-----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, TSErjB6m9FE8ojtzdf+nP3j6dqDnc3dXIcdQcBuOqX+mYt9uh0YkVxIaBeEbUHy4 f1iNQOO6ttFg/sdyoRBObg== 0000789538-96-000002.txt : 19960517 0000789538-96-000002.hdr.sgml : 19960517 ACCESSION NUMBER: 0000789538-96-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ML VENTURE PARTNERS II LP CENTRAL INDEX KEY: 0000789538 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 133324232 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 814-00043 FILM NUMBER: 96565751 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 March 31, 1996 Or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number 0-14217 ML VENTURE PARTNERS II, L.P. ================================================================================ (Exact name of registrant as specified in its charter) Delaware 13-3324232 ================================================================================ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) World Financial Center, North Tower New York, New York 10281-1326 ================================================================================ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 449-1000 Not applicable ================================================================================ Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ML VENTURE PARTNERS II, L.P. INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Balance Sheets as of March 31, 1996 (Unaudited) and December 31, 1995 Schedule of Portfolio Investments as of March 31, 1996 (Unaudited) Statements of Operations for the Three Months Ended March 31, 1996 and 1995 (Unaudited) Statements of Cash Flows for the Three Months Ended March 31, 1996 and 1995 (Unaudited) Statement of Changes in Partners' Capital for the Three Months Ended March 31, 1996 (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 March 31, 1996 December 31, (Unaudited) 1995 ASSETS Investments - Notes 2, 9, 10 and 11 Portfolio investments, at fair value (cost $33,675,294 at March 31, 1996 and $38,000,476 at December 31, 1995) $ 53,489,300 $ 73,125,660 Short-term investments, at amortized cost 34,905,720 17,369,428 Cash and cash equivalents 69,058 685,917 Accrued interest receivable 950,051 870,177 Deposit in escrow - 184,502 Receivable from securities sold 3,838,349 2,809,725 ---------------- ----------------- TOTAL ASSETS $ 93,252,478 $ 95,045,409 ================ ================= LIABILITIES AND PARTNERS' CAPITAL Liabilities: Cash distribution payable - Note 7 $ 21,378,498 $ 14,336,506 Accounts payable 183,753 118,288 Due to Management Company - Note 4 205,188 224,683 Due to Independent General Partners - Note 5 28,500 23,400 ---------------- ----------------- Total liabilities 21,795,939 14,702,877 ---------------- ----------------- Partners' Capital: Managing General Partner 3,910,449 1,471,685 Individual General Partners 1,591 1,457 Limited Partners (120,000 Units) 47,730,493 43,744,206 Unallocated net unrealized appreciation of investments - Note 2 19,814,006 35,125,184 ---------------- ----------------- Total partners' capital 71,456,539 80,342,532 ---------------- ----------------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 93,252,478 $ 95,045,409 ================ =================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED) March 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 $ 434,757 2,000,000 shares of Preferred Stock 1,000,000 1,687,500 Warrants to purchase 594,000 shares of Preferred Stock at $.60 per share, expiring on 12/18/96 0 144,788 - ------------------------------------------------------------------------------------------------------------------------------- Borg-Warner Automotive, Inc.*(A) 444,664 shares of Common Stock Sept. 1988 2,223,320 11,088,809 - ------------------------------------------------------------------------------------------------------------------------------- Borg-Warner Security Corporation*(A) 500,000 shares of Common Stock Sept. 1988 2,500,000 4,171,875 - ------------------------------------------------------------------------------------------------------------------------------- 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)(B) 239,503 shares of Common Stock May 1992 124,456 6,322,879 - ------------------------------------------------------------------------------------------------------------------------------- Diatide, Inc.*(C) 1,349,508 shares of Preferred Stock Dec. 1991 2,986,023 4,454,528 - ------------------------------------------------------------------------------------------------------------------------------- Elantec, Inc.(A)(B) 243,245 shares of Common Stock Aug. 1988 886,574 1,313,523 - ------------------------------------------------------------------------------------------------------------------------------- Horizon Cellular Telephone Company, L.P.: HCTC Investment, L.P. 10% Promissory Note due 3/26/98 May 1992 2,587,500 2,587,500 SPTHOR Corporation 10% Promissory Note due 3/26/98 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 0 - ------------------------------------------------------------------------------------------------------------------------------- IDEC Pharmaceuticals Corporation(A): ML/MS Associates, L.P.* 34.4% Limited Partnership interest June 1989 3,960,000 6,219,785 MLMS Cancer Research, Inc.*(D) 400,000 shares of Common Stock July 1989 69,566 62,822 - -------------------------------------------------------------------------------------------------------------------------------
ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED) - continued March 31, 1996 Initial Investment Company / Position Date Cost Fair Value Inference Corporation(A)(B) 109,424 shares of Common Stock Apr. 1993 $ 580,889 $ 1,518,258 Brightware, Inc. 140,485 shares of Common Stock Apr. 1993 39,252 100,000 Warrants to purchase 38,737 shares of Common Stock at $.40 per share, expiring on 4/19/99 1,138 0 Warrants to purchase 4,846 shares of Common Stock at $.40 per share, expiring on 12/16/97 327 0 Warrants to purchase 59,166 shares of Common Stock at $.80 per share, expiring on 6/10/98 3,986 0 - ------------------------------------------------------------------------------------------------------------------------------- Ligand Pharmaceuticals Inc.(A)(B) 2,417 shares of Common Stock Apr. 1989 10,719 14,049 Warrants to purchase 3,167 shares of Common Stock at $7.22 per share to $9.60 per share, expiring between 5/31/97 and 7/31/97 0 0 - ------------------------------------------------------------------------------------------------------------------------------- Neocrin Company*(B)(E) 484,300 shares of Preferred Stock June 1991 4,203,716 193,720 Warrants to purchase 922,050 shares of Preferred Stock at $.40 per share, expiring on 1/3/01 92 0 - ------------------------------------------------------------------------------------------------------------------------------- OccuSystems, Inc.(A)(B) 227,864 shares of Common Stock June 1993 1,139,320 3,887,930 - ------------------------------------------------------------------------------------------------------------------------------- Photon Dynamics, Inc.*(A) 425,235 shares of Common Stock Sept. 1988 2,452,226 1,929,504 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)(B) 350,000 shares of Common Stock Feb. 1990 1,334,469 1,843,311 Options to purchase 27,969 shares of Common Stock at $1.42 per share, expiring on 10/31/01 0 114,114 - ------------------------------------------------------------------------------------------------------------------------------- Sanderling Biomedical, L.P.* 80% Limited Partnership interest May 1988 1,786,643 3,641,996 - ------------------------------------------------------------------------------------------------------------------------------- Totals from Active Portfolio Investments $ 33,675,294 $ 53,489,300 ---------------------------------
ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED) - continued March 31, 1996 Supplemental Information: Liquidated Portfolio Investments(F) Cost Realized Gain Return Totals from Liquidated Portfolio Investments $ 82,383,446 $ 78,785,408 $ 161,168,854 ========================================================= Combined Net Combined Unrealized and Fair Value Cost Realized Gain and Return Totals from Active & Liquidated Portfolio Investments $ 116,058,740 $ 98,599,414 $ 214,658,154 =========================================================
(A) Public company (B) During and/or subsequent to the end of the quarter, the Partnership liquidated equity securities of such investment. See Notes 9 and 11 of Notes to Financial Statements for summarized information. (C) During the quarter ended March 31, 1996, Diatech, Inc. changed its name to Diatide, Inc. (D) In January 1996, the Partnership paid $22,609 to MLMS Cancer Research, Inc. in connection with a call on the non-interest bearing promissory note payable on demand to MLMS. The payment increased the cost basis of the Partnership's common stock investment in the company from $46,957 to $69,566 and reduced the outstanding obligation under the promissory note from $393,043 to $370,434. (E) In January 1996, the Partnership's warrant to purchase 13,005 shares of Neocrin Company common stock at $5 per share expired unexercised. Additionally, in January 1996, the Partnership purchased 36,882 shares of preferred stock of Neocrin Company and a warrant to purchase 922,050 shares of Neocrin preferred stock at $.40 per share for $184,502. (F) Amounts provided for "Supplemental Information: Liquidated Portfolio Investments" are cumulative from inception through March 31, 1996. * May be deemed an affiliated person of the Partnership as defined in the Investment Company Act of 1940. See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENTS OF OPERATIONS (UNAUDITED) For the Three Months Ended March 31, 1996 1995 ---------------- --------- INVESTMENT INCOME AND EXPENSES Interest from short-term investments $ 210,732 $ 175,029 Interest and other income from portfolio investments 81,309 127,069 Dividend income from portfolio investments 66,700 66,700 ---------------- --------------- Total investment income 358,741 368,798 ---------------- --------------- Expenses: Management fee - Note 4 205,188 322,618 Professional fees 33,071 89,901 Mailing and printing 108,126 157,477 Independent General Partners' fees - Note 5 29,256 27,183 Custodial fees 3,618 3,428 Miscellaneous 650 585 ---------------- --------------- Total expenses 379,909 601,192 ---------------- --------------- NET INVESTMENT LOSS (21,168) (232,394) Net realized gain from portfolio investments 27,824,851 7,945,512 ---------------- --------------- NET REALIZED GAIN FROM OPERATIONS (allocable to Partners) - Note 3 27,803,683 7,713,118 Net change in unrealized appreciation of investments (15,311,178) 3,775,345 ---------------- --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 12,492,505 $ 11,488,463 ================ ===============
See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENTS OF CASH FLOWS (UNAUDITED) For the Three Months Ended March 31, 1996 1995 ---------------- --------- CASH FLOWS PROVIDED FROM (USED FOR) OPERATING ACTIVITIES Net investment loss $ (21,168) $ (232,394) Adjustments to reconcile net investment loss to cash provided from (used for) operating activities: (Increase) decrease in accrued interest receivable (79,874) 185,352 Increase in accrued interest on short-term investments (108,180) (21,208) Increase in payables, net 51,070 164,135 ---------------- --------------- Cash provided from (used for) operating activities (158,152) 95,885 ---------------- --------------- CASH FLOWS PROVIDED FROM (USED FOR) INVESTING ACTIVITIES Net purchase of short-term investments (17,428,112) (11,195,820) Cost of portfolio investments purchased (207,111) (658,093) Net proceeds from the sale of portfolio investments 31,328,520 9,831,338 Deposit released from escrow 184,502 - Repayment of investments in notes - 2,019,721 ---------------- --------------- Cash provided from (used for) investing activities 13,877,799 (2,854) ---------------- --------------- CASH FLOWS FOR FINANCING ACTIVITIES Cash distribution to Partners (14,336,506) - ---------------- --------------- Increase (decrease) in cash and cash equivalents (616,859) 93,031 Cash and cash equivalents at beginning of period 685,917 638,868 ---------------- --------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 69,058 $ 731,899 ================ ===============
See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENT OF CHANGES IN PARTNERS' CAPITAL (UNAUDITED) For the Three Months Ended March 31, 1996 Unallocated Managing Individual Net Unrealized General General Limited Appreciation of Partner Partners Partners Investments Total Balance at beginning of period $ 1,471,685 $ 1,457 $ 43,744,206 $ 35,125,184 $ 80,342,532 Accrued cash distribution, paid April 26, 1996 - Note 7 (3,377,898) (600) (18,000,000) - (21,378,498) Net investment loss 29,094 (2) (50,260) - (21,168) Net realized gain from portfolio investments 5,787,568 736 22,036,547 - 27,824,851 Net change in unrealized appreciation of investments - - - (15,311,178) (15,311,178) ------------- -------- -------------- -------------- ---------------- Balance at end of period $ 3,910,449 $ 1,591 $ 47,730,493(A) $ 19,814,006 $ 71,456,539 ============= ======== ============== ============== ================
(A) The net asset value per unit of limited partnership interest, including an assumed allocation of net unrealized appreciation of investments, was $529 at March 31, 1996. Cumulative cash distributions paid or accrued to Limited Partners from inception to March 31, 1996 totaled $1,040 per Unit. See notes to financial statements. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. Organization and Purpose ML Venture Partners II, L.P. (the "Partnership") is a Delaware limited partnership formed on February 4, 1986. MLVPII Co., L.P., the managing general partner of the Partnership (the "Managing General Partner") and four individuals (the "Individual General Partners") are the general partners of the Partnership. The general partner of MLVPII Co., L.P. is Merrill Lynch Venture Capital Inc. (the "Management Company"), an indirect subsidiary of Merrill Lynch & Co., Inc. DLJ Capital Management Corporation (the "Sub-Manager"), an indirect subsidiary of Donaldson, Lufkin & Jenrette, Inc., is the sub-manager of the Partnership, pursuant to a sub-management agreement among the Partnership, the Management Company, the Managing General Partner and the Sub-Manager. The Partnership's objective is to achieve long-term capital appreciation from its portfolio of venture capital investments in new and developing companies and other special investment situations. The Partnership does not engage in any other business or activity. The Partnership is scheduled to terminate on December 31, 1997. However, pursuant to the Partnership Agreement, 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 Sub-Manager under the supervision of the Individual General Partners and the Managing General Partner. The fair value of publicly-held portfolio securities is adjusted to the closing public market price for the last trading day of the accounting period discounted by a factor of 0% to 50% for sales restrictions. Factors considered in the determination of an appropriate discount include, underwriter lock-up or Rule 144 trading restrictions, insider status where the Partnership either has a representative serving on the company's Board of Directors or is greater than a 10% shareholder, and other liquidity factors such as the size of the Partnership's position in a given company compared to the trading history of the public security. Privately-held portfolio securities are carried at cost until significant developments affecting the portfolio company provide a basis for change in valuation. The fair value of private securities is adjusted 1) to reflect meaningful third-party transactions in the private market or 2) to reflect significant progress or slippage in the development of the company's business such that cost is no longer reflective of fair value. As a venture capital investment fund, the Partnership's portfolio investments involve a high degree of business and financial risk that can result in substantial losses. The Sub-Manager considers such risks in determining the fair value of the Partnership's portfolio investments. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Investment Transactions - Investment transactions are recorded on the accrual method. Portfolio investments are recorded on the trade date, the date the Partnership obtains an enforceable right to demand the securities or payment therefor. Realized gains and losses on investments sold are computed on a specific identification basis. Income Taxes - No provision for income taxes has been made since all income and losses are allocable to the Partners for inclusion in their respective tax returns. The Partnership's net assets for financial reporting purposes differ from its net assets for tax purposes. Net unrealized appreciation of investments of $19.8 million at March 31, 1996, which was recorded for financial statement purposes, was not recognized for tax purposes. Additionally, from inception to March 31, 1996, timing differences primarily relating to realized losses totaling $1.2 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 March 31, 1996, the Partnership had a $82.6 million net gain from its venture capital investments, which includes interest and other income from portfolio investments totaling $3.8 million. 4. Related Party Transactions The Management Company is responsible for the management and administrative services necessary for the operation of the Partnership and receives a management fee at the annual rate of 2.5% of the gross capital contributions to the Partnership, reduced by selling commissions, organizational and offering expenses paid by the Partnership, capital distributed and realized capital losses with a minimum annual fee of $200,000. Such fee is determined and payable quarterly. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 5. Independent General Partners' Fees As compensation for services rendered to the Partnership, each of the three Independent General Partners receives $20,000 annually in quarterly installments, $1,400 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 $1,200 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). 6. Commitments The Partnership has an outstanding commitment of $370,434 payable on demand, when and if called for by MLMS Cancer Research, Inc. The Partnership has a 34.8% ownership interest in MLMS Cancer Research which is the general partner of ML/MS Associates, L.P., formerly a research and development joint venture with IDEC Pharmaceuticals Corporation. The Partnership also owns a 34.4% limited partnership interest in ML/MS Associates. 7. Cash Distributions On February 29, 1996, the General Partners approved a cash distribution to Partners totaling $21,378,498; $18,000,000, or $150 per Unit, to the Limited Partners and $3,378,498 to the General Partners. The distribution was paid on April 26, 1996 to Limited Partners of record on March 31, 1996. Cash distributions paid or accrued during the periods presented and cumulative cash distributions to Partners from inception of the Partnership through March 31, 1996 are listed below: General Limited Per $1,000 Distribution Date Partners Partners Unit - ------------------------------------------------ --------------- ---------------- --------- Inception to December 31, 1994 $ 1,400,000 $ 58,800,000 $ 490 April 11, 1995 2,234,189 9,000,000 75 October 5, 1995 5,001,136 27,000,000 225 January 12, 1996 2,336,506 12,000,000 100 April 26, 1996 (accrued at March 31, 1996) 3,378,498 18,000,000 150 --------------- ---------------- --------- Cumulative totals at March 31, 1996 $ 14,350,329 $ 124,800,000 $ 1,040 =============== ================ =========
Additionally, on May 8, 1996, the General Partners approved a cash distribution to Partners totaling $23,439,491; $19.2 million, or $160 per Unit, to the Limited Partners and $4,239,491 to the General Partners. The distribution will be paid in July 1996 to Limited Partners of record on June 30, 1996 and will bring cumulative cash distributions paid to Limited Partners to $144 million, or $1,200 per $1,000 Unit. Cumulative cash distributions paid to the General Partners will total $18.6 million. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 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 in the Amended Complaint and that the cost of resolution of the litigation will not have a material impact on the financial condition of the Partnership. As of March 31, 1996, the Partnership has incurred cumulative legal expenses totaling $236,000 related to the litigation. 9. Portfolio Investments During the three months ended March 31, 1996, the Partnership liquidated equity securities of the following portfolio companies: Number of Realized Company Shares/Warrants Cost Gain (Loss) Return CellPro, Incorporated 50,166 $ 93,241 $ 744,215 $ 837,456 Corporate Express, Inc. 320,000 940,025 8,827,460 9,767,485 Inference Corporation 80,000 223,801 1,336,816 1,560,617 Ligand Pharmaceuticals, Inc. 217,358 528,967 1,979,901 2,508,868 Neocrin Company 13,005 130 (130) 0 OccuSystems, Inc. 176,000 880,000 2,766,218 3,646,218 Raytel Medical Corporation 345,753 714,834 2,449,363 3,164,197 SDL, Inc. 379,155 999,015 9,120,519 10,119,534 Viasoft, Inc. 47,795 152,280 600,489 752,769 --------------- ---------------- ---------------- Totals $ 4,532,293 $ 27,824,851 $ 32,357,144 =============== ================ ================
ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 10. Classification of Portfolio Investments As of March 31, 1996, the Partnership's investments in portfolio companies were categorized as follows: % of Type of Investments Cost Fair Value Net Assets* - ------------------- ---------------- --------------- ----------- Common Stock $ 13,004,368 $ 33,017,456 46.21% Limited Partnerships 5,746,643 9,861,781 13.80% Preferred Stock 11,689,908 7,375,688 10.32% Debt Securities 3,234,375 3,234,375 4.53% ---------------- --------------- ---------- Total $ 33,675,294 $ 53,489,300 74.86% ================ =============== ========== Country/Geographic Region Midwestern U.S. $ 8,376,264 $ 26,366,645 36.90% Western U.S. 17,752,098 19,218,127 26.89% Eastern U.S. 7,546,932 7,904,528 11.07% ---------------- --------------- ---------- Total $ 33,675,294 $ 53,489,300 74.86% ================ =============== ========== Industry Business Services $ 3,763,776 $ 14,382,684 20.13% Biotechnology 8,812,951 14,393,180 20.14% Automotive Parts 2,223,320 11,088,809 15.52% Semiconductors/Electronics 3,338,800 3,243,027 4.54% Medical Devices and Services 10,349,946 5,313,342 7.44% Telecommunications 3,450,000 3,450,000 4.83% Computer Hardware/Software 1,736,501 1,618,258 2.26% ---------------- --------------- ---------- Total $ 33,675,294 $ 53,489,300 74.86% ================ =============== ==========
* Percentage of net assets is based on fair value. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 11. Subsequent Events From April 1, 1996 to May 3, 1996, the Partnership sold the following publicly-traded securities: Company Shares/Warrants Cost Realized Gain Return Elantec Inc. 220,000 $ 826,137 $ 1,745,113 $ 2,571,250 Inference Corporation 20,000 106,172 268,828 375,000 Ligand Pharmaceuticals, Inc. 5,584 10,719 21,255 31,974 OccuSystems, Inc. 221,864 1,109,320 4,798,166 5,907,486 --------------- ---------------- ---------------- Totals $ 2,052,348 $ 6,833,362 $ 8,885,710 =============== ================ ================
12. Interim Financial Statements In the opinion of MLVPII Co., L.P., the managing general partner of the Partnership, the unaudited financial statements as of March 31, 1996, and for the three month period then ended, reflect all adjustments necessary for the fair presentation of the results of the interim period. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Liquidity and Capital Resources In January 1996, the Partnership made a $14.3 million cash distribution to Partners. For the three months ended March 31, 1996, the Partnership received proceeds from the sale of certain portfolio investments totaling $31.3 million. As a result, as of March 31, 1996, the Partnership held $35 million in cash and short-term investments; $34.9 million in short-term securities with maturities of less than one year and $69,000 in an interest-bearing cash account. Interest earned from such investments totaled $211,000 for the three months ended March 31, 1996. Interest earned in future periods is subject to fluctuations in short-term interest rates and changes in amounts available for investment in such securities. In February 1996, the General Partners approved a cash distribution to Partners totaling $21.4 million. Such distribution was paid in April 1996 to Partners of record as of March 31, 1996. Subsequent to the end of the quarter, from April 1, 1996 through May 3, 1996, the Partnership realized $8.9 million from additional portfolio security sales. As a result, the General Partners approved an additional cash distribution to Partners totaling $23.4 million. Such distribution will be paid in July 1996 to Limited Partners of record on June 30, 1996. Cumulative cash distributions paid to Partners, after the distribution to be paid in July 1996, will total $162.6 million; $144 million to the Limited Partners, or $1,200 per $1,000 Unit, and $18.6 million to the General Partners. Generally, proceeds 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. Funds needed to cover future operating expenses and follow-on investments will be obtained from the Partnership's existing cash reserves, from interest and other investment income and from proceeds received from the sale of portfolio investments. During the three months ended March 31, 1996, the Partnership made follow-on investments in two existing portfolio companies totaling $207,000. From its inception to March 31, 1996, the Partnership had invested $116.1 million in 58 portfolio companies. The Partnership will not make investments in new portfolio companies, however, it may make additional follow-on investments in certain existing portfolio companies. Results of Operations For the three months ended March 31, 1996 and 1995, the Partnership had a net realized gain from operations of $27.8 million and $7.7 million, respectively. Net realized gain or loss from operations is comprised of 1) net realized gain or loss from portfolio investments and 2) net investment income or loss (interest and dividend income less operating expenses). Realized Gains and Losses from Portfolio Investments - For the three months ended March 31, 1996, the Partnership had a $27.8 million net realized gain from portfolio investments. During the quarter, the Partnership sold shares of common stock of eight of its publicly-traded portfolio companies for $32.4 million, realizing a gain of $27.8 million. See Note 9 of Notes to Financial Statements for a summary of sales by investment. For the three months ended March 31, 1995, the Partnership had a $7.9 million net realized gain from portfolio investments. During the quarter, the Partnership sold shares of common stock of five of its publicly-traded portfolio companies for $12.6 million, realizing a gain of $8.1 million. The number of shares sold of each portfolio company were: 115,267 shares of Children's Discovery Centers of America, Inc., 104,435 shares of Corporate Express, Inc., 144,486 shares of Komag, Incorporated, 520,000 shares of Regeneron Pharmaceuticals, Inc. and 60,000 shares of Viasoft, Inc. Additionally, subsequent to the end of the quarter, the Partnership sold its investment in TargetVision, Inc. for $250,000, resulting in the write-off $145,000 of its $395,000 remaining investment in the company. Investment Income and Expenses - For the three months ended March 31, 1996 and 1995, the Partnership had a net investment loss of $21,000 and $232,000, respectively. The decrease in net investment loss for the 1996 period compared to the same period in 1995, primarily was attributable to a decrease in the management fee, as discussed below, and reduced professional fees and mailing and printing expenses for the 1996 period. The decrease in professional fees for the 1996 period compared to the 1995 period included a decline in legal and accounting fees. The decline in mailing and printing expenses for the 1996 period compared to the 1995 period was due to a reduction in mailing and printing costs associated with the Partnership's annual meeting. Additionally, a decrease in interest and other income from portfolio investments for the 1996 period compared to the 1995 period was mostly offset by an increase in interest earned from short-term investments over the same periods. The decrease in interest earned from portfolio investments for 1996 primarily was due to the maturity of the Partnership's $2 million note due from SDL, Inc. in March 1995. The increase in interest earned from short-term investments for 1996 was due to an increase in interest rates for the 1996 period and an increase in funds available for investment in short-term securities, resulting from the $31.3 million of proceeds from the sale of portfolio investments received during the 1996 period as compared to $9.8 million received from portfolio liquidations for the same period in 1995. Such proceeds are invested in short-term securities until cash distributions are paid to Partners. The Management Company is responsible for the management and administrative services necessary for the operation of the Partnership. The Management Company receives a management fee at an annual rate of 2.5% of the gross capital contributions to the Partnership, reduced by selling commissions, organizational and offering expenses paid by the Partnership, return of capital and realized capital losses, with a minimum annual fee of $200,000. Such fee is determined and payable quarterly. The management fee for the three months ended March 31, 1996 and 1995, was $205,000 and $323,000, respectively. The decline in the management fee for the 1996 period compared to the same period in 1995 is due to the portfolio liquidations and subsequent distributions made to Partners since March 31, 1995. The management fee will continue to decline in future periods as the Partnership's investment portfolio continues to mature and cash 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 earned from short-term investments, interest and other income from portfolio investments and proceeds from the sale of certain portfolio investments. Unrealized Gains and Losses and Changes in Unrealized Appreciation or Depreciation of Portfolio Investments - For the three months ended March 31, 1996, the Partnership had a $2.7 million net unrealized gain from its portfolio investments, primarily resulting from the net upward revaluation of its remaining publicly traded securities. Additionally, during the three month period, $18 million was transferred from unrealized gain to realized gain related to the portfolio investments sold during the quarter, as discussed above. The $18 million transfer from unrealized gain to realized gain, partially offset by the $2.7 million unrealized gain, resulted in a $15.3 million decrease to the Partnership's net unrealized appreciation of investments for the three month period. For the three months ended March 31, 1995, the Partnership had a $7.4 million net unrealized gain from its portfolio investments, primarily resulting from the net upward revaluation of its publicly traded securities. Additionally, during the three month period, $3.6 million was transferred from unrealized gain to realized gain related to portfolio investments sold or written-off during the quarter, as discussed above. The $7.4 million unrealized gain, partially offset by the $3.6 million transfer from unrealized gain to realized gain, resulted in a $3.8 million increase to the Partnership's net unrealized appreciation of investments for the three month period. Net Assets - Changes to net assets resulting from operations are comprised of 1) net realized gain or loss from operations and 2) changes to net unrealized appreciation or depreciation of portfolio investments. For the three months ended March 31, 1996, the Partnership had a $12.5 million net increase in net assets resulting from operations, comprised of the $27.8 million net realized gain from operations offset by the $15.3 million decrease in unrealized appreciation of investments for the three month period. At March 31, 1996, the Partnership's net assets were $71.4 million, down $8.9 million from $80.3 million at December, 31 1995. This decrease resulted from the $21.4 million accrued cash distribution paid to Partners in April 1996 offset by the $12.5 million increase in net assets from operations for the three month period. For the three months ended March 31, 1995, the Partnership had an $11.5 million net increase in net assets resulting from operations, comprised of the $3.8 million increase in unrealized appreciation of investments and the $7.7 million net realized gain from operations for the three month period. At March 31, 1995, the Partnership's net assets were $83.7 million, up $254,000 from $83.4 million at December 31, 1994. This increase resulted from the $11.5 million net increase in net assets from operations for the three month period offset by the $11.2 million accrued cash distribution paid to Partners in April 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 at March 31, 1996 and December 31, 1995 was $529 and $596, respectively. 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 former individual officers and directors of In-Store Advertising, the underwriters involved in the Offering, 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. In their answers to the Amended Complaint, defendants (including the Partnership) asserted cross-claims for contribution against their then co-defendant KPMG Peat Marwick (In-Store Advertising's auditors). Plaintiffs' claims against KPMG Peat Marwick were dismissed as barred by the statute of limitations. 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 it has meritorious defenses to the allegations in the Amended Complaint and that the cost of resolution of the litigation will not have a material impact on the financial condition of the Partnership (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. No matter was submitted to a vote of security holders during the period in which this report covers. Item 5. Other Information. In January 1996, the Partnership purchased 36,882 shares of preferred stock of Neocrin Company and a warrant to purchase 922,050 shares of Neocrin preferred stock at $.40 per share for $184,502. Also in January 1996, the Partnership paid $22,609 to MLMS Cancer Research, Inc. in connection with a call on the non-interest bearing promissory note payable on demand to MLMS. The payment increased the cost basis of the Partnership's common stock investment in the company from $46,957 to $69,566 and reduced the outstanding obligation under the promissory note from $393,043 to $370,434. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits (3) (a) Amended and Restated Certificate of Limited Partnership of the Partnership, dated as of January 12, 1987. (1) (3) (b) Amended and Restated Certificate of Limited Partnership of the Partnership, dated July 27, 1990. (2) (3) (c) Amended and Restated Certificate of Limited Partnership of the Partnership, dated March 25, 1991. (3) (3) (d) Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of May 4, 1987. (4) (3) (e) Amendment No. 1 dated February 14, 1989 to Amended and Restated Agreement of Limited Partnership of the Partnership. (5) (3) (f) Amendment No. 2 dated July 27, 1990 to Amended and Restated Agreement of Limited Partnership of the Partnership. (2) (3) (g) Amendment No. 3 dated March 25, 1991 to Amended and Restated Agreement of Limited Partnership of the Partnership. (3) (3) (h) Amendment No. 4 dated May 23, 1991 to Amended and Restated Agreement of Limited Partnership of the Partnership. (6) (10) (a) Management Agreement dated as of May 23, 1991 among the Partnership, Management Company and the Managing General Partner. (6) (10) (b) Sub-Management Agreement dated as of May 23, 1991 among the Partnership, Management Company, the Managing General Partner and the Sub-Manager. (8) (27) Financial Data Schedule. (28) Prospectus of the Partnership dated February 10, 1987 filed with the Securities and Exchange Commission pursuant to Rule 424(b) under the Securities Act of 1933, as supplemented by a supplement thereto dated April 21, 1987 filed pursuant to Rule 424(c) under the Securities Act of 1933. (7) (b) No reports on Form 8-K have been filed during the quarter for which this report is filed.
(1) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1988 filed with the Securities and Exchange Commission on March 27, 1989. (2) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990 filed with the Securities and Exchange Commission on November 14, 1990. (3) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1990 filed with the Securities and Exchange Commission on March 28, 1991. (4) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 1987 filed with the Securities and Exchange Commission on August 14, 1987. (5) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989 filed with the Securities and Exchange Commission on May 15, 1989. (6) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991 filed with the Securities and Exchange Commission on August 14, 1991. (7) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended March 31, 1987 filed with the Securities and Exchange Commission on May 15, 1987. (8) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1992 filed with the Securities and Exchange Commission on March 26, 1993. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ML VENTURE PARTNERS II, L.P. By: /s/ Kevin K. Albert Kevin K. Albert General Partner By: MLVPII Co., L.P. its Managing General Partner By: Merrill Lynch Venture Capital Inc. its General Partner By: /s/ Kevin K. Albert Kevin K. Albert President (Principal Executive Officer) By: /s/ Diane T. Herte Diane T. Herte Vice President and Treasurer (Principal Financial and Accounting Officer) Date: May 14, 1996 EX-27 2 EXHIBIT 27
6 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ML VENTURE PARTNERS II, L.P.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1996 JAN-1-1996 MAR-31-1996 68,439,066 88,395,020 4,788,400 0 69,058 93,252,478 0 0 21,795,939 21,795,939 0 0 120,000 120,000 0 0 0 0 19,814,006 71,456,539 66,700 292,041 0 379,909 (21,168) 27,824,851 (15,311,178) 12,492,505 0 0 0 21,378,498 0 0 0 (1,792,931) 0 0 0 0 0 0 0 75,899,536 596 0 83 0 (150) 0 529 0 0 0
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