-----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, EI2xGMv4SaaYbTvsiltmh6382tpgi9N52K8c66re2k3U0k8SBgyiYzx0u4WUBr0y Aoxy/2a+BQYosCfyTSEoQg== 0000789538-98-000001.txt : 19980401 0000789538-98-000001.hdr.sgml : 19980401 ACCESSION NUMBER: 0000789538-98-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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-K SEC ACT: SEC FILE NUMBER: 814-00043 FILM NUMBER: 98583170 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-K 1 FORM 10-K 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 Fiscal Year Ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from 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 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: Units of Limited Partnership Interest ================================================================================ (Title of class) 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. [X] At March 16, 1998, 119,636 units of limited partnership interest ("Units") were held by non-affiliates of the registrant. There is no established public trading market for such Units. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Prospectus of the Registrant dated February 10, 1987, as supplemented by a supplement thereto dated April 21, 1987, are incorporated by reference in Part I and Part II hereof. PART I Item 1. Business. Formation ML Venture Partners II, L.P. (the "Partnership" or the "Registrant") is a Delaware limited partnership organized on February 4, 1986. The General Partners of the Partnership consist of four individuals (the "Individual General Partners") and MLVPII Co., L.P. (the "Managing General Partner"), a New York limited partnership in which Merrill Lynch Venture Capital Inc. (the "Management Company") is the general partner. The Management Company is an indirect subsidiary of Merrill Lynch & Co., Inc. and an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). DLJ Capital Management Corporation (the "Sub-Manager"), an affiliate of Donaldson, Lufkin and Jenrette, Inc., is the sub-manager pursuant to a sub-management agreement, dated May 23, 1991, among the Partnership, the Managing General Partner, the Management Company and the Sub-Manager. The Partnership operates as a business development company under the Investment Company Act of 1940. The Partnership's investment objective is to seek long-term capital appreciation from its portfolio of venture capital investments. The Partnership considers this activity to constitute the single industry segment of venture capital investing. Through Merrill Lynch, the Partnership publicly offered 120,000 units of limited partnership interest (the "Units") at $1,000 per Unit. The Units were registered under the Securities Act of 1933 pursuant to a Registration Statement on Form N-2 (File No. 33-3220) which was declared effective on February 10, 1987. The Partnership held its initial and final closings on March 31, 1987 and June 10, 1987, respectively. A total of 120,000 Units were accepted at such closings and the additional limited partners (the "Limited Partners") were admitted to the Partnership. The information set forth under the captions "Risk and Other Important Factors" (pages 8 through 11), "Investment Objective and Policies" (pages 14 through 16), "Venture Capital Operations" (pages 17 through 20) and "Portfolio Valuation" (pages 27 and 28) in the 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 and filed pursuant to Rule 424(c) under the Securities Act of 1933 (the "Prospectus"), is incorporated herein by reference. The Venture Capital Investments The Partnership has fully invested the net proceeds received from the offering of Units and will not make investments in any new portfolio companies. However, the Partnership may make additional follow-on investments in its remaining portfolio companies. During the year ended December 31, 1997, the Partnership invested $474,255 in three existing portfolio companies. As of December 31, 1997, the Partnership had invested a total of $116,532,996 in its portfolio of venture capital investments. During the first quarter of 1997, the Partnership provided a $228,926 bridge loan to SPTHOR Corporation, in connection with the Partnership's investment in Horizon Cellular Telephone Company, L.P. During 1997 the Partnership made two follow-on investments in Biocircuits Corporation. The first investment, made on April 14, 1997 for $106,250, was for the purchase of 106,250 shares of the company's common stock, and the second, on July 2, 1997 for $125,000, was for the purchase of an additional 166,667 common shares and a warrant to purchase 166,667 common shares for $.75 per share, expiring on January 2, 1999. Also during 1997, the Partnership satisfied its $370,434 non-interest bearing obligation payable to MLMS Cancer Research, Inc., the general partner of ML/MS Associates, L.P., by making a final payment of $14,079 in November 1997. As of December 31, 1997, the Partnership's investment portfolio consisted of 13 active investments with a cost of $13,013,680 and a fair value of $17,021,243. From its inception through December 31, 1997, the Partnership has fully or partially liquidated or written-off investments with an aggregate cost basis of $103,519,316. These liquidated investments returned a total of $216,964,477 to the Partnership for a realized gain of $113,445,161. Additionally, the Partnership earned interest and dividend income from its venture capital investments totaling $4,244,696 from inception to December 31, 1997. Termination In July 1997, the Individual General Partners voted to extend the Partnership's originally scheduled termination date of December 31, 1997 for an additional two-year period. As a result, the Partnership's scheduled termination date is December 31, 1999. Pursuant to the Partnership Agreement, the Individual General Partners can extend the term of the Partnership for an additional two-year period, if such extension is determined to be in the best interest of the Partnership. Competition The Partnership encounters competition from other entities having similar investment objectives, including other entities affiliated with Merrill Lynch & Co., Inc. Primary competition for venture capital investments has been from venture capital partnerships, venture capital affiliates of large industrial and financial companies, small business investment companies and wealthy individuals. Competition has also been from foreign investors and from large industrial and financial companies investing directly rather than through venture capital affiliates. The Partnership has frequently been a co-investor with other professional venture capital groups and these relationships generally have expanded the Partnership's access to investment opportunities. Employees The Partnership has no employees. The Partnership Agreement provides that the Managing General Partner, subject to the supervision of the Individual General Partners, manages and controls the Partnership's venture capital investments. The Management Company performs, or arranges for others to perform, the management and administrative services necessary for the operation of the Partnership and is responsible for managing the Partnership's short-term investments. The Sub-Manager, subject to the supervision of the Management Company and Individual General Partners, provides management services in connection with the Partnership's venture capital investments and investments of the Partnership in unaffiliated venture capital funds. Item 2. Properties. The Partnership does not own or lease physical properties. Item 3. Legal Proceedings. The Partnership is not a party to any material pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The information with respect to the market for the Units set forth under the subcaption "Substituted Limited Partners" on pages 30 and 31 of the Prospectus is incorporated herein by reference. An established public market for Registrant's Units does not now exist, and it is not anticipated that such a market will develop in the future. Accordingly, accurate information as to the market value of a Unit at any given date is not available. The approximate number of holders of Units as of March 16, 1998 is 12,898. The Managing General Partner and the Individual General Partners of the Partnership also hold interests in the Partnership. Beginning with the December 1994 client account statements, Merrill Lynch implemented new guidelines for reporting estimated values of limited partnerships and other direct investments on client account statements. As a result, Merrill Lynch no longer reports general partner estimates of limited partnership net asset value on its client account statements, although the Registrant may continue to provide its estimate of net asset value to Unit holders. Pursuant to the new guidelines, Merrill Lynch will report estimated values for limited partnership interests originally sold by Merrill Lynch (such as Registrant's Units) two times per year. These estimated values will be provided to Merrill Lynch by independent valuation services based on financial and other information available to the independent services on (i) the prior August 15th for reporting on December year-end and subsequent client account statements through the following May's month-end client account statements, and on (ii) March 31st for reporting on June month-end and subsequent client account statements through the November month-end client account statements of the same year. The Managing General Partner's estimate of net asset value at December 31, 1997 is $162 per Unit, including an assumed allocation of net unrealized appreciation of investments. The Managing General Partner's estimate of net asset value as set forth above reflects the value of the Partnership's underlying assets remaining at year-end, whereas the value provided by the independent services reflects the estimated value of the Partnership Units themselves based on information that was available on August 15, 1997. Merrill Lynch clients may contact their Merrill Lynch Financial Consultants or telephone the number provided to them on their account statements to obtain a general description of the methodology used by the independent services to determine the estimated value. The estimated value provided by the independent valuation services and the Registrant's current net asset value are not market values and Unit holders may not be able to sell their Units or realize either amount upon a sale of their Units. In addition, Unit holders may not realize the independent estimated value or the Registrant's current net asset value amount upon the liquidation of Registrant's assets over its remaining life. Cash Distributions Cash distributions paid or accrued during the periods presented and cumulative cash distributions to Partners from inception of the Partnership through December 31, 1997 are listed below: Managing Individual General General Limited Per $1,000 Distribution Date Partner Partners Partners Unit - ------------------------------------------------ ----------------- --------------- ---------------- -------- Inception to December 31, 1994 $ 1,400,000 $ 0 $ 58,800,000 $ 490 April 11, 1995 2,231,929 2,260 9,000,000 75 October 5, 1995 5,000,236 900 27,000,000 225 January 12, 1996 2,336,106 400 12,000,000 100 April 26, 1996 3,377,898 600 18,000,000 150 July 29, 1996 4,238,951 640 19,200,000 160 October 11, 1996 2,547,571 400 12,000,000 100 July 11, 1997 2,590,089 640 19,200,000 160 October 16, 1997 411,084 260 7,800,000 65 ----------------- ------------ ----------------- ----------- Cumulative totals at December 31, 1997 $ 24,133,864 $ 6,100 $ 183,000,000 $ 1,525 ================= ============ ================= ===========
Item 6. Selected Financial Data. ($ In Thousands, Except For Per Unit Information) Years Ended December 31, 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- -------- Net Realized Gain on Investments $ 15,606 $ 46,879 $ 41,368 $ 18,593 $ 10,605 Net Change in Unrealized Appreciation of Investments (5,873) (25,245) 12,661 (29,444) 9,430 Net Increase (Decrease) in Net Assets Resulting from Operations 9,786 20,947 54,512 (11,668) 18,581 Cash Distributions to Partners 30,002 59,366 57,572 17,600 15,600 Cumulative Cash Distributions to Partners 207,140 177,138 117,772 60,200 42,600 Total Assets 21,919 42,268 95,045 83,796 113,087 Net Unrealized Appreciation of Investments 4,008 9,880 35,125 22,464 51,908 Purchase of Portfolio Investments 474 207 2,741 2,428 8,050 Cumulative Cost of Portfolio Investments 116,533 116,059 115,851 113,110 110,682 PER UNIT OF LIMITED PARTNERSHIP INTEREST: Net Realized Gain on Investments $ 103 $ 309 $ 273 $ 135 $ 87 Net Increase (Decrease) in Net Assets Resulting from Operations 64 137 358 (79) 120 Cash Distributions 225 410 400 135 130 Cumulative Cash Distributions 1,525 1,300 890 490 355 Net Unrealized Appreciation of Investments 26 65 232 148 355 Net Asset Value, Including Net Unrealized Appreciation of Investments 162 323 596 638 852
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Liquidity and Capital Resources As of December 31, 1997, the Partnership held $2,979,552 in short-term investments with maturities of less than one year and $1,918,335 in an interest-bearing cash account. For the years ended December 31, 1997, 1996 and 1995, the Partnership earned interest from such investments totaling $638,556, $979,803 and $1,062,296, respectively. Interest earned in future periods is subject to fluctuations in short-term interest rates and changes in amounts available for investment in such securities. Funds needed to cover the Partnership's future operating expenses and follow-on investments will be obtained from these existing cash reserves, from interest and other investment income and from proceeds received from the sale of portfolio investments. The Partnership will not make any new portfolio investments. Therefore, generally all cash received from the sale of portfolio investments is distributed to Partners as soon as practicable after receipt, and after an adequate reserve for operating expenses and follow-on investments in existing portfolio companies. During 1997, the Partnership made cash distributions to Partners totaling $30,002,073, including $27,000,000, or $225 per Unit, to the Limited Partners and $3,002,073 to the General Partners. Cumulative cash distributions to Partners as of December 31, 1997 total $207,139,964, including $183,000,000 to the Limited Partners, or $1,525 per $1,000 Unit, and $24,139,964 to the General Partners. Results of Operations For the years ended December 31, 1997, 1996 and 1995, the Partnership had a net realized gain from operations of $15,659,055, $46,191,360 and $41,850,542, respectively. Net realized gain or loss from operations is comprised of 1) net realized gains or losses from portfolio investments and 2) net investment income or loss (interest, dividend and other income less operating expenses). Realized Gains and Losses from Portfolio Investments - For the year ended December 31, 1997, the Partnership had a $15,605,512 net realized gain from its portfolio investments. During 1997, the Partnership liquidated portfolio investments, including positions in several of its publicly-traded securities, for $30,571,957, realizing a gain of $22,400,099. This gain was offset by a $6,794,587 realized loss, resulting from the partial write-off of the Partnership's investments in Biocircuits Corporation, Clarus Medical Systems, Inc., Neocrin Company, Inc. and Horizon Cellular Telephone Company, L.P. See Note 7 of Notes to Financial Statements for a summary of liquidations by investment completed during 1997. For the year ended December 31, 1996, the Partnership had a $46,879,092 net realized gain from its portfolio investments. During 1996, the Partnership sold positions in several of its publicly-traded securities for $56,853,362, realizing a gain of $47,763,001. This gain was offset by an $883,909 realized loss, resulting from the write-off of 80% of the Partnership's investment in I.D.E. Corporation. For the year ended December 31, 1995, the Partnership had a $41,368,447 net realized gain from its portfolio investments. During 1995, the Partnership sold positions in several of its publicly-traded securities for $56,779,615, realizing a gain of $43,339,948. On December 31, 1995, the Partnership wrote-off its $1,822,751 investment in Home Express, Inc. due to financial and operating difficulties at the company. Additionally, during 1995, the Partnership realized a $148,750 loss on its remaining $395,000 investment in Target Vision, Inc., which was sold in 1995 for $246,250 plus interest. Investment Income and Expenses - For the year ended December 31, 1997, the Partnership had net investment income of $53,543. For the year ended December 31, 1996, the Partnership had a net investment loss of $687,732 and for the year ended December 31, 1995, the Partnership had net investment income of $482,095. The increase in net investment income for 1997 compared to 1996 was the result of a $1,560,580 reduction in operating expenses which was partially offset by a $819,305 decrease in investment income for 1997. The decrease in operating expenses during 1997 primarily was attributable to the $1.0 million litigation settlement expensed in 1996 relating to the Partnership's investment in In-Store Advertising, Inc. The additional $560,580 decrease in operating expenses includes a decrease in the management fee, as discussed below, and a reduction to professional fees and mailing and printing expenses incurred during 1997. Such reduced operating expenses reflect the decreased level of activity as the Partnership proceeds to liquidate its remaining investments. The decrease in investment income for 1997 compared to 1996 was comprised of a $478,058 decrease in interest and dividend income from portfolio investments and a $341,247 decrease in interest from short-term investments. Interest income from portfolio investments decreased by $303,166 resulting from the reduced amount of interest-bearing debt securities held by the Partnership during 1997 compared to the amount of such securities held during 1996. Dividend income also declined by $174,892 primarily due to the sale of the Partnership's investment in Borg-Warner Automotive, Inc., which was fully liquidated during the first quarter of 1997. Interest earned from short-term investments declined during 1997 primarily due to a decline in funds available for investment in short-term securities during 1997. The increase in net investment loss for 1996 compared to 1995 was the result of a $746,580 decrease in investment income and a $423,247 increase in operating expenses during 1996 compared to 1995. The decrease in investment income was comprised of a $664,087 decrease in interest and dividend income from portfolio investments and an $82,493 decrease in interest from short-term investments. The decrease in interest and dividend income from portfolio investments for 1996 compared to 1995 primarily was attributable to a one-time dividend from Raytel Medical Corporation totaling $566,025 received in 1995. The decrease in interest income from short-term investments primarily was due to a decrease in funds available for investment in such securities during 1996. The increase in operating expenses during 1996 compared to 1995 primarily was attributable to the $1.0 million litigation settlement expense incurred in 1996 relating to the Partnership's investment in In-Store Advertising. Partially offsetting the increase in litigation expense was a $451,507 decrease in the management fee, as discussed below, and a $143,990 decrease in professional fees, which primarily resulted from reduced legal fees incurred during 1996 in connection with the In-Store Advertising litigation. 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 years ended December 31, 1997, 1996 and 1995, was $282,686, $686,493 and $1,138,000, respectively. The decline in the management fee for the years presented primarily resulted from the return of capital included in the cash distributions made to Partners during such years. The management fee is expected to decline to its $200,000 minimum fee for 1998 and future years. The management fee and other operating expenses are paid with funds provided from operations. Funds provided from operations for the periods presented were obtained from interest received 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 of Portfolio Investments - During the year ended December 31, 1997, the Partnership increased the fair value of its portfolio of investments on a net basis by $1,200,665. Additionally during 1997, a net $7,073,490 was transferred from unrealized gain to realized gain relating to portfolio investments sold and written-off during 1997, as discussed above. As a result, unrealized appreciation of investments was reduced by $5,872,825 for 1997. During the year ended December 31, 1996, the Partnership increased the fair value of its portfolio of investments on a net basis by $4,876,621. Additionally during 1996, a net $30,121,417 of unrealized gain was transferred to realized gain relating to portfolio investments sold and written-off during 1996, as discussed above. As a result, unrealized appreciation of investments was reduced by $25,244,796 for 1996. During the year ended December 31, 1995, the Partnership increased the fair value of its portfolio of investments on a net basis by $37,867,207. Additionally during 1995, a net $25,205,865 of unrealized gain was transferred to realized gain relating to portfolio investments sold and written-off during 1995, as discussed above. As a result, unrealized appreciation of investments was increased by $12,661,342 for 1995. Net Assets - Changes to net assets resulting from operations is comprised of 1) net realized gains and losses from operations and 2) changes to net unrealized appreciation or depreciation of portfolio investments. For the the year ended December 31, 1997, the Partnership had a $9,786,230 net increase in net assets resulting from operations, comprised of the $15,659,055 net realized gain from operations offset by the $5,872,825 decrease in unrealized appreciation of investments for the year. As of December 31, 1997, the Partnership's net assets were $21,707,193, down $20,215,843 from $41,923,036 million as of December 31, 1996. This decrease is the result of the $30,002,073 of cash distributions paid to Partners during 1997 exceeding the $9,786,230 increase in net assets from operations for 1997. For the year ended December 31, 1996, the Partnership had a $20,946,564 net increase in net assets resulting from operations, comprised of the $46,191,360 net realized gain from operations partially offset by the $25,244,796 decrease in unrealized appreciation of investments for 1996. As of December 31, 1996, the Partnership's net assets were $41,923,036, down $38,419,496 from $80,342,532 as of December 31, 1995. This decrease resulted from the $59,366,060 of cash distributions, accrued or paid to Partners during 1996, exceeding the $20,946,564 net increase in net assets resulting from operations for 1996. For the year ended December 31, 1995, the Partnership had a $54,511,884 net increase in net assets resulting from operations, comprised of the $41,850,542 net realized gain from operations and the $12,661,342 increase in unrealized appreciation of investments for 1995. As of December 31, 1995, the Partnership's net assets were $80,342,532, down $3,059,947 from $83,402,479 as of December 31, 1994. This $3,059,947 decrease resulted from the $57,571,831 of cash distributions, accrued or paid to Partners during 1995, exceeding the $54,511,884 net increase in net assets resulting from operations for 1995. 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 as of December 31, 1997, 1996 and 1995, was $162, $323, and $596, respectively. Item 8. Financial Statements and Supplementary Data. ML VENTURE PARTNERS II, L.P. INDEX Independent Auditors' Report Balance Sheets as of December 31, 1997 and 1996 Schedule of Portfolio Investments as of December 31, 1997 Schedule of Portfolio Investments as of December 31, 1996 Statements of Operations for the years ended December 31, 1997, 1996 and 1995 Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Statements of Changes in Partners' Capital for the years ended December 31, 1995, 1996 and 1997 Notes to Financial Statements NOTE - All other schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or the notes thereto. INDEPENDENT AUDITORS' REPORT ML Venture Partners II, L.P.: We have audited the accompanying balance sheets of ML Venture Partners II, L.P. (the "Partnership"), including the schedules of portfolio investments, as of December 31, 1997 and 1996, and the related statements of operations, cash flows, and changes in partners' capital for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at December 31, 1997 and 1996 by correspondence with the custodian; where confirmation was not possible, we performed other audit procedures. 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, such financial statements present fairly, in all material respects, the financial position of ML Venture Partners II, L.P. as of December 31, 1997 and 1996, and the results of its operations, its cash flows and the changes in its partners' capital for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. As explained in Note 2, the financial statements include securities valued at $16,497,000 and $37,386,258 as of December 31, 1997 and 1996, respectively, representing 76% and 89% of net assets, respectively, whose values have been estimated by the Sub-Manager under the supervision of the Individual General Partners and the Managing General Partner in the absence of readily ascertainable market values. We have reviewed the procedures used by the Sub-Manager in arriving at its estimate of value of such securities and have inspected underlying documentation, and, in the circumstances, we believe the procedures are reasonable and the documentation appropriate. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. Deloitte & Touche LLP New York, New York February 20, 1998 ML VENTURE PARTNERS II, L.P. BALANCE SHEETS December 31, 1997 1996 ---------------- ---------- ASSETS Portfolio investments, at fair value (cost $13,013,680 as of December 31, 1997 and $27,505,870 as of December 31, 1996) $ 17,021,243 $ 37,386,258 Short-term investments, at amortized cost 2,979,552 4,486,402 Cash and cash equivalents 1,918,335 346,129 Accrued interest receivable - 49,442 ---------------- ---------------- TOTAL ASSETS $ 21,919,130 $ 42,268,231 ================ ================ LIABILITIES AND PARTNERS' CAPITAL Liabilities: Accounts payable and accrued expenses $ 144,890 $ 183,406 Due to Management Company 41,349 138,389 Due to Independent General Partners 25,698 23,400 ---------------- ---------------- Total liabilities 211,937 345,195 ---------------- ---------------- Partners' Capital: Managing General Partner 1,416,952 1,158,769 Individual General Partners 543 1,029 Limited Partners (120,000 Units) 16,282,135 30,882,850 Unallocated net unrealized appreciation of investments 4,007,563 9,880,388 ---------------- ---------------- Total partners' capital 21,707,193 41,923,036 ---------------- ---------------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 21,919,130 $ 42,268,231 ================ ================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS December 31, 1997 Initial Investment Company / Position Date Cost Fair Value Biocircuits Corporation*(A)(B)(C) 401,734 shares of Common Stock May 1991 $ 468,051 $ 175,759 2,000,000 shares of Preferred Stock 1,000,000 218,750 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 6,609,375 - ------------------------------------------------------------------------------------------------------------------------------- Brightware, Inc. (D) 144,039 shares of Common Stock May 1995 39,579 216,059 Warrants to purchase 38,737 shares of Common Stock at $.40 per share, expiring on 4/19/99 1,138 42,611 Warrants to purchase 59,166 shares of Common Stock at $.80 per share, expiring on 6/10/98 3,986 41,416 - ------------------------------------------------------------------------------------------------------------------------------- Clarus Medical Systems, Inc.*(B)(E) 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 - ------------------------------------------------------------------------------------------------------------------------------- CoCensys, Inc.(A)(I) 152,507 shares of Common Stock Feb. 1989 192,504 524,243 - ------------------------------------------------------------------------------------------------------------------------------- Corporate Express, Inc.(A)(B)(F) 60,000 shares of Common Stock May 1992 12,000 618,000 - ------------------------------------------------------------------------------------------------------------------------------- Diatide, Inc.*(A) 809,704 shares of Common Stock Dec. 1991 2,986,023 4,802,557 - ------------------------------------------------------------------------------------------------------------------------------- Horizon Cellular Telephone Company, L.P.:(B)(G) SPTHOR Corporation 10% Promissory Note due 3/26/98 May 1992 5,073 5,073 5.67% Bridge Loan 9,271 9,271 34.5 shares of Common Stock 154,806 154,806 - ------------------------------------------------------------------------------------------------------------------------------- I.D.E. Corporation 113,322 shares of Common Stock Mar. 1988 227,000 0 - ------------------------------------------------------------------------------------------------------------------------------- Neocrin Company*(B)(H) 48,429 shares of Preferred Stock June 1991 363,378 0 - ------------------------------------------------------------------------------------------------------------------------------- Photon Dynamics, Inc.*(A) 425,236 shares of Common Stock Sept. 1988 2,452,226 1,148,135 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, continued December 31, 1997 Initial Investment Company / Position Date Cost Fair Value Raytel Medical Corporation(A)(B) 62,500 shares of Common Stock Feb. 1990 $ 241,639 $ 581,250 Options to purchase 27,969 shares of Common Stock at $1.42 per share, expiring on 10/31/01 0 220,396 - ------------------------------------------------------------------------------------------------------------------------------- Sanderling Biomedical, L.P.*(I) 80% Limited Partnership interest May 1988 1,335,625 758,390 - ------------------------------------------------------------------------------------------------------------------------------- Total Portfolio Investments(J) $ 13,013,680 $ 17,021,243 --------------------------------- Supplemental Information: Liquidated Portfolio Investments(K) Liquidation Realized Company Date Cost Gain (Loss) Return - ------------------------------------------------------------------------------------------------------------------------------- Allez, Inc. 1992 $ 1,781,320 $ (1,781,320) $ 0 Amdahl Corporation (Key Computer) 1989 729,742 1,837,787 2,567,529 Aqua Group, Inc. 1990 2,000,000 (1,999,999) 1 BBN Advanced Computer Partners, L.P. 1990 868,428 (864,028) 4,400 BBN Integrated Switch Partners, L.P. 1990-1992 5,022,380 (4,822,797) 199,583 Biocircuits Corporation(B) 1997 1,164,867 (1,164,867) 0 Borg-Warner Automotive, Inc.(B) 1994-1997 2,500,000 14,628,202 17,128,202 Business Depot, Ltd. 1994 1,214,184 1,539,475 2,753,659 CellPro, Incorporated 1994-1996 1,560,944 15,999,505 17,560,449 Children's Discovery Centers of America, Inc. 1995 2,000,259 (236,187) 1,764,072 Clarus Medical Systems(B) 1997 1,388,620 (1,388,620) 0 Communications International, Inc. 1992-1994 1,819,332 (1,819,331) 1 Computer-Aided Design Group 1990-1991 1,131,070 (1,131,069) 1 Corporate Express, Inc.(B) 1994-1997 2,987,912 25,499,494 28,487,406 Data Recording Systems, Inc. 1988 1,615,129 (1,499,999) 115,130 Eckerd Corporation 1995 857,004 2,019,272 2,876,276 Elantec, Inc.(B) 1993-1997 1,412,118 2,105,168 3,517,286 Everex Systems, Inc. 1991-1992 750,000 447,606 1,197,606 - ------------------------------------------------------------------------------------------------------------------------------- Hoffman & Company, L.P. 1993 40,000 (40,000) 0 - ------------------------------------------------------------------------------------------------------------------------------- ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS, continued December 31, 1997 Liquidation Realized Company Date Cost Gain (Loss) Return - ------------------------------------------------------------------------------------------------------------------------------- Home Express, Inc. 1995 $ 1,822,751 $ (1,822,751) $ 0 - ------------------------------------------------------------------------------------------------------------------------------- Horizon Cellular Telephone Company, L.P.(B) 1996-1997 3,509,776 1,684,582 5,194,358 IDE Corporation 1996 883,909 (883,909) 0 - ------------------------------------------------------------------------------------------------------------------------------- IDEC Pharmaceuticals Corporation(B) 1994-1997 4,261,036 8,377,068 12,638,104 - ------------------------------------------------------------------------------------------------------------------------------- Inference Corporation 1995-1996 849,362 3,280,433 4,129,795 - ------------------------------------------------------------------------------------------------------------------------------- In-Store Advertising, Inc. 1992 2,259,741 (2,259,741) 0 - ------------------------------------------------------------------------------------------------------------------------------- InteLock Corporation 1992 1,254,125 (1,251,274) 2,851 Komag, Incorporated 1991-1995 2,365,237 4,477,842 6,843,079 - ------------------------------------------------------------------------------------------------------------------------------- Ligand Pharmaceuticals Inc. 1992-1996 1,414,435 4,227,245 5,641,680 - ------------------------------------------------------------------------------------------------------------------------------- Magnesys 1989 1,440,997 (1,412,049) 28,948 Meteor Message Corporation 1990 1,501,048 (1,501,047) 1 - ------------------------------------------------------------------------------------------------------------------------------- Micro Linear Corporation 1994-1995 1,120,300 2,897,886 4,018,186 - ------------------------------------------------------------------------------------------------------------------------------- Mobile Telecommunications Technologies Corporation 1995 1,558,155 3,439,923 4,998,078 - ------------------------------------------------------------------------------------------------------------------------------- Neocrin Company(B) 1996-1997 3,840,560 (3,840,560) 0 - ------------------------------------------------------------------------------------------------------------------------------- OccuSystems, Inc. 1994-1996 2,657,000 9,353,722 12,010,722 - ------------------------------------------------------------------------------------------------------------------------------- Ogle Resources, Inc. 1993 1,974,286 (1,974,186) 100 - ------------------------------------------------------------------------------------------------------------------------------- Pandora Industries, Inc. 1990 2,060,139 (2,060,138) 1 - ------------------------------------------------------------------------------------------------------------------------------- Pyxis Corporation 1993 634,598 7,169,424 7,804,022 - ------------------------------------------------------------------------------------------------------------------------------- Raytel Medical Corp.(B) 1996-1997 1,807,664 4,370,155 6,177,819 R-Byte Inc. 1992-1994 1,991,098 (443,566) 1,547,532 Regeneron Pharmaceuticals, Inc. 1991-1995 2,678,135 30,203,091 32,881,226 Research Applications, Inc. 1994 100,000 (100,000) 0 Ringer Corporation 1991-1994 3,029,652 (2,208,012) 821,640 S & J Industries 1991-1992 1,600,150 (1,555,149) 45,001 Sanderling Biomedical, L.P.(B) 1995-1997 471,871 1,944,061 2,415,932 Saxpy Computer Corporation 1988 2,000,000 (2,000,000) 0 SDL, Inc. 1993-1996 4,757,265 10,502,531 15,259,796 SF2 Corporation 1991-1994 2,193,293 (1,856,570) 336,723 ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS, continued December 31, 1997 Liquidation Realized Company Date Cost Gain (Loss) Return - ------------------------------------------------------------------------------------------------------------------------------- Shared Resource Exchange, Inc. 1990-1994 $ 999,999 $ (999,998) $ 1 Special Situations, Inc. 1988 215,000 (187,175) 27,825 Storage Technology Corporation 1990 2,174,000 1,466,802 3,640,802 - ------------------------------------------------------------------------------------------------------------------------------- Target Vision, Inc. 1992-1995 1,500,000 (1,253,750) 246,250 - ------------------------------------------------------------------------------------------------------------------------------- TCOM Systems, Inc. 1990-1992 4,715,384 (4,711,536) 3,848 - ------------------------------------------------------------------------------------------------------------------------------- Telecom USA, Inc. 1989 5,000,000 3,361,778 8,361,778 - ------------------------------------------------------------------------------------------------------------------------------- Touch Communications Incorporated 1991 1,119,693 (1,119,693) 0 Viasoft, Inc. 1995-1996 915,348 2,801,429 3,716,777 - ------------------------------------------------------------------------------------------------------------------------------- Totals from Liquidated Portfolio Investments $ 103,519,316 $ 113,445,161 $ 216,964,477 ========================================================= Combined Net Combined Unrealized and Fair Value Cost Realized Gain and Return Totals from Active & Liquidated Portfolio Investments $ 116,532,996 $ 117,452,724 $ 233,985,720 =========================================================
(A) Public company (B) During 1997, the Partnership sold or wrote-off equity securities of such company. See Note 7 of Notes to Financial Statements for summarized information. (C) 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. During 1997, the Partnership made two follow-on investments in Biocircuits, the first on April 14, 1997 for $106,250, acquiring an additional 106,250 shares of the company's common stock, and the second on July 2, 1997 for $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. Additionally, on April 15, 1997, the Partnership's warrant to purchase 594,000 shares of Biocircuits preferred stock for $.60 per share, expired unexercised. (D) In December 1997, the Partnership exchanged its warrant to purchase 4,846 common shares at $.40 per share for 3,554 common shares of Brightware. ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS, continued December 31, 1997 (E) 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. (F) In January 1997, Corporate Express, Inc. issued a 50% stock dividend resulting in the receipt by the Partnership of an additional 60,252 shares of the company's common stock. Additionally, the Partnership sold 120,755 shares of Corporate Express during 1997. See Note 7 of Notes to Financial Statements. (G) During the first quarter of 1997, the Partnership received cash proceeds totaling $2,213,626 covering interest and principal on promissory notes due from HCTC Investment, L.P. and SPTHOR Corporation, net of certain reclassifications of prior payments. Additionally, during 1997, the Partnership received an additional $2,085,252, plus interest of $14,873 from the sale of options in connection with its investment in HCTC/SPTHOR. (H) In February 1997, Neocrin Company effected a one-for-ten reverse stock split of the company's common stock and preferred stock. Additionally, in connection with a financial restructuring of the company completed in 1997, the Partnership's warrants to purchase 92,205 common shares of Neocrin were canceled and the Partnership wrote-off $3,840,430 of its $4,203,808 investment in the company. See Note 7 of Notes to Financial Statements. (I) During 1997, the Partnership received three in-kind distributions of common stock from Sanderling Biomedical, L.P. The first was in July 1997 for 4,645 shares of Graham Fields International, the second in September 1997 for 59,685 shares of Vical, Inc. and the third in October 1997 for 152,507 shares of CoCensys, Inc. The Graham Fields and Vical shares were subsequently sold during 1997. See Note 7 of Notes to Financial Statements. (J) During 1997, the Partnership received two in-kind distributions of common shares of IDEC Pharmaceuticals Corporation from ML/MS Associates, L.P. and MLMS Cancer Research, Inc. as final liquidating distributions. The first was in March 1997 for 347,826 shares and the second was in May 1997 for 129,407 shares. All 477,233 were subsequently sold during 1997. Also during 1997, the Partnership completed the liquidation of its investments in Borg-Warner Automotive, Inc. and Elantec, Inc. See Note 7 of Notes to Financial Statements. (K) Amounts provided for "Supplemental Information: Liquidated Portfolio Investments" are cumulative from inception through December 31, 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. SCHEDULE OF PORTFOLIO INVESTMENTS December 31, 1996 Active Portfolio Investments: Initial Investment Company / Position Date Cost Fair Value Biocircuits Corporation*(A) 128,817 shares of Common Stock May 1991 $ 1,422,501 $ 187,171 2,000,000 shares of Preferred Stock 1,000,000 726,500 Warrants to purchase 594,000 shares of Preferred Stock at $.60 per share, expiring on 4/15/97 0 0 - ------------------------------------------------------------------------------------------------------------------------------- Borg-Warner Automotive, Inc.*(A) 251,694 shares of Common Stock Sept. 1988 1,258,470 7,267,664 - ------------------------------------------------------------------------------------------------------------------------------- Borg-Warner Security Corporation*(A) 500,000 shares of Common Stock Sept. 1988 2,500,000 4,031,250 - ------------------------------------------------------------------------------------------------------------------------------- Brightware, Inc. 140,485 shares of Common Stock Apr. 1993 39,252 84,291 Warrants to purchase 38,737 shares of Common Stock at $.40 per share, expiring on 4/19/99 1,138 7,748 Warrants to purchase 4,846 shares of Common Stock at $.40 per share, expiring on 12/16/97 327 969 Warrants to purchase 59,166 shares of Common Stock at $.80 per share, expiring on 6/10/98 3,986 3,986 - ------------------------------------------------------------------------------------------------------------------------------- Clarus Medical Systems, Inc.* 179,028 shares of Preferred Stock Jan. 1991 2,389,168 895,152 Warrants to purchase 4,048 shares of Common Stock at $18.75 per share, expiring on 7/31/97 0 0 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) 120,503 shares of Common Stock May 1992 36,150 2,837,894 - ------------------------------------------------------------------------------------------------------------------------------- Diatide, Inc.*(A) 809,704 shares of Common Stock Dec. 1991 2,986,023 3,691,266 - ------------------------------------------------------------------------------------------------------------------------------- Elantec, Inc.(A) 23,245 shares of Common Stock Aug. 1988 60,437 81,655 - ------------------------------------------------------------------------------------------------------------------------------- Horizon Cellular Telephone Company, L.P: HCTC Investment, L.P. 10% Promissory Note due 3/26/98 May 1992 1,926,168 1,926,168 SPTHOR Corporation 10% Promissory Note due 3/26/98 May 1992 580,760 580,760 34.5 shares of Common Stock 215,625 2,188,625 - ------------------------------------------------------------------------------------------------------------------------------- I.D.E. Corporation 113,322 shares of Common Stock Mar. 1988 227,000 0 - -------------------------------------------------------------------------------------------------------------------------------
ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS, continued December 31, 1996 Initial Investment Company / Position Date Cost Fair Value IDEC Pharmaceuticals Corporation(A) ML/MS Associates, L.P.* 34.4% Limited Partnership interest June 1989 $ 3,960,000 $ 6,750,656 MLMS Cancer Research, Inc.* 400,000 shares of Common Stock July 1989 69,566 68,184 - ------------------------------------------------------------------------------------------------------------------------------- Neocrin Company* 484,300 shares of Preferred Stock June 1991 4,203,716 193,720 Warrants to purchase 922,050 shares of Common Stock at $.40 per share, expiring on 1/3/01 92 0 - ------------------------------------------------------------------------------------------------------------------------------- Photon Dynamics, Inc.*(A) 425,235 shares of Common Stock Sept. 1988 2,452,226 2,593,934 Warrants to purchase 6,062 shares of Common Stock at $5.40 per share, expiring on 6/30/00 0 0 - ------------------------------------------------------------------------------------------------------------------------------- Raytel Medical Corporation(A) 100,000 shares of Common Stock Feb. 1990 386,622 557,483 Options to purchase 27,969 shares of Common Stock at $1.42 per share, expiring on 10/31/01 0 206,411 - ------------------------------------------------------------------------------------------------------------------------------- Sanderling Biomedical, L.P.* 80% Limited Partnership interest May 1988 1,786,643 2,504,771 - ------------------------------------------------------------------------------------------------------------------------------- Totals from Active Portfolio Investments $ 27,505,870 $ 37,386,258 --------------------------------- Supplemental Information: Liquidated Portfolio Investments Cost Realized Gain Return Totals from Liquidated Portfolio Investments $ 88,552,870 $ 97,839,649 $ 186,392,519 ========================================================= Combined Net Combined Unrealized and Fair Value Cost Realized Gain and Return Totals from Active & Liquidated Portfolio Investments $ 116,058,740 $ 107,720,037 $ 223,778,777 =========================================================
* May be deemed an affiliated person of the Partnership as defined in the Investment Company Act of 1940. (A) Public company ML VENTURE PARTNERS II, L.P. STATEMENTS OF OPERATIONS For the Years Ended December 31, 1997 1996 1995 --------------- --------------- --------- INVESTMENT INCOME AND EXPENSES Income: Interest from short-term investments $ 638,556 $ 979,803 $ 1,062,296 Interest and other income from portfolio investments 27,270 330,436 374,344 Dividend income 37,754 212,646 832,825 --------------- ---------------- ---------------- Total investment income 703,580 1,522,885 2,269,465 --------------- ---------------- ---------------- Expenses: Management fee 282,686 686,493 1,138,000 Professional fees 140,089 175,434 319,424 Mailing and printing 126,589 220,877 211,662 Independent General Partners' fees 94,663 109,262 103,049 Custodial fees 373 13,930 14,602 Miscellaneous 5,637 4,621 633 Litigation settlement - 1,000,000 - --------------- ---------------- ---------------- Total investment expenses 650,037 2,210,617 1,787,370 --------------- ---------------- ---------------- NET INVESTMENT INCOME (LOSS) 53,543 (687,732) 482,095 Net realized gain from portfolio investments 15,605,512 46,879,092 41,368,447 --------------- ---------------- ---------------- NET REALIZED GAIN FROM OPERATIONS 15,659,055 46,191,360 41,850,542 Net change in unrealized appreciation of investments (5,872,825) (25,244,796) 12,661,342 --------------- ---------------- ---------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 9,786,230 $ 20,946,564 $ 54,511,884 =============== ================ ================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1997 1996 1995 --------------- --------------- ----------- CASH FLOWS PROVIDED FROM (USED FOR) OPERATING ACTIVITIES Net investment income (loss) $ 53,543 $ (687,732) $ 482,095 Adjustments to reconcile net investment income (loss) to cash provided from (used for) operating activities: Decrease (increase) in accrued interest receivable 49,442 820,735 (55,706) Decrease (increase) in accrued interest on short-term investments 19,695 (10,369) (8,190) Decrease in payables (133,258) (21,176) (27,451) --------------- --------------- ---------------- Cash provided from (used for) operating activities (10,578) 101,458 390,748 --------------- --------------- ---------------- CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES Net return (purchase) of short-term investments 1,487,155 12,893,395 (10,426,139) Cost of portfolio investments purchased (474,255) (207,111) (2,741,249) Deposits released from (placed in) escrow - 184,502 (184,502) Net proceeds from the sale of portfolio investments 28,190,298 59,663,087 54,223,795 Repayment of investments in notes 2,381,659 727,447 2,019,721 --------------- --------------- ---------------- Cash provided from investing activities 31,584,857 73,261,320 42,891,626 --------------- --------------- ---------------- CASH FLOWS USED FOR FINANCING ACTIVITIES Cash distributions to Partners (30,002,073) (73,702,566) (43,235,325) --------------- --------------- ---------------- Increase (decrease) in cash and cash equivalents 1,572,206 (339,788) 47,049 Cash and cash equivalents at beginning of year 346,129 685,917 638,868 --------------- --------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,918,335 $ 346,129 $ 685,917 =============== =============== ================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENTS OF CHANGES IN PARTNERS' CAPITAL For the Years Ended December 31, 1995, 1996 and 1997 Unallocated Managing Individual Net Unrealized General General Limited Appreciation of Partner Partners Partners Investments Total Balance as of December 31, 1994 $ 2,191,479 $ 3,917 $ 58,743,241 $ 22,463,842 $ 83,402,479 Cash distributions, paid April 11, 1995 and October 5, 1995 (7,232,165) (3,160) (36,000,000) - (43,235,325) Cash distribution, paid January 12, 1996 (2,336,106) (400) (12,000,000) - (14,336,506) Net investment income 243,840 7 238,248 - 482,095 Net realized gain on investments 8,604,637 1,093 32,762,717 - 41,368,447 Net change in unrealized appreciation of investments - - - 12,661,342 12,661,342 ------------- ------- -------------- -------------- ---------------- Balance as of December 31, 1995 1,471,685 1,457 43,744,206(A) 35,125,184 80,342,532 Cash distributions, paid April 26, 1996, July 29, 1996 and October 11, 1996 (10,164,420) (1,640) (49,200,000) - (59,366,060) Net investment income (loss) 100,653 (26) (788,359) - (687,732) Net realized gain on investments 9,750,851 1,238 37,127,003 - 46,879,092 Net change in unrealized appreciation on investments - - - (25,244,796) (25,244,796) ------------- ------- -------------- -------------- ---------------- Balance as of December 31, 1996 1,158,769 1,029 30,882,850(A) 9,880,388 41,923,036 Cash distribution, paid July 11, 1997 (2,590,089) (640) (19,200,000) - (21,790,729) Cash distribution, paid October 16, 1997 (411,084) (260) (7,800,000) - (8,211,344) Net investment income 13,410 2 40,131 - 53,543 Net realized gain on investments 3,245,946 412 12,359,154 - 15,605,512 Net change in unrealized appreciation on investments - - - (5,872,825) (5,872,825) ------------- ------- -------------- -------------- ---------------- Balance as of December 31, 1997 $ 1,416,952 $ 543 $ 16,282,135(A) $ 4,007,563 $ 21,707,193 ============= ======= ============== ============== ================
(A) The net asset value per unit of limited partnership interest, including an assumed allocation of net unrealized appreciation of investments, was $162, $323 and $596 as of December 31, 1997, 1996 and 1995, respectively. Cumulative cash distributions paid, or payable, to Limited Partners from inception to December 31, 1997, 1996 and 1995 totaled $1,525, $1,300 and $890 per Unit, respectively. See notes to financial statements ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS 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. The Partnership is now scheduled to terminate on December 31, 1999. In addition, 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. 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. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS, continued 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 $4 million as of December 31, 1997, which was recorded for financial statement purposes, was not recognized for tax purposes. Additionally, from inception to December 31, 1997, timing differences of approximately $6.8 million 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 December 31, 1997, the Partnership had a $117.7 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. 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). Such amounts were increased beginning on July 1, 1997 from the previous amounts received by the Independent General Partners of $20,000 for the annual fee and $1,400 for each meeting attended. The annual fee will revert back to $20,000 effective on January 1, 1998. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS, continued 6. Commitments The Partnership satisfied its $370,434 non-interest bearing obligation payable to MLMS Cancer Research, Inc., the general partner of ML/MS Associates, L.P., by making a final payment of $14,079 in November 1997. 7. Portfolio Investments During 1997 the Partnership fully or partially liquidated the following portfolio securities: Realized Company Shares Sold Cost Gain (Loss) Return Biocircuits Corporation - partial write-off n/a $ 1,164,867 $ (1,164,867) $ 0 Borg-Warner Automotive, Inc. 251,694 1,258,470 8,381,410 9,639,880 Clarus Medical Systems, Inc. - partial write-off n/a 1,388,620 (1,388,620) 0 Corporate Express, Inc. 120,755 24,150 2,561,946 2,586,096 Elantec, Inc. 23,245 60,437 32,945 93,382 Graham Fields International (Sanderling) 4,645 113,964 (50,960) 63,004 IDEC Pharmaceuticals Corporation 477,233 4,043,645 8,594,459 12,638,104 HCTC Investment, L.P. - sale of options n/a 0 2,085,252 2,085,252 HCTC / SPTHOR - note repayment n/a 2,381,659 0 2,381,659 HCTC Investment, L.P. - partial write-off n/a 400,670 (400,670) 0 Neocrin Company - partial write-off n/a 3,840,430 (3,840,430) 0 Raytel Medical Corporation 37,500 144,983 0 144,983 Vical, Inc. (Sanderling) 59,685 144,550 795,047 939,597 -------------- -------------- ---------------- Total $ 14,966,445 $ 15,605,512 $ 30,571,957 -------------- -------------- ----------------
8. Cash Distributions Cash distributions paid or accrued during the periods presented and cumulative cash distributions to Partners from inception of the Partnership through December 31, 1997 are listed below: Managing Individual General General Limited Per $1,000 Distribution Date Partner Partners Partners Unit - ------------------------------------------------ --------------- -------------- ---------------- -------- Inception to December 31, 1994 $ 1,400,000 $ 0 $ 58,800,000 $ 490 April 11, 1995 2,231,929 2,260 9,000,000 75 October 5, 1995 5,000,236 900 27,000,000 225 January 12, 1996 2,336,106 400 12,000,000 100 April 26, 1996 3,377,898 600 18,000,000 150 July 29, 1996 4,238,951 640 19,200,000 160 October 11, 1996 2,547,571 400 12,000,000 100 July 11, 1997 2,590,089 640 19,200,000 160 October 16, 1997 411,084 260 7,800,000 65 --------------- ------------- ------------------ ----------- Cumulative totals at December 31, 1997 $ 24,133,864 $ 6,100 $ 183,000,000 $ 1,525 =============== ============= ================== ===========
ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS, continued 9. Litigation Settlement During 1996, the Partnership settled an action in which it was named as a defendant, along with other entities and individuals, in respect of its ownership of securities of In-Store Advertising, Inc. ("ISA"). The action was a purported class action suit wherein the plaintiffs, who purchased shares of ISA in its July 19, 1990 initial public offering through November 8, 1990, alleged violations under certain sections of the Securities Act of 1933, the Securities Exchange Act of 1934 and common law. The plaintiffs sought rescission of their purchases of ISA common stock together with damages and certain costs and expenses. In connection with the settlement, the Partnership delivered $1,000,000 into escrow on September 20, 1996, representing its share of the settlement agreement. On December 18, 1996, the court entered an order approving the settlement and dismissing the action against the Partnership and the other defendants involved in the settlement. Additionally, the Partnership incurred legal expenses totaling approximately $246,000 related to the litigation. 10. Classification of Portfolio Investments As of December 31, 1997, the Partnership's investments in portfolio companies were categorized as follows: % of Type of Investments Cost Fair Value Net Assets* - ------------------- -------------- --------------- ----------- Common Stock and Warrants $ 9,299,785 $ 15,134,607 69.72% Limited Partnerships 1,335,625 758,390 3.49% Preferred Stock 2,363,926 1,113,902 5.13% Debt Securities 14,344 14,344 .07% -------------- --------------- -------- Total $ 13,013,680 $ 17,021,243 78.41% ============== =============== ====== Country/Geographic Region Midwestern U.S. $ 3,512,548 $ 8,122,527 37.42% Western U.S. 6,118,959 3,927,009 18.09% Eastern U.S. 3,382,173 4,971,707 22.90% -------------- --------------- ------ Total $ 13,013,680 $ 17,021,243 78.41% ============== =============== ====== Industry Business Services $ 2,512,000 $ 7,227,375 33.30% Biotechnology 4,514,152 6,085,190 28.03% Semiconductors/Electronics 2,452,226 1,148,135 5.29% Medical Devices and Services 3,094,449 2,091,307 9.63% Telecommunications 169,150 169,150 .78% Computer Hardware/Software 271,703 300,086 1.38% -------------- --------------- -------- Total $ 13,013,680 $ 17,021,243 78.41% ============== =============== ======
* Percentage of net assets is based on fair value. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS - continued 11. Short-Term Investments As of December 31, 1997 and 1996, the Partnership had short-term investments in commercial paper as detailed below. Maturity Purchase Amortized Value at Issuer Yield Date Price Cost Maturity December 31, 1997: International Lease Finance 5.55% 1/15/98 $ 1,480,344 $ 1,496,532 $ 1,500,000 National Rule 5.66% 3/13/98 1,474,766 1,483,020 1,500,000 --------------- --------------- ---------------- Total as of December 31, 1997 $ 2,955,110 $ 2,979,552 $ 3,000,000 =============== =============== ================ December 31, 1996: Korean Development Bank 5.35% 1/17/97 $ 2,960,767 $ 2,992,421 $ 3,000,000 Japan Leasing 5.35% 1/27/97 1,481,498 1,493,981 1,500,000 --------------- --------------- ---------------- Total as of December 31, 1996 $ 4,442,265 $ 4,486,402 $ 4,500,000 =============== =============== ================
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. None PART III Item 10. Directors and Executive Officers of the Registrant. The Partnership GENERAL PARTNERS The General Partners of the Partnership consist of the four Individual General Partners and the Managing General Partner. The five General Partners are responsible for the management and administration of the Partnership. As required by the Investment Company Act of 1940 (the "1940 Act"), a majority of the General Partners must be individuals who are not "interested persons" of the Partnership as defined in the 1940 Act. In 1987, the Securities and Exchange Commission (the "SEC") issued an order declaring that the three Independent General Partners of the Partnership (the "Independent General Partners") are not "interested persons" of the Partnership as defined in the 1940 Act solely by reason of their being general partners of the Partnership. The Individual General Partners have full authority over the management of the Partnership and provide overall guidance and supervision with respect to the operations of the Partnership and perform the various duties imposed on the directors of business development companies by the 1940 Act. In addition to general fiduciary duties, the Individual General Partners, among other things, supervise the management arrangements of the Partnership. The Managing General Partner, subject to the supervision of the Individual General Partners, has authority to provide, or arrange for the provision of, management services in connection with the venture capital investments of the Partnership. The general partner of the Managing General Partner is Merrill Lynch Venture Capital Inc. (the "Management Company"). The Management Company is an indirect subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."). Individual General Partners Dr. Steward S. Flaschen (1) 592 Weed Street New Canaan, Connecticut 06840 Age 71 Individual General Partner since 1987 Units of the Partnership beneficially owned at March 16, 1998 - None (3) President of Flaschen & Davies, a management consulting firm, since 1986; Corporate Senior Vice President and member of the Management Policy Board of ITT Corporation from 1982 to 1986 and General Technical Director from 1969 to 1986; Chairman of Telco Systems Inc. from 1990 to present; Chairman of TranSwitch Corp. from 1989 to present; Director of Sipex Corp. from 1996 to present. Jerome Jacobson (1) 4200 Massachusetts Avenue, N.W. Washington, D.C. 20016 Age 76 Individual General Partner since 1987 Units of the Partnership beneficially owned at March 16, 1998 - None (3) President of Economic Studies Inc., an economic consulting firm, since 1984; Vice Chairman and a director of the Burroughs Corporation from 1980 to 1984; Director of Cerplex Group, Inc., and Datawatch Inc. William M. Kelly (1) 40 Wall Street New York, New York 10005 Age 54 Individual General Partner since 1991 Units of the Partnership beneficially owned at March 16, 1998 - None (3) Managing Associate of Lingold Associates, since 1980; Vice President of National Aviation and Technology Company, a registered investment company, from 1977 to 1980; Director of First Eagle Fund of America since 1998 and First Eagle International Fund from 1994 to present. Kevin K. Albert (2) World Financial Center North Tower New York, New York 10281-1326 Age 45 Individual General Partner since 1990 Units of the Partnership beneficially owned at March 16, 1998 - None (3) Director and President of the Management Company; Managing Director of Merrill Lynch Investment Banking Division ("MLIBK") since 1988. (1) Independent General Partner and member of the Audit Committee. (2) Interested person of the Partnership as defined in the 1940 Act. (3) Messrs. Flaschen and Jacobson have each contributed $1,000 to the capital of the Partnership. Messrs. Kelly and Albert succeeded to the interest of prior Individual General Partners who each contributed $1,000 to the capital of the Partnership. The Management Company Merrill Lynch Venture Capital Inc. (the "Management Company") serves as the Partnership's management company and performs, or arranges for the performance of, the management and administrative services necessary for the operations of the Partnership pursuant to a management agreement dated May 23, 1991 (the "Management Agreement"). The Management Company has served as the management company for the Partnership since the Partnership commenced operations in 1987. The Management Company is a wholly-owned subsidiary of ML Leasing Equipment Corp., which is an indirect subsidiary of Merrill Lynch & Co., Inc. The Management Company, which was incorporated under Delaware law on January 25, 1982, maintains its principal office at North Tower, World Financial Center, New York, New York 10281-1326. On May 23, 1991, the limited partners of the Partnership approved a sub-management agreement among the Partnership, the Management Company, the Managing General Partner and DLJ Capital Management Corporation (the "Sub-Manager"). Under the terms of such sub-management agreement, the Sub-Manager agreed to provide, subject to the supervision of the Managing General Partner, the Management Company and the Individual General Partners, certain of the management services previously provided by the Management Company. Due to certain transactions involving The Equitable Companies Incorporated, the indirect parent of the Sub-Manager, a substantially similar sub-management agreement (the "Sub-Management Agreement") was approved by the limited partners of the Partnership at their 1992 annual meeting held on May 26, 1992. The Management Company has arranged for Palmeri Fund Administrators, Inc., an independent administrative services company, to provide administrative services to the Partnership. Fees for such services are paid directly by the Management Company. The following table sets forth information concerning the directors of the Management Company and the executive officers of the Management Company involved with the Partnership. Information concerning Kevin K. Albert, Director and President of the Management Company, is set forth under "General Partners - Individual General Partners". The address of Mr. Aufenanger, Mr. Lurie and Ms. Herte is South Tower, World Financial Center, New York, New York 10080. Robert F. Aufenanger Executive Vice President and Director Age 44 Officer or Director since 1990 Vice President of Merrill Lynch & Co. Corporate Credit and Director of the Partnership Management Group since 1991; Director of MLIBK from 1990 to 1991; Vice President of MLIBK from 1984 to 1990. Michael E. Lurie Vice President and Director Age 54 Officer or Director since 1995 First Vice President of Merrill Lynch & Co. Corporate Credit and Director of the Asset Recovery Management Department, joined Merrill Lynch in 1970. Prior to his present position, Mr. Lurie was the Director of Debt and Equity Markets Credit responsible for the global allocation of credit limits and the approval and structuring of specific transactions related to debt and equity products. Mr. Lurie also served as Chairman of the Merrill Lynch International Bank Credit Committee. Diane T. Herte Vice President and Treasurer Age 37 Officer or Director since 1995 Vice President of Merrill Lynch & Co. Investment Banking Group since 1996 and previously an Assistant Vice President of Merrill Lynch & Co. Corporate Credit Group since 1992, joined Merrill Lynch in 1984. Ms. Herte's responsibilities include controllership and financial management functions for certain partnerships and other entities for which subsidiaries of Merrill Lynch are the general partner. The directors of the Management Company will serve as directors until the next annual meeting of stockholders and until their successors are elected and qualify. The officers of the Management Company will hold office until the next annual meeting of the Board of Directors of the Management Company and until their successors are elected and qualify. There are no family relationships among any of the Individual General Partners of the Partnership and the officers and directors of the Management Company. DLJ Capital Management Corporation - The Sub-Management Company DLJ Capital Management Corporation (the "Sub-Manager"), a Delaware corporation, is an indirect wholly-owned subsidiary of Donaldson, Lufkin & Jenrette, Inc. ("DLJ"), a holding company which through its subsidiaries engages in the following activities: investment banking, merchant banking, public finance, trading, distribution and research. The Sub-Manager maintains its principal office at 277 Park Avenue, New York, New York 10172. The Sub-Manager is a wholly-owned subsidiary of DLJ Capital Corporation ("DLJ Capital"). DLJ Capital, which was founded in 1969, has established nine institutional venture capital funds ("Sprout Funds") and several smaller funds, with total committed capital of over $800 million. Six of such institutional funds, with capital exceeding $750 million, are currently operating. As of December 31, 1997, DLJ Capital's most recent limited partnership is Sprout Capital VII, L.P., which was established in 1994 with an excess of 75 percent of its $250 million capital provided by participants in earlier Sprout Funds. Sprout Capital VIII, L.P., a $750 million fund, was scheduled to close after year end. DLJ Capital's principal office is located at 277 Park Avenue, New York, New York 10172, and it maintains additional offices in Menlo Park, California and Boston, Massachusetts. The following table sets forth information concerning the directors, principal executive officers and other officers of the Sub-Manager. Unless otherwise noted, the address of each such person is 277 Park Avenue, New York, New York 10172. Richard E. Kroon President, Chief Executive Officer and Director Age 55 Officer or Director since 1977 Managing General Partner of Sprout Group, the venture capital affiliate of DLJ since 1981. Janet A. Hickey Senior Vice President Age 52 Officer or Director since 1985 General Partner of Sprout Group since 1985; Vice President and Manager of Venture Capital Division of General Electric Investment Corp. from 1970 to 1985. Keith B. Geeslin(1) Senior Vice President Age 44 Officer or Director since 1984 General Partner of Sprout Group since 1986. Dr. Robert E. Curry(1) Vice President Age 51 Officer or Director since 1991 President and Director of the Management Company from 1989 to 1991; Managing Director of MLIBK from 1990 to 1991; President of Merrill Lynch R&D Management Inc. ("ML R&D") from 1990 to 1991, Vice President of ML R&D from 1984 to 1990 and Director of ML R&D from 1987 to 1991; General Partner of Sprout Group since 1991. Robert Finzi(1) Vice Presid ent Age 44 Officer or Director since 1991 Vice President of the Management Company from 1985 to 1991; Associate with Menlo Ventures from 1983 to 1984; General Partner of Sprout Group since 1991. Anthony F. Daddino Vice President and Director Age 57 Officer or Director since 1989 Director, Executive Vice President and Chief Financial Officer of DLJ. Marjorie S. White Secretary, Treasurer and Director Age 44 Officer or Director since 1997 Vice President and Secretary of DLJ. (1) The address of these officers is 3000 Sand Hill Road, Menlo Park, California 94025. The Managing General Partner MLVPII Co., L.P. (the "Managing General Partner") is a limited partnership organized on February 4, 1986 under the laws of the State of New York. The Managing General Partner maintains its principal office at North Tower, World Financial Center, New York, New York 10281-1326. The Managing General Partner has acted as the managing general partner of the Partnership since the Partnership commenced operations. The Managing General Partner is engaged in no other activities at the date hereof. The general partner of the Managing General Partner is the Management Company. The limited partners of the Managing General Partner include DLJ Capital Management Corporation ("DLJ"), Dr. Robert E. Curry and Robert Finzi. Messrs. Curry and Finzi are currently officers of DLJ and were previously officers of the Management Company. The Partnership Agreement obligates the Managing General Partner to contribute cash to the capital of the Partnership so that the Managing General Partner's capital contribution at all times will be equal to one percent (1%) of the aggregate capital contributions of all partners of the Partnership. The Managing General Partner has contributed $1,212,162 to the capital of the Partnership. Item 11. Executive Compensation. Compensation - Beginning on July 1, 1997, the Partnership paid each Independent General Partner an annual fee of $21,000 in quarterly installments plus $1,500 for each meeting of the Individual General Partners attended or for each other meeting, conference or engagement in connection with Partnership activities at which attendance by the Individual General Partner is required. The Partnership pays all actual out-of-pocket expenses incurred by the Independent General Partners relating to attendance at such meetings. The Independent General Partners receive $1,500 for each meeting of the Audit Committee attended unless such committee meeting is held on the same day as a meeting of the Individual General Partners. In such case, the Independent General Partners receive $500 for each meeting of the Audit Committee attended. The fees paid to the Independent General Partners were increased on July 1, 1997 from the previously paid amounts of $20,000 for the annual fee and $1,400 for each meeting attended. Beginning on January 1, 1998, the annual fee will revert back to $20,000. For the year ended December 31, 1997, the aggregate fees and expenses paid by the Partnership to the Independent General Partners totaled $94,663. Allocations and Distributions - Profits and losses of the Partnership are determined and allocated as of the end of and within sixty days after the end of each calendar year. If the aggregate of the investment income and net realized capital gains and losses from venture capital investments is positive, calculated on a cumulative basis over the life of the Partnership through such year, the Managing General Partner is allocated investment income and net realized capital gains or losses from venture capital investments for such year so that, together with all investment income and gains and losses previously allocated to the Managing General Partner, it has received 20% of the aggregate of such income and gains calculated on a cumulative basis over the life of the Partnership through such year. Such allocation is referred to herein as the "Managing General Partner's Allocation" and is applicable only to the investment income and net realized capital gains and losses resulting from venture capital investments. The Partnership's investment income and net realized capital gains and losses in excess of the Managing General Partner's Allocation and all other profits and losses, including interest or other income on funds not invested in venture capital investments, are allocated among all the Partners (including the Managing General Partner) in proportion to their capital contributions. Cash or other assets otherwise distributable to the Managing General Partner are not distributed to the Managing General Partner to the extent that the net realized gains allocated to the Managing General Partner are offset by an amount equal to 20% of the net unrealized losses of the Partnership. For its fiscal year ended December 31, 1997, the Partnership had a net realized gain of $15,605,512 from the liquidation of certain portfolio investments. On a cumulative basis, from inception to December 31, 1997, the Partnership had $117,689,857 of net realized gains and investment income from its portfolio of venture capital investments. The Partnership made two cash distributions during 1997 totaling $27,000,000 to Limited Partners and $3,002,073 to the General Partners. Management Fee - Pursuant to the Management Agreement, the Partnership pays the Management Company a management fee at the annual rate of 2.5% of the gross capital contributions to the Partnership (net of selling commissions and organizational and offering expenses paid by the Partnership), reduced by capital distributed to the Partners and realized capital losses, with a minimum annual fee of $200,000. Such fee is payable quarterly based on the adjusted capital contributions, as described above, at the end of the preceding calendar quarter. As described previously, the Management Company has entered into a Sub-Management Agreement with DLJ, pursuant to which the Management Company compensates DLJ for management services. For the year ended December 31, 1997, management fees incurred by the Partnership to the Management Company aggregated $282,686. Item 12. Security Ownership of Certain Beneficial Owners and Management. Reference is made to Item 10 "Individual General Partners" concerning information with respect to security ownership. As of March 16, 1998, no person or group is known by the Partnership to be the beneficial owner of more than 5 percent of the Units. Mark Clein and Stephen Warner, limited partners of the Managing General Partner, own an aggregate of 134 Units of the Partnership and Merrill Lynch Pierce Fenner & Smith, Incorporated owns 230 Units. The Individual General Partners and the directors and officers of the Management Company do not own any Units. The Partnership is not aware of any arrangement which may, at a subsequent date, result in a change of control of the Partnership. Item 13. Certain Relationships and Related Transactions. Kevin K. Albert, a Director and President of the Management Company and a Managing Director of Merrill Lynch Investment Banking Group ("ML Investment Banking"), joined Merrill Lynch in 1981. Robert F. Aufenanger, a Director and Executive Vice President of the Management Company, a Vice President of Merrill Lynch & Co. Corporate Credit and a Director of the Partnership Management Department, joined Merrill Lynch in 1980. Michael E. Lurie, a Director and Vice President of the Management Company, a First Vice President of Merrill Lynch & Co. Corporate Credit and the Director of the Asset Recovery Management Department, joined Merrill Lynch in 1970. Diane T. Herte, a Vice President and Treasurer of the Management Company and a Vice President of Merrill Lynch & Co. Investment Banking Group, joined Merrill Lynch in 1984. Messrs. Albert, Aufenanger, Lurie and Ms. Herte are involved with certain other entities affiliated with Merrill Lynch or its affiliates. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) 1. Financial Statements Balance Sheets as of December 31, 1997 and 1996 Schedule of Portfolio Investments as of December 31, 1997 Schedule of Portfolio Investments as of December 31, 1996 Statements of Operations for the years ended December 31, 1997, 1996 and 1995 Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Statements of Changes in Partners' Capital for the years ended December 31, 1995, 1996 and 1997 Notes to Financial Statements 2. 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) Form of Sub-Management Agreement 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 since the beginning of the last quarter of the period 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 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 on the 31st day of March 1998. ML VENTURE PARTNERS II, L.P. /s/ Kevin K. Albert By: Kevin K. Albert Individual General Partner 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 indicated on the 31st day of March 1998. By: MLVPII Co., L.P. By: /s/ Steward S. Flaschen its Managing General Partner Steward S. Flaschen Individual General Partner By: Merrill Lynch Venture Capital Inc. ML Venture Partners II, L.P. its General Partner By: /s/ Kevin K. Albert By: /s/ Jerome Jacobson ------------------------------------------------- --------------------- Kevin K. Albert Jerome Jacobson President Individual General Partner (Principal Executive Officer) ML Venture Partners II, L.P. By: /s/ Diane T. Herte By: /s/ William M. Kelly Diane T. Herte William M. Kelly Vice President and Treasurer Individual General Partner (Principal Financial and Accounting Officer) ML Venture Partners II, L.P.
EX-27 2 EXHIBIT 27
6 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ML VENTURE PARTNERS II, L.P.'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 13,013,680 17,021,243 0 0 4,897,887 21,919,130 0 0 211,937 211,937 0 0 120,000 120,000 0 0 0 0 4,007,563 21,707,193 37,754 665,826 0 650,037 53,543 15,605,512 (5,872,825) 9,786,230 0 0 0 30,002,073 0 0 0 (20,215,843) 0 0 0 0 0 0 0 31,815,115 323 (.3) 64.3 0 225 0 162 0 0 0
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