<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Year Ended December 31, 1994
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)
(415) 345-2200
--------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Limited
Partnership Units
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 of 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
No active market for the units of limited partnership interests ("Units")
exists, and therefore the market value of such Units cannot be
determined.
Documents incorporated by reference: Portions of the Prospectus dated
June 4, 1987 forming a part of Registration Statement No. 33-12566 and of
Supplement No. 2 dated February 12, 1988 and filed pursuant to Rule
424(c) of the General Rules and Regulations under the Securities Act of
1933 and of the Amended Prospectus dated March 8, 1988 that forms a part
of Post-Effective Amendment No. 1 to the Registration Statement are
incorporated by reference in Parts I and III, hereof. Portions of the
Prospectus of Technology Funding Medical Partners I, L.P., as modified by
Cumulative Supplement No. 4 dated January 4, 1995, forming a part of the
May 3, 1993, Pre-Effective Amendment No. 3 to the Form N-2 Registration
Statement No. 33-54002 dated October 30, 1992 is incorporated by
reference in Part III hereof.
<PAGE>
PART I
Item 1. BUSINESS
- ------ --------
Technology Funding Secured Investors II (hereinafter referred to
as the "Partnership" or the "Registrant") was formed as a
California limited partnership on August 31, 1984 and commenced
operations on June 4, 1987 with the sale of Units. The business
of the Partnership is to provide loans secured by equipment and
other assets to new and developing companies and to acquire
equity interests in these companies as described in the "Summary
of the Offering" and "Business of the Partnership" sections of
the Prospectus originally dated June 4, 1987 and in Supplement
No. 2 thereto dated February 12, 1988 (the "Supplement"), that
forms a part of the Registrant's Form S-1 Registration Statement
No. 33-12566 and in the Amended Prospectus dated March 8, 1988
that forms a part of Post-Effective Amendment No. 1 to the
Registration Statement as filed with the Securities and Exchange
Commission on March 8, 1988, (such Prospectus, as supplemented
and amended on March 8, 1988, is hereinafter referred to as the
"Prospectus"), which sections are incorporated herein by
reference. Additional characteristics of the Partnership's
business are discussed in the "Risk Factors" and "Conflicts of
Interest" sections of the Prospectus, which sections are also
incorporated herein by reference. The Partnership had been
inactive until it commenced selling units of limited partnership
interest ("Units") on June 4, 1987. The Partnership's Amended
and Restated Limited Partnership Agreement ("Partnership
Agreement") provides that the Partnership will continue until
December 31, 1996, unless further extended for up to two
additional two-year periods from such date if the General
Partners so determine, or the Partnership may be dissolved
earlier.
Item 2. PROPERTIES
- ------ ----------
The Registrant has no material physical properties.
Item 3. LEGAL PROCEEDINGS
- ------ -----------------
There are no material pending legal proceedings to which the
Registrant is party or of which any of its property is the
subject, other than ordinary routine litigation incidental to
the business of the Partnership.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
No matter was submitted to a vote of the holders of units of
limited partnership interests ("Units") during 1994.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- ------ -------------------------------------------------------------
MATTERS
- -------
(a) There is no established public trading market for the
Units.
(b) At December 31, 1994, there were 5,279 record holders of
Units.
(c) The Registrant, being a partnership, does not pay
dividends. Cash distributions, however, may be made to the
partners in the Partnership pursuant to the Registrant's
Partnership Agreement.
Item 6. SELECTED FINANCIAL DATA
- ------ -----------------------
<TABLE>
<CAPTION>
For the Years Ended and As of December 31,
--------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total income $ 1,159,042 967,972 2,560,375 3,250,112 3,530,108
Net realized (loss)
income (2,240,459) (4,326,926) (27,468) 1,213,257 322,502
Change in net unrealized
fair value:
Equity investments (1,220,545) 2,033,650 (3,404,583) 990,743 67,863
Secured notes receivable (286,000) 511,000 (1,413,767) (223,550) (551,822)
Net (loss) income (3,747,004) (1,782,276) (4,845,818) 1,980,450 (161,457)
Net realized (loss)
income per Unit (14) (27) -- 7 2
Total assets 7,661,352 11,843,982 15,516,042 24,581,830 26,102,466
Distributions declared (300,003) (900,008) (3,037,768) (3,636,385) (3,636,872)
</TABLE>
Refer to Notes 1 and 5 of the financial statements entitled
"Summary of Significant Accounting Policies" and "Allocation of
Profits and Losses" for a description of the method of
calculation of net realized (loss) income per Unit.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------ -----------------------------------------------------------
AND RESULTS OF OPERATIONS
- -------------------------
Liquidity and Capital Resources
- -------------------------------
In 1994, net cash used by operations totaled $321,246. The
Partnership paid management fees of $205,152 to the Managing
General Partner and reimbursed related parties for operating
expenses of $522,486, and paid $35,121 to affiliated
partnerships for net loan participations. Other operating
expenses of $529,883 were paid, and interest and other income
of $761,636 and $22,319, respectively, were received. In
addition, the Partnership received a reimbursement of $187,441
from a portfolio company for operating expenses relating to
collection efforts.
During 1994, the Partnership issued $2,760,238 in secured notes
receivable primarily to portfolio companies in the computers
and computer equipment, medical and computer software and
systems industries and purchased $251,013 in equity investments
primarily in the microelectronics industry. Repayments of
secured notes receivable provided cash of $2,261,515. As of
December 31, 1994, the Partnership was committed to fund up to
an additional $337,000 on account receivable lines of credit to
borrowing companies.
The Partnership distributed $297,003 to the Limited Partners
and $3,000 to the General Partners in 1994. As defined in the
Partnership Agreement, the Partnership ended its mandatory
reinvestment period in early 1993 and entered its liquidation
stage. Future distributions will be dependent upon loan
repayments from borrowing companies and available cash, and are
expected to fluctuate.
All management fees which are due have been paid through
December 31, 1994. Management fees are paid to the extent that
the aggregate amount of all proceeds (including those from
warrants exercised without cash) from the sale or other
disposition of borrowing company equities, plus the aggregate
fair market value of any equity securities distributed to the
partners, exceeds the total management fee payable as defined
in the Partnership Agreement.
Cash and cash equivalents at December 31, 1994 were $1,006,954.
Operating cash reserves combined with proceeds from the sale of
investments, interest income received from short-term
investments and repayments of secured notes receivable are
expected to be sufficient to fund Partnership operations and
the loan requirements of existing borrowing companies through
the next twelve months.
Results of Operations
- ---------------------
1994 compared to 1993
- ---------------------
Net loss was $3,747,004 and $1,782,276 in 1994 and 1993,
respectively. The change in net loss was primarily due to
decreases of $3,254,195 and $797,000 in the change in net
unrealized fair value of equity investments and secured notes
receivable, respectively, a $317,520 decrease in the net
realized gain from sale of equity investments and a $169,856
increase in other investment expenses. These changes were
partially offset by a $1,865,433 decrease in realized losses
from investment write-downs, a $480,228 decrease in total
operating expenses, and a $191,070 increase in total income.
The change in fair value of equity investments reflected a net
decrease in the fair value of the Partnership's holdings.
During 1994, the $1,220,545 decrease was primarily related to a
portfolio company in the medical industry. In 1993, the
$2,033,650 increase in fair value was primarily attributable to
the write-downs of portfolio companies in the computers and
computer equipment and retail/consumer products industries as
these investments had been reflected with changes in fair
values less than cost of $2,486,076 in 1992, which was reversed
as a result of the realized losses taken.
The Partnership recorded a decrease in the fair value of
secured notes receivable of $286,000 and an increase of
$511,000 in 1994 and 1993, respectively, based upon the level
of loan loss reserves deemed adequate by the Managing General
Partner at the respective year ends.
During 1994, the partnership recorded a net realized gain from
sale of equity investments of $25,813 mostly related to the
non-cash exercise of Elantec, Inc. warrants. In 1993, the gain
of $343,333 was mainly related to Cornerstone Imaging, Inc. and
Software Transformation, Inc., partially offset by a net
realized loss from the sale of GP Publications, Inc.
During 1994, the Partnership recorded other investment expenses
of $169,856 primarily related to legal proceedings with a third
party portfolio company in the retail/consumer products
industry. See Note 8 to the financial statements for further
details. No such expenses were recorded for the same period in
1993.
In 1994, the Partnership's realized losses from investment
write-downs of $2,460,743 primarily related to secured notes
receivable to a portfolio in the computers and computer
equipment industry. Realized losses of $4,326,176 in 1993,
primarily related to equity investments in portfolio companies
in the computers and computer equipment, and retail/consumer
products industries.
Total operating expenses were $589,563 in 1994 compared to
$1,069,791 in 1993. In June 1994, the Partnership was
reimbursed $187,441 for legal, consulting, and other external
costs relating to a portfolio company in the computers and
computer equipment industry, of which $130,000 related to
expenses incurred prior to December 31, 1993. This recovery
was recorded as a reduction to lending operations and
investment management expense. Had the recovery not occurred,
total operating expenses would have been $717,930. The
decrease was mostly due to lower lending operations and
investment management expenses, and administrative and investor
services expenses from reduced overall portfolio activity.
Total income was $1,159,042 and $967,972 in 1994 and 1993,
respectively. The increase was mostly due to a secured note
receivable cash interest payment from a portfolio company in
the computer software and systems industry which had been on
nonaccrual status.
The Partnership's portfolio of secured notes receivable is with
new and developing companies; therefore, there is no
established source of market value information. The value of
the portfolio has been estimated by the Managing General
Partner in the absence of readily ascertainable market values.
Although secured notes receivable are secured by specific
assets of the borrowing company, due to the inherent
uncertainty of valuation, estimated values may differ
significantly from the values that would have been used had a
ready market of the investment existed. The difference could
be material.
Given the inherent risk associated with the business of the
Partnership, the future performance of the portfolio company
investments may significantly impact future operations.
1993 compared to 1992
- ---------------------
Net loss was $1,782,276 and $4,845,818 in 1993 and 1992,
respectively. The decrease in net loss was primarily due to
increases of $5,438,233 and $1,924,767 in the change in net
unrealized fair value of equity investments and secured notes
receivable, respectively, and a $626,896 decrease in total
operating expenses. These changes were partially offset by a
$3,036,967 increase in realized losses from investment write-
downs, a $1,589,558 decrease in notes receivable interest
income and a $456,135 decrease in realized gains from sale of
equity investments.
In 1993, the $2,033,650 increase in fair value of equity
investments was primarily attributable to the write-downs of
portfolio companies in the computers and computer equipment and
retail/consumer products industries, as these investments had
been reflected with changes in fair values less than cost of
$2,486,076 which was reversed as a result of the realized
losses taken. In 1992, the decrease of $3,404,583 was
primarily due to portfolio companies in the retail/consumer
products, computers and computer equipment, telecommunications
and computer systems and software industries.
The Partnership recorded an increase in the change in fair
value of secured notes receivable of $511,000 and a decrease of
$1,413,767 in 1993 and 1992, respectively, based upon the level
of loan loss reserves deemed adequate by the Managing General
Partner at the respective year ends.
Total operating expenses were $1,069,791 in 1993 compared to
$1,696,687 in 1992. The decrease was primarily attributable to
lower overall portfolio activity. The Partnership also
incurred management fees of $269,647 and $401,415 in 1993 and
1992, respectively. As management fees are computed based on
assets under management, the decrease is consistent with the
decrease in such assets.
In 1993 and 1992, the Partnership realized losses from
investment write-downs of $4,326,176 and $1,289,209,
respectively. Realized losses in 1993 primarily related to
equity investments in portfolio companies in the computers and
computer equipment, and retail/consumer products industries.
Realized losses in 1992 primarily related to the write-down of
secured notes receivable for portfolio companies in the
microelectronics, medical, retail/consumer products, and
computers and computer equipment industries.
Secured notes receivable interest income was $916,590 and
$2,506,148 in 1993 and 1992, respectively. The decrease was
primarily attributable to lower interest-bearing notes
receivable balances in 1993 compared to 1992.
Net realized gain from sale of equity investments was $343,333
and $799,468 in 1993 and 1992, respectively. The gains in 1993
mainly related to Cornerstone Imaging, Inc. and Software
Transformation, Inc., partially offset by a net realized loss
from the sale of GP Publications, Inc. In 1992, the gain was
primarily attributable to investment sales in Catalina
Marketing, Ventritex, Inc., COR Therapeutics, Inc. and
Videoconferencing Systems, Inc.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
The financial statements of the Registrant are set forth in
Item 14.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- ------ -----------------------------------------------------------
AND FINANCIAL DISCLOSURE
- ------------------------
Registrant has reported no disagreements with its accountants
on matters of accounting principles or practices or financial
statement disclosure.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
As a partnership, the Registrant has no directors or executive
officers. Technology Funding Ltd., a California limited
partnership ("TFL") and Technology Funding Inc., a California
corporation ("TFI"), and wholly owned subsidiary of TFL, are
the General Partners of the Partnership. TFI is the Managing
General Partner. Information concerning the ownership of TFL
and the business experience of the key officers of TFI and the
partners of TFL is incorporated by reference from the sections
entitled "Management of the Partnership - The General Partners"
and "Management of the Partnership - Key Personnel" in the
Prospectus, which are incorporated herein by reference.
Changes in this information that have occurred since the date
of the Prospectus are included in the parallel sections of the
Technology Funding Medical Partners I, L.P. Prospectus, as
modified by Cumulative Supplement No. 4 dated January 4, 1995,
forming a part of the May 3, 1993 Pre-Effective Amendment No. 3
to the Form N-2 Registration Statement No. 33-54002, dated
October 30, 1992 which is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
- ------- ----------------------
As a partnership, the Registrant has no officers or directors.
In 1994, the Partnership incurred $205,152 in management fees.
The management fees are designed to compensate the General
Partners for its General Partner Overhead incurred in
performing management duties for the Partnership through
December 31, 1994. General Partner Overhead includes rent,
utilities, and certain salaries and benefits paid by the
General Partners.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
Not applicable. No Limited Partner beneficially holds more
than 5% of the aggregate number of Units held by all Limited
Partners, and neither the General Partners nor any of their
officers, directors or partners own any Units. The General
Partners control the affairs of the Partnership pursuant to the
Partnership Agreement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
The Registrant has engaged in no transactions with the General
Partners or their officers and partners other than as described
above, in the notes to the financial statements, or in the
Prospectus.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
- ------- -------------------------------------------------------
FORM 8-K
- --------
(a) List of Documents filed as part of this Annual Report on
Form 10-K
(1) Financial Statements - the following financial
statements are filed as a part of this Report:
Independent Auditors' Report
Balance Sheets as of December 31, 1994 and 1993
Statements of Operations for the years ended
December 31, 1994, 1993 and 1992
Statements of Partners' Capital for the years ended
December 31, 1994, 1993 and 1992
Statements of Cash Flows for the years ended
December 31, 1994, 1993 and 1992
Notes to Financial Statements
(2) Financial Statement Schedules
All schedules have been omitted because they are not
applicable or the required information is included in
the financial statements or the notes thereto.
(3) Exhibits
Registrant's Amended and Restated Limited Partnership
Agreement (incorporated by reference to Exhibit A to
Registrant's Prospectus dated March 8, 1988 included in
Registration Statement No. 33-12566 filed pursuant to
Rule 424(b) of the General Rules and Regulations under
the Securities Act of 1933).
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during
the year ended December 31, 1994.
(c) Financial Data Schedule for the year ended and as of
December 31, 1994 (Exhibit 27).
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Partners
Technology Funding Secured Investors II:
We have audited the accompanying balance sheets of Technology Funding
Secured Investors II (a California limited partnership) as of December
31, 1994 and 1993, and the related statements of operations, partners'
capital, and cash flows for each of the years in the three-year period
ended December 31, 1994. These financial statements are the
responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of loans by
correspondence with the individual borrowing companies and a physical
examination of securities held as of December 31, 1994 and 1993. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Technology
Funding Secured Investors II as of December 31, 1994 and 1993, and the
results of its operations and its cash flows for each of the years in
the three-year period ended December 31, 1994 in conformity with
generally accepted accounting principles.
As explained in Notes 1, 6, and 7, the financial statements include
investments of $6,603,200 and $9,420,362 (88% and 82% of partners'
capital) as of December 31, 1994 and 1993, respectively, whose values,
in certain circumstances, have been estimated by the Managing General
Partner in the absence of readily ascertainable market values. We have
reviewed the procedures used by the Managing General Partner in arriving
at its estimate of value of such investments and have inspected
underlying documentation, and, in the circumstances, we believe the
procedures are reasonable and the documentation appropriate. However,
because of the inherent uncertainty of valuation, those estimated values
may differ significantly from the values that would have been used had a
ready market for the investments existed, and the difference could be
material.
San Francisco, California KPMG Peat Marwick LLP
March 17, 1995
<PAGE>
BALANCE SHEETS
- --------------
<TABLE>
<CAPTION>
December 31,
-------------------------------
1994 1993
---- ----
<S> <C> <C>
ASSETS
Investments:
Secured notes receivable, net
(cost basis of $7,528,512 and
$10,207,189 in 1994 and 1993,
respectively) $ 4,999,512 7,964,189
Equity investments (cost basis
of $2,936,564 and $1,568,504 in
1994 and 1993, respectively) 1,603,688 1,456,173
---------- ----------
Total investments 6,603,200 9,420,362
Cash and cash equivalents 1,006,954 2,400,854
Other assets 51,198 22,766
---------- ----------
Total $ 7,661,352 11,843,982
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 131,356 202,738
Due to related parties -- 11,490
Due to affiliated partnerships 246 35,367
Other liabilities 50,778 44,983
---------- ----------
Total liabilities 182,380 294,578
Commitments (Notes 3 and 11)
Partners' capital:
Limited Partners
(Units outstanding of 159,006
and 159,390 in 1994 and 1993,
respectively) 11,449,172 13,987,654
General Partners (108,324) (82,919)
Net unrealized fair value decrease
from cost:
Secured notes receivable (2,529,000) (2,243,000)
Equity investments (1,332,876) (112,331)
---------- ----------
Total partners' capital 7,478,972 11,549,404
---------- ----------
Total $ 7,661,352 11,843,982
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS
- ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Income:
Secured notes receivable
interest $ 1,085,580 916,590 2,506,148
Short-term investment interest 51,143 19,189 16,164
Other income 22,319 32,193 38,063
--------- --------- ---------
Total income 1,159,042 967,972 2,560,375
--------- --------- ---------
Costs and expenses:
Management fees 205,152 269,647 401,415
Other investment expenses 169,856 -- --
Operating expenses:
Lending operations and
investment management 167,539 517,118 833,919
Administrative and investor
services 279,120 355,671 570,858
Computer services 83,269 104,384 169,539
Professional fees 59,635 92,618 95,734
Interest -- -- 26,637
--------- --------- ---------
Total operating expenses 589,563 1,069,791 1,696,687
--------- --------- ---------
Total costs and expenses 964,571 1,339,438 2,098,102
--------- --------- ---------
Net operating income (loss) 194,471 (371,466) 462,273
Net realized gain from sale of
equity investments 25,813 343,333 799,468
Realized losses from
investment write-downs (2,460,743) (4,326,176) (1,289,209)
Recovery from investments
previously written off -- 27,383 --
--------- --------- ---------
Net realized loss (2,240,459) (4,326,926) (27,468)
Change in net unrealized
fair value:
Equity investments (1,220,545) 2,033,650 (3,404,583)
Secured notes receivable (286,000) 511,000 (1,413,767)
--------- --------- ---------
Net loss $(3,747,004) (1,782,276) (4,845,818)
========= ========= =========
Net realized loss per Unit $ (14) (27) --
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF PARTNERS' CAPITAL
- ------------------------------
<TABLE>
<CAPTION>
For the years ended December 31, 1994, 1993 and 1992:
Net Unrealized Fair Value
Increase (Decrease) From Cost
-----------------------------
Limited General Equity Secured Notes
Partners Partners Investments Receivable Total
-------- -------- ----------- ---------- -----
<S> <C> <C> <C> <C> <C>
Partners' capital,
December 31, 1991 $22,242,005 -- 1,258,602 (1,340,233) 22,160,374
Distributions (3,007,394) (30,374) -- -- (3,037,768)
Net realized loss (27,193) (275) -- -- (27,468)
Change in net unrealized fair
value:
Equity investments -- -- (3,404,583) -- (3,404,583)
Secured notes receivable -- -- -- (1,413,767) (1,413,767)
---------- ------- --------- --------- ----------
Partners' capital,
December 31, 1992 19,207,418 (30,649) (2,145,981) (2,754,000) 14,276,788
Distributions (891,008) (9,000) -- -- (900,008)
Repurchase of limited
partnership interests (45,100) -- -- -- (45,100)
Net realized loss (4,283,656) (43,270) -- -- (4,326,926)
Change in net unrealized fair
value:
Equity investments -- -- 2,033,650 -- 2,033,650
Secured notes receivable -- -- -- 511,000 511,000
---------- ------- --------- --------- ----------
Partners' capital,
December 31, 1993 13,987,654 (82,919) (112,331) (2,243,000) 11,549,404
Distributions (297,003) (3,000) -- -- (300,003)
Repurchase of limited
partnership interests (23,425) -- -- -- (23,425)
Net realized loss (2,218,054) (22,405) -- -- (2,240,459)
Change in net unrealized fair
value:
Equity investments -- -- (1,220,545) -- (1,220,545)
Secured notes receivable -- -- -- (286,000) (286,000)
--------- ------- --------- ---------- ----------
Partners' capital,
December 31, 1994 $11,449,172 (108,324) (1,332,876) (2,529,000) 7,478,972
========== ======= ========= ========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS
- ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash flows from operations:
Interest received $ 761,636 825,257 2,320,463
Other income received 22,319 32,193 38,063
Cash paid to vendors (529,883) (449,280) (521,370)
Cash paid to related parties (727,638) (1,582,259) (1,742,594)
Cash (paid to)/received from
affiliated partnerships (35,121) 184,729 (591,082)
Reimbursement for collection
expenses received from
a portfolio company 187,441 -- --
--------- --------- ----------
Net cash used by operations (321,246) (989,360) (496,520)
--------- --------- ----------
Cash flows from investing activities:
Secured notes receivable issued (2,760,238) (3,944,367) (13,338,747)
Repayments of secured notes
receivable 2,261,515 6,362,019 13,942,754
Repayment of other investments -- 314,976 --
Purchase of equity investments (251,013) (91,298) (200,000)
Proceeds from sale of
equity investments 510 1,709,023 1,137,056
Recovery from investments
previously written off -- 27,383 --
--------- --------- ----------
Net cash (used) provided by
investing activities (749,226) 4,377,736 1,541,063
--------- --------- ----------
Cash flows from financing
activities:
Distributions to Limited and
General Partners (300,003) (1,184,330) (3,602,180)
Repurchase of Limited Partnership
interests (23,425) (45,100) --
--------- --------- ----------
Net cash used by financing
activities (323,428) (1,229,430) (3,602,180)
--------- --------- ----------
Net (decrease) increase in cash
and cash equivalents (1,393,900) 2,158,946 (2,557,637)
Cash and cash equivalents at
beginning of year 2,400,854 241,908 2,799,545
--------- --------- ----------
Cash and cash equivalents at
end of year $ 1,006,954 2,400,854 241,908
========= ========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (continued)
- -----------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Reconciliation of net loss
to net cash used
by operations:
Net loss $(3,747,004) (1,782,276) (4,845,818)
Adjustments to reconcile net
loss to net cash used
by operations:
Net realized gain from sale of
equity investments (25,813) (343,333) (799,468)
Realized losses from investment
write-downs 2,460,743 4,326,176 1,289,209
Recovery from investments
previously written off -- (27,383) --
Amortization of organizational
costs -- -- 4,668
Amortization of discount
related to warrants (608) (43,014) (174,455)
Change in net unrealized
fair value:
Equity investments 1,220,545 (2,033,650) 3,404,583
Secured notes receivable 286,000 (511,000) 1,413,767
Changes in:
Accrued interest on secured and
convertible notes receivable (374,479) (67,508) (27,394)
Accounts payable and accrued
expenses (71,382) 16,774 80,733
Due to related parties (12,155) (724,452) (273,845)
Due from/to affiliated
partnerships (35,121) 184,729 (591,082)
Other, net (21,972) 15,577 22,582
---------- --------- ---------
Net cash used by operations $ (321,246) (989,360) (496,520)
========= ========= =========
Non-cash investing activities:
Additions to equity investments $ 100,556 3,333 56,406
========= ========= =========
Conversion of secured notes
receivable and interest
to equity and other
investments $ 1,229,406 1,787,447 3,333,050
========= ========= =========
Non-cash exercise of
warrants $ 25,813 -- 141,943
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
1. Summary of Significant Accounting Policies
------------------------------------------
Organization
- ------------
Technology Funding Secured Investors II (the "Partnership") is a limited
partnership organized under the laws of the State of California on
August 31, 1984. The purpose of the Partnership is to provide secured
equipment financing to new and developing companies and to acquire, hold,
sell, trade, exchange or otherwise dispose of warrants and/or capital
stock acquired by the Partnership in conjunction with these loans. The
General Partners are Technology Funding Ltd. ("TFL") and Technology
Funding Inc. ("TFI"), a wholly-owned subsidiary of TFL. TFI is the
Managing General Partner.
On September 17, 1987, the minimum number of units of limited partnership
interest ("Units") required to form the Partnership (4,800) had been sold.
On March 31, 1989, the offering terminated after 160,000 Units had been
sold, generating $40,000,000 in cash from Limited Partners and $40,041
from the General Partners. The Partnership Agreement provides that the
Partnership will continue until December 31, 1996, unless further extended
for up to two additional two-year periods from such date if the General
Partners so determine, or the Partnership may be dissolved earlier.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents are principally comprised of cash invested in
demand accounts, money market instruments and commercial paper and are
stated at cost plus accrued interest. The Partnership considers all money
market and short-term investments with an original maturity of three
months or less to be cash equivalents.
Organizational Costs
- --------------------
Organizational costs of $35,000 are amortized over 60 months, using the
straight-line method.
Provision for Income Taxes
- --------------------------
No provision for income taxes has been made by the Partnership, as the
Partnership is not directly subject to taxation. The partners are to
report their respective shares of Partnership income or loss on their
individual tax returns.
The accompanying financial statements are prepared using generally
accepted accounting principles which may not equate to tax accounting,
however, the Partnership's total tax basis in investments was higher than
the reported total cost basis of $10,465,076 by $536,356 as of December
31, 1994.
Net Realized Loss Per Unit
- --------------------------
Net realized loss per Unit is calculated by dividing the weighted average
number of Units outstanding for 1994, 1993, and 1992 of 159,312, 159,757
and 159,940, respectively, into total net realized loss allocated to the
Limited Partners. The General Partners contributed an amount equal to
0.1% of total Limited Partner Capital Contribution and did not receive
Partnership Units.
Investments:
- -----------
The Partnership's method of accounting for investments, in accordance with
generally accepted accounting principles, is the fair value basis used for
investment companies. The fair value of Partnership investments is their
initial cost basis with changes as noted below:
Secured Notes Receivable, Net
-----------------------------
The secured notes receivable portfolio includes accrued interest less the
discount related to warrants and the allowance for loan losses. The
portfolio approximates fair value through inclusion of an allowance for
loan losses. Allowance for loan losses is reviewed quarterly by the
Managing General Partner and is adjusted to a level deemed adequate to
cover possible losses inherent in notes and unfunded commitments. Notes
receivable are placed on nonaccrual status when, in the opinion of the
Managing General Partner, the future collectibility of interest or
principal is in doubt.
In conjunction with the secured notes granted, the Partnership has
received warrants to purchase certain shares of capital stock of the
borrowing company. The cost basis of the warrants and the resulting
discount has been estimated by the Managing General Partner to be 1% of
the principal balance of the original notes made to the borrowing company.
The discount is amortized to interest income on a straight-line basis over
the term of the loan. These warrants are included in the equity
investment portfolio.
Nonrefundable fees received in connection with loan fundings are deferred
and amortized to interest income over the contractual life of the loan
using the effective interest method or the straight-line method if it is
not materially different. Direct loan origination costs mainly consist of
third-party costs and generally are reimbursed by portfolio companies.
Equity Investments
------------------
The fair value for publicly-traded equity investments (marketable equity
securities) is based upon the five-day-average closing sales price or
bid/ask price that is available on a national securities exchange or over-
the-counter market. Certain publicly-traded equity investments may not be
marketable due to selling restrictions. For publicly-traded equity
investments with selling restrictions, an illiquidity discount of 25% is
applied when determining the fair value. Sales of equity investments are
recorded on the trade date. The basis on which cost is determined in
computing realized gains or losses is generally specific identification.
Other equity investments, which are not publicly-traded, are generally
valued utilizing pricing obtained from the most recent round of third
party financings. Valuation is estimated quarterly by the Managing
General Partner. Included in equity investments are convertible or
subordinated notes receivable as repayment of these notes may occur
through conversion into equity investments.
Equity investments with temporary changes in fair value result in
increases or decreases to the unrealized fair value of equity investments.
The cost basis does not change. In the case of an other than temporary
decline in value below cost basis, an appropriate reduction in the cost
basis is recognized as a realized loss. Adjustments to fair value basis
are reflected as "Change in net unrealized fair value of equity
investments." Cost basis adjustments are reflected as "Realized losses
from investment write-downs" on the Statements of Operations.
Other Investments
-----------------
At times, the Partnership will receive other assets in satisfaction of
secured notes receivable or equity investments in portfolio companies.
When the asset is received, existing investment balances in excess of the
fair value of the asset received are written off.
Non-cash Exercise of Warrants
- -----------------------------
Periodically, the Partnership may acquire stock through the non-cash
exercise of warrants. During 1994 and 1992, realized gains resulting from
the non-cash exercise of warrants totaled $25,813 and $141,943,
respectively. During 1993, there were no such realized gains. These
amounts are included in net realized gains from sale of equity
investments.
Distributions
- -------------
Distributions made to the Limited Partners are made among such partners in
the proportion their respective capital accounts bear to the total of all
capital accounts of the group. Unnegotiated distribution checks, if any,
after a reasonable amount of time are recorded as other liabilities on the
Balance Sheets.
2. Change in Net Unrealized Fair Value of Equity Investments
---------------------------------------------------------
In accordance with the Partnership's accounting policy as stated in Note
1, the Statements of Operations include a line item entitled "Change in
net unrealized fair value of equity investments." The table below
discloses details of the changes:
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
(Decrease)/increase in fair
value from cost of marketable
equity securities $ (62,285) 18,500 253,033
Decrease in fair value from
cost of non-marketable
equity securities (1,270,591) (130,831) (2,399,014)
--------- --------- ---------
Net unrealized fair value
decrease from cost
at end of year (1,332,876) (112,331) (2,145,981)
Net unrealized fair value
(decrease) increase from cost
at beginning of year (112,331) (2,145,981) 1,258,602
--------- --------- ---------
Change in net unrealized
fair value of equity
investments $(1,220,545) 2,033,650 (3,404,583)
========= ========= =========
</TABLE>
3. Related Party Transactions
--------------------------
Included in costs and expenses are related party costs as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Management fees $205,152 269,647 401,415
Amortization of
organizational costs -- -- 4,668
Reimbursable operating expenses:
Lending operations and
investment management 204,574 241,285 514,402
Administrative and investor
services 222,488 242,491 383,460
Computer services 83,269 104,384 169,472
</TABLE>
Management fees, payable quarterly, are equal to one half of one percent
of the Partnership's assets under management. Management fees compensate
the General Partners solely for General Partner Overhead (as defined in
the Partnership Agreement) incurred in supervising the operation,
management, and progress of Partnership loans to borrowing companies and
its portfolio of warrants and capital stock of borrowing companies, as
well as for general administration of the Partnership. Currently,
management fees are only paid to the extent that the aggregate amount of
all proceeds received by the Partnership (including warrants exercised
without cash) from the sale or other disposition of borrowing company
equities plus the aggregate fair market value of any equity securities
distributed to the partners exceeds the total management fee payable.
The Partnership reimburses the General Partners and affiliates for
operating expenses incurred in connection with the business of the
Partnership. Reimbursable operating expenses include all expenses other
than Organizational and Offering Expenses and General Partner Overhead (as
defined in the Partnership Agreement). At December 31, 1994, there was
$665 of such expenses due from related parties included in other assets,
compared to $11,490 due to related parties at December 31, 1993.
Under the terms of a computer support agreement, the Partnership
recognized charges from Technology Administrative Management, a division
of TFL, for its share of computer support costs. These amounts are
included in computer services expense.
Within the normal course of business, the Partnership participates in
secured notes receivable granted to non-affiliated borrowing companies by
affiliated partnerships which are also managed by the Managing General
Partner. At December 31, 1994 and 1993, due to affiliated partnerships on
such participations totaled $246 and $35,367, respectively. These amounts
were paid to such affiliated partnerships by the Partnership immediately
following the respective year ends. The Partnership may also
reparticipate such secured notes receivable amongst affiliated
partnerships to meet business needs.
TFL currently has a sublease rental agreement with a Partnership portfolio
company in the computers and computer equipment industry.
4. Distributions
-------------
In early 1993, the Partnership ended its mandatory reinvestment period, as
defined in the Partnership Agreement, and entered its liquidation stage.
In January 1994, distributions totaling $300,003 were declared and paid.
Future distributions will be dependent upon loan repayments from borrowing
companies and available cash, and are expected to fluctuate.
5. Allocation of Profits and Losses
--------------------------------
Net realized profit of the Partnership is allocated based on the beginning
of year partners' capital balances as follows:
(a) first, to those partners with deficit capital account balances
in proportion to such deficits until such deficits have been
eliminated.
(b) second, to the partners as necessary to offset net realized
loss previously allocated to such partners and sales
commissions charged to their capital accounts until each
partner has been allocated cumulative net realized profit
equal to cumulative net realized loss previously allocated to
such partner and its share of sales commissions not already
offset.
(c) third, 99% to the Limited Partners and 1% to the General
Partners until the Limited Partners have been allocated an
amount of cumulative net realized profit that would, if
distributed at the end of the taxable period, result in a
cumulative, compounded annual return to the Limited Partners
of 8% of their adjusted capital contributions.
(d) fourth,
(i) 80% to the Limited Partners
(ii) 20% to the General Partners.
In no event are the General Partners to be allocated less than
1% of the net realized profit of the Partnership.
Net realized loss of the Partnership is allocated as follows:
(a) to the partners as necessary to offset net realized profit
previously allocated to such partners pursuant to (d) above
until each partner has been allocated cumulative net realized
loss equal to the cumulative net realized profit previously
allocated to such partners.
(b) 99% to the Limited Partners and 1% to the General Partners.
Losses in excess of Limited Partner capital accounts are allocated to the
General Partners.
6. Equity Investments
------------------
At December 31, 1994 and December 31, 1993, equity investments consisted
of:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
----------------- -----------------
Investment Cost Fair Cost Fair
Industry/Company Date Position Basis Value Basis Value
- ---------------- ---------- -------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
WARRANTS
- --------
Biotechnology
- -------------
Biocircuits 01/91 10,000 Common
Corporation shares at $2.00;
expiring 01/96 $ 0 0 2,000 20,500
Hybridon, Inc. 03/91 3,572 Common
shares at $3.50;
expiring 03/97 1,250 16,074 1,250 33,799
Computers and Computer Equipment
- --------------------------------
Censtor Corporation 02/91 16,808 Common
shares at $.29;
expiring 5/95 7,500 37,112 7,500 37,112
Komag, Inc. 12/91 955 Common shares
at $21.61; exercised
08/94 -- -- 5,000 5,000
MARCorp 05/92 2,562,043 Series B
Preferred shares
at $1.00; expiring
05/97 0 0 0 0
MARCorp 08/93 333,333 Series B
Preferred shares
at $.75; expiring
08/98 0 0 0 0
MARCorp 03/94 125,000 Series B
Preferred shares
at $.75; expiring
03/99 0 0 -- --
Pinnacle Systems, 05/90 2,083 Common
Inc. shares at $8.00;
expiring 05/95 2,500 14,164 2,500 2,500
Computer Software and Systems
- -----------------------------
Datalogix Inter- 01/92 17,787 Common
national, Inc. shares at $1.87;
expiring 01/97 10,000 10,000 10,000 10,000
Logisticon 08/89 86,957 Common
shares at $.23;
expired 08/94 -- -- 0 0
Logisticon 02/90 65,217 Common
shares at $.23;
expired 08/94 -- -- 0 0
Molecular 10/90 6,111 Common
Simulations shares at $18.00;
(Polygen Corporation) expiring 10/95 0 0 10,000 10,000
Wasatch Education 04/93 111,111 Common
Systems shares at $.50;
Corporation expiring 04/98 0 0 0 41,667
Wasatch Education 04/93 483,750 Common
Systems shares at $.50;
Corporation expiring 04/98 0 0 0 181,406
Wasatch Education 07/93 16,667 Common
Systems shares at $.50;
Corporation expiring 07/98 3,333 0 3,333 6,250
Wasatch Education 02/94 183,333 Common
Systems shares at $.50;
Corporation expiring 02/99 1,667 0 -- --
Wright Express 08/90 114,521 Common
Corporation shares at $.87;
expiring 08/95 -- -- 20,000 20,000
Industrial/Business Automation
- ------------------------------
Cyclean, Inc. 08/88 43,194 Common
shares at $2.74;
expiring 04/01 4,000 0 4,000 15,550
Cyclean, Inc. 03/91 44,589 Common
shares at $3.10;
expiring 04/01 7,500 0 7,500 7,500
Cyclean, Inc. 07/92 20,968 Common
shares at $3.10;
expiring 07/97 2,500 0 2,500 2,500
Cyclean, Inc. 07/92 53,130 Common
shares at $3.10;
expiring 07/02 1,176 0 1,176 1,176
Cyclean, Inc. 09/94 8,064 Common
shares at $3.10;
expiring 03/99 0 0 -- --
Cyclean, Inc. 09/94 9,464 Common
shares at $4.00;
expiring 03/99 0 0 -- --
ElectroScan, 12/91 22,177 Common
Corporation shares at $3.10;
expiring 12/96 0 0 0 0
Medical
- -------
Ash Medical 03/90 2,400 Common
Systems, Inc. shares at $12.50;
expiring 03/95 0 0 0 0
Hemocleanse, Inc. 03/90 10,205 Common
shares at $.92;
expiring 03/95 0 0 0 0
Hemocleanse, Inc. 01/92 12,474 Common
shares at $.50;
expiring 01/97 0 0 0 0
Loredan 04/91 150,000 Common
BioMedical, shares at $.60;
Inc. expiring 04/96 -- -- 0 0
Loredan 05/92 62,500 Common
BioMedical, shares at $.60;
Inc. expiring 05/97 0 0 0 0
Loredan 12/92 166,667 Common
BioMedical, shares at $.30;
Inc. expiring 12/97 0 0 0 0
Microgon, Inc. 10/90 62,500 Common
shares at $.60;
expiring 10/95 0 0 0 0
Microgon, Inc. 09/91 14,583 Common
shares at $.60;
expiring 09/96 0 0 0 0
Microgon, Inc. 06/92 62,500 Common
shares at $.60;
expiring 06/97 0 0 0 0
National Pain 03/92 19,680 Common
Institute, Inc. shares at $8.33;
expiring 03/97 -- -- 20,000 20,000
Resonex, Inc. 08/90 187,500 Common
shares at $1.00;
expiring 08/95 -- -- 0 0
Resonex, Inc. 09/90 46,875 Common
shares at $1.00;
expiring 09/95 -- -- 0 0
Resonex, Inc. 10/91 300,000 Common
shares at $1.00;
expiring 10/96 -- -- 0 0
Resonex, Inc. 10/92 114,000 Common
shares at $1.00;
expiring 10/97 -- -- 0 0
Resonex, Inc. 01/93 340,000 Common
shares at $1.00;
expiring 01/98 -- -- 0 0
Microelectronics
- ----------------
Applied Micro 03/90 14,286 Common
Circuits, Inc. shares at $1.75;
expiring 03/95 5,000 5,000 5,000 5,000
Applied Micro 08/90 14,286 Common
Circuits, Inc. shares at $1.75;
expiring 08/95 5,000 5,000 5,000 5,000
Celeritek 05/89 31,479 Common
shares at $7.50;
exercised 05/94 -- -- 17,336 17,336
Celeritek 09/89 1,500 Common
shares at $7.50;
exercised 08/94 -- -- 7,500 7,500
Elantec, Inc. 05/89 300,000 Common
shares at $.40;
exercised 05/94 -- -- 3,333 3,333
Elantec, Inc. 08/90 109,091 Common
shares at $.55;
expiring 08/95 1,667 1,667 1,667 1,667
Retail/Consumer Products
- ------------------------
Superbin USA, Inc. 02/89 18 Common
shares at $1,794;
expired 02/94 -- -- 2,171 2,171
Superbin USA, Inc. 03/89 8 Common shares
at $1,794; expired
03/94 -- -- 940 940
Superbin USA, Inc. 12/89 8 Common shares at
$1,794; expired
12/94 -- -- 911 911
Semiconductor Equipment
- -----------------------
Quantrad Sensor, 10/94 56,875 Common
Inc. shares at $1.60;
expiring 01/96 0 0 0 0
Quantrad Sensor, 10/94 30,062 Common
Inc. shares at $1.60;
expiring 12/96 0 0 0 0
Telecommunications
- ------------------
All Post, Inc. 08/93 4,394 Common
shares at $.79;
expiring 08/95 -- -- 0 0
Integrated Network 06/91 11,765 Common
Corporation shares at $17.00;
expiring 06/96 20,000 100,002 20,000 20,000
Primary Access 10/90 14,511 Common
Corporation shares at $2.25;
expiring 10/95 2,900 2,900 2,900 2,900
Primary Access 04/91 2,267 Common
Corporation shares at $2.25;
expiring 10/95 600 600 600 600
------- ------- ------- -------
Total warrants 76,593 192,519 164,117 482,318
------- ------- ------- -------
STOCKS:
Computers and Computer Equipment
- --------------------------------
MARCorp 12/89 309,827 Series A
Preferred shares 0 0 0 0
MARCorp 05/92 Convertible
subordinated
debenture,
$1,936,104
principal amount 0 0 0 0
MARCorp 02/93 96,866 Series A
Preferred shares 0 0 0 0
MTI Technology 04/94 20,928 Common
Corporation shares 188,352 74,566 -- --
Industrial/Business Automation
- ------------------------------
ARIX Computer 04/92 34,286 Common
Corporation shares 0 0 0 0
Cyclean, Inc. 09/94 36,042 Series D
Preferred shares 100,556 100,556 -- --
Medical
- -------
Allegiant Physicians 08/94 27,000 Common
Services, Inc. shares 15,000 54,837 -- --
Resonex Holding 02/94 11,402 Common
Corporation shares 841,254 0 -- --
Microelectronics
- ----------------
Celeritek, Inc. 05/94 31,479 Common
shares 253,429 253,429 -- --
Celeritek, Inc. 08/94 1,500 Common
shares 18,750 18,750 -- --
Elantec, Inc. 05/94 81,818 Common
shares 33,636 33,636 -- --
Retail/Consumer Products
- ------------------------
GP Publications, 03/92 200,000 Common
Inc. shares 200,000 200,000 200,000 200,000
GP Publications, 06/93 435,310 Common
Inc. shares 435,310 435,310 435,310 435,310
S-TRON 05/93 Subordinated
debenture (1),
$220,000 principal
amount 221,136 73,511 220,000 114,596
S-TRON 05/93 220,000 Common
shares 0 0 0 0
S-TRON 05/93 506,000 Series 1
Preferred shares 166,827 0 166,827 0
S-TRON 05/93 1,320,000
Series 2
Preferred shares 330,000 110,853 330,000 171,699
Telecommunications
- ------------------
All Post, Inc. 10/94 4,394 Common
shares 3,471 3,471 -- --
Primary Access 11/93 22,000 Common
Corporation shares 52,250 52,250 52,250 52,250
--------- --------- --------- ---------
Total stocks 2,859,971 1,411,169 1,404,387 973,855
--------- --------- --------- ---------
Total equity investments $2,936,564 1,603,688 1,568,504 1,456,173
========= ========= ========= =========
- -- No investment held at end of period.
0 Investment active with a carrying value or fair value of zero.
(1) Subordinated note includes accrued interest. The interest rate
on the subordinated note was 6%.
</TABLE>
<PAGE>
Marketable Equity Securities
- ----------------------------
At December 31, 1994 and 1993, marketable equity securities had
aggregate costs of $205,852 and $7,000, respectively, and aggregate fair
values of $143,567 and $25,500, respectively. The unrealized (losses)
gains at December 31, 1994 and 1993 included gross gains of $51,501 and
$18,500, respectively.
Biocircuits Corporation
- -----------------------
Based on the Managing General Partner's opinion, there has been an other
than temporary decline in the value of the Partnership's investment.
Accordingly, the Partnership had written off its warrant investment of
$2,000 and recorded a decrease in fair value of $48,000 at December 31,
1994.
Celeritek, Inc.
- ---------------
In 1994, the Partnership exercised its warrants to purchase 32,979
common shares. The total recorded cost basis and fair value of $272,179
for the common shares included the warrant cash exercise price of
$247,343 at $7.50 per share (adjusted during 1994) and the warrant cost
basis of $24,836.
Cyclean, Inc.
- -------------
In September 1994, the Partnership restructured its secured notes
previously issued to Cyclean, Inc. In exchange for an extension of the
maturity date and certain interest rate changes, the Partnership
received a warrant for 8,064 shares of common stock exercisable at $3.10
per share expiring March 1999, a second warrant for 9,464 shares of
common stock exercisable at $4.00 per share expiring March 1999, and
36,042 shares of Series D Preferred stock. The Partnership recorded the
cost basis and fair value at $100,556 for the preferred stock received,
and recorded a decrease in fair value of $26,726 for the Partnership's
existing warrants based on the Managing General Partner's judgment. In
addition, the expiration dates for the Partnership's existing Cyclean,
Inc. common stock warrants were extended as part of the restructuring.
Elantec, Inc.
- -------------
In May 1994, the Partnership exercised its warrant without cash and
received 81,818 common shares. The recorded cost basis and fair value
of $33,636 includes a realized gain of $30,303 for shares applied
towards the exercise price of $.40 per share and the warrant cost basis
of $3,333.
Hybridon
- --------
In late 1994, the company completed a Series G Preferred round of
financing in which the Partnership did not participate. The pricing of
this round occurred at a lower price per share than the previous round
and resulted in a decrease of $17,725 in the fair value of the
Partnership's warrant investment.
Integrated Network Corporation
- ------------------------------
In addition to the Partnership's right to exercise its warrant for
common stock, the Partnership has an option to sell its common share
warrant back to the company for $100,002. Accordingly, this amount is
recorded as the fair value at December 31, 1994.
Komag, Inc.
- -----------
In August 1994, the Partnership exercised its warrants without cash and
received 20 common shares. Immediately after the warrant exercise,
these shares were sold for total proceeds of $510 resulting in a
realized loss of $4,490.
MTI Technology Corporation
- --------------------------
System Industries, Inc. (System), a notes receivable portfolio company
of the Partnership, filed for protection under chapter 11 of the United
States Bankruptcy Code in late 1993. In April 1994, substantially all
the assets of System were acquired by MTI Technology Corporation (MTI).
As consideration for the amount due, the Partnership received a new
secured note in MTI, cash from certain MTI common shares sold, and
received an additional 20,928 shares of MTI common stock. A cost basis
of $188,352 was assigned to the common shares received (based on market
value at time of issuance), and an unrealized fair value decrease of
$113,786 was recorded to reflect the market price for these
unrestricted, publicly-traded shares at December 31, 1994.
Pinnacle Systems, Inc.
- ----------------------
In November 1994, Pinnacle Systems, Inc. completed its initial public
offering at $8 per share. The Partnership recorded an increase in fair
value of $11,664 for its existing warrant investment at December 31,
1994 to reflect the publicly-traded market value for common stock.
Allegiant Physicians Services, Inc./National Pain Institute, Inc.
- -----------------------------------------------------------------
In August 1994, the Partnership received 27,000 common shares of
Allegiant Physicians Services, Inc. (Allegiant) in exchange for its
19,680 common share warrants in National Pain Institute, Inc. (NPI) as a
result of Allegiant's acquisition of NPI. The Partnership recorded an
unrealized fair value increase of $39,837 to reflect the market price
for these unrestricted shares at December 31, 1994.
Resonex, Inc./Resonex Holding Corporation
- -----------------------------------------
In February 1994 the Partnership, together with two affiliated
partnerships, assigned their Resonex, Inc. note holdings to Resonex
Holding Corporation ("RHC"), a new company wholly-owned by the
Partnership and the affiliated partnerships. RHC foreclosed on the
assets of Resonex, Inc. The partnerships' ownership of RHC is in
proportion to their respective Resonex, Inc. loan balances. The
Partnership received 11,402 common shares in RHC in exchange for $200
cash and its share of Resonex, Inc. secured notes totaling $1,041,054.
During 1994, a realized loss of $200,000 was recorded based on the
Managing General Partner's opinion, reducing the investment book value
to $841,254 with an estimated fair value of zero at December 31, 1994
pending the results of management actions being taken. The Managing
General Partner's intention is to maximize the net realizable value on
this investment.
S-TRON
- ------
In late 1994, based on the Managing General Partner's estimate, the fair
value of the Partnership's investment had declined. Accordingly, the
Partnership recorded a change in fair value decrease of $103,067 on its
existing investments at December 31, 1994.
Wasatch Education Systems Corporation
- -------------------------------------
In February 1994, the Partnership increased the borrowing capacity on an
accounts receivable line of credit to the company and received 183,333
common share warrants. The Partnership recorded a change in fair value
decrease of $230,990 for the company's restricted warrants based on the
publicly-traded market price of this investment at December 31, 1994.
In 1993, based on a June 1993 financing round and the relatively low
level of common stock trading to set a market price, the fair value for
the company's common stock was estimated to be $1.00 per share. Since
there has not been a recent round of financing, the publicly-traded
market price is used to value warrants at December 31, 1994.
Wright Express Corporation
- --------------------------
In August 1994, Wright Express Corporation was acquired and the
Partnership's warrant was canceled as the price per share paid to equity
investment holders was lower than the warrant exercise price.
Accordingly, the warrant cost basis was written off.
Other Equity Investments
- ------------------------
Biocircuits Corporation, MTI Technology Corporation, Pinnacle Systems,
Inc. and Premier Anesthesia, Inc. are publicly-traded companies. All
such securities are unrestricted. All other equity investments not
specifically discussed above are privately held and no public market for
the sale of these securities exists.
7. Secured Notes Receivable, Net
-----------------------------
At December 31, 1994 and 1993, secured notes receivable consisted of:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Secured notes receivable $ 7,385,322 10,220,234
Accrued interest 279,214 248,031
Unamortized discount related to warrants (136,024) (261,076)
--------- ----------
Total secured notes receivable,
net (cost basis) 7,528,512 10,207,189
Allowance for loan losses (2,529,000) (2,243,000)
--------- ----------
Total secured notes receivable,
net (fair value) $ 4,999,512 7,964,189
========= ==========
</TABLE>
The 1994 notes were primarily from three portfolio companies in the
computers and computer equipment, computer software and systems, and
industrial/business automation industries. The remaining loans were
from approximately ten other companies in a variety of industries. All
notes are secured by specific assets of the borrowing companies.
Interest rates on secured notes receivable at December 31, 1994 ranged
from 10% to 21%. During 1994, approximately $190,000 of accrued
interest was converted to equity investments and approximately $154,000
was written off as a result of notes being placed on nonaccrual status.
During the month of June 1994, the Partnership received full repayment
of principal balance of approximately $1.4 million for a secured note to
a portfolio company in the computers and computer equipment industry.
In addition, the Partnership was reimbursed $187,441 for legal,
consulting, and other external costs incurred in the defense of the
Partnership's secured note rights through bankruptcy court. Of the
amount reimbursed, approximately $130,000 was incurred in prior periods.
The recovery was recorded as a reduction to lending operations and
investment management expense.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Balance, beginning of year $ 2,243,000 2,754,000
--------- ---------
Provision for loan losses 2,356,908 3,481
Secured notes receivable write-downs:
Computers and computer equipment (2,035,000) (300,000)
Medical (35,908) --
Retail/consumer products -- (151,864)
Semiconductor -- (90,000)
--------- ---------
Total write-downs (2,070,908) (541,864)
--------- ---------
Recoveries of previous write-offs:
Semiconductor equipment -- 12,189
Microelectronics -- 14,520
Industrial/business automation -- 674
--------- ---------
Total recoveries -- 27,383
--------- ---------
Change in net unrealized fair value
of secured notes receivable 286,000 (511,000)
--------- ---------
Balance, end of year $ 2,529,000 2,243,000
========= =========
</TABLE>
The provision for loan losses is generally comprised of realized loan
losses, net of recognized recoveries, and a change in net unrealized
fair value based upon the level of loan loss reserves deemed adequate by
the Managing General Partner at the respective year ends.
The allowance for loan losses is adjusted based upon changes to the
portfolio size and risk profile. Although the allowance is established
by evaluating individual debtor repayment ability, the allowance
represents the Managing General Partner's assessment of the portfolio as
a whole.
Notes with a total cost basis of $4,321,823 and $5,884,025 were on
nonaccrual status due to uncertainties of the borrowers' financial
condition at December 31, 1994 and 1993, respectively. The decrease was
primarily due to note write-downs. The Managing General Partner
continues to monitor the progress of these companies. The fair value at
December 31, 1994 is based on the Managing General Partner's estimate of
collectibility of these notes.
The scheduled principal repayments remaining are:
<TABLE>
<CAPTION>
Year Ending Principal
December 31, Repayments
----------- ----------
<S> <C>
1995 $3,937,203
1996 3,054,967
1997 375,000
1998 --
1999 18,152
---------
$7,385,322
=========
</TABLE>
Secured notes receivable which are due on demand are included as
principal repayments for the year ending December 31, 1995. In
addition, the Managing General Partner may at times need to restructure
notes by either extending maturity dates or converting notes to equity
investments to increase the ultimate collectibility of investments to
the Partnership.
8. Litigation and Other Investment Expenses
----------------------------------------
Other investment expenses reflect the cost of legal action with a third
party related to a portfolio company in the retail/consumer products
industry. At December 31, 1994, the Partnership has accrued expenses of
$47,000 for future costs to defend the case. In late 1992, the
Partnership and the portfolio company filed a lawsuit against the third
party claiming that the Partnership had the right to take possession of
collateral, the price paid was fair and did not interfere with the third
party's legal rights. The third party filed a countersuit claiming
otherwise and is seeking relief for $2.6 million. An estimate of
possible loss cannot be determined at this time; however, the Managing
General Partner believes the outcome will not have a material adverse
effect on partners' capital. Accordingly, no amounts have been provided
in the accompanying financial statements for any possible negative
outcome in this matter.
9. Cash and Cash Equivalents
-------------------------
At December 31, 1994 and 1993, cash and cash equivalents consisted of:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Demand accounts $ 2,334 44,970
Money-market accounts 1,004,620 2,355,884
--------- ---------
Total $1,006,954 2,400,854
========= =========
</TABLE>
10. Repurchase of Limited Partnership Interests
-------------------------------------------
Each June, Limited Partners may tender their Units for repurchase by the
Partnership. The amount available in any year to repurchase tendered
Units is limited to 10% of the aggregate principal repayments received
by the Partnership during the preceding calendar year on notes to
borrowing companies. The price paid for any Units tendered is subject
to the restrictions stated in the Partnership Agreement. In 1994 and
1993, 384 and 550 Units were tendered for repurchase totaling $23,425
and $45,100, respectively. No Units were tendered in 1992.
11. Commitments
-----------
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. At December 31, 1994, the Partnership had
unfunded commitments of $337,000 related to accounts receivable lines of
credit.
The Partnership uses the same credit policies in making these
commitments and conditional obligations as it does for on-balance-sheet
instruments. Commitments to extend financing are agreements to lend to
a company as long as there are no violations of any conditions
established in the contract. The credit lines generally have fixed
termination dates or other termination clauses. Since many of the
commitments are expected to expire without being fully drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. All commitments funded require collateral specified in
the agreements.
<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: March 17, 1995 By: /s/Frank R. Pope
--------------------------------------
Frank R. Pope
Executive Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
Signature Capacity Date
--------- -------- ----
/s/Charles R. Kokesh President, Chief March 17, 1995
- ------------------------ Executive Officer
Charles R. Kokesh and Chairman of
Technology Funding Inc.
and Managing General
Partner of Technology
Funding Ltd.
/s/Frank R. Pope Executive Vice March 17, 1995
- ------------------------ President, Chief
Frank R. Pope Financial Officer,
Secretary and a
Director of Technology
Funding Inc. and a
General Partner of
Technology Funding Ltd.
/s/Gregory T. George Group Vice President March 17, 1995
- -------------------------- of Technology Funding
Gregory T. George Inc. and a General
Partner of Technology
Funding Ltd.
The above represents a majority of the Board of Directors of Technology
Funding Inc. and a majority of the General Partners of Technology
Funding Ltd.
<TABLE> <S> <C>
<ARTICLE>6
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FORM 10-K AS OF DECEMBER 31, 1994 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<PERIOD-TYPE> YEAR
<INVESTMENTS-AT-COST> 10,465,076
<INVESTMENTS-AT-VALUE> 6,603,200
<RECEIVABLES> 0
<ASSETS-OTHER> 51,198
<OTHER-ITEMS-ASSETS> 1,006,954
<TOTAL-ASSETS> 7,661,352
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 182,380
<TOTAL-LIABILITIES> 182,380
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,340,848
<SHARES-COMMON-STOCK> 159,006
<SHARES-COMMON-PRIOR> 159,390
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,861,876)
<NET-ASSETS> 7,478,972
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,136,723
<OTHER-INCOME> 22,319
<EXPENSES-NET> 964,571
<NET-INVESTMENT-INCOME> 194,471
<REALIZED-GAINS-CURRENT> (2,434,930)
<APPREC-INCREASE-CURRENT> (1,506,545)
<NET-CHANGE-FROM-OPS> (3,747,004)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 300,003
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 384
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (4,070,432)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 205,152
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,026,404
<AVERAGE-NET-ASSETS> 9,514,188
<PER-SHARE-NAV-BEGIN> 88
<PER-SHARE-NII> (14)
<PER-SHARE-GAIN-APPREC> 0 <F1>
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (2)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 72
<EXPENSE-RATIO> .1
<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. Only taxable gains or losses are allocated in accordance with
the Partnership Agreement.
</FN>
</TABLE>
