<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, 1999
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,
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
Investments:
Notes receivable, net (cost basis
of $3,379,270 and $4,057,307 in
1999 and 1998, respectively) $3,259,270 3,937,307
Equity investments (cost basis
of $3,042,246 in 1999 and 1998) 1,819,009 1,861,859
--------- ---------
Total investments 5,078,279 5,799,166
Cash and cash equivalents 155,823 28,836
Restricted cash 16,500 16,500
Due from related parties 6,351 --
Other assets 61,278 55,272
--------- ---------
Total assets $5,318,231 5,899,774
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 94,996 73,424
Due to related parties -- 11,678
Other liabilities 10,809 10,852
--------- ---------
Total liabilities 105,805 95,954
Commitments, contingencies and
subsequent event (Notes 3, 5 and 8)
Partners' capital:
Limited Partners
(150,570 Units outstanding) 6,735,272 7,278,331
General Partners (179,609) (174,124)
Net unrealized fair value decrease
from cost:
Secured notes receivable (120,000) (120,000)
Equity investments (1,223,237) (1,180,387)
--------- ---------
Total partners' capital 5,212,426 5,803,820
--------- ---------
Total liabilities and
partners' capital $5,318,231 5,899,774
========= =========
</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,
----------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Short-term investment interest $ 1,494 82 1,867 8,287
------- ------- ------- ---------
Total income 1,494 82 1,867 8,287
------- ------- ------- ---------
Costs and expenses:
Management fees 26,946 27,785 84,114 89,120
Operating expenses:
Administrative and investor services 83,875 184,290 255,294 328,875
Investment operations 28,686 53,430 100,493 123,102
Professional fees 15,387 12,466 50,052 37,213
Computer services 23,243 32,597 60,458 29,882
------- ------- ------- ---------
Total operating expenses 151,191 282,783 466,297 519,072
------- ------- -------- ---------
Total costs and expenses 178,137 310,568 550,411 608,192
------- ------- -------- ---------
Net operating loss (176,643) (310,486) (548,544) (599,905)
Net realized loss from sales of
equity investments -- (66,534) -- (66,534)
------- ------- ------- ---------
Net realized loss (176,643) (377,020) (548,544) (666,439)
Change in net unrealized fair
value of equity investments -- (120,019) (42,850) (478,879)
------- ------- ------- ---------
Net loss $(176,643) (497,039) (591,394) (1,145,318)
======= ======= ======= =========
Net realized loss per Unit $ (1.16) (2.48) (3.61) (4.38)
======= ======= ======= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 1,867 8,287
Cash paid to vendors (152,311) (113,519)
Cash paid to related parties (400,606) (338,632)
------- ---------
Net cash used by operating
activities (551,050) (443,864)
------- ---------
Cash flows from investing activities:
Purchase of equity investments -- (447,746)
Repayments of secured notes receivable 678,037 --
Proceeds from sales of equity investments -- 195,267
------- ---------
Net cash provided (used) by
investing activities 678,037 (252,479)
------- ---------
Net increase (decrease) in cash and
restricted cash 126,987 (696,343)
Cash and restricted cash at
beginning of year 45,336 933,930
------- ---------
Cash and restricted cash at September 30 $172,323 237,587
======= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- ------------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Reconciliation of net loss to net cash
used by operating activities:
Net loss $(591,394) (1,145,318)
Adjustments to reconcile net loss to net
cash used by operating activities:
Net realized loss from sales of
equity investments -- 66,534
Change in net unrealized fair value of
equity investments 42,850 478,879
Changes in:
Accounts payable and accrued expenses 21,572 (5,209)
Due to related parties (18,029) 200,319
Other changes, net (6,049) (39,069)
------- ---------
Net cash used by operating
activities $(551,050) (443,864)
======= =========
</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, 1998. 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.
2. Financing of Partnership Operations
-----------------------------------
The Managing General Partner expects that cash received from liquidation of
Partnership investments 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 this support in the form of short-term cash 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, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Management fees $ 84,114 89,120
Reimbursable operating expenses 298,463 449,831
</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, 1999, $6,351 of such expenses
were due from related parties and at December 31, 1998, $1,645 were due to
related parties.
Amounts payable for management fees were $0 and $10,033 at September 30,
1999 and December 31, 1998, respectively.
In 1999, the Managing General Partner entered into a sublease rental
agreement with a Partnership portfolio company in the computers and
computer equipment industry. The terms of this agreement are similar to
those which would apply to an unrelated party.
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 three and nine months ended September
30, 1999 and 1998 of 150,570.
5. Notes Receivable, Net
---------------------
<TABLE>
A complete listing of the Partnership's notes receivable at December 31, 1998, is included in the
1998 Annual Report on Form 10-K. Activity from January 1 through September 30, 1999, consisted of:
January 1 through
September 30, 1999
---------------------
Investment Cost Fair
Industry/Company Date Position Basis Value
- ---------------- ---------- -------- -------- -------
<S> <C> <C> <C> <C>
Balance at January 1, 1999 $4,057,307 3,937,307
1999 activity:
Computers and Computer Equipment
- --------------------------------
MARCorp 12/89- Secured notes
02/93 receivable, plus
interest (678,037) (678,037)
--------- ---------
Total notes receivable at September 30, 1999 $3,379,270 3,259,270
========= =========
MARCorp
- -------
In 1998, the company entered into an agreement to sell the majority of its assets to the management
of one of its subsidiaries. The Partnership has valued its secured notes receivable investment in
the company at its expected share of the proceeds from this sale. In February 1999, the Partnership
received $678,037 of these proceeds. The fair market value of the remaining proceeds at June 30,
1999 was $1,854,636.
During 1999, the company purchased $3,000,000 in senior secured convertible debentures of Sutmyn
Storage Corporation, a company in the computer industry.
In 1999, an affiliated partnership borrowed $575,000 from the company under unsecured promissory
notes. The notes bear interest at 9% and are payable together with interest on June 15, 2000. In
October 1999, the affiliated partnership repaid $275,000 of the notes.
</TABLE
6. Equity Investments
------------------
A complete listing of the Partnership's equity investments at December 31, 1998, is included in the
1998 Annual Report on Form 10-K. Activity from January 1 through September 30, 1999, consisted of:
January 1 through
September 30, 1999
---------------------
Investment Cost Fair
Industry/Company Date Position Basis Value
- ---------------- ---------- -------- -------- -------
<S> <C> <C> <C> <C>
Balance at January 1, 1999 $3,042,246 1,861,859
1999 activity:
Computer Software and Systems
- -----------------------------
Wasatch Education 06/95 1,741,550 Series C
Systems Corporation Preferred shares 0 (41,751)
Other changes, net 0 (1,099)
--------- ---------
Total equity investments at September 30, 1999 $3,042,246 1,819,009
========= =========
Wasatch Education Systems Corporation
- -------------------------------------
In June 1999, the Partnership recorded a $41,751 decrease in the fair value of its investment based
upon the Managing General Partners' assessment of the operating status of the company.
</TABLE>
7. Cash and Cash Equivalents
-------------------------
At September 30, 1999, and December 31, 1998, cash and cash equivalents
consisted of:
<TABLE>
<CAPTION>
1999 1998
-------- ---------
<S> <C> <C>
Demand and brokerage accounts $ 33,721 27,472
Money market accounts 122,102 1,364
------- -------
Total $155,823 28,836
======= =======
</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, together with an affiliated partnership, is a guarantor
for a note payable of a portfolio company. The Partnership's share of the
guarantee is $247,500.
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 nine months ended September 30, 1999, net cash used by operating
activities totaled $551,050. The Partnership paid management fees of
$94,147 to the Managing General Partner and reimbursed related parties for
operating expenses of $306,459. Other operating expenses of $152,311 were
paid, and interest income of $1,867 was received.
During the nine months ended September 30, 1999, the Partnership received
$678,037 in secured notes receivable repayments.
Cash and restricted cash at September 30, 1999, were $172,323. 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 the sale of 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 $176,643 and $497,039 for the quarters ended September 30,
1999 and 1998, respectively. The decrease in net loss was primarily a
result of a $131,592 decrease in operating expenses and a $120,019 increase
in the change in net unrealized fair value of investments.
Total operating expenses were $151,191 and $282,783 for the quarters ended
September 30, 1999 and 1998, respectively. The decrease is primarily
attributable to decreased investment monitoring and administrative
overhead.
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. There
was no change in the comparative period of 1999.
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 loss was $591,394 and $1,145,318 for the nine months ended September
30, 1999 and 1998, respectively. The decrease in net loss was
substantially due to a $436,029 increase in the change in net unrealized
fair value of investments and a $52,775 decrease in operating expenses.
The $42,850 decrease in the net unrealized fair value of investments in the
nine months ended September 30, 1999 was primarily due to a decrease in the
computer systems and software industry. 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.
Total operating expenses were $466,297 and $519,072 for the nine months
ended September 30, 1999, and 1998, respectively. The decrease is
primarily attributable to decreased investor relations and administrative
overhead costs, partially offset by increased computer expenses and
professional fees. Computer services for the comparative 1998 period
included a refund of costs previously incurred.
YEAR 2000
- ---------
Widespread use of computer programs that use two digits rather than four to
store, calculate, and display year values in dates may cause computer
systems to malfunction in the year 2000, resulting in significant business
delays and disruptions.
The Partnership's State of Readiness
------------------------------------
Computer services are provided to the Partnership by its Managing General
Partner, Technology Funding Inc. ("TFI"). For several years, TFI has
sought to use Year 2000 compliant storage formats and algorithms in its
internally-developed and maintained systems. TFI has also completed
initial evaluations of computer systems, software, and embedded
technologies. Those evaluations confirmed that certain components of its
network server hardware and operating systems, voice mail system, e-mail
system, and accounting software may have Year 2000 compliance issues.
These resources and several less-critical components of the systems
environment were all scheduled as part of normal maintenance and
replacement cycles to be replaced or upgraded as Year 2000 compatible
components became available from vendors during 1998 and 1999. That
program remains on schedule to provide Year 2000 capable systems timely
without significant expenditures or disruption of Partnership operations.
TFI has implemented and tested Year 2000 capable versions of all its
mission-critical systems. However, the risk remains that TFI may not be
able to verify whether Year 2000 compatibility claims by vendors are
accurate, or whether changes undertaken to achieve Year 2000 compatibility
will create other undetected problems in associated systems. Therefore,
TFI anticipates that Year 2000 compliance testing and maintenance of these
systems will continue as needed into the first quarter of 2000.
As part of Year 2000 evaluation, TFI has also assembled a database listing
its significant suppliers to assess the extent to which it needs to prepare
for any of those parties' potential failure to remediate their Year 2000
compliance issues. TFI reviewed public Year 2000 statements of those
suppliers and sent questionnaires to vendors whose public statements were
not adequate for assessment. All mission-critical vendors have responded
that they expect to be Year 2000 compliant barring any unforeseen
circumstances. TFI will continue to monitor its significant suppliers as
part of its Year 2000 evaluation. However, there can be no guarantee that
the systems of other companies on which TFI relies will be timely
converted, or that failure to convert will not have a material adverse
effect on the Partnership and its operations. TFI is also working with the
Partnership's portfolio companies to determine the extent to which their
operations are vulnerable to Year 2000 issues, and maintaining their
responses in the vendor database. There can be no guarantee that the
systems of portfolio companies in which the Partnership has invested will
be timely converted, or that their failure to convert will not have a
material adverse effect on the Partnership.
The Cost to Address Year 2000 Issues
------------------------------------
Expenditures in 1999 to date related to Year 2000 issues were not material
to the Partnership's financial statements. TFI expects that additional
expenditures for Year 2000 compliance will not be material to the
Partnership.
The Risks Associated with Year 2000 Issues
------------------------------------------
Any failure by the portfolio companies in which the Partnership has
invested, or by those portfolio companies' key suppliers or customers, to
anticipate and avoid Year 2000 related problems at reasonable cost could
have a material adverse effect on the value of and/or the timing of
realization of value from the Partnership's investments. If TFI's Year
2000 compliance issues have not been resolved correctly, internal system
failures or miscalculations could cause a temporary inability to process
transactions, loss of ability to send or receive e-mail and voice mail
messages, or disruptions in other normal business activities.
Additionally, failure of third parties on whom TFI relies to remediate
their Year 2000 issues timely could result in disruptions in the
Partnership's relationship with its financial institutions, temporary
disruptions in processing transactions, unanticipated costs, and problems
related to the Partnership's daily operations. While TFI continues to
address its internal Year 2000 issues, the overall risks associated with
the Year 2000 issue remain difficult to describe and quantify. There can
be no guarantee that the Year 2000 issue will not have a material adverse
effect on the Partnership and its operations.
TFI's Contingency Plan
----------------------
As part of its normal efforts to assure business continuation in the event
of natural disasters, systems failures, or other disruptions, TFI has
prepared contingency plans including an extensive Year 2000 contingency
plan. Taken together with TFI's Year 2000 remediation plan, it identifies
potential points of failure, approaches to correcting known Year 2000
problems, dates by which the preferred corrections are anticipated to be
made and tested, and alternative approaches if the corrections are not
completed timely or are later found to be inadequate. Although backup
systems and contingency approaches have been identified for most systems
and vendor dependencies, there remain some systems for which no good
alternative exists, and there may be some problems that prove more
intractable than currently anticipated.
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, 1999.
(b) Financial Data Schedule for the nine months ended and as of September
30, 1999 (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, 1999 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, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<PERIOD-TYPE> 9-MOS
<INVESTMENTS-AT-COST> 6,421,516
<INVESTMENTS-AT-VALUE> 5,078,279
<RECEIVABLES> 0
<ASSETS-OTHER> 67,629
<OTHER-ITEMS-ASSETS> 172,323
<TOTAL-ASSETS> 5,318,231
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 105,805
<TOTAL-LIABILITIES> 105,805
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,555,663
<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> (1,343,237)
<NET-ASSETS> 5,212,426
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,867
<OTHER-INCOME> 0
<EXPENSES-NET> 550,411
<NET-INVESTMENT-INCOME> (548,544)
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> (42,850)
<NET-CHANGE-FROM-OPS> (591,394)
<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> (591,394)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 84,114
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 550,511
<AVERAGE-NET-ASSETS> 5,508,123
<PER-SHARE-NAV-BEGIN> 48
<PER-SHARE-NII> (4)
<PER-SHARE-GAIN-APPREC> 0 <F1>
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 45
<EXPENSE-RATIO> 9.99
<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.
</FN>
</TABLE>
