<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 June 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)
June 30, December 31,
1995 1994
---------- -----------
<S> <C> <C>
ASSETS
Investments:
Equity investments (cost basis
of $2,346,664 and $2,189,096 at
1995 and 1994, respectively) $6,451,902 6,130,253
Secured notes receivable, net
(cost basis of $0 and
$217,465 at 1995 and 1994,
respectively) -- 177,465
--------- ---------
Total investments 6,451,902 6,307,718
Cash and cash equivalents 177,643 2,934
Due from related parties -- 9,384
--------- ---------
Total $6,629,545 6,320,036
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 22,630 34,732
Due to related parties 446,251 --
Interest payable 16,136 15,240
Short-term borrowings 2,482,496 2,482,496
--------- ---------
Total liabilities 2,967,513 2,532,468
Commitments and subsequent events
(Notes 3 and 4)
Partners' capital:
Limited Partners
(Units outstanding of 50,000
for both 1995 and 1994) -- 87,801
General Partners (443,206) (201,390)
Net unrealized fair value increase
(decrease) from cost:
Equity investments 4,105,238 3,941,157
Secured notes receivable -- (40,000)
--------- ---------
Total partners' capital 3,662,032 3,787,568
--------- ---------
Total $6,629,545 6,320,036
========= =========
</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,
-------------- ----------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income: $ 700 7,811 6,059 11,498
Costs and expenses:
Management fees 125,000 125,000 250,000 250,000
Operating expenses:
Administrative and investor
services 23,495 38,440 46,413 76,521
Investment operations 4,622 22,508 10,712 38,489
Computer services 5,548 6,410 11,475 15,595
Professional fees 12,026 6,867 19,187 15,197
Interest expense 56,477 36,097 111,816 60,047
--------- --------- ------- ---------
Total operating expenses 102,168 110,322 199,603 205,849
--------- --------- -------- ---------
Total costs and expenses 227,168 235,322 449,603 455,849
--------- --------- ------- ---------
Net operating loss (226,468) (227,511) (443,544) (444,351)
Net realized gain from sales
of equity investments 160,208 -- 160,208 --
Realized losses from
investment writedowns (46,281) -- (46,281) --
--------- --------- ------- ---------
Net realized loss (112,541) (227,511) (329,617) (444,351)
Change in net unrealized
fair value:
Equity investments 1,953,896 (2,397,791) 164,081 (2,064,016)
Secured notes receivable 39,000 -- 40,000 (32,000)
--------- --------- ------- ---------
Net income (loss) $1,880,355 (2,625,302) (125,536) (2,540,367)
========= ========= ======= =========
Net realized loss per Unit $ -- (5) (2) (9)
========= ========= ======= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
- ------------------------------------
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Cash paid to related parties $ -- (530,616)
Cash paid to vendors (43,925) (44,503)
Interest paid on short-term
borrowings (110,920) (48,859)
Interest received 2,243 3,195
------- ---------
Net cash used by operating activities (152,602) (620,783)
------- ---------
Cash flows from investing activities:
Proceeds from sales of equity investments 177,640 --
------- ---------
Net cash provided by investing
activities 177,640 --
------- ---------
Cash flows from financing activities:
Proceeds from short-term
borrowings, net -- 542,440
Short-term advances from Managing
General Partner 149,671 --
------- ---------
Net cash provided by financing
activities 149,671 542,440
------- ---------
Net increase (decrease) in cash
and cash equivalents 174,709 (78,343)
Cash and cash equivalents at beginning
of year 2,934 81,073
------- ---------
Cash and cash equivalents at June 30 $ 177,643 2,730
======= =========
Reconciliation of net loss to net
cash used by operating activities:
Net loss $(125,536) (2,540,367)
Adjustments to reconcile net loss to
net cash used by operating activities:
Net realized gain from sales of
equity investments (160,208) --
Realized losses from investment
write-downs 46,281 --
Change in net unrealized fair value:
Equity investments (164,081) 2,064,016
Secured notes receivable (40,000) 32,000
Other, net (788) (300)
Changes in:
Accounts payable and accrued liabilities (12,102) (10,416)
Due to related parties, net of
short-term advances 305,964 (43,901)
Prepaid management fees -- (125,000)
Other, net (2,132) 3,185
------- ---------
Net cash used by operating activities $(152,602) (620,783)
======= =========
Non-cash investing activities:
Conversion of secured notes receivable
to equity investments $ 175,000 --
======= =========
</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
June 30, 1995 and December 31, 1994 and the related Statements of
Operations for the three and six months ended June 30, 1995 and 1994,
and Statements of Cash Flows for the six months ended June 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
June 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.
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 six months
ended June 30, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Management fees $250,000 250,000
Reimbursable operating expenses 55,964 111,715
</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. Given the Partnership's low cash
resources, the Managing General Partner has deferred collection of
reimbursable operating expenses and management fees, and made advances
to the Partnership to pay other operating expenses. At June 30, 1995,
due to related parties for such advances and reimbursable operating
costs was $446,251 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 June 30, 1995, the Partnership had an indirect interest
in such options, worth approximately $8,599, in non-transferable
Viewlogic Systems, Inc. and Cytocare, 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
June 30, 1995 consisted of
<TABLE>
<CAPTION>
January 1 -
June 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 (905,065)
Industrial/Business Automation
- ------------------------------
Acuity Imaging, Common
Inc. shares 03/88 13,158 (17,432) (39,881)
Medical
- -------
Cardiac Science, Common 07/91-
Inc. shares 09/94 1,157,572 0 45,196
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
Cytocare, Inc. Common
shares 06/88 211,351 0 639,666
--------- ---------
Total significant changes during
the six months ended June 30, 1995 157,568 321,209
Other changes, net 0 440
--------- ---------
Total equity investments at June 30, 1995 $2,346,664 6,451,902
========= =========
</TABLE>
Marketable Equity Securities
- ----------------------------
At June 30, 1995 and December 31, 1994, marketable equity securities had
aggregate costs of $886,725 and $559,243, respectively, and aggregate
fair values of $4,659,292 and $3,982,963, respectively. The net
unrealized gains at June 30, 1995 and December 31, 1994 included gross
gains of $3,784,676 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. In addition, the decrease in fair value of $39,881 reflected
the publicly-traded unrestricted market value of $154,605 at June 30,
1995.
In April 1995, the company announced a definitive agreement to merge with
Robotic Vision Systems Inc. ("RVSI"), a public company. A targeted date
for the completion of the merger has not been announced as the merger is
still subject to various conditions customary for transactions of this
nature. Upon consummation of the merger, the Partnership will exchange
its remaining common share holdings in Acuity for approximately 10,079
RVSI common shares; at August 4, 1995, these shares had an approximate
market value of $167,600.
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.
Viewlogic Systems, Inc.
- -----------------------
The Partnership recorded a decrease in fair value of $905,065 to reflect
the publicly-traded market price at June 30, 1995. The Managing General
Partner continues to believe that its investment is capable of a higher
future value.
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.
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 June 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 June 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 June 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 June 30, 1995; the Partnership may not make additional draws
based on current collateral values. The weighted average interest rates
during the six months ended June 30, 1995 and 1994 were 9% and 6.45%,
respectively. The Partnership's shares in Cytocare, Inc. and Viewlogic
Systems, Inc. are pledged as collateral.
<PAGE>
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, 1995, net cash used by operating
activities totaled $152,602. Operating expenses paid to vendors totaled
$43,925. The Partnership also paid $110,920 in interest on short-term
borrowings and received $2,243 in interest income. Given the
Partnership's low cash resources, the Managing General Partner advanced
$149,671 to the Partnership to pay certain operating expenses and has
deferred collection of reimbursable expenses and management fees.
During the six months ended June 30, 1995, proceeds from sales of equity
investments were $177,640.
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 June 30, 1995; the Partnership may not make
additional draws based on current collateral values. The Partnership's
shares in Viewlogic Systems, Inc. and Cytocare, Inc. are pledged as
collateral.
Cash and cash equivalents at June 30, 1995 were $177,643. 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 $1,880,355 compared to a net loss of $2,625,302 for the
three months ended June 30, 1995 and 1994, respectively. The change was
primarily due to a $4,351,687 increase in the change in net unrealized
fair values of equity investments and a $160,208 increase in net realized
gain from sales of equity investments.
During the quarter ended June 30, 1995, the increase in fair value of
equity investments of $1,953,896 was primarily due to portfolio companies
in the electronic design automation and medical industries. During the
same period in 1994, the decrease in fair value of $2,397,791 was
primarily due to portfolio companies in the same two industries.
During the three months ended June 30, 1995, net realized gain from sales
of equity investments was $160,208 related to Acuity Imaging, Inc. No
such gain was realized for the same period in 1994.
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.
The Partnership recorded an increase of $39,000 in the fair value of
secured notes receivable in 1995 in order to eliminate the allowance for
loan losses as there were no secured notes receivable outstanding. No
such increase was recorded 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 six months compared to corresponding six months in the preceding
- ------------------------------------------------------------------------
year
- ----
Net losses were $125,536 and $2,540,367 for the six months ended June 30,
1995 and 1994, respectively. The change was primarily due to an increase
of $2,228,097 in the change in net unrealized fair value of equity
investments and a $160,208 increase in net realized gain from sales of
equity investments.
During the six months ended June 30, 1995, the increase in fair value of
equity investments of $164,081 was primarily due to increases in
portfolio companies in the medical industry, partially offset by a
decrease for a portfolio company in the electronic design automation
industry. During the same period in 1994, the decrease in fair value of
$2,064,016 was primarily due to portfolio companies in the electronic
design automation and medical industries.
In 1995, net realized gain from sales of equity investments was $160,208
related to Acuity Imaging, Inc. No such gain was realized for the same
period in 1994.
In 1995, realized losses from investment write-downs totaled $46,281
related to the write-off of accrued interest as discussed in the above
section. No such write-down was recorded in 1994.
During the six months ended June 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 $32,000 decrease was recorded for the
same period 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 June 30, 1995.
(b) Financial Data Schedule for the quarter ended and as of June 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: August 11, 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 JUNE 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> JUN-30-1995
<PERIOD-TYPE> 6-MOS
<INVESTMENTS-AT-COST> 2,346,664
<INVESTMENTS-AT-VALUE> 6,451,902
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 177,643
<TOTAL-ASSETS> 6,629,545
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,967,513
<TOTAL-LIABILITIES> 2,967,513
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> (443,206)
<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> 4,105,238
<NET-ASSETS> 3,662,032
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,059
<OTHER-INCOME> 0
<EXPENSES-NET> 449,603
<NET-INVESTMENT-INCOME> (443,544)
<REALIZED-GAINS-CURRENT> 113,927
<APPREC-INCREASE-CURRENT> 204,081
<NET-CHANGE-FROM-OPS> (125,536)
<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> (125,536)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 250,000
<INTEREST-EXPENSE> 111,816
<GROSS-EXPENSE> 449,903
<AVERAGE-NET-ASSETS> 3,724,800
<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> .12
<AVG-DEBT-OUTSTANDING> 2,482,496
<AVG-DEBT-PER-SHARE> 50
<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>
