<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, 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)
March 31, 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 $4,293,145 and $4,143,319 in
1998 and 1997, respectively) 3,492,792 3,477,307
--------- ---------
Total investments 5,285,099 5,269,614
Cash and cash equivalents 302,147 669,856
Restricted cash 264,271 264,074
Due from related parties 83,800 52,126
Other assets 43,957 18,556
--------- ---------
Total assets $5,979,274 6,274,226
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 44,092 57,675
Other liabilities 11,301 11,301
--------- ---------
Total liabilities 55,393 68,976
Commitments, contingencies and
subsequent event (Notes 1, 2 and 8)
Partners' capital:
Limited Partners
(Units outstanding of 150,570 in
1998 and 1997) 9,144,507 9,290,065
General Partners (155,273) (153,803)
Net unrealized fair value decrease
from cost:
Secured notes receivable (2,265,000) (2,265,000)
Equity investments (800,353) (666,012)
--------- ---------
Total partners' capital 5,923,881 6,205,250
--------- ---------
Total liabilities and
partners' capital $5,979,274 6,274,226
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1998 1997
---------- -----------
<S> <C> <C>
Income:
Secured notes receivable interest $ -- 22,462
Short-term investment interest 9,405 37,657
Other income -- 5,172
------- -------
Total income 9,405 65,291
------- -------
Costs and expenses:
Management fees 31,716 34,004
Other investment expenses -- 148,831
Operating expenses 124,717 122,520
------- -------
Total costs and expenses 156,433 305,355
------- -------
Net operating loss (147,028) (240,064)
Net realized gain from sales of
equity investments -- 5,198
------- -------
Net realized loss (147,028) (234,866)
Change in net unrealized
fair value:
Equity investments (134,341) (14,388)
------- -------
Net loss $(281,369) (249,254)
======= =======
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,
------------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 9,405 65,291
Cash paid to vendors (54,315) (38,265)
Cash paid to related parties (172,776) (167,972)
------- ---------
Net cash used by operating
activities (217,686) (140,946)
------- ---------
Cash flows from investing activities:
Purchase of equity investments (149,826) --
Secured notes receivable issued -- (33,213)
Repayments of secured notes receivable -- 4,989
------- ---------
Net cash used by investing
activities (149,826) (28,224)
------- ---------
Net decrease in cash and
restricted cash (367,512) (169,170)
Cash and restricted cash at
beginning of year 933,930 3,886,602
------- ---------
Cash and restricted cash at March 31 $566,418 3,717,432
======= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- ------------------------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
---------------------------------------
1998 1997
---------- ---------
<S> <C> <C>
Reconciliation of net loss to net cash
used by operating activities:
Net loss $(281,369) (249,254)
Adjustments to reconcile net loss to net
cash used by operating activities:
Net realized gain from sales of
equity investments -- (5,198)
Change in net unrealized fair value:
Equity investments 134,341 14,388
Changes in:
Accounts payable and accrued expenses (13,583) 128,581
Due to/from related parties (31,674) (29,602)
Other assets (25,401) 1,954
Other liabilities -- (1,815)
------- -------
Net cash used by operating
activities $(217,686) (140,946)
======= =======
</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, 1998, and December 31, 1997, and the related Statements of
Operations and Statements of Cash Flows for the three months ended March
31, 1998 and 1997, 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, 1997.
The following notes to financial statements for activity through March 31,
1998, supplement those included in the Annual Report on Form 10-K.
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 General Partners extended the Partnership's term for
another two-year period to December 31, 2000.
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, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Management fees $ 31,716 34,004
Reimbursable operating expenses 109,386 104,366
</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 March 31, 1998 and December 31, 1997, due
from related parties for such expenses were $83,800 and $52,126,
respectively.
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, 1998 and
1997 of 150,570 and 155,671, respectively.
4. Secured Notes Receivable, Net
-----------------------------
There were no secured notes receivable activities from January 1 through
March 31, 1998.
The Partnership's secured notes receivable portfolio was on nonaccrual
status due to the uncertainty of the financial conditions of certain
borrowers at March 31, 1998 and December 31, 1997. 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 March 31, 1998, recognizes the Managing General
Partner's estimate of collectibility of these notes. All notes are secured
by specific assets of the borrowing company.
5. 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 March 31, 1998, consisted of:
<CAPTION>
January 1 through March 31, 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:
STOCKS:
- ------
Industrial/Business Automation
- ------------------------------
Cyclean of 01/98- 149,826
Long Beach, LLC 03/98 LLC Units 149,826 149,826
Microelectronics
- ----------------
Celeritek, Inc. 05/94 47,219 Common
shares 0 (136,558)
--------- ---------
Total significant changes 149,826 13,268
Other changes, net 0 2,217
--------- ---------
Total equity investments at March 31, 1998 $4,293,145 3,492,792
========= =========
</TABLE
Marketable Equity Securities
- ----------------------------
At March 31, 1998, and December 31, 1997, marketable equity securities had
aggregate costs of $261,804 and $261,804, respectively and aggregate fair
values of $574,527 and $708,864, respectively. The net unrealized gains at
March 31, 1998, and December 31, 1997, did not include any gross losses.
Cyclean of Long Beach, LLC
- --------------------------
In the first quarter of 1998, the Partnership purchased 149,826 LLC Units
for a total of $149,826.
Other Equity Investments
- ------------------------
Other significant changes reflected above relate to market value
fluctuations for publicly-traded portfolio companies.
6. Other Investment Expenses
-------------------------
Other investment expenses, primarily legal fees, of $148,831 in 1997,
reflect the participated cost of litigation which was settled in the same
year. There were no such expenses in 1998.
7. Cash and Cash Equivalents
-------------------------
At March 31, 1998, and December 31, 1997, cash and cash equivalents
consisted of:
</TABLE>
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Demand and brokerage accounts $ 30,194 38,563
Money market accounts 271,953 631,293
------- ---------
Total $302,147 669,856
======= =========
</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. The Partnership had unfunded commitments for equity investments
of $47,920 as of March 31, 1998.
At March 31, 1998, restricted cash of $264,271 included the following:
In April, 1997, the Partnership together with an affiliated partnership,
deposited $750,000 into an escrow account as collateral for a note payable
of a portfolio company. The Partnership's share of the deposit is
$247,500. While the Partnership expects the company to repay the note, if
they fail to do so, the note holder may assume the escrow account.
In December 1997, the Partnership together with an affiliated Partnership,
guaranteed 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 three months ended March 31, 1998, net cash used by operating
activities totaled $217,686. The Partnership paid $172,776 to related
parties. Other operating expenses of $54,315 were paid, and interest
income of $9,405 was received.
During the three months ended March 31, 1998, the Partnership funded
$149,826 in equity investments to a portfolio company in the industrial and
business automation industry.
Cash and restricted cash at March 31, 1998, were $566,418. Future
distributions will be dependent upon loan repayments from borrowing
companies, future proceeds from equity investment sales, and available
cash. Operating cash reserves combined with proceeds from the sale of
investments, interest income received from short-term investments,
repayments of secured notes receivable and equity investment sales 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 losses were $281,369 and $249,254 for the three months ended March 31,
1998 and 1997, respectively. The increase in net loss was primarily a
result of a $119,953 decrease in the change in net unrealized fair value of
investments and a $55,886 decrease in interest and other income, partially
offset by a $148,831 decrease in other investment expenses.
The $134,341 decrease in net unrealized fair value of investments during
the quarter ended March 31, 1998, was primarily due to decreases in the
microelectronics industry.
Interest and other income was $9,405 and $65,291 during the three months
ended March 31, 1998 and 1997, respectively. The decrease was mostly
attributable to lower cash and cash equivalent balances in 1998 and loans
on nonaccrual status.
Other investment expenses, primarily legal fees, for the quarter ended
March 31, 1997 were $148,831. There were no such expenses in 1998. The
decrease was due to the settlement of the related litigation.
Total operating expenses were $124,717 and $122,520 for the three months
ended March 31, 1998 and 1997, respectively.
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, 1998.
(b) Financial Data Schedule for the three months ended and as of March
31, 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: May 14, 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 MARCH 31, 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> MAR-31-1998
<PERIOD-TYPE> 3-MOS
<INVESTMENTS-AT-COST> 8,350,452
<INVESTMENTS-AT-VALUE> 5,285,099
<RECEIVABLES> 0
<ASSETS-OTHER> 127,757
<OTHER-ITEMS-ASSETS> 566,418
<TOTAL-ASSETS> 5,979,274
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 55,393
<TOTAL-LIABILITIES> 55,393
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,989,234
<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> (3,065,353)
<NET-ASSETS> 5,923,881
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 9,405
<OTHER-INCOME> 0
<EXPENSES-NET> 156,433
<NET-INVESTMENT-INCOME> (147,028)
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> (134,341)
<NET-CHANGE-FROM-OPS> (281,369)
<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> (281,369)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 31,716
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 156,533
<AVERAGE-NET-ASSETS> 6,064,565
<PER-SHARE-NAV-BEGIN> 62
<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> 61
<EXPENSE-RATIO> 2.6
<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>
