<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, 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. 0-16683
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 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
--- ---
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
- ------ -----------------
Except as disclosed in Note 8 to the financial statements, there
are no other 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 1995.
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, 1995, there were 5,258 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,
--------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total income $ 1,305,344 1,159,042 967,972 2,560,375 3,250,112
Net operating (loss)
income (470,089) 194,471 (371,466) 462,273 1,191,178
Net realized gain from sales
of equity investments 2,438,619 25,813 343,333 799,468 373,099
Realized losses from
investment write-downs (2,367,660) (2,460,743) (4,326,176) (1,289,209) (351,020)
Recoveries from investments
previously written off 28,690 -- 27,383 -- --
Net realized (loss)
income (370,440) (2,240,459) (4,326,926) (27,468) 1,213,257
Change in net unrealized
fair value:
Equity investments 1,604,675 (1,220,545) 2,033,650 (3,404,583) 990,743
Secured notes receivable 346,000 (286,000) 511,000 (1,413,767) (223,550)
Net income (loss) 1,580,235 (3,747,004) (1,782,276) (4,845,818) 1,980,450
Net realized (loss)
income per Unit (2) (14) (27) -- 7
Total assets 10,266,004 7,661,352 11,843,982 15,516,042 24,581,830
Distributions declared (466,804) (300,003) (900,008) (3,037,768) (3,636,385)
</TABLE>
Refer to financial statement notes 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 1995, net cash provided by operating activities totaled
$344,675. The Partnership paid management fees of $148,338 to
the Managing General Partner and reimbursed related parties for
operating expenses of $349,985, and received $1,801 from
affiliated partnerships for net loan participations. Other
operating expenses of $435,420 were paid, and interest and
other income of $1,266,488 and $10,129, respectively, were
received.
During 1995, the Partnership issued $770,665 in secured notes
receivable primarily to portfolio companies in the computers
and computer equipment and medical industries and purchased
$3,278 in equity investments. Repayments of secured notes
receivable provided cash of $1,128,063. Proceeds from sales of
equity investments and recoveries from investments previously
written off totaled $3,379,417 and $28,690, respectively. As
of December 31, 1995, the Partnership was committed to fund up
to an additional $208,000 on term note financings to existing
borrowing companies.
During 1995, Datalogix International, Inc., Celeritek, Inc. and
Elantec, Inc. completed their initial public offerings
("IPOs"). Hybridon, Inc. completed its IPO in early 1996. The
Partnership sold its Datalogix International, Inc. and a
portion of its Celeritek, Inc. investments for total proceeds
of $136,944. Although investments in Celeritek, Inc., Elantec,
Inc. and Hybridon, Inc. are subject to certain selling
restrictions, their IPOs indicate potential future liquidity.
In December 1995, the Partnership sold its remaining 50%
ownership in Imagine Publishing, Inc. (formerly GP
Publications, Inc.) for net cash proceeds of $2,450,316. The
first half of the investment was sold in 1993 for net proceeds
of $572,917.
All management fees which are due have been paid through
December 31, 1995. 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, 1995 were $5,058,537.
Operating cash reserves combined with proceeds from the sales
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
- ---------------------
1995 compared to 1994
- ---------------------
Net income was $1,580,235 compared to a net loss of $3,747,004
in 1995 and 1994, respectively. The change was primarily due
to a $2,825,220 increase in the change in net unrealized fair
value of equity investments, and a $2,412,806 increase in net
realized gain from sales of equity investments, partially
offset by a $742,232 increase in total operating expenses.
In 1995, the increase in equity investment fair value of
$1,604,675 was primarily due to the reversal of unrealized
losses, which were realized from investments write-downs for
portfolio companies in the medical and retail/consumer products
industries. In 1994, the decrease of $1,220,545 was mostly due
to a net decrease in the fair value of the Partnership's
holdings in a portfolio company in the medical industry.
Net realized gain from sales of equity investments totaled
$2,438,619 primarily from the sales of Imagine Publishing, Inc.
as discussed in the above section, 3Com Corporation, and
Datalogix International, Inc. In 1994, the realized gain of
$25,813 mostly related to the non-cash exercise of Elantec,
Inc. warrants.
Total operating expenses were $1,331,795 and $589,563 in 1995
and 1994, respectively. As discussed in Note 3 to the
financial statements, the 1995 operating expenses include
additional administrative and investors services expenses of
$877,965. In addition, the 1994 operating expenses were
reduced by collection expense reimbursements of $187,441 from a
portfolio company in the computers and computer equipment
industry, of which approximately $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 additional expenses in 1995 been
recorded in prior years and had there been no such recovery of
prior period costs in 1994, total operating expenses would have
been $510,515 and $775,097 for 1995 and 1994, respectively.
The decrease was primarily due to lower administrative and
investor services, and lending operations and investment
management expenses from lower overall portfolio activities.
The Partnership recorded an increase in the fair value of
secured notes receivable of $346,000 in 1995 compared to a
decrease of $286,000 in 1994, based upon the level of loan loss
reserves deemed adequate by the Managing General Partner at the
respective year ends. The 1995 increase was primarily due to
the reversal of unrealized losses, which were realized from
investment write-downs for a portfolio company in the medical
industry.
Secured notes receivable interest income was $1,229,935 and
$1,085,580 in 1995 and 1994, respectively. The increase was
mostly due to cash interest payments received from portfolio
companies in the semiconductor equipment, medical, and
telecommunication industries which had been on nonaccrual
status.
In 1995 and 1994, the Partnership realized losses from
investments write-downs of $2,367,660 and $2,460,743
respectively. The 1995 write-downs primarily related to equity
investments in portfolio companies in the medical and retail
and consumer products industries. Write-downs in 1994 mostly
related to secured notes receivable to a portfolio company in
the computers and computer equipment industry.
There is no established source of market value information for
the Partnership's portfolio of equity investments and secured
notes receivable. 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 portfolio company
investments may significantly impact future 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 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
sales 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 Imagine Publishing, 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. As discussed above, had the additional
expenses in 1995 been recorded in prior years and had there
been no collection expense reimbursement of prior period costs
in 1994, total operating expenses would have been $775,097 and
$1,133,495 in 1994 and 1993, respectively. 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.
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 1995, the Partnership incurred $148,338 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, 1995. General Partner Overhead includes the
General Partners' share of rent and utilities, and certain
salaries and benefits paid by the General Partners in
performing their obligations to the Partnership.
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, or its investee companies, have 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 Partnership Agreement.
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, 1995 and 1994
Statements of Operations for the years ended
December 31, 1995, 1994 and 1993
Statements of Partners' Capital for the years ended
December 31, 1995, 1994 and 1993
Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993
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, 1995.
(c) Financial Data Schedule for the year ended and as of
December 31, 1995 (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, 1995 and 1994, and the related statements of operations, partners'
capital, and cash flows for each of the years in the three-year period
ended December 31, 1995. 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 certain
loans and securities owned, by correspondence with the individual
borrowing and investee companies, and a physical examination of
securities held by a safeguarding agent as of December 31, 1995 and
1994. 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, 1995 and 1994, and the
results of its operations and its cash flows for each of the years in
the three-year period ended December 31, 1995 in conformity with
generally accepted accounting principles.
San Francisco, California KPMG Peat Marwick LLP
March 22, 1996
<PAGE>
BALANCE SHEETS
- --------------
<TABLE>
<CAPTION>
December 31,
-------------------------------
1995 1994
---- ----
<S> <C> <C>
ASSETS
Investments:
Secured notes receivable, net
(cost basis of $4,535,031 and
$7,528,512 in 1995 and 1994,
respectively) $ 2,352,031 4,999,512
Equity investments (cost basis
of $2,533,378 and $2,936,564 in
1995 and 1994, respectively) 2,805,177 1,603,688
---------- ----------
Total investments 5,157,208 6,603,200
Cash and cash equivalents 5,058,537 1,006,954
Other assets 50,259 51,198
---------- ----------
Total $10,266,004 7,661,352
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 340,131 131,356
Due to related parties 872,822 --
Due to affiliated partnerships 2,047 246
Distributions payable 466,804 --
Other liabilities 47,116 50,778
---------- ----------
Total liabilities 1,728,920 182,380
Commitments (Notes 3, 10 and 11)
Partners' capital:
Limited Partners
(Units outstanding of 157,829
and 159,006 in 1995 and 1994,
respectively) 10,592,289 11,449,172
General Partners (144,004) (108,324)
Net unrealized fair value (decrease)
increase from cost:
Secured notes receivable (2,183,000) (2,529,000)
Equity investments 271,799 (1,332,876)
---------- ----------
Total partners' capital 8,537,084 7,478,972
---------- ----------
Total $10,266,004 7,661,352
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS
- ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income:
Secured notes receivable
interest $ 1,229,935 1,085,580 916,590
Short-term investment interest 65,280 51,143 19,189
Other income 10,129 22,319 32,193
--------- --------- ---------
Total income 1,305,344 1,159,042 967,972
--------- --------- ---------
Costs and expenses:
Management fees 148,338 205,152 269,647
Other investment expenses 295,300 169,856 --
Operating expenses:
Lending operations and
investment management 145,015 167,539 517,118
Administrative and investor
services 1,068,625 279,120 355,671
Computer services 70,057 83,269 104,384
Professional fees 48,098 59,635 92,618
--------- --------- ---------
Total operating expenses 1,331,795 589,563 1,069,791
--------- --------- ---------
Total costs and expenses 1,775,433 964,571 1,339,438
--------- --------- ---------
Net operating (loss) income (470,089) 194,471 (371,466)
Net realized gain from sales of
equity investments 2,438,619 25,813 343,333
Realized losses from
investment write-downs (2,367,660) (2,460,743) (4,326,176)
Recoveries from investments
previously written off 28,690 -- 27,383
--------- --------- ---------
Net realized loss (370,440) (2,240,459) (4,326,926)
Change in net unrealized
fair value:
Equity investments 1,604,675 (1,220,545) 2,033,650
Secured notes receivable 346,000 (286,000) 511,000
--------- --------- ---------
Net income (loss) $ 1,580,235 (3,747,004) (1,782,276)
========= ========= =========
Net realized loss
per Unit $ (2) (14) (27)
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF PARTNERS' CAPITAL
- -------------------------------
<TABLE>
<CAPTION>
For the years ended December 31, 1995, 1994 and 1993:
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, 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
Distributions (434,828) (31,976) -- -- (466,804)
Repurchase of limited
partnership interests (55,319) -- -- -- (55,319)
Net realized loss (366,736) (3,704) -- -- (370,440)
Change in net unrealized fair
value:
Equity investments -- -- 1,604,675 -- 1,604,675
Secured notes receivable -- -- -- 346,000 346,000
---------- ------- --------- --------- ----------
Partners' capital,
December 31, 1995 $10,592,289 (144,004) 271,799 (2,183,000) 8,537,084
========== ======= ========= ========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS
- ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating
activities:
Interest received $ 1,266,488 761,636 825,257
Other income received 10,129 22,319 32,193
Cash paid to vendors (435,420) (529,883) (449,280)
Cash paid to related parties (498,323) (727,638) (1,582,259)
Cash received from (paid to)
affiliated partnerships 1,801 (35,121) 184,729
Reimbursement for collection
expenses received from
a portfolio company -- 187,441 --
--------- --------- ----------
Net cash provided (used)
by operating activities 344,675 (321,246) (989,360)
--------- --------- ----------
Cash flows from investing
activities:
Secured notes receivable issued (770,665) (2,760,238) (3,944,367)
Repayments of secured notes
receivable 1,128,063 2,261,515 6,362,019
Repayment of other investments -- -- 314,976
Purchase of equity investments (3,278) (251,013) (91,298)
Proceeds from sales of
equity investments 3,379,417 510 1,709,023
Recoveries from investments
previously written off 28,690 -- 27,383
--------- --------- ----------
Net cash provided (used) by
investing activities 3,762,227 (749,226) 4,377,736
--------- --------- ----------
Cash flows from financing
activities:
Distributions to Limited and
General Partners -- (300,003) (1,184,330)
Repurchase of Limited Partnership
interests (55,319) (23,425) (45,100)
--------- --------- ----------
Net cash used by financing
activities (55,319) (323,428) (1,229,430)
--------- --------- ----------
Net increase (decrease) in cash
and cash equivalents 4,051,583 (1,393,900) 2,158,946
Cash and cash equivalents at
beginning of year 1,006,954 2,400,854 241,908
--------- --------- ----------
Cash and cash equivalents at
end of year $ 5,058,537 1,006,954 2,400,854
========= ========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (continued)
- -----------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Reconciliation of net income (loss)
to net cash provided (used)
by operating activities:
Net income (loss) $ 1,580,235 (3,747,004) (1,782,276)
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Net realized gain from sales of
equity investments (2,438,619) (25,813) (343,333)
Realized losses from investment
write-downs 2,367,660 2,460,743 4,326,176
Recoveries from investments
previously written off (28,690) -- (27,383)
Amortization of discount
related to warrants (7,962) (608) (43,014)
Change in net unrealized
fair value:
Equity investments (1,604,675) 1,220,545 (2,033,650)
Secured notes receivable (346,000) 286,000 (511,000)
Changes in:
Accrued interest on secured and
convertible notes receivable (30,765) (374,479) (67,508)
Accounts payable and accrued
expenses (28,409) (71,382) 16,774
Due to/from related parties 873,487 (12,155) (724,452)
Due from/to affiliated
partnerships 1,801 (35,121) 184,729
Other, net 6,612 (21,972) 15,577
---------- --------- ---------
Net cash provided (used)
by operating activities: $ 344,675 (321,246) (989,360)
========= ========= =========
Non-cash investing activities:
Additions to equity investments $ 142,432 100,556 3,333
========= ========= =========
Conversion of secured notes
receivable and interest
to equity investments $ 1,752,641 1,229,406 1,787,447
========= ========= =========
Non-cash exercise of
warrants $ 83,619 25,813 --
========= ========= =========
</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.
Preparation of Financial Statements and Use of Estimates
- --------------------------------------------------------
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
This required management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The financial statements include non-marketable investments of $4,553,944
and $6,459,633 (53% and 86% of partners' capital) as of December 31, 1995
and 1994, respectively, whose values have been estimated by the Managing
General Partner in the absence of readily ascertainable market values.
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 investments existed, and the differences could be
material. In addition, for certain publicly traded investments that may
not be marketable due to selling restrictions, the Managing General
Partner has applied an illiquidity discount of 25% in determining fair
value as mentioned below.
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.
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.
The Partnership's total tax basis in investments was higher than the
reported total cost basis of $7,068,409 by $1,888,444 as of December 31,
1995.
Net Realized Income (Loss) Per Unit
- -----------------------------------
Net realized income (loss) per Unit is calculated by dividing the weighted
average number of Units outstanding for 1995, 1994, and 1993 of 158,614,
159,312 and 159,757, respectively, into total net realized income (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 certain secured notes issued, the Partnership receives
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 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 and
subordinated notes receivable as repayment of these notes generally 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 1995 and 1994, realized gains resulting from
the non-cash exercise of warrants totaled $83,619 and $25,813,
respectively. During 1993, there were no such realized gains. These
amounts are included in net realized gain from sales 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,
---------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Increase (decrease) in fair
value from cost of marketable
equity securities $ 92,684 (62,285) 18,500
Increase (decrease) in fair value
from cost of non-marketable
equity securities 179,115 (1,270,591) (130,831)
--------- --------- ---------
Net unrealized fair value
increase (decrease) from cost
at end of year 271,799 (1,332,876) (112,331)
Net unrealized fair value
decrease from cost
at beginning of year (1,332,876) (112,331) (2,145,981)
--------- --------- ---------
Change in net unrealized
fair value of equity
investments $ 1,604,675 (1,220,545) 2,033,650
========= ========= =========
</TABLE>
3. Related Party Transactions
--------------------------
Included in costs and expenses are related party costs as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Management fees $ 148,338 205,152 269,647
Reimbursable operating expenses:
Lending operations and
investment management 117,938 204,574 241,285
Administrative and investor
services 1,035,477 222,488 242,491
Computer services 70,057 83,269 104,384
</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. 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 Managing General Partner and affiliates for
operating expenses incurred in connection with the business of the
Partnership. Reimbursable operating expenses include expenses (other than
Organizational and Offering and General Partner Overhead) such as
investment operations, administrative and investor services and computer
services. During late 1995, operating cost allocations to the Partnership
were reevaluated. The Managing General Partner determined that it had not
fully recovered allocable overhead as permitted by the Partnership
Agreement. As a result, the Partnership was charged additional
administrative and investor services costs of $877,965, which were not
previously recognized by the Partnership. This charge consisted of
$56,685, $57,167, $63,704 and $700,409 related to 1995, 1994, 1993 and
prior years, respectively. If this charge had been recorded in prior
years, total operating expenses would have been $510,515, $646,730, and
$1,133,495 for 1995, 1994, and 1993, respectively. At December 31, 1995,
expenses due to related parties totaled $872,822, compared to due from
related parties of $665 included in other assets at December 31, 1994.
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 issued to non-affiliated borrowing companies by
affiliated partnerships which are also managed by the Managing General
Partner. The Partnership may also reparticipate such secured notes
receivable amongst affiliated partnerships to meet business needs. At
December 31, 1995 and 1994, due to affiliated partnerships on such
participations totaled $2,047 and $246, respectively. These amounts were
paid to such affiliated partnerships by the Partnership immediately
following the respective year ends.
In order to increase the future investment returns from several portfolio
companies, the Partnership has contracted directly with Affiliates of the
General Partners or the General Partners as provided in Article 3 sections
3.02(d) and 3.06. These agreements generally provide for the Partnership
to make current payment of the direct expenses of the Affiliate or the
General Partners related to such recovery efforts as well as a performance
incentive payment based on the amount of incremental recovery less
expenses previously paid, which expenses will be returned to the
Partnership from recoveries. The General Partners have agreed to waive
any profit interest payable pursuant to Article 8 Section 8.01(d)
attributable to any recoveries from the portfolio companies subject to
these separate written agreements. These agreements are subject to review
by legal counsel for the Partnership and may be modified to assure
conformity with the terms of the Partnership's Amended and Restated
Limited Partnership Agreement. Consistent with note participations as
discussed above, the agreements provide for a pro-rata payment of expenses
and incentive payments and a pro-rata participation in the results of
recovery efforts.
In 1995, 1994, and 1993, TFL had a sublease rental agreement with a
Partnership portfolio company in the computers and computer equipment
industry. The terms of this agreement were similar to those which would
apply to an unrelated party. This agreement was terminated in the fourth
quarter of 1995.
4. Distributions Payable
---------------------
In early 1993, the Partnership ended its mandatory reinvestment period, as
defined in the Partnership Agreement, and entered its liquidation stage.
In December 1995, distributions totaling $466,804 were declared and will
be paid in March 1996. 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, 1995 and 1994, equity investments consisted of:
<TABLE>
<CAPTION>
December 31,1995 December 31, 1994
---------------- -----------------
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 2,500 Common
Corporation shares at $8.00;
expiring 01/96 $ 0 300 0 0
Hybridon, Inc. 03/91 3,572 Common
shares at $3.50;
expiring 03/97 1,250 16,074 1,250 16,074
Computers and Computer Equipment
- --------------------------------
Censtor Corporation 02/91 16,808 Common
shares at $.29;
exercised 05/95 -- -- 7,500 37,112
MARCorp 05/92 2,562,043 Series B
Preferred shares
at $1.00; expiring
05/97 -- -- 0 0
MARCorp 08/93 333,333 Series B
Preferred shares
at $.75; expiring
08/98 -- -- 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;
exercised 02/95 -- -- 2,500 14,164
Computer Software and Systems
- -----------------------------
Datalogix Inter- 01/92 17,787 Common
national, Inc. shares at $1.87;
exercised 06/95 -- -- 10,000 10,000
Molecular 10/90 6,111 Common
Simulations shares at $18.00;
expired 10/95 -- -- 0 0
Wasatch Education 04/93 111,111 Common
Systems shares at $.50;
Corporation expiring 04/98 -- -- 0 0
Wasatch Education 04/93 483,750 Common
Systems shares at $.50;
Corporation expiring 04/98 -- -- 0 0
Wasatch Education 07/93 16,667 Common
Systems shares at $.50;
Corporation expiring 07/98 -- -- 3,333 0
Wasatch Education 02/94 183,333 Common
Systems shares at $.50;
Corporation expiring 02/99 -- -- 1,667 0
Wasatch Education 06/95 959,546 Common
Systems shares at $0.50;
Corporation expiring 06/00 5,000 179,915 -- --
Industrial/Business Automation
- ------------------------------
Cyclean, Inc. 08/88 43,194 Common
shares at $2.74;
expiring 04/01 0 0 4,000 0
Cyclean, Inc. 03/91 44,589 Common
shares at $3.10;
expiring 04/01 0 0 7,500 0
Cyclean, Inc. 07/92 20,968 Common
shares at $3.10;
expiring 07/97 0 0 2,500 0
Cyclean, Inc. 07/92 53,130 Common
shares at $3.10;
expiring 07/02 0 0 1,176 0
Cyclean, Inc. 09/94 8,064 Common
shares at $3.10;
expiring 03/99 0 0 0 0
Cyclean, Inc. 09/94 9,464 Common
shares at $4.00;
expiring 03/99 0 0 0 0
Cyclean, Inc. 01/95 9,750 Common
shares at $4.00;
expiring 01/00 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;
expired 03/95 -- -- 0 0
Hemocleanse, Inc. 03/90 10,205 Common
shares at $.92;
exercised 03/95 -- -- 0 0
Hemocleanse, Inc. 01/92 12,474 Common
shares at $.50;
expiring 01/97 0 0 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;
expired 10/95 -- -- 0 0
Microgon, Inc. 09/91 14,583 Common
shares at $.60;
expiring 09/96 -- -- 0 0
Microgon, Inc. 06/92 62,500 Common
shares at $.60;
expiring 06/97 -- -- 0 0
Microelectronics
- ----------------
Applied Micro 03/90 14,286 Common
Circuits, Inc. shares at $1.75;
expired 05/95 -- -- 5,000 5,000
Applied Micro 08/90 14,286 Common
Circuits, Inc. shares at $1.75;
expired 08/95 -- -- 5,000 5,000
Elantec, Inc. 08/90 109,091 Common
shares at $.55;
exercised 07/95 -- -- 1,667 1,667
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
- ------------------
Integrated Network 06/91 5,882 Common
Corporation shares at $17.00;
expiring 06/96 10,000 0 20,000 100,002
Primary Access 10/90 13,060 Common
Corporation shares at $2.25;
exercised 06/95 -- -- 2,900 2,900
Primary Access 04/91 2,040 Common
Corporation shares at $2.25;
exercised 06/95 -- -- 600 600
------- ------- ------- -------
Total warrants 16,250 196,289 76,593 192,519
------- ------- ------- -------
STOCKS:
Computers and Computer Equipment
- --------------------------------
Censtor Corporation 05/95 4,538 Common
shares 2,395 2,395 -- --
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 43,949 188,352 74,566
Computer Software and Systems
- -----------------------------
Wasatch Education 06/95 1,741,550
Systems Series C
Corporation Preferred
shares 1,741,550 1,741,550 -- --
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 100,556 100,556 100,556 100,556
Cyclean, Inc. 01/95 51,051 Series D
Preferred shares 142,432 142,432 -- --
Cyclean of 03/95 Class A LLC Unit -
Los Angeles, LLC 45% ownership 11,091 11,091 -- --
Medical
- -------
Allegiant Physicians 08/94 13,500 Common
Services, Inc. shares 4,821 22,500 15,000 54,837
Allegiant Physicians 11/95 7,500 Common
Services, Inc. shares 2,679 12,500 -- --
Hemocleanse, Inc. 03/95 5,512 Common
shares 5,071 5,071 -- --
Resonex Holding 02/94 11,402 Common
Corporation shares 0 0 841,254 0
Microelectronics
- ----------------
Celeritek, Inc. 05/94 47,219 Common
shares 253,429 365,825 253,429 253,429
Celeritek, Inc. 08/94 2,250 Common
shares -- -- 18,750 18,750
Elantec, Inc. 05/94 8,182 Common
shares 33,636 61,241 33,636 33,636
Elantec, Inc. 07/95 3,409 Common
shares 19,270 25,517 -- --
Retail/Consumer Products
- ------------------------
Imagine Publishing, 03/92 200,000 Common
Inc. (formerly GP shares
Publications, Inc.) -- -- 200,000 200,000
Imagine Publishing 06/93 435,310 Common
Inc. (formerly GP shares
Publications, Inc.) -- -- 435,310 435,310
S-TRON 05/93 Subordinated
debenture (1),
$220,000 principal
amount 0 0 221,136 73,511
S-TRON 05/93 220,000 Common
shares 0 0 0 0
S-TRON 05/93 506,000 Series 1
Preferred shares 0 0 166,827 0
S-TRON 05/93 1,320,000
Series 2
Preferred shares 0 0 330,000 110,853
Telecommunications
- ------------------
All Post, Inc. 10/94 4,394 Common
shares 3,471 3,471 3,471 3,471
Primary Access 11/93 22,000 Common
Corporation shares -- -- 52,250 52,250
3Com Corporation 06/95 1,597 Common
shares in Escrow 8,375 70,790 -- --
--------- --------- --------- ---------
Total stocks 2,517,128 2,608,888 2,859,971 1,411,169
--------- --------- --------- ---------
Total equity investments $2,533,378 2,805,177 2,936,564 1,603,688
========= ========= ========= =========
- -- 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, 1995 and 1994, marketable equity securities had
aggregate costs of $510,580 and $205,852, respectively, and aggregate
fair values of $603,264 and $143,567, respectively. The net unrealized
gain (loss) at December 31, 1995 and 1994 included gross gains of
$237,087 and $51,501, respectively.
Allegiant Physicians Services, Inc.
- -----------------------------------
In August 1995, the Partnership exercised its option to sell half of its
common stock holdings to the company for $22,500 and realized a gain of
$15,000. In November 1995, the Partnership received an additional 7,500
common shares from the company as settlement for the company's failure
to register the Partnership's common stock holdings by March 1995 as
stipulated in a 1994 agreement. The Partnership has options to sell all
shares to the company at a later date. An unrealized fair value of
$35,000 was recorded to reflect the option value which is greater than
the market value for the Partnership's marketable, unrestricted common
shares at December 31, 1995.
Celeritek, Inc.
- ---------------
In December 1995, Celeritek, Inc. completed its IPO after effecting a
common stock 3-for-2 split. The Partnership sold 3,233 of its post-
split common shares acquired in August 1994 and April 1995 into the IPO
for proceeds of $22,552 and realized a gain of $524. The Partnership
recorded a $112,396 increase in fair value to reflect the market value
of $365,825 for its remaining shares at December 31, 1995. The market
value reflects a 25% discount for certain lockup restrictions.
Censtor Corporation
- -------------------
In May 1995, the Partnership exercised its warrant without cash and
received 4,538 common shares. The recorded common share cost basis was
$2,395, which is net of a realized loss.
Cyclean, Inc./Cyclean of Los Angeles, LLC
- -----------------------------------------
In January 1995, the Partnership obtained the right to receive 51,051
Series D Preferred shares with a twelve month vesting schedule in
exchange for a one year maturity date extension of secured notes
receivable. At December 31, 1995, all 51,051 shares were fully vested
with a recorded cost basis and fair value of $142,432.
In March 1995, Cyclean, Inc. ("Cyclean") formed Cyclean of Los Angeles,
LLC ("Cyclean LLC") and contributed certain assets and contracts to the
new entity. Cyclean LLC is completing a new round of financing through
the offering of Class A LLC Units. As a result of this transaction, one
of the Partnership's secured notes receivable was transferred from
Cyclean to Cyclean LLC with modified terms; Cyclean has guaranteed note
repayments. The Partnership received a participated percentage of one
Class A LLC Unit in exchange for certain interest payments and late
charges totaling $11,091. The Partnership is also entitled to royalty
payments and additional Series D Preferred shares based on the total
proceeds raised from the Cyclean LLC offering, which is expected to be
completed by early 1996.
In December 1995, all warrant cost bases totaling $15,176 were written
off as these warrants are expected to be canceled in 1996 at the close
of the next financing round.
Datalogix International, Inc.
- -----------------------------
In June 1995, Datalogix International, Inc. completed its initial public
offering. The Partnership exercised its warrant without cash and sold
all of its resulting common shares in the company for total proceeds of
$114,392 and a realized gain of $104,392.
Elantec, Inc.
- -------------
In July 1995, the Partnership exercised its warrant without cash and
received 34,091 common shares. The recorded common shares cost basis of
$19,270 included a realized gain of $17,603 and a warrant cost basis of
$1,667.
Then in October 1995, Elantec, Inc. completed its IPO after a 1-for-10
reverse common stock split. The Partnership recorded an increase in
fair value of $33,852 to reflect the market value of its 11,591 post-
split shares at December 31, 1995. The market value reflects a 25%
discount for certain lockup restrictions.
Imagine Publishing, Inc. (formerly GP Publications, Inc.)
- ---------------------------------------------------------
In December 1995, the Partnership sold its remaining 50% investment of
635,310 common shares to a third party for net proceeds of $2,450,316
resulting in a realized gain of $1,815,006. The first half of the
investment was sold to the same buyer in October 1993 for net proceeds
of $572,917.
Integrated Network Corporation
- ------------------------------
During June 1995, the Partnership exercised its option to sell half of
its warrant holdings to the company for $100,000, and realized warrant
income of $90,000, which was included in "secured notes receivable
interest income" on the Statements of Operations. The Partnership does
not have this option for its remaining warrant.
Pinnacle Systems, Inc.
- ----------------------
In February 1995, the Partnership exercised its warrant without cash and
received 1,971 common shares. In May 1995, the Partnership sold the
common shares for total proceeds of $37,449 and realized a gain of
$34,949.
Primary Access Corporation/3Com Corporation
- -------------------------------------------
In June 1995, Primary Access Corporation ("Primary Access") was acquired
by 3Com Corporation ("3Com"), a public company. Immediately prior to
the acquisition, the Partnership exercised its Primary Access common
warrant holdings without cash and received 12,686 shares of Primary
Access common stock with a cost basis of $31,504, which reflects a
realized gain of $28,004 and a warrant cost basis of $3,500. Upon the
acquisition, these shares, along with the existing 22,000 Primary Access
common shares held by the Partnership, were then exchanged for 7,984
3Com common shares, of which 7,186 shares were sold for total proceeds
of $495,024 and realized a gain of $419,645 in July 1995. The remaining
798 shares, which became 1,597 shares after a 2-for-1 stock split in
August 1995, are held in an escrow account until March 21, 1996 to
indemnify 3Com for any loss it may incur as a result of any contractual
breach of the merger agreement by Primary Access. The Partnership
recorded an increase in the change in fair value of $62,415 to reflect
the market value at December 31, 1995 for these unrestricted shares.
Resonex Holding Corporation
- ---------------------------
Resonex Holding Corporation has licensed certain technologies and is
currently obtaining additional bids from other potential licensees. The
company may wind down its operations by mid-1996. Based on the opinion
of the Managing General Partner, there has been an other than temporary
decline in the Partnership's investment value and accordingly, the
common stock cost basis of $841,254 and secured notes receivable
investments totaling $536,962, which were on nonaccrual status, were
written off.
S-Tron
- ------
The company was unsuccessful in its efforts to obtain a major government
contract; as a result, operations will likely cease by early 1996.
Based on the Managing General Partner's opinion, there has been an other
than temporary decline in the fair value of the Partnership's
investment. Accordingly, the Partnership has written off the cost basis
of its Preferred stock investment of $496,827 and recorded a write-down
of $221,136 on its subordinated note investment.
Wasatch Education Systems Corporation
- -------------------------------------
In June 1995, the Partnership converted its secured notes receivable
totaling $1,741,550 into 1,741,550 Series C Preferred shares at $1.00
per share. As part of the conversion, the Partnership wrote off or
reversed accrued interest totaling $357,495. In addition, the
Partnership's existing common warrants were replaced with new five-year
warrants with similar exercise prices. New warrants were also received
as a result of previous maturity extensions. The Partnership recorded
an unrealized fair value of $179,915 to reflect the restricted market
value of these warrants at December 31, 1995.
Other Equity Investments
- ------------------------
Biocircuits Corporation and MTI Technology Corporation 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 existed at
December 31, 1995.
7. Secured Notes Receivable, Net
-----------------------------
At December 31, 1995 and 1994, secured notes receivable consisted of:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Secured notes receivable $ 4,797,690 7,385,322
Accrued interest 4,306 279,214
Unamortized discount (266,965) (136,024)
--------- ---------
Total secured notes receivable,
net (cost basis) 4,535,031 7,528,512
Allowance for loan losses (2,183,000) (2,529,000)
--------- ---------
Total secured notes receivable,
net (fair value) $ 2,352,031 4,999,512
========= =========
</TABLE>
The 1995 notes were primarily from two portfolio companies in the
computers and computer equipment and industrial/business automation
industries. The remaining loans were from approximately four 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, 1995 ranged from 10% to 20.91%.
During 1995, $1,741,550 of secured note principal and $11,091 of accrued
interest were converted to equity investments, and secured notes
totaling $536,962 were written off. Refer to Note 6, Equity
Investments, for disclosure regarding secured notes receivable converted
to equity investments, write-off of secured notes receivable, and write-
off or reversal of accrued interest.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Balance, beginning of year $ 2,529,000 2,243,000
--------- ---------
Provision for loan losses 162,272 2,356,908
Secured notes receivable write-downs:
Computers and computer equipment -- (2,035,000)
Medical (536,962) (35,908)
--------- ---------
Total write-downs (536,962) (2,070,908)
--------- ---------
Recoveries of previous write-offs:
Semiconductor equipment 28,690 --
--------- ---------
Total recoveries 28,690 --
--------- ---------
Change in net unrealized fair value
of secured notes receivable (346,000) 286,000
--------- ---------
Balance, end of year $ 2,183,000 2,529,000
========= =========
</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 $4,031,001 and $4,321,823 were on
nonaccrual status due to uncertainties of the borrowers' financial
condition at December 31, 1995 and 1994, respectively. The decrease of
approximately $291,000 included note repayments and write-downs for a
portfolio company in the medical industry, partially offset by secured
notes issued to a portfolio company in the computers and computer
equipment industry. The Managing General Partner continues to monitor
the progress of these companies. The fair value at December 31, 1995 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>
1996 $1,971,038
1997 --
1998 --
1999 --
2000 2,826,652
---------
$4,797,690
=========
</TABLE>
Secured notes receivable which are due on demand are included as
principal repayments for the year ending December 31, 1996. 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, 1995, the Partnership had accrued expenses of
approximately $82,000 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 affiliated 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. Currently, the Partnership and the portfolio company have
appealed a recent trial court ruling that absolved the Partnership from
wrongdoing but declared that the assets of the portfolio company, for a
sum not certain, are available to satisfy certain claims of the third
party. An estimate of possible loss can not be determined at this time.
The Managing General Partner believes the Partnership has adequate
defense and intends to pursue this matter vigorously. No amounts have
been provided in the accompanying financial statements for any possible
negative outcome of this matter.
9. Cash and Cash Equivalents
-------------------------
At December 31, 1995 and 1994, cash and cash equivalents consisted of:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Demand accounts $ -- 2,334
Money-market accounts 5,058,537 1,004,620
--------- ---------
Total $5,058,537 1,006,954
========= =========
</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 1995, 1994,
and 1993, 1,177, 384, and 550 Units were tendered for repurchase
totaling $55,319, $23,425, and $45,100 respectively.
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, 1995, the Partnership had
unfunded commitments of $208,000 related to term note financings.
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 22, 1996 By: /s/Debbie A. Wong
--------------------------------------
Debbie A. Wong
Controller
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 22, 1996
- ------------------------ Executive Officer
Charles R. Kokesh and Chairman of
Technology Funding Inc.
and Managing General
Partner of Technology
Funding Ltd.
/s/Gregory T. George Group Vice President March 22, 1996
- -------------------------- 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, 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> DEC-31-1995
<PERIOD-TYPE> YEAR
<INVESTMENTS-AT-COST> 7,068,409
<INVESTMENTS-AT-VALUE> 5,157,208
<RECEIVABLES> 0
<ASSETS-OTHER> 50,259
<OTHER-ITEMS-ASSETS> 5,058,537
<TOTAL-ASSETS> 10,266,004
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,728,920
<TOTAL-LIABILITIES> 1,728,920
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10,448,285
<SHARES-COMMON-STOCK> 157,829
<SHARES-COMMON-PRIOR> 159,006
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,911,201)
<NET-ASSETS> 8,537,084
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,295,215
<OTHER-INCOME> 10,129
<EXPENSES-NET> 1,775,433
<NET-INVESTMENT-INCOME> (470,089)
<REALIZED-GAINS-CURRENT> 99,649
<APPREC-INCREASE-CURRENT> 1,950,675
<NET-CHANGE-FROM-OPS> 1,580,235
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 466,804
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 1,177
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1,058,112
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 148,338
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,834,648
<AVERAGE-NET-ASSETS> 8,008,028
<PER-SHARE-NAV-BEGIN> 72
<PER-SHARE-NII> (2)
<PER-SHARE-GAIN-APPREC> 0 <F1>
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (3)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 67
<EXPENSE-RATIO> 22
<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>
