-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, GR+HY+Dr7NYiJRVtMTOBNp0eMnx+NxQDYAG0ZL8KF66R/3MWOxJYzrPuiVJOoZFI QChO8OYpaOMd17+QJJ5GAA== 0000789538-94-000004.txt : 19941116 0000789538-94-000004.hdr.sgml : 19941116 ACCESSION NUMBER: 0000789538-94-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ML VENTURE PARTNERS II LP CENTRAL INDEX KEY: 0000789538 STANDARD INDUSTRIAL CLASSIFICATION: 0000 IRS NUMBER: 133324232 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 814-00043 FILM NUMBER: 94559181 BUSINESS ADDRESS: STREET 1: WORLD FINANCIAL CTR N TOWER STREET 2: 25TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10281-1330 BUSINESS PHONE: 2124491000 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 1994 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 10281-1327 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 449-1000 Not applicable Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No INDEX ML VENTURE PARTNERS II, L.P. PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Balance Sheets as of September 30, 1994 (Unaudited) and December 31, 1993 Schedule of Portfolio Investments as of September 30, 1994 (Unaudited) Statements of Operations for the Three and Nine Months Ended September 30, 1994 and 1993 (Unaudited) Statements of Cash Flows for the Nine Months Ended September 30, 1994 and 1993 (Unaudited) Statement of Changes in Partners' Capital for the Nine Months Ended September 30, 1994 (Unaudited) Notes to Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Item 2. Changes in Securities. Item 3. Defaults upon Senior Securities. Item 4. Submission of Matters to a Vote of Security Holders. Item 5. Other Information. Item 6. Exhibits and Reports on Form 8-K. PART I - FINANCIAL INFORMATION Item 1. Financial Statements. ML VENTURE PARTNERS II, L.P. BALANCE SHEETS September 30, 1994 December 31, (Unaudited) 1993 ASSETS Investments - Note 2 Portfolio investments, at fair value (cost $52,679,933 at September 30, 1994 and $55,130,444 at December 31, 1993) $ 80,377,799 $ 107,038,636 Short-term investments, at amortized cost 4,736,321 3,991,697 Cash and cash equivalents 734,938 1,412,882 Accrued interest and other receivables 545,789 220,067 Notes receivable 206,139 102,579 Receivable from securities sold - 321,300 - ------- TOTAL ASSETS $ 86,600,986 $ 113,087,161 = ========== = =========== LIABILITIES AND PARTNERS' CAPITAL Liabilities: Accounts payable $ 110,666 $ 41,535 Due to Management Company - Note 4 327,873 353,242 Due to Independent General Partners - Note 5 21,450 21,450 ------ ------ Total liabilities 459,989 416,227 ------- ------- Partners' Capital: Managing General Partner 1,599,737 1,033,457 Individual General Partners 3,853 3,410 Limited Partners (120,000 Units) 56,839,541 59,725,875 Unallocated net unrealized appreciation of investments - Note 2 27,697,866 51,908,192 ---------- ---------- Total partners' capital 86,140,997 112,670,934 ---------- ----------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 86,600,986 $ 113,087,161 = ========== = ===========
See notes to financial statements. ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED) SEPTEMBER 30, 1994 ACTIVE PORTFOLIO INVESTMENTS: Initial Investment Company / Position Date Cost Fair Value Biocircuits Corporation*(A) 515,269 shares of Common Stock May 1991 $ 1,422,501 $ 326,552 - ------------------------------ -------- - --------- - ------- Borg-Warner Automotive, Inc.*(A)(B) 500,000 shares of Common Stock Sept. 1988 2,500,000 9,690,970 - ------------------------------ ---------- --------- --------- Borg-Warner Security Corporation*(A) 500,000 shares of Common Stock Sept. 1988 2,500,000 4,068,750 - ------------------------------ ---------- --------- --------- CellPro, Incorporated*(A) 423,333 shares of Common Stock Mar. 1989 873,242 6,453,182 - ------------------------------ --------- ------- --------- Children's Discovery Centers of America, Inc.(A) 115,267 shares of Common Stock July 1988 2,000,259 1,292,915 - ------------------------------ --------- --------- --------- Clarus Medical Systems, Inc.* 507,458 shares of Preferred Stock Jan. 1991 2,037,290 807,350 Warrants to purchase 20,238 shares of Common Stock at $3.75 per share, expiring on 7/31/97 0 0 --------------------------------------- - - Corporate Express, Inc.*(A)(C) 678,193 shares of Common Stock May 1992 1,929,913 9,446,159 - ------------------------------ -------- --------- --------- Diatech, Inc.* 1,258,006 shares of Preferred Stock Dec. 1991 2,620,015 3,145,015 - ----------------------------------- --------- --------- --------- Eckerd Corporation*(A) 92,843 shares of Common Stock July 1992 857,004 1,786,067 - ----------------------------- --------- ------- --------- Elantec, Inc. 2,889,947 shares of Preferred Stock Aug. 1988 1,069,569 1,069,569 852,273 shares of Common Stock 340,909 340,909 - ------------------------------ ------- ------- Home Express, Inc.* 486,067 shares of Preferred Stock June 1992 1,822,751 2,303,957 - --------------------------------- --------- --------- --------- Horizon Cellular Telephone Company, L.P.: HCTC Investment, L.P. 10% Promissory Note May 1992 2,587,500 2,587,500 SPTHOR Corporation 10% Promissory Note May 1992 646,875 646,875 34.5 shares of Common Stock 215,625 215,625 --------------------------- ------- ------- I.D.E. Corporation* 493,391 shares of Preferred Stock Mar. 1988 1,110,909 555,455 - --------------------------------- --------- --------- ------- IDEC Pharmaceuticals Corporation(A): ML/MS Associates, L.P.* 34.4% Limited Partnership interest June 1989 3,960,000 3,960,000 Warrants to purchase 380,000 shares of Common Stock of IDEC Pharmaceuticals Corporation at $7.25 per share, expiring on 2/17/95 217,391 0 MLMS Cancer Research, Inc. 400,000 shares of Common Stock July 1989 46,957 46,957 ------------------------------ --------- ------ ------
ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED) SEPTEMBER 30, 1994 ACTIVE PORTFOLIO INVESTMENTS (CONTINUED): Initial Investment Company / Position Date Cost Fair Value Inference Corporation 702,427 shares of Preferred Stock Apr. 1993 $ 785,032 $ 785,032 Warrants to purchase 193,682 shares of Preferred Stock at $1 per share, expiring on 4/19/99 22,777 22,777 Warrants to purchase 24,233 shares of Preferred Stock at $1.05 per share, expiring on 12/16/97 6,531 6,531 Warrants to purchase 295,827 shares of Common Stock at $1 per share, expiring on 6/10/98 79,725 79,725 ------------------------------------ ------ ------ Komag, Incorporated(A) 144,486 shares of Common Stock Aug. 1988 1,331,561 3,329,611 - ------------------------------ --------- --------- --------- Ligand Pharmaceuticals Inc.*(A) 115,440 shares of Class A Common Stock Apr. 1989 304,116 904,186 346,323 shares of Class B Common Stock 912,350 1,587,340 Warrants to purchase 5,158 shares of Common Stock at $4.80 per share, expiring between 1/18/96 and 7/31/97 0 3,912 ----------------------------------------------------- - ----- Micro Linear Corporation(A)(D) 800,214 shares of Common Stock Aug. 1988 1,120,300 1,749,692 - ------------------------------ --------- --------- --------- Neocrin Company(E) 317,366 shares of Preferred Stock June 1991 3,369,046 2,102,381 9.25% Convertible Note due 6/22/95 317,592 317,592 - ---------------------------------- ------- ------- OccuSystems, Inc. 504,830 shares of Preferred Stock June 1993 2,524,150 3,155,188 - --------------------------------- --------- --------- --------- Photon Dynamics, Inc.* 1,222,828 shares of Preferred Stock Sept. 1988 2,452,226 1,435,181 - ----------------------------------- ---------- --------- --------- Raytel Medical Corporation* 1,000,000 shares of Preferred Stock Feb. 1990 1,000,000 2,000,000 Options to purchase 55,938 shares of Preferred Stock at $.71 per share, expiring 10/31/01 0 72,160 ------------------------------------ - ------ Regeneron Pharmaceuticals, Inc.(A) 1,377,895 shares of Common Stock Jan. 1988 1,616,740 5,581,026 - -------------------------------- --------- --------- --------- Sanderling Biomedical, L.P.*(F) 80% Limited Partnership interest May 1988 2,000,000 2,199,127 - -------------------------------- -------- --------- --------- Shared Resource Exchange, Inc. 2,777 shares of Common Stock Apr. 1987 250,000 0 - ---------------------------- --------- ------- - SDL, Inc.* 8% Subordinated Note July 1992 2,019,721 2,019,721 97,011 shares of Common Stock 169,769 169,769 26,270 shares of Preferred Stock 849,834 849,834 - -------------------------------- ------- ------- Target Vision, Inc.* 395,000 shares of Preferred Stock Apr. 1987 395,000 0 - --------------------------------- --------- ------- -
ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED) SEPTEMBER 30, 1994 ACTIVE PORTFOLIO INVESTMENTS (CONTINUED): Initial Investment Company / Position Date Cost Fair Value United States Paging Corporation*(A) 450,053 shares of Common Stock Apr. 1987 $ 1,479,405 $ 1,715,827 Warrants to purchase 16,887 shares of Common Stock at $3.33 per share, expiring between 2/27/95 and 4/28/95 0 8,148 Warrants to purchase 25,330 shares of Common Stock at $.89 per share, expiring between 12/15/95 and 3/8/96 0 74,027 ---------------------------------------------------- - ------ Viasoft, Inc. 861,885 shares of Preferred Stock Dec. 1987 915,348 1,465,205 - --------------------------------- --------- ------- --------- TOTALS FROM ACTIVE PORTFOLIO INVESTMENTS $ 52,679,933 $ 80,377,799 - ---------- - ---------- SUPPLEMENTAL INFORMATION: LIQUIDATED PORTFOLIO INVESTMENTS(H) Cost Realized Gain Return TOTALS FROM LIQUIDATED PORTFOLIO INVESTMENTS(G) $ 58,912,242 $ 6,726,237 $ 65,638,479 - ---------- - --------- - ---------- Combined Net Combined Unrealized and Fair Value Cost Realized Gain and Return TOTALS FROM ACTIVE & LIQUIDATED PORTFOLIO INVESTMENTS $ 111,592,175 $ 34,424,103 $ 146,016,278 = =========== = ========== = ===========
(A) Public company (B) Subsequent to the end of the quarter, on October 6, 1994, Borg-Warner Automotive, Inc. completed a public offering of its common stock. In connection with the offering, the Partnership sold 54,678 shares of common stock for $1.2 million, realizing a gain of $917,000. (C) On September 23, 1994, Corporate Express, Inc. completed its initial public offering of common stock. In connection with the offering and a one-for-two reverse split of its common stock, the Partnership exchanged its 914,250 preferred shares and 442,136 common shares for 678,193 common shares of the company. ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED) SEPTEMBER 30, 1994 ACTIVE PORTFOLIO INVESTMENTS (CONTINUED): (D) Subsequent to the end of the quarter, on October 13, 1994, Micro Linear Corporation completed its initial public offering of common stock. In connection with the offering, the company effected a 1-for-2.5 reverse split of its outstanding stock. As a result, the Partnership exchanged its 800,214 common shares for 320,085 common shares of the company. Additionally, the Partnership sold 106,666 shares in the offering for $843,000, realizing a gain of $693,000. (E) During the quarter, Neocrin Company effected a one-for-five reverse split of its common and preferred stock. As a result, the Partnership exchanged its 1,586,831 preferred shares for 317,366 preferred shares of the company. (F) Indirectly, the Partnership has an additional investment in Regeneron Pharmaceuticals, Inc. through its 80% limited partnership interest in Sanderling Biomedical, L.P. (G) During the quarter, the Partnership sold its $1.2 million investment in preferred stock of The Business Depot Ltd. for $2.5 million, realizing a gain of $1.3 million. (H) Amounts provided for "Supplemental Information: Liquidated Portfolio Investments" are cumulative from inception through September 30, 1994. * Company may be deemed an affiliated person of the Partnership as such term is defined in the Investment Company Act of 1940. See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Nine Months Ended September 30, September 30, 1994 1993 1994 1993 ---- ---- ---- ---- INVESTMENT INCOME AND EXPENSES Income: Interest from short-term investments $ 52,980 $ 54,514 $ 289,791 $ 320,812 Interest and other income from portfolio investments 282,950 151,176 820,340 404,508 ------- ------- ------- ------- Totals 335,930 205,690 1,110,131 725,320 ------- ------- --------- ------- Expenses: Management fee - Note 4 327,041 353,827 1,008,363 1,091,746 Professional fees 60,078 19,234 279,142 163,414 Mailing and printing 30,373 28,822 190,912 185,757 Independent General Partners' fees - Note 5 22,190 18,219 66,271 72,021 Custodial fees 3,289 3,351 10,727 11,229 Miscellaneous - 94 1,275 94 Bad debt expense - Note 9 - - - 406,355 - - - ------- Totals 442,971 423,547 1,556,690 1,930,616 ------- ------- --------- --------- NET INVESTMENT LOSS (107,041) (217,857) (446,559) (1,205,296) Net realized gain from investments sold or written-off 1,331,614 46,650 15,726,948 10,397,322 --------- ------ ---------- ---------- NET REALIZED GAIN (LOSS) FROM OPERATIONS (allocable to Partners) - Note 3 1,224,573 (171,207) 15,280,389 9,192,026 Net change in unrealized appreciation of investments 6,891,653 1,454,491 (24,210,326) (2,654,128) --------- --------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 8,116,226 $ 1,283,284 $ (8,929,937) $ 6,537,898 = ========= = ========= = ========== = =========
See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 1993 ---- ---- CASH FLOWS USED FOR OPERATING ACTIVITIES Net investment loss $ (446,559) $ (1,205,296) Adjustments to reconcile net investment loss to cash used for operating activities: (Increase) decrease in receivables and other assets (429,282) 295,739 (Increase) decrease in accrued interest on short-term investments (8,794) 9,078 Increase (decrease) in payables 43,762 (25,123) ------ ------- Cash used for operating activities (840,873) (925,602) -------- -------- CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES Net return (purchase) of short-term investments (735,830) 5,662,696 Purchase of portfolio investments (909,776) (8,016,529) Net proceeds from the sale of portfolio investments 19,408,535 16,260,582 Proceeds from repayment of note - 2,044,011 - --------- Cash provided from investing activities 17,762,929 15,950,760 ---------- ---------- CASH FLOWS USED FOR FINANCING ACTIVITIES Cash distributions to Partners - Note 7 (17,600,000) (15,600,000) ----------- ----------- Decrease in cash and cash equivalents (677,944) (574,842) Cash and cash equivalents at beginning of period 1,412,882 2,306,339 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 734,938 $ 1,731,497 = ======= = =========
See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENT OF CHANGES IN PARTNERS' CAPITAL (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 Unallocated Managing Individual Net Unrealized General General Limited Appreciation of Partner Partners Partners Investments Total Balance at beginning of period $ 1,033,457 $ 3,410 $ 59,725,875 $ 51,908,192 $ 112,670,934 Cash distribution paid May 26, 1994 - Note 7 - - (16,200,000) - (16,200,000) Cash distribution paid September 1, 1994 - - Note 7 (1,400,000) - - - (1,400,000) Allocation of net investment loss - Note 3 157,962 (21) (604,500) - (446,559) Allocation of net realized gain on investments - - Note 3 1,808,318 464 13,918,166 - 15,726,948 Net change in unrealized appreciation of investments - - - (24,210,326) (24,210,326) - - - ----------- ----------- Balance at end of period $ 1,599,737 $ 3,853 $ 56,839,541(A) $ 27,697,866 $ 86,140,997 = ========= = ===== = ========== = ========== = ==========
(A) The net asset value per unit of limited partnership interest, including an assumed allocation of net unrealized appreciation of investments, was $656 at September 30, 1994. Cumulative cash distributions paid to Limited Partners from inception to September 30, 1994 totaled $490 per Unit. See notes to financial statements. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. Organization and Purpose 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. The Partnership's objective is to achieve long-term capital appreciation from its portfolio of venture capital investments, originally made in new and developing companies and other special investment situations. The Partnership does not engage in any other business or activity. The Partnership is scheduled to terminate on December 31, 1997. The Individual General Partners can extend the termination date for up to two additional two-year periods if they determine that such extensions would be 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 Managing General Partner under the supervision of the Individual General Partners. The fair value of publicly-held portfolio securities is adjusted to the average closing public market price for the last five trading days of each quarter 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 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 clearly 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 Managing General Partner considers such risks in determining the fair value of the Partnership's portfolio investments. 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. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED Statements of Cash Flows - The Partnership considers its interest-bearing cash account to be cash equivalents. 3. Allocation of Partnership Profits and Losses The Partnership Agreement provides that the Managing General Partner will be allocated, on a cumulative basis over the life of the Partnership, 20% of the Partnership's aggregate investment income and net realized gains and losses from venture capital investments, provided that such amount is positive. All other gains and losses of the Partnership are allocated among all the Partners (including the Managing General Partner) in proportion to their respective capital contributions to the Partnership. From its inception to September 30, 1994, the Partnership had a $9.2 million net realized gain from its venture capital investments. 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 ("IGP's") receives $19,000 annually in quarterly installments, $1,200 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 IGP is required and $1,200 for each committee meeting attended ($500 if a committee meeting is held on the same day as a meeting of the General Partners). 6. Commitments In January 1994, the Management Company made a $1.1 million investment in Corporate Express, Inc. on behalf of the Partnership and is holding such investment until the Partnership obtains an exemptive order from the Securities and Exchange Commission allowing the Partnership to acquire this investment from the Management Company. The purchase price to the Partnership will be the lesser of the fair value of the investment or the Management Company's cost, plus interest, as of the date of acquisition by the Partnership. Additionally, the Partnership has guaranteed $1.8 million of bank debt of SDL, Inc. which is payable by the company on or before June 30, 1995. The Partnership also has a $393,043 non-interest bearing obligation payable on demand to MLMS Cancer Research, Inc. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED 7. Cash Distributions On September 1, 1994, the Partnership made a $1.4 million cash distribution to the Managing General Partner. On May 26, 1994, the Partnership made a cash distribution to Limited Partners of record on March 31, 1994 totaling $16.2 million, or $135 per $1,000 Unit. On May 26, 1993, the Partnership made a cash distribution to Limited Partners of record on March 31, 1993 totaling $15.6 million, or $130 per $1,000 Unit. These distributions primarily represented proceeds received by the Partnership from the sale of certain portfolio investments. Cash distributions paid to Limited Partners from the inception of the Partnership to September 30, 1994 totaled $58.8 million, or $490 per $1,000 Unit. 8. Pending Litigation The Partnership has been named as a defendant, along with other entities and individuals, in an action involving In-Store Advertising, Inc. ("ISA"). The action is 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, allege violations under certain sections of the Securities Act of 1933, the Securities Exchange Act of 1934 and common law. The plaintiffs seek rescission of their purchases of ISA common stock together with damages and certain costs and expenses. The Partnership believes it has meritorious defenses to the allegations and that the cost of resolution of the litigation will not have a material impact on the financial condition and results of operations of the Partnership. 9. Bad Debt Expense On March 31, 1993, the Partnership wrote off its $1.7 million promissory note dated May 17, 1988 due from Ogle Resources, Inc. As a result, the Partnership realized a bad debt expense of $406,355 representing accrued interest receivable from the note. 10. Interim Financial Statements In the opinion of MLVPII Co., L.P., the managing general partner of the Partnership, the unaudited financial statements as of September 30, 1994, and for the three and nine month periods then ended, reflect all adjustments necessary for the fair presentation of the results of the interim periods. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Liquidity and Capital Resources During the quarter ended September 30, 1994, the Partnership purchased 10,000 shares of CellPro, Incorporated, an existing portfolio investment, for $105,000. From its inception through September 30, 1994, the Partnership invested $111.6 million in 58 portfolio investments. Additionally, the Partnership has a commitment to purchase a $1.1 million investment in Corporate Express, Inc., purchased by the Management Company on behalf of the Partnership (see Note 6 of Notes to Financial Statements). As of September 30, 1994, 29 of the Partnership's 58 portfolio investments had been fully liquidated and 9 investments had been partially liquidated. Portfolio investments liquidated through September 30, 1994, had a cost of $58.9 million and returned $65.6 million, resulting in a cumulative net realized gain of $6.7 million. Generally, all cash received from the sale of portfolio investments, after an adequate reserve for operating expenses and follow-on investments in existing portfolio companies, is distributed to Partners as soon as practicable after receipt. On September 1, 1994, the Partnership made a $1.4 million cash distribution to the Managing General Partner. At September 30, 1994, cumulative cash distributions paid to Limited Partners totaled $58.8 million, or $490 per $1,000 Unit. At September 30, 1994, the Partnership held $5.5 million in cash and short-term investments; $4.7 million in short-term securities with maturities of less than one year and $735,000 in an interest-bearing cash account. Funds needed to cover future operating expenses and follow-on investments primarily will be obtained from the Partnership's existing cash reserves and from proceeds received from the future sale of portfolio investments. Results of Operations For the three and nine months ended September 30, 1994, the Partnership had a net realized gain from operations of $1.2 million and $15.3 million, respectively. For the three and nine months ended September 30, 1993, the Partnership had a net realized loss from operations of $171,000 and a net realized gain from operations of $9.2 million, respectively. Net realized gain or loss from operations is comprised of 1) net realized gains or losses from portfolio investments sold or written-off and 2) net investment income or loss. Realized Gains and Losses from Portfolio Investments - For the three and nine months ended September 30, 1994, the Partnership had a net realized gain from portfolio investments sold or written-off of $1.3 million and $15.7 million, respectively. In August 1994, the Partnership sold its 94,435 preferred shares of The Business Depot Ltd. for $2.5 million, realizing a gain of $1.3 million. Additionally, during the nine month period, the Partnership sold common stock of the following portfolio companies in the public market: 370,000 shares of CellPro, Incorporated for $11.3 million, realizing a gain of $10.6 million; 90,000 shares of Komag, Incorporated for $2.4 million, realizing a gain of $1.6 million; 140,000 shares of Regeneron Pharmaceuticals, Inc. for $2.3 million, realizing a gain of $2.2 million; and 78,271 shares of Ringer Corporation for $254,000, realizing a gain of $20,000. Also, in a private transaction, the Partnership sold 26,570 preferred shares of OccuSystems, Inc. for $173,000, realizing a gain of $40,000. Additionally, the Partnership realized a $54,000 gain from the receipt of final escrow payments relating to the sale of its investment in R-Byte, Inc. and wrote off its remaining $100,000 investment in Research Applications, Inc. For the three and nine months ended September 30, 1993, the Partnership had a net realized gain from portfolio investments sold and written-off of $47,000 and $10.4 million, respectively. During September 1993, the Partnership received $326,000 from MTI Technology Corporation ("MTI") representing repayment of a promissory note obtained in connection with MTI's acquisition of the Partnership's investment in SF2 Corporation. This transaction resulted in a realized gain of $48,000. During August 1993, the Partnership's warrant to purchase 164,030 common shares of Elantec, Inc. expired resulting in a realized loss of $1,000. Additionally, during nine month period, the Partnership sold 505,000 common shares of Regeneron for $7.9 million, realizing a gain of $7.3 million; 195,262 common shares of Pyxis Corporation for $7.8 million, realizing a gain of $7.2 million; and 187,912 common shares of Ringer Corporation for $567,000, realizing a gain of $4,000. Additionally, the Partnership wrote off its $2 million investment in Ogle Resources, Inc., its remaining $1.1 million investment in In-Store Advertising, Inc. ("ISA") and its remaining $900,000 investment in Communications International, Inc. due to financial difficulties at the companies. The Partnership also received a final liquidation payment from InteLock Corporation resulting in realized loss of $123,000. Investment Income and Expenses - For the three months ended September 30, 1994 and 1993, the Partnership had a net investment loss of $107,000 and $218,000, respectively. The decrease in net investment loss for the 1994 period compared to the 1993 period primarily is attributable to an increase in interest and other income from portfolio investments for the 1994 period reflecting dividends received from Borg-Warner Automotive, Inc. which began during the 1994 period. This increase was partially offset by a $41,000 increase in professional fees for the 1994 period, which included legal fees totaling $50,000 relating to the ISA litigation (see Note 8 of Notes to Financial Statements). For the nine months ended September 30, 1994 and 1993, the Partnership had a net investment loss of $447,000 and $1.2 million, respectively. The decrease in net investment loss for the 1994 period compared to the 1993 period primarily is attributable to an increase in interest and other income from portfolio investments for the 1994 period and a bad debt expense recorded during 1993, as discussed below. The increase in interest and other income from portfolio investments was partially offset by an increase in professional fees for the 1994 period, which included legal fees totaling $132,000 relating to the ISA litigation. The $416,000 increase in interest and other income from portfolio investments for the 1994 period compared to the 1993 period primarily is due to the receipt of purchase option income of $208,000 in the 1994 period and dividends received from Borg-Warner, as discussed above. The purchase option income resulted from the sale by the Partnership of an option to purchase its preferred shares of The Business Depot Ltd. The bad debt expense of $406,000 recorded during the 1993 period represented accrued interest on a $1.7 million promissory note due from Ogle Resources, Inc., which was written-off on June 30, 1993. The Management Company performs, or arranges for others to perform, the management and administrative services necessary for the operation of the Partnership. The Management Company receives a management fee at an annual rate of 2.5% of the gross capital contributions to the Partnership, reduced by selling commissions, organizational and offering expenses paid by the Partnership, return of capital and realized capital losses, with a minimum annual fee of $200,000. Such fee is determined and payable quarterly. The management fee for the three months ended September 30, 1994 and 1993, was $327,000 and $354,000, respectively. The management fee for the nine months ended September 30, 1994 and 1993, was $1 million and $1.1 million, respectively. The management fee will continue to decline in future periods as the Partnership's investment portfolio continues to mature and distributions are paid to Partners. The management fee and other operating expenses are paid with funds provided from operations. Funds provided from operations for the period were obtained from interest received on short-term investments, interest and other income from portfolio investments and proceeds from the sale of certain portfolio investments. Unrealized Gains and Losses and Changes in Unrealized Appreciation or Depreciation of Portfolio Investments - For the nine months ended September 30, 1994, the Partnership had an $11.4 million net unrealized loss from its portfolio investments primarily resulting from the net downward revaluation of the Partnership's publicly traded securities. Additionally, during the nine month period, a net $12.8 million was transferred from unrealized gain to realized gain primarily relating to the sale of CellPro and Regeneron shares, as discussed above. The $11.4 million unrealized loss and the $12.8 million net transfer from unrealized gain to realized gain resulted in a $24.2 million reduction to the Partnership's net unrealized appreciation of investments for the nine month period. For the nine months ended September 30, 1993, the Partnership had an $8.5 million net unrealized gain from its portfolio investments primarily resulting from the upward revaluation of the Partnership's investments in Regeneron, CellPro and Corporate Express, Inc. Additionally, during the nine month period, the Partnership transferred a net $11.2 million from unrealized gain to realized gain relating to investments sold or written-off, as discussed above. The $8.5 million unrealized gain offset by the $11.2 million net transfer from unrealized gain to realized gain resulted in a $2.7 million reduction to the Partnership's net unrealized appreciation of investments for the nine month period. 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 nine months ended September 30, 1994, the Partnership had a net decrease in net assets resulting from operations of $8.9 million. For the nine months ended September 30, 1993, the Partnership had a net increase in net assets resulting from operations of $6.5 million. At September 30, 1994, the Partnership's net assets were $86.1 million, a decrease of $26.5 million from $112.7 million at December 31, 1993. This decrease resulted from the $17.6 million of cash distributions paid to Partners during the period and the $8.9 million net decrease in net assets resulting from operations for the nine month period. At September 30, 1993, the Partnership's net assets were $100.6 million, a decrease of $9.1 million from $109.7 million at December 31, 1992. This decrease resulted from the $15.6 million cash distribution to Limited Partners paid in May 1993 exceeding the $6.5 million net increase in net assets resulting from operations for the nine month period. Gains and losses from investments are allocated to Partners' capital accounts when realized, in accordance with the Partnership Agreement (see Note 3 of Notes to Financial Statements). However, for purposes of calculating the net asset value per unit of limited partnership interest, net unrealized appreciation of investments has been included as if the net appreciation had been realized and allocated to the Limited Partners in accordance with the Partnership Agreement. Pursuant to such calculation, the net asset value per $1,000 Unit at September 30, 1994 and December 31, 1993, was $656 and $852, respectively. The reduction to the Partnership's net asset value of $196 per Unit for the nine months ended September 30, 1994, reflects the cash distribution of $135 per Unit and a decrease in net assets resulting from operations of $61 per Unit. PART II - OTHER INFORMATION Item 1. Legal Proceedings. The Partnership has been named as a defendant in an action relating to its ownership of securities of In-Store Advertising, Inc. ("In-Store Advertising"). On or about July 16, 1993, a Second Amended Consolidated Class Action Complaint (the "Amended Complaint") was filed in the United States District Court for the Southern District of New York in the In Re In-Store Advertising Securities Litigation. The action is a purported class action suit wherein the plaintiffs (the "Plaintiffs") are persons who allegedly purchased shares of In-Store Advertising common stock in the July 19, 1990 initial public offering (the "Offering") and through November 8, 1990. The defendants named in the Amended Complaint include present and former individual officers and directors of In-Store Advertising, the underwriters involved in the Offering, KPMG Peat Marwick (In-Store Advertising's auditors) and certain other defendants, including the Partnership, who owned In-Store Advertising securities prior to the Offering (the "Venture Capital Defendants"). Prior to the filing of the Amended Complaint, In-Store Advertising filed a "prepackaged" plan in U.S. Bankruptcy Court pursuant to Chapter XI of the U.S. Bankruptcy Code. The Amended Complaint alleges violations under Sections 11, 12(2) and 15 of the Securities Act of 1933, as amended (the "1933 Act"), Section 10(b) and 20 of the Securities Exchange Act of 1934, as amended (the "1934 Act") and Rule 10b-5 promulgated thereunder, and common law claims of negligent misrepresentation, fraud and deceit in connection with the sale of securities. The Plaintiffs seek rescission of the purchases of In-Store Advertising's common stock to the extent the members of the alleged classes still hold their shares, together with damages and certain costs and expenses. The Amended Complaint alleges that the Venture Capital Defendants are liable under Section 10(b) of the 1934 Act and Rule 10b-5, and are also liable as controlling persons of In-Store Advertising within the meaning of Section 15 of the 1933 Act and Section 20(a) of the 1934 Act. The Venture Capital Defendants are also being sued as alleged knowing and substantial aiders and abettors of the other defendants' wrongful conduct and under common law fraud and negligence theories. An individual director of In-Store Advertising, named as a defendant in the action, was a Vice President of Merrill Lynch Venture Capital Inc., the General Partner of the Managing General Partner of the Partnership. The Partnership believes that it has meritorious defenses to the allegations in the Amended Complaint (see Note 8 of Notes to Financial Statements). Item 2. Changes in Securities. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. The 1994 Annual Meeting of the Limited Partners was held on August 4, 1994. At the meeting the four Individual General Partners, Kevin K. Albert, Steward S. Flaschen, Jerome Jacobson and William M. Kelly, were elected to continue to serve as Individual General Partners and MLVPII Co., L.P. was elected to continue to serve as the Managing General Partner. The following other matters were also voted on and, with the exception of the proposal to amend Paragraph 11.4 of the Amended and Restated Agreement of Limited Partnership with respect to the requirement to hold Annual Meetings of Limited Partners, were approved: Affirmative Negative Votes Votes Abstentions Ratification of the selection of Deloitte & Touche LLP as independent auditors of the Partnership for its fiscal year ending December 31, 1994. 61,393 1,149 2,602 Approval of the continuance of the Management Agreement among the Partnership, the Management Company and the Managing General Partner and the continuance of the Sub-Management Agreement among the Partnership, the Managing General Partner, the Management Company and the Sub-Manager. 58,991 2,849 3,304 Proposal to amend Paragraph 11.4 of the Amended and Restated Agreement of Limited Partnership with respect to the requirement to hold Annual Meetings of Limited Partners. 51,821 8,393 4,930
Item 5. Other Information. During the quarter, the Partnership purchased 10,000 shares of CellPro, Incorporated for $105,000. This investment is in addition to the 413,333 shares of common stock previously owned by the Partnership. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits (3) (a)Amended and Restated Certificate of Limited Partnership of the Partnership, dated as of January 12, 1987. (1) (3) (b)Amended and Restated Certificate of Limited Partnership of the Partnership, dated July 27, 1990. (2) (3) (c)Amended and Restated Certificate of Limited Partnership of the Partnership, dated March 25, 1991. (3) (3) (d)Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of May 4, 1987. (4) (3) (e)Amendment No. 1 dated February 14, 1989 to Amended and Restated Agreement of Limited Partnership of the Partnership. (5) (3) (f)Amendment No. 2 dated July 27, 1990 to Amended and Restated Agreement of Limited Partnership of the Partnership. (2) (3) (g)Amendment No. 3 dated March 25, 1991 to Amended and Restated Agreement of Limited Partnership of the Partnership. (3) (3) (h)Amendment No. 4 dated May 23, 1991 to Amended and Restated Agreement of Limited Partnership of the Partnership. (6) (10) (a)Management Agreement dated as of May 23, 1991 among the Partnership, Management Company and the Managing General Partner. (6) (10) (b)Sub-Management Agreement dated as of May 23, 1991 among the Partnership, Management Company, the Managing General Partner and the Sub-Manager. (8)
(28) Prospectus of the Partnership dated February 10, 1987 filed with the Securities and Exchange Commission pursuant to Rule 424(b) under the Securities Act of 1933, as supplemented by a supplement thereto dated April 21, 1987 filed pursuant to Rule 424(c) under the Securities Act of 1933. (7) (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. (1) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1988 filed with the Securities and Exchange Commission on March 27, 1989. (2) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990 filed with the Securities and Exchange Commission on November 14, 1990. (3) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1990 filed with the Securities and Exchange Commission on March 28, 1991. (4) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 1987 filed with the Securities and Exchange Commission on August 14, 1987. (5) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989 filed with the Securities and Exchange Commission on May 15, 1989. (6) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991 filed with the Securities and Exchange Commission on August 14, 1991. (7) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended March 31, 1987 filed with the Securities and Exchange Commission on May 15, 1987. (8) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1992 filed with the Securities and Exchange Commission on March 26, 1993.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ML VENTURE PARTNERS II, L.P. By: /s/ Kevin K. Albert Kevin K. Albert General Partner By: MLVPII Co., L.P. its Managing General Partner By: Merrill Lynch Venture Capital Inc. its General Partner By: /s/ Kevin K. Albert Kevin K. Albert President (Principal Executive Officer) By: /s/ Joseph W. Sullivan Joseph W. Sullivan Treasurer (Principal Financial and Accounting Officer) Date: November 11, 1994 Exhibit Index Exhibits Page (3) (a) Amended and Restated Certificate of Limited Partnership of the Partnership, dated January 12, 1987. (1) (3) (b) Amended and Restated Certificate of Limited Partnership of the Partnership, dated July 27, 1990. (2) (3) (c) Amended and Restated Certificate of Limited Partnership of the Partnership, dated March 25, 1991. (3) (3) (d) Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of May 4, 1987. (4) (3) (e) Amendment No. 1 dated February 14, 1989 to Amended and Restated Agreement of Limited Partnership of the Partnership. (5) (3) (f) Amendment No. 2 dated July 27, 1990 to Amended and Restated Agreement of Limited Partnership of the Partnership. (2) (3) (g) Amendment No. 3 dated March 25, 1991 to Amended and Restated Agreement of Limited Partnership of the Partnership. (3) (3) (h) Amendment No. 4 dated May 23, 1991 to Amended and Restated Agreement of Limited Partnership of the Partnership. (6) (10) (a) Management Agreement dated as of May 23, 1991 among the Partnership, Management Company and the Managing General Partner. (6) (10) (b) Sub-Management Agreement dated as of May 23, 1991 among the Partnership, Management Company, the Managing General Partner and the Sub-Manager. (8)
(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) (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.
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