<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 March 31, 1996
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 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)
March 31, December 31,
1996 1995
-------- ------------
<S> <C> <C>
ASSETS
Investments:
Secured notes receivable, net
(cost basis of $4,559,401 and
$4,535,031 at 1996 and 1995,
respectively) $ 2,480,401 2,352,031
Equity investments (cost basis
of $2,417,015 and $2,533,378 at
1996 and 1995, respectively) 2,656,188 2,805,177
---------- ----------
Total investments 5,136,589 5,157,208
Cash and cash equivalents 3,643,494 5,058,537
Restricted cash 135,703 50,000
Other assets 14,828 259
---------- ----------
Total $ 8,930,614 10,266,004
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 331,157 340,131
Due to related parties 23,355 872,822
Due to affiliated partnerships 919 2,047
Distributions payable -- 466,804
Other liabilities 47,598 47,116
---------- ----------
Total liabilities 403,029 1,728,920
Commitments and subsequent events
(Notes 2, 4 and 7)
Partners' capital:
Limited Partners
(Units outstanding of
157,829 for both 1996 and 1995) 10,512,224 10,592,289
General Partners (144,812) (144,004)
Net unrealized fair value (decrease)
increase from cost:
Secured notes receivable (2,079,000) (2,183,000)
Equity investments 239,173 271,799
---------- ----------
Total partners' capital 8,527,585 8,537,084
---------- ----------
Total $ 8,930,614 10,266,004
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------
1996 1995
---- ----
<S> <C> <C>
Income:
Secured notes receivable interest $ 29,012 247,654
Short-term investment interest 54,359 8,680
Other income 4,030 4,255
------- -------
Total income 87,401 260,589
------- -------
Costs and expenses:
Management fees 42,685 37,395
Other investment expenses 30,000 30,606
Operating expenses:
Lending operations and investment
management 19,422 41,232
Administrative and investor
services 53,565 50,411
Computer services 12,545 18,182
Professional fees 8,964 9,094
------- -------
Total operating expenses 94,496 118,919
------- -------
Total costs and expenses 167,181 186,920
------- -------
Net operating (loss) income (79,780) 73,669
Net realized gain from sales of
equity investments 32,775 15,815
Realized losses from
investment write-downs (115,104) --
Recoveries from investments
previously written off 81,236 16,647
------- -------
Net realized (loss) income (80,873) 106,131
Change in net unrealized
fair value:
Secured notes receivable 104,000 (291,000)
Equity investments (32,626) 3,002
------- -------
Net loss $ (9,499) (181,867)
======= =======
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,
-----------------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Interest and other income received $ 81,723 145,895
Cash paid to vendors (52,420) (75,887)
Cash paid to related parties (987,289) (119,162)
Cash (paid to) received from affiliated
partnerships (1,128) 91
--------- ---------
Net cash used by operating
activities (959,114) (49,063)
--------- ---------
Cash flows from investing activities:
Secured notes receivable issued (122,400) (450,000)
Repayments of secured notes receivable 103,708 121,002
Proceeds from sales of equity investments 34,034 --
Recoveries from investments previously
written off 81,236 16,647
--------- ---------
Net cash provided (used) by investing
activities 96,578 (312,351)
--------- ---------
Cash flows from financing activities:
Distributions to Limited and General
Partners (466,804) --
--------- ---------
Net cash used by financing
activities (466,804) --
--------- ---------
Net decrease in cash and
restricted cash (1,329,340) (361,414)
Cash and restricted cash at
beginning of year 5,108,537 1,006,954
--------- ---------
Cash and restricted cash at March 31 $3,779,197 645,540
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- ------------------------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------
1996 1995
---- ----
<S> <C> <C>
Reconciliation of net loss to
net cash used by operating activities:
Net loss $ (9,499) (181,867)
Adjustments to reconcile net loss
to net cash used by operating activities:
Net realized gain from sales of
equity investments (32,775) (15,815)
Realized losses from investment
write-downs 115,104 --
Recoveries from investments previously
written off (81,236) (16,647)
Change in net unrealized fair value:
Secured notes receivable (104,000) 291,000
Equity investments 32,626 (3,002)
Other, net (5,678) (766)
Changes in:
Accounts payable and accrued expenses (8,974) (47,549)
Due to/from related parties (849,467) 14,875
Accrued interest on secured and
convertible notes receivable -- (113,928)
Other assets (14,569) 19,981
Other, net (646) 4,655
--------- ---------
Net cash used by operating activities $ (959,114) (49,063)
========= =========
</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, 1996 and December 31, 1995, and the related Statements of
Operations and Statements of Cash Flows for the three months ended
March 31, 1996 and 1995, 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, 1996. The following notes to financial statements
for activity through March 31, 1996 supplement those included in the
Annual Report on Form 10-K. Certain 1995 balances have been
reclassified to conform with the 1996 financial statement presentation.
As set forth in the Partnership Agreement, the Partnership is scheduled
to be dissolved on December 31, 1996 (or such later date to which the
General Partners extend the Partnership up to a limit of two two-year
extensions). The General Partners intend to exercise their right to
extend the term of the Partnership to 12/31/98.
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, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Management fees $42,685 37,395
Reimbursable operating expenses 95,137 96,642
</TABLE>
Certain reimbursable expenses have been allocated and accrued based
upon interim estimates prepared by the Managing General Partner and are
adjusted to actual cost periodically. As of March 31, 1996 and
December 31, 1995, due to related parties for such expenses were
$23,355 and $872,822, respectively.
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, 1996 and December
31, 1995, the amounts due to affiliated partnerships on such
participations were $919 and $2,047, 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, 1996
and 1995 of 157,829 and 159,006, respectively.
4. Equity Investments
------------------
A complete listing of the Partnership's equity investments at December
31, 1995 are included in the 1995 Annual Report. Activity from January
1 through March 31, 1996 consisted of
<TABLE>
<CAPTION>
January 1 -
March 31, 1996
-------------------
Investment Cost Fair
Industry/Company Date Position Basis Value
- ---------------- ---------- -------- ----- -----
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $2,533,378 2,805,177
--------- ---------
Significant changes:
WARRANTS:
- --------
Biotechnology
- -------------
Hybridon, Inc. 03/91 3,572 Common
shares at $3.50;
exercised 01/96 (1,250) (16,074)
Computer Software and Systems
- -----------------------------
Wasatch Educations Systems 06/95 959,546 Common
Corporation shares at $0.50;
expiring 06/00 0 (179,915)
STOCKS:
- ------
Biotechnology
- -------------
Hybridon, Inc. 01/96 1,250 Common
shares 4,812 11,000
Computers and Computer Equipment
- --------------------------------
MTI Technology Corporation 04/94 20,928 Common
shares (115,104) (6,007)
Medical
- -------
Allegiant Physicians 08/94 13,500 Common
Services, Inc. shares (4,821) (22,500)
Microelectronics
- ----------------
Celeritek, Inc. 05/94 47,219 Common
shares 0 74,568
Retail/Consumer Products
- ------------------------
S-TRON 05/93 Subordinated
debenture, $220,000
principal amount (0) (0)
S-TRON 05/93 220,000 Common
shares (0) (0)
S-TRON 05/93 1,826,000 Series 1
& 2 Preferred
shares (0) (0)
--------- ---------
Total significant changes (116,363) (138,928)
Other changes, net 0 (10,061)
--------- ---------
Total equity investments at March 31, 1996 $2,417,015 2,656,188
========= =========
</TABLE
Marketable Equity Securities
- ----------------------------
At March 31, 1996 and December 31, 1995, marketable equity securities
had aggregate costs of $393,736 and $510,580, respectively, and
aggregate fair values of $639,833 and $603,264, respectively. The net
unrealized gains at March 31, 1996 and December 31, 1995 included gross
gains of $281,421 and $237,087, respectively.
Allegiant Physicians Services, Inc.
- -----------------------------------
In February 1996, the Partnership exercised its option to sell 13,500 of
its common shares to the company for $22,500 and realized a gain of
$17,679. The Partnership's remaining 7,500 common shares are
unrestricted.
Hybridon, Inc.
- --------------
In January 1996, Hybridon, Inc. completed its initial public offering.
The Partnership exercised its warrant holdings without cash and received
2,532 shares of common stock with a cost basis of $9,747, which
reflected a realized gain of $8,497 and a warrant cost basis of $1,250.
Subsequently, the Partnership sold 1,282 of these shares for total
proceeds of $11,534 and realized a gain of $6,599. The Partnership
recorded a decrease of $8,636 in the change in fair value to reflect the
above transactions and the market value of the remaining unrestricted
shares at March 31, 1996.
MTI Technology Corporation
- --------------------------
During the first quarter of 1996, the Managing General Partner
determined that there had been an other than temporary decline in value
of the Partnership's investment. As a result, the Partnership realized
a loss of $115,104. The Partnership also recorded a decrease in fair
value of $6,007 to reflect the unrestricted market value at March 31,
1996.
S-TRON
- ------
The company was unsuccessful in its efforts to obtain a major government
contract; as a result, company operations ceased during March 1996.
This investment, which had previously been written off, is no longer
held by the Partnership.
Other Equity Investments
- ------------------------
Other significant changes during the quarter ended March 31, 1996
reflected above relate to market value fluctuations or the elimination
of a discount relating to selling restrictions for publicly-traded
portfolio companies. The Partnership's warrant investment in Wasatch
Education Systems Corporation and 3Com Corporation shares are partially
restricted.
As of May 3, 1996, the fair value for Celeritek, Inc. increased to
$627,008 compared to $440,393 at March 31, 1996. This change reflects
changes in common stock prices which fluctuate daily on stock exchanges.
5. Secured Notes Receivable, Net
-----------------------------
Activity from January 1 through March 31, 1996 consisted of:
</TABLE>
<TABLE>
<S> <C>
Balance at January 1, 1996 $2,352,031
1996 activity:
Secured notes receivable issued 122,400
Repayments of secured notes receivable (103,708)
Decrease in allowance for loan losses 104,000
Other, net 5,678
---------
Total secured notes receivable, net,
at March 31, 1996 $2,480,401
=========
</TABLE>
The Partnership had accrued interest of $4,306 at both March 31, 1996
and December 31, 1995.
Changes in the allowance for loan losses were as follows:
<TABLE>
<S> <C>
Balance at January 1, 1996 $2,183,000
Decrease in provision for loan losses (185,236)
Recoveries of previous write-offs:
Semiconductor equipment 29,333
Medical 51,903
---------
Total recoveries 81,236
---------
Change in net unrealized fair value of
secured notes receivable (104,000)
---------
Balance at March 31, 1996 $2,079,000
=========
</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.
Secured notes receivable with a total cost basis of $4,055,095 and
$4,031,001 were on nonaccrual status due to the uncertainty of certain
borrowers' financial conditions at March 31, 1996 and December 31, 1995,
respectively. The Managing General Partner continues to monitor the
progress of these companies. The fair value at March 31, 1996
recognizes the Managing General Partner's estimate of collectibility of
these notes.
During the first quarter of 1996, the Partnership received approximately
$43,000 from a portfolio company in the medical industry to pay off its
principal balance. In addition, the Partnership was reimbursed $30,045
for legal, consulting, and other costs incurred in prior periods in the
defense of the Partnership's secured note rights through bankruptcy
court. The reimbursement was recorded as a reduction to lending
operations and investment management expense.
All notes are secured by specific assets of the borrowing company. The
interest rate on notes issued during the three months ended March 31,
1996 was 12%.
6. Cash and Cash Equivalents
-------------------------
At March 31, 1996 and December 31, 1995, cash and cash equivalents
consisted of money-market account balances of $3,643,494 and
$5,058,537, respectively.
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, 1996, the Partnership had unfunded
commitments of $57,600 related to term note financings to an existing
borrowing company.
<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, 1996, net cash used by operating
activities totaled $959,114. The Partnership paid management fees of
$42,685 to the Managing General Partner and reimbursed related parties
for operating expenses of $944,604. Payments to affiliated partnerships
for net loan participations totaled $1,128. In addition, other
operating expenses of $52,420 were paid and $81,723 in interest and
other income was received. Distributions totaling $466,804 were paid to
Limited and General Partners.
During the quarter ended March 31, 1996, the Partnership issued $122,400
in secured notes receivable to a portfolio company in the computers and
computer equipment industry. Repayments of secured notes receivable and
recoveries from investments previously written off were $103,708 and
$81,236, respectively. In addition, proceeds from sales of equity
investments provided cash of $34,034. As of March 31, 1996, the
Partnership was committed to fund $57,600 on term note financings to an
existing borrowing company.
Cash and restricted cash at March 31, 1996 were $3,779,197. 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 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 $9,499 and $181,867 for the quarters ended March 31,
1996 and 1995, respectively. The change was primarily due to a $395,000
increase in the change in net unrealized fair value of secured notes
receivable and a $64,589 increase in recoveries from investments
previously written off. These changes were mostly offset by a $173,188
decrease in total income and a $115,104 increase in realized losses from
investment write-downs.
The Partnership recorded an increase in fair value of secured notes
receivable of $104,000 for the three months ended March 31, 1996
compared to a decrease of $291,000 for the same period in 1995, based
upon the level of loan loss reserves deemed adequate by the Managing
General Partner at the respective quarter ends.
During the quarter ended March 31, 1996, the recovery of $81,236 related
to portfolio companies in the medical and semiconductor equipment
industries. In 1995, recoveries of $16,647 related to portfolio
companies in the computers and computer equipment, and semiconductor
equipment industries.
Total income was $87,401 and $260,589 during the three months ended
March 31, 1996 and 1995, respectively. The decrease was mostly
attributable to lower secured notes receivable balances in 1996. In
addition, the 1995 income was higher due to cash interest payments
received on a secured note receivable from a portfolio company in the
computer software and systems industry which had been on nonaccrual
status.
In 1996, realized losses from investment write-downs totaled $115,104,
related to equity investments in a portfolio company in the computers
and computer equipment industry. No such losses were recorded for the
same period in 1995.
Operating expenses were $94,496 and $118,919 for the three months ended
March 31, 1996 and 1995, respectively. As explained in Note 5 to the
financial statements, 1996 operating expenses were reduced by a $30,045
reimbursement of prior period collection expenses from a portfolio
company in the medical industry. Had the reimbursement not been
received, total operating expenses would have been $124,541 for the
quarter ended March 31, 1996.
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, 1996.
(b) Financial Data Schedule for the three months ended and as of March
31, 1996 (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 10, 1996 By: /s/Debbie A. Wong
------------------------------------
Debbie A. Wong
Controller
<TABLE> <S> <C>
<ARTICLE>6
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FORM 10-Q AS OF MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<PERIOD-TYPE> 3-MOS
<INVESTMENTS-AT-COST> 6,976,416
<INVESTMENTS-AT-VALUE> 5,136,589
<RECEIVABLES> 0
<ASSETS-OTHER> 14,828
<OTHER-ITEMS-ASSETS> 3,779,197
<TOTAL-ASSETS> 8,930,614
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 403,029
<TOTAL-LIABILITIES> 403,029
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10,367,412
<SHARES-COMMON-STOCK> 157,829
<SHARES-COMMON-PRIOR> 157,829
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,839,827)
<NET-ASSETS> 8,527,585
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 83,371
<OTHER-INCOME> 4,030
<EXPENSES-NET> 167,181
<NET-INVESTMENT-INCOME> (79,780)
<REALIZED-GAINS-CURRENT> (1,093)
<APPREC-INCREASE-CURRENT> 71,364
<NET-CHANGE-FROM-OPS> (9,499)
<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> (9,499)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 42,685
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 209,468
<AVERAGE-NET-ASSETS> 8,532,335
<PER-SHARE-NAV-BEGIN> 67
<PER-SHARE-NII> (1)
<PER-SHARE-GAIN-APPREC> 0 <F1>
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 67
<EXPENSE-RATIO> 2
<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>
