<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 September 30, 1998
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)
(650) 345-2200
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
No active market for the units of limited partnership interests ("Units")
exists, and therefore the market value of such Units cannot be
determined.
<PAGE>
I. FINANCIAL INFORMATION
Item 1. Financial Statements
BALANCE SHEETS
- --------------
<TABLE>
<CAPTION>
(unaudited)
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Investments:
Secured notes receivable, net
(cost basis of $4,057,307 in
1998 and 1997) $1,792,307 1,792,307
Equity investments (cost basis
of $4,329,264 and $4,143,319 in
1998 and 1997, respectively) 3,184,373 3,477,307
--------- ---------
Total investments 4,976,680 5,269,614
Cash and cash equivalents 221,087 669,856
Restricted cash 16,500 264,074
Due from related parties -- 52,126
Other assets 57,176 18,556
--------- ---------
Total assets $5,271,443 6,274,226
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 52,466 57,675
Due to related party 148,193 --
Other liabilities 10,852 11,301
--------- ---------
Total liabilities 211,511 68,976
Commitments and contingencies
(Notes 3 and 9)
Partners' capital:
Limited Partners
(Units outstanding of 150,570 in
1998 and 1997) 8,630,291 9,290,065
General Partners (160,468) (153,803)
Net unrealized fair value decrease
from cost:
Secured notes receivable (2,265,000) (2,265,000)
Equity investments (1,144,891) (666,012)
--------- ---------
Total partners' capital 5,059,932 6,205,250
--------- ---------
Total liabilities and
partners' capital $5,271,443 6,274,226
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Secured notes receivable interest $ -- -- -- 22,462
Short-term investment interest 82 5,354 8,287 53,970
Other income -- 11,380 -- 25,023
------- ------- --------- -------
Total income 82 16,734 8,287 101,455
------- ------- --------- -------
Costs and expenses:
Management fees 27,785 32,488 89,120 99,249
Other investment expenses -- -- -- 190,431
Operating expenses:
Lending operations and investment
management 53,430 65,774 123,102 127,647
Administrative and investor services 184,290 89,069 328,875 208,441
Computer services 32,597 24,180 29,882 52,159
Professional fees 12,466 17,440 37,213 36,636
------- ------- ---------- -------
Total operating expenses 282,783 196,463 519,072 424,883
------- ------- ---------- -------
Total costs and expenses 310,568 228,951 608,192 714,563
------- ------- ---------- -------
Net operating loss (310,486) (212,217) (599,905) (613,108)
Net realized (loss) gain from sales of
equity investments (66,534) 16,626 (66,534) 21,824
------- ------- --------- -------
Net realized loss (377,020) (195,591) (666,439) (591,284)
Change in net unrealized
fair value:
Secured notes receivable -- -- -- (15,000)
Equity investments (120,019) 441,001 (478,879) 521,588
------- ------- --------- -------
Net (loss) income $(497,039) 245,410 (1,145,318) (84,696)
======= ======= ========= =======
Net realized loss per Unit $ (2) (1) (4) (4)
======= ======= ========= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 8,287 101,455
Cash paid to vendors (113,519) (400,377)
Cash paid to related parties (338,632) (451,991)
------- ----------
Net cash used by operating
activities (443,864) (750,913)
------- ----------
Cash flows from investing activities:
Secured notes receivable issued -- (181,413)
Repayments of secured notes receivable -- 4,989
Proceeds from sales of equity investments 195,267 69,534
Purchase of equity investments (447,746) (1,815,000)
------- ----------
Net cash used by investing
activities (252,479) (1,921,890)
------- ----------
Net decrease in cash and
restricted cash (696,343) (2,672,803)
Cash and restricted cash at
beginning of year 933,930 3,886,602
------- ----------
Cash and restricted cash at September 30 $237,587 1,213,799
======= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- ------------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------------
1998 1997
---------- ---------
<S> <C> <C>
Reconciliation of net loss to net cash
used by operating activities:
Net loss $(1,145,318) (84,696)
Adjustments to reconcile net loss to net
cash used by operating activities:
Net realized loss (gain) from sales of
equity investments 66,534 (21,824)
Change in net unrealized fair value:
Equity investments 478,879 (521,588)
Secured notes receivable -- 15,000
Changes in:
Accounts payable and accrued expenses (5,209) (86,182)
Due to/from related parties 200,319 (32,416)
Other changes, net (39,069) (19,207)
--------- -------
Net cash used by operating
activities $ (443,864) (750,913)
========= =======
Non-cash financing activities:
Limited Partners unit repurchases $ -- 250,284
========= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
- ----------------------------------------
1. General
-------
In the opinion of the Managing General Partner, the accompanying interim
financial statements reflect all adjustments necessary for a fair
presentation of the financial position, results of operations, and cash
flows for the interim periods presented. These statements should be read
in conjunction with the Annual Report on Form 10-K for the year ended
December 31, 1997. Allocation of income and loss to Limited and General
Partners is based on cumulative income and loss. Adjustments, if any, are
reflected in the current quarter balances.
Extension of Partnership
------------------------
In April 1998, the Managing General Partner extended the Partnership's term
for an additional two-year period to December 31, 2000.
2. Financing of Partnership Operations
-----------------------------------
The Managing General Partner expects cash received from the future
liquidation of Partnership investments and the collection of notes
receivable will provide the necessary liquidity to fund Partnership
operations. The Partnership may be dependent upon the financial support of
the Managing General Partner to fund operations if future proceeds are not
received timely. The Managing General Partner has committed to support the
Partnership's working capital requirements through short term advances.
3. Related Party Transactions
--------------------------
Related party costs are included in costs and expenses shown on the
Statements of Operations. Related party costs for the nine months ended
September 30, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Management fees $ 89,120 99,249
Reimbursable operating expenses 449,831 320,326
</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. At September 30, 1998, amounts due to related
parties for such expenses were $148,193 compared to $52,126 due from
related parties at December 31, 1997.
The Managing General Partner allocates operating expenses incurred in
connection with the business of the Partnership based on employee hours
incurred. In the third quarter of 1998, the Managing General Partner
reevaluated allocations to the Partnership and determined that they had not
fully recovered allocable operating expenses, primarily salary and
benefits, as permitted by the Partnership Agreement. As a result, the
Partnership was charged additional operating expenses in the third quarter
of 1998 of $122,514 consisting of $12,070 for the nine months ended
September 30, 1997 and $110,444 for prior years. Had the additional
expenses been recorded in prior years, total operating expenses for the
three months ended September 30, 1998 and 1997 would have been $160,269 and
$208,533, respectively, and total operating expenses for the nine months
ended September 30, 1998 and 1997 would have been $396,558 and $436,953,
respectively.
4. 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 nine months ended September 30, 1998
and 1997 of 150,570 and 154,682, respectively.
5. Secured Notes Receivable, Net
-----------------------------
There were no secured notes receivable activities from January 1 through
September 30, 1998.
The Partnership's secured notes receivable portfolio at September 30, 1998
and December 31, 1997 was on nonaccrual status due to the uncertainty of
the borrowers' financial conditions. The Managing General Partner
continues to monitor the progress of these companies and intends to manage
these investments to maximize the Partnership's net realizable value. The
fair value at September 30, 1998, reflects the Managing General Partner's
estimate of collectibility of these notes. All notes are secured by
specific assets of the borrowing companies.
6. Equity Investments
------------------
<TABLE>
A complete listing of the Partnership's equity investments at December 31, 1997 is included in
the 1997 Annual Report. Activity from January 1 through September 30, 1998 consisted of:
<CAPTION>
January 1 through
September 30, 1998
-----------------------
Investment Cost Fair
Industry/Company Date Position Basis Value
- ---------------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 $4,143,319 3,477,307
--------- ---------
Significant changes:
Industrial/Business Automation
- ------------------------------
CLB, LLC 01/98- 447,746
06/98 LLC Units 447,746 447,746
Microelectronics
- ----------------
Celeritek, Inc. 05/94 47,219 Common
shares (253,426) (657,761)
Telecommunications
- ------------------
3Com Corporation 06/95 1,490 Common
shares (8,375) (51,107)
--------- ---------
Total significant changes 185,945 (261,122)
Other changes, net 0 (31,812)
--------- ---------
Total equity investments at September 30, 1998 $4,329,264 3,184,373
========= =========
</TABLE
Marketable Equity Securities
- ----------------------------
At December 31, 1997, marketable equity securities had aggregate costs of
$261,804 and aggregate fair values of $708,864. The net unrealized gains
at December 31, 1997, did not include any gross losses.
3Com Corporation
- ----------------
In September 1998, the Partnership sold its investment in the company for
total proceeds of $47,213 and realized a gain of $38,838.
Celeritek, Inc.
- ---------------
In September 1998, the Partnership sold its investment in the company for
total proceeds of $147,554 and realized a loss of $105,872.
CLB, LLC
- --------
In the first quarter of 1998, the Partnership purchased 149,826 LLC Units
for $149,826 and in the second quarter purchased an additional 297,920 LLC
Units for $297,920. The Partnership, together with an affiliated
partnership, owns 100% of the company.
7. Other Investment Expenses
-------------------------
Other investment expenses, primarily legal fees, of $190,431 in 1997,
reflect the participated cost of litigation which was settled in the same
year. There were no such expenses in 1998.
8. Cash and Cash Equivalents
-------------------------
At September 30, 1998, and December 31, 1997, cash and cash equivalents
consisted of:
</TABLE>
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Demand accounts $ 27,834 38,563
Money market accounts 193,253 631,293
------- ---------
Total $221,087 669,856
======= =========
</TABLE>
9. 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.
In April, 1997, the Partnership together with an affiliated partnership,
deposited $750,000 into an escrow account as collateral for a $750,000 note
payable of Ecopave. At December 31, 1997, the Partnership's share of the
deposit was $247,500. In June 1998, certain assets of CLB, LLC, a
portfolio company, were pledged as collateral for the Ecopave note payable,
resulting in the release of the Partnership's escrowed funds. The
Partnership, however, remains a guarantor for the note payable.
In December 1997, the Partnership together with an affiliated Partnership,
guaranteed $50,000 of equipment financing for a portfolio company by
depositing $50,000 in an escrow account with the lending institution. The
Partnership funded $16,500 of this deposit. If the portfolio company fails
to repay the line of credit, the Partnership may forego the escrowed funds.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
- -------------------------------
During the nine months ended September 30, 1998, net cash used by operating
activities totaled $443,864. The Partnership paid $338,632 to related
parties. Other operating expenses of $113,519 were paid, and interest
income of $8,287 was received.
During the nine months ended September 30, 1998, the Partnership funded
$447,746 in equity investments to a portfolio company in the industrial and
business automation industry. Proceeds from sales of equity investments
were $195,267.
Cash and restricted cash at September 30, 1998, were $237,587. Future
distributions will be dependent upon loan repayments from borrowing
companies, future proceeds from equity investment sales, and available
cash. Operating cash reserves, proceeds from sales of equity investments,
repayments of secured notes receivable, and the Managing General Partner's
support are expected to be sufficient to fund Partnership operations
through the next twelve months.
Results of Operations
- ---------------------
Current quarter compared to corresponding quarter in the preceding year
- -----------------------------------------------------------------------
Net loss was $497,039 for the three months ended September 30, 1998 as
compared to net income of $245,410 for the three months ended September 30,
1997. The increase in net loss was primarily a result of a $561,020
decrease in the change in net unrealized fair value of investments, an
$86,320 increase in operating expenses and a $83,160 decrease in realized
gains from sales of equity investments.
The $120,019 decrease in net unrealized fair value of investments during
the quarter ended September 30, 1998, was primarily due to the sales of the
Partnership's investments in Celeritek, Inc. and 3Com Corporation. In the
corresponding quarter of 1997, the $441,001 increase in equity investment
fair value was primarily due to increases in the microelectronics industry.
Total operating expenses were $282,783 and $196,463 for the three months
ended September 30, 1998 and 1997, respectively. As disclosed in Note 3 to
the financial statements, operating expenses for the three months ended
September 30, 1998 include additional expenses of $122,514 related to prior
years which were not previously charged to the Partnership. Had the
additional expenses been recorded in prior years, operating expenses for
the quarters ended September 30, 1998 and 1997 would have been $160,269 and
$208,533, respectively. The decrease is attributable to decreased
administrative and investor services, investment operations expenses and
professional fees due to decreased levels of investment activity.
The net realized loss from sales of equity investments of $66,534 for the
three months ended September 30, 1998 primarily resulted from a loss on the
sale of Celeritek, Inc. common shares, partially offset by a gain on the
sale of 3Com Corporation common shares.
Given the inherent risk associated with the business of the Partnership,
the future performance of the portfolio company investments may
significantly impact future operations.
Current nine months compared to corresponding nine months in the preceding
- ------------------------------------------------------------------------
year
- ----
Net losses were $1,145,318 and $84,696 for the nine months ended September
30, 1998 and 1997, respectively. The increase in net loss was
substantially due to a $1,000,467 decrease in the change in net unrealized
fair value of equity investments, a $94,189 increase in operating expenses
and a $93,168 decrease in interest and other income, partially offset by a
$190,431 decrease in other investment expenses.
The $478,879 decrease in net unrealized fair value of equity investments
during the nine months ended September 30, 1998 was primarily due to the
sales of Celeritek, Inc. and 3Com Corporation common shares. In the
corresponding period of 1997, the increase in equity investment fair value
of $521,588 primarily related to increases in portfolio companies in the
microelectronics industry.
Total operating expenses were $519,072 and $424,883 for the nine months
ended September 30, 1998, and 1997, respectively. As disclosed in Note 3
to the financial statements, operating expenses for the nine months ended
September 30, 1998 include additional expenses of $122,514 related to prior
years which were not previously charged to the Partnership. Had the
additional expenses been recorded in prior years, operating expenses for
the nine months ended September 30, 1998 and 1997 would have been $396,558
and $436,953, respectively. The decrease is attributable to decreased
investment operations and computer expenses due to decreased levels of
investment activity.
Interest and other income was $8,287 and $101,455 for the nine months ended
September 30, 1998 and 1997, respectively. The decrease is due to lower
cash and cash equivalent balances and loans on nonaccrual status.
Other investment expenses were $190,431 for the nine months ended September
30, 1997. There were no such expenses in 1998. The decrease was due to
the settlement of the related litigation.
The Year 2000
- -------------
The widespread use of computer programs that rely on two-digit date
programs to perform computations and decision-making functions may cause
computer systems to malfunction in the year 2000 and lead to significant
business delays and disruptions.
The Managing General Partner has completed a preliminary assessment of the
internal financial, information and operating systems which it provides to
the Partnership. Implementation and testing of necessary system
modifications is in progress and will be completed by December 31, 1999.
The Managing General Partner is also monitoring the progress of software
vendors and third-party processors on which it relies, as well as the
progress of portfolio companies in which it has made significant
investments.
The Managing General Partner does not expect the cost of the internal
system modifications to be material to the Partnership's financial
statements.
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 September 30, 1998.
b) Financial Data Schedule for the nine months ended and as of September
30, 1998 (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: November 12, 1998 By: /s/Michael R. Brenner
------------------------------------
Michael R. Brenner
Controller
<TABLE> <S> <C>
<ARTICLE>6
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FORM 10-Q AS OF SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<PERIOD-TYPE> 9-MOS
<INVESTMENTS-AT-COST> 8,386,571
<INVESTMENTS-AT-VALUE> 4,976,680
<RECEIVABLES> 0
<ASSETS-OTHER> 57,176
<OTHER-ITEMS-ASSETS> 237,587
<TOTAL-ASSETS> 5,271,443
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 211,511
<TOTAL-LIABILITIES> 211,511
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,469,823
<SHARES-COMMON-STOCK> 150,570
<SHARES-COMMON-PRIOR> 150,570
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,409,891)
<NET-ASSETS> 5,059,932
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8,287
<OTHER-INCOME> 0
<EXPENSES-NET> 608,192
<NET-INVESTMENT-INCOME> (599,905)
<REALIZED-GAINS-CURRENT> (66,534)
<APPREC-INCREASE-CURRENT> (478,879)
<NET-CHANGE-FROM-OPS> (1,145,318)
<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> (1,145,318)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 89,120
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 608,592
<AVERAGE-NET-ASSETS> 5,632,591
<PER-SHARE-NAV-BEGIN> 62
<PER-SHARE-NII> (5)
<PER-SHARE-GAIN-APPREC> 0 <F1>
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 57
<EXPENSE-RATIO> 10.8
<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>
