<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, 1998
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 (pages 23
to 25) of the Prospectus of Technology Funding Venture Capital Fund VI,
LLC, as revised June 4, 1998 (accession number 0000950133-98-002220),
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, 1996, unless
further extended for up to two additional two-year periods by
the General Partners. In September 1996, the General Partners
exercised their right and extended the term of the Partnership
to December 31, 1998. In April 1998, the General Partners
further extended the term of the Partnership to December 31,
2000, unless 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 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 1998.
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, 1998, there were 5,086 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,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Total income $ 8,703 111,351 328,865 1,305,344 1,159,042
Net operating (loss)
income (774,340) (731,548) (560,566) (470,089) 194,471
Net realized (loss) gain
from sales of equity
investments (67,034) 267,869 48,824 2,438,619 25,813
Realized losses from
investment write-downs (1,284,518) -- (125,104) (2,367,660) (2,460,743)
Recoveries from investments
previously written off 93,837 7,387 113,214 28,690 --
Net realized loss (2,032,055) (456,292) (523,632) (370,440) (2,240,459)
Change in net unrealized
fair value:
Equity investments (514,375) 95,677 (1,033,488) 1,604,675 (1,220,545)
Notes receivable 2,145,000 (15,000) (67,000) 346,000 (286,000)
Net (loss) income (401,430) (375,615) (1,624,120) 1,580,235 (3,747,004)
Net realized loss per unit (13) (3) (3) (2) (14)
Total assets 5,899,774 6,274,226 7,168,026 10,266,004 7,661,352
Distributions declared -- -- -- 466,804 300,003
Distributions declared
per Unit (1) -- -- -- 3 2
(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 1998, net cash used by operating activities totaled $731,952.
The Partnership paid management fees of $104,386 to the Managing
General Partner and reimbursed related parties for operating
expenses of $509,667. Other operating expenses of $126,602 were
paid, and interest income of $8,703 was received.
During 1998, the Partnership funded $445,246 in equity
investments primarily to a portfolio company in the industrial
and business automation industry. Proceeds from sales of equity
investments and recoveries from investments previously written
off provided cash of $194,767 and $93,837, respectively. As
disclosed in Note 10 to the Financial Statements, certain funds
escrowed as collateral for a note payable of a portfolio company
were released in 1998, providing cash of $247,574.
Cash and cash equivalents at December 31, 1998, were $28,836.
Operating cash reserves combined with repayments of secured
notes receivable and future proceeds from the sales of
investments are expected to be sufficient to fund Partnership
operations through the next twelve months.
Results of Operations
- ---------------------
1998 compared to 1997
- ---------------------
Net losses were $401,430 and $375,615 for the years ended
December 31, 1998 and 1997, respectively. The increased loss
was primarily due to a $1,284,518 increase in realized losses
from investment write-downs, a $610,052 decrease in the change
in net unrealized fair value of equity investments, and a
$334,903 decrease in realized gain from sales of equity
investments. Additionally, there was a $131,577 increase in
operating expenses, and a $102,648 decrease in total income.
These decreases were partially offset by a $2,160,000 increase
in the change in net unrealized fair value of notes receivable
and a $174,274 decrease in other investment expenses.
Realized losses from investment write-downs totaled $1,284,518
in 1998 and resulted primarily from the write-down of equity
investments in Wasatch Education Systems Corporation. This
write-down was based on the opinion of the Managing General
Partner that the operating status of the company and the highly
competitive educational software market indicated a permanent
decline in value of the company's equity investment. There were
no investment write-downs in 1997.
The Partnership recorded a $514,375 decrease in the change in
fair value of equity investments in 1998 as compared to a
$95,677 increase in 1997. The 1998 decrease was comprised of a
decrease in the fair value of a portfolio company in the
industrial/business automation industry and the sale of an
investment in a portfolio company in the microelectronics
industry. These decreases in fair value were partially offset
by an increase resulting from the realization of the loss from
the write-down of Wasatch Education Systems Corporation. The
1997 gain 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 1998, the Partnership's $67,034 net realized loss from
sales of equity investments resulted from the sale of Celeritek,
Inc. common shares, partially offset by a gain on the sale of
3Com Corporation common shares. The 1997 net realized gain from
sales of equity investments resulted from the sale of the
Partnership's investment in MTI Technology Corporation.
Total operating expenses were $668,624 and $537,047 in 1998 and
1997, respectively. As disclosed in Note 2 to the financial
statements, the Managing General Partner re-evaluated
allocations to the Partnership in 1998 and determined that they
had not fully recovered allocable operating expenses, primarily
salary, benefits, and professional fees as permitted by the
Partnership agreement. As a result, the Partnership was charged
$154,704 of additional operating expenses in 1998 of which
$17,151 and $137,553 related to 1997 and prior years,
respectively. If the additional expense had been recorded in
prior years, total operating expenses would have been $513,920
and $554,198 for 1998 and 1997, respectively.
Total income in 1998 decreased to $8,703 from $111,351 in 1997
primarily due to a decrease in interest income earned on short-
term investments as a result of declining cash reserves.
The Partnership recorded a $2,145,000 increase in the fair value
of notes receivable in 1998 compared to a $15,000 decrease in
1997. The increase in 1998 was primarily due to an increase in
expected loan repayments resulting from the improved financial
condition of borrowing companies in the computer and computer
equipment and industrial/business automation industries.
Other investment expenses of $174,274 in 1997 related to
litigation which was settled in 1997. There were no such
expenses in 1998.
Given the inherent risk associated with the business of the
Partnership, the future performance of portfolio company
investments may significantly impact future 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.
YEAR 2000
- ---------
Widespread use of computer programs that use two digits rather
than four to store, calculate, and display year values in dates
may cause computer systems to malfunction in the year 2000,
resulting in significant business delays and disruptions.
The Partnership's State of Readiness
- ------------------------------------
Computer services are provided to the Partnership by its
Managing General Partner, Technology Funding Inc. ("TFI".) For
several years, TFI has sought to use Year 2000 compliant storage
formats and algorithms in its internally-developed and
maintained systems. TFI has also completed initial evaluations
of computer systems, software, and embedded technologies. Those
evaluations confirmed that certain components of its network
server hardware and operating systems, voice mail system, e-mail
system, and accounting software may have Year 2000 compliance
issues. These resources and several less-critical components of
the systems environment were all scheduled as part of normal
maintenance and replacement cycles to be replaced or upgraded as
Year 2000 compatible components became available from vendors
during 1998 and 1999. That program remains on schedule to
provide Year 2000 capable systems timely without significant
expenditures or disruption of Partnership operations. However,
the risk remains that TFI may not be able to verify whether Year
2000 compatibility claims by vendors are accurate, or whether
changes undertaken to achieve Year 2000 compatibility will
create other undetected problems in associated systems.
Therefore, TFI anticipates that Year 2000 compliance testing and
maintenance of these systems will continue as needed into the
first quarter of 2000.
As part of Year 2000 evaluation, TFI has also assembled a
database listing its significant suppliers to assess the extent
to which it needs to prepare for any of those parties' potential
failure to remediate their Year 2000 compliance issues. TFI is
reviewing public Year 2000 statements of those suppliers and
preparing questionnaires to be sent to mission-critical vendors
whose public statements were not adequate for assessment. TFI
will continue to monitor its significant suppliers as part of
its Year 2000 evaluation. However, there can be no guarantee
that the systems of other companies on which TFI relies will be
timely converted, or that failure to convert will not have a
material adverse effect on the Partnership and its operations.
TFI is also working with the Partnership's portfolio companies
to determine the extent to which their operations are vulnerable
to Year 2000 issues. There can be no guarantee that the systems
of portfolio companies in which the Partnership has invested
will be timely converted, or that their failure to convert will
not have a material adverse effect on the Partnership.
The Cost to Address Year 2000 Issues
- ------------------------------------
Expenditures in 1998 related to Year 2000 issues were not
material to the Partnership's financial statements. TFI expects
that additional expenditures for Year 2000 compliance will not
be material to the Partnership.
The Risks Associated with Year 2000 Issues
- ------------------------------------------
Any failure by the portfolio companies in which the Partnership
has invested, or by those portfolio companies' key suppliers or
customers, to anticipate and avoid Year 2000 related problems at
reasonable cost could have a material adverse effect on the
value of and/or the timing of realization of value from the
Partnership's investments. If Year 2000 compliance issues are
not resolved by December 31, 1999, internal system failures or
miscalculations could cause a temporary inability to process
transactions, loss of ability to send or receive e-mail and
voice mail messages, or disruptions in other normal business
activities. Additionally, failure of third parties on whom TFI
relies to remediate their Year 2000 issues timely could result
in disruptions in the Partnership's relationship with its
financial institutions, temporary disruptions in processing
transactions, unanticipated costs, and problems related to the
Partnership's daily operations. While TFI continues to address
its internal Year 2000 issues, until TFI receives and evaluates
responses from a significant number of its suppliers, the
overall risks associated with the Year 2000 issue remain
difficult to describe and quantify. There can be no guarantee
that the Year 2000 issue will not have a material adverse effect
on the Partnership and its operations.
TFI's Contingency Plan
- ----------------------
As part of its normal efforts to assure business continuation in
the event of natural disasters, systems failures, or other
disruptions, TFI has prepared contingency plans including an
extensive Year 2000 contingency plan. Taken together with TFI's
Year 2000 remediation plan, it identifies potential points of
failure, approaches to correcting known Year 2000 problems,
dates by which the preferred corrections are anticipated to be
made and tested, and alternative approaches if the corrections
are not completed timely or are later found to be inadequate.
Although backup systems and contingency approaches have been
identified for most mission-critical systems and vendor
dependencies, there remain some systems for which no good
alternative exists, and there may be some problems that prove
more intractable than currently anticipated.
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 on pages 23 to 25 in the parallel
sections of the Technology Funding Venture Capital Fund VI, LLC,
Prospectus, revised June 4, 1998 (accession number 0000950133-
98-002220), 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 1998, the Partnership incurred $114,419 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, 1998.
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, 1998 and 1997
Statements of Operations for the years ended
December 31, 1998, 1997 and 1996
Statements of Partners' Capital for the years ended
December 31, 1998, 1997 and 1996
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
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, 1998.
(c) Financial Data Schedule for the year ended and as of
December 31, 1998 (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, 1998 and 1997, and the related statements of operations, partners'
capital, and cash flows for each of the years in the three-year period
ended December 31, 1998. 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, 1998 and 1997. 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, 1998 and 1997, and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Albuquerque, New Mexico /S/KPMG LLP
March 26, 1999
<PAGE>
BALANCE SHEETS
- --------------
</TABLE>
<TABLE>
<CAPTION> December 31,
----------------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Investments:
Notes receivable, net (cost basis of
$4,057,307 in 1998 and 1997) $3,937,307 1,792,307
Equity investments (cost basis of
$3,042,246 and $4,143,319 in 1998 and
1997, respectively) 1,861,859 3,477,307
--------- ---------
Total investments 5,799,166 5,269,614
Cash and cash equivalents 28,836 669,856
Restricted cash 16,500 264,074
Due from related parties -- 52,126
Other assets 55,272 18,556
--------- ---------
Total assets $5,899,774 6,274,226
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 73,424 57,675
Due to related parties 11,678 --
Other liabilities 10,852 11,301
--------- ---------
Total liabilities 95,954 68,976
Commitments, contingencies, and subsequent
event (Notes 2, 4, and 10)
Partners' capital:
Limited Partners
(Units outstanding of 150,570 in
1998 and 1997) 7,278,331 9,290,065
General Partners (174,124) (153,803)
Net unrealized fair value decrease
from cost:
Notes receivable (120,000) (2,265,000)
Equity investments (1,180,387) (666,012)
--------- ---------
Total partners' capital 5,803,820 6,205,250
--------- ---------
Total liabilities and partners'
capital $5,899,774 6,274,226
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS
- ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Income:
Secured notes receivable
interest $ -- 22,462 138,770
Short-term investment interest 8,703 88,889 185,854
Other income -- -- 4,241
--------- ------- ---------
Total income 8,703 111,351 328,865
--------- ------- ---------
Costs and expenses:
Management fees 114,419 131,578 165,379
Other investment expenses -- 174,274 201,820
Operating expenses:
Lending operations and
investment management 151,543 132,357 138,446
Administrative and investor
services 396,994 291,379 252,509
Computer services 47,035 65,590 83,418
Professional fees 73,052 47,721 47,859
--------- ------- ---------
Total operating expenses 668,624 537,047 522,232
--------- ------- ---------
Total costs and expenses 783,043 842,899 889,431
--------- ------- ---------
Net operating loss (774,340) (731,548) (560,566)
Net realized (loss) gain from
sales of equity investments (67,034) 267,869 48,824
Realized losses from
investment write-downs (1,284,518) -- (125,104)
Recoveries from investments
previously written off 93,837 7,387 113,214
--------- ------- ---------
Net realized loss (2,032,055) (456,292) (523,632)
Change in net unrealized
fair value:
Equity investments (514,375) 95,677 (1,033,488)
Notes receivable 2,145,000 (15,000) (67,000)
--------- ------- ---------
Net loss $ (401,430) (375,615) (1,624,120)
========= ======= =========
Net realized loss
per Unit $ (13) (3) (3)
========= ======= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF PARTNERS' CAPITAL
- -------------------------------
<TABLE>
<CAPTION>
For the years ended December 31, 1998, 1997, and 1996:
Net Unrealized Fair
Value Increase
(Decrease) From Cost
------------------------
Limited General Equity Notes
Partners Partners Investments Receivable Total
-------- -------- ----------- ---------- -----
<S> <C> <C> <C> <C> <C>
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)
Notes receivable -- -- -- (67,000) (67,000)
---------- ------- --------- --------- ---------
Partners' capital,
December 31, 1996 9,961,677 (149,240) (761,689) (2,250,000) 6,800,748
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
Notes receivable -- -- -- (15,000) (15,000)
---------- ------- --------- --------- ---------
Partners' capital,
December 31, 1997 9,290,065 (153,803) (666,012) (2,265,000) 6,205,250
Net realized loss (2,011,734) (20,321) -- -- (2,032,055)
Change in net unrealized fair
value:
Equity investments -- -- (514,375) -- (514,375)
Notes receivable -- -- -- 2,145,000 2,145,000
---------- ------- --------- --------- ---------
Partners' capital,
December 31, 1998 $ 7,278,331 (174,124) (1,180,387) (120,000) 5,803,820
========== ======= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS
- ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Cash flows from operating
activities:
Interest received $ 8,703 111,351 323,252
Other income received -- -- 4,241
Cash paid to vendors (126,602) (570,993) (377,998)
Cash paid to related parties (614,053) (631,756) (1,458,213)
Cash paid to affiliated
partnerships -- -- (2,047)
Reimbursement for collection
expenses received from
portfolio companies -- 3,572 41,542
--------- --------- ---------
Net cash used by operating
activities (731,952) (1,087,826) (1,469,223)
--------- --------- ---------
Cash flows from investing
activities:
Notes receivable issued -- (181,413) (168,002)
Repayments of secured notes
receivable -- 4,989 823,522
Purchase of equity investments (445,246) (1,864,753) --
Proceeds from sales of
equity investments 194,767 388,827 57,574
Recoveries from investments
previously written off 93,837 7,387 113,214
Payments from (deposits to)
restricted cash 247,574 378,620 (592,694)
--------- --------- ---------
Net cash provided (used) by
investing activities 90,932 (1,266,343) 233,614
--------- --------- ---------
Cash flows from financing
activities:
Distributions to Limited and
General Partners -- -- (466,804)
Repurchase of Limited Partnership
interests -- (219,883) (112,216)
--------- --------- ---------
Net cash used by financing
activities -- (219,883) (579,020)
--------- --------- ---------
Net decrease in cash
and cash equivalents (641,020) (2,574,052) (1,814,629)
<PAGE>
STATEMENTS OF CASH FLOWS
- ------------------------
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Cash and cash equivalents
at beginning of year 669,856 3,243,908 5,058,537
--------- --------- ---------
Cash and cash equivalents
at end of year $ 28,836 669,856 3,243,908
========= ========= =========
Reconciliation of net loss
to net cash used by operating
activities:
Net loss $ (401,430) (375,615) (1,624,120)
Adjustments to reconcile net
loss to net cash used by
operating activities:
Net realized loss (gain) from
sales of equity investments 67,034 (267,869) (48,824)
Realized losses from investment
write-downs 1,284,518 -- 125,104
Recoveries from investments
previously written off (93,837) (7,387) (113,214)
Amortization of discount
related to warrants -- -- (5,678)
Change in net unrealized
fair value:
Equity investments 514,375 (95,677) 1,033,488
Notes receivable (2,145,000) 15,000 67,000
Changes in:
Accounts payable and accrued
expenses 15,749 (252,140) (30,316)
Due to/from related parties 63,804 (94,995) (829,953)
Other (37,165) (9,143) (42,710)
--------- --------- ---------
Net cash used by operating
activities: $ (731,952) (1,087,826) (1,469,223)
========= ========= =========
Non-cash investing activities:
Non-cash exercise of
warrants $ -- 5,196 8,497
========= ========= =========
</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. In April 1998, the
General Partner's further extended the term of the Partnership to December
31, 2000, unless 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
- -----------
Notes Receivable, Net
---------------------
The Partnership's method of accounting for secured and unsecured notes
receivable, in accordance with generally accepted accounting principles, is
the fair value basis used for investment companies.
The fair value of notes receivable is their initial cost basis adjusted for
unrealized gains and losses. The cost basis is comprised of note principal
plus accrued interest, less any discount related to warrants. The net
unrealized gain or loss is reviewed quarterly by the Managing General
Partner and is adjusted upward or downward to reflect the change in the
fair market value of the notes. Fair value may change due to an increase
or decrease in the allowance for loan losses, or when the current expected
loan proceeds exceed the cost basis. Adjustments to fair value are
reflected as "Change in net unrealized fair value of notes receivable".
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.
Where, in the opinion of the Managing General Partner, events indicate
there has been an other than temporary decline in value below the cost
basis of the note, an appropriate reduction in the cost basis is recognized
as "Realized losses from investment write-downs" on the Statements of
Operations. "Recoveries from investments previously written off" represent
realized gains when payment is received on such notes.
In conjunction with certain secured notes, upon note issuance or
restructure, the Partnership has received warrants to purchase certain
types of capital stock or capital stock of the borrowing company. The cost
basis of such warrants and the resulting discount has generally 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 resulting 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 $0 and
$708,864 at December 31, 1998 and 1997, 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 $1,861,859 and $2,768,443 at December 31, 1998 and 1997,
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 1998, 1997, and 1996 of 150,570,
155,221, and 157,128, 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 $7,099,553 by $2,005,676 as of December 31, 1998.
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,
-----------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Management fees $114,419 131,578 165,379
Reimbursable operating expenses:
Lending operations and
investment management 141,932 134,418 159,570
Administrative and investor
services 374,471 212,469 219,893
Computer services 47,035 58,296 83,418
</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. Management fees payable at December 31,
1998 were $10,033. All management fees had been paid at December 31, 1997.
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, 1998, amounts due to related parties totaled
$1,645, and at December 31, 1997, amounts due from related parties totaled
$52,126.
The Managing General Partner allocates operating expenses incurred in
connection with the business of the Partnership based on employee hours
incurred. In 1998, operating cost allocations to the Partnership were re-
evaluated. The Managing General Partner determined that they had not fully
recovered allocable operating expenses, primarily salary, benefits, and
professional fees, as permitted by the Partnership Agreement. As a result,
the Partnership was charged additional operating expenses of $154,704,
consisting of $17,151, $25,002, and $112,551 for 1997, 1996, and prior
years, respectively. Had the additional expenses been recorded in prior
years, operating expenses would have been $513,920, 554,198, and $547,234
for 1998, 1997 and 1996, respectively.
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 TFI, 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.
An affiliated partnership owns approximately 80% of MARCorp, a portfolio
company. In addition, the Partnership and affiliated partnerships have
secured notes receivable from MARCorp.
The Partnership together with affiliated entities own a 66% interest in
Cyclean, Inc., a portfolio company. In addition, the Partnership and
affiliated partnerships wholly own Cyclean of Los Angeles, LLC ("CLA"), a
portfolio company. The Partnership also owns 33% of CLB, LLC ("CLB"), a
portfolio company, and together with an affiliated partnership wholly own
CLB. The Partnership and other affiliated partnerships have notes
receivable from Cyclean, Inc., CLA, and CLB. Additionally, the General
Partners have charged CLB for certain management services provided during
1998 and 1997.
In 1996, a portfolio company of the Partnership and affiliated partnerships
entered into a joint venture with the General Partners to perform
investment recovery efforts in order to increase the future investment
returns to the Partnership. 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. Through December
31, 1998, the Partnership realized recoveries of $91,337 and the General
Partners had not realized any profit from the joint venture.
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. Notes Receivable, Net
---------------------
At December 31, 1998 and 1997, notes receivable consisted of:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------- -----------------
Investment Cost Fair Cost Fair
Industry/Company Date Position Basis Value Basis Value
- ---------------- ---------- -------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Industrial/Business Automation
- ------------------------------
Cyclean, Inc. and 09/87- Secured notes
Cyclean of 09/94 receivable, plus
Los Angeles, LLC interest, totaling
$2,435,426 $ 925,653 1,272,634 925,653 413,653
CLB, LLC 04/97 Unsecured note
receivable, plus
interest, totaling
$160,600 132,000 132,000 132,000 132,000
Computers and Computer Equipment
- --------------------------------
MARCorp 12/89- Secured notes
02/93 receivable, plus
interest, totaling
$13,718,448 2,999,654 2,532,673 2,999,654 1,246,654
--------- --------- --------- ---------
Total notes receivable $4,057,307 3,937,307 4,057,307 1,792,307
========= ========= ========= =========
Cyclean, Inc. and Cyclean of Los Angeles, LLC.
- ----------------------------------------------
The Partnership has valued its secured notes receivable investment in these
companies at its estimated share of proceeds that could result from a
current sale or liquidation. Because both companies are on going
operations and not currently pursuing sale or liquidation, there are
inherent uncertainties involved in estimating these proceeds. The
estimated fair value of $1,272,634 at December 31, 1998, may differ
significantly from a value that would have been used had the ultimate
realization of the investment been known, and the differences could be
material.
MARCorp
- -------
In 1998, the Company entered into an agreement to sell the majority of its
assets to the management of one of its subsidiaries. The Partnership has
valued its secured notes receivable investment in the company at its
expected share of the proceeds from this sale. The fair market value of
these proceeds at December 31, 1998 was $2,532,673. In February 1999, the
Partnership received $678,037 of these proceeds, the remainder of which are
due to be received no later than August 2000.
Resonex Holding Corporation
- ---------------------------
In 1998, the Partnership realized recoveries of $91,337 on notes receivable
written off in prior years. (See Note 2.)
Changes in the net unrealized fair value of notes receivable were as
follows:
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C>
Net unrealized fair value decrease
from cost at beginning of year $(2,265,000) (2,250,000) (2,183,000)
Change in net unrealized fair value
of notes receivable 2,145,000 (15,000) (67,000)
--------- --------- ---------
Net unrealized fair value increase
decrease from cost at end of year $ (120,000) (2,265,000) (2,250,000)
========= ========= =========
</TABLE>
The secured notes are collateralized by specific assets of the borrowing
companies, and interest rates on secured and unsecured notes at December
31, 1998, ranged from 12% to 13%. Scheduled principal repayments are
$1,311,939 and $2,999,655 for 1999 and 2000, respectively. Notes
receivable which are due on demand are included as principal repayments in
1999. In addition, the Managing General Partner may at times need to
restructure notes by either extending maturity dates or converting notes
into equity investments to increase the ultimate collectibility of the
Partnership's investments.
The notes receivable portfolio at December 31, 1998 and 1997, was on
nonaccrual status due to uncertainty of the 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.
5. Equity Investments
------------------
At December 31, 1998 and December 31, 1997, equity investments consisted of:
<TABLE>
December 31, 1998 December 31, 1997
------------------- -----------------
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 Common share
Systems warrant for 959,546
Corporation shares at $0.50;
expiring 06/00 $ 0 0 5,000 0
Industrial/Business Automation
- ------------------------------
Cyclean, Inc. 08/88- Common share
01/95 warrants for
168,191 shares (1) 0 0 0 0
------- ------- ------- -------
Total warrants 0 0 5,000 0
------- ------- ------- -------
December 31, 1998 December 31, 1997
------------------- -----------------
Investment Cost Fair Cost Fair
Industry/Company Date Position Basis Value Basis Value
- ---------------- ---------- -------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
STOCKS:
Computers and Computer Equipment
- --------------------------------
Censtor Corporation 05/95 4,538 Common
shares 0 0 2,395 0
MARCorp 12/89- 406,693 Series A
02/93 Preferred shares 0 0 0 0
MARCorp 05/92 Convertible
subordinated
debenture,
$1,936,104
principal amount 0 0 0 0
Computer Software and Systems
- -----------------------------
Wasatch Education 06/95 1,741,550
Systems Series C
Corporation Preferred
shares 464,427 464,427 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- 225,088 Series D
04/96 Preferred shares 242,989 0 242,989 0
Cyclean of 03/95 Class A LLC Unit
Los Angeles, LLC 45% ownership 11,091 0 11,091 0
CLB, LLC 04/97- 2,309,999
06/98 LLC Units 2,309,999 1,396,333 1,864,753 1,864,753
December 31, 1998 December 31, 1997
------------------- -----------------
Investment Cost Fair Cost Fair
Industry/Company Date Position Basis Value Basis Value
- ---------------- ---------- -------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Medical
- -------
HemoCleanse, Inc. 03/95- 15,907 Common
01/97 shares 10,269 0 10,269 31,812
Resonex Holding 02/94 11,402 Common
Corporation shares 0 0 0 0
Microelectronics
- ----------------
Celeritek, Inc. 05/94 47,219 Common
shares -- -- 253,426 657,761
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
--------- --------- --------- ---------
Total stocks 3,042,246 1,861,859 4,138,319 3,477,307
--------- --------- --------- ---------
Total equity investments $3,042,246 1,861,859 4,143,319 3,477,307
========= ========= ========= =========
- -- No investment held at end of period.
0 Investment active with a carrying value or fair value of zero.
(1) Cyclean, Inc. common share warrants are exercisable at prices ranging from $2.74 to $4.00
per share and expire on dates ranging from 03/99 to 07/02.
</TABLE>
Marketable Equity Securities
- ----------------------------
At December 31, 1997, marketable equity securities had aggregate costs of
$261,804 and aggregate fair values of $708,864. The net unrealized gains
at December 31, 1997, did not include any gross losses. All of the
Partnership's marketable equity securities were sold in 1998.
3Com Corporation
- ----------------
In September 1998, the Partnership sold its investment in the company for
total proceeds of $47,213 and realized a gain of $38,838.
Celeritek, Inc.
- ---------------
In September 1998, the Partnership sold its investment in the company for
total proceeds of $147,554 and realized a loss of $105,872.
CLB, LLC
- --------
In 1998, the Partnership purchased 445,246 LLC Units for $445,246. The
Partnership, together with an affiliated partnership, own 100% of the
company.
The Partnership has valued its investment in the company at its estimated
share of proceeds that could result from a current sale or liquidation of
the company. Because the company is an on going operation and not
currently pursuing a sale or liquidation, there are inherent
uncertainties involved in estimating these proceeds. The estimated fair
value of $1,396,333 at December 31, 1998 may differ significantly from a
value that would have been used had the ultimate realization of the
investment been known, and the differences could be material.
Wasatch Education Systems Corporation
- -------------------------------------
In February 1997, the company sold its education market net assets to
Wasatch Interactive Learning Company ("WILC"), 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, 1998, the company had net current assets
of $505,000(unaudited) and is expected to receive future royalties from
WILC of approximately $900,000(unaudited). The Partnership has valued
its investment in the company at its share of net current assets and
expected future royalty payments. Because of the highly competitive
educational software marketplace, no value has been assigned to the
company's capitalized technology costs. Based on this valuation, the
Partnership recorded a write-down of the cost basis and fair market value
of its investment to $464,427, at December 31, 1998, resulting in a
realized loss of $1,282,123. Because of the inherent uncertainties
involved in estimating these future proceeds, the estimated fair value of
$464,427 may differ significantly from a value that would have been used
had a ready market existed, and the differences could be material.
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,
---------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Increase in fair
value from cost of marketable
equity securities $ -- 447,060 327,887
Decrease in fair value
from cost of non-marketable
equity securities (1,180,387) (1,113,072) (1,089,576)
--------- --------- ---------
Net unrealized fair value
decrease from cost
at end of year (1,180,387) (666,012) (761,689)
Net unrealized fair value
(decrease) increase from cost
at beginning of year (666,012) (761,689) 271,799
--------- --------- ---------
Change in net unrealized
fair value of equity
investments $ (514,375) 95,677 (1,033,488)
========= ========= =========
7. Cash and Cash Equivalents
-------------------------
At December 31, 1998 and 1997, cash and cash equivalents consisted of:
</TABLE>
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Demand accounts $ 27,472 38,563
Money-market accounts 1,364 631,293
-------- -------
Total $ 28,836 669,856
======== =======
</TABLE>
8. Litigation and Other Investment Expenses
----------------------------------------
Other investment expenses in 1997 and 1996 of $174,274 and $201,820,
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 1997, the Partnership and the portfolio
company obtained a favorable judgment in their appeal of a prior trial
court ruling that declared the assets of the portfolio company, for a sum
not certain, were available to satisfy certain claims of Quebecor.
Quebecor's subsequent appeal to the North Carolina Supreme Court was
denied in July 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 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 1997, a counterclaim 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 was $247,500. As discussed in Note 10, the Partnership's escrowed
funds were released in June 1998.
9. Repurchase of Limited Partnership Interests
-------------------------------------------
Each June, subject to the limitations of the Partnership agreement,
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 101 Units for $219,883 in 1997 and 2,158 Units for
$112,216 in 1996. The Partnership did not repurchase Units in 1998.
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, 1998, the Partnership had no
unfunded commitments for investments.
In April 1997, the Partnership together with an affiliated partnership
deposited $750,000 into an escrow account as collateral for a $750,000
note payable of Ecopave. At December 31, 1997, the Partnership's share
of the deposit was $247,500. In June 1998, certain assets of CLB, LLC, a
portfolio company, were pledged as collateral for the Ecopave note
payable, resulting in the release of the Partnership's escrowed funds.
The Partnership, however, remains a guarantor for the note payable.
In December 1997, the Partnership together with an affiliated partnership
guaranteed $50,000 of 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 29, 1999 By: /s/Michael Brenner
--------------------------------------
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 29, 1999
- ------------------------ Executive Officer,
Charles R. Kokesh Chief Financial
Officer and Chairman of
Technology Funding Inc.
and Managing 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, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<PERIOD-TYPE> YEAR
<INVESTMENTS-AT-COST> 7,099,553
<INVESTMENTS-AT-VALUE> 5,799,166
<RECEIVABLES> 0
<ASSETS-OTHER> 55,272
<OTHER-ITEMS-ASSETS> 45,336
<TOTAL-ASSETS> 5,899,774
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 95,954
<TOTAL-LIABILITIES> 95,954
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,104,207
<SHARES-COMMON-STOCK> 150,570
<SHARES-COMMON-PRIOR> 150,570
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,300,387)
<NET-ASSETS> 5,803,820
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8,703
<OTHER-INCOME> 0
<EXPENSES-NET> 783,043
<NET-INVESTMENT-INCOME> (774,340)
<REALIZED-GAINS-CURRENT> (1,257,715)
<APPREC-INCREASE-CURRENT> 1,630,625
<NET-CHANGE-FROM-OPS> (401,430)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (401,430)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 114,419
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 783,793
<AVERAGE-NET-ASSETS> 6,004,535
<PER-SHARE-NAV-BEGIN> 62
<PER-SHARE-NII> (13)
<PER-SHARE-GAIN-APPREC> 0 <F1>
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 49
<EXPENSE-RATIO> 13.04
<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.
</FN>
</TABLE>
