<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 period ended September 30, 1995
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. 0-14607
TECHNOLOGY FUNDING PARTNERS II
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-2970428
------------------------------ ----------------------------------
(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)
(415) 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,
1995 1994
---------- -----------
<S> <C> <C>
ASSETS
Investments:
Equity investments (cost basis
of $2,330,874 and $2,189,096 at
1995 and 1994, respectively) $7,098,375 6,130,253
Secured notes receivable, net
(cost basis of $0 and
$217,465 at 1995 and 1994,
respectively) -- 177,465
--------- ---------
Total investments 7,098,375 6,307,718
Cash and cash equivalents 390 2,934
Due from related parties -- 9,384
--------- ---------
Total $7,098,765 6,320,036
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 27,810 34,732
Due to related parties 19,152 --
Interest payable 17,723 15,240
Short-term borrowings 2,813,000 2,482,496
--------- ---------
Total liabilities 2,877,685 2,532,468
Commitments and subsequent event
(Notes 1, 3, and 7)
Partners' capital:
Limited Partners
(Units outstanding of 50,000
for both 1995 and 1994) -- 87,801
General Partners (546,421) (201,390)
Net unrealized fair value increase
(decrease) from cost:
Equity investments 4,767,501 3,941,157
Secured notes receivable -- (40,000)
--------- ---------
Total partners' capital 4,221,080 3,787,568
--------- ---------
Total $7,098,765 6,320,036
========= =========
</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,
-------------- ----------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income: $ -- 6,015 6,059 17,513
Costs and expenses:
Management fees 125,000 125,000 375,000 375,000
Operating expenses:
Administrative and investor
services 19,732 38,148 66,145 114,669
Investment operations 5,673 13,853 16,385 52,342
Computer services 5,555 8,035 17,030 23,630
Professional fees 5,397 5,604 24,584 20,801
Interest expense 57,648 40,969 169,464 101,016
------- --------- ------- ---------
Total operating expenses 94,005 106,609 293,608 312,458
------- --------- ------- ---------
Total costs and expenses 219,005 231,609 668,608 687,458
------- --------- ------- ---------
Net operating loss (219,005) (225,594) (662,549) (669,945)
Net realized gain from sales
of equity investments 115,790 -- 275,998 --
Realized losses from
investment writedowns -- -- (46,281) --
------- --------- ------- ---------
Net realized loss (103,215) (225,594) (432,832) (669,945)
Change in net unrealized
fair value:
Equity investments 662,263 1,074,555 826,344 (989,461)
Secured notes receivable -- 31,000 40,000 (1,000)
------- --------- ------- ---------
Net income (loss) $ 559,048 879,961 433,512 (1,660,406)
======= ========= ======= =========
Net realized loss per Unit $ -- (4) (2) (13)
======= ========= ======= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
- ------------------------------------
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
--------------------------------------
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Cash paid to related parties $(427,861) (483,499)
Cash paid to vendors (49,669) (51,530)
Interest paid on short-term
borrowings (166,981) (101,016)
Interest received 2,243 3,047
------- ---------
Net cash used by operating activities (642,268) (632,998)
------- ---------
Cash flows from investing activities:
Proceeds from sales of equity investments 309,220 --
------- ---------
Net cash provided by investing
activities 309,220 --
------- ---------
Cash flows from financing activities:
Proceeds from short-term
borrowings, net 330,504 554,404
------- ---------
Net cash provided by financing
activities 330,504 554,404
------- ---------
Net decrease in cash and cash equivalents
(2,544) (78,594)
Cash and cash equivalents at beginning
of year 2,934 81,073
------- ---------
Cash and cash equivalents at September 30 $ 390 2,479
======= =========
Reconciliation of net income (loss) to net
cash used by operating activities:
Net income (loss) $ 433,512 (1,660,406)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Net realized gain from sales of
equity investments (275,998) --
Realized losses from investment
write-downs 46,281 --
Change in net unrealized fair value:
Equity investments (826,344) 989,461
Secured notes receivable (40,000) 1,000
Other, net (788) (1,096)
Changes in:
Due to related parties 28,536 58,045
Other, net (7,467) (20,002)
------- ---------
Net cash used by operating activities $(642,268) (632,998)
======= =========
Non-cash investing activities:
Conversion of secured notes receivable
to equity investments $ 175,000 125,000
======= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
- ----------------------------------------
1. General
-------
In the opinion of the Managing General Partner, the Balance Sheets as of
September 30, 1995 and December 31, 1994 and the related Statements of
Operations for the three and nine months ended September 30, 1995 and
1994, and Statements of Cash Flows for the nine months ended September
30, 1995 and 1994, reflect all adjustments which are necessary for a
fair presentation of the financial position, results of operations and
cash flows for such periods. These statements should be read in
conjunction with the Annual Report on Form 10-K for the year ended
December 31, 1994. The following notes to financial statements for
activity through September 30, 1995 supplement those included in the
Annual Report on Form 10-K. Certain 1994 balances have been
reclassified to conform with the 1995 financial statement presentation.
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.
Dissolution of the Partnership
- ------------------------------
The Managing General Partner decided to seek approval from Limited
Partners to terminate the partnership by the end of 1995. The decision
was made because the future potential of the assets is outweighed by the
costs of continuing Partnership operations. Subsequent to quarter end,
a Consent to Dissolve and Terminate the Partnership was sent to each
Limited Partner for voting purposes. A majority in interest of the
Limited Partners is required for dissolution.
2. Financing of Partnership Operations
-----------------------------------
The Managing General Partner expects cash received from the liquidation
of Partnership investments will provide the necessary liquidity to
service Partnership debt and fund Partnership operations. Until such
future proceeds are received, the Partnership is dependent upon the
financial support of the Managing General Partner to fund operations.
The Managing General Partner has committed to support the Partnership's
working capital requirements through advances as necessary.
3. Related Party Transactions
--------------------------
Related party costs are included in costs and expenses shown on the
Statements of Operations. Related party expenses for the nine months
ended September 30, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Management fees $375,000 375,000
Reimbursable operating expenses 81,397 166,544
</TABLE>
Certain reimbursable operating expenses have been accrued based upon
interim estimates prepared by the Managing General Partner and are
adjusted to actual costs periodically. At September 30, 1995, due to
related parties for such reimbursable operating costs was $19,152
compared to due from related parties of $9,384 at December 31, 1994.
Officers of the General Partners occasionally receive stock options as
compensation for serving on the Boards of Directors of portfolio
companies. At September 30, 1995, the Partnership had an indirect
interest in such options, worth approximately $13,823, in non-
transferable Viewlogic Systems, Inc. and Medstone International Inc.
options.
4. Equity Investments
------------------
A complete listing of the Partnership's equity investments at December
31, 1994 is in the 1994 Annual Report. Activity from January 1 through
September 30, 1995 consisted of
<TABLE>
<CAPTION>
January 1 -
September 30, 1995
Principal ------------------
Investment Amount or Cost Fair
Industry/Company Position Date Shares Basis Value
- ---------------- -------- ---------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $2,189,096 6,130,253
--------- ---------
Significant changes:
Computer Systems and Software
- -----------------------------
Wasatch Education Series C
Systems Preferred
Corporation shares 06/95 175,000 175,000 175,000
Electronic Design Automation
- ----------------------------
Viewlogic Systems, Common 12/91&
Inc. shares 10/92 211,306 0 (704,325)
Industrial/Business Automation
- ------------------------------
Acuity Imaging, Common
Inc. shares 03/88 27,685 (33,222) (194,486)
Medical
- -------
Cardiac Science, Common 07/91-
Inc. shares 09/94 1,157,572 0 34,728
CEMAX, Inc. Common
shares 06/86 8,850 (13,275) (13,275)
CEMAX, Inc. Redeemable
Convertible
Series A,B,C,
Preferred
shares 05/92 514,314 (303,959) (291,445)
CEMAX-ICON, Inc. Common
shares 06/95 203,146 317,234 711,013
Medstone International Common
Inc. (formerly shares 06/88 211,351 0 1,250,471
Cytocare, Inc.)
--------- ---------
Total significant changes during
the nine months ended September 30, 1995 141,778 967,681
Other changes, net 0 441
--------- ---------
Total equity investments at September 30, 1995 $2,330,874 7,098,375
========= =========
</TABLE>
Marketable Equity Securities
- ----------------------------
At September 30, 1995 and December 31, 1994, marketable equity securities
had aggregate costs of $887,440 and $559,243, respectively, and aggregate
fair values of $5,333,149 and $3,982,963, respectively. The net
unrealized gains at September 30, 1995 and December 31, 1994 included
gross gains of $4,460,819 and $3,438,556, respectively.
Acuity Imaging, Inc.
- --------------------
In June 1995, the Partnership sold 14,527 common shares of Acuity
Imaging, Inc. for total proceeds of $177,640 and realized a gain of
$160,208. Then in July and August 1995, the Partnership sold its
remaining 13,158 common shares for total proceeds of $131,580 and
realized a gain of $115,790.
CEMAX-ICON, Inc./CEMAX, Inc.
- ----------------------------
In June 1995, CEMAX, Inc. merged with ICON Medical Systems creating a new
entity named CEMAX-ICON, Inc. The Partnership's CEMAX, Inc. investment
holdings were exchanged for 203,146 shares of CEMAX-ICON, Inc. common
stock. Subsequent to the merger, the company completed a new round of
financing at a higher valuation resulting in an increase in the change in
fair value of $406,293 for the Partnership's investment.
Wasatch Education Systems Corporation
- -------------------------------------
In June 1995, the Partnership converted its secured notes receivable
totaling $175,000 into 175,000 Series C Preferred shares at $1.00 per
share. As part of the conversion, the Partnership wrote off or reversed
accrued interest totaling $49,839. In addition, the Partnership's
existing common warrants were replaced with new five-year warrants with
similar exercise prices. New warrants were also received as a result of
previous maturity extensions.
Other Equity Investments
- ------------------------
Other significant changes reflected above relate to market value
fluctuations and the elimination of a discount relating to selling
restrictions for publicly-traded portfolio companies. The Partnership's
investment in Cardiac Science, Inc. is partially restricted.
5. Secured Notes Receivable, Net
-----------------------------
<TABLE>
<CAPTION>
Activity from January 1 through September 30, 1995 consisted of:
<S> <C>
Balance at January 1, 1995 $ 177,465
1995 Activity:
Conversion of secured notes receivable
to equity investments (175,000)
Write-off of accrued interest (46,281)
Decrease in allowance for loan losses 40,000
Other activity, net 3,816
-------
Total secured notes receivable, net
at September 30, 1995 $ --
=======
</TABLE>
Refer to Note 4, Equity Investments, for disclosure regarding the note
conversion and interest write-off. The Partnership holds no other note
receivable.
There was no accrued interest at September 30, 1995 compared to $43,253
at December 31, 1994. Also, the beginning of year allowance for loan
losses of $40,000 was eliminated.
6. Short-term Borrowings
---------------------
The Partnership maintains a line of credit with a financial institution,
which has been renewed with a maturity date of April 5, 1996. The
maximum drawing capacity of $3,000,000 was reduced based on collateral
value at September 30, 1995; the Partnership may not make additional
draws based on current collateral values. The weighted average interest
rates during the nine months ended September 30, 1995 and the year ended
1994 were 8.86% and 7.14%, respectively. The Partnership's shares in
Medstone International Inc. and Viewlogic Systems, Inc. are pledged as
collateral.
7. Subsequent Events
-----------------
For the Partnership's public portfolio companies at quarter end,
Viewlogic Systems, Inc. had a material fair value change subsequent to
September 30, 1995. The change reflects changes in common stock prices
which fluctuate daily on stock exchanges.
As of November 3, 1995, the fair value for Viewlogic Systems, Inc.
decreased to $2,125,738, compared to $2,937,153 at September 30, 1995.
In addition, subsequent to September 30, 1995, the Partnership sold
42,261 Medstone International Inc. common shares for total proceeds of
$412,860 and a realized gain of $307,862.
<PAGE>
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, 1995, net cash used by
operating activities totaled $642,268. The Partnership paid management
fees of $375,000 to the Managing General Partner and reimbursed related
parties for operating expenses of $52,861. Other operating expenses of
$49,669 were paid to vendors. The Partnership also paid $166,981 in
interest on short-term borrowings and received $2,243 in interest income.
During the nine months ended September 30, 1995, proceeds from sales of
equity investments were $309,220.
The Partnership has a line of credit with a financial institution. This
line of credit has been renewed with a maturity date of April 5, 1996.
The maximum drawing capacity of $3,000,000 was reduced based on
collateral value at September 30, 1995. Net proceeds from short-term
borrowings for the nine months ended September 30, 1995 totaled
$330,504; the Partnership may not make additional draws based on current
collateral values. The Partnership's shares in Viewlogic Systems, Inc.
and Medstone International Inc. are pledged as collateral.
Subsequent to September 30, 1995, the Partnership sold 42,261 Medstone
International Inc. common shares for total proceeds of $412,860.
Cash and cash equivalents at September 30, 1995 were $390. If the
Partnership is not dissolved by year-end 1995 as disclosed in Note 1,
proceeds from the future sale of investments and General Partner support
are expected to be adequate to fund Partnership operations through the
next twelve months.
Results of Operations
- ---------------------
Current quarter compared to corresponding quarter in the preceding year
- -----------------------------------------------------------------------
Net income was $559,048 and $879,961 for the three months ended September
30, 1995 and 1994, respectively. The decrease in net income included
decreases of $412,292 and $31,000 in the changes in net unrealized fair
value of equity investments and secured notes receivable, respectively.
These decreases were partially offset by a $115,790 increase in net
realized gain from sales of equity investments.
During the quarter ended September 30, 1995, equity investment fair
values were higher than cost basis by $662,263 primarily due to portfolio
companies in the medical and electronic design automation industries. In
1994, fair values were higher by $1,074,555 primarily due to portfolio
companies in the electronic design automation and medical industries.
In 1995, there were no secured notes receivable outstanding. During the
quarter ended September 30, 1994, an increase of $31,000 was recorded
based upon the level of loan loss reserves deemed adequate by the
Managing General Partner.
During the three months ended September 30, 1995, the Partnership
realized a gain of $115,790 from sales of equity investments in Acuity
Imaging, Inc. No such gain was realized for the same period in 1994.
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 income was $433,512 compared to a net loss of $1,660,406 for the nine
months ended September 30, 1995 and 1994, respectively. The change was
substantially due to a $1,815,805 increase in the change in net
unrealized fair value of equity investments, a $275,998 increase in the
net realized gain from sales of equity investments, and an increase of
$41,000 in the change in net unrealized fair value of secured notes
receivable. These changes were partially offset by a $46,281 increase in
realized losses from investment write-downs.
In 1995, the $826,344 increase in fair value of equity investments was
primarily due to portfolio companies in the medical industry, partially
offset by a portfolio company in the electronic design automation
industry. In 1994, the decrease of $989,461 was primarily due to
portfolio companies in the medical and electronic design automation
industries.
During the nine months ended September 1995, the Partnership realized a
gain of $275,998 from sales of equity investments in Acuity Imaging, Inc.
No such gain was realized in 1994.
During the nine months ended September 30, 1995, the Partnership recorded
an increase in the fair value of secured notes receivable of $40,000 in
order to eliminate the allowance for loan losses as there were no secured
notes receivable outstanding. A $1,000 decrease was recorded in 1994
based upon the level of loan loss reserves deemed adequate by the
Managing General Partner.
In 1995, realized losses from investment write-downs totaled $46,281
related to the write-off of accrued interest on secured notes receivable
to Wasatch Education Systems Corporation as discussed in Note 4 to the
financial statements. No such write-down was recorded in 1994.
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, 1995.
(b) Financial Data Schedule for the nine months ended and as of
September 30, 1995 (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 PARTNERS II
By: TECHNOLOGY FUNDING INC.
Managing General Partner
Date: November 10, 1995 By: /s/Frank R. Pope
-----------------------------------------
Frank R. Pope
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE>6
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FORM 10-Q AS OF SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<PERIOD-TYPE> 9-MOS
<INVESTMENTS-AT-COST> 2,330,874
<INVESTMENTS-AT-VALUE> 7,098,375
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 390
<TOTAL-ASSETS> 7,098,765
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,877,685
<TOTAL-LIABILITIES> 2,877,685
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> (546,421)
<SHARES-COMMON-STOCK> 50,000
<SHARES-COMMON-PRIOR> 50,000
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,767,501
<NET-ASSETS> 4,221,080
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,059
<OTHER-INCOME> 0
<EXPENSES-NET> 668,608
<NET-INVESTMENT-INCOME> (662,549)
<REALIZED-GAINS-CURRENT> 229,717
<APPREC-INCREASE-CURRENT> 866,344
<NET-CHANGE-FROM-OPS> 433,512
<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> 433,512
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 375,000
<INTEREST-EXPENSE> 169,464
<GROSS-EXPENSE> 669,158
<AVERAGE-NET-ASSETS> 4,004,324
<PER-SHARE-NAV-BEGIN> 2
<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> 0
<EXPENSE-RATIO> 16.70
<AVG-DEBT-OUTSTANDING> 2,647,748
<AVG-DEBT-PER-SHARE> 53
<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>
