
partnership interests ("Units") in May of 1993.
On October 8, 1993, the Commencement Date, the minimum number of
Units required to begin Partnership operations (12,000) had been
sold. The offering terminated with 79,716 Units sold on May 3,
1995. The Partnership Agreement provides that the Partnership will
continue until December 31, 2002, unless further extended for up to
two additional two-year periods from such date if the Individual
General Partners so determine or unless sooner dissolved.
Preparation of Financial Statements and Use of Estimates
- --------------------------------------------------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates. Estimates are used when
accounting for investments, change in unrealized fair value of
investments, liabilities and contingencies. Because of the
inherent uncertainty of valuation, the estimated fair value of
investments may differ significantly from the values that would
have been used had a ready market for investments existed, and the
differences could be material.
Equity Investments
- ------------------
The Partnership's method of accounting for investments, in
accordance with generally accepted accounting principles, is the
fair value basis used for investment companies. The fair value of
Partnership equity investments is their initial cost basis with
changes as noted below:
The fair value for publicly-traded equity investments (marketable
equity securities) is based upon the five-day-average closing sales
price or bid/ask price that is available on a national securities
exchange or over-the-counter market. Certain publicly-traded
equity investments may not be marketable due to selling
restrictions and for those securities, an illiquidity discount of
up to 33% is applied when determining the fair value; the actual
discount percentage is based on the type and length of the
restrictions. Investments valued under this method were $1,180,687
and $249,469 at December 31, 1997 and 1996, respectively.
All investments which are not publicly traded are valued at fair
market value as determined by the Managing General Partners in the
absence of readily ascertainable market values. Investments valued
under this method were $5,301,299 and $3,769,989 at December 31,
1997 and 1996, respectively. Generally, investments in privately
held companies are valued at original cost unless there is clear
evidence of a change in fair value, such as a recent round of
third-party financings or events that, in the opinion of the
Managing General Partners, indicate a change in value.
Convertible and subordinated notes receivable are stated at cost
plus accrued interest, which is equivalent to fair value, and are
included in equity investments as repayment of these notes
generally occurs through conversion into equity investments.
Venture capital limited partnership investments are initially
recorded at cost and are valued based on the fair value of the
underlying investments. Limited partnership distributions that are
a return of capital reduce the cost basis of the Partnership's
investment. Distributions from limited partnership cumulative
earnings are reflected as realized gains by the Partnership.
Where, in the opinion of the Managing General Partners, events
indicate that the fair value of equity and venture capital
investments and convertible and subordinated notes receivable may
not be recoverable, a write down to estimated fair value is
recorded. Temporary changes in fair value result in increases or
decreases to the unrealized fair value of equity investments.
Adjustments to fair value basis are reflected as "Change in net
unrealized fair value of equity investments." In the case of an
other than temporary decline in value below cost basis, an
appropriate reduction in the cost basis is recognized as a realized
loss with the fair value being adjusted to match the new cost
basis. Cost basis adjustments are reflected as "Realized losses
from investment write-downs" or "Net realized loss from venture
capital limited partnership investments" on the Statements of
Operations.
Sales of equity investments are recorded on the trade date. The
basis on which cost is determined in computing realized gains or
losses is specific identification.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents are principally comprised of cash
invested in demand accounts and money market instruments and are
stated at cost plus accrued interest. The Partnership considers
all money market and short-term investments with an original
maturity of three months or less to be cash equivalents.
Organizational Costs
- --------------------
Organizational costs of $40,000 are amortized over 60 months using
the straight-line method.
Net Realized Income (Loss) Per Unit
- -----------------------------------
Net realized income (loss) per Limited Partner Unit is calculated
by dividing the weighted average number of Limited Partner Units
outstanding for the years ended December 31, 1997, 1996 and 1995,
of 79,716, 79,716 and 74,425, respectively, into total net realized
loss allocated to the Limited Partners. The Managing General
Partners contributed 0.1% of total Limited Partner capital
contribution and did not receive any Partnership units.
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 generally
accepted accounting principles which may not equate to tax
accounting. The difference in the total book and tax cost basis as
of December 31, 1997, is not material.
Syndication Fees
- ----------------
Syndication fees, which consist of commissions and certain
organizational and offering costs, are deducted from the partners'
capital accounts. Pursuant to the Partnership Agreement, selling
commissions are allocated solely to the Limited Partners. All
other syndication fees are allocated 99% to the Limited Partners
and 1% to the Managing General Partners. Syndication fees are not
deductible for income tax purposes. Such fees may result in a
reduction of any gain (or an increase in any loss) realized for tax
purposes by the partners upon dissolution of the Partnership or a
transfer of their interests.
2. Financing of Partnership Operations
-----------------------------------
The Managing General Partners expect cash received from the future
liquidation of Partnership investments 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
--------------------------
Included in costs and expenses are related party costs as follows:
1997 1996 1995
------ ----- ------
Management fees $158,597 158,597 204,134
Syndication fees -- -- 234,333
Individual General Partners'
compensation 31,804 31,138 31,575
Amortization of organizational
costs 8,000 8,000 8,000
Reimbursable operating expenses:
Administrative and investor
services 145,407 114,191 216,113
Investment operations 63,311 52,354 70,810
Computer services 44,535 38,897 29,172
Expenses absorbed by
General Partners -- (54,010) (77,958)
Expenses previously absorbed
by General Partners -- 128,120 --
Management fees are equal to two percent of the total Limited
Partner capital contributions for the first year of Partnership
operations through the sixth year. Beginning in the seventh year,
management fees will decline by ten percent per year from the
initial two 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. Pursuant to the Partnership Agreement, a full first
year fee is paid to the Managing General Partners as each
additional Limited Partner is admitted to the Partnership,
regardless of the date the Limited Partner is admitted. Management
fees payable were $26,433 and $13,216 at December 31, 1997 and
1996, respectively.
The Partnership reimbursed the Managing General Partners for
organizational and offering expenses (up to five percent of the
total Limited Partner capital contributions) incurred in connection
with organizing the Partnership and the offering of Units thereof.
Such reimbursements have been reflected in the Statements of
Partners' Capital as syndication fees except for $40,000 of
organizational costs which have been capitalized.
Also included in the syndication fees are commissions and fees paid
to Technology Funding Securities Corporation (TFSC), the dealer-
manager. During the year ended December 31, 1995, the Partnership
paid commissions and fees of $133,618 of which $118,711 was
reallowed to participating broker-dealers. In addition, the
Partnership also paid $7,424 in 1995, to TFSC for due diligence
expenses (up to one-half of one percent of total Limited Partner
capital contributions) that TFSC paid to unaffiliated broker-
dealers. No such commissions and fees were paid in 1997 or 1996.
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 or
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 on May 3. No expenses were
absorbed by the General Partners in 1997. Amounts due to related
parties were $5,525 and $15,476 at December 31, 1997 and 1996,
respectively. In 1996 and 1995, the Managing General Partners
absorbed $54,010 and $77,958, respectively, in operating expenses.
In 1996, it was determined that certain operational costs paid
directly to the Partnership, which had previously been absorbed by
the General Partners were not subject to this limitation;
consequently $128,120 was reimbursed to the General Partners.
Reimbursable operating expenses include expenses (other than
Organizational and Offering expenses and General Partner overhead)
such as administrative and investor services, investment
operations, and computer services. During late 1995, operating
cost allocations to the Partnership were reevaluated. The Managing
General Partners determined that they had not fully recovered
allocable overhead as permitted by the Partnership Agreement. As a
result, the Partnership was charged additional administrative and
investor services costs of $52,403 that were not previously
recognized by the Partnership. This amount consisted of
$26,613,and $25,790 for 1995 and prior years, respectively. If
this charge had been recorded in prior years, operating expenses
(before expenses absorbed by General Partners and expenses not
subject to limitation) would have been $317,731 and $382,758 for
1996 and 1995, respectively.
As compensation for their services, the Individual General Partners
each receive $6,000 annually beginning on the Commencement Date,
plus $1,000 for each of the management committee meetings attended
and related expenses. The three Individual General Partners each
own 20 Units.
Effective November 1, 1997, TFL assigned its California office
lease to Technology Funding Property Management LLC (TFPM), an
entity that is affiliated to the Managing General Partner. Under
the terms of a rent agreement, TFPM charges the Partnership for its
share of office rent and related overhead costs. These amounts are
included in administrative and investor service costs.
Under the terms of a computer service agreement, Technology
Administrative Management, a division of TFL, charges the
Partnership for its share of computer support costs. These amounts
are included in computer services expenses.
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.
4. Allocation of Profits and Losses
--------------------------------
Net realized profit and loss of the Partnership are allocated based
on the beginning of year partners' capital balances as follows:
(a) Profits:
(i) first, to those partners with deficit capital account
balances in proportion to such deficits until the
deficits have been eliminated; then
(ii) second, to the partners as necessary to offset net loss
and sales commissions previously allocated to such
partners; then
(iii)third, 75% to the Limited Partners as a group in
proportion to the number of Units, 5% to the Limited
Partners in proportion to the Unit months of each
Limited Partner, and 20% to the Managing General
Partners. Unit months are the number of half months a
Unit would be outstanding if held from the date the
original holder of such Unit was deemed admitted into
the Partnership until the termination of the offering
of Units.
(b) Losses:
(i) first, to the partners as necessary to offset net
profit previously allocated to the partners under
(a)(iii) above plus losses from unaffiliated venture
capital limited partnership investments; then
(ii) 99% to the Limited Partners as a group and 1% to the
Managing General Partners.
Losses allocable to Limited Partners in excess of their capital
account balances will be allocated to the Managing General
Partners. Net profit thereafter, otherwise allocable to those
Limited Partners, would be allocated to the Managing General
Partners to the extent of such losses.
As indicated above, losses from unaffiliated venture capital
limited partnership investments are allocated pursuant to section
(b). Gains are allocated first to offset previously allocated
losses pursuant to (b)(i) above, and then 99% to Limited Partners
and 1% to the Managing General Partners.
Income earned from short-term investments during the Offering
Period was allocated monthly, 99% to the Limited Partners and 1% to
the Managing General Partners.
In no event shall the General Partners' interest in profits and
losses be less than 1%.
5. Equity Investments
------------------
At December 31, 1997, and December 31, 1996, equity investments consisted of:
December 31, 1997 December 31, 1996
Principal ------------------ -----------------
Investment Amount or Cost Fair Cost Fair
Industry/Company Position Date Shares Basis Value Basis Value
- ---------------- -------- ---- ------ ----- ----- ----- -----
Medical/Biotechnology
- ---------------------
Acusphere, Inc. Series B
Preferred
shares 05/95 125,000 $ 200,000 375,000 200,000 267,500
Acusphere, Inc. Series C
Preferred
shares 05/96 163,552 350,001 490,656 350,001 350,001
Acusphere, Inc. Series D
Preferred
shares 11/97 52,083 156,250 156,250 -- --
Biex, Inc. Series E
Preferred
shares 8/97 120,000 300,000 300,000 -- --
CV Therapeutics, Common
Inc. share
warrant at
$20.00;
expiring
09/00 09/95 1,920 768 0 768 0
CV Therapeutics, Common
Inc. shares 11/96 26,455 487,224 240,211 487,224 125,982
Peptide Common
Therapeutics shares
Group 02/96 2,151 -- -- 7,313 7,823
Prolinx, Inc. Series A
Preferred
shares 05/95 119,631 119,631 209,354 119,631 119,631
Prolinx, Inc. Series A
Preferred
shares 12/95 124,369 124,369 217,646 124,369 124,369
Prolinx, Inc. Series A
Preferred
shares 09/96 156,000 156,000 273,000 156,000 156,000
Prolinx, Inc. Series B
Preferred
shares 07/97 164,835 288,461 288,461 -- --
RedCell, Inc. Series B
Preferred
shares 12/94 132,979 125,000 0 125,000 125,000
RedCell, Inc. Convertible
note (1) 02/96 $89,966 98,149 98,149 96,285 96,285
RedCell, Inc. Series C
Preferred
share warrant
exercise
price to be $13,495
determined; aggregate
expiring purchase
02/01 02/96 price 0 0 0 0
RedCell, Inc. Convertible
note (1) 07/96 $71,973 76,131 76,131 74,692 74,692
RedCell, Inc. Series C
Preferred
share warrant
exercise
price to be $10,796
determined; aggregate
expiring purchase
07/01 07/96 price 0 0 0 0
Medical/Diagnostic Equipment
- ----------------------------
Endocare, Inc. Common
shares 08/96 2,000 6,000 7,160 6,000 4,824
Endocare, Inc. Common
share
warrant at
$3.00;
expiring
08/01 08/96 30,000 0 13,050 0 12,060
Endocare, Inc. Convertible
note (1) 08/96 $150,000 -- -- 158,533 158,533
Endocare, Inc. Common
shares 01/97 66,400 166,000 214,480 -- --
Endocare, Inc. Common
shares 01/97 84,000 294,000 300,720 -- --
LifeCell Series B
Corporation Preferred
shares 11/96 2,500 232,089 232,089 247,500 247,500
LifeCell Common
Corporation share
warrant at
$4.13;
expiring
11/01 11/96 56,451 2,500 37,258 2,500 2,500
LifeCell Series B
Corporation Preferred
shares 02/97 29 2,692 2,692 -- --
LifeCell Series B
Corporation Preferred
shares 05/97 60 5,570 5,570 -- --
LifeCell Series B
Corporation Preferred
shares 08/97 38 3,528 3,528 -- --
LifeCell Series B
Corporation Preferred
shares 11/97 39 3,621 3,621 -- --
R2 Technology, Series A-1
Inc. Preferred
shares 05/94 100,000 100,000 184,000 100,000 184,000
R2 Technology, Series B
Inc. Preferred
share warrant
at $2.00;
expiring
11/00 11/95 2,417 0 0 0 0
R2 Technology, Series B-1
Inc. Preferred
shares 03/96 17,134 34,268 34,268 34,268 34,268
Health Information Systems
- --------------------------
ADESSO Specialty Series D
Services Preferred
Organization, shares
Inc. 12/97 11,905 100,002 100,002 -- --
CareCentric Series A
Solutions, Inc. Preferred
shares 10/95 66,667 100,000 65,710 100,000 113,333
CareCentric Series B
Solutions, Inc. Preferred
shares 09/96 86,999 130,499 85,749 130,499 130,499
CareCentric Series C
Solutions, Inc. Preferred
shares 12/97 31,051 32,604 32,604 -- --
CareCentric Common
Solutions, Inc. share
warrant at
$.15
expiring
12/02 12/97 15,525 13,972 13,972 -- --
Pharmaceuticals
- ---------------
Axys Common
Pharmaceuticals shares
Inc. 12/95 9,464 125,000 78,930 125,000 130,017
Megabios Corp. Common
shares 09/94 64,375 250,000 725,957 250,000 482,813
Megabios Corp. Common
shares 12/94 19,312 75,001 217,781 75,001 144,845
Megabios Corp. Common
shares 07/95 16,737 64,999 188,743 64,999 125,530
Neurex Common
Corporation shares 09/96 149 3,129 2,004 3,129 2,350
Periodontix, Series A
Inc. Preferred
shares 12/93 100,000 100,000 245,000 100,000 200,000
Periodontix, Series B
Inc. Preferred
shares 02/96 67,000 134,000 164,150 134,000 134,000
Environmental
- -------------
Naiad Technologies,Series A
Inc. Preferred
shares 12/95 50,000 25,000 162,500 25,000 100,000
Naiad Technologies,Series B
Inc. Preferred
Shares 11/96 62,602 125,204 203,457 125,204 125,204
Naiad Technologies,Series C
Inc. Preferred
Shares 11/97 49,230 159,998 159,998 -- --
Venture Capital Limited Partnership Investments
- -----------------------------------------------
Medical Science Limited
Partners II Partnership
Interests various $250,000 239,558 272,135 227,058 239,899
--------- --------- --------- ---------
Total Equity Investments $5,011,218 6,481,986 3,649,974 4,019,458
========= ========= ========= =========
-- No investment held at end of period.
0 Investment active with a carrying value or fair value of zero.
(1) Convertible notes include accrued interest. Interest rates on such notes ranged from 8%
to 16%.
Marketable Equity Securities
- ----------------------------
At December 31, 1997 and 1996, marketable equity securities had
an aggregate cost of $1,084,621 and $587,242, respectively, and
an aggregate fair value of $1,180,687 and $249,469, respectively.
The unrealized gain/loss at December 31, 1997 and 1996, included
gross gains of $391,042 and $5,527, respectively.
Acusphere, Inc.
- ---------------
In November of 1997, the Partnership made an additional
investment in the company by purchasing 52,083 Series D Preferred
shares for $156,250. The pricing of this round, in which third
parties participated, indicated a fair value increase of $248,155
for the Partnership's existing investment.
Adesso Specialty Services Organization, Inc.
- ---------------------------------------------
In December of 1997, the Partnership purchased 11,905 Series D
Preferred shares for $100,002.
Biex, Inc.
- ----------
In August of 1997, the Partnership purchased 120,000 Series E
Preferred shares for $300,000.
CareCentric Solutions, Inc.
- ---------------------------
In December of 1997, the Partnership made an additional
investment in the company by purchasing 31,051 Series C Preferred
shares and a warrant for 15,525 common shares for a total cost of
$46,576. The pricing of this round, in which third parties
participated, indicated a decrease in fair value of $92,373 for
the Partnership's existing investment.
Endocare, Inc.
- --------------
In January of 1997, the Partnership made an additional investment
in the company by purchasing 84,000 common shares for $294,000.
In addition, the Partnership converted its $150,000 note
receivable, including accrued interest of $16,000, into 66,400
common shares at a total cost of $166,000. At December 31, 1997,
the Partnership recorded an increase of $58,526 in fair value to
reflect the publicly-traded market price of its common stock and
warrant investments; the fair value was net of a discount applied
for restricted securities.
Megabios Corp.
- --------------
In September of 1997, the company completed its initial public
offering ("IPO"). Prior to the IPO, the company effected a
reverse stock split resulting in the Partnership's Preferred
shares being converted to 100,424 Common shares. At December 31,
1997, the Partnership recorded an increase in the change in fair
value of $379,293 to reflect the publicly traded market price of
its investment, net of a discount applied as the Partnership is
restricted from selling its shares until March 1998.
Subsequent to year end, the fair value of the Partnership's
investment decreased by $319,047 as a result of a decrease in the
publicly-traded market price at March 23, 1998.
Naiad Technologies, Inc. (formerly TMC, Inc.)
- ---------------------------------------------
In November of 1997, the Partnership made an additional
investment in the company by purchasing 49,230 Series C Preferred
shares for $159,998. The pricing of this round, in which third
parties participated, indicated an increase in fair value of
$140,753 for the Partnership's existing investment.
Periodontix, Inc.
- -----------------
In December of 1997, the company had an additional round of
financing in which the Partnership did not participate. The
pricing of this round, indicated an increase in fair value of
$75,150 for the Partnership's existing investment.
Prolinx, Inc.
- -------------
In July of 1997, the Partnership made an additional investment in
the company by purchasing 164,835 Series B Preferred shares for
$288,461. The pricing of this round in which third parties
participated, indicated a $300,000 increase in the fair value of
the Partnership's existing investment.
RedCell, Inc.
- -------------
During the second quarter of 1997, the company had a new round of
financing in which the Partnership did not participate. The
pricing of this round indicated a decrease in fair value of
$125,000 for the Partnership's existing investment at December
31, 1997.
Venture Capital Limited Partnership Investment
- ----------------------------------------------
The Partnership recorded a cost basis increase of $12,500 in
venture capital limited partnership investments in 1997, as a
result of an additional capital contribution. The Partnership
recorded an increase in fair value of $19,736 due to the
additional contribution and an increase in fair value of the
underlying investments.
Other Equity Investments
- ------------------------
Other significant changes reflected above relate to market value
fluctuations or the elimination of a discount relating to selling
restrictions for publicly-traded portfolio companies.
6. Change in Net Unrealized Fair Value of Equity Investments
---------------------------------------------------------
In accordance with the accounting policy as stated in Note 1, the
Statements of Operations include a line item entitled "Change in
net unrealized fair value of equity investments. " The table
below discloses details of the changes:
For the Years Ended December 31,
------------------------------------
1997 1996 1995
-------- -------- --------
Increase (decrease) in
fair value from cost of
marketable equity
securities $ 96,066 (337,773) --
Increase (decrease) in fair
value from cost of
non-marketable
equity securities 1,374,702 707,257 (8,477)
--------- ------- -----
Net unrealized fair
value increase (decrease)
from cost at end of year 1,470,768 369,484 (8,477)
Net unrealized fair
value increase (decrease)
from cost at beginning
of year 369,484 (8,477) --
--------- ------- -----
Change in net unrealized
fair value of equity
investments $1,101,284 377,961 (8,477)
========= ======= =====
7. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at December 31, 1997 and 1996,
consisted of:
1997 1996
------- -------
Demand accounts $ 3,470 2,844
Money-market accounts 153,667 1,982,209
------- ---------
Total $157,137 1,985,053
======= =========
8. Commitments
-----------
The Partnership is 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
fundings, venture capital limited partnership investments,
equipment financing commitments, or accounts receivable lines of
credit that are outstanding but not currently fully utilized. As
they do not represent current outstanding balances, these
unfunded commitments are properly not recognized in the financial
statements. At December 31, 1997, the Partnership had no
unfunded commitments.
The Partnership uses the same credit policies in making these
commitments and conditional obligations as it does for on-
balance-sheet instruments. Commitments to extend financing are
agreements to lend to a company as long as there are no
violations of any conditions established in the contract. The
credit lines generally have fixed termination dates or other
termination clauses. Since many of the commitments are expected
to expire without being fully drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
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: March 25, 1998 By: /s/Michael Brenner
------------------------------
Michael Brenner
Controller
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated:
Signature Capacity Date
--------- -------- ----
/s/Charles R. Kokesh President, Chief March 25, 1998
- ------------------------ Executive Officer,
Charles R. Kokesh Chief Financial
Officer and Chairman of
Technology Funding Inc.
and Managing General
Partner of Technology
Funding, Ltd.
/s/Gregory T. George Group Vice President March 25, 1998
- ------------------------ of Technology Funding
Gregory T. George Inc. and a General
Partner of Technology
Funding, Ltd.
The above represents the Board of Directors of Technology Funding
Inc. and the General Partners of Technology Funding Ltd.