-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fy0Lvcsp42kHPEuU0fjZzuJhPMPUCiZepBpXOk1HlIN4bT3l2vwCnjkTbfecOW2+ U4JbErMfWNo54wQXsHNSsA== 0000789538-97-000004.txt : 19971115 0000789538-97-000004.hdr.sgml : 19971115 ACCESSION NUMBER: 0000789538-97-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ML VENTURE PARTNERS II LP CENTRAL INDEX KEY: 0000789538 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 133324232 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 814-00043 FILM NUMBER: 97717411 BUSINESS ADDRESS: STREET 1: WORLD FINANCIAL CTR N TOWER STREET 2: 25TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10281-1330 BUSINESS PHONE: 2124491000 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 1997 Or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number 0-14217 ML VENTURE PARTNERS II, L.P. =============================================================================== (Exact name of registrant as specified in its charter) Delaware 13-3324232 =============================================================================== (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) World Financial Center, North Tower New York, New York 10281-1326 =============================================================================== (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 449-1000 Not applicable =============================================================================== Former name, former address and former fiscal year, if changed since last report 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 ML VENTURE PARTNERS II, L.P. INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Balance Sheets as of September 30, 1997 (Unaudited) and December 31, 1996 Schedule of Portfolio Investments as of September 30, 1997 (Unaudited) Statements of Operations for the Three and Nine Months Ended September 30, 1997 and 1996 (Unaudited) Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996 (Unaudited) Statement of Changes in Partners' Capital for the Nine Months Ended September 30, 1997 (Unaudited) Notes to Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Item 2. Changes in Securities. Item 3. Defaults upon Senior Securities. Item 4. Submission of Matters to a Vote of Security Holders. Item 5. Other Information. Item 6. Exhibits and Reports on Form 8-K. PART I - FINANCIAL INFORMATION Item 1. Financial Statements. ML VENTURE PARTNERS II, L.P. BALANCE SHEETS September 30, 1997 December 31, (Unaudited) 1996 ASSETS Portfolio investments at fair value (cost $13,558,900 as of September 30, 1997 and $27,505,870 as of December 31, 1996) $ 22,961,464 $ 37,386,258 Short-term investments at amortized cost 7,981,544 4,486,402 Cash and cash equivalents 1,518,088 346,129 Accrued interest receivable 4,749 49,442 Receivable from securities sold 2,586,096 - ---------------- ----------------- TOTAL ASSETS $ 35,051,941 $ 42,268,231 ================ ================= LIABILITIES AND PARTNERS' CAPITAL Liabilities: Cash distribution payable $ 8,211,344 $ - Accounts payable and accrued expenses 150,342 183,406 Due to Management Company 43,853 138,389 Due to Independent General Partners 20,250 23,400 ---------------- ----------------- Total liabilities 8,425,789 345,195 ---------------- ----------------- Partners' Capital: Managing General Partner 1,314,334 1,158,769 Individual General Partners 530 1,029 Limited Partners (120,000 Units) 15,908,724 30,882,850 Unallocated net unrealized appreciation of investments 9,402,564 9,880,388 ---------------- ----------------- Total partners' capital 26,626,152 41,923,036 ---------------- ----------------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 35,051,941 $ 42,268,231 ================ =================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED) September 30, 1997 Initial Investment Company / Position Date Cost Fair Value Biocircuits Corporation*(A)(B) 401,734 shares of Common Stock May 1991 $ 468,051 $ 200,867 2,000,000 shares of Preferred Stock 1,000,000 250,000 Warrants to purchase 166,667 shares of Common Stock at $.75 per share, expiring 1/2/99 20,833 0 - ------------------------------------------------------------------------------------------------------------------------------- Borg-Warner Security Corporation*(A) 500,000 shares of Common Stock Sept. 1988 2,500,000 7,312,500 - ------------------------------------------------------------------------------------------------------------------------------- Brightware, Inc. 140,485 shares of Common Stock May 1995 39,252 245,849 Warrants to purchase 38,737 shares of Common Stock at $.40 per share, expiring on 4/19/99 1,138 52,295 Warrants to purchase 4,846 shares of Common Stock at $.40 per share, expiring on 12/16/97 327 6,542 Warrants to purchase 59,166 shares of Common Stock at $.80 per share, expiring on 6/10/98 3,986 56,208 - ------------------------------------------------------------------------------------------------------------------------------- Clarus Medical Systems, Inc.*(C) 179,028 shares of Preferred Stock Jan. 1991 1,000,548 895,152 Warrants to purchase 14,043 shares of Common Stock at $.05 per share, expiring between 3/7/00 and 7/3/00 0 0 Warrants to purchase 2,826 shares of Preferred Stock at $5.00 per share, expiring on 3/7/00 0 0 - ------------------------------------------------------------------------------------------------------------------------------- Corporate Express, Inc.(A)(D) 60,000 shares of Common Stock May 1992 12,000 1,014,000 - ------------------------------------------------------------------------------------------------------------------------------- Diatide, Inc.*(A) 809,704 shares of Common Stock Dec. 1991 2,986,023 6,315,692 - ------------------------------------------------------------------------------------------------------------------------------- Horizon Cellular Telephone Company, L.P.:(E) SPTHOR Corporation 10% Promissory Note due 3/26/98 May 1992 125,269 5,073 5.67% Bridge Loan 228,926 9,271 34.5 shares of Common Stock 215,625 256,339 - ------------------------------------------------------------------------------------------------------------------------------- I.D.E. Corporation 113,322 shares of Common Stock Mar. 1988 227,000 0 - ------------------------------------------------------------------------------------------------------------------------------- Neocrin Company* 48,430 shares of Preferred Stock June 1991 363,378 0 Warrants to purchase 92,205 shares of Common Stock at $4.00 per share, expiring on 1/3/01 0 0 - ------------------------------------------------------------------------------------------------------------------------------- Photon Dynamics, Inc.*(A) 425,235 shares of Common Stock Sept. 1988 2,452,226 2,530,148 Warrants to purchase 6,062 shares of Common Stock at $5.40 per share, expiring on 6/30/00 0 0 - -------------------------------------------------------------------------------------------------------------------------------
ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED), continued September 30, 1997 Initial Investment Company / Position Date Cost Fair Value Raytel Medical Corporation(A) 62,500 shares of Common Stock Feb. 1990 $ 241,639 $ 725,000 Options to purchase 27,969 shares of Common Stock at $1.42 per share, expiring on 10/31/01 0 284,724 - ------------------------------------------------------------------------------------------------------------------------------- Sanderling Biomedical, L.P.*(F) 80% Limited Partnership interest May 1988 1,528,129 1,958,753 - ------------------------------------------------------------------------------------------------------------------------------- Vical, Inc.(A)(F) 59,685 shares of Common Stock Aug. 1990 144,550 843,051 - ------------------------------------------------------------------------------------------------------------------------------- Total Portfolio Investments(G) $ 13,558,900 $ 22,961,464 --------------------------------- Supplemental Information - Liquidated Portfolio Investments(H): Cost Realized Gain Return Totals from Liquidated Portfolio Investments $ 102,974,096 $ 112,950,601 $ 215,924,697 ========================================================= Combined Net Combined Unrealized and Fair Value Cost Realized Gain and Return Totals from Active & Liquidated Portfolio Investments $ 116,532,996 $ 122,353,165 $ 238,886,161 =========================================================
(A) Public company (B) The preferred shares of Biocircuits Corporation held by the Partnership are convertible into common shares of the company at a ratio of 4 shares of preferred stock for 1 share of common stock. On July 2, 1997, the Partnership made a follow-on investment in Biocircuits Corporation of $125,000, acquiring an additional 166,667 shares of the company's common stock and a warrant to purchase 166,667 shares of common stock for $.75 per share, expiring on 1/2/99. (C) On July 31, 1997, the Partnership's warrant to purchase 4,048 shares of Clarus Medical Systems, Inc. common stock for $18.75 per share, expired unexercised. (D) On September 30, 1997, the Partnership sold 120,755 shares of Corporate Express, Inc. common stock for $2,586,096, realizing a gain of $2,561,946. (E) In August 1997, the Partnership received an additional $188,423, plus interest of $5,245, from the sale of options in connection with its investment in HCTC/SPTHOR. ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED), continued September 30, 1997 (F) In July and September 1997, the Partnership received in-kind distributions of 4,645 shares of Graham Fields International common stock and 59,685 shares of Vical, Inc. common stock, respectively, from Sanderling Biomedical, L.P. In July 1997, the Partnership sold its 4,645 shares of Graham Fields common stock for $63,004 realizing a loss of $50,960. Subsequent to the end of the quarter, in October 1997, the Partnership sold its 59,685 shares of Vical common stock for $939,597, realizing a gain of $795,047. (G) In July 1997, the Partnership sold its remaining 152,843 common shares of IDEC Pharmaceuticals Corporation for $4.1 million, realizing a gain of $2.8 million. Also in July 1997, the Partnership sold its remaining 23,245 common shares of Elantec, Inc., for $93,382 realizing a gain of $32,945. (H) Amounts provided for "Supplemental Information: Liquidated Portfolio Investments" are cumulative from inception through September 30, 1997. * May be deemed an affiliated person of the Partnership as defined in the Investment Company Act of 1940. See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 ----------------- --------------- --------------- ---------- INVESTMENT INCOME AND EXPENSES Income: Interest from short-term investments $ 118,572 $ 282,021 $ 566,469 $ 898,233 Interest and other income from portfolio investments 5,333 81,108 27,597 243,541 Dividend income - 41,492 37,754 174,892 --------------- --------------- --------------- ---------------- Totals 123,905 404,621 631,820 1,316,666 ------------------------------------------------------ ---------- ----------- ------------ Expenses: Management fee 43,853 158,795 241,337 548,104 Professional fees 23,931 59,658 105,367 139,755 Mailing and printing 37,277 20,860 139,041 158,293 Independent General Partners' fees 20,623 27,959 68,604 85,425 Custodial fees (3,727) 3,194 (227) 10,430 Miscellaneous 5,341 70 5,637 1,520 Litigation settlement - 1,000,000 - 1,000,000 --------------- --------------- --------------- ---------------- Totals 127,298 1,270,536 559,759 1,943,527 ------------------------------------------------------ ------------ ----------- ------------ NET INVESTMENT INCOME (LOSS) (3,393) (865,915) 72,061 (626,861) Net realized gain from portfolio investments 5,518,904 9,797,095 15,110,952 47,763,001 --------------- --------------- --------------- ---------------- NET REALIZED GAIN FROM OPERATIONS - (allocable to Partners) 5,515,511 8,931,180 15,183,013 47,136,140 Net change in unrealized appreciation of investments 1,620,875 (12,958,684) (477,824) (28,445,452) --------------- --------------- --------------- ---------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 7,136,386 $ (4,027,504) $ 14,705,189 $ 18,690,688 =============== =============== =============== ================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended September 30, 1997 1996 ---------------- ---------- CASH FLOWS PROVIDED FROM (USED FOR) OPERATING ACTIVITIES Net investment income (loss) $ 72,061 $ (626,861) Adjustments to reconcile net investment income (loss) to cash provided from (used for) operating activities: Decrease in accrued interest and notes receivable 44,693 541,167 Increase in dividend receivable - (41,492) Decrease in accrued interest on short-term investments 44,137 13,407 Decrease in payables (144,829) (33,794) ---------------- ---------------- Cash provided from (used for) operating activities 16,062 (147,573) ---------------- ---------------- CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES Net purchase of short-term investments (3,539,279) (620,016) Cost of portfolio investments purchased (460,176) (207,111) Deposit released from escrow - 184,502 Net proceeds from the sale of portfolio investments 24,564,422 59,663,087 Proceeds from repayment of note 2,381,659 - ---------------- ---------------- Cash provided from investing activities 22,946,626 59,020,462 ---------------- ---------------- CASH FLOWS USED FOR FINANCING ACTIVITIES Cash distributions paid to Partners (21,790,729) (59,154,595) ---------------- ---------------- Increase (decrease) in cash and cash equivalents 1,171,959 (281,706) Cash and cash equivalents at beginning of period 346,129 685,917 ---------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,518,088 $ 404,211 ================ ================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENT OF CHANGES IN PARTNERS' CAPITAL (UNAUDITED) For the Nine Months Ended September 30, 1997 Unallocated Net Unrealized Managing Individual Appreciation General General Limited (Depreciation) Partner Partners Partners of Investments Total Balance at beginning of period $ 1,158,769 $ 1,029 $ 30,882,850 $ 9,880,388 $ 41,923,036 Cash distribution, paid 7/11/97 (2,590,089) (640) (19,200,000) - (21,790,729) Cash distribution, accrued (411,084) (260) (7,800,000) - (8,211,344) Net investment income 13,660 2 58,399 - 72,061 Net realized gain from portfolio investments 3,143,078 399 11,967,475 - 15,110,952 Net change in unrealized appreciation (depreciation) of investments - - - (477,824) (477,824) ------------- -------- -------------- -------------- ---------------- Balance at end of period $ 1,314,334 $ 530 $ 15,908,724(A) $ 9,402,564 $ 26,626,152 ============= ======== ============== ============== ================
(A) The net asset value per unit of limited partnership interest, including an assumed allocation of net unrealized appreciation of investments, was $195 at September 30, 1997. Cumulative cash distributions paid or accrued to Limited Partners from inception to September 30, 1997 totaled $1,525 per Unit. See notes to financial statements. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. Organization and Purpose ML Venture Partners II, L.P. (the "Partnership") is a Delaware limited partnership formed on February 4, 1986. MLVPII Co., L.P., the managing general partner of the Partnership (the "Managing General Partner"), and four individuals (the "Individual General Partners") are the general partners of the Partnership. The general partner of MLVPII Co., L.P. is Merrill Lynch Venture Capital Inc. (the "Management Company"), an indirect subsidiary of Merrill Lynch & Co., Inc. DLJ Capital Management Corporation (the "Sub-Manager"), an indirect subsidiary of Donaldson, Lufkin & Jenrette, Inc., is the sub-manager of the Partnership, pursuant to a sub-management agreement among the Partnership, the Management Company, the Managing General Partner and the Sub-Manager. The Partnership's objective is to achieve long-term capital appreciation from its portfolio of venture capital investments in new and developing companies and other special investment situations. The Partnership does not engage in any other business or activity. In July 1997, the Individual General Partners voted to extend the term of the Partnership for an additional two-year period. As a result, the Partnership is scheduled to terminate on December 31, 1999. The Individual General Partners have the right to extend the term of the Partnership for an additional two-year period if they determine that such extension is in the best interest of the Partnership. 2. Significant Accounting Policies Valuation of Investments - Short-term investments are carried at amortized cost which approximates market. Portfolio investments are carried at fair value as determined quarterly by the Sub-Manager under the supervision of the Individual General Partners and the Managing General Partner. The fair value of publicly-held portfolio securities is adjusted to the closing public market price for the last trading day of the accounting period discounted by a factor of 0% to 50% for sales restrictions. Factors considered in the determination of an appropriate discount include, underwriter lock-up or Rule 144 trading restrictions, insider status where the Partnership either has a representative serving on the company's Board of Directors or is greater than a 10% shareholder, and other liquidity factors such as the size of the Partnership's position in a given company compared to the trading history of the public security. Privately-held portfolio securities are carried at cost until significant developments affecting the portfolio company provide a basis for change in valuation. The fair value of private securities is adjusted 1) to reflect meaningful third-party transactions in the private market or 2) to reflect significant progress or slippage in the development of the company's business such that cost is no longer reflective of fair value. As a venture capital investment fund, the Partnership's portfolio investments involve a high degree of business and financial risk that can result in substantial losses. The Sub-Manager considers such risks in determining the fair value of the Partnership's portfolio investments. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - continued 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Investment Transactions - Investment transactions are recorded on the accrual method. Portfolio investments are recorded on the trade date, the date the Partnership obtains an enforceable right to demand the securities or payment therefor. Realized gains and losses on investments sold are computed on a specific identification basis. Income Taxes - No provision for income taxes has been made since all income and losses are allocable to the Partners for inclusion in their respective tax returns. The Partnership's net assets for financial reporting purposes differ from its net assets for tax purposes. Net unrealized appreciation of investments of $9.4 million at September 30, 1997, which was recorded for financial statement purposes, was not recognized for tax purposes. Additionally, from inception to September 30, 1997, timing differences of approximately $400,000 have been deducted on the Partnership's financial statements and syndication costs relating to the selling of Units totaling $11.3 million were charged to partners' capital on the financial statements. These amounts have not been deducted or charged against partners' capital for tax purposes. Statements of Cash Flows - The Partnership considers its interest-bearing cash account to be cash equivalents. 3. Allocation of Partnership Profits and Losses The Partnership Agreement provides that the Managing General Partner will be allocated, on a cumulative basis over the life of the Partnership, 20% of the Partnership's aggregate investment income and net realized gains and losses from venture capital investments, provided that such amount is positive. All other gains and losses of the Partnership are allocated among all the Partners (including the Managing General Partner) in proportion to their respective capital contributions to the Partnership. From its inception to September 30, 1997, the Partnership had a $117.2 million net gain from its venture capital investments, which includes interest and other income from portfolio investments totaling $4.2 million. 4. Related Party Transactions The Management Company performs, or arranges for others to perform, the management and administrative services necessary for the operation of the Partnership and receives a management fee at the annual rate of 2.5% of the gross capital contributions to the Partnership, reduced by selling commissions, organizational and offering expenses paid by the Partnership, capital distributed and realized capital losses with a minimum annual fee of $200,000. Such fee is determined and payable quarterly. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - continued 5. Independent General Partners' Fees As compensation for services rendered to the Partnership, each of the three Independent General Partners receives $21,000 annually in quarterly installments, $1,500 for each meeting of the General Partners attended or for each other meeting, conference or engagement in connection with Partnership activities at which attendance by an Independent General Partner is required and $1,500 for each audit committee meeting attended ($500 if an audit committee meeting is held on the same day as a meeting of the Independent General Partners). Prior to July 1, 1997, the Independent General Partners had received a $20,000 annual fee and $1,400 for each meeting attended. 6. Commitments The Partnership had a $370,434 non-interest obligation payable on demand to MLMS Cancer Research, Inc., the general partner of ML/MS Associates, L.P. This obligation was satisfied in November 1997 by making a final payment of $14,079 to MLMS Cancer Research, Inc. 7. Portfolio Investments During the three and nine months ended September 30, 1997, the Partnership liquidated or wrote-off the following portfolio securities: Realized Company Shares Sold Cost Gain (Loss) Return Six Months Ended June 30, 1997: Borg-Warner Automotive, Inc. 251,694 $ 1,258,470 $ 8,381,410 $ 9,639,880 IDEC Pharmaceuticals Corporation 324,390 2,718,916 5,807,909 8,526,825 Raytel Medical Corporation 37,500 144,983 0 144,983 Biocircuits Corporation - partial write-off n/a 1,164,867 (1,164,867) 0 Clarus Medical Systems, Inc. - partial write-off n/a 1,388,620 (1,388,620) 0 Neocrin Company - partial write-off n/a 3,840,430 (3,840,430) 0 HCTC Investment, L.P. - sale of options n/a 0 1,796,646 1,796,646 HCTC Investment, L.P. - note repayment n/a 1,926,168 0 1,926,168 SPTHOR Corporation - note repayment n/a 455,491 0 455,491 -------------- -------------- --------------- Sub-total 12,897,945 9,592,048 22,489,993 -------------- -------------- --------------- Three Months Ended September 30, 1997: IDEC Pharmaceuticals Corporation 152,843 1,324,729 2,786,550 4,111,279 HCTC Investment, L.P. - sale of options n/a 0 188,423 188,423 Elantec, Inc. 23,245 60,437 32,945 93,382 Graham Fields International (Sanderling) 4,645 113,964 (50,960) 63,004 Corporate Express, Inc. 120,755 24,150 2,561,946 2,586,096 -------------- -------------- --------------- Sub-total 1,523,280 5,518,904 7,042,184 -------------- -------------- --------------- Totals for the nine months ended September 30, 1997 $ 14,421,225 $ 15,110,952 $ 29,532,177 ============== ============== ===============
ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - continued 8. Interim Financial Statements In the opinion of MLVPII Co., L.P., the managing general partner of the Partnership, the unaudited financial statements as of September 30, 1997, and for the three and nine month periods then ended, reflect all adjustments necessary for the fair presentation of the results of the interim periods. 9. Cash Distribution On October 16, 1997, the Partnership made a cash distribution to Partners totaling $8,211,344. Limited Partners of record on September 30, 1997 received $7,800,000, or $65 per Unit, and the General Partners received $411,344. 10. Subsequent Event Subsequent to the end of the quarter, in October 1997, the Partnership sold its 59,685 common shares of Vical, Inc. for $939,597, realizing a gain of $795,047. 11. Classification of Portfolio Investments As of September 30, 1997, the Partnership's investments in portfolio companies were categorized as follows: % of Type of Investments Cost Fair Value Net Assets* - ------------------- -------------- --------------- ----------- Common Stock $ 9,312,650 $ 19,843,215 74.52% Limited Partnerships 1,528,129 1,958,753 7.36% Preferred Stock 2,363,926 1,145,152 4.30% Debt Securities 354,195 14,344 .06% -------------- --------------- ------ Total $ 13,558,900 $ 22,961,464 86.24% ============== =============== ====== Country/Geographic Region Midwestern U.S. $ 3,512,548 $ 9,221,652 34.63% Western U.S. 6,263,509 7,153,437 26.87% Eastern U.S. 3,782,843 6,586,375 24.74% -------------- --------------- ------ Total $ 13,558,900 $ 22,961,464 86.24% ============== =============== ====== Industry Business Services $ 2,512,000 $ 8,326,500 31.27% Biotechnology 4,658,702 9,117,496 34.25% Semiconductors/Electronics 2,452,226 2,530,148 9.50% Medical Devices and Services 3,094,449 2,355,743 8.84% Telecommunications 569,820 270,683 1.02% Computer Hardware/Software 271,703 360,894 1.36% -------------- --------------- --------- Total $ 13,558,900 $ 22,961,464 86.24% ============== =============== ======
* Percentage of net assets is based on fair value. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Liquidity and Capital Resources During the quarter ended September 30, 1997, the Partnership sold certain portfolio investments for net proceeds totaling $7,042,184, of which $2,586,096 was a receivable at September 30, 1997. Also during the quarter, the Partnership made follow-on investments totaling $139,079. As of September 30, 1997, the Partnership held $9,499,632 in cash and short-term investments; $7,981,544 in short-term securities with maturities of less than one year and $1,518,088 in an interest-bearing cash account. Interest earned from such investments totaled $118,572 and $566,469 for the three and nine months ended September 30, 1997. Interest earned in future periods is subject to fluctuations in short-term interest rates and changes in amounts available for investment in such securities. The Partnership will not make any new portfolio investments. Therefore, all cash received from the sale of portfolio investments is distributed to Partners as soon as practicable after an adequate reserve for operating expenses and follow-on investments in the remaining portfolio companies. Subsequent to the end of the quarter, on October 16, 1997, the Partnership made a cash distribution to Partners totaling $8,211,344. Limited Partners of record on September 30, 1997 received $7,800,000, or $65 per Unit, and the General Partners received $411,344. Results of Operations For the three and nine months ended September 30, 1997, the Partnership had a net realized gain from operations of $5,515,511 and $15,183,013, respectively. For the three and nine months ended September 30, 1996, the Partnership had a net realized gain from operations of $8,931,180 and $47,136,140, respectively. Net realized gain or loss from operations is comprised of 1) net realized gain or loss from portfolio investments and 2) net investment income or loss (interest and dividend income less operating expenses). Realized Gains and Losses from Portfolio Investments - For the three and nine months ended September 30, 1997, the Partnership had a net realized gain from portfolio investments of $5,518,904 and $15,110,952, respectively. During the three months ended September 30, 1997, the Partnership sold investments with a cost of $1,523,280 for a net return of $7,042,184. These liquidations included the sale of the Partnership's remaining 152,843 common shares of IDEC Pharmaceuticals Corporation and an additional 120,755 common shares of Corporate Express, Inc. For the nine months ended September 30, 1997, the Partnership sold investments with a cost of $14,421,225 for a net return of $29,532,177. Portfolio liquidations during the nine month period include the sale of the Partnership's entire position of 477,233 common shares of IDEC and its remaining 251,694 common shares of Borg-Warner Automotive, Inc. These liquidations also include the partial write-off of the Partnership's investments in Biocircuits Corporation, Clarus Medical Systems, Inc. and Neocrin Company resulting in an aggregate realized loss of $6,393,917. Portfolio investments liquidated for the respective periods are shown in detail in Note 7 of the Notes to Financial Statements. For the three and nine months ended September 30, 1996, the Partnership had a net realized gain from portfolio investments of $9,797,095 and $47,763,001, respectively. During the three months ended September 30, 1996, the Partnership sold shares of common stock of four publicly-traded portfolio companies for $10,898,579, realizing a gain of $9,797,095. During the six months ended June 30, 1996, the Partnership sold shares of common stock of nine of its publicly-traded portfolio companies for $45,954,783, realizing a gain of $37,965,906. Investment Income and Expenses - For the three months ended September 30, 1997, the Partnership had a net investment loss of $3,393 compared to a net investment loss of $865,915 for the three months ended September 30, 1996. The decrease in net investment loss for the 1997 period compared to the same period in 1996, primarily was attributable to a $1.0 million litigation settlement expense incurred during the 1996 period, relating to the Partnership's investment in In-Store Advertising, Inc. Additionally, a $280,716 decrease in investment income during the 1997 period was partially offset by a $143,238 decrease in operating expenses, including the management fee, as discussed below, and professional fees incurred during the 1997 period compared to the 1996 period. Interest earned from short-term investments declined to $118,572 during the 1997 period from $282,021 for the 1996 period. This decrease primarily resulted from a decline in funds available for investment in short-term securities during the three months ended September 30, 1997 compared to the same period in 1996. Additionally, interest income from portfolio investments decreased by $75,775 resulting from the reduced amount of interest-bearing debt securities held by the Partnership during the 1997 period compared to the same period in 1996. Dividend income also declined by $41,492 due to the sale of the Partnership's investment in Borg-Warner Automotive, which was fully liquidated during the first quarter of 1997. For the nine months ended September 30, 1997, the Partnership had net investment income of $72,061 compared to a net investment loss of $626,861 for the same period in 1996. The increase in net investment income for the 1997 period compared to the same period in 1996, primarily was attributable to the $1.0 million litigation settlement expense incurred during the 1996 period, as discussed above, partially offset by a $684,846 decrease in investment income for the 1997 period compared to the same period in 1996. Interest earned from short-term investments decreased to $566,469 for the 1997 period from $898,233 for the 1996 period, primarily resulting from a decrease in funds available for investment in short-term securities during the nine months ended September 30, 1997 compared to the same period in 1996. Additionally, interest from portfolio investments decreased by $215,944 resulting from the reduced amount of interest-bearing debt securities held by the Partnership during the 1997 period compared to the same period in 1996. Dividend income also decreased by $137,138 due to the sale of the Partnership's investment in Borg-Warner Automotive, as discussed above. Additionally, operating expenses declined by $383,768 for the 1997 period compared to the same period in 1996, primarily resulting from reduced management fees, as discussed below. The Management Company is responsible for the management and administrative services necessary for the operation of the Partnership. The Management Company receives a management fee at an annual rate of 2.5% of the gross capital contributions to the Partnership, reduced by selling commissions, organizational and offering expenses paid by the Partnership, return of capital and realized capital losses, with a minimum annual fee of $200,000. Such fee is determined and payable quarterly. The management fee for the three months ended September 30, 1997 and 1996, was $43,853 and $158,795, respectively. The management fee for the nine months ended September 30, 1997 and 1996, was $241,337 and $548,104, respectively. The decline in the management fee for the 1997 periods compared to the same periods in 1996 is due to continued portfolio liquidations and subsequent distributions made to Partners. The management fee and other operating expenses are paid with funds provided from operations. Funds provided from operations are obtained from interest earned from short-term investments, interest and other income from portfolio investments and proceeds from the sale of certain portfolio investments. Unrealized Gains and Losses and Changes in Unrealized Appreciation or Depreciation of Portfolio Investments - During the nine months ended September 30, 1997, the Partnership recorded net unrealized gains of $6,297,835, primarily resulting from the net upward revaluation of certain publicly-traded securities. Additionally, during the nine month period, $6,775,659 of unrealized gain was transferred to realized gain in connection with the portfolio investments sold during the period, as discussed above. As a result, unrealized appreciation of investments was reduced by $477,824 for the nine month period. For the nine months ended September 30, 1996, the Partnership recorded net unrealized gains of $2,559,874, primarily resulting from the net upward revaluation of certain publicly-traded securities. Additionally, during the nine month period, $31,005,326 of unrealized gain was transferred to realized gain in connection with the portfolio investments sold during the period, as discussed above. As a result, unrealized appreciation of investments was reduced by $28,445,452 for the nine month period. Net Assets - Changes to net assets resulting from operations are comprised of 1) net realized gain or loss from operations and 2) changes to net unrealized appreciation of portfolio investments. For the nine months ended September 30, 1997, the Partnership had an $14,705,189 net increase in net assets resulting from operations, comprised of the $15,183,013 net realized gain from operations offset by the $477,824 decrease in unrealized appreciation of investments for the nine month period. At September 30, 1997, the Partnership's net assets were $26,626,152, down $15,296,884 from $41,923,036 million at December 31, 1996. This decrease is the result of the $30,002,073 of cash distributions paid, or accrued, to Partners during the nine months ended September 30, 1997 exceeding the $14,705,189 increase in net assets from operations for the nine month period. For the nine months ended September 30, 1996, the Partnership had an $18,690,688 net increase in net assets resulting from operations, comprised of the $47,136,140 net realized gain from operations offset by the $28,445,452 decrease in unrealized appreciation of investments for the nine month period. At September 30, 1996, the Partnership's net assets were $39,667,160, down $40,675,372 from $80,342,532 at December 31, 1995. This decrease is the result of the $59,366,060 of cash distributions paid, or accrued, to Partners during the nine months ended September 30, 1996 exceeding the $18,690,688 increase in net assets from operations for the nine month period. Gains and losses from investments are allocated to Partners' capital accounts when realized, in accordance with the Partnership Agreement (see Note 3 of Notes to Financial Statements). However, for purposes of calculating the net asset value per unit of limited partnership interest, net unrealized appreciation of investments has been included as if the net appreciation had been realized and allocated to the Limited Partners in accordance with the Partnership Agreement. Pursuant to such calculation, the net asset value per $1,000 Unit at September 30, 1997 and December 31, 1996 was $195 and $323, respectively. PART II - OTHER INFORMATION Item 1. Legal Proceedings. Not applicable. Item 2. Changes in Securities. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. No mater was submitted to a vote of security holders during the period in which this report covers. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits (3) (a) Amended and Restated Certificate of Limited Partnership of the Partnership, dated as of January 12, 1987. (1) (3) (b) Amended and Restated Certificate of Limited Partnership of the Partnership, dated July 27, 1990. (2) (3) (c) Amended and Restated Certificate of Limited Partnership of the Partnership, dated March 25, 1991. (3) (3) (d) Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of May 4, 1987. (4) (3) (e) Amendment No. 1 dated February 14, 1989 to Amended and Restated Agreement of Limited Partnership of the Partnership. (5) (3) (f) Amendment No. 2 dated July 27, 1990 to Amended and Restated Agreement of Limited Partnership of the Partnership. (2) (3) (g) Amendment No. 3 dated March 25, 1991 to Amended and Restated Agreement of Limited Partnership of the Partnership. (3) (3) (h) Amendment No. 4 dated May 23, 1991 to Amended and Restated Agreement of Limited Partnership of the Partnership. (6) (10) (a) Management Agreement dated as of May 23, 1991 among the Partnership, Management Company and the Managing General Partner. (6) (10) (b) Sub-Management Agreement dated as of May 23, 1991 among the Partnership, Management Company, the Managing General Partner and the Sub-Manager. (8) (27) Financial Data Schedule. (28) Prospectus of the Partnership dated February 10, 1987 filed with the Securities and Exchange Commission pursuant to Rule 424(b) under the Securities Act of 1933, as supplemented by a supplement thereto dated April 21, 1987 filed pursuant to Rule 424(c) under the Securities Act of 1933. (7) (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. (1) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1988 filed with the Securities and Exchange Commission on March 27, 1989. (2) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990 filed with the Securities and Exchange Commission on November 14, 1990. (3) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1990 filed with the Securities and Exchange Commission on March 28, 1991. (4) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 1987 filed with the Securities and Exchange Commission on August 14, 1987. (5) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989 filed with the Securities and Exchange Commission on May 15, 1989. (6) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991 filed with the Securities and Exchange Commission on August 14, 1991. (7) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended March 31, 1987 filed with the Securities and Exchange Commission on May 15, 1987. (8) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1992 filed with the Securities and Exchange Commission on March 26, 1993. SIGNATURES Pursuant to the requirements 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. ML VENTURE PARTNERS II, L.P. By: /s/ Kevin K. Albert Kevin K. Albert General Partner By: MLVPII Co., L.P. its Managing General Partner By: Merrill Lynch Venture Capital Inc. its General Partner By: /s/ Kevin K. Albert Kevin K. Albert President (Principal Executive Officer) By: /s/ Diane T. Herte Diane T. Herte Vice President and Treasurer (Principal Financial and Accounting Officer) Date: November 13, 1997 EX-27 2 EXHIBIT 27
6 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ML VENTURE PARTNERS II, L.P.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1997 JAN-1-1997 SEP-30-1997 13,558,900 22,961,464 2,590,845 0 9,499,632 35,051,941 0 0 8,425,789 8,425,789 0 0 120,000 120,000 0 0 0 0 9,402,564 26,626,152 37,754 566,469 27,597 559,759 72,061 15,110,952 (477,824) 14,705,189 0 0 0 30,002,073 0 0 0 (15,296,884) 0 0 0 0 0 0 0 34,274,594 322.6 .5 96.5 0 (225.0) 0 194.6 0 0 0
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