<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 period ended March 31, 1995
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. 0-16683
TECHNOLOGY FUNDING SECURED INVESTORS II
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-3034262
- ------------------------------- -----------------------------------
(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)
(415) 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 of 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)
March 31, December 31,
1995 1994
-------- ------------
<S> <C> <C>
ASSETS
Investments:
Secured notes receivable, net
(cost basis of $7,917,346 and
$7,528,512 at 1995 and 1994,
respectively) $ 5,097,346 4,999,512
Equity investments (cost basis
of $3,007,237 and $2,936,564 at
1995 and 1994, respectively) 1,677,363 1,603,688
---------- ----------
Total investments 6,774,709 6,603,200
Cash and cash equivalents 645,540 1,006,954
Other assets 30,552 51,198
---------- ----------
Total $ 7,450,801 7,661,352
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 83,807 131,356
Due to related parties 14,210 --
Due to affiliated partnerships 337 246
Other liabilities 55,342 50,778
---------- ----------
Total liabilities 153,696 182,380
Commitments and subsequent event
(Notes 2, 4, and 7)
Partners' capital:
Limited Partners
(Units outstanding of
159,006 for both 1995 and 1994) 11,453,458 11,449,172
General Partners (6,479) (108,324)
Net unrealized fair value decrease
from cost:
Secured notes receivable (2,820,000) (2,529,000)
Equity investments (1,329,874) (1,332,876)
---------- ----------
Total partners' capital 7,297,105 7,478,972
---------- ----------
Total $ 7,450,801 7,661,352
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------
1995 1994
---- ----
<S> <C> <C>
Income:
Secured notes receivable interest $ 247,654 158,677
Short-term investment interest 8,680 12,002
Other income 4,255 2,220
------- -------
Total income 260,589 172,899
------- -------
Costs and expenses:
Management fees 37,395 57,747
Other investment expenses 30,606 18,761
Operating expenses:
Lending operations and investment
management 41,232 113,648
Administrative and investor
services 50,411 86,028
Computer services 18,182 27,955
Professional fees 9,094 23,986
------- -------
Total operating expenses 118,919 251,617
------- -------
Total costs and expenses 186,920 328,125
------- -------
Net operating income (loss) 73,669 (155,226)
Net realized gain from sales of
equity investments 15,815 --
Realized losses from
investment write-downs -- (3,111)
Recovery from investments
previously written off 16,647 --
------- -------
Net realized income (loss) 106,131 (158,337)
Change in net unrealized
fair value:
Secured notes receivable (291,000) 506,000
Equity investments 3,002 (367,671)
------- -------
Net loss $(181,867) (20,008)
======= =======
Net realized loss per Unit $ -- (1)
======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Interest and other income received $ 145,895 99,972
Cash paid to vendors (75,887) (254,720)
Cash paid to related parties (119,162) (219,559)
Cash received from affiliated partnerships 91 143,725
--------- ---------
Net cash used by operating
activities (49,063) (230,582)
--------- ---------
Cash flows from investing activities:
Secured notes receivable issued (450,000) (650,410)
Repayments of secured notes receivable 121,002 433,986
Purchase of equity investments -- (200)
Recovery from investments previously
written off 16,647 --
--------- ---------
Net cash used by investing
activities (312,351) (216,624)
--------- ---------
Cash flows from financing activities:
Distributions to Limited and General
Partners -- (300,003)
--------- ---------
Net cash used by financing
activities -- (300,003)
--------- ---------
Net decrease in cash and
cash equivalents (361,414) (747,209)
Cash and cash equivalents at beginning
of year 1,006,954 2,400,854
--------- ---------
Cash and cash equivalents at March 31 $ 645,540 1,653,645
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- ------------------------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------
1995 1994
---- ----
<S> <C> <C>
Reconciliation of net loss to
net cash used by operating activities:
Net loss $ (181,867) (20,008)
Adjustments to reconcile net loss
to net cash used by operating activities:
Net realized gain from sales of
equity investments (15,815) --
Realized losses from investment
write-downs -- 3,111
Recovery from investments previously
written off (16,647) --
Change in net unrealized fair value:
Secured notes receivable 291,000 (506,000)
Equity investments (3,002) 367,671
Other, net (766) (1,624)
Changes in:
Accounts payable and accrued expenses (47,549) (103,336)
Due to/from related parties 14,875 11,317
Due to affiliated partnership 91 143,725
Accrued interest on secured and
convertible notes receivable (113,928) (71,303)
Other assets 19,981 (57,459)
Other liabilities 4,564 3,324
--------- ---------
Net cash used by operating activities $ (49,063) (230,582)
========= =========
Non-cash investing activities:
Conversion of secured notes
receivable and interest to equity
and other investments $ -- 1,041,054
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
- ----------------------------------------
1. General
-------
In the opinion of the Managing General Partner, the Balance Sheets as of
March 31, 1995 and December 31, 1994, and the related Statements of
Operations and Statements of Cash Flows for the three months ended March
31, 1995 and 1994, reflect all adjustments which are necessary for a fair
presentation of the financial position, results of operations and cash
flows for such periods. These statements should be read in conjunction
with the Annual Report on Form 10-K for the year ended December 31, 1994.
The following notes to financial statements for activity through March
31, 1995 supplement those included in the Annual Report on Form 10-K.
Certain 1994 balances have been reclassified to conform with the 1995
financial statement presentation.
2. Related Party Transactions
--------------------------
Related party costs are included in costs and expenses shown on the
Statements of Operations. Related party costs for the three months ended
March 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Management fees $37,395 57,747
Reimbursable operating expenses 96,642 173,129
</TABLE>
Certain reimbursable expenses have been accrued and allocated based upon
interim estimates prepared by the Managing General Partner and are
adjusted to actual cost periodically. As of March 31, 1995, due to
related parties for such expenses were $14,210 compared to $665 due from
related parties included in other assets at December 31, 1994.
Within the normal course of business, the Partnership participates with
affiliated partnerships in secured notes receivable granted to
nonaffiliated borrowing companies. The Partnership may also
reparticipate such secured notes receivable amongst affiliated
partnerships to meet business needs. At March 31, 1995 and December 31,
1994, the amounts due to affiliated partnerships on such participations
were $337 and $246, respectively. These amounts were paid to such
affiliated partnerships in the respective following quarters.
3. Net Realized Income (Loss) Per Unit
-----------------------------------
Net realized income (loss) per Unit is calculated by dividing total net
realized income (loss) allocated to the Limited Partners by the average
number of Units outstanding for the three months ended March 31, 1995 and
1994 of 159,006 and 159,390, respectively.
4. Equity Investments
------------------
A complete listing of the Partnership's equity investments at December
31, 1994 are included in the 1994 Annual Report. Activity from January 1
through March 31, 1995 consisted of
<TABLE>
<CAPTION>
January 1 -
March 31, 1995
-------------------
Investment Cost Fair
Industry/Company Date Position Basis Value
- ---------------- ---------- -------- ----- -----
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $2,936,564 1,603,688
--------- ---------
Significant changes:
WARRANTS:
- --------
Computers and Computer Equipment
- --------------------------------
Pinnacle Systems, Inc. 05/90 2,083 Common
shares at $8.00;
exercised 02/95 (2,500) (14,164)
STOCKS:
- ------
Computers and Computer Equipment
- --------------------------------
Pinnacle Systems, Inc. 02/95 1,971 Common
shares 13,244 31,713
Industrial/Business Automation
- ------------------------------
Cyclean, Inc. 01/95 15,687 Series D
Preferred shares 43,767 43,767
Cyclean of Los Angeles, LLC 03/95 Class A LLC Unit -
45% ownership 11,091 11,091
--------- ---------
Total significant changes 65,602 72,407
Other changes, net 5,071 1,268
--------- ---------
Total equity investments at March 31, 1995 $3,007,237 1,677,363
========= =========
</TABLE>
Marketable Equity Securities
- ----------------------------
At March 31, 1995 and December 31, 1994, marketable equity securities
had aggregate costs of $216,596 and $205,852, respectively, and
aggregate fair values of $157,313 and $143,567, respectively. The
unrealized losses at March 31, 1995 and December 31, 1994 included gross
gains of $65,029 and $51,501, respectively.
Cyclean, Inc./Cyclean of Los Angeles, LLC
- -----------------------------------------
In January 1995, the Partnership obtained the right to receive 51,051
Series D Preferred shares with a twelve month vesting schedule in
exchange for a one year maturity date extension of secured notes
receivable. At March 31, 1995, 15,687 shares were fully vested with a
recorded cost basis and fair value of $43,767.
In March 1995, Cyclean, Inc. ("Cyclean") formed Cyclean of Los Angeles,
LLC ("Cyclean LLC") and contributed certain assets and contracts to the
new entity. Cyclean LLC is completing a new round of financing through
the offering of Class A LLC Units. As a result of this transaction, one
of the Partnership's secured notes receivable was transferred from
Cyclean to Cyclean LLC with modified terms; Cyclean has guaranteed note
repayments. The Partnership received a participated percentage of one
Class A LLC Unit in exchange for certain interest payments and late
charges totaling $11,091. The Partnership is also entitled to royalty
payments and additional Series D Preferred shares based on the total
proceeds raised from the Cyclean LLC offering, which is expected to be
completed by mid-1995.
Pinnacle Systems, Inc.
- ----------------------
In February 1995, the Partnership exercised its warrant without cash and
received 1,971 common shares. The recorded cost basis of $13,244
included a realized gain of $10,744 and the warrant cost basis of
$2,500. The Partnership recorded an increase in the change in fair
value of $6,805 to reflect this transaction and the market value at
March 31, 1995.
Other Equity Investments
- ------------------------
In March 1995, 3Com Corporation ("3Com"), a public company, announced
its intention to acquire Primary Access Corporation ("Primary Access"),
a Partnership portfolio company. The acquisition is subject to various
conditions customary for transactions of this nature and is expected to
be completed mid-1995. Upon consummation of the acquisition, the
Partnership will receive 3Com common shares in exchange for its Primary
Access investment holdings, which will indicate future liquidity in
excess of the current fair value of $55,750 for this investment.
5. Secured Notes Receivable, Net
-----------------------------
Activity from January 1 through March 31, 1995 consisted of:
<TABLE>
<S> <C>
Balance at January 1, 1995 $4,999,512
1995 activity:
Secured notes receivable issued 450,000
Repayments of secured notes receivable (121,002)
Change in interest receivable 54,545
Increase in allowance for loan losses (291,000)
Other, net 5,291
---------
Total secured notes receivable, net,
at March 31, 1995 $5,097,346
=========
</TABLE>
The Partnership had accrued interest of $333,759 and $279,214 at March
31, 1995 and December 31, 1994, respectively.
Changes in the allowance for loan losses were as follows:
<TABLE>
<S> <C>
Balance at January 1, 1995 $2,529,000
Provision for loan losses 274,353
Recoveries of previous write-offs:
Semiconductor equipment 13,132
Industrial/business automation 3,515
---------
Total recoveries 16,647
---------
Change in net unrealized fair value of
secured notes receivable 291,000
---------
Balance at March 31, 1995 $2,820,000
=========
</TABLE>
The provision for loan losses is generally comprised of realized loan
losses, net of recognized recoveries, and a change in net unrealized
fair value based upon the level of loan loss reserves deemed adequate by
the Managing General Partner.
The allowance for loan losses is adjusted quarterly based upon changes
to the portfolio size and risk profile. Although the allowance is
established by evaluating individual debtor repayment ability, the
allowance represents the Managing General Partner's assessment of the
portfolio as a whole.
Notes aggregating $4,773,542 and $4,321,823 were on nonaccrual status
due to uncertainties of the borrowers' financial condition at March 31,
1995 and December 31, 1994, respectively. The Managing General Partner
continues to monitor the progress of companies with nonaccrual notes.
The fair value at March 31, 1995 recognizes the Managing General
Partner's estimate of collectibility of these notes.
All notes are secured by specific assets of the borrowing company.
Interest rates on notes issued during the three months ended March 31,
1995 ranged from 12% to 13%.
6. Cash and Cash Equivalents
-------------------------
At March 31, 1995 and December 31, 1994, cash and cash equivalents
consisted of:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Demand accounts $ 2,740 2,334
Money-market accounts 642,800 1,004,620
------- ---------
Total $645,540 1,006,954
======= =========
</TABLE>
7. 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 equipment financing commitments or accounts receivable
lines of credit that are outstanding but not currently fully utilized by
a borrowing company. As they do not represent current outstanding
balances, these unfunded commitments are properly not recognized in the
financial statements. At March 31, 1995, the Partnership had unfunded
commitments of $250,278 mostly related to accounts receivable lines of
credit.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
- -------------------------------
During the three months ended March 31, 1995, net cash used by
operations totaled $49,063. The Partnership paid management fees of
$37,395 to the Managing General Partner, reimbursed related parties for
operating expenses of $81,767, and received $91 from affiliated
partnerships for net loan participations. In addition, other operating
expenses of $75,887 were paid. Interest and other income received
totaled $145,895.
During the quarter ended March 31, 1995, the partnership issued $450,000
in secured notes receivable to a portfolio company in the computers and
computer equipment industry. Repayments of notes receivable provided
cash of $121,002. As of March 31, 1995, the Partnership was committed
to fund $250,278 mostly on accounts receivable lines of credit to
existing borrowing companies.
All management fees which are due have been paid through March 31, 1995.
Management fees are paid to the extent that the aggregate amount of all
proceeds (including those from warrants exercised without cash) from the
sale or other disposition of borrowing company equities, plus the
aggregate fair market value of any equity securities distributed to the
partners, exceeds the total management fee payable as defined in the
Partnership Agreement.
Cash and cash equivalents at March 31, 1995 were $645,540. Future
distributions will be dependent upon loan repayments from borrowing
companies and available cash, and are expected to fluctuate. Operating
cash reserves combined with proceeds from the sale of investments,
interest income received on short-term investments and repayments of
secured notes receivable are expected to be sufficient to fund
Partnership operations and the loan requirements of existing borrowing
companies through the next twelve months.
Results of Operations
- ---------------------
Current quarter compared to corresponding quarter in the preceding year
- -----------------------------------------------------------------------
Net losses were $181,867 and $20,008 for the quarters ended March 31,
1995 and 1994, respectively. The increase was primarily due to a
$797,000 decrease in the change in net unrealized fair value of secured
notes receivable, mostly offset by a $370,673 increase in the change in
net unrealized fair value of equity investments, a $132,698 decrease in
operating expenses, and a $87,690 increase in total income.
The Partnership recorded a decrease in fair value of secured notes
receivable of $291,000 for the three months ended March 31, 1995
compared to an increase of $506,000 for the same period in 1994, based
upon the level of loan loss reserves deemed adequate by the Managing
General Partner at the respective quarter ends. The increase in 1994 was
primarily due to the conversion of notes receivable at fair values lower
than cost to equity investments for a portfolio company in the medical
industry. The increase was also due to a higher likelihood of
collectibility for a portfolio company in the computers and computer
equipment industry.
In 1995, the net unrealized fair value of equity investments reflected a
net increase in the fair value of the Partnership's holdings. During
the quarter ended March 31, 1995, there was an increase of $3,002. In
1994, the decrease of $367,671 was primarily due to the conversion of
notes receivable to equity investments as discussed above, partially
offset by an increase in a portfolio company in the computer software
and systems industry.
Operating expenses were $118,919 and $251,617 for the three months ended
March 31, 1995 and 1994, respectively. The decrease was primarily due
to a decrease in lending operations and investment management expenses
from reduced collections costs and lower overall portfolio activity.
Total income was $260,589 and $172,899 during the three months ended
March 31, 1995 and 1994, respectively. The increase was primarily
attributable to cash interest payments on a secured note receivable from
a portfolio company in the computer software and systems industry which
had been on nonaccrual status.
The Partnership also incurred management fees of $37,395 and $57,747
during the three months ended March 31, 1995 and 1994, respectively. As
management fees are computed based on assets under management, the
decrease is consistent with the decrease in such assets.
Given the inherent risk associated with the business of the Partnership,
the future performance of the portfolio company investments may
significantly impact future operations.
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 March 31, 1995.
(b) Financial Data Schedule for the three months ended and as of March
31, 1995 (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 SECURED INVESTORS II
By: TECHNOLOGY FUNDING INC.
Managing General Partner
Date: May 12, 1995 By: /s/Frank R. Pope
------------------------------------
Frank R. Pope
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE>6
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FORM 10-Q AS OF MARCH 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<PERIOD-TYPE> 3-MOS
<INVESTMENTS-AT-COST> 10,924,583
<INVESTMENTS-AT-VALUE> 6,774,709
<RECEIVABLES> 0
<ASSETS-OTHER> 30,552
<OTHER-ITEMS-ASSETS> 645,540
<TOTAL-ASSETS> 7,450,801
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 153,696
<TOTAL-LIABILITIES> 153,696
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,446,979
<SHARES-COMMON-STOCK> 159,006
<SHARES-COMMON-PRIOR> 159,006
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (4,149,874)
<NET-ASSETS> 7,297,105
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 256,334
<OTHER-INCOME> 4,255
<EXPENSES-NET> 186,920
<NET-INVESTMENT-INCOME> 73,669
<REALIZED-GAINS-CURRENT> 32,462
<APPREC-INCREASE-CURRENT> (287,998)
<NET-CHANGE-FROM-OPS> (181,867)
<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> (181,867)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 37,395
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 200,153
<AVERAGE-NET-ASSETS> 7,388,039
<PER-SHARE-NAV-BEGIN> 72
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0 <F1>
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 72
<EXPENSE-RATIO> .03
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>
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>
