<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 June 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)
June 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 $4,591,065 and $4,143,319 in
1998 and 1997, respectively) 3,566,193 3,477,307
--------- ---------
Total investments 5,358,500 5,269,614
Cash and cash equivalents 182,558 669,856
Restricted cash 16,500 264,074
Due from related parties -- 52,126
Other assets 52,401 18,556
--------- ---------
Total assets $5,609,959 6,274,226
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 40,636 57,675
Due to related party 1,500 --
Other liabilities 10,852 11,301
--------- ---------
Total liabilities 52,988 68,976
Commitments and contingencies
(Notes 3 and 9)
Partners' capital:
Limited Partners
(Units outstanding of 150,570 in
1998 and 1997) 9,003,541 9,290,065
General Partners (156,698) (153,803)
Net unrealized fair value decrease
from cost:
Secured notes receivable (2,265,000) (2,265,000)
Equity investments (1,024,872) (666,012)
--------- ---------
Total partners' capital 5,556,971 6,205,250
--------- ---------
Total liabilities and
partners' capital $5,609,959 6,274,226
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Secured notes receivable interest $ -- -- -- 22,462
Short-term investment interest 4,772 10,959 8,205 48,616
Other income -- 8,471 -- 13,643
------- ------- ------- -------
Total income 4,772 19,430 8,205 84,721
------- ------- ------- -------
Costs and expenses:
Management fees 29,619 32,757 61,335 66,761
Other investment expenses -- 41,600 -- 190,431
Operating expenses 117,544 105,900 236,289 228,420
------- ------- -------- -------
Total costs and expenses 147,163 180,257 297,624 485,612
------- ------- -------- -------
Net operating loss (142,391) (160,827) (289,419) (400,891)
Net realized gain from sales of
equity investments -- -- -- 5,198
------- ------- ------- -------
Net realized loss (142,391) (160,827) (289,419) (395,693)
Change in net unrealized
fair value:
Secured notes receivable -- (15,000) -- (15,000)
Equity investments (224,520) 94,975 (358,860) 80,587
------- ------- ------- -------
Net loss $(366,911) (80,852) (648,279) (330,106)
======= ======= ======= =======
Net realized loss per Unit $ (1) (1) (2) (3)
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 8,205 84,721
Cash paid to vendors (90,961) (350,344)
Cash paid to related parties (204,370) (282,139)
------- ----------
Net cash used by operating
activities (287,126) (547,762)
------- ----------
Cash flows from investing activities:
Purchase of equity investments (447,746) (1,815,000)
Secured notes receivable issued -- (165,213)
Repayments of secured notes receivable -- 4,989
------- ----------
Net cash used by investing
activities (447,746) (1,975,224)
------- ----------
Net decrease in cash and
restricted cash (734,872) (2,522,986)
Cash and restricted cash at
beginning of year 933,930 3,886,602
------- ----------
Cash and restricted cash at June 30 $199,058 1,363,616
======= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- ------------------------------------------------
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1998 1997
---------- ---------
<S> <C> <C>
Reconciliation of net loss to net cash
used by operating activities:
Net loss $(648,279) (330,106)
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 358,860 (80,587)
Secured notes receivable -- 15,000
Changes in:
Accounts payable and accrued expenses (17,039) (91,143)
Due to/from related parties 53,626 (39,570)
Other assets (33,845) (14,346)
Other changes, net (449) (1,812)
------- -------
Net cash used by operating
activities $(287,126) (547,762)
======= =======
</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 six months ended
June 30, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Management fees $ 61,335 66,761
Reimbursable operating expenses 196,661 175,808
</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 June 30, 1998, amounts due to related
parties for such expenses were $1,500 compared to $52,126 due from related
parties at December 31, 1997.
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 six months ended June 30, 1998 and 1997
of 150,570 and 155,221, respectively.
5. Secured Notes Receivable, Net
-----------------------------
There were no secured notes receivable activities from January 1 through
June 30, 1998.
The Partnership's secured notes receivable portfolio was on nonaccrual
status due to the uncertainty of the financial conditions of certain
borrowers at June 30, 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 June 30, 1998, recognizes the Managing General
Partner's estimate of collectibility of these notes. All notes are secured
by specific assets of the borrowing company.
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 June 30, 1998 consisted of:
<CAPTION>
January 1
through June 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 0 (352,585)
--------- ---------
Total significant changes 447,746 95,161
Other changes, net 0 (6,275)
--------- ---------
Total equity investments at June 30, 1998 $4,591,065 3,566,193
========= =========
</TABLE
Marketable Equity Securities
- ----------------------------
At June 30, 1998, and December 31, 1997, marketable equity securities had
aggregate costs of $261,804 and $261,804, respectively and aggregate fair
values of $350,007 and $708,864, respectively. The net unrealized gains at
June 30, 1998, and December 31, 1997, did not include any gross losses.
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.
Other Equity Investments
- ------------------------
Other significant changes reflected above relate to market value
fluctuations for publicly-traded portfolio companies.
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 June 30, 1998, and December 31, 1997, cash and cash equivalents
consisted of:
</TABLE>
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Demand accounts $ 30,294 38,563
Money market accounts 152,264 631,293
------- ---------
Total $182,558 669,856
======= =========
</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 six months ended June 30, 1998, net cash used by operating
activities totaled $287,126. The Partnership paid $204,370 to related
parties. Other operating expenses of $90,961 were paid, and interest
income of $8,205 was received.
During the six months ended June 30, 1998, the Partnership funded $447,746
in equity investments to a portfolio company in the industrial and business
automation industry.
Cash and restricted cash at June 30, 1998, were $199,058. 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 losses were $366,911 and $80,852 for the three months ended June 30,
1998 and 1997, respectively. The increase in net loss was primarily a
result of a $304,495 decrease in the change in net unrealized fair value of
investments and a $14,658 decrease in interest and other income, partially
offset by a $41,600 decrease in other investment expenses.
The $224,520 decrease in net unrealized fair value of investments during
the quarter ended June 30, 1998, was primarily due to decreases in the
microelectronics industry. In the corresponding quarter of 1997, the
$79,975 increase in investment fair value was primarily due to increases in
the microelectronics industry.
Interest and other income was $4,772 and $19,430 during the three months
ended June 30, 1998 and 1997, respectively. The decrease was mostly
attributable to lower cash and cash equivalent balances in 1998.
Other investment expenses, primarily legal fees, for the quarter ended June
30, 1997 were $41,600. There were no such expenses in 1998. The decrease
was due to the settlement of the related litigation.
Total operating expenses were $117,544 and $105,900 for the three months
ended June 30, 1998 and 1997, respectively. The increase is attributable
to increased investment monitoring activities and administrative costs.
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 six months compared to corresponding six months in the preceding
- ------------------------------------------------------------------------
year
- ----
Net losses were $648,279 and $330,106 for the six months ended June 30,
1998 and 1997, respectively. The increase in net loss was substantially
due to a $424,447 decrease in the change in net unrealized fair value of
investments and a $76,516 decrease in interest and other income, partially
offset by a $190,431 decrease in other investment expenses.
The $358,860 decrease in net unrealized fair value of equity investments
during the quarter ended June 30, 1998 was primarily due to decreases in
the microelectronics industry. In the corresponding period of 1997, the
increase in equity investment fair value of $80,587 primarily related to
increases in portfolio companies in the microelectronics industry.
Interest and other income was $8,205 and $84,721 for the six months ended
June 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 six months ended June 30,
1997. There were no such expenses in 1998. The decrease was due to the
settlement of the related litigation.
Total operating expenses were $236,289 and $228,420 for the six months
ended June 30, 1998, and 1997, respectively.
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 June 30, 1998.
b) Financial Data Schedule for the six months ended and as of June 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: August 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 JUNE 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> JUN-30-1998
<PERIOD-TYPE> 6-MOS
<INVESTMENTS-AT-COST> 8,648,372
<INVESTMENTS-AT-VALUE> 5,358,500
<RECEIVABLES> 0
<ASSETS-OTHER> 52,401
<OTHER-ITEMS-ASSETS> 199,058
<TOTAL-ASSETS> 5,609,959
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 52,988
<TOTAL-LIABILITIES> 52,988
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,846,843
<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> (3,289,872)
<NET-ASSETS> 5,556,971
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8,205
<OTHER-INCOME> 0
<EXPENSES-NET> 297,624
<NET-INVESTMENT-INCOME> (289,419)
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> (358,860)
<NET-CHANGE-FROM-OPS> (648,279)
<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> (648,279)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 61,335
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 340,956
<AVERAGE-NET-ASSETS> 5,881,111
<PER-SHARE-NAV-BEGIN> 62
<PER-SHARE-NII> (2)
<PER-SHARE-GAIN-APPREC> 0 <F1>
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 60
<EXPENSE-RATIO> 5.1
<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>
