<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, 2000
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
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(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,
2000 1999
------------ -----------
<S> <C> <C>
ASSETS
Investments:
Notes receivable, at fair value
(cost basis of $3,379,270 in 2000
and 1999) $367,700 2,651,270
Equity investments, at fair value
(cost basis of $3,042,246 in 2000
and 1999) 61,200 945,281
------- ---------
Total investments 428,900 3,596,551
Cash and cash equivalents 31,099 38,290
Restricted cash 16,500 16,500
Due from related parties -- 11,197
Other assets -- 63,030
------- ---------
Total assets $476,499 3,725,568
======= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 58,357 70,718
Due to related parties 75,572 --
Other liabilities 10,809 10,809
------- ---------
Total liabilities 144,738 81,527
Commitments and contingencies
Partners' capital:
Limited Partners
(150,570 Units outstanding) 428,300 3,707,457
General Partners (96,539) (63,416)
------- ---------
Total partners' capital 331,761 3,644,041
------- ---------
Total liabilities and
partners' capital $476,499 3,725,568
======= =========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
STATEMENTS OF OPERATIONS (unaudited)
-----------------------------------
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
----------------- ------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Short-term investment interest $ 285 1,494 766 1,867
Other income 22,131 -- 22,131 --
--------- ------- --------- -------
Total income 22,416 1,494 22,897 1,867
--------- ------- --------- -------
Costs and expenses:
Management fees 18,303 26,946 54,306 84,114
Operating expenses (reimbursements):
Administrative and investor services 46,789 83,875 87,747 255,294
Investment operations 86,890 28,686 (41,237) 100,493
Professional fees 17,860 15,387 28,696 50,052
Computer services 13,824 23,243 38,014 60,458
--------- ------- --------- -------
Total operating expenses 165,363 151,191 113,220 466,297
--------- ------- --------- -------
Total costs and expenses 183,666 178,137 167,526 550,411
--------- ------- --------- -------
Net realized loss (161,250) (176,643) (144,629) (548,544)
Change in net unrealized fair value:
Equity investments (884,081) -- (884,081) (42,850)
Notes receivable (2,283,570) -- (2,283,570) --
--------- ------- --------- -------
Net loss $(3,328,901) (176,643) (3,312,280) (591,394)
========= ======= ========= =======
Net loss per unit $ (21.78) (1.16) (21.78) (3.89)
========= ======= ========= =======
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
-----------------------------------
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
---------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 766 1,867
Other income received 22,131 --
Cash paid to vendors (89,219) (152,311)
Cash received from (paid to)
related parties 59,131 (400,606)
------ -------
Net cash used by operating
activities (7,191) (551,050)
------ -------
Cash flows from investing activities:
Repayments of secured notes receivable -- 678,037
------ -------
Net cash provided by
investing activities -- 678,037
------ -------
Net (decrease) increase in cash and
restricted cash (7,191) 126,987
Cash and restricted cash at
beginning of year 54,790 45,336
------ -------
Cash and restricted cash at September 30 $47,599 172,323
====== =======
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
------------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
---------------------------
2000 1999
--------- ---------
<S> <C> <C>
Reconciliation of net loss to net cash
used by operating activities:
Net loss $(3,312,280) (591,394)
Adjustments to reconcile net loss to net
cash used by operating activities:
Change in net unrealized fair value:
Equity investments 884,081 42,850
Notes receivable 2,283,570 --
Changes in:
Accounts payable and accrued expenses (12,361) 21,572
Due to related parties 86,769 (18,029)
Other changes, net 63,030 (6,049)
--------- -------
Net cash used by operating
activities $ (7,191) (551,050)
========= =======
</TABLE>
See accompanying notes to unaudited 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 the 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, 1999. 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.
The Partnership is scheduled to terminate on December 31, 2000. If no
further action is taken by the General Partners before this termination
date, the Partnership will be liquidated in accordance with the Partnership
Agreement. The General Partners expect to request that the Partnership
assets be transferred to a liquidating trust (the "Trust") to continue the
management and sale of the remaining Partnership assets and the liquidation
of its obligations. Partners would have beneficial interests in the Trust
equal to their individual interests in the Partnership.
2. Financing of Partnership Operations
-----------------------------------
The General Partners have made loans to the Partnership to finance its
recurring losses from on-going operations. The Partnership has very
limited cash resources and primarily illiquid assets. The General Partners
are under no obligation to continue the financing of the Partnership's
daily operations and may elect to discontinue such support at any time
during the remaining life of the Partnership.
The uncertainties arising from these circumstances raise substantial doubt
about the Partnership's ability to continue as a going concern. The
accompanying interim financial statements do not include any adjustments
that might result from the outcome of these uncertainties. The Partnership
has been advised by its independent public accountants that should the
uncertainties surrounding the Partnership's future operations remain
unresolved at year-end, their report on those financial statements will be
modified for that contingency.
3. Fair Value of Investments
-------------------------
The Partnership's investments are valued at fair value as determined in
good faith by the Managing General Partner in the absence of readily
available market quotations. At this stage of the Partnership's life, the
holdings in the Partnership's portfolio are limited to companies for which
any estimate of fair value is highly subjective. Therefore, in August
2000, the General Partners engaged an independent third party to appraise
the Partnership's remaining portfolio companies. Based upon the final
appraisal report received in October 2000, the Managing General Partner has
determined that the fair value of the Partnership's investments in
portfolio companies totals $428,900 at September 30, 2000. The Managing
General Partner is currently pursuing the sale of these investments. The
fair value at September 30, 2000 may differ significantly from a value that
would have been used had the ultimate proceeds from sale of the investments
been known.
4. 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, 2000 and 1999, were as follows:
2000 1999
-------- --------
Management fees $54,306 84,114
Reimbursable operating expenses, net (26,668) 298,463
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, 2000, $51,631 was due to
related parties for such expenses, compared to $11,197 due from related
parties at December 31, 1999. In the second quarter of 2000, the Managing
General Partner refunded the Partnership $199,996 for investment management
expenses previously billed by the General Partners in 1998 and 1999.
Amounts payable for management fees were $23,941 and $0 at September 30,
2000 and December 31, 1999, respectively. Management fees, payable
quarterly, are equal to one half of one percent of the Partnership's assets
under management.
5. Notes Receivable, Net
---------------------
At September 30, 2000 notes receivable consisted of:
Investment Cost Fair
Portfolio Company Date Position Basis Value
----------------- ---------- -------- ----- -----
CLB, LLC 4/97 Unsecured note
receivable $ 132,000 83,433
Cyclean, Inc. 09/87-09/94 Secured notes
receivable 925,653 237,167
MARCorp 12/89-02/93 Secured notes
receivable 2,321,617 47,100
--------- -------
Total notes receivable $3,379,270 367,700
========= =======
As discussed in Note 3, the Managing General Partner obtained an appraisal
of the Partnership's remaining assets in the following portfolio companies
from an independent third party. The Managing General Partner is currently
pursuing the sale of these investments. The fair value at September 30,
2000 may differ significantly from a value that would have been used had
the ultimate proceeds from sale of the investments been known.
CLB, LLC
--------
The fair value of the company's assets is estimated to range from $175,666
to $308,000. Assuming that the partnership's notes would be paid on a pro
rata basis from the proceeds of a sale of the company's assets, the
appraised value of the partnership's notes receivable is approximately
$83,433.
Cyclean, Inc.
-------------
The fair value of the company's assets is estimated to range from
$1,751,334 to $2,824,000. However, the company's debt totals over
$22,872,000. Assuming that the partnership's notes would be paid on a pro
rata basis from the proceeds of a sale of the company's assets, the
appraised value of the partnership's notes receivable is approximately
$237,167.
MARCorp
-------
The company is pursuing several options, including debt buy-downs, capital
restructuring and additional financing. After assessing the reasonable
probabilities of the possible scenarios, the appraised value of the
Partnership's interest in the company is approximately $47,100.
Changes in the net unrealized fair value of notes receivable were as
follows:
Net unrealized fair value of notes
receivable at January 1, 2000 $ 2,651,270
Net unrealized fair value of notes
receivable at September 30, 2000 367,700
---------
Change in net unrealized fair value of
notes receivable $(2,283,570)
=========
The decrease in unrealized fair value is a result of changes in the
estimated fair value of the investments described above.
6. Equity Investments
------------------
At September 30, 2000 equity investments consisted of:
Investment Cost Fair
Portfolio Company Date Position Basis Value
----------------- ---------- -------- ----- -----
All Post, Inc. 10/94 4,394 Common
shares $ 3,471 0
CLB, LLC 04/97-06/98 2,309,999 LLC
Units 2,309,999 0
Cyclean, Inc. 09/94-04/96 225,088 Series D
Preferred shares 242,989 0
Cyclean of 03/95 Class A LLC Unit
Los Angeles, LLC 45% ownership 11,091 0
HemoCleanse, Inc. 03/95-01/97 15,907 Common
shares 10,269 0
Wasatch Education 06/95 1,741,550 Series
Systems Corporation C Preferred
shares 464,427 61,200
--------- ------
Total equity investments $3,042,246 61,200
========= ======
As discussed in Note 3, the Managing General Partner obtained an appraisal
of the Partnership's remaining investments in portfolio companies from an
independent third party. The Managing General Partner is currently
pursuing the sale of these investments. The fair value at September 30,
2000 may differ significantly from a value that would have been used had
the ultimate proceeds from sale of the investments been known.
Wasatch Education Systems Corporation
-------------------------------------
The fair value of the company's assets is estimated to range from $300,000
to $525,000 with the assumption that an associated company, which provides
royalty payments to Wasatch Education Systems Corp., will succeed in
achieving and sustaining positive operating cash flow during the next five
to fifteen years. Based on this assumption, the estimated fair value of
the partnership's invested capital is approximately $61,200.
Changes in the net unrealized fair value of equity investments were as
follows:
Net unrealized fair value of equity
investments at January 1, 2000 $ 945,281
Net unrealized fair value of equity
investments at September 30, 2000 61,200
-------
Change in net unrealized fair value of
equity investments $(884,081)
=======
The decrease in unrealized fair value is a result of changes in the
estimated fair value of the investments described above.
7. Cash and Cash Equivalents
-------------------------
At September 30, 2000, and December 31, 1999, cash and cash equivalents
consisted of:
2000 1999
-------- ---------
Demand and brokerage accounts $30,557 36,148
Money market accounts 542 2,142
------ ------
Total $31,099 38,290
====== ======
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 no unfunded commitments for equity
investments as of September 30, 2000.
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, 2000, net cash used by operating
activities totaled $7,191. The Partnership paid management fees of
$30,365, received a refund of previously billed operating expenses of
$199,996 from the Managing General Partner and reimbursed related parties
for operating expenses of $110,500. Other operating expenses of $89,219
were paid and interest income of $766 and other income of $22,131 was
received.
Cash and restricted cash at September 30, 2000, were $47,599. The
Partnership is scheduled to terminate on December 31, 2000. If no further
action is taken by the General Partners before this termination date, the
Partnership will be liquidated in accordance with the Partnership
Agreement. The General Partners expect to request that the Partnership
assets be transferred to a liquidating trust (the "Trust") to continue the
management and sale of the remaining Partnership assets and the liquidation
of its obligations. Partners would have beneficial interests in the Trust
equal to their individual interests in the Partnership.
The General Partners have made loans to the Partnership to finance its
recurring losses from on-going operations. The Partnership has very
limited cash resources and primarily illiquid assets. The General Partners
are under no obligation to continue the financing of the Partnership's
daily operations and may elect to discontinue such support at any time
during the remaining life of the Partnership.
The uncertainties arising from these circumstances raise substantial doubt
about the Partnership's ability to continue as a going concern. The
accompanying interim financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
The Partnership's investments are valued at fair value as determined in
good faith by the Managing General Partner in the absence of readily
available market quotations. At this stage of the Partnership's life, the
holdings in the Partnership's portfolio are limited to troubled companies
for which any estimate of fair value is highly subjective. Therefore, in
August 2000, the General Partners engaged an independent third party to
appraise the Partnership's remaining portfolio companies. Based upon the
final appraisal report received in October 2000, the Managing General
Partner has determined that the fair value of the Partnership's investments
in portfolio companies totals $428,900 at September 30, 2000. The Managing
General Partner is currently pursuing the sale of these investments. The
fair value at September 30, 2000 may differ significantly from a value that
would have been used had the ultimate proceeds from sale of the investments
been known.
Results of Operations
---------------------
Current quarter compared to corresponding quarter in the preceding year
-----------------------------------------------------------------------
Net loss was $3,328,901 and $176,643 for the quarters ended September 30,
2000 and 1999, respectively. The increase in net loss was primarily a
result of a $2,283,570 decrease in the change in net unrealized fair value
of notes receivable and an $884,081 decrease in the change in net
unrealized fair value of equity investments.
The fair value of notes receivable decreased $2,283,570 in the quarter
ended September 30, 2000 as a result of a decline in estimated fair value.
There was no change in the fair value of notes receivable during the
quarter ended September 30, 1999.
The fair value of equity investments decreased $884,081 in the three months
ended September 30, 2000 as a result of a decline in estimated fair value.
There was no change in the fair value of equity investments during the
quarter ended September 30, 1999.
Total operating expenses were $165,363 and $151,191 for the quarters ended
September 30, 2000 and 1999, respectively. In the second quarter of 2000,
the Managing General Partner refunded the Partnership $199,996 for
investment management expenses previously billed by the General Partners in
1998 and 1999. If these expenses had not been billed in prior years,
operating expenses for the three months ended September 30, 2000 and 1999
would have been $165,363 and $133,118, respectively. The increase is
primarily attributable to the writeoff of a receivable for operating costs
previously billed to a portfolio company.
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 $3,312,280 and $591,394 for the nine months ended September
30, 2000 and 1999, respectively. The increase in net loss was primarily a
result of a $2,283,570 decrease in the change in net unrealized fair value
of notes receivable and an $841,231 decrease in the change in net
unrealized fair value of equity investments, partially offset by a $353,077
decrease in operating expenses.
The fair value of notes receivable decreased $2,283,570 in the nine months
ended September 30, 2000 as a result of a decline in estimated fair value.
There was no change in the fair value of notes receivable in the
corresponding period in 1999.
During the nine months ended September 30, 2000, the decrease in fair value
of equity investments of $884,081 was a result of a decline in estimated
fair value. The $42,850 decrease in the net unrealized fair value of
equity investments in the nine months ended September 30, 1999 was
primarily due to a decrease in the computer systems and software industry.
Total operating expenses were $113,220 and $466,297 for the nine months
ended September 30, 2000, and 1999, respectively. In the second quarter of
2000, the Managing General Partner refunded the Partnership $199,996 for
investment management expenses previously billed by the General Partners in
1998 and 1999. If these expenses had not been billed in prior years,
operating expenses for the nine months ended September 30, 2000 and 1999
would have been $313,216 and $394,868, respectively. The decrease is
attributable to decreased administrative costs.
II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Form 8-K was filed by the Partnership on September 12, 2000 to report
the resignation of KPMG LLP as the Partnership's independent
accountants. A Form 8-K/A was filed by the Fund on September 25, 2000
with KPMG LLP's letter in response to the Form 8-K.
A Form 8-K was filed by the Partnership on November 13, 2000 to
report the appointment of Arthur Andersen LLP as the Partnership's
independent public accountants.
(b) Financial Data Schedule for the nine months ended and as of September
30, 2000 (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 14, 2000 By: /s/Charles R. Kokesh
-------------------------------------
Charles R. Kokesh
President, Chief Executive
Officer, Chief Financial
Officer and Chairman of
Technology Funding Inc
