<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, 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. 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,
1997 1996
-------- ------------
<S> <C> <C>
ASSETS
Investments:
Secured notes receivable, net
(cost basis of $3,909,107 and
$3,880,883 at 1997 and 1996,
respectively) $ 1,659,107 1,630,883
Equity investments (cost basis
of $2,404,722 and $2,399,524 at
1997 and 1996, respectively) 1,628,645 1,637,835
---------- ----------
Total investments 3,287,752 3,268,718
Cash and cash equivalents 3,073,163 3,243,908
Restricted cash 644,269 642,694
Other assets 10,752 12,706
---------- ----------
Total $ 7,015,936 7,168,026
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 438,396 309,815
Due to related parties 13,267 42,869
Other liabilities 12,779 14,594
---------- ----------
Total liabilities 464,442 367,278
Commitments, contingencies and
subsequent events
(Notes 2, 6 and 8)
Partners' capital:
Limited Partners
(Units outstanding of
155,671 for both 1997 and 1996) 9,729,160 9,961,677
General Partners (151,589) (149,240)
Net unrealized fair value decrease
from cost:
Secured notes receivable (2,250,000) (2,250,000)
Equity investments (776,077) (761,689)
---------- ----------
Total partners' capital 6,551,494 6,800,748
---------- ----------
Total $ 7,015,936 7,168,026
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------
1997 1996
---- ----
<S> <C> <C>
Income:
Secured notes receivable interest $ 22,462 29,012
Short-term investment interest 37,657 54,359
Other income 5,172 4,030
------- -------
Total income 65,291 87,401
------- -------
Costs and expenses:
Management fees 34,004 42,685
Other investment expenses 148,831 30,000
Operating expenses:
Lending operations and investment
management 43,920 19,422
Administrative and investor
services 54,696 53,565
Computer services 16,043 12,545
Professional fees 7,861 8,964
------- -------
Total operating expenses 122,520 94,496
------- -------
Total costs and expenses 305,355 167,181
------- -------
Net operating loss (240,064) (79,780)
Net realized gain from sales of
equity investments 5,198 32,775
Realized losses from
investment write-downs -- (115,104)
Recoveries from investments
previously written off -- 81,236
------- -------
Net realized loss (234,866) (80,873)
Change in net unrealized
fair value:
Secured notes receivable -- 104,000
Equity investments (14,388) (32,626)
------- -------
Net loss $(249,254) (9,499)
======= =======
Net realized loss per Unit $ (1) (1)
======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Interest and other income received $ 65,291 81,723
Cash paid to vendors (38,265) (52,420)
Cash paid to related parties (167,972) (987,289)
Cash paid to affiliated
partnerships -- (1,128)
--------- ---------
Net cash used by operating
activities (140,946) (959,114)
--------- ---------
Cash flows from investing activities:
Secured notes receivable issued (33,213) (122,400)
Repayments of secured notes receivable 4,989 103,708
Proceeds from sales of equity investments -- 34,034
Recoveries from investments previously
written off -- 81,236
--------- ---------
Net cash (used) provided by investing
activities (28,224) 96,578
--------- ---------
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 (169,170) (1,329,340)
Cash and restricted cash at
beginning of year 3,886,602 5,108,537
--------- ---------
Cash and restricted cash at March 31 $3,717,432 3,779,197
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- ------------------------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------
1997 1996
---- ----
<S> <C> <C>
Reconciliation of net loss to
net cash used by operating activities:
Net loss $ (249,254) (9,499)
Adjustments to reconcile net loss
to net cash used by operating activities:
Net realized gain from sales of
equity investments (5,198) (32,775)
Realized losses from investment
write-downs -- 115,104
Recoveries from investments previously
written off -- (81,236)
Change in net unrealized fair value:
Secured notes receivable -- (104,000)
Equity investments 14,388 32,626
Other, net -- (5,678)
Changes in:
Accounts payable and accrued expenses 128,581 (8,974)
Due to/from related parties (29,602) (849,467)
Other assets 1,954 (14,569)
Other, net (1,815) (646)
--------- ---------
Net cash used by operating activities $ (140,946) (959,114)
========= =========
</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, 1997, and December 31, 1996, and the related Statements of
Operations and Statements of Cash Flows for the three months ended
March 31, 1997 and 1996, 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, 1997, supplement those included in the
Annual Report on Form 10-K.
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, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Management fees $ 34,004 42,685
Reimbursable operating expenses 104,366 95,137
</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, 1997, and
December 31, 1996, due to related parties for such expenses were
$18,849 and $42,869, respectively.
At March 31, 1997, a management fee receivable of $5,582 was recorded;
this amount was reimbursed by the General Partners subsequent to
quarter end.
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, 1997
and 1996, of 155,671 and 157,829, respectively.
4. Equity Investments
------------------
A complete listing of the Partnership's equity investments at December
31, 1996, is included in the 1996 Annual Report. Activity from January
1 through March 31, 1997, consisted of
<TABLE>
<CAPTION>
January 1 -
March 31, 1997
-------------------
Investment Cost Fair
Industry/Company Date Position Basis Value
- ---------------- ---------- -------- ----- -----
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $2,399,524 1,637,835
--------- ---------
Significant changes:
WARRANTS:
- --------
Medical
- -------
Hemocleanse, Inc. 01/92 12,474 Common
shares at $.50;
exercised 01/97 0 (31,185)
STOCKS:
- ------
Medical
- -------
Hemocleanse, Inc. 01/97 10,395 Common
shares 5,198 31,185
Microelectronics
- ----------------
Celeritek, Inc. 05/94 47,219 Common
shares 0 56,663
Telecommunications
- ------------------
3Com Corporation 06/95 1,490 Common
shares (0) (63,161)
-------- ---------
Total significant changes 5,198 (6,498)
Other changes, net 0 (2,692)
--------- ---------
Total equity investments at March 31, 1997 $2,404,722 1,628,645
========= =========
</TABLE
Marketable Equity Securities
- ----------------------------
At March 31, 1997, and December 31, 1996, marketable equity securities
had an aggregate cost of $387,958, and aggregate fair values of $706,655
and $715,845, respectively. The net unrealized gains at March 31, 1997,
and December 31, 1996, included gross gains of $332,197 and $339,223,
respectively.
Celeritek, Inc.
- ---------------
The Partnership recorded an increase in fair value of $56,663 to reflect
the market price of the unrestricted shares at March 31, 1997.
Hemocleanse, Inc.
- -----------------
In January of 1997, the Partnership exercised its warrant for common
shares without cash and received 10,395 shares of common stock and
realized a gain of $5,198.
3Com Corporation
- ----------------
The Partnership recorded a fair value decrease of $63,161 to reflect the
market price of the unrestricted shares at March 31, 1997.
5. Secured Notes Receivable, Net
-----------------------------
Activity from January 1 through March 31, 1997, consisted of:
</TABLE>
<TABLE>
<S> <C>
Balance at January 1, 1997 $1,630,883
1997 activity:
Secured notes receivable issued 33,213
Repayments of secured notes receivable (4,989)
---------
Total secured notes receivable, net,
at March 31, 1997 $1,659,107
=========
</TABLE>
There was no activity in the $2,250,000 allowance for loan losses during
the first quarter of 1997.
The Partnership's secured notes receivable portfolio was on nonaccrual
status due to the uncertainty of the borrowers' financial conditions at
March 31, 1997, and December 31, 1996. The Managing General Partner
continues to monitor the progress of these companies. The fair value at
March 31, 1997, recognizes the Managing General Partner's estimate of
collectibility of these notes.
All notes are secured by specific assets of the borrowing company. The
interest rate on notes issued during the three months ended March 31,
1997, was 18%.
6. Litigation and Other Investment Expenses
----------------------------------------
Other investment expenses in 1997 of $148,831 reflect the cost of the
following legal actions.
The case between the Partnership and a portfolio company in the
retail/consumer products industry against Quebecor is currently pending.
In March of 1997, the Partnership and the portfolio company obtained a
favorable judgment in its appeal of a prior trial court ruling that
declared the assets of the portfolio company, for a sum not certain, are
available to satisfy certain claims of Quebecor. Quebecor had
subsequently filed an appeal to the North Carolina Supreme Court. The
Managing General Partner believes the Partnership has adequate defenses
and no amounts have been provided in the accompanying financial
statements for any possible negative outcome for this matter.
In March of 1996, the Partnership filed a lawsuit in the United States
District Court, Northern District of California, against Cyclean, Inc.,
("Cyclean"), Ecopave, L.P. ("Ecopave"), Ecopave Corp. and Stephen M.
Vance ("Vance").
Ecopave was formed by Cyclean, Ecopave Corp. and Vance. Cyclean,
without the consent of the Partnership, transferred certain equipment
worth approximately $488,000 to Ecopave that is subject to the
Partnership's security interest. Cyclean further gave Ecopave a license
to use its patented technology. The equipment and intellectual property
were security interest on a secured loan extended by the Partnership to
Cyclean. The Partnership thus commenced this legal action for patent
infringement, seeking to collect approximately $3.5 million of
indebtedness owed to the Partnership and affiliated partnerships by
Cyclean and the recovery of the equipment from Ecopave. In January of
1997, a counter claim was filed by Ecopave Corp. and Vance against the
Partnership which seeks declaration that certain patent rights held by
the Partnership as security for the Cyclean debt are invalid as well as
asserts a fraud claim. In addition, the counter suit seeks compensatory
damages of approximately $5 million and unspecified punitive damages.
As a result of a settlement conference, the above lawsuits have been
resolved effective April 1, 1997. The Partnership has indirectly
purchased Ecopave Corp. and Vance's ownership interest in Ecopave for
$5.5 million and agreed to set up an escrow account for $750,000; the
affiliated partnerships have participated in this purchase (see Note 8
for additional disclosure). The Partnership's participated purchase was
$1,815,000. The settlement of this claim should not result in any
material negative impact to the Partnership as the Managing General
Partner believes that the fair value of this additional investment is
equal to or greater than the purchase price and improves the
Partnership's position to recover its secured notes receivable. The
Managing General Partner believes a settlement is the most cost
effective resolution of this dispute for the Partnership.
At March 31, 1997, restricted cash of $644,269 represented amounts held
in escrow accounts pending the outcome of certain litigation.
7. Cash and Cash Equivalents
-------------------------
At March 31, 1997, and December 31, 1996, cash and cash equivalents
consisted of :
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Demand accounts $ 1,985 7,989
Money-market accounts 3,071,178 3,235,919
--------- ---------
Total $3,073,163 3,243,908
========= =========
</TABLE>
8. Commitments and Contingencies
-----------------------------
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, 1997, the Partnership had unfunded
commitments of $107,987 and $1,930,603 related to term note financings
and equity investments, respectively.
In March, 1997, the Partnership, together with an affiliated
partnership, were committed to deposit $750,000 into an escrow account
as collateral for a note payable of Ecopave. The Partnership's share of
the deposit is $247,500. While the Partnership expects Ecopave to repay
the note, if the company fails to do so, the note holder may assume the
escrow account.
<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, 1997, net cash used by operating
activities totaled $140,946. The Partnership paid management fees of
$39,586 to the Managing General Partner and reimbursed related parties
for operating expenses of $128,386. In addition, other operating
expenses of $38,265 were paid and $65,291 in interest and other income
was received.
During the quarter ended March 31, 1997, the Partnership issued $33,213
in secured notes receivable to a portfolio company in the
industrial/business automation industry. Repayments of secured notes
receivable were $4,989. At March 31, 1997, the Partnership was
committed to fund $107,987 and $1,930,603 on term note financings and
equity investments, respectively, and to fund $247,500 into an escrow
account as disclosed in Note 8 to the financial statements.
Cash and restricted cash at March 31, 1997, were $3,717,432. Future
distributions will be dependent upon loan repayments from borrowing
companies and available cash. 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 $249,254 and $9,499 for the quarters ended March 31,
1997 and 1996, respectively. The increase in net loss was primarily due
to a $118,831 increase in other investment expenses, a $104,000 decrease
in the change in net unrealized fair value of secured notes receivable,
and a $81,236 decrease in recoveries from investments previously written
off. These changes were partially offset by a $115,104 decrease in
realized losses from investment write-downs.
Other investment expenses were $148,831 and $30,000 for the quarters
ended March 31, 1997 and 1996, respectively. The increase was due to
higher legal expenses related to the lawsuits as discussed in Note 6 to
the financial statements.
The Partnership did not record a change in net unrealized fair value of
secured notes receivable for the quarter ended March 31, 1997. During
the same period in 1996, the Partnership recorded an increase in fair
value of $104,000, based upon the level of loan loss reserves deemed
adequate by the Managing General Partner.
During the quarter ended March 31, 1996, the recovery of $81,236 related
to portfolio companies in the medical and semiconductor equipment
industries. No such recovery was recorded for the same period in 1997.
There was no realized loss from investment write-down for the quarter
ended March 31, 1997. Realized losses from investment write-downs of
$115,104 for the same period in 1996 related to equity investments in a
portfolio company in the computers and computer equipment industry.
Total income was $65,291 and $87,401 during the three months ended March
31, 1997 and 1996, respectively. The decrease was mostly attributable
to lower cash and cash equivalent balances in 1997.
Operating expenses were $122,520 and $94,496 for the three months ended
March 31, 1997 and 1996, respectively. In 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 1. Legal Proceedings
The lawsuit the Partnership filed in the United States District Court,
Northern District of California, against Cyclean Inc., et al, and the
related counter claims, which were previously reported in the 1996 Form
10-K, have been resolved effective April 1, 1997. See Note 6 to the
financial statements for additional disclosure.
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, 1997.
(b) Financial Data Schedule for the three months ended and as of March
31, 1997 (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 9, 1997 By: /s/Debbie A. Wong
------------------------------------
Debbie A. Wong
Vice President
and Controller
<TABLE> <S> <C>
<ARTICLE>6
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FORM 10-Q AS OF MARCH 31, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<PERIOD-TYPE> 3-MOS
<INVESTMENTS-AT-COST> 6,313,829
<INVESTMENTS-AT-VALUE> 3,287,752
<RECEIVABLES> 0
<ASSETS-OTHER> 10,752
<OTHER-ITEMS-ASSETS> 3,717,432
<TOTAL-ASSETS> 7,015,936
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 464,442
<TOTAL-LIABILITIES> 464,442
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,577,571
<SHARES-COMMON-STOCK> 155,671
<SHARES-COMMON-PRIOR> 155,671
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,026,077)
<NET-ASSETS> 6,551,494
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 60,119
<OTHER-INCOME> 5,172
<EXPENSES-NET> 305,355
<NET-INVESTMENT-INCOME> (240,064)
<REALIZED-GAINS-CURRENT> 5,198
<APPREC-INCREASE-CURRENT> (14,388)
<NET-CHANGE-FROM-OPS> (249,254)
<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> (249,254)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 34,004
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 309,550
<AVERAGE-NET-ASSETS> 6,676,121
<PER-SHARE-NAV-BEGIN> 64
<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> 62
<EXPENSE-RATIO> 4.6
<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>
