<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Year Ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
--- ---
Commission File No. 0-14607
TECHNOLOGY FUNDING PARTNERS II
------------------------------
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-2970428
- ------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2000 Alameda de las Pulgas, Suite 250
San Mateo, California 94403
- --------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(415) 345-2200
--------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Limited
Partnership Units
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
No active market for the units of limited partnership interests
("Units") exists, and therefore the market value of such Units cannot be
determined.
Documents incorporated by reference: Portions of the Prospectus dated
August 14, 1985 forming a part of Registration Statement No. 2-98729 and
as modified by Supplement No. 3 dated October 27, 1986 and filed
pursuant to Rule 424(c) of the General Rules and Regulations under the
Securities Act of 1933 are incorporated by reference in Parts I and III
hereof. Portions of the Prospectus of Technology Funding Medical
Partners I, L.P., as modified by Cumulative Supplement No. 4 dated
January 4, 1995, forming a part of the May 3, 1993, Pre-Effective
Amendment No. 3 to the Form N-2 Registration Statement No. 33-54002
dated October 30, 1992, is incorporated by reference in Part III hereof.
<PAGE>
PART I
Item 1. BUSINESS
- ------ --------
Technology Funding Partners II (hereinafter referred to as
the "Partnership" or the "Registrant") is a limited
partnership organized under the laws of the State of
California on June 13, 1985. The purpose of the Partnership
is to provide venture capital financing to high technology
companies, equity partnerships, and joint ventures as
described in the "Introductory Statement" and "Business of
the Partnership" sections of the Prospectus dated August 14,
1985 that forms a part of Registrant's Form S-1 Registration
Statement (such Prospectus, as supplemented, 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's Amended and Restated Limited
Partnership Agreement ("Partnership Agreement") provides that
the Partnership will continue until December 31, 2005, unless
terminated sooner.
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 in
1994.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- ------ -------------------------------------------------------------
MATTERS
-------
(a) There is no established public trading market for the
Units.
(b) At December 31, 1994, there were 2,363 record holders of
Units.
(c) The Registrant, being a partnership, does not pay
dividends. Cash distributions, however, may be made to
the partners pursuant to the Registrant's Partnership
Agreement.
Item 6. SELECTED FINANCIAL DATA
- ------ -----------------------
<TABLE>
<CAPTION>
For the Years Ended and As of December 31,
--------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income $ 25,269 74,370 137,743 136,667 149,318
Net operating loss (881,725) (796,481) (774,359) (690,653) (791,717)
Net realized gain from sale
of equity investments -- 30,216 183,745 1,890,386 1,365,272
Realized losses from
investment write-downs -- (1,021,161) (554,897) (1,142,063) (873,451)
Provision for loan losses -- -- (2,187,423) (797,416) (275,000)
Net realized loss (881,725) (1,787,426) (3,332,934) (739,746) (574,896)
Change in net unrealized
fair value:
Equity investments (1,448,637) (125,140) -- -- --
Secured notes receivable (12,000) 105,000 -- -- --
Cumulative effect on prior
periods of changing to the
fair value method of
accounting for investments -- 5,381,934 -- -- --
Net (loss) income (2,342,362) 3,574,368 (3,332,934) (739,746) (574,896)
Net realized loss per Unit (17) (35) (66) (15) (11)
Total assets 6,320,036 7,827,286 3,290,208 5,935,881 6,739,958
Short-term borrowings (2,497,736) (1,595,056) (656,563) -- --
Distributions declared -- -- -- -- (404,065)
</TABLE>
Refer to the financial statement notes entitled "Summary of
Significant Accounting Policies" and "Allocation of Profits
and Losses" for a description of the method of calculation of
net realized loss per Unit.
Refer to the financial statement note entitled "Change in
Method of Accounting for Investments" for a description of an
accounting change made prospectively in 1993.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------ -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
- -----------------------------------
Liquidity and Capital Resources
- -------------------------------
In 1994, net cash used by operations totaled $980,819. The
Partnership paid management fees of $500,000 to the Managing
General Partner and reimbursed related parties for operating
expenses of $271,715. In addition, other operating expenses
of $62,778 were paid and interest income of $3,127 was
received. The Partnership also paid $149,453 for interest on
short-term borrowings.
In early 1994, the Partnership established a new line of
credit with a financial institution. The maximum borrowing
capacity of $2,500,000 was reduced to $1,954,581 at December
31, 1994 due to lower collateral value. The actual
outstanding balance of $2,497,736 at year end was higher
based on a different collateral calculation ("indebtedness
balance"). The Partnership's shares in Viewlogic Systems,
Inc. and Cytocare, Inc. are pledged as collateral.
Cash and cash equivalents at December 31, 1994 were $2,934.
Proceeds from the future sale of investments and General
Partner support are expected to be adequate to fund
Partnership operations through the next twelve months.
Results of Operations
- ---------------------
1994 compared to 1993
- ---------------------
Net loss was $2,342,362 in 1994 compared to a net income of
$3,574,368 in 1993. The 1993 net income was primarily due to
the cumulative effect at January 1, 1993 of $5,381,934 from
the Partnership adopting the fair value method of accounting
for investments. In addition, other changes were related to
decreases of $1,323,497 and $117,000 in the fair values of
equity investments and secured notes receivable,
respectively, partially offset by a $1,021,161 decrease in
realized losses from investment write-downs.
In 1994, the decrease in fair value of equity investments of
$1,448,637 was primarily due to market price declines of
public portfolio companies in the medical and electronic
design automation industries. In 1993, the decrease in fair
value was $125,140.
In 1994, the Partnership recorded a decrease in fair value of
secured notes receivable of $12,000 based upon the level of
loan loss reserves deemed adequate by the Managing General
Partner. A $105,000 increase was recorded in 1993. The 1993
increase was due primarily to a reduction in the loan loss
reserve related to the conversion of $705,054 from secured
notes receivable and interest to equity investments.
There were no realized losses from investment write-downs in
1994. In 1993, write-downs of $1,021,161 were primarily from
an investment in the computer systems and software industry
as the portfolio company terminated operations.
Operating expenses were $406,994 in 1994 compared to $370,851
in 1993. The increase in operating expenses was primarily
due to higher interest expense from increased borrowings on
the line of credit, partially offset by a decline in
investment operations expense due to lower overall portfolio
activity.
Interest income was $25,269 in 1994 compared to $74,370 in
1993. The decrease was primarily due to a lower average
outstanding balance on interest bearing secured notes
receivable.
Given the inherent risk associated with the business of the
Partnership, the future performance of the portfolio company
investments may significantly impact future operations.
1993 compared to 1992
- ---------------------
Net income was $3,574,368 in 1993 compared to a net loss of
$3,332,934 in 1992. The change was primarily due to the
Partnership adopting the fair value method of accounting for
investments in 1993. The cumulative effect of this change on
prior periods resulted in an increase in income of $5,381,934
as investments were recorded at total fair value which
exceeded total cost basis. In addition, the provision for
loan losses decreased by $2,187,423. These changes were
partially offset by a $466,264 increase in realized losses
from investment write-downs.
In 1993, the Partnership recorded an increase in fair value
of secured notes receivable of $105,000, as previously
discussed, based upon the level of loan loss reserves deemed
adequate by the Managing General Partner. For the same
period in 1992, the decrease in fair value was recorded as a
provision for loan losses and was reflected as a realized
loss since the Partnership accounted for secured notes
receivable on a cost basis. The provision for loan losses in
1992 was $2,187,423.
In 1993, the Partnership realized losses from investment
write-downs of $1,021,161 primarily from the write-off of
investments in a portfolio company in the computer systems
and software industry as the company terminated operations in
1993. Realized losses from investment write-downs of
$554,897 in 1992 primarily related to portfolio companies in
the computer systems and software, and medical industries.
Net realized gain from sale of equity investments were
$30,216 and $183,745 in 1993 and 1992, respectively. Amounts
realized for both years related to the Omni-Flow, Inc.
liquidation.
Operating expenses were $370,851 in 1993 compared to $412,102
in 1992. The decrease in operating expenses was primarily
due to lower overall portfolio activity, partially offset by
higher interest expense from increased borrowings on the
margin account.
Interest income was $74,370 in 1993 compared to $137,743 in
1992. The decrease was primarily due to a lower average
outstanding balance on interest-bearing secured and
convertible notes receivable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
The financial statements of the Registrant are set forth in
Item 14.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ------ ------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
- -----------------------------------
Registrant has reported no disagreements with its accountants
on matters of accounting principles or practices or financial
statement disclosure.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
As a partnership, the Registrant has no directors or
executive officers. Technology Funding Ltd., a California
limited partnership ("TFL") and Technology Funding Inc., a
California corporation ("TFI") and wholly-owned subsidiary of
TFL, are the General Partners of the Partnership. TFI is the
Managing General Partner. Information concerning the
ownership of TFL and the business experience of the key
officers of TFI and the partners of TFL is incorporated by
reference from the sections entitled "Management of the
Partnership - The General Partners" and "Management of the
Partnership - Key Personnel" in the Prospectus, which are
incorporated herein by reference. Changes in this
information that have occurred since the date of the
Prospectus are included in the Technology Funding Medical
Partners I, L.P. Prospectus, as modified by Cumulative
Supplement No. 4 dated January 4, 1995, forming a part of the
May 3, 1993, Pre-Effective Amendment No. 3 to the Form N-2
Registration Statement No. 33-54002 dated October 30, 1992
which is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
- ------- ----------------------
As a partnership, the Registrant has no officers or
directors. In 1994, the Partnership incurred $500,000 in
management fees. The fees are designed to compensate the
General Partners for General Partner Overhead incurred in
performing management duties for the Partnership through
December 31, 1994. General Partner Overhead (as defined in
the Partnership Agreement) includes rent, utilities, and
certain salaries and benefits paid by the General Partners.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- ------- ---------------------------------------------------
MANAGEMENT
- ----------
Not applicable. No limited partner beneficially holds more
than 5% of the aggregate number of Units held by all Limited
Partners, and neither the General Partners nor any of their
officers, directors or partners own any Units. The General
Partners control the affairs of the Partnership pursuant to
the Partnership Agreement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
The Registrant has engaged in no transactions with the
General Partners or their officers and partners other than as
described above, in the notes to the financial statements, or
in the Prospectus.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
- ------- ------------------------------------------------------------
8-K
---
(a) List of Documents filed as part of this Annual Report on
Form 10-K
(1) Financial Statements - the following financial
statements are filed as a part of this Report:
Independent Auditors' Report
Balance Sheets as of December 31, 1994
and 1993
Statements of Operations for the years
ended December 31, 1994, 1993 and 1992
Statements of Partners' Capital for the years
ended December 31, 1994, 1993 and 1992
Statements of Cash Flows for the years
ended December 31, 1994, 1993 and 1992
Notes to Financial Statements
(2) Financial Statement Schedules
All schedules have been omitted because they are
not applicable or the required information is
included in the financial statements or the notes
thereto.
(3) Exhibits
Registrant's Amended and Restated Limited
Partnership Agreement (incorporated by reference to
Exhibit A to Registrant's Prospectus dated August
14, 1985, included in Registration Statement No. 2-
98729 filed pursuant to Rule 424(b) of the General
Rules and Regulations under the Securities Act of
1933).
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant
during the year ended December 31, 1994.
(c) Financial Data Schedule for the year ended and as of
December 31, 1994 (Exhibit 27).
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
The Partners
Technology Funding Partners II:
We have audited the accompanying balance sheets of Technology Funding
Partners II (a California limited partnership) as of December 31, 1994
and 1993, and the related statements of operations, partners' capital,
and cash flows for each of the years in the three-year period ended
December 31, 1994. These financial statements are the responsibility
of the Partnership's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of certain
securities owned by correspondence with the individual investee
companies and a physical examination of those securities held by a
safeguarding agent as of December 31, 1994 and 1993. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Technology
Funding Partners II as of December 31, 1994 and 1993, and the results
of its operations and its cash flows for each of the years in the
three-year period ended December 31, 1994 in conformity with generally
accepted accounting principles.
As discussed in Note 10 to the financial statements, in 1993 the
Partnership changed its method of accounting for investments from a
cost basis to a fair value basis.
As explained in Notes 1, 6, and 7, the financial statements include
investments of $6,307,718 and $7,746,213 (167% and 126% of partners'
capital) as of December 31, 1994 and 1993, respectively, whose values,
in certain circumstances, have been estimated by the Managing General
Partner in the absence of readily ascertainable market values. We
have reviewed the procedures used by the Managing General Partner in
arriving at its estimate of value of such investments and have
inspected underlying documentation, and, in the circumstances, we
believe the procedures are reasonable and the documentation
appropriate. However, because of the inherent uncertainty of
valuation, those estimated values may differ significantly from the
values that would have been used had a ready market for the
investments existed, and the difference could be material.
San Francisco, California KPMG Peat Marwick LLP
March 17, 1995
<PAGE>
BALANCE SHEETS
- --------------
<TABLE>
<CAPTION>
December 31,
----------------------
1994 1993
---- ----
<S> <C> <C>
ASSETS
Investments:
Equity investments (cost basis of
$2,189,096 and $2,064,096 at 1994
and 1993, respectively) $6,130,253 7,453,890
Secured notes receivable, net
(cost basis of $217,465 and
$320,323 at 1994 and 1993,
respectively) 177,465 292,323
--------- ---------
Total investments 6,307,718 7,746,213
Cash and cash equivalents 2,934 81,073
Due from related parties 9,384 --
--------- ---------
Total $6,320,036 7,827,286
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 34,732 37,528
Due to related parties -- 64,772
Short-term borrowings 2,497,736 1,595,056
--------- ---------
Total liabilities 2,532,468 1,697,356
Commitments and subsequent events
(Notes 4, 6, 9 and 11)
Partners' capital:
Limited Partners
(Units outstanding
of 50,000 at 1994 and 1993) 87,801 960,708
General Partners (201,390) (192,572)
Net unrealized fair value increase
(decrease) from cost:
Equity investments 3,941,157 5,389,794
Secured notes receivable (40,000) (28,000)
--------- ---------
Total partners' capital 3,787,568 6,129,930
--------- ---------
Total $6,320,036 7,827,286
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS
- ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Interest income $ 25,269 74,370 137,743
Costs and expenses:
Management fees 500,000 500,000 500,000
Operating expenses:
Investment operations 59,549 84,455 142,442
Administrative and
investor services 142,286 134,450 159,155
Computer services 29,031 37,807 49,527
Professional fees 26,675 40,646 54,415
Interest expense 149,453 73,493 6,563
--------- --------- ---------
Total operating expenses 406,994 370,851 412,102
--------- --------- ---------
Total costs and expenses 906,994 870,851 912,102
--------- --------- ---------
Net operating loss (881,725) (796,481) (774,359)
Provision for loan losses -- -- (2,187,423)
Net realized gain from
sale of equity investments -- 30,216 183,745
Realized losses from
investment write-downs -- (1,021,161) (554,897)
--------- --------- ---------
Net realized loss (881,725) (1,787,426) (3,332,934)
Change in net unrealized
fair value:
Equity investments (1,448,637) (125,140) --
Secured notes receivable (12,000) 105,000 --
Cumulative effect on prior
periods of changing to the
fair value method of
accounting for
investments -- 5,381,934 --
--------- --------- ---------
Net (loss) income $(2,342,362) 3,574,368 (3,332,934)
========= ========= =========
Net realized loss
per Unit $ (17) (35) (66)
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF PARTNERS' CAPITAL
- -------------------------------
<TABLE>
<CAPTION>
For the years ended December 31, 1994, 1993 and 1992:
Net Unrealized Fair Value
Increase (Decrease) From Cost
-----------------------------
Limited General Equity Secured Notes
Partners Partners Investments Receivable Total
-------- -------- ----------- ------------- -----
<S> <C> <C> <C> <C> <C>
Partners' capital,
December 31, 1991 $ 6,029,865 (141,369) -- -- 5,888,496
Net realized loss (3,299,605) (33,329) -- -- (3,332,934)
--------- ------- --------- ------- ---------
Partners' capital,
December 31, 1992 2,730,260 (174,698) -- -- 2,555,562
Net realized loss (1,769,552) (17,874) -- -- (1,787,426)
Change in net unrealized
fair value:
Equity investments -- -- (125,140) -- (125,140)
Secured notes receivable -- -- -- 105,000 105,000
Cumulative effect on prior
periods of changing to the
fair value method of
accounting for investments -- -- 5,514,934 (133,000) 5,381,934
--------- ------- --------- ------- ---------
Partners' capital,
December 31, 1993 960,708 (192,572) 5,389,794 (28,000) 6,129,930
Net realized loss (872,907) (8,818) -- -- (881,725)
Change in net unrealized
fair value:
Equity investments -- -- (1,448,637) -- (1,448,637)
Secured notes receivable -- -- -- (12,000) (12,000)
---------- ------- --------- ------- ---------
Partners' capital,
December 31, 1994 $ 87,801 (201,390) 3,941,157 (40,000) 3,787,568
========== ======= ========= ======= =========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
STATEMENTS OF CASH FLOWS
- ------------------------
<TABLE>
<CAPTION>
For The Years Ended December 31,
------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash flows from operations:
Interest received $ 3,127 56,694 81,684
Interest paid on short-term
borrowings (149,453) (73,493) (6,563)
Cash paid to vendors (62,778) (76,582) (103,609)
Cash paid to related parties (771,715) (568,506) (771,809)
------- ------- ---------
Net cash used by
operations (980,819) (661,887) (800,297)
------- ------- ---------
Cash flows from investing
activities:
Secured notes receivable
issued -- (75,000) (1,222,066)
Repayments of convertible
and secured notes receivable -- 18,000 158,333
Purchase of equity
investments -- (200,000) (464,463)
Proceeds from sale of
investments -- 30,216 183,745
------- ------- ---------
Net cash used by
investing activities -- (226,784) (1,344,451)
------- ------- ---------
Cash flows from financing
activities:
Proceeds from short-term
borrowings, net 902,680 938,493 656,563
------- ------- ---------
Net cash provided by
financing activities 902,680 938,493 656,563
------- ------- ---------
Net (decrease) increase in cash
and cash equivalents (78,139) 49,822 (1,488,185)
Cash and cash equivalents
at beginning of year 81,073 31,251 1,519,436
------- ------- ---------
Cash and cash equivalents
at end of year $ 2,934 81,073 31,251
======= ======= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (continued)
- -----------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Reconciliation of net
(loss) income to net cash
used by operations:
Net (loss) income $(2,342,362) 3,574,368 (3,332,934)
Adjustments to reconcile
net (loss) income to
net cash used by
operations:
Net realized gain from
sale of investments -- (30,216) (183,745)
Realized losses from
investment write-downs -- 1,021,161 554,897
Provision for loan losses -- -- 2,187,423
Change in net unrealized
fair value:
Equity investments 1,448,637 125,140 --
Secured notes
receivable 12,000 (105,000) --
Cumulative effect of a
change in accounting
principle -- (5,381,934) --
Other, net (1,183) (600) (1,974)
Changes in:
Accrued interest on
convertible and secured
notes receivable (20,959) (17,076) (54,085)
Due to/from related parties (74,156) 28,958 22,146
Prepaid management fees -- 125,000 --
Other, net (2,796) (1,688) 7,975
--------- --------- ---------
Net cash used by operations $ (980,819) (661,887) (800,297)
========= ========= =========
Non-cash investing activities:
Notes receivable and accrued
interest converted to
equity investments $ 125,000 705,054 112,785
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
1. Summary of Significant Accounting Policies
------------------------------------------
Organization
- ------------
Technology Funding Partners II (the "Partnership") is a limited
partnership organized under the laws of the State of California on
June 13, 1985. The purpose of the Partnership is to provide venture
capital financing to, and participate in the management of, high
technology companies, equity partnerships, and joint ventures. The
General Partners are Technology Funding Ltd. ("TFL") and its wholly-
owned subsidiary, Technology Funding Inc. ("TFI"); TFI is the
Managing General Partner. The registration statement of the
Partnership, filed with the Securities and Exchange Commission,
became effective on August 14, 1985. The Partnership commenced
selling units of limited partnership interest ("Units") on August
14, 1985. On October 14, 1985, the minimum number of Units required
to form the Partnership (3,000) had been sold. On December 30, 1986
the offering terminated with 50,000 Units sold. The Partnership
Agreement provides that the Partnership will continue until December
31, 2005, unless terminated sooner.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents are principally comprised of cash invested
in money market accounts and are stated at cost plus accrued
interest. The Partnership considers all money market and short-term
investments with an original maturity of three months or less to be
cash equivalents.
Provision for Income Taxes
- --------------------------
No provision for income taxes has been made for 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.
Since 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 $2,406,561 by
$1,255,351 as of December 31, 1994.
Net Realized Loss Per Unit
- --------------------------
Net realized loss per Unit is calculated by dividing the number of
Units outstanding as of December 31, 1994, 1993, and 1992 (50,000)
into the total net realized loss allocated to the Limited Partners.
The General Partners contributed an amount equal to 0.1% of total
limited partner capital contributions and did not receive any
Partnership Units.
Investments:
- -----------
The Partnership's method of accounting for investments, in
accordance with generally accepted accounting principles, is the
fair value basis used for investment companies. The fair value of
Partnership investments is their initial cost basis with changes as
noted below:
Equity Investments
------------------
The fair value for publicly-traded equity investments (marketable
equity securities) is based upon the five day average closing sales
price or bid/ask price that is available on a national securities
exchange or over-the-counter market. Certain publicly-traded equity
investments may not be marketable due to selling restrictions. For
publicly-traded equity investments with selling restrictions, an
illiquidity discount of 25% is applied when determining fair value.
Sales of equity investments are recorded on the trade date. The
basis on which cost is determined in computing realized gains or
losses is generally specific identification.
Other equity investments, which are not publicly traded, are
generally valued utilizing pricing obtained from the most recent
round of third party financings. Valuation is determined quarterly
by the Managing General Partner. Included in equity investments are
convertible or subordinated notes receivable as repayment of these
notes may occur through conversion into equity investments.
Equity investments with temporary changes in fair value result in
increases or decreases to the unrealized fair value of equity
investments. The cost basis does not change. In the case of an
other than temporary decline in value below cost basis, an
appropriate reduction in the cost basis is recognized as a realized
loss with the fair value being adjusted to match the new cost basis.
Adjustments to fair value basis are reflected as "Change in net
unrealized fair value of equity investments." Cost basis
adjustments are reflected as "Realized losses from investment write-
downs" on the Statements of Operations.
Secured Notes Receivable, Net
-----------------------------
The secured notes receivable portfolio includes accrued interest
less the discount related to warrants and the allowance for loan
losses. The portfolio approximates fair value through inclusion of
an allowance for loan losses. Allowance for loan losses is reviewed
quarterly by the Managing General Partner and is adjusted to a level
deemed adequate to cover possible losses inherent in notes and
unfunded commitments. Notes receivable are placed on nonaccrual
status when, in the opinion of the Managing General Partner, the
future collectibility of interest or principal is in doubt.
In conjunction with the secured notes granted to portfolio
companies, the Partnership has received warrants to purchase certain
shares of capital stock of the borrowing companies. 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 companies. The discount is
amortized to interest income on a straight-line basis over the term
of the loan. Warrants received in conjunction with convertible
notes are not assigned any additional costs. These warrants are
included in the equity investment portfolio.
Nonrefundable fees received in connection with loan fundings are
deferred and amortized to interest income over the contractual life
of the loan using the effective interest method or the straight-line
method if it is not materially different. Direct loan origination
costs consist of third-party costs and generally are reimbursed by
portfolio companies.
2. Financing of Partnership Operations
-----------------------------------
The Managing General Partner expects cash received from the
liquidation of Partnership investments and the collection of notes
receivable will provide the necessary liquidity to service
Partnership debt and fund Partnership operations. Until such future
proceeds are received, the Partnership is dependent upon the
financial support of the Managing General Partner to fund
operations. The Managing General Partner has committed to support
the Partnership's working capital requirements through advances as
necessary.
3. Change in Net Unrealized Fair Value of Equity Investments
---------------------------------------------------------
In accordance with the accounting policy as stated in Note 1, the
Statements of Operations include a line item entitled "Change in net
unrealized fair value of equity investments." The table below
discloses details of the changes:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Increase in fair value
from cost of marketable
equity securities $ 3,423,720 3,776,069 2,869,199
Increase in fair value from
cost of non-marketable
equity securities 517,437 1,613,725 2,645,735
--------- --------- ---------
Net unrealized fair
value increase from
cost at end of year 3,941,157 5,389,794 5,514,934
Net unrealized fair
value increase from
cost at beginning
of year 5,389,794 5,514,934 --
--------- --------- ---------
Change in net unrealized
fair value of equity
investments $(1,448,637) (125,140) 5,514,934
========= ========= =========
</TABLE>
4. Related Party Transactions
--------------------------
Included in costs and expenses are related party costs as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Management fees $500,000 500,000 500,000
Reimbursable operating
expenses:
Investment operations 59,065 78,906 136,838
Administrative and
investor services 109,463 105,751 107,665
Computer services 29,031 37,807 49,451
</TABLE>
Management fees are equal to two percent of the total limited
partners' capital contributions. The fees will remain at this level
in future years. Management fees compensate the Managing General
Partner solely for General Partner Overhead (as defined in the
Partnership Agreement) incurred in supervising the operations and
management of the Partnership and the Partnership's investments. At
December 31, 1994 and 1993, there were no prepaid or accrued
management fees.
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, 1994,
there was $9,384 due from related parties for such expenses compared
to $64,772 due to related parties at December 31, 1993.
Under the terms of a computer service agreement, the Partnership
paid Technology Administrative Management, a division of TFL, for
its share of computer support costs for the years ended December 31,
1994, 1993 and 1992. These amounts are included in computer
services expenses above.
Officers of the General Partners occasionally receive stock options
as compensation for serving on the Boards of Directors of portfolio
companies. It is the General Partners' policy that all such
compensation be transferred to the investing Partnerships. If the
options are non-transferable, they are not recorded as an asset of
the Partnership. Any profit from the exercise of such options will
be transferred if and when the options are exercised and the
underlying stock is sold by the officers. At December 31, 1994, the
Partnership had an indirect interest, worth approximately $5,819 in
non-transferable Viewlogic Systems, Inc. and Cytocare, Inc. options.
5. Allocation of Profits and Losses
--------------------------------
Net profit and loss of the Partnership are allocated as follows:
A. Losses:
(i) 99% to the Limited Partners as a group and 1% to the
General Partners until such time as the aggregate
amount of such losses equals their total initial
capital contributions; then
(ii) Losses in excess of Limited Partner capital accounts
will be allocated to the General Partners as a group.
B. Profits:
(i) Net profits shall be first allocated to the General
Partners to the extent of losses allocated in A(ii);
then
(ii) 99% to the Limited Partners as a group, and 1% to the
General Partners as a group until such time as the
aggregate amount of cash and the value of securities
distributed to the Limited Partners equals the
aggregate amount of limited partner capital
contributions; then
(iii)75% to the Limited Partners as a group and 25% to the
General Partners as a group.
6. Equity Investments
------------------
At December 31, 1994 and 1993, equity investments consisted of:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
Principal ----------------- -----------------
Investment Amount or Cost Fair Cost Fair
Industry/Company Position Date Shares Basis Value Basis Value
- ---------------- -------- ------- ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Computer Systems and Software
- -----------------------------
Quick Connect Common
Software, Inc. shares 08/94 13,636 $ 0 0 -- --
Wasatch Education Common
Systems shares
Corporation 05/86 193,264 156,544 23,497 156,544 153,350
Wasatch Education Common
Systems warrants
Corporation at $1.31;
expiring
05/97 05/92 133,595 0 0 0 0
Wasatch Education Common
Systems warrants
Corporation at $.50;
expiring
04/98 04/93 376,250 0 0 0 141,094
Wasatch Education Common
Systems warrants
Corporation at $.50;
expiring
04/98 04/93 70,000 0 0 0 25,000
Wasatch Education Series A
Systems Preferred
Corporation shares 06/93 700,000 700,000 700,000 700,000 700,000
Electronic Design Automation
- ----------------------------
Viewlogic Common 12/91 &
Systems, Inc. shares 10/92 211,306 321,409 3,641,478 321,409 4,321,445
Industrial/Business Automation
- ------------------------------
Acuity Imaging, Common
Inc (formerly shares 03/88 27,685 33,222 194,486 33,222 145,623
Automatix, Inc.)
Medical
- -------
Cardiac Science, Common 07/91 -
Inc. shares 09/94 324,239 9,333 60,794 9,333 241,273
Cardiac Science, Common
Inc. warrants
at $.15;
expiring
04/97 04/92 833,333 -- -- 1,250 492,500
Cardiac Science, Common
Inc. options
at $2.05;
expiring
12/97,
15,000 in
total, fully
vested
in 12/95 12/92 10,000 0 0 0 0
Cardiac Science, Common
Inc. shares 09/94 833,333 126,250 156,250 -- --
CEMAX, Inc. Common
shares 06/86 8,850 13,275 13,275 13,275 13,275
CEMAX, Inc. Redeemable
convertible
Series A
Preferred
shares 05/92 323,250 129,622 4,849 129,622 4,849
CEMAX, Inc. Redeemable
convertible
Series B
Preferred
shares 05/92 97,059 33,330 145,589 33,330 145,589
CEMAX, Inc. Redeemable
convertible
Series C
Preferred
shares 05/92 94,005 141,007 141,007 141,007 141,007
Cytocare, Inc. Common
shares 06/88 211,351 525,104 1,049,028 525,104 928,885
Microelectronics
- ----------------
Giordano Series D
Associates, Inc. Preferred
shares 06/89 770 0 0 0 0
Giordano Series E
Associates, Inc. Preferred
shares 06/89 85 0 0 0 0
--------- --------- --------- ----------
Total equity investments $2,189,096 6,130,253 2,064,096 7,453,890
========= ========= ========= ==========
0 Investment active with a carrying value or fair value of zero.
- -- No investment held at end of period.
</TABLE>
Marketable Equity Securities
- ----------------------------
At December 31, 1994 and 1993, marketable equity securities had
aggregate costs of $559,243 and $554,273, respectively, and
aggregate fair values of $3,982,963 and $4,330,342, respectively.
The net unrealized gains at December 31, 1994 and 1993 included
gross gains of $3,438,556 and $3,776,069, respectively.
Acuity Imaging, Inc. (formerly Automatix, Inc.)
- -----------------------------------------------
In January 1994, Automatix, Inc. changed its name to Acuity
Imaging, Inc., merged with Itran Corporation, and had a 20 for 1
reverse common stock split. The Partnership's investment was
converted into 27,685 marketable, unrestricted common shares of
Acuity Imaging, Inc. The increase in the net unrealized fair value
of $48,863 reflected the market price at December 31, 1994.
Cardiac Science, Inc.
- ---------------------
In September 1994, the company resumed operations after it
completed a new round of equity financing. The company suspended
operations in February 1994 pending such additional financing.
Also in September 1994, the Partnership used its existing $125,000
notes receivable from the company to exercise its warrants and
received 833,333 common shares. In addition, 50,666 shares of
common stock were received as consideration for interest on the
note. At December 31, 1994, the Partnership recorded a change in
fair value decrease of $641,729 mainly due to a market value
decline as a result of the temporary suspension of operations.
Related to the new round of financing, all of the Partnership's
common shares became restricted resulting in a 25% illiquidity
discount from market value, which also contributed to the decrease
in fair value.
Cytocare, Inc.
- --------------
The Partnership recorded an increase in fair value of $120,143 to
reflect the publicly-traded market price at December 31, 1994; the
fair value was adjusted to reflect a 25% discount for restricted
securities.
Viewlogic Systems, Inc.
- -----------------------
The Partnership recorded a decrease in fair value of $679,967 to
reflect the publicly-traded market price at December 31, 1994; the
fair value was adjusted to reflect a 25% discount for restricted
securities.
Wasatch Education Systems Corporation
- -------------------------------------
The Partnership recorded a decrease in fair value of $295,947 based
on the publicly-traded market price of this investment at December
31, 1994; the fair value was adjusted to reflect a 25% discount for
restricted securities. In 1993, based on a June 1993 financing
round and the relatively low level of common stock trading to set a
market price, the fair value for the company's preferred and common
stock was estimated to be $1.00 per share. Since there has not
been a recent round of financing, the publicly-traded market price
is used to value common stock and warrants at December 31, 1994.
The Managing General Partner believes the best valuation at this
time for the preferred shares is $1.00 per share.
7. Secured Notes Receivable, Net
-----------------------------
At December 31, 1994 and 1993, secured notes receivable consisted
of:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Secured notes receivable $175,000 300,000
Accrued interest 43,253 22,294
Unamortized discount related to warrants (788) (1,971)
------- -------
Total secured notes receivable,
net (cost basis) 217,465 320,323
Allowance for loan losses (40,000) (28,000)
------- -------
Total secured notes receivable,
net (fair value) $177,465 292,323
======= =======
</TABLE>
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Balance, beginning of year $28,000 133,000
------ -------
Increase (decrease) in provision
for loan losses 12,000 (48,000)
Secured notes receivable write-offs:
Computer systems and software -- (57,000)
------ -------
Change in net unrealized fair value of
secured notes receivable 12,000 (105,000)
------ -------
Balance, end of year $40,000 28,000
====== =======
</TABLE>
The increase (decrease) in provision for loan losses is generally
comprised of realized loan losses, net of recognized recoveries,
and a change in net unrealized fair value based upon the level of
loan loss reserve deemed adequate by the Managing General Partner
at the respective year ends.
The allowance for loan losses is adjusted based upon changes to the
portfolio size and risk profile. Although the allowance is
established by evaluating individual debtor repayment ability, the
allowance represents the Managing General Partner's assessment of
the portfolio as a whole.
The interest rate on secured notes receivable at December 31, 1994
was 12%.
The principal balance of $175,000 is scheduled to be repaid in
1995. The Managing General Partner may at times need to
restructure notes by either extending maturity dates or converting
notes to equity investments to increase the ultimate collectibility
of investments to the Partnership.
8. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at December 31, 1994 and 1993 consisted
of:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Demand accounts $ 382 8,493
Money-market accounts 2,552 72,580
----- ------
Total $2,934 81,073
===== ======
</TABLE>
9. Short-term Borrowings
---------------------
In early 1994, the Partnership established a new line of credit
with a financial institution. The line of credit will expire on
April 5, 1995; however, the Managing General Partner plans to renew
the line of credit. The maximum drawing capacity of $2,500,000 was
reduced to $1,954,581 based on collateral value at December 31,
1994. The actual outstanding balance may be higher based on a
different collateral calculation ("indebtedness balance"). During
1993, the Partnership maintained a margin account with a brokerage
firm, which was replaced by the line of credit. The balance
outstanding at December 31, 1994 was $2,497,736. The maximum and
weighted average amounts outstanding on this account during the
year ended December 31, 1994 were $2,497,736 and $2,040,264,
respectively. In 1993, the maximum and weighted average amounts
outstanding were $1,595,056 and $1,288,326, respectively. The
year-end and weighted average interest rates during the year ended
December 31, 1994 were 8.5% and 7.14%. In 1993, both the year-end
and weighted average interest rates were 6%. In 1994, interest
expense of $149,453 was recorded. The Partnership's shares in
Viewlogic Systems, Inc. and Cytocare, Inc. are pledged as
collateral.
10. Change in Method of Accounting for Investments
----------------------------------------------
In 1993 the Partnership changed its method of accounting and
reporting for investments from a cost basis to a fair value basis.
The newly adopted accounting principle is preferable because it
provides more meaningful financial information and more accurately
reflects the current values of the Partnership's portfolio assets.
Under the cost basis method of accounting, 1993 net loss would have
been $1,815,426, or $36 per Unit, as changes in fair value would
not have been reflected on the Statement of Operations.
The cumulative effect of the change on prior periods is presented
as a separate item on the 1993 Statement of Operations.
11. Subsequent Events
-----------------
For the Partnership's public portfolio companies at year end,
Viewlogic Systems, Inc. had a material fair value change subsequent
to December 31, 1994. This change reflects changes in common share
prices which fluctuate daily on stock exchanges.
As of February 24, 1995, the fair value for Viewlogic Systems, Inc.
decreased to $2,060,791, compared to $3,641,478 at December 31,
1994.
<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 PARTNERS II
By: TECHNOLOGY FUNDING INC.
Managing General Partner
Date: March 17, 1995 By: /s/Frank R. Pope
---------------------------------
Frank R. Pope
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated:
Signature Capacity Date
--------- -------- ----
/s/Charles R. Kokesh President, Chief March 17, 1995
- ------------------------ Executive Officer
Charles R. Kokesh and Chairman of
Technology Funding Inc.
and Managing General
Partner of Technology
Funding Ltd.
/s/Frank R. Pope Executive Vice March 17, 1995
- ------------------------ President, Chief
Frank R. Pope Financial Officer,
Secretary and a
Director of Technology
Funding Inc. and a
General Partner of
Technology Funding Ltd.
/s/Gregory T. George Group Vice March 17, 1995
- -------------------------- President of Technology
Gregory T. George Funding Inc.and a
General Partner of
Technology Funding Ltd.
The above represents a majority of the Board of Directors of
Technology Funding Inc. and a majority of the General Partners of
Technology Funding Ltd.
<TABLE> <S> <C>
<ARTICLE>6
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FORM 10-K AS OF DECEMBER 31, 1994 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<PERIOD-TYPE> YEAR
<INVESTMENTS-AT-COST> 2,406,561
<INVESTMENTS-AT-VALUE> 6,307,718
<RECEIVABLES> 0
<ASSETS-OTHER> 9,384
<OTHER-ITEMS-ASSETS> 2,934
<TOTAL-ASSETS> 6,320,036
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,532,468
<TOTAL-LIABILITIES> 2,532,468
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> (113,589)
<SHARES-COMMON-STOCK> 50,000
<SHARES-COMMON-PRIOR> 50,000
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,901,157
<NET-ASSETS> 3,787,568
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 25,269
<OTHER-INCOME> 0
<EXPENSES-NET> 906,994
<NET-INVESTMENT-INCOME> (881,725)
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> (1,460,637)
<NET-CHANGE-FROM-OPS> (2,342,362)
<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> (2,342,362)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 500,000
<INTEREST-EXPENSE> 149,453
<GROSS-EXPENSE> 908,094
<AVERAGE-NET-ASSETS> 4,958,749
<PER-SHARE-NAV-BEGIN> 19
<PER-SHARE-NII> (17)
<PER-SHARE-GAIN-APPREC> 0 <F1>
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 2
<EXPENSE-RATIO> .18
<AVG-DEBT-OUTSTANDING> 2,040,264
<AVG-DEBT-PER-SHARE> 41
<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>
