<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, 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)
June 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 323,518 28,836
Restricted cash 16,500 16,500
Other assets 61,178 55,272
--------- ---------
Total assets $5,479,475 5,899,774
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 70,360 73,424
Due to related parties 9,237 11,678
Other liabilities 10,809 10,852
--------- ---------
Total liabilities 90,406 95,954
Commitments and contingencies
(Notes 3 and 8)
Partners' capital:
Limited Partners
(150,570 Units outstanding) 6,910,149 7,278,331
General Partners (177,843) (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 5,389,069 5,803,820
--------- ---------
Total liabilities and
partners' capital $5,479,475 5,899,774
========= =========
</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,
------------------------ ------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Short-term investment interest $ 188 4,772 373 8,205
------- ------- ------- -------
Total income 188 4,772 373 8,205
------- ------- ------- -------
Costs and expenses:
Management fees 28,149 29,619 57,168 61,335
Operating expenses:
Administrative and investor services 93,565 76,848 171,419 144,585
Investment operations 35,673 12,465 71,807 69,672
Professional fees 21,721 13,366 34,665 24,747
Computer services 19,052 14,865 37,215 (2,715)
------- ------- ------- -------
Total operating expenses 170,011 117,544 315,106 236,289
------- ------- -------- -------
Total costs and expenses 198,160 147,163 372,274 297,624
------- ------- -------- -------
Net realized loss (197,972) (142,391) (371,901) (289,419)
------- ------- ------- -------
Change in net unrealized fair
value of equity investments (42,850) (224,520) (42,850) (358,860)
------- ------- ------- -------
Net loss $(240,822) (366,911) (414,751) (648,279)
======= ======= ======= =======
Net realized loss per Unit $ (1.31) (0.94) (2.45) (1.90)
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 373 8,205
Cash paid to vendors (116,384) (90,961)
Cash paid to related parties (267,344) (204,370)
------- -------
Net cash used by operating
activities (383,355) (287,126)
------- -------
Cash flows from investing activities:
Purchase of equity investments -- (447,746)
Repayments of secured notes receivable 678,037 --
------- -------
Net cash provided (used) by
investing activities 678,037 (447,746)
------- -------
Net increase (decrease) in cash and
restricted cash 294,682 (734,872)
Cash and restricted cash at
beginning of year 45,336 933,930
------- -------
Cash and restricted cash at June 30 $340,018 199,058
======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- ------------------------------------------------
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1999 1998
---------- ---------
<S> <C> <C>
Reconciliation of net loss to net cash
used by operating activities:
Net loss $(414,751) (648,279)
Adjustments to reconcile net loss to net
cash used by operating activities:
Change in net unrealized fair value of
equity investments 42,850 358,860
Changes in:
Accounts payable and accrued expenses (3,064) (17,039)
Due to related parties (2,441) 53,626
Other assets (5,906) (33,845)
Other changes, net (43) (449)
------- -------
Net cash used by operating
activities $(383,355) (287,126)
======= =======
</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 six months ended
June 30, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Management fees $ 57,168 61,335
Reimbursable operating expenses 207,735 196,661
</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, 1999 and December 31, 1998, $9,237
and $1,645, respectively, were due to related parties for such expenses.
Amounts payable for management fees were $0 and $10,033 at June 30, 1999
and December 31, 1998, 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 three and six months ended June 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 June 30, 1999, consisted of:
January 1 through June 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 June 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 the quarter, the company purchased $3,000,000 in senior secured convertible debentures of
Sutmyn Storage Corporation, a company in the computer industry.
In June 1999, an affiliated partnership borrowed $300,000 from the company under an unsecured
promissory note. That note bears interest at 9% and is payable together with interest on June 15,
2000. In August 1999, the affiliated partnership borrowed an additional $275,000 on similar terms.
</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 June 30, 1999, consisted of:
January 1 through June 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 (1,099)
--------- ---------
Total equity investments at June 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 June 30, 1999, and December 31, 1998, cash and cash equivalents
consisted of:
<TABLE>
<CAPTION>
1999 1998
-------- ---------
<S> <C> <C>
Demand and brokerage accounts $ 34,076 27,472
Money market accounts 289,442 1,364
------- ------
Total $323,518 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 six months ended June 30, 1999, net cash used by operating
activities totaled $383,355. The Partnership paid management fees of
$67,201 to the Managing General Partner and reimbursed related parties for
operating expenses of $200,143. Other operating expenses of $116,384 were
paid, and interest income of $373 was received.
During the six months ended June 30, 1999, the Partnership received
$678,037 in secured notes receivable repayments.
Cash and restricted cash at June 30, 1999, were $340,018. 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 $240,822 and $366,911 for the quarters ended June 30, 1999 and
1998, respectively. The decrease in net loss was primarily a result of a
$181,670 increase in the change in net unrealized fair value of
investments, partially offset by a $52,467 increase in operating expenses.
The $42,850 decrease in the net unrealized fair value of investments in the
quarter ended June 30, 1999 was primarily due to a decrease in the computer
systems and software industry. 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.
Total operating expenses were $170,011 and $117,544 for the quarter ended
June 30, 1999 and 1998, respectively. The increase is primarily
attributable to increased investment monitoring activities resulting from
notes receivable collection activities, increased professional fees and
investor relations 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 loss was $414,751 and $648,279 for the six months ended June 30, 1999
and 1998, respectively. The decrease in net loss was substantially due to
a $316,010 increase in the change in net unrealized fair value of
investments, partially offset by a $78,817 increase in operating expenses.
The $42,850 decrease in the net unrealized fair value of investments in the
six months ended June 30, 1999 was primarily due to a decrease in the
computer systems and software industry. 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.
Total operating expenses were $315,106 and $236,289 for the six months
ended June 30, 1999, and 1998, respectively. The increase is primarily
attributable to increased investor relations and administrative overhead
costs and increased computer expenses. 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.
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 mission-critical 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. 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 Year 2000
compliance issues are not resolved by December 31, 1999, 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, until TFI receives and evaluates
responses from a significant number of its suppliers, 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 mission-
critical 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 June 30, 1999.
(b) Financial Data Schedule for the six months ended and as of June
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: August 13, 1999 By: /s/Michael R. Brenner
------------------------------------
Michael R. Brenner
Controller
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE>6
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FORM 10-Q AS OF JUNE 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> JUN-30-1999
<PERIOD-TYPE> 6-MOS
<INVESTMENTS-AT-COST> 6,421,516
<INVESTMENTS-AT-VALUE> 5,078,279
<RECEIVABLES> 0
<ASSETS-OTHER> 61,178
<OTHER-ITEMS-ASSETS> 340,018
<TOTAL-ASSETS> 5,479,475
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 90,406
<TOTAL-LIABILITIES> 90,406
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,732,306
<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> 5,389,069
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 373
<OTHER-INCOME> 0
<EXPENSES-NET> 372,274
<NET-INVESTMENT-INCOME> (371,901)
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> (42,850)
<NET-CHANGE-FROM-OPS> (414,751)
<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> (414,751)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 57,168
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 372,274
<AVERAGE-NET-ASSETS> 5,596,444
<PER-SHARE-NAV-BEGIN> 48
<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> 46
<EXPENSE-RATIO> 6.65
[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.
</FN>
</TABLE>
