<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, 1999
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 1999.
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, 1999, there were 5,090 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,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Total income $ 6,876 8,703 111,351 328,865 1,305,344
Net operating loss (635,201) (774,340) (731,548) (560,566) (470,089)
Net realized (loss) gain
from sales of equity
investments -- (67,034) 267,869 48,824 2,438,619
Realized losses from
investment write-downs -- (1,284,518) -- (125,104) (2,367,660)
Recoveries from investments
previously written off -- 93,837 7,387 113,214 28,690
Net realized loss (635,201) (2,032,055) (456,292) (523,632) (370,440)
Change in net unrealized
fair value:
Equity investments (916,578) (514,375) 95,677 (1,033,488) 1,604,675
Notes receivable (608,000) 2,145,000 (15,000) (67,000) 346,000
Net (loss) income (2,159,779) (401,430) (375,615) (1,624,120) 1,580,235
Net (loss) income per
Unit (1) (14.20) (2.64) (2.40) (10.23) 8.84
Total assets 3,725,568 5,899,774 6,274,226 7,168,026 10,266,004
Distributions declared -- -- -- -- 466,804
Distributions declared
per Unit (2) -- -- -- -- 2.94
(1) See Notes 1 and 4 to the Financial Statements for discussion of partners' capital
reclassification and the method of calculation of net income (loss) per Unit.
(2) Calculation is based on distributions declared to Limited Partners divided by the weighted
average number of Units outstanding during the year.
</TABLE
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------ -----------------------------------------------------------
AND RESULTS OF OPERATIONS
- -------------------------
Liquidity and Capital Resources
- -------------------------------
In 1999, net cash used by operating activities totaled $668,583.
The Partnership paid management fees of $120,208 to the Managing
General Partner and reimbursed related parties for operating
expenses of $377,340. Other operating expenses of $177,911 were
paid, and interest income of $6,876 was received. Repayments of
secured notes receivable totaled $678,037.
Cash and cash equivalents at December 31, 1999 were $38,290. The
Partnership is scheduled to terminate on December 31, 2000. If no
further action is taken by the General Partners before this
termination date, the Partnership will be liquidated in accordance
with the Partnership Agreement. The General Partners expect to
request that the Partnership assets be transferred to a
liquidating trust (the "Trust") to continue the management and
sale of the remaining Partnership assets and the liquidation of
its obligations. Such a trust generally operates for a period not
exceeding two years (and its formation will require the approval
by a majority in interest of the Partners). Partners would have
beneficiary interests in the Trust equal to their individual
interests in the Partnership. Alternatively, the General Partners
may seek to obtain approval of a majority in interest of the
Limited Partners to extend the Partnership for two additional two-
year terms.
The General Partners have made loans to the Partnership to finance
its recurring losses from on-going operations. The Partnership
has very limited cash resources and primarily illiquid assets.
The General Partners are under no obligation to continue the
financing of the Partnership's daily operations and may elect to
discontinue such support at any time during the remaining life of
the Partnership or Trust, if created. The General Partners may
attempt to secure third party financing to continue operations
using the collateral value of the Partnership's remaining
investments. It is likely that a potential lender would require
the remaining Partnership investment be appraised by an
independent third party, specifically to assess their value as
readily liquid collateral prior to any financing. The collateral
values determined by a lender may differ significantly from the
investment fair value reflected in these financial statements.
Results of Operations
- ---------------------
1999 compared to 1998
- ---------------------
Net losses were $2,159,779 and $401,430 for the years ended
December 31, 1999 and 1998, respectively.
The Partnership recorded a $916,578 decrease in the change in fair
value of equity investments in 1999, as compared to a $514,375
decrease in 1998. The 1999 decrease was due to decreases in the
valuations of the Cyclean entities and Wasatch Education Systems
Corporation. 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 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.
In 1999, the Partnership recorded a $608,000 decrease in the fair
value of notes receivable, as compared to a $2,145,000 increase in
1998. These changes were due to changes in expected loan
repayments based on the financial conditions of borrowing
companies.
In 1998, realized losses from investment write-downs totaled
$1,284,518 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 1999.
Total operating expenses were $531,902 and $668,624 in 1999 and
1998, respectively. As disclosed in Note 3 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 which related to prior
years. If the additional expense had been recorded in prior
years, total operating expenses would have been $531,902 and
$513,920 for 1999 and 1998, respectively.
Given the inherent risk associated with the business of the
Partnership, the future performance of portfolio company
investments may significantly impact future 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 3 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.
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
1999, the Partnership incurred $110,175 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, 1999. 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, 1999 and 1998
Statements of Operations for the years ended
December 31, 1999, 1998 and 1997
Statements of Partners' Capital for the years ended
December 31, 1999, 1998 and 1997
Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
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, 1999.
(c) Financial Data Schedule for the year ended and as of December
31, 1999 (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, 1999 and 1998, and the related statements of operations, partners'
capital, and cash flows for each of the years in the three-year period
ended December 31, 1999. 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, 1999 and 1998. 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, 1999 and 1998, and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Partnership will continue as a going concern. As discussed in Note 2
to the financial statements, the Partnership has suffered recurring
losses from operations and has primarily illiquid assets that raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note
2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As discussed in Note 1 to the financial statements, under the terms of
the Partnership Agreement the Partnership can continue until December 31,
2000 unless dissolved earlier. Management's plans with regard to this
matter are also discussed in Note 1.
Albuquerque, New Mexico /S/KPMG LLP
March 29, 2000
<PAGE>
BALANCE SHEETS
- --------------
</TABLE>
<TABLE>
<CAPTION> December 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Investments:
Notes receivable, net (cost basis of
$3,379,270 and $4,057,307 in 1999 and
1998, respectively) $2,651,270 3,937,307
Equity investments (cost basis of
$3,042,246 in 1999 and 1998) 945,281 1,861,859
--------- ---------
Total investments 3,596,551 5,799,166
Cash and cash equivalents 38,290 28,836
Restricted cash 16,500 16,500
Due from related parties 11,197 --
Other assets 63,030 55,272
--------- ---------
Total assets $3,725,568 5,899,774
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 70,718 73,424
Due to related parties -- 11,678
Other liabilities 10,809 10,852
--------- ---------
Total liabilities 81,527 95,954
Commitments, contingencies and subsequent
events (Notes 1, 2, 3, 5 and 11)
Partners' capital
(150,570 Limited Partner Units
outstanding) 3,644,041 5,803,820
--------- ---------
Total liabilities and partners'
capital $3,725,568 5,899,774
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS
- ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Income:
Secured notes receivable
interest $ -- -- 22,462
Short-term investment interest 6,876 8,703 88,889
--------- --------- -------
Total income 6,876 8,703 111,351
--------- --------- -------
Costs and expenses:
Management fees 110,175 114,419 131,578
Other investment expenses -- -- 174,274
Operating expenses:
Lending operations and
investment management 90,238 151,543 132,357
Administrative and investor
services 303,264 396,994 291,379
Computer services 80,920 47,035 65,590
Professional fees 57,480 73,052 47,721
--------- --------- -------
Total operating expenses 531,902 668,624 537,047
--------- --------- -------
Total costs and expenses 642,077 783,043 842,899
--------- --------- -------
Net operating loss (635,201) (774,340) (731,548)
Net realized (loss) gain from
sales of equity investments -- (67,034) 267,869
Realized losses from
investment write-downs -- (1,284,518) --
Recoveries from investments
previously written off -- 93,837 7,387
--------- --------- -------
Net realized loss (635,201) (2,032,055) (456,292)
Change in net unrealized
fair value:
Equity investments (916,578) (514,375) 95,677
Notes receivable (608,000) 2,145,000 (15,000)
--------- --------- -------
Net loss $(2,159,779) (401,430) (375,615)
========= ========= =======
Net loss per Unit (14.20) (2.64) (2.40)
========= ========= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF PARTNERS' CAPITAL
- -------------------------------
<TABLE>
<CAPTION>
For the years ended December 31, 1999, 1998, and 1997:
Reclassified-(see Note 1)
-------------------------
Limited General
Partners Partners Total
-------- -------- -----
<S> <C> <C> <C>
Partners' capital,
December 31, 1996 $6,834,796 (34,048) 6,800,748
Net loss (371,859) (3,756) (375,615)
Repurchase of Units (219,883) -- (219,883)
--------- ------ ---------
Partners' capital,
December 31, 1997 6,243,054 (37,804) 6,205,250
Net loss (397,416) (4,014) (401,430)
--------- ------ ---------
Partners' capital,
December 31, 1998 5,845,638 (41,818) 5,803,820
Net loss (2,138,181) (21,598) (2,159,779)
--------- ------ ---------
Partners' capital,
December 31, 1999 $3,707,457 (63,416) 3,644,041
========= ====== =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS
- ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Cash flows from operating
activities:
Interest received $ 6,876 8,703 111,351
Cash paid to vendors (177,911) (126,602) (570,993)
Cash paid to related parties (497,548) (614,053) (631,756)
Reimbursement for collection
expenses received from
portfolio companies -- -- 3,572
------- --------- ---------
Net cash used by operating
activities (668,583) (731,952) (1,087,826)
------- --------- ---------
Cash flows from investing
activities:
Notes receivable issued -- -- (181,413)
Repayments of secured notes
receivable 678,037 -- 4,989
Purchase of equity investments -- (445,246) (1,864,753)
Proceeds from sales of
equity investments -- 194,767 388,827
Recoveries from investments
previously written off -- 93,837 7,387
Payments from restricted cash -- 247,574 378,620
------- --------- ---------
Net cash provided (used) by
investing activities 678,037 90,932 (1,266,343)
------- --------- ---------
Cash flows from financing
activities:
Repurchase of Limited Partnership
interests -- -- (219,883)
------- --------- ---------
Net cash used by financing
activities -- -- (219,883)
------- --------- ---------
Net increase (decrease) in cash
and cash equivalents 9,454 (641,020) (2,574,052)
<PAGE>
STATEMENTS OF CASH FLOWS
- ------------------------
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Cash and cash equivalents
at beginning of year 28,836 669,856 3,243,908
--------- --------- ---------
Cash and cash equivalents
at end of year $ 38,290 28,836 669,856
========= ========= =========
Reconciliation of net loss
to net cash used by operating
activities:
Net loss $(2,159,779) (401,430) (375,615)
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)
Realized losses from investment
write-downs -- 1,284,518 --
Recoveries from investments
previously written off -- (93,837) (7,387)
Change in net unrealized
fair value:
Equity investments 916,578 514,375 (95,677)
Notes receivable 608,000 (2,145,000) 15,000
Changes in:
Accounts payable and accrued
expenses (2,706) 15,749 (252,140)
Due to/from related parties (22,875) 63,804 (94,995)
Other (7,801) (37,165) (9,143)
--------- --------- ---------
Net cash used by operating
activities: $ (668,583) (731,952) (1,087,826)
========= ========= =========
Non-cash investing activities:
Non-cash exercise of
warrants $ -- -- 5,196
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
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 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. The Partnership is scheduled to
terminate on December 31, 2000. If no further action is taken by the
General Partners before this termination date, the Partnership will be
liquidated in accordance with the Partnership Agreement. The General
Partners expect to request that the Partnership assets be transferred
to a liquidating trust (the "Trust") to continue the management and
sale of the remaining Partnership assets and the liquidation of its
obligations. Such a trust generally operates for a period not
exceeding two years (and its formation would require the approval by a
majority in interest of the Partners). Partners would have
beneficiary interests in the Trust equal to their individual interests
in the Partnership. Alternatively, the General Partners may seek to
obtain approval of a majority in interest of the Limited Partners to
extend the Partnership for two additional two-year terms.
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.
Partners' Capital Reclassification
- ----------------------------------
<TABLE>
<CAPTION>
Commencing in the fourth quarter of 1999, the Partnership is including the change in net
unrealized fair value of investments in the profits and losses allocated to partners' capital
accounts based on a reevaluation of the Partnership Agreement. Accordingly, prior years have been
reclassified to conform to the current year presentation. The allocations of the net unrealized
fair value increase (decrease) from cost of investments, and resulting reclassifications, were
determined by applying the provisions of the Partnership Agreement described in Note 4 from the
inception of the Partnership. The reclassification has no effect on total partners' capital or
the Partnership's net income or loss for any period. The reclassifications resulting from the
reevaluation of the Partnership Agreement have the effect of accelerating the allocation of
profits or losses (under the provisions described in Note 4) to partners' capital accounts and, as
a result, may change the timing of any distributions allowable under the Partnership Agreement.
The allocations of the net unrealized fair value decrease reclassified in prior periods are as
follows:
Net Unrealized
Fair Value
Decrease
Limited General From Cost of
Partners Partners Investments Total
-------- -------- --------------- -----
<S> <C> <C> <C> <C>
Partners' capital, December 31, 1996,
before reclassification $9,961,677 (149,240) (3,011,689) 6,800,748
Allocation of net unrealized fair value
decrease from cost (3,126,881) 115,192 3,011,689 --
--------- ------- --------- ---------
Partners' capital, December 31, 1996,
as reclassified $6,834,796 (34,048) -- 6,800,748
========= ======= ========= =========
Partners' capital, December 31, 1997,
before reclassification $9,290,065 (153,803) (2,931,012) 6,205,250
Allocation of net unrealized fair value
decrease from cost (3,047,011) 115,999 2,931,012 --
--------- ------- --------- ---------
Partners' capital, December 31, 1997,
as reclassified $6,243,054 (37,804) -- 6,205,250
========= ======= ========= =========
Partners' capital, December 31, 1998,
before reclassification $7,278,331 (174,124) (1,300,387) 5,803,820
Allocation of net unrealized fair value
decrease from cost (1,432,693) 132,306 1,300,387 --
--------- ------- --------- ---------
Partners' capital, December 31, 1998,
as reclassified $5,845,638 (41,818) -- 5,803,820
========= ======= ========= =========
The reclassifications of the change in net unrealized fair value of investments for prior periods
are as follows:
Limited General
Partners Partners Total
-------- -------- ---------
For the Year Ended December 31, 1997 $ 79,870 807 80,677
For the Year Ended December 31, 1998 1,614,318 16,307 1,630,625
</TABLE>
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. There were no investments valued under this method at
December 31, 1999 or 1998.
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 $945,281 and $1,861,859 at December 31, 1999 and 1998,
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 Income (Loss) Per Unit
- --------------------------
Commencing in the fourth quarter of 1999, the Partnership is including the
change in net unrealized fair value of equity investments in the profits
and losses allocated to partners' capital accounts. (See discussion of
Partners' Capital Reclassification above. The 1998 and 1997 per Unit
amounts have been modified to conform to this presentation.) Net income
(loss) per Unit is calculated by dividing the weighted average number of
Limited Partner Units outstanding for the years ended December 31, 1999,
1998 and 1997 of 150,570, 150,570 and 155,221, respectively, into the total
net income (loss) allocated to the Limited Partners. The Managing General
Partners contributed 0.1% of total Limited Partner capital contributions
and did not receive any 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 $6,421,516 by $1,403,552 as of December 31, 1999.
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. Financing of Partnership Operations
-----------------------------------
The General Partners have made loans to the Partnership to finance its
recurring losses from on-going operations. The Partnership has very
limited cash resources and primarily illiquid assets. The General Partners
are under no obligation to continue the financing of the Partnership's
daily operations and may elect to discontinue such support at any time
during the remaining life of the Partnership or Trust, if created. The
General Partners may attempt to secure third party financing to continue
operations using the collateral value of the Partnership's remaining
investments. It is likely that a potential lender would require the
remaining Partnership investment be appraised by an independent third
party, specifically to assess their value as readily liquid collateral
prior to any financing. The collateral values determined by a lender may
differ significantly from the investment fair value reflected in these
financial statements.
3. Related Party Transactions
--------------------------
Included in costs and expenses are related party costs as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Management fees $110,175 114,419 131,578
Reimbursable operating expenses:
Lending operations and
investment management 89,691 141,932 134,418
Administrative and investor
services 193,887 374,471 212,469
Computer services 80,920 47,035 58,296
</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 were $0 and
$10,033 at December 31, 1999 and 1998, respectively.
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, 1999, amounts due from related parties totaled
$11,197, and at December 31, 1998, amounts due to related parties totaled
$1,645.
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 and $137,553 for 1997 and prior years, respectively.
Had the additional expenses been recorded in prior years, operating
expenses would have been $513,920 and $554,198 for 1998 and 1997,
respectively.
During 1997, the Partnership received reimbursements of $3,572 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. Effective December 31, 1998,
TFPM was acquired by TFL. Under the terms of a rent agreement, TFL charges
the Partnership for its share of office rent and related overhead costs on
a cost recovery basis. 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. An affiliated partnership has notes
payable to MARCorp. MARCorp and affiliated partnerships have advanced
loans to Sutmyn Storage Corporation. Wasatch Education Systems
Corporation, a portfolio company, advanced $500,000 to MARCorp during 1999
(see Notes 5 and 6.)
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
1999 and 1998.
4. Allocation of Profits and Losses
--------------------------------
In accordance with the Partnership Agreement (see Note 1), net profits and
losses of the Partnership are allocated based on beginning-of-year
partners' capital balances as follows:
(a) Profits:
(i) first, to those partners with deficit capital account balances
in proportion to such deficits until such deficits have been
eliminated.
(ii) second, to the partners as necessary to offset net loss
previously allocated to such partners and sales commissions
charged to their capital accounts until each partner has been
allocated cumulative net profit equal to cumulative net loss
previously allocated to such partner and its share of sales
commissions not already offset.
(iii) third, 99% to the Limited Partners and 1% to the General
Partners until the Limited Partners have been allocated an
amount of cumulative net 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.
(iv) fourth, 80% to the Limited Partners and 20% to the General
Partners.
In no event are the General Partners to be allocated less than
1% of the net profit of the Partnership.
(b) Losses:
(i) to the partners as necessary to offset net profit previously
allocated to such partners pursuant to (a) (iv) above until
each partner has been allocated cumulative net loss equal to
the cumulative net profit previously allocated to such
partners.
(ii) 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.
5. Notes Receivable, Net
---------------------
At December 31, 1999 and 1998, notes receivable consisted of:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------- -----------------
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 $ 925,653 664,634 925,653 1,272,634
CLB, LLC 04/97 Unsecured note
receivable, plus
interest 132,000 132,000 132,000 132,000
Computers and Computer Equipment
- --------------------------------
MARCorp 12/89- Secured notes
02/93 receivable, plus
interest 2,321,617 1,854,636 2,999,654 2,532,673
--------- --------- --------- ---------
Total notes receivable $3,379,270 2,651,270 4,057,307 3,937,307
========= ========= ========= =========
</TABLE>
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 $664,634 at December 31, 1999, 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, MARCorp 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 MARCorp at its expected
share of the proceeds from this sale. In February 1999, the Partnership
received $678,037 of these proceeds. The fair market value of the
remaining proceeds at December 31, 1999 was $1,854,636.
During 1999, MARCorp purchased $3,000,000 (unaudited) in senior secured
convertible debentures of Sutmyn Storage Corporation, a company in the
computer industry. As of December 31, 1999, an affiliated partnership has
advanced loans totaling $2,000,000 to Sutmyn in the form of demand notes.
Subsequent to December 31, 1999, affiliated partnerships have funded
additional demand notes to Sutmyn totaling $4,000,000 (unaudited.)
In 1999, an affiliated partnership borrowed $575,000 from MARCorp under
unsecured promissory notes. The notes bear interest at 9% and are payable
together with interest on June 15, 2000. In October 1999, the affiliated
partnership repaid $275,000 of the notes.
Changes in the net unrealized fair value of notes receivable were as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C>
Net unrealized fair value decrease
from cost at beginning of year $(120,000) (2,265,000) (2,250,000)
Change in net unrealized fair value
of notes receivable (608,000) 2,145,000 (15,000)
------- --------- ---------
Net unrealized fair value decrease
from cost at end of year $(728,000) (120,000) (2,265,000)
======= ========= =========
</TABLE>
The secured notes are collateralized by specific assets of the borrowing
companies, and interest rates on secured and unsecured notes at December
31, 1999, ranged from 12% to 13%. All notes are scheduled for repayment in
2000 or due upon demand. 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, 1999 and 1998, 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.
6. Equity Investments
------------------
At December 31, 1999 and December 31, 1998, equity investments consisted of:
<TABLE>
December 31, 1999 December 31, 1998
------------------- -----------------
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 (a) (b) shares at $0.50;
expiring 06/00 $ 0 0 0 0
Industrial/Business Automation
- ------------------------------
Cyclean, Inc. 08/88- Common share
(a) (b) 01/95 warrants for
150,663 shares (1) 0 0 0 0
------- ------- ------- -------
Total warrants 0 0 0 0
------- ------- ------- -------
STOCKS:
Computer Software and Systems
- -----------------------------
Wasatch Education 06/95 1,741,550
Systems Series C
Corporation (a) (b) Preferred
shares 464,427 390,948 464,427 464,427
Industrial/Business Automation
- ------------------------------
Cyclean, Inc. 09/94- 225,088 Series D
(a) (b) 04/96 Preferred shares 242,989 0 242,989 0
Cyclean of 03/95 Class A LLC Unit
Los Angeles,
LLC (a) (b) 45% ownership 11,091 0 11,091 0
CLB, LLC 04/97- 2,309,999
(a) (b) 06/98 LLC Units 2,309,999 554,333 2,309,999 1,396,333
Medical
- -------
HemoCleanse, Inc. 03/95- 15,907 Common
(a) 01/97 shares 10,269 0 10,269 0
Telecommunications
- ------------------
All Post, Inc. 10/94 4,394 Common
(a) shares 3,471 0 3,471 1,099
--------- --------- --------- ---------
Total stocks 3,042,246 945,281 3,042,246 1,861,859
--------- --------- --------- ---------
Total equity investments $3,042,246 945,281 3,042,246 1,861,859
========= ========= ========= =========
Legends and footnotes:
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 01/00 to 07/02.
(a) All investments are restricted securities acquired in private placement transactions;
resale may be subject to certain restrictions. None of the Partnership's investments are
income-producing.
(b) Portfolio company is an affiliate of the Partnership; resale may be subject to certain
restrictions.
</TABLE>
CLB, LLC
- --------
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 $554,333 at December 31, 1999 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 1999, Wasatch's operations were limited to pursuit of additional
markets for its technology, debt service and the collection of royalty
income. At December 31, 1999, Wasatch had net current assets of
$508,000(unaudited) and is expected to receive future royalties of
approximately $680,000(unaudited). The Partnership valued its investment
in Wasatch at its share of net current assets and expected future royalty
payments. In 1999, Wasatch advanced $500,000 (unaudited) to MARCorp, a
portfolio company (see Note 5.) This advance, in the form of a
promissory note, bears interest at the rate of 9% annum and is repayable
on demand. Because of the highly competitive educational software
marketplace, no value has been assigned to Wasatch's capitalized
technology costs. Based on this valuation, the Partnership's investment
has an estimated fair value of $390,948 at December 31, 1999. Because of
the inherent uncertainties involved in estimating these future proceeds,
the estimated fair value of $390,948 may differ significantly from a
value that would have been used had a ready market existed, and the
differences could be material.
7. 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,
---------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Increase in fair
value from cost of marketable
equity securities $ -- -- 447,060
Decrease in fair value
from cost of non-marketable
equity securities (2,096,965) (1,180,387) (1,113,072)
--------- --------- ---------
Net unrealized fair value
decrease from cost
at end of year (2,096,965) (1,180,387) (666,012)
Net unrealized fair value
decrease from cost at
beginning of year (1,180,387) (666,012) (761,689)
--------- --------- ---------
Change in net unrealized
fair value of equity
investments $ (916,578) (514,375) 95,677
========= ========= =========
8. Cash and Cash Equivalents
-------------------------
At December 31, 1999 and 1998, cash and cash equivalents consisted of:
</TABLE>
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Demand accounts $36,148 27,472
Money-market accounts 2,142 1,364
------ -------
Total $38,290 28,836
====== =======
</TABLE>
9. Litigation and Other Investment Expenses
----------------------------------------
Other investment expenses in 1997 of $174,274 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 11, the Partnership's escrowed
funds were released in June 1998.
10. 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. In 1997, 101 Units were
repurchased for $219,883. The Partnership did not repurchase any Units
in 1999 or 1998.
11. 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, 1999, 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, 2000 By: /s/Michael Brenner
--------------------------------------
Michael Brenner
Vice President
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, 2000
- ------------------------ 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, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<PERIOD-TYPE> YEAR
<INVESTMENTS-AT-COST> 6,421,516
<INVESTMENTS-AT-VALUE> 3,596,551
<RECEIVABLES> 0
<ASSETS-OTHER> 74,227
<OTHER-ITEMS-ASSETS> 54,790
<TOTAL-ASSETS> 3,725,568
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 81,527
<TOTAL-LIABILITIES> 81,527
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,469,006
<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> (2,824,965)
<NET-ASSETS> 3,644,041
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,876
<OTHER-INCOME> 0
<EXPENSES-NET> 642,077
<NET-INVESTMENT-INCOME> (635,201)
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> (1,524,578)
<NET-CHANGE-FROM-OPS> (2,159,779)
<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> (2,159,779)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 110,175
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 641,727
<AVERAGE-NET-ASSETS> 4,723,930
<PER-SHARE-NAV-BEGIN> 38.82
<PER-SHARE-NII> (14.20)
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 24.62
<EXPENSE-RATIO> 13.59
</TABLE>
