<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, 1997
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)
(650) 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 Venture Capital Fund VI, LLC, as revised
January 22, 1998, forming a part of December 5, 1997, Pre-Effective
Amendment No. 1 to the Form N-2 Registration Statement No. 333-23913
dated July 11, 1997, 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, 1997, 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
- ------ -----------------
There are no material pending legal proceedings to which the
Registrant is party or of which any of its property is the
subject, other than ordinary routine litigation incidental to
the business of the Partnership.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
No matter was submitted to a vote of the holders of units of
limited partnership interests ("Units") during 1997.
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, 1997, there were 5,217 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,
--------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Total income $ 111,351 328,865 1,305,344 1,159,042 967,972
Net operating (loss)
income (731,548) (560,566) (470,089) 194,471 (371,466)
Net realized gain from
sales of equity
investments 267,869 48,824 2,438,619 25,813 343,333
Realized losses from
investment write-downs -- (125,104) (2,367,660) (2,460,743) (4,326,176)
Recoveries from investments
previously written off 7,387 113,214 28,690 -- 27,383
Net realized loss (456,292) (523,632) (370,440) (2,240,459) (4,326,926)
Change in net unrealized
fair value:
Equity investments 95,677 (1,033,488) 1,604,675 (1,220,545) 2,033,650
Secured notes receivable (15,000) (67,000) 346,000 (286,000) 511,000
Net (loss) income (375,615) (1,624,120) 1,580,235 (3,747,004) (1,782,276)
Net realized loss per unit (3) (3) (2) (14) (27)
Total assets 6,274,226 7,168,026 10,266,004 7,661,352 11,843,982
Distributions declared -- -- 466,804 300,003 900,008
Distributions declared
per Unit (1) -- -- 3 2 6
(1) Calculation is based on weighted average number of Limited Partner Units
outstanding during the year.
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.
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------ -----------------------------------------------------------
AND RESULTS OF OPERATIONS
- -------------------------
Liquidity and Capital Resources
- -------------------------------
In 1997, net cash used by operating activities totaled
$1,087,826. The Partnership paid management fees of $131,578
to the Managing General Partner and reimbursed related parties
for operating expenses of $500,178. Other operating expenses
of $570,993 were paid, and interest income of $111,351 was
received.
During 1997, the Partnership funded $1,864,753 in equity
investments and issued $181,413 in secured notes receivable
primarily to a portfolio company in the industrial and business
automation industry. Repayments of secured notes receivable
provided cash of $4,989. Proceeds from sales of equity
investments and recoveries from investments previously written
off totaled $388,827 and $7,387, respectively. At December 31,
1997, the Partnership was committed to find $200,246 in
additional investments as disclosed in Note 10 to the Financial
Statements.
Cash and restricted cash at December 31, 1997, were $933,930.
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
- ---------------------
1997 compared to 1996
- ---------------------
Net losses in 1997 and 1996 were $375,615 and $1,624,120,
respectively. This improvement was primarily a result of an
$1,181,165 increase in the change in net unrealized fair value
of investments and a $219,045 increase in net realized gain
from sales of investments, partially offset by a $213,273
decrease in interest income.
The $80,677 increase in net unrealized fair value of
investments in 1997 was primarily due to increases in a
portfolio company in the microelectronics industry, partially
offset by decreases in portfolio companies in the
telecommunications and medical industries. During 1996, the
decrease in investment fair value of $1,100,488 primarily
related to portfolio companies in the computer software and
systems and industrial/business automation industries.
During 1997, the Partnership's net realized gain from sales of
equity investments of $267,869 primarily resulted from the sale
of its investment in MTI Technology Corporation. During 1996,
the Partnership realized a gain of $48,824 from sales of
Hybridon, Inc. and Allegiant Physician Services, Inc. stock.
Interest income was $111,351 and $324,624 in 1997 and 1996,
respectively. The decrease is a result of lower cash balances
on hand and loans to portfolio companies on non-accrual status
due to uncertainty of the borrowers financial condition.
Total operating expenses were $537,047 and $522,232 in 1997 and
1996, respectively. Included in 1997 operating expenses are
the costs of the Partnership's relocation of its administrative
and investor service operations to Santa Fe, New Mexico. As
disclosed in Note 2 to the financial statements, the 1997 and
1996 operating expenses were reduced by reimbursements of
$3,572 and $41,542, respectively, for prior period collection
expenses. Had the reimbursements not been received, total
operating expenses for 1997 and 1996 would have been $540,619
and $563,774, respectively.
Given the inherent risk associated with the business of the
Partnership, the future performance of portfolio company
investments may significantly impact future operations.
1996 compared to 1995
- ---------------------
Net loss in 1996 was $1,624,120 compared to 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 4 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 2 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.
The Year 2000
- -------------
The Managing General Partner is currently reviewing the
Partnership's information systems in anticipation of the
potential computer software problems associated with the Year
2000. The Year 2000 issue exists because many computer
software programs use only two digits to identify a year in the
date field and were developed without considering the impact of
the upcoming change in the century. The Managing General
Partner currently expects to complete the necessary critical
software conversion modifications in 1999, and does not
anticipate any material adverse impact on the financial
position or results of operations of the Partnership, as a
result of the Year 2000 issue.
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
- ------------------------
None
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 Venture Capital Fund VI, LLC, Prospectus,
revised January 22, 1998, forming a part of the December 5,
1997, Pre-Effective Amendment No. 1 to the Form N-2
Registration Statement No. 333-23913, dated July 11, 1997,
which is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
- ------- ----------------------
As a partnership, the Registrant has no officers or directors.
In 1997, the Partnership incurred $131,578 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, 1997. 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, 1997 and 1996
Statements of Operations for the years ended
December 31, 1997, 1996 and 1995
Statements of Partners' Capital for the years ended
December 31, 1997, 1996 and 1995
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
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, 1997.
(c) Financial Data Schedule for the year ended and as of
December 31, 1997 (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, 1997 and 1996, and the related statements of operations, partners'
capital, and cash flows for each of the years in the three-year period
ended December 31, 1997. 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, 1997 and
1996. 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, 1997 and 1996, and the
results of its operations and its cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Albuquerque, New Mexico /S/KPMG Peat Marwick LLP
March 25, 1998
<PAGE>
BALANCE SHEETS
- --------------
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Investments:
Secured notes receivable, net
(cost basis of $4,057,307 and
$3,880,883 in 1997 and 1996,
respectively) $1,792,307 1,630,883
Equity investments (cost basis
of $4,143,319 and $2,399,524 in
1997 and 1996, respectively) 3,477,307 1,637,835
--------- ---------
Total investments 5,269,614 3,268,718
Cash and cash equivalents 669,856 3,243,908
Restricted cash 264,074 642,694
Due from related parties 52,126 --
Other assets 18,556 12,706
--------- ---------
Total assets $6,274,226 7,168,026
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 57,675 309,815
Due to related parties -- 42,869
Other liabilities 11,301 14,594
--------- ---------
Total liabilities 68,976 367,278
Commitments and contingencies
(Notes 2 and 10)
Partners' capital:
Limited Partners
(Units outstanding of 150,570
and 155,671 in 1997 and 1996,
respectively) 9,290,065 9,961,677
General Partners (153,803) (149,240)
Net unrealized fair value
decrease from cost:
Secured notes receivable (2,265,000) (2,250,000)
Equity investments (666,012) (761,689)
--------- ---------
Total partners' capital 6,205,250 6,800,748
--------- ---------
Total liabilities and
partners' capital $6,274,226 7,168,026
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS
- ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income:
Secured notes receivable
interest $ 22,462 138,770 1,229,935
Short-term investment interest 88,889 185,854 65,280
Other income -- 4,241 10,129
------- --------- ---------
Total income 111,351 328,865 1,305,344
------- --------- ---------
Costs and expenses:
Management fees 131,578 165,379 148,338
Other investment expenses 174,274 201,820 295,300
Operating expenses:
Lending operations and
investment management 132,357 138,446 145,015
Administrative and investor
services 291,379 252,509 1,068,625
Computer services 65,590 83,418 70,057
Professional fees 47,721 47,859 48,098
------- --------- ---------
Total operating expenses 537,047 522,232 1,331,795
------- --------- ---------
Total costs and expenses 842,899 889,431 1,775,433
------- --------- ---------
Net operating loss (731,548) (560,566) (470,089)
Net realized gain from sales of
equity investments 267,869 48,824 2,438,619
Realized losses from
investment write-downs -- (125,104) (2,367,660)
Recoveries from investments
previously written off 7,387 113,214 28,690
------- --------- ---------
Net realized loss (456,292) (523,632) (370,440)
Change in net unrealized
fair value:
Equity investments 95,677 (1,033,488) 1,604,675
Secured notes receivable (15,000) (67,000) 346,000
------- --------- ---------
Net (loss) income $(375,615) (1,624,120) 1,580,235
======= ========= =========
Net realized loss
per Unit $ (3) (3) (2)
======= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF PARTNERS' CAPITAL
- -------------------------------
<TABLE>
<CAPTION>
For the years ended December 31, 1997, 1996 and 1995:
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, 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
Distributions -- -- -- -- --
Repurchase of limited
partnership interests (219,883) -- -- -- (219,883)
Net realized loss (451,729) (4,563) -- -- (456,292)
Change in net unrealized fair
value:
Equity investments -- -- 95,677 -- 95,677
Secured notes receivable -- -- -- (15,000) (15,000)
---------- ------- --------- --------- ---------
Partners' capital,
December 31, 1997 $ 9,290,065 (153,803) (666,012) (2,265,000) 6,205,250
========== ======= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS
- ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating
activities:
Interest received $ 111,351 323,252 1,266,488
Other income received -- 4,241 10,129
Cash paid to vendors (570,993) (377,998) (385,420)
Cash paid to related parties (631,756) (1,458,213) (498,323)
Cash (paid to) received from
affiliated partnerships -- (2,047) 1,801
Reimbursement for collection
expenses received from
portfolio companies 3,572 41,542 --
--------- --------- ---------
Net cash (used) provided
by operating activities (1,087,826) (1,469,223) 394,675
--------- --------- ---------
Cash flows from investing
activities:
Secured notes receivable issued (181,413) (168,002) (770,665)
Repayments of secured notes
receivable 4,989 823,522 1,128,063
Purchase of equity investments (1,864,753) -- (3,278)
Proceeds from sales of
equity investments 388,827 57,574 3,379,417
Recoveries from investments
previously written off 7,387 113,214 28,690
Payments from (deposits to)
restricted cash 378,620 (592,694) (50,000)
--------- --------- ---------
Net cash (used) provided by
investing activities (1,266,343) 233,614 3,712,227
--------- --------- ---------
Cash flows from financing
activities:
Distributions to Limited and
General Partners -- (466,804) --
Repurchase of Limited Partnership
interests (219,883) (112,216) (55,319)
--------- --------- ---------
Net cash used by financing
activities (219,883) (579,020) (55,319)
--------- --------- ---------
Net (decrease) increase in cash
and cash equivalents (2,574,052) (1,814,629) 4,051,583
STATEMENTS OF CASH FLOWS (con't)
- --------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash and cash equivalents
at beginning of year 3,243,908 5,058,537 1,006,954
--------- --------- ---------
Cash and cash equivalents
at end of year $ 669,856 3,243,908 5,058,537
========= ========= =========
</TABLE>
Reconciliation of net (loss)
income to net cash (used)
provided by operating activities:
Net (loss) income $ (375,615) (1,624,120) 1,580,235
Adjustments to reconcile net
(loss) income to net cash (used)
provided by operating activities:
Net realized gain from sales of
equity investments (267,869) (48,824) (2,438,619)
Realized losses from investment
write-downs -- 125,104 2,367,660
Recoveries from investments
previously written off (7,387) (113,214) (28,690)
Amortization of discount
related to warrants -- (5,678) (7,962)
Change in net unrealized
fair value:
Equity investments (95,677) 1,033,488 (1,604,675)
Secured notes receivable 15,000 67,000 (346,000)
Changes in:
Accrued interest on secured and
convertible notes receivable -- 4,306 (30,765)
Accounts payable and accrued
expenses (252,140) (30,316) (28,409)
Due to/from related parties (94,995) (829,953) 873,487
Due from/to affiliated
partnerships -- (2,047) 1,801
Other liabilities (3,293) (32,522) (3,662)
Other assets (5,850) (12,447) 60,274
--------- --------- ---------
Net cash (used) provided
by operating activities: $(1,087,826) (1,469,223) 394,675
========= ========= =========
<PAGE>
STATEMENTS OF CASH FLOWS (continued)
- -----------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Non-cash investing activities:
Additions to equity investments $ -- -- 142,432
========= ========= =========
Conversion of secured notes
receivable and interest
to equity investments $ -- -- 1,752,641
========= ========= =========
Non-cash exercise of
warrants $ 5,196 8,497 83,619
========= ========= =========
</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 provided that the Partnership
would 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
- --------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Estimates are used when accounting for investments, change in unrealized
fair value of investments, liabilities and contingencies. Because of the
inherent uncertainty of valuation, the estimated fair value of investments
may differ significantly from the values that would have been used had a
ready market for investments existed, and the differences could be
material.
Investments
- -----------
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 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 equity investments is
their initial cost basis with changes as noted below:
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 and for those securities, an
illiquidity discount of up to 33% is applied when determining the fair
value; the actual discount percentage is based on the type and length of
the restrictions. Equity investments valued under this method were
$708,864 and $715,845 at December 31, 1997 and 1996, respectively.
All investments which are not publicly traded are valued at fair market
value as determined by the Managing General Partner in the absence of
readily ascertainable market values. Equity investments valued under this
method were $2,768,443 and $921,990 at December 31, 1997 and 1996,
respectively. Generally, investments in privately held companies are
valued at original cost unless there is clear evidence of a change in fair
value, such as a recent round of third-party financings, or events that,
in the opinion of the Managing General Partners, indicate a change in
value.
Convertible and subordinated notes receivable are stated at cost plus
accrued interest, which is equivalent to fair value, and are included in
equity investments as repayment of these notes generally occurs through
conversion into equity investments.
Where, in the opinion of the Managing General Partner, events indicate
that the fair value of equity investments and convertible and subordinated
notes receivable may not be recoverable, a write down to estimated fair
value is recorded. Temporary changes in fair value result in increases or
decreases to the unrealized fair value of equity investments. Adjustments
to fair value basis are reflected as "Change in net unrealized fair value
of equity investments." 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 with the fair value being adjusted to match
the new cost basis. Cost basis adjustments are reflected as "Realized
losses from investment write-downs" on the Statements of Operations.
Sales of equity investments are recorded on the trade date. The basis on
which cost is determined in computing realized gains or losses is specific
identification.
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.
Net Realized Income (Loss) Per Unit
- -----------------------------------
Net realized income (loss) per Unit is calculated by dividing the weighted
average number of Units outstanding for 1997, 1996, and 1995 of 155,221,
157,128 and 158,614, 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.
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 $8,200,626 by $1,612,253 as of December 31,
1997.
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.
2. Related Party Transactions
--------------------------
Included in costs and expenses are related party costs as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Management fees $ 131,578 165,379 148,338
Reimbursable operating expenses:
Lending operations and
investment management 134,418 159,570 117,938
Administrative and investor
services 212,469 219,893 1,035,477
Computer services 58,296 83,418 70,057
</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. At December 31, 1997, amounts due from related parties totaled
$52,126 and at December 31, 1996, amounts due to related parties totaled
$42,869. 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 and $821,280 related to 1995 and prior years, respectively. If
this charge had been recorded in prior years, total operating expenses
would have been $510,515 for 1995.
During 1997 and 1996, the Partnership received reimbursements of $3,572
and $41,542, respectively, 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.
Effective November 1, 1997, TFL assigned its California office lease to
Technology Funding Property Management LLC (TFPM), an entity that is
affiliated to the Managing General Partner. Under the terms of a rent
agreement, TFPM charges the Partnership for its share of office rent and
related overhead costs. These amounts are included in administrative and
investor service costs.
Under the terms of a computer service agreement, Technology Administrative
Management, a division of TFL, charges the Partnership for its share of
computer support costs. These amounts are included in computer services
expenses.
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.
In order to increase the future investment returns to the Partnership, a
portfolio company of the Partnership and affiliated partnerships has
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 will become effective upon approval of a joint venture operating
agreement.
In 1995, 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.
3. 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.
4. Secured Notes Receivable, Net
-----------------------------
At December 31, 1997 and 1996, secured notes receivable consisted of:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Secured notes receivable $4,311,594 4,142,170
Unamortized discount (254,287) (261,287)
--------- ---------
Total secured notes receivable,
net (cost basis) 4,057,307 3,880,883
Allowance for loan losses (2,265,000) (2,250,000)
--------- ---------
Total secured notes receivable,
net (fair value) $1,792,307 1,630,883
========= =========
</TABLE>
The 1997 notes are from two portfolio companies 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, 1997, ranged from 8% to 15%.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C>
Balance, beginning of year $2,250,000 2,183,000 2,529,000
--------- --------- ---------
Increase (decrease) in provision
for loan losses 7,613 (46,214) 162,272
Secured notes receivable write-
downs -- -- (536,962)
Recoveries of previous write-offs 7,387 113,214 28,690
--------- --------- ---------
Change in net unrealized fair value
of secured notes receivable 15,000 67,000 (346,000)
--------- --------- ---------
Balance, end of year $2,265,000 2,250,000 2,183,000
========= ========= =========
</TABLE>
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 $4,057,307 and $3,880,883 at December 31, 1997
and 1996, respectively were on nonaccrual status due to the uncertainty of
the borrowers' financial condition. 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, 1997, 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>
1998 $ 963,647
1999 348,292
2000 2,999,655
---------
$4,311,594
=========
</TABLE>
Secured notes receivable which are due on demand are included as principal
repayments in 1998. 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.
5. Equity Investments
------------------
At December 31, 1997 and December 31, 1996, equity investments consisted of:
<TABLE>
December 31, 1997 December 31, 1996
------------------- -----------------
Investment Cost Fair Cost Fair
Industry/Company Date Position Basis Value Basis Value
- ---------------- ---------- -------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
WARRANTS
- --------
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 0
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
December 31, 1997 December 31, 1996
------------------- -------------------
Investment Cost Fair Cost Fair
Industry/Company Date Position Basis Value Basis Value
- ---------------- ---------- -------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
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
Medical
- -------
Hemocleanse, Inc. 01/92 12,474 Common
shares at $.50;
exercised 01/97 -- -- 0 31,185
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
------- ------- ------- -------
Total warrants 5,000 0 5,000 31,185
------- ------- ------- -------
STOCKS:
Computers and Computer Equipment
- --------------------------------
Censtor Corporation 05/95 4,538 Common
shares 2,395 0 2,395 2,395
MARCorp 12/89 309,827 Series A
Preferred shares 0 0 0 0
December 31, 1997 December 31, 1996
------------------- -----------------
Investment Cost Fair Cost Fair
Industry/Company Date Position Basis Value Basis Value
- ---------------- ---------- -------- ----- ----- ----- -----
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
Computer Software and Systems
- -----------------------------
Wasatch Education 06/95 1,741,550
Systems Series C
Corporation Preferred
shares 1,741,550 870,775 1,741,550 870,775
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 38,908 0
Cyclean, Inc. 01/95 51,051 Series D
Preferred shares 55,111 0 55,111 0
Cyclean, Inc. 04/96 137,995 Series D
Preferred shares 148,969 0 148,969 0
Cyclean of 03/95 Class A LLC Unit
Los Angeles, LLC 45% ownership 11,091 0 11,091 0
Cyclean of 1,815,000
Long Beach, LLC 04/97 LLC Units 1,815,000 1,815,000 -- --
Cyclean of 49,753
Long Beach, LLC 12/97 LLC Units 49,753 49,753 -- --
December 31, 1997 December 31, 1996
------------------- -----------------
Investment Cost Fair Cost Fair
Industry/Company Date Position Basis Value Basis Value
- ---------------- ---------- -------- ----- ----- ----- -----
Medical
- -------
Hemocleanse, Inc. 03/95 5,512 Common
shares 5,071 11,024 5,071 16,536
Hemocleanse. Inc. 01/97 10,395 Common
shares 5,196 20,788 -- --
Resonex Holding 02/94 11,402 Common
Corporation shares 0 0 0 0
Microelectronics
- ----------------
Celeritek, Inc. 05/94 47,219 Common
shares 253,429 657,761 253,429 482,814
Elantec, Inc. 05/94 8,181 Common
shares -- -- 33,636 38,475
Elantec, Inc. 07/95 3,409 Common
shares -- -- 19,270 16,033
Telecommunications
- ------------------
All Post, Inc. 10/94 4,394 Common
shares 3,471 1,099 3,471 1,099
3Com Corporation 06/95 1,490 Common
shares 8,375 51,107 8,375 113,374
--------- --------- --------- ---------
Total stocks 4,138,319 3,477,307 2,394,524 1,606,650
--------- --------- --------- ---------
Total equity investments $4,143,319 3,477,307 2,399,524 1,637,835
========= ========= ========= =========
- -- No investment held at end of period.
0 Investment active with a carrying value or fair value of zero.
</TABLE>
Marketable Equity Securities
- ----------------------------
At and December 31, 1997 and 1996, marketable equity securities had
aggregate costs of $261,804 and $387,958, respectively and aggregate fair
values of $708,864 and $715,845, respectively. The net unrealized gains
at December 31, 1997 and 1996, included gross gains of $447,060 and
$339,223, respectively.
Celeritek, Inc.
- ---------------
The Partnership recorded an increase in fair value of $174,947 to reflect
the market price of the unrestricted shares at December 31, 1997.
Cyclean of Long Beach, LLC
- --------------------------
In April 1997, the Partnership purchased 1,815,000 LLC Units for
$1,815,000. In December 1997, the Partnership purchased an additional
49,753 LLC Units for $49,753. The Partnership is also committed to fund
additional equity investments as described in Note 10. The Partnership,
together with an affiliated partnership, own 100% of the company. See
Note 8 for additional information.
Elantec, Inc.
- -------------
In August 1997, the Partnership sold its entire investment in the company
for total proceeds of $69,532 and a realized gain of $16,626.
Hemocleanse, Inc.
- -----------------
In January 1997, the Partnership exercised its warrant for common shares
without cash and received 10,395 shares of common stock and realized a
gain of $5,196.
MTI Technology Corporation
- --------------------------
In October 1997, the Partnership sold its entire investment in the
company for total proceeds of $319,295 and realized a gain of $246,047.
Wasatch Education Systems Corporation
- -------------------------------------
In February 1997, the company sold its education market net assets to
Wasatch Interactive Learning Company (an entity formed by the company's
former management team), for $1.5 million in cash and future royalties
over a five year period, while retaining ownership of the majority of its
technology.
Currently, the company's operations have been limited to pursuit of
additional markets for its technology, debt service and the receipt of
royalty income. At December 31, 1997, the company had capitalized
technology costs, net current assets, and stockholders equity of
$3,044,000, $83,000 and $3,127,000 (unaudited), respectively. The
Partnership has valued its investment in the company at its share of
expected future royalty payments and estimated proceeds from the sale of
the company's technology. Because of the inherent uncertainties involved
in estimating these future proceeds, the estimated fair value of $870,775
may differ significantly from a value that would have been used had a
ready market existed, and the differences could be material.
3Com Corporation
- ----------------
The Partnership recorded a fair value decrease of $62,267 to reflect the
market price of the unrestricted shares at December 31, 1997.
6. 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,
---------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Increase in fair
value from cost of marketable
equity securities $ 447,060 327,887 92,684
(Decrease) increase in fair value
from cost of non-marketable
equity securities (1,113,072) (1,089,576) 179,115
--------- --------- ---------
Net unrealized fair value
(decrease) increase from cost
at end of year (666,012) (761,689) 271,799
Net unrealized fair value
(decrease) increase from cost
at beginning of year (761,689) 271,799 (1,332,876)
--------- --------- ---------
Change in net unrealized
fair value of equity
investments $ 95,677 (1,033,488) 1,604,675
========= ========= =========
7. Cash and Cash Equivalents
-------------------------
At December 31, 1997 and 1996, cash and cash equivalents consisted of:
</TABLE>
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Demand accounts $ 38,563 7,987
Money-market accounts 631,293 3,235,921
------- ---------
Total $669,856 3,243,908
======= =========
</TABLE>
8. Litigation and Other Investment Expenses
----------------------------------------
Other investment expenses in 1997, 1996 and 1995 of $174,274, $201,820
and $295,300, respectively, 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
sought 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.
Quebecor's subsequent appeal to the North Carolina Supreme Court was
denied in July of 1997. Quebecor's request for a rehearing was denied
and all suits have been terminated. The Partnership is seeking to
recover certain costs of this litigation.
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") to protect its interest in certain assets which were a
security interest on a secured loan extended by the Partnership to
Cyclean. In January of 1997, a counter claim was filed by Ecopave Corp.
and Vance.
As a result of a settlement conference, these lawsuits were resolved
effective April 1, 1997. The Partnership indirectly purchased Ecopave
Corp. and Vance's interest in Ecopave for $5.5 million, of which
$3,685,000 was participated by an affiliated partnership. In addition,
an escrow account for $750,000 was established as collateral for a note
payable by Ecopave to Ecopave Corp. The Partnership's share of this
deposit is $247,500. While the Partnership expects Ecopave to repay the
note, if Ecopave fails to do so, the note holder may assume the escrow
account. The Managing General Partner believes that the fair value of
this additional investment is equal to or greater than the purchase price
and the Partnership has improved its ability to recover its secured notes
receivable.
9. 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: 5,101 Units for $219,883; 2,158 Units for $112,216
and 1,177 Units for $55,319 in 1997, 1996, and 1995, respectively.
10. Commitments and Contingencies
-----------------------------
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, 1997, the Partnership had unfunded
commitments for equity investments of $200,246.
At December 31, 1997, restricted cash of $264,074 included the following:
In April 1997, the Partnership together with an affiliated partnership,
deposited $750,000 into an escrow account as collateral for a note
payable of Ecopave. The Partnership's share of the deposit is $247,500.
While the Partnership expects Ecopave to repay the note, if Ecopave fails
to do so, the note holder may assume the escrow account.
In December 1997, the Partnership together with an affiliated
partnership, guaranteed equipment financing for a portfolio company by
depositing $50,000 in an escrow account with the lending institution.
The Partnership funded $16,500 of this deposit. If the portfolio company
fails to repay the line of credit, the Partnership may forego the
escrowed funds.
<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 25, 1998 By: /s/Michael Brenner
--------------------------------------
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 25, 1998
- ------------------------ 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 25, 1998
- -------------------------- 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, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<PERIOD-TYPE> YEAR
<INVESTMENTS-AT-COST> 8,200,626
<INVESTMENTS-AT-VALUE> 5,269,614
<RECEIVABLES> 0
<ASSETS-OTHER> 70,682
<OTHER-ITEMS-ASSETS> 933,930
<TOTAL-ASSETS> 6,274,226
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 68,976
<TOTAL-LIABILITIES> 68,976
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,136,262
<SHARES-COMMON-STOCK> 150,570
<SHARES-COMMON-PRIOR> 155,671
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2,931,012)
<NET-ASSETS> 6,205,250
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 111,351
<OTHER-INCOME> 0
<EXPENSES-NET> 842,889
<NET-INVESTMENT-INCOME> (731,548)
<REALIZED-GAINS-CURRENT> 275,256
<APPREC-INCREASE-CURRENT> 80,677
<NET-CHANGE-FROM-OPS> (375,615)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 5,101
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (595,498)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 131,578
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 847,449
<AVERAGE-NET-ASSETS> 6,502,999
<PER-SHARE-NAV-BEGIN> 64
<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> 62
<EXPENSE-RATIO> 13.0
<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>
