<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, 1996
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, are 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. In September of 1996, the General Partners
exercised their right and extended the term of the Partnership
to December 31, 1998. If the General Partners so determine, the
Partnership term can be further extended for an additional two-
year period, 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 1996.
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, 1996, there were 5,214 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,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total income $ 328,865 1,305,344 1,159,042 967,972 2,560,375
Net operating (loss)
income (560,566) (470,089) 194,471 (371,466) 462,273
Net realized gain from
sales of equity
investments 48,824 2,438,619 25,813 343,333 799,468
Realized losses from
investment write-downs (125,104) (2,367,660) (2,460,743) (4,326,176) (1,289,209)
Recoveries from investments
previously written off 113,214 28,690 -- 27,383 --
Net realized loss (523,632) (370,440) (2,240,459) (4,326,926) (27,468)
Change in net unrealized
fair value:
Equity investments (1,033,488) 1,604,675 (1,220,545) 2,033,650 (3,404,583)
Secured notes receivable (67,000) 346,000 (286,000) 511,000 (1,413,767)
Net (loss) income (1,624,120) 1,580,235 (3,747,004) (1,782,276) (4,845,818)
Net realized loss per unit (3) (2) (14) (27) --
Total assets 7,168,026 10,266,004 7,661,352 11,843,982 15,516,042
Distributions declared -- 466,804 300,003 900,008 3,037,768
Distributions declared
per Unit (1) -- 3 2 6 19
(1) Calculation is based on weighted average number of Limited Partner Units
outstanding during the year.
</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 for 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 1996, net cash used by operating activities totaled
$1,469,223. The Partnership paid management fees of $165,379
to the Managing General Partner, reimbursed related parties for
operating expenses of $1,292,834, and paid affiliated
partnerships $2,047 for net loan participations. Other
operating expenses of $377,998 were paid, and interest and
other income of $323,252 and $4,241, respectively, were
received. In addition, the Partnership received collection
expense reimbursements of $41,542 from portfolio companies.
Distributions declared in 1995 of $466,804 were paid to the
Limited and General Partners.
During 1996, the Partnership issued $168,002 in secured notes
receivable primarily to a portfolio company in the computers
and computer equipment industry. Repayments of secured notes
receivable provided cash of $823,522. Proceeds from sales of
equity investments and recoveries from investments previously
written off totaled $57,574 and $113,214, respectively. The
Partnership is a party to litigation, see Note 8 for additional
information regarding the future use of Partnership funds and
restricted cash as of December 31, 1996.
Cash and cash equivalents at December 31, 1996, were
$3,243,908. Operating cash reserves combined with future
proceeds from the sales of investments, interest income
received from short-term investments, repayments of secured
notes receivable, and equity investment sales are expected to
be sufficient to fund Partnership operations through the next
twelve months.
Results of Operations
- ---------------------
1996 compared to 1995
- ---------------------
Net loss in 1996 was $1,624,120 compared to a net income of
$1,580,235 in 1995. The change was primarily due to a
$2,638,163 decrease in the change in net unrealized fair value
of equity investments, a $2,389,795 decrease in net realized
gain from sales of equity investments, and a $1,091,165
decrease in secured notes receivable interest income. These
changes were mostly offset by a $2,242,556 decrease in realized
losses from investment write-downs and a $809,563 decrease in
total operating expenses.
During 1996, the decrease in equity investment fair value of
$1,033,488 mostly related to portfolio companies in the
computer software and systems and industrial/business
automation industries. 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.
During 1996, the Partnership realized a gain of $48,824 from
sales of Hybridon, Inc., and Allegiant Physicians Services,
Inc., stock. In 1995, realized gain totaled $2,438,619,
primarily related to sales of Imagine Publishing, Inc., 3Com
Corporation, and Datalogix International, Inc.
Secured notes receivable interest income was $138,770 and
$1,229,935 for 1996 and 1995, respectively. The higher 1995
balance was primarily due to cash interest payments received
from portfolio companies in the computer software and systems,
telecommunications, and medical industries which had been on
nonaccrual status. At December 31, 1996, the remaining
portfolio was on non-accrual status due to uncertainty of the
borrowers' financial conditions.
In 1996 and 1995, the Partnership realized losses from
investments write-downs of $125,104 and $2,367,660,
respectively. The 1996 write-downs related to equity
investments in portfolio companies in the computer and computer
equipment and telecommunication industries. Write-downs in 1995
primarily related to equity investments in portfolio companies
in the medical and retail/consumer products industries.
Total operating expenses were $522,232 and $1,331,795 in 1996
and 1995, respectively. As disclosed in Note 7 to the
financial statements, the 1996 operating expenses were reduced
by reimbursements of $41,542 for prior period collection
expenses. Additionally, as disclosed in Note 3 to the
financial statements, the 1995 operating expenses included
additional administrative and investor services expenses of
$877,965. Had the 1996 reimbursements not been received and
the additional expenses in 1995 been recorded in prior years,
total operating expenses for 1996 and 1995 would have been
$563,774 and $510,515, respectively. The increase was
primarily due to higher collection costs as the remaining
portfolio requires additional workout efforts to realize
maximum value by the Partnership.
The Partnership recorded a secured notes receivable fair value
decrease of $67,000 in 1996, compared to an increase of
$346,000 in 1995, 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.
Given the inherent risk associated with the business of the
Partnership, the future performance of portfolio company
investments may significantly impact future 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., 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, had the additional expenses in 1995 been
recorded in prior years and had there been no recovery of prior
period costs of approximately $130,000 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.
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 1996, the Partnership incurred $165,379 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, 1996. 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, 1996 and 1995
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994
Statements of Partners' Capital for the years ended
December 31, 1996, 1995 and 1994
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
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, 1996.
(c) Financial Data Schedule for the year ended and as of
December 31, 1996 (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, 1996 and 1995, and the related statements of operations, partners'
capital, and cash flows for each of the years in the three-year period
ended December 31, 1996. 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, 1996 and
1995. 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, 1996 and 1995, and the
results of its operations and its cash flows for each of the years in
the three-year period ended December 31, 1996, in conformity with
generally accepted accounting principles.
San Francisco, California /S/KPMG Peat Marwick LLP
March 27, 1997
<PAGE>
BALANCE SHEETS
- --------------
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Investments:
Secured notes receivable, net
(cost basis of $3,880,883 and
$4,535,031 in 1996 and 1995,
respectively) $ 1,630,883 2,352,031
Equity investments (cost basis
of $2,399,524 and $2,533,378 in
1996 and 1995, respectively) 1,637,835 2,805,177
--------- ----------
Total investments 3,268,718 5,157,208
Cash and cash equivalents 3,243,908 5,058,537
Restricted cash 642,694 50,000
Other assets 12,706 259
--------- ----------
Total $ 7,168,026 10,266,004
========= ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 309,815 340,131
Due to related parties 42,869 872,822
Due to affiliated partnerships -- 2,047
Distributions payable -- 466,804
Other liabilities 14,594 47,116
--------- ----------
Total liabilities 367,278 1,728,920
Commitments, contingencies,
and subsequent events
(Notes 3, 6, 8 and 10)
Partners' capital:
Limited Partners
(Units outstanding of 155,671
and 157,829 in 1996 and 1995,
respectively) 9,961,677 10,592,289
General Partners (149,240) (144,004)
Net unrealized fair value (decrease)
increase from cost:
Secured notes receivable (2,250,000) (2,183,000)
Equity investments (761,689) 271,799
--------- ----------
Total partners' capital 6,800,748 8,537,084
--------- ----------
Total $ 7,168,026 10,266,004
========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS
- ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income:
Secured notes receivable
interest $ 138,770 1,229,935 1,085,580
Short-term investment interest 185,854 65,280 51,143
Other income 4,241 10,129 22,319
--------- --------- ---------
Total income 328,865 1,305,344 1,159,042
--------- --------- ---------
Costs and expenses:
Management fees 165,379 148,338 205,152
Other investment expenses 201,820 295,300 169,856
Operating expenses:
Lending operations and
investment management 138,446 145,015 167,539
Administrative and investor
services 252,509 1,068,625 279,120
Computer services 83,418 70,057 83,269
Professional fees 47,859 48,098 59,635
--------- --------- ---------
Total operating expenses 522,232 1,331,795 589,563
--------- --------- ---------
Total costs and expenses 889,431 1,775,433 964,571
--------- --------- ---------
Net operating (loss) income (560,566) (470,089) 194,471
Net realized gain from sales of
equity investments 48,824 2,438,619 25,813
Realized losses from
investment write-downs (125,104) (2,367,660) (2,460,743)
Recoveries from investments
previously written off 113,214 28,690 --
--------- --------- ---------
Net realized loss (523,632) (370,440) (2,240,459)
Change in net unrealized
fair value:
Equity investments (1,033,488) 1,604,675 (1,220,545)
Secured notes receivable (67,000) 346,000 (286,000)
--------- --------- ---------
Net (loss) income $(1,624,120) 1,580,235 (3,747,004)
========= ========= =========
Net realized loss
per Unit $ (3) (2) (14)
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF PARTNERS' CAPITAL
- -------------------------------
<TABLE>
<CAPTION>
For the years ended December 31, 1996, 1995 and 1994:
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, 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
Repurchase of limited
partnership interests (112,216) -- -- -- (112,216)
Net realized loss (518,396) (5,236) -- -- (523,632)
Change in net unrealized fair
value:
Equity investments -- -- (1,033,488) -- (1,033,488)
Secured notes receivable -- -- -- (67,000) (67,000)
---------- ------- --------- --------- ----------
Partners' capital,
December 31, 1996 $ 9,961,677 (149,240) (761,689) (2,250,000) 6,800,748
========== ======= ========= ========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS
- ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating
activities:
Interest received $ 323,252 1,266,488 761,636
Other income received 4,241 10,129 22,319
Cash paid to vendors (377,998) (385,420) (529,883)
Cash paid to related parties (1,458,213) (498,323) (727,638)
Cash (paid to) received from
affiliated partnerships (2,047) 1,801 (35,121)
Reimbursement for collection
expenses received from
portfolio companies 41,542 -- 187,441
--------- --------- ---------
Net cash (used) provided
by operating activities (1,469,223) 394,675 (321,246)
--------- --------- ---------
Cash flows from investing
activities:
Secured notes receivable issued (168,002) (770,665) (2,760,238)
Repayments of secured notes
receivable 823,522 1,128,063 2,261,515
Purchase of equity investments -- (3,278) (251,013)
Proceeds from sales of
equity investments 57,574 3,379,417 510
Recoveries from investments
previously written off 113,214 28,690 --
Deposits to restricted cash (592,694) (50,000) --
--------- --------- ---------
Net cash provided (used) by
investing activities 233,614 3,712,227 (749,226)
--------- --------- ---------
Cash flows from financing
activities:
Distributions to Limited and
General Partners (466,804) -- (300,003)
Repurchase of Limited Partnership
interests (112,216) (55,319) (23,425)
--------- --------- ---------
Net cash used by financing
activities (579,020) (55,319) (323,428)
--------- --------- ---------
Net (decrease) increase in cash
and cash equivalents (1,814,629) 4,051,583 (1,393,900)
Cash and cash equivalents at
beginning of year 5,058,537 1,006,954 2,400,854
--------- --------- ---------
Cash and cash equivalents at
end of year $ 3,243,908 5,058,537 1,006,954
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (continued)
- -----------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Reconciliation of net (loss)
income to net cash (used)
provided by operating activities:
Net (loss) income $(1,624,120) 1,580,235 (3,747,004)
Adjustments to reconcile net
(loss) income to net cash (used)
provided by operating activities:
Net realized gain from sales of
equity investments (48,824) (2,438,619) (25,813)
Realized losses from investment
write-downs 125,104 2,367,660 2,460,743
Recoveries from investments
previously written off (113,214) (28,690) --
Amortization of discount
related to warrants (5,678) (7,962) (608)
Change in net unrealized
fair value:
Equity investments 1,033,488 (1,604,675) 1,220,545
Secured notes receivable 67,000 (346,000) 286,000
Changes in:
Accrued interest on secured and
convertible notes receivable 4,306 (30,765) (374,479)
Accounts payable and accrued
expenses (30,316) (28,409) (71,382)
Due to/from related parties (829,953) 873,487 (12,155)
Due from/to affiliated
partnerships (2,047) 1,801 (35,121)
Other liabilities (32,522) (3,662) 5,795
Other assets (12,447) 60,274 (27,767)
--------- --------- ---------
Net cash (used) provided
by operating activities: $(1,469,223) 394,675 (321,246)
========= ========= =========
Non-cash investing activities:
Additions to equity investments $ -- 142,432 100,556
========= ========= =========
Conversion of secured notes
receivable and interest
to equity investments $ -- 1,752,641 1,229,406
========= ========= =========
Non-cash exercise of
warrants $ 8,497 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) were 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. In
September of 1996, the General Partners exercised their right and extended
the term of the partnership to December 31, 1998. If the General Partners
so determine, the Partnership term can be further extended for an
additional two-year period, 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 marketable and non-marketable investments
of $3,268,718 and $5,157,208 (48% and 60% of partners' capital) as of
December 31, 1996 and 1995, respectively. For the non-marketable
investments, the Managing General Partner has estimated the fair value of
such investments 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 up to 33% in determining
fair value as discussed 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 $6,280,407 by $1,490,360 as of December 31,
1996.
Net Realized Income (Loss) Per Unit
- -----------------------------------
Net realized income (loss) per Unit is calculated by dividing the weighted
average number of Units outstanding for 1996, 1995, and 1994 of 157,128,
158,614 and 159,312, 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:
- -----------
In accordance with generally accepted accounting principles, the
Partnership's method of accounting for investments 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 receivable 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, upon note issuance or
restructure, the Partnership receives warrants (to purchase certain types
of capital stock) or 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 cost basis of capital stock and
the discount are generally based on the valuation set at the latest round
of financing. The discount is amortized to interest income on a straight-
line basis over the term of the loan. These warrants and capital stock
are included in the equity investment portfolio.
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 up to
33% is applied when determining fair value; the actual discount percentage
is based on the type and length of restrictions. 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.
Non-cash Exercise of Warrants
- -----------------------------
Periodically, the Partnership may acquire stock through the non-cash
exercise of warrants. Upon the non-cash exercise of warrants, the
Partnership recorded net realized gains of $8,497, $83,619, and $25,813,
during 1996, 1995, and 1994, respectively, as a result of the underlying
stock prices at the date of exercise. These amounts are included in net
realized gain from sales of equity investments in the Statements of
Operations.
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. After a reasonable amount of time,
unnegotiated distribution checks, if any, are recorded as other
liabilities on the Balance Sheets.
Reclassification
- ----------------
Certain prior year balances have been reclassified to conform with the
1996 financial statement presentation.
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,
---------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Increase (decrease) in fair
value from cost of marketable
equity securities $ 327,887 92,684 (62,285)
(Decrease) increase in fair value
from cost of non-marketable
equity securities (1,089,576) 179,115 (1,270,591)
--------- --------- ---------
Net unrealized fair value
(decrease) increase from cost
at end of year (761,689) 271,799 (1,332,876)
Net unrealized fair value
increase (decrease) from cost
at beginning of year 271,799 (1,332,876) (112,331)
--------- --------- ---------
Change in net unrealized
fair value of equity
investments $(1,033,488) 1,604,675 (1,220,545)
========= ========= =========
</TABLE>
3. Related Party Transactions
--------------------------
Included in costs and expenses are related party costs as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Management fees $ 165,379 148,338 205,152
Reimbursable operating expenses:
Lending operations and
investment management 159,570 117,938 204,574
Administrative and investor
services 219,893 1,035,477 222,488
Computer services 83,418 70,057 83,269
</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, and $764,113 related to 1995, 1994, and prior years,
respectively. If this charge had been recorded in prior years, total
operating expenses would have been $510,515 and $646,730 for 1995 and
1994, respectively. At December 31, 1996 and 1995, expenses due to
related parties totaled $42,869 and $872,822, respectively.
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, 1996, no amounts were due to or from affiliated partnerships.
At December 31, 1995, $2,047 was due to affiliated partnerships. This
amount was paid to such affiliated partnerships by the Partnership
immediately following the year end.
In order to increase the future investment returns to the Partnership, a
portfolio company of the Partnership and affiliated partnerships have
entered into a joint venture with the General Partners to perform
investment recovery efforts. The General Partners have agreed to waive
any "post conversion" profit interest in the Partnership attributable to
any such recoveries for a share of the joint venture net profits. The
post conversion profit is pursuant to, and as defined in, the profit and
loss provisions of the Partnership's Partnership Agreement. The joint
venture documents are subject to review by legal counsel for the
Partnership to ensure conformity with the terms of the Partnership
Agreement.
In 1995 and 1994, 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
-------------
During 1996, distributions of $466,804 ($3 per Unit) declared in 1995 were
paid to the Limited and General Partners. As the Partnership has been in
its liquidation stage since 1993, future distributions are expected to
fluctuate as distributions will be dependent upon loan repayments from
borrowing companies and available cash.
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.
Given the inherent risk associated with the business of the Partnership,
the future performance of portfolio company investments may significantly
impact future operations.
6. Equity Investments
------------------
At December 31, 1996 and 1995, equity investments consisted of:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------ -----------------
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;
expired 01/96 $ -- -- 0 300
Hybridon, Inc. 03/91 3,572 Common
shares at $3.50;
exercised 01/96 -- -- 1,250 16,074
Computer Software and Systems
- -----------------------------
Wasatch Education 06/95 959,546 Common
Systems shares at $0.50;
Corporation expiring 06/00 5,000 0 5,000 179,915
Industrial/Business Automation
- ------------------------------
Cyclean, Inc. 08/88 43,194 Common
shares at $2.74;
expiring 04/01 0 0 0 0
Cyclean, Inc. 03/91 44,589 Common
shares at $3.10;
expiring 04/01 0 0 0 0
Cyclean, Inc. 07/92 20,968 Common
shares at $3.10;
expiring 07/97 0 0 0 0
Cyclean, Inc. 07/92 53,130 Common
shares at $3.10;
expiring 07/02 0 0 0 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 0 0
ElectroScan, 12/91 22,177 Common
Corporation shares at $3.10;
expired 12/96 -- -- 0 0
Medical
- -------
Hemocleanse, Inc. 01/92 12,474 Common
shares at $.50;
expiring 01/97 0 31,185 0 0
Loredan 05/92 62,500 Common
BioMedical, shares at $.60;
Inc. expiring 05/97 -- -- 0 0
Loredan 12/92 166,667 Common
BioMedical, shares at $.30;
Inc. expiring 12/97 -- -- 0 0
Semiconductor Equipment
- -----------------------
Quantrad Sensor, 10/94 56,875 Common
Inc. shares at $1.60;
expiring 01/98 0 0 0 0
Quantrad Sensor, 10/94 30,062 Common
Inc. shares at $1.60;
expiring 12/98 0 0 0 0
Telecommunications
- ------------------
Integrated Network 06/91 5,882 Common
Corporation shares at $17.00;
expired 06/96 -- -- 10,000 0
------- ------- ------- -------
Total warrants 5,000 31,185 16,250 196,289
------- ------- ------- -------
STOCKS:
Computers and Computer Equipment
- --------------------------------
Censtor Corporation 05/95 4,538 Common
shares 2,395 2,395 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 73,248 65,149 188,352 43,949
Computer Software and Systems
- -----------------------------
Wasatch Education 06/95 1,741,550
Systems Series C
Corporation Preferred
shares 1,741,550 870,775 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 38,908 0 100,556 100,556
Cyclean, Inc. 01/95 51,051 Series D
Preferred shares 55,111 0 142,432 142,432
Cyclean, Inc. 04/96 137,995 Series D
Preferred shares 148,969 0 -- --
Cyclean of 03/95 Class A LLC Unit
Los Angeles, LLC - 45% ownership 11,091 0 11,091 11,091
Medical
- -------
Allegiant Physicians 08/94 13,500 Common
Services, Inc. shares -- -- 4,821 22,500
Allegiant Physicians 11/95 7,500 Common
Services, Inc. shares -- -- 2,679 12,500
Hemocleanse, Inc. 03/95 5,512 Common
shares 5,071 16,536 5,071 5,071
Resonex Holding 02/94 11,402 Common
Corporation shares 0 0 0 0
Microelectronics
- ----------------
Celeritek, Inc. 05/94 47,219 Common
shares 253,429 482,814 253,429 365,825
Elantec, Inc. 05/94 8,181 Common
shares 33,636 38,475 33,636 61,241
Elantec, Inc. 07/95 3,409 Common
shares 19,270 16,033 19,270 25,517
Retail/Consumer Products
- ------------------------
S-TRON 05/93 Subordinated
debenture,
$220,000 principal
amount -- -- 0 0
S-TRON 05/93 220,000 Common
shares -- -- 0 0
S-TRON 05/93 506,000 Series 1
Preferred shares -- -- 0 0
S-TRON 05/93 1,320,000
Series 2
Preferred shares -- -- 0 0
Telecommunications
- ------------------
All Post, Inc. 10/94 4,394 Common
shares 3,471 1,099 3,471 3,471
3Com Corporation 06/95 1,490 Common
shares 8,375 113,374 8,375 70,790
--------- --------- --------- ---------
Total stocks 2,394,524 1,606,650 2,517,128 2,608,888
--------- --------- --------- ---------
Total equity investments $2,399,524 1,637,835 2,533,378 2,805,177
========= ========= ========= =========
- -- No investment held at end of period.
0 Investment active with a carrying value or fair value of zero.
</TABLE>
Marketable Equity Securities
- ----------------------------
At December 31, 1996 and 1995, marketable equity securities had
aggregate costs of $387,958 and $510,580, respectively, and aggregate
fair values of $715,845 and $603,264, respectively. The net unrealized
gains at December 31, 1996 and 1995, included gross gains of $339,223
and $237,087, respectively.
Allegiant Physicians Services, Inc.
- -----------------------------------
During 1996, the Partnership exercised its option to sell all of its
21,000 common shares to the company for $35,025 resulting in a realized
gain of $27,525.
Cyclean, Inc./Cyclean of Los Angeles, LLC
- -----------------------------------------
During the second quarter of 1996, the Partnership received 25,495
Series D Preferred shares as a stock dividend while another 112,500
shares were received pursuant to a prior debt restructure.
Subsequently, the Managing General Partner determined that the fair
value of the Partnership's investment had declined and accordingly, the
Partnership recorded a $254,079 decrease in fair value at December 31,
1996.
Hemocleanse, Inc.
- -----------------
During 1996, the Partnership recorded a total increase in fair value of
$42,650 for its warrant and stock investment, based on the valuation set
at the latest round of financing in which third parties participated.
Hybridon, Inc.
- --------------
In January of 1996, Hybridon, Inc., completed its initial public
offering. The Partnership exercised its warrant holdings without cash
and received 2,532 shares of common stock, which were subsequently sold
for total proceeds of $22,549. The total realized gain from these
transactions was $21,299.
MTI Technology Corporation
- --------------------------
During the first quarter of 1996, the Managing General Partner
determined that there had been an other than temporary decline in value
of the Partnership's investment. As a result, the Partnership realized
a loss of $115,104. The Partnership recorded an increase in fair value
of $21,200 to reflect the market price of the unrestricted shares at
December 31, 1996.
S-TRON
- ------
The company was unsuccessful in its efforts to obtain a major government
contract; as a result, the company ceased operations during March of
1996. This investment, which had previously been written off, is no
longer held by the Partnership.
Wasatch Education Systems Corporation
- -------------------------------------
In early 1997, the company entered into a buyout agreement to sell
certain assets and liabilities and to grant an exclusive license for a
segment of the company's market to management. The company retains the
use of the technology for other markets along with certain liabilities
and will receive approximately $1.5 million in cash and a royalty stream
based on future revenues generated by the new company formed by the
former management team. Minimum royalty payments of $500,000 per year
for four years must be received in order for the new company to retain
exclusivity. Based on terms of the agreement and the near term need to
develop a new management team, the Managing General Partner determined
that there has been a fair value decline in the Partnership's investment
and accordingly, the Partnership recorded a decrease of $1,050,690 at
December 31, 1996.
Other Equity Investments
- ------------------------
Other changes reflected above generally relate to market value
fluctuations or the elimination of a discount relating to selling
restrictions for publicly-traded portfolio companies. Celeritek, Inc.,
Elantec, Inc., and 3Com Corporation are publicly traded companies.
7. Secured Notes Receivable, Net
-----------------------------
At December 31, 1996 and 1995, secured notes receivable consisted of:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Secured notes receivable $ 4,142,170 4,797,690
Accrued interest -- 4,306
Unamortized discount (261,287) (266,965)
--------- ---------
Total secured notes receivable,
net (cost basis) 3,880,883 4,535,031
Allowance for loan losses (2,250,000) (2,183,000)
--------- ---------
Total secured notes receivable,
net (fair value) $ 1,630,883 2,352,031
========= =========
</TABLE>
The 1996 notes are substantially from two portfolio companies
(representing 75% and 25% of the notes receivable fair value at December
31, 1996) in the computers and computer equipment and
industrial/business automation industries. The notes are secured by
specific assets of the borrowing companies. Interest rates at December
31, 1996, ranged from 8% to 15%.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance, beginning of year $ 2,183,000 2,529,000
--------- ---------
(Decrease) increase in provision for loan (46,214) 162,272
losses
Secured notes receivable write-downs:
Medical -- (536,962)
--------- ---------
Total write-downs -- (536,962)
--------- ---------
Recoveries of previous write-offs:
Semiconductor equipment 61,310 28,690
Medical 51,904 --
--------- ---------
Total recoveries 113,214 28,690
--------- ---------
Change in net unrealized fair value
of secured notes receivable 67,000 (346,000)
--------- ---------
Balance, end of year $ 2,250,000 2,183,000
========= =========
</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 and is considered adequate at the respective year ends.
Secured notes receivable of $3,880,883 and $4,031,001 at December 31,
1996 and 1995, respectively were on nonaccrual status due to the
uncertainty of certain borrowers' financial conditions. The Managing
General Partner continues to monitor the progress of these companies and
intends to manage these investments to maximize the Partnership's net
realizable value. The fair value at December 31, 1996, is based on the
Managing General Partner's estimate of collectibility of these notes.
During 1996, in addition to the above note recoveries, the Partnership
received reimbursements of $41,542 from portfolio companies primarily
for legal, consulting, and other costs incurred in prior periods in the
defense of the Partnership's secured note rights through bankruptcy
court. The reimbursements were recorded as a reduction to lending
operations and investment management expense.
The scheduled principal repayments remaining are:
<TABLE>
<CAPTION>
Year Ending Principal
December 31, Repayments
----------- ----------
<S> <C>
1997 $ 803,426
1998 --
1999 348,292
2000 2,990,452
---------
$4,142,170
=========
</TABLE>
Secured notes receivable which are due on demand are included as
principal repayments in 1997. 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 the Partnership's investments.
8. Litigation and Other Investment Expenses
----------------------------------------
Other investment expenses in 1996 of $201,820 reflect the cost of the
following legal actions.
In 1992, the Partnership and a portfolio company in the retail/consumer
products industry filed a lawsuit against Quebecor in the Superior Court
of Guilford County, North Carolina, claiming that the Partnership had
the right to take possession of collateral upon foreclosure on the
portfolio company, the price paid was fair and did not interfere with
Quebecor's legal rights. Quebecor filed a counter suit claiming
otherwise and is seeking relief for $2.6 million, including accrued
interest, legal costs and punitive damages. In March of 1997, the
Partnership and the portfolio company obtained a favorable judgment in
its appeal of a prior trial court ruling that declared the assets of the
portfolio company, for a sum not certain, are available to satisfy
certain claims of Quebecor. Unless Quebecor is granted the right to
appeal this decision to the North Carolina Supreme Court within 30 days,
there are no damages to the Partnership. The Managing General Partner
believes the Partnership has adequate defenses and no amounts have been
provided in the accompanying financial statements for any possible
negative outcome for this matter.
In March of 1996, the Partnership filed a lawsuit in the United States
District Court, Northern District of California, against Cyclean, Inc.
("Cyclean"), Ecopave, L.P. ("Ecopave"), Ecopave Corp. and Stephen M.
Vance ("Vance").
Ecopave was formed by Cyclean, Ecopave Corp. and Vance. Cyclean,
without the consent of the Partnership, transferred certain equipment
worth approximately $488,000 to Ecopave that is subject to the
Partnership's security interest. Cyclean further gave Ecopave a license
to use its patented technology. The equipment and intellectual property
were security interest on a secured loan extended by the Partnership to
Cyclean. The Partnership thus commenced this legal action for patent
infringement, seeking to collect approximately $3.5 million of
indebtedness owed to the Partnership and affiliated partnerships by
Cyclean and the recovery of the equipment from Ecopave. In January of
1997, a counter claim was filed by Ecopave Corp. and Vance against the
Partnership which seeks declaration that certain patent rights held by
the Partnership as security for the Cyclean debt are invalid as well as
asserts a fraud claim. In addition, the counter suit seeks compensatory
damages of approximately $5 million and unspecified punitive damages.
As a result of a settlement conference, the above lawsuits have
tentatively been resolved for an effective date of April 1, 1997. The
Partnership has agreed to indirectly purchase Ecopave Corp. and Vance's
ownership interest in Ecopave for $5.5 million; the affiliated
partnerships will participate in this purchase. It is anticipated that
the settlement of this claim will not result in any material negative
impact to the Partnership at December 31, 1996, or the date of
settlement as the Managing General Partner believes that the fair value
of this additional investment is equal to or greater than the purchase
price and improves the Partnership's position to recover its secured
notes receivable. The Managing General Partner believes a settlement is
the most cost effective resolution of this dispute for the Partnership.
In the event that the aforementioned settlement is not consummated, the
above lawsuits will continue to trial. Estimates of possible loss, if
any, for the ongoing lawsuits cannot be determined at this time. No
amounts have been provided in the accompanying financial statements for
any possible negative outcome of this matter. The Managing General
Partner believes the Partnership has adequate defenses and intends to
pursue this matter vigorously.
At December 31, 1996 and 1995, restricted cash of $642,694 and $50,000,
respectively, represented amounts held in escrow accounts pending the
outcome of these cases.
9. Cash and Cash Equivalents
-------------------------
At December 31, 1996 and 1995, cash and cash equivalents consisted of:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Demand accounts $ 7,987 --
Money-market accounts 3,235,921 5,058,537
--------- ---------
Total $3,243,908 5,058,537
========= =========
</TABLE>
10. Repurchase of Limited Partnership Interests
-------------------------------------------
Each June, Limited Partners may tender their Units for repurchase by the
Partnership. The price paid for any units tendered is based on the June
30 estimates of fair value for the Partnership. Units repurchased and
the amounts paid were: 2,158 Units for $112,216; 1,177 Units for
$55,319; and 384 Units for $23,425 in 1996, 1995, and 1994,
respectively.
<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 27, 1997 By: /s/Debbie A. Wong
--------------------------------------
Debbie A. Wong
Vice President
and 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 27, 1997
- ------------------------ Executive Officer,
Charles R. Kokesh Chief Financial
Officer and Chairman of
Technology Funding Inc.
and Managing General
Partner of Technology
Funding Ltd.
/s/Gregory T. George Group Vice President March 27, 1997
- -------------------------- of Technology Funding
Gregory T. George Inc. and a General
Partner of Technology
Funding Ltd.
The above represents the Board of Directors of Technology Funding Inc.
and 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, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<PERIOD-TYPE> YEAR
<INVESTMENTS-AT-COST> 6,280,407
<INVESTMENTS-AT-VALUE> 3,268,718
<RECEIVABLES> 0
<ASSETS-OTHER> 12,706
<OTHER-ITEMS-ASSETS> 3,886,602
<TOTAL-ASSETS> 7,168,026
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 367,278
<TOTAL-LIABILITIES> 367,278
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,812,437
<SHARES-COMMON-STOCK> 155,671
<SHARES-COMMON-PRIOR> 157,829
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,011,689)
<NET-ASSETS> 6,800,748
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 324,624
<OTHER-INCOME> 4,241
<EXPENSES-NET> 889,431
<NET-INVESTMENT-INCOME> (560,566)
<REALIZED-GAINS-CURRENT> 36,934
<APPREC-INCREASE-CURRENT> (1,100,488)
<NET-CHANGE-FROM-OPS> (1,624,120)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 2,158
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (1,736,336)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 165,379
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 945,346
<AVERAGE-NET-ASSETS> 7,668,916
<PER-SHARE-NAV-BEGIN> 67
<PER-SHARE-NII> (3)
<PER-SHARE-GAIN-APPREC> 0 <F1>
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 64
<EXPENSE-RATIO> 12
<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>
