-----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, FKduEQnWnnmaIFErEcgxMAevrXZgmfNibPYm2IHc43e5lygW+6nJVUol0iiyQe8w +lsN+WSiWJoPnqw5riAZrA== 0000789538-97-000001.txt : 19970401 0000789538-97-000001.hdr.sgml : 19970401 ACCESSION NUMBER: 0000789538-97-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ML VENTURE PARTNERS II LP CENTRAL INDEX KEY: 0000789538 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 133324232 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 814-00043 FILM NUMBER: 97570778 BUSINESS ADDRESS: STREET 1: WORLD FINANCIAL CTR N TOWER STREET 2: 25TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10281-1330 BUSINESS PHONE: 2124491000 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 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 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: Units of Limited Partnership Interest =============================================================================== (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] At March 21, 1997, 119,866 units of limited partnership interest ("Units") were held by non-affiliates of the registrant. There is no established public trading market for such Units. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Prospectus of the Registrant dated February 10, 1987, as supplemented by a supplement thereto dated April 21, 1987, are incorporated by reference in Part I and Part II hereof. Portions of the Registrant's Form 10-Q for the quarter ended March 31, 1996 filed with the Securities and Exchange Commission on May 14, 1996 are incorporated by reference in Part I hereof. PART I Item 1. Business. Formation ML Venture Partners II, L.P. (the "Partnership" or the "Registrant") is a Delaware limited partnership organized on February 4, 1986. The General Partners of the Partnership consist of four individuals (the "Individual General Partners") and MLVPII Co., L.P. (the "Managing General Partner"), a New York limited partnership in which Merrill Lynch Venture Capital Inc. (the "Management Company") is the general partner. The Management Company is an indirect subsidiary of Merrill Lynch & Co., Inc. and an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). DLJ Capital Management Corporation (the "Sub-Manager"), an affiliate of Donaldson, Lufkin and Jenrette, Inc., is the sub-manager pursuant to a sub-management agreement, dated May 23, 1991, among the Partnership, the Managing General Partner, the Management Company and the Sub-Manager. The Partnership operates as a business development company under the Investment Company Act of 1940. The Partnership's investment objective is to seek long-term capital appreciation from its portfolio of venture capital investments. The Partnership considers this activity to constitute the single industry segment of venture capital investing. Through Merrill Lynch, the Partnership publicly offered 120,000 units of limited partnership interest (the "Units") at $1,000 per Unit. The Units were registered under the Securities Act of 1933 pursuant to a Registration Statement on Form N-2 (File No. 33-3220) which was declared effective on February 10, 1987. The Partnership held its initial and final closings on March 31, 1987 and June 10, 1987, respectively. A total of 120,000 Units were accepted at such closings and the additional limited partners (the "Limited Partners") were admitted to the Partnership. The information set forth under the captions "Risk and Other Important Factors" (pages 8 through 11), "Investment Objective and Policies" (pages 14 through 16), "Venture Capital Operations" (pages 17 through 20) and "Portfolio Valuation" (pages 27 and 28) in the prospectus of the Partnership dated February 10, 1987, filed with the Securities and Exchange Commission pursuant to Rule 424(b) under the Securities Act of 1933, as supplemented by a supplement thereto dated April 21, 1987 and filed pursuant to Rule 424(c) under the Securities Act of 1933 (the "Prospectus"), is incorporated herein by reference. The Venture Capital Investments During the year ended December 31, 1996, the Partnership invested $207,000 in two existing portfolio companies. As of December 31, 1996, the Partnership had invested $116.06 million in a portfolio of venture capital companies. At December 31, 1996, the Partnership's investment portfolio consisted of 15 active investments with a cost of $27.5 million and a fair value of $37.4 million. From its inception through December 31, 1996, the Partnership has fully or partially liquidated investments with an aggregate cost basis of $88.55 million. These liquidated investments returned a total of $186.4 million to the Partnership for a realized gain of $97.84 million. The Partnership also realized interest and dividend income from its venture capital investments totaling $4.2 million from inception to December 31, 1996. The description of the Partnership's follow-on investments in Neocrin Company and ML/MS Cancer Research, Inc. set forth in Item 5 of Part II of the Partnership's quarterly report on Form 10-Q for the quarter ended March 31, 1996 is incorporated herein by reference. Competition The Partnership encounters competition from other entities having similar investment objectives, including other entities affiliated with Merrill Lynch & Co., Inc. Primary competition for venture capital investments has been from venture capital partnerships, venture capital affiliates of large industrial and financial companies, small business investment companies and wealthy individuals. Competition has also been from foreign investors and from large industrial and financial companies investing directly rather than through venture capital affiliates. The Partnership has frequently been a co-investor with other professional venture capital groups and these relationships generally have expanded the Partnership's access to investment opportunities. Employees The Partnership has no employees. The Partnership Agreement provides that the Managing General Partner, subject to the supervision of the Individual General Partners, manages and controls the Partnership's venture capital investments. The Management Company performs, or arranges for others to perform, the management and administrative services necessary for the operation of the Partnership and is responsible for managing the Partnership's short-term investments. The Sub-Manager, subject to the supervision of the Management Company and Individual General Partners, provides management services in connection with the Partnership's venture capital investments and investments of the Partnership in unaffiliated venture capital funds. Item 2. Properties. The Partnership does not own or lease physical properties. Item 3. Legal Proceedings. The Partnership has settled an action in which the Partnership was named as a defendant in respect of its ownership of securities of In-Store Advertising, Inc. ("In-Store Advertising"). In connection therewith, the Partnership delivered $1,000,000 into escrow on September 20, 1996, representing its share of the settlement. On December 18, 1996, the court entered an order approving the settlement and dismissing the action against the Partnership and the other defendants involved in the settlement. The following is additional information regarding this matter: 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 was a purported class action suit wherein the plaintiffs (the "Plaintiffs") were 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 included 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 alleged 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 sought rescission of the purchases of In-Store Advertising's common stock to the extent the members of the alleged classes still held their shares, together with damages and certain costs and expenses. The Amended Complaint alleged that the Venture Capital Defendants were liable under Section 10(b) of the 1934 Act and Rule 10b-5, and were 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 were 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. See Note 8 of Notes to Financial Statements. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The information with respect to the market for the Units set forth under the subcaption "Substituted Limited Partners" on pages 30 and 31 of the Prospectus is incorporated herein by reference. There is no established public trading market for the Units as of March 21, 1997. The approximate number of holders of Units as of March 21, 1997 is 13,125. The Managing General Partner and the Individual General Partners of the Partnership also hold interests in the Partnership. Effective November 9, 1992, Registrant was advised that Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") introduced a new limited partnership secondary service available to its clients through Merrill Lynch's Limited Partnership Secondary Transaction Department. Beginning with the December 1994 client account statements, Merrill Lynch implemented new guidelines for providing estimated values of limited partnerships and other direct investments reported on client account statements. As a result, Merrill Lynch no longer reports general partner estimates of limited partnership net asset value on its client account statements, although the Registrant may continue to provide its estimate of net asset value to Unit holders. Pursuant to the guidelines, estimated values for limited partnership interests originally sold by Merrill Lynch (such as Registrant's Units) will be provided two times per year to Merrill Lynch by independent valuation services. These estimated values will be based on financial and other information available to the independent services on (i) the prior August 15th for reporting on December year-end and subsequent client account statements through the following May's month-end client account statement, and on (ii) March 31st for reporting on June month-end and subsequent client account statements through the November month-end client account statement of the same year. The Managing General Partner's estimate of net asset value at December 31, 1996 is $323 per Unit, including an assumed allocation of net unrealized appreciation of investments. The Managing General Partner's estimate of net asset value as set forth above reflects the value of the Partnership's underlying assets remaining at fiscal year-end, whereas the value provided by the independent services reflects the estimated value of the Partnership Units themselves based on information that was available on August 15th. Merrill Lynch clients may contact their Merrill Lynch Financial Consultants or telephone the number provided to them on their account statements to obtain a general description of the methodology used by the independent valuation services to determine their estimates of value. The estimated values provided by the independent services and the Registrant's current net asset value are not market values and Unit holders may not be able to sell their Units or realize either amount upon a sale of their Units. In addition, Unit holders may not realize the independent estimated value or the Registrant's current net asset value upon the liquidation of the Registrant's assets over its remaining life. Cash distributions to Partners, paid or accrued, during 1996, 1995 and 1994 and cumulative cash distributions to Partners from the inception of the Partnership through December 31, 1996 are listed below: General Limited Per $1,000 Distribution Date Partners Partners Unit - ----------------- --------------- ---------------- --------- Inception to December 31, 1993 $ 0 $ 42,600,000 $ 355 May 26, 1994 0 16,200,000 135 September 1, 1994 1,400,000 0 0 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 3,378,498 18,000,000 150 July 29, 1996 4,239,591 19,200,000 160 October 11, 1996 2,547,971 12,000,000 100 --------------- ---------------- --------- Cumulative totals at December 31, 1996 $ 21,137,891 $ 156,000,000 $ 1,300 =============== ================ =========
Item 6. Selected Financial Data. ($ In Thousands, Except For Per Unit Information) Years Ended December 31, 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- -------- Net Realized Gain (Loss) on Investments $ 46,879 $ 41,368 $ 18,593 $ 10,605 $ (5,677) Net Change in Unrealized Appreciation of Investments (25,245) 12,661 (29,444) 9,430 11,657 Net Increase (Decrease) in Net Assets Resulting from Operations 20,947 54,512 (11,668) 18,581 4,809 Cash Distributions to Partners 59,366 57,572 17,600 15,600 9,000 Cumulative Cash Distributions to Partners 177,138 117,772 60,200 42,600 27,000 Total Assets 42,268 95,045 83,796 113,087 110,149 Net Unrealized Appreciation of Investments 9,880 35,125 22,464 51,908 42,478 Purchase of Portfolio Investments 207 2,741 2,428 8,050 13,781 Cumulative Cost of Portfolio Investments 116,059 115,851 113,110 110,682 102,633 PER UNIT OF LIMITED PARTNERSHIP INTEREST: Net Realized Gain (Loss) on Investments $ 309 $ 273 $ 135 $ 87 $ (47) Net Increase (Decrease) in Net Assets Resulting from Operations 137 358 (79) 120 29 Cash Distributions 410 400 135 130 75 Cumulative Cash Distributions 1,300 890 490 355 225 Net Unrealized Appreciation of Investments 65 232 148 355 310 Net Asset Value, Including Net Unrealized Appreciation of Investments 323 596 638 852 862
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Liquidity and Capital Resources At December 31, 1996, the Partnership held $4.5 million in short-term investments with maturities of less than one year and $346,000 in an interest-bearing cash account. For the years ended December 31, 1996, 1995 and 1994, the Partnership earned interest from such investments totaling $980,000, $1.06 million and $373,000, respectively. Interest earned in future periods is subject to fluctuations in short-term interest rates and changes in amounts available for investment in such securities. Funds needed to cover the Partnership's future operating expenses and follow-on investments will be obtained from these existing cash reserves, from interest and other investment income received and from proceeds received from the sale of portfolio investments. The Partnership will not make any new portfolio investments. Therefore, generally all cash received from the sale of portfolio investments is distributed to Partners as soon as practicable after receipt, after an adequate reserve for operating expenses and follow-on investments in existing portfolio companies. In January 1996, the Partnership paid a cash distribution, that had been accrued at December 31, 1995, totaling $14.3 million. During 1996, the Partnership made additional cash distributions to Partners totaling $59.4 million; $49.2 million, or $410 per Unit, to Limited Partners and $10.2 million to the General Partners. Cumulative cash distributions to Partners total $177.1 million; $156.0 million to the Limited Partners, or $1,300 per $1,000 Unit and $21.1 million to the General Partners. Results of Operations For the years ended December 31, 1996, 1995 and 1994, the Partnership had a net realized gain from operations of $46.2 million, $41.9 million and $17.8 million, respectively. Net realized gain or loss from operations is comprised of 1) net realized gains or losses from portfolio investments and 2) net investment income or loss (interest, dividend and other income less operating expenses). Realized Gains and Losses from Portfolio Investments - For the year ended December 31, 1996, the Partnership had a $46.9 million net realized gain from portfolio investments. During the year, the Partnership sold positions in several of its publicly-held companies for $56.9 million realizing a gain of $47.8 million. See Note 9 of Notes to Financial Statements for a summary of sales by investment completed in 1996. This gain was offset by an $884,000 realized loss, resulting from the write-off of 75% of the Partnership's investment in I.D.E. Corporation due to continued operating difficulties at the company. For the year ended December 31, 1995, the Partnership had a $41.4 million net realized gain from portfolio investments. During the year, the Partnership sold positions in several of its publicly-held portfolio companies for $56.8 million, realizing a gain of $43.3 million. On December 31, 1995, the Partnership wrote-off its $1.8 million investment in Home Express, Inc. due to financial and operating difficulties at the company. Additionally, during 1995, the Partnership realized a $148,750 loss on its remaining $395,000 investment in Target Vision, Inc. which was sold in 1995 for $246,250 plus interest. For the year ended December 31, 1994, the Partnership had an $18.6 million net realized gain from portfolio investments. During 1994, the Partnership sold positions in several of its publicly-held investments for $20.2 million, realizing a gain of $17.5 million. Additionally, in two private transactions completed during 1994, the Partnership sold its 94,435 preferred shares of The Business Depot Ltd. for $2.8 million, realizing a gain of $1.5 million, and sold 26,570 preferred shares of OccuSystems, Inc. for $173,000, realizing a gain of $40,000. Also during 1994, the Partnership wrote-off its $100,000 investment in Research Applications, Inc. and sold its investment in Shared Resource Exchange, Inc., realizing a loss of $250,000. The Partnership also wrote-off the cost of its warrant to purchase 380,000 common shares of IDEC Pharmaceuticals Corporation, which expired in February 1995, realizing a loss of $217,000. The Partnership also realized gains in 1994 totaling $54,000 from the receipt of final escrow payments relating to the 1992 sale of its investment in R-Byte, Inc. Investment Income and Expenses - For the year ended December 31, 1996, the Partnership had a net investment loss of $688,000. For the years ended December 31, 1995 and 1994, the Partnership had a net investment gain of $482,000 and a net investment loss of $817,000, respectively. The $1.2 million increase in net investment loss for the 1996 period compared to the 1995 period was the result of a $747,000 decrease in investment income and a $423,000 increase in operating expenses during 1996 compared to 1995. The decrease in investment income was comprised of a $664,000 decrease in interest and dividend income from portfolio investments and an $82,000 decrease in interest from short-term investments. The decrease in interest and dividend income from portfolio investments for 1996 compared to 1995 primarily was attributable to a one-time dividend from Raytel Medical Corporation totaling $566,000 received in 1995. The decrease in interest income from short-term investments primarily was due to a decrease in funds available for investment in such securities during 1996. The increase in operating expenses during 1996 compared to 1995 primarily was attributable to a $1.0 million litigation settlement expense incurred in 1996 relating to the Partnership's investment in In-Store Advertising. See Note 8 of the Notes to the Financial Statements for more information regarding this litigation. Partially offsetting the increase in litigation expense was a $452,000 decrease in the management fee as discussed below, and a $144,000 decrease in professional fees, which primarily resulted from reduced legal fees incurred during 1996 in connection with the In-Store Advertising litigation. The $1.3 million increase in net investment income for 1995 compared to 1994 resulted from a $1.1 million increase in investment income and a $219,000 decrease in operating expenses during 1995 as compared to 1994. The increase in investment income was due to a $690,000 increase in interest earned from short-term investments and a $390,000 increase in interest and dividend income from portfolio investments. The increase in interest income from short-term investments was due to an increase in amounts invested in such securities during 1995, resulting from proceeds received from the liquidation of portfolio investments during 1995. Such proceeds are invested in short-term securities until distributions are made to Partners. In 1995, the Partnership received $56.2 million from the liquidation of portfolio investments compared to $23.5 million received in 1994. The increase in interest and dividend income from portfolio investments for 1995 compared to 1994 was attributable to a one-time dividend totaling $566,025 from Raytel received in 1995. Such dividend income, received in the form of 70,753 shares of common stock of Raytel, was offset by a $152,000 decrease in interest earned during 1995 on a promissory note due from SDL, Inc., due to the maturity of such note in March 1995. The Partnership's operating expenses declined for 1995 compared to 1994, primarily due to a $195,000 decrease in the management fee for 1995, as discussed below, and a non-recurring interest expense charge of $42,000 incurred during 1994, which is also discussed below. The Management Company is responsible for the management and administrative services necessary for the operation of the Partnership. The Management Company receives a management fee at an annual rate of 2.5% of the gross capital contributions to the Partnership, reduced by selling commissions, organizational and offering expenses paid by the Partnership, return of capital and realized capital losses, with a minimum annual fee of $200,000. Such fee is determined and payable quarterly. The management fee for the years ended December 31, 1996, 1995 and 1994, was $686,000 $1.1 million and $1.3 million, respectively. The decline in the management fee for the years presented resulted from the distributions made to Partners during such years. 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 periods presented were obtained from interest received from short-term investments, interest and other income from portfolio investments and proceeds from the sale of certain portfolio investments. Unrealized Gains and Losses and Changes in Unrealized Appreciation or Depreciation of Portfolio Investments - For the year ended December 31, 1996, the Partnership had a $4.9 million net unrealized gain from its portfolio investments, primarily resulting from the net upward revaluation of its publicly traded securities. Additionally during 1996, a net $30.1 million of unrealized gain was transferred to realized gain relating to portfolio investments sold and written-off during 1996, as discussed above. The $4.9 million unrealized gain was more than offset by the $30.1 million transfer from unrealized gain to realized gain, resulting in a $25.2 million decrease to net unrealized appreciation of investments for 1996. For the year ended December 31, 1995, the Partnership had a $37.9 million net unrealized gain from its portfolio investments, primarily resulting from the net upward revaluation of its publicly traded securities. Additionally during 1995, a net $25.2 million of unrealized gain was transferred to realized gain relating to portfolio investments sold and written-off during 1995, as discussed above. The $37.9 million unrealized gain offset by the $25.2 million transfer from unrealized gain to realized gain resulted in a $12.7 million increase to net unrealized appreciation of investments for 1995. For the year ended December 31, 1994, the Partnership had a $14.4 million net unrealized loss from its portfolio investments, primarily resulting from the net downward revaluation of its publicly traded securities. Additionally during 1994, a net $15 million was transferred from unrealized gain to realized gain relating to portfolio investments sold and written-off during 1994, as discussed above. The $15 million transfer from unrealized gain to realized gain combined with the $14.4 million unrealized loss, resulted in a $29.4 million reduction to the Partnership's net unrealized appreciation of investments for 1994. 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 year ended December 31, 1996, the Partnership had a $21.0 million net increase in net assets resulting from operations, comprised of the $46.2 million net realized gain from operations partially offset by the $25.2 million decrease in unrealized appreciation of investments for 1996. At December 31, 1996, the Partnership's net assets were $41.9 million, down $38.4 million from $80.3 million at December 31, 1995. This $38.4 million decrease resulted from the $59.4 million of cash distributions, paid or accrued to Partners during 1996, exceeding the $21.0 million net increase in net assets resulting from operations for 1996. For the year ended December 31, 1995, the Partnership had a $54.5 million net increase in net assets resulting from operations, comprised of the $41.9 million net realized gain from operations and the $12.7 million increase in unrealized appreciation of investments for 1995. At December 31, 1995, the Partnership's net assets were $80.3 million, down $3.1 million from $83.4 million at December 31, 1994. This $3.1 million decrease resulted from the $57.6 million of cash distributions, paid or accrued to Partners during 1995, exceeding the $54.5 million net increase in net assets resulting from operations for 1995. Gains and losses from investments are allocated to Partners' capital accounts when realized, in accordance with the Partnership Agreement (see Note 3 of Notes to Financial Statements). However, for purposes of calculating the net asset value per unit of limited partnership interest, net unrealized appreciation of investments has been included as if the net appreciation had been realized and allocated to the Limited Partners in accordance with the Partnership Agreement. Pursuant to such calculation, the net asset value per $1,000 Unit at December 31, 1996, 1995 and 1994, was $323, $596 and $638, respectively. Item 8. Financial Statements and Supplementary Data. ML VENTURE PARTNERS II, L.P. INDEX Independent Auditors' Report Balance Sheets as of December 31, 1996 and 1995 Schedule of Portfolio Investments as of December 31, 1996 Schedule of Portfolio Investments as of December 31, 1995 Statements of Operations for the years ended December 31, 1996, 1995 and 1994 Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 Statements of Changes in Partners' Capital for the years ended December 31, 1994, 1995 and 1996 Notes to Financial Statements NOTE - All other schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or the notes thereto. INDEPENDENT AUDITORS' REPORT ML Venture Partners II, L.P.: We have audited the accompanying balance sheets of ML Venture Partners II, L.P. (the "Partnership"), including the schedules of portfolio investments, as of December 31, 1996 and 1995, and the related statements of operations, cash flows, and changes in partners' capital for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at December 31, 1996 and 1995 by correspondence with the custodian; where confirmation was not possible, we performed other audit procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of ML Venture Partners II, L.P. at December 31, 1996 and 1995, and the results of its operations, its cash flows and the changes in its partners' capital for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. As explained in Note 2, the financial statements include securities valued at $37,386,258 and $73,125,660 at December 31, 1996 and 1995, respectively, representing 89% and 91% of net assets, respectively, whose values have been estimated by the Sub-Manager under the supervision of the Individual General Partners and the Managing General Partner in the absence of readily ascertainable market values. We have reviewed the procedures used by the Sub-Manager in arriving at its estimate of value of such securities and have inspected underlying documentation, and, in the circumstances, we believe the procedures are reasonable and the documentation appropriate. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. Deloitte & Touche LLP New York, New York February 18, 1997, except for Note 11 as to which the date is March 24, 1997 ML VENTURE PARTNERS II, L.P. BALANCE SHEETS December 31, 1996 1995 ---------------- ---------- ASSETS Investments - Notes 2 and 9 Portfolio investments, at fair value (cost $27,505,870 at December 31, 1996 and $38,000,476 at December 31, 1995) $ 37,386,258 $ 73,125,660 Short-term investments, at amortized cost - Note 12 4,486,402 17,369,428 Cash and cash equivalents 346,129 685,917 Accrued interest receivable 49,442 870,177 Deposit in escrow - 184,502 Receivable from securities sold - 2,809,725 ---------------- ---------------- TOTAL ASSETS $ 42,268,231 $ 95,045,409 ================ ================ LIABILITIES AND PARTNERS' CAPITAL Liabilities: Cash distribution payable - Note 7 $ - $ 14,336,506 Accounts payable 183,406 118,288 Due to Management Company - Note 4 138,389 224,683 Due to Independent General Partners - Note 5 23,400 23,400 ---------------- ---------------- Total liabilities 345,195 14,702,877 ---------------- ---------------- Partners' Capital: Managing General Partner 1,158,769 1,471,685 Individual General Partners 1,029 1,457 Limited Partners (120,000 Units) 30,882,850 43,744,206 Unallocated net unrealized appreciation of investments - Note 2 9,880,388 35,125,184 ---------------- ---------------- Total partners' capital 41,923,036 80,342,532 ---------------- ---------------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 42,268,231 $ 95,045,409 ================ ================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS December 31, 1996 Active Portfolio Investments: Initial Investment Company / Position Date Cost Fair Value Biocircuits Corporation*(A)(C) 128,817 shares of Common Stock May 1991 $ 1,422,501 $ 187,171 2,000,000 shares of Preferred Stock 1,000,000 726,500 Warrants to purchase 594,000 shares of Preferred Stock at $.60 per share, expiring on 4/15/97 0 0 - ------------------------------------------------------------------------------------------------------------------------------- Borg-Warner Automotive, Inc.*(A)(B) 251,694 shares of Common Stock Sept. 1988 1,258,470 7,267,664 - ------------------------------------------------------------------------------------------------------------------------------- Borg-Warner Security Corporation*(A) 500,000 shares of Common Stock Sept. 1988 2,500,000 4,031,250 - ------------------------------------------------------------------------------------------------------------------------------- Brightware, Inc. 140,485 shares of Common Stock Apr. 1993 39,252 84,291 Warrants to purchase 38,737 shares of Common Stock at $.40 per share, expiring on 4/19/99 1,138 7,748 Warrants to purchase 4,846 shares of Common Stock at $.40 per share, expiring on 12/16/97 327 969 Warrants to purchase 59,166 shares of Common Stock at $.80 per share, expiring on 6/10/98 3,986 3,986 - ------------------------------------------------------------------------------------------------------------------------------- Clarus Medical Systems, Inc.* 179,028 shares of Preferred Stock Jan. 1991 2,389,168 895,152 Warrants to purchase 4,048 shares of Common Stock at $18.75 per share, expiring on 7/31/97 0 0 Warrants to purchase 14,043 shares of Common Stock at $.05 per share, expiring between 3/7/00 and 7/3/00 0 0 Warrants to purchase 2,826 shares of Preferred Stock at $5.00 per share, expiring on 3/7/00 0 0 - ------------------------------------------------------------------------------------------------------------------------------- Corporate Express, Inc.(A)(B) 120,503 shares of Common Stock May 1992 36,150 2,837,894 - ------------------------------------------------------------------------------------------------------------------------------- Diatide, Inc.*(A)(D) 809,704 shares of Common Stock Dec. 1991 2,986,023 3,691,266 - ------------------------------------------------------------------------------------------------------------------------------- Elantec, Inc.(A)(B) 23,245 shares of Common Stock Aug. 1988 60,437 81,655 - ------------------------------------------------------------------------------------------------------------------------------- Horizon Cellular Telephone Company, L.P:(E) HCTC Investment, L.P. 10% Promissory Note due 3/26/98 May 1992 1,926,168 1,926,168 SPTHOR Corporation 10% Promissory Note due 3/26/98 May 1992 580,760 580,760 34.5 shares of Common Stock 215,625 2,188,625 - ------------------------------------------------------------------------------------------------------------------------------- I.D.E. Corporation(B)(F) 113,322 shares of Common Stock Mar. 1988 227,000 0 - -------------------------------------------------------------------------------------------------------------------------------
ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS continued December 31, 1996 Initial Investment Company / Position Date Cost Fair Value IDEC Pharmaceuticals Corporation(A)(G) ML/MS Associates, L.P.* 34.4% Limited Partnership interest June 1989 $ 3,960,000 $ 6,750,656 MLMS Cancer Research, Inc.* 400,000 shares of Common Stock July 1989 69,566 68,184 - ------------------------------------------------------------------------------------------------------------------------------- Neocrin Company*(B)(H) 484,300 shares of Preferred Stock June 1991 4,203,716 193,720 Warrants to purchase 922,050 shares of Common Stock at $.40 per share, expiring on 1/3/01 92 0 - ------------------------------------------------------------------------------------------------------------------------------- Photon Dynamics, Inc.*(A) 425,235 shares of Common Stock Sept. 1988 2,452,226 2,593,934 Warrants to purchase 6,062 shares of Common Stock at $5.40 per share, expiring on 6/30/00 0 0 - ------------------------------------------------------------------------------------------------------------------------------- Raytel Medical Corporation(A)(B) 100,000 shares of Common Stock Feb. 1990 386,622 557,483 Options to purchase 27,969 shares of Common Stock at $1.42 per share, expiring on 10/31/01 0 206,411 - ------------------------------------------------------------------------------------------------------------------------------- Sanderling Biomedical, L.P.*(B) 80% Limited Partnership interest May 1988 1,786,643 2,504,771 - ------------------------------------------------------------------------------------------------------------------------------- Totals from Active Portfolio Investments $ 27,505,870 $ 37,386,258 ---------------------------------
Supplemental Information: Liquidated Portfolio Investments(I) Liquidation Realized Company Date Cost Gain (Loss) Return - ------------------------------------------------------------------------------------------------------------------------------- Allez, Inc. 1992 $ 1,781,320 $ (1,781,320) $ 0 Amdahl Corporation 1989 729,742 1,837,787 2,567,529 Aqua Group, Inc. 1990 2,000,000 (1,999,999) 1 BBN Advanced Computer Partners, L.P. 1990 868,428 (864,028) 4,400 BBN Integrated Switch Partners, L.P. 1990-1992 5,022,380 (4,822,797) 199,583 Borg-Warner Automotive, Inc.(B) 1994-1996 1,241,530 6,246,792 7,488,322 Business Depot, Ltd. 1994 1,214,184 1,539,475 2,753,659 CellPro, Incorporated(B) 1994-1996 1,560,944 15,999,505 17,560,449 Children's Discovery Centers of America, Inc. 1995 2,000,259 (236,187) 1,764,072 Communications International, Inc. 1992-1994 1,819,332 (1,819,331) 1 Computer-Aided Design Group 1990-1991 1,131,070 (1,131,069) 1
ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS - continued December 31, 1996 Liquidation Realized Company Date Cost Gain (Loss) Return - ------------------------------------------------------------------------------------------------------------------------------- Corporate Express, Inc.(B) 1994-1996 $ 2,963,761 $ 22,937,548 $ 25,901,309 Data Recording Systems, Inc. 1988 1,615,129 (1,499,999) 115,130 Eckerd Corporation 1995 857,004 2,019,272 2,876,276 Elantec, Inc.(B) 1993-1996 1,351,681 2,072,223 3,423,904 Everex Systems, Inc. 1991-1992 750,000 447,606 1,197,606 - ------------------------------------------------------------------------------------------------------------------------------- Hoffman & Company, L.P. 1993 40,000 (40,000) 0 - ------------------------------------------------------------------------------------------------------------------------------- Home Express, Inc. 1995 1,822,751 (1,822,751) 0 - ------------------------------------------------------------------------------------------------------------------------------- Horizon Cellular Telephone Company, L.P.(E) 1996 727,447 0 727,447 IDE Corporation(B) 1996 883,909 (883,909) 0 IDEC Pharmaceuticals Corporation 1994 217,391 (217,391) 0 Inference Corporation(B) 1995-1996 849,362 3,280,433 4,129,795 - ------------------------------------------------------------------------------------------------------------------------------- In-Store Advertising, Inc. 1992 2,259,741 (2,259,741) 0 InteLock Corporation 1992 1,254,125 (1,251,274) 2,851 Komag, Incorporated 1991-1995 2,365,237 4,477,843 6,843,080 Ligand Pharmaceuticals Inc.(B) 1992-1996 1,414,435 4,227,245 5,641,680 Magnesys 1989 1,440,997 (1,412,049) 28,948 Meteor Message Corporation 1990 1,501,048 (1,501,047) 1 - ------------------------------------------------------------------------------------------------------------------------------- Micro Linear Corporation 1994-1995 1,120,300 2,897,886 4,018,186 - ------------------------------------------------------------------------------------------------------------------------------- Mobile Telecommunications Technologies Corporation 1995 1,558,155 3,439,923 4,998,078 - ------------------------------------------------------------------------------------------------------------------------------- Neocrin Company 1996 130 (130) 0 OccuSystems, Inc.(B) 1994-1996 2,657,000 9,353,722 12,010,722 Ogle Resources, Inc. 1993 1,974,286 (1,974,186) 100 - ------------------------------------------------------------------------------------------------------------------------------- Pandora Industries, Inc. 1990 2,060,139 (2,060,138) 1 - ------------------------------------------------------------------------------------------------------------------------------- Pyxis Corporation 1993 634,598 7,169,424 7,804,022 - ------------------------------------------------------------------------------------------------------------------------------- Raytel Medical Corp.(B) 1996 1,662,681 4,370,155 6,032,836 R-Byte Inc. 1992-1994 1,991,098 (443,566) 1,547,532 Regeneron Pharmaceuticals, Inc. 1991-1995 2,678,135 30,203,091 32,881,226 Research Applications, Inc. 1994 100,000 (100,000) 0 Ringer Corporation 1991-1994 3,029,652 (2,208,012) 821,640 S & J Industries 1991-1992 1,600,150 (1,555,149) 45,001
ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS - continued December 31, 1996 Liquidation Realized Company Date Cost Gain (Loss) Return - ------------------------------------------------------------------------------------------------------------------------------- Sanderling Biomedical, L.P.(B) 1995-1996 $ 213,357 $ 1,199,974 $ 1,413,331 Saxpy Computer Corporation 1988 2,000,000 (2,000,000) 0 SDL, Inc.(B) 1993-1996 4,757,265 10,502,531 15,259,796 SF2 Corporation 1991-1994 2,193,293 (1,856,570) 336,723 Shared Resource Exchange, Inc. 1990-1994 999,999 (999,998) 1 Special Situations, Inc. 1988 215,000 (187,175) 27,825 Storage Technology Corporation 1990 2,174,000 1,466,802 3,640,802 - ------------------------------------------------------------------------------------------------------------------------------- Target Vision, Inc. 1992-1995 1,500,000 (1,253,750) 246,250 - ------------------------------------------------------------------------------------------------------------------------------- TCOM Systems, Inc. 1990-1992 4,715,384 (4,711,536) 3,848 - ------------------------------------------------------------------------------------------------------------------------------- Telecom USA, Inc. 1989 5,000,000 3,361,778 8,361,778 Touch Communications Incorporated 1991 1,119,693 (1,119,693) 0 Viasoft, Inc.(B) 1995-1996 915,348 2,801,429 3,716,777 Totals from Liquidated Portfolio Investments $ 88,552,870 $ 97,839,649 $ 186,392,519 ========================================================= Combined Net Combined Unrealized and Fair Value Cost Realized Gain and Return Totals from Active & Liquidated Portfolio Investments $ 116,058,740 $ 107,720,037 $ 223,778,777 =========================================================
(A) Public company (B) During 1996, the Partnership sold or wrote-off equity securities of such company. See Note 9 of Notes to Financial Statements for summarized information. (C) The preferred shares of Biocircuits Corporation are convertible into common shares at a ratio of 4 shares of preferred stock for 1 share of common stock. (D) During the quarter ended March 31, 1996, Diatech, Inc. changed its name to Diatide, Inc. On June 13, 1996, Diatide completed its initial public offering at $8.50 per share. In connection with the offering and a 6-for-10 reverse split of its outstanding common stock, the Partnership exchanged its 1,349,508 preferred shares of Diatide for 809,704 shares of the company's common stock. (E) During 1996, the Partnership received cash distributions totaling $1,673,826 relating to its Horizon Cellular investment. The distributions included $946,379 in payment of accrued interest and $727,447 return of principal on promissory notes due from HCTC Investment, L.P. and SPTHOR Corporation. ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS - continued December 31, 1996 (F) In connection with a recapitalization of IDE Corporation completed in September 1996, the Partnership's 493,391 shares of IDE preferred stock were converted into 113,322 shares of the company's common stock. (G) 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. (H) In January 1996, the Partnership's warrant to purchase 13,005 shares of Neocrin Company preferred stock at $5 per share expired. 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. (I) Amounts provided for "Supplemental Information: Liquidated Portfolio Investments" are cumulative from inception through December 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. SCHEDULE OF PORTFOLIO INVESTMENTS December 31, 1995 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 $ 678,223 2,000,000 shares of Preferred Stock 1,000,000 1,000,000 Warrants to purchase 594,000 shares of Preferred Stock at $.60 per share, expiring on 12/18/96 0 0 - ------------------------------------------------------------------------------------------------------------------------------- Borg-Warner Automotive, Inc.*(A) 444,664 shares of Common Stock Sept. 1988 2,223,320 10,505,187 - ------------------------------------------------------------------------------------------------------------------------------- Borg-Warner Security Corporation*(A) 500,000 shares of Common Stock Sept. 1988 2,500,000 4,668,750 - ------------------------------------------------------------------------------------------------------------------------------- CellPro, Incorporated(A) 50,166 shares of Common Stock Mar. 1989 93,241 648,145 - ------------------------------------------------------------------------------------------------------------------------------- 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 14,048 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) 559,503 shares of Common Stock May 1992 1,064,481 12,588,818 - ------------------------------------------------------------------------------------------------------------------------------- Diatech, Inc.* 1,349,508 shares of Preferred Stock Dec. 1991 2,986,023 4,454,528 - ------------------------------------------------------------------------------------------------------------------------------- Elantec, Inc.(A) 243,245 shares of Common Stock Aug. 1988 886,574 1,334,503 - ------------------------------------------------------------------------------------------------------------------------------- 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 5,995,956 MLMS Cancer Research, Inc.* 400,000 shares of Common Stock July 1989 46,957 60,566 - -------------------------------------------------------------------------------------------------------------------------------
ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS - continued December 31, 1995 Initial Investment Company / Position Date Cost Fair Value Inference Corporation(A) 189,424 shares of Common Stock Apr. 1993 $ 804,690 $ 2,293,214 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) 219,775 shares of Common Stock Apr. 1989 539,686 1,877,893 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* 447,418 shares of Preferred Stock June 1991 4,019,306 559,305 Warrants to purchase 13,005 shares of Preferred Stock at $5.00 per share, expiring on 1/20/96 130 0 - ------------------------------------------------------------------------------------------------------------------------------- OccuSystems, Inc.(A) 403,864 shares of Common Stock June 1993 2,019,320 6,292,201 - ------------------------------------------------------------------------------------------------------------------------------- Photon Dynamics, Inc.*(A) 425,235 shares of Common Stock Sept. 1988 2,452,226 1,711,571 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) 695,753 shares of Common Stock Feb. 1990 2,049,303 2,988,374 Options to purchase 27,969 shares of Common Stock at $1.42 per share, expiring on 10/31/01 0 81,600 - ------------------------------------------------------------------------------------------------------------------------------- Sanderling Biomedical, L.P.*(B) 80% Limited Partnership interest May 1988 1,786,643 3,352,688 - ------------------------------------------------------------------------------------------------------------------------------- SDL, Inc.*(A) 379,155 shares of Common Stock July 1992 999,015 7,112,948 - ------------------------------------------------------------------------------------------------------------------------------- Viasoft, Inc.(A) 47,795 shares of Common Stock Dec. 1987 152,280 476,038 - ------------------------------------------------------------------------------------------------------------------------------- Totals from Active Portfolio Investments $ 38,000,476 $ 73,125,660 =================================
ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS - continued December 31, 1995 Supplemental Information: Liquidated Portfolio Investments(B) Totals from Liquidated Portfolio Investments $ 77,851,153 $ 50,960,557 $ 128,811,710 ========================================================= Combined Net Combined Unrealized and Fair Value Cost Realized Gain and Return Totals from Active & Liquidated Portfolio Investments $ 115,851,629 $ 86,085,741 $ 201,937,370 =========================================================
(A) Public company (B) Amounts provided for "Supplemental Information: Liquidated Portfolio Investments" are cumulative from inception through December 31, 1995. * 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 For the Years Ended December 31, 1996 1995 1994 --------------- --------------- --------- INVESTMENT INCOME AND EXPENSES Interest from short-term investments $ 979,803 $ 1,062,296 $ 372,789 Interest and other income from portfolio investments 330,436 374,344 537,731 Dividend income 212,646 832,825 279,298 --------------- ---------------- ---------------- Total investment income 1,522,885 2,269,465 1,189,818 --------------- ---------------- ---------------- Expenses: Management fee - Note 4 686,493 1,138,000 1,333,363 Professional fees 175,434 319,424 326,655 Mailing and printing 220,877 211,662 197,083 Independent General Partners' fees - Note 5 109,262 103,049 92,584 Custodial fees 13,930 14,602 14,097 Miscellaneous 4,621 633 1,275 Interest expense - Note 4 - - 41,687 Litigation settlement - Note 8 1,000,000 - - --------------- ---------------- ---------------- Total expenses 2,210,617 1,787,370 2,006,744 --------------- ---------------- ---------------- NET INVESTMENT INCOME (LOSS) (687,732) 482,095 (816,926) Net realized gain from portfolio investments - Note 9 46,879,092 41,368,447 18,592,821 --------------- ---------------- ---------------- NET REALIZED GAIN FROM OPERATIONS (allocable to Partners) - Note 3 46,191,360 41,850,542 17,775,895 Net change in unrealized appreciation of investments (25,244,796) 12,661,342 (29,444,350) --------------- ---------------- ---------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 20,946,564 $ 54,511,884 $ (11,668,455) =============== ================ ================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1996 1995 1994 --------------- --------------- ----------- CASH FLOWS PROVIDED FROM (USED FOR) OPERATING ACTIVITIES Net investment income (loss) $ (687,732) $ 482,095 $ (816,926) Adjustments to reconcile net investment income (loss) to cash provided from (used for) operating activities: (Increase) decrease in accrued interest and notes receivable 820,735 (55,706) (491,825) Increase in accrued interest on short-term investments (10,369) (8,190) (14,089) Decrease in payables, net (21,176) (27,451) (22,405) --------------- --------------- ---------------- Cash provided from (used for) operating activities 101,458 390,748 (1,345,245) --------------- --------------- ---------------- CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES Net return (purchase) of short-term investments 12,893,395 (10,426,139) (2,929,313) Cost of portfolio investments purchased (207,111) (2,741,249) (2,427,981) Deposits released from (placed in) escrow 184,502 (184,502) - Net proceeds from the sale of portfolio investments 59,663,087 54,223,795 23,528,525 Repayment of investments in notes 727,447 2,019,721 - --------------- --------------- ---------------- Cash provided from investing activities 73,261,320 42,891,626 18,171,231 --------------- --------------- ---------------- CASH FLOWS FOR FINANCING ACTIVITIES Cash distributions to Partners (73,702,566) (43,235,325) (17,600,000) --------------- --------------- ---------------- Increase (decrease) in cash and cash equivalents (339,788) 47,049 (774,014) Cash and cash equivalents at beginning of period 685,917 638,868 1,412,882 --------------- --------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 346,129 $ 685,917 $ 638,868 =============== =============== ================
See notes to financial statements. - ------------------------------------------------------------------------------- ML VENTURE PARTNERS II, L.P. - ------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN PARTNERS' CAPITAL For the Years Ended December 31, 1994, 1995 and 1996 Unallocated Managing Individual Net Unrealized General General Limited Appreciation of Partner Partners Partners Investments Total Balance at December 31, 1993 $ 1,033,457 $ 3,410 $ 59,725,875 $ 51,908,192 $ 112,670,934 Cash distributions, paid May 26, 1994 and September 1, 1994 (1,400,000) - (16,200,000) - (17,600,000) Net investment loss 153,602 (32) (970,496) - (816,926) Net realized gain on investments 2,404,420 539 16,187,862 - 18,592,821 Net change in unrealized appreciation of investments - - - (29,444,350) (29,444,350) ------------- ------- -------------- -------------- ---------------- Balance at December 31, 1994 2,191,479 3,917 58,743,241(A) 22,463,842 83,402,479 Cash distributions, paid April 11, 1995 and October 5, 1995 (7,232,165) (3,160) (36,000,000) - (43,235,325) Accrued cash distribution, paid January 12, 1996 (2,336,106) (400) (12,000,000) - (14,336,506) Net investment income 243,840 7 238,248 - 482,095 Net realized gain on investments 8,604,637 1,093 32,762,717 - 41,368,447 Net change in unrealized appreciation of investments - - - 12,661,342 12,661,342 ------------- ------- -------------- -------------- ---------------- Balance at December 31, 1995 1,471,685 1,457 43,744,206(A) 35,125,184 80,342,532 Cash distribution, paid April 26, 1996 (3,377,898) (600) (18,000,000) - (21,378,498) Cash distribution, paid July 29, 1996 (4,238,951) (640) (19,200,000) - (23,439,591) Cash distribution, paid October 11, 1996 (2,547,571) (400) (12,000,000) - (14,547,971) Net investment income (loss) 100,653 (26) (788,359) - (687,732) Net realized gain on investments 9,750,851 1,238 37,127,003 - 46,879,092 Net change in unrealized appreciation on investments - - - (25,244,796) (25,244,796) ------------- ------- -------------- -------------- ---------------- Balance at December 31, 1996 $ 1,158,769 $ 1,029 $ 30,882,850(A) $ 9,880,388 $ 41,923,036 ============= ======= ============== ============== ================
(A) The net asset value per unit of limited partnership interest, including an assumed allocation of net unrealized appreciation of investments, was $323, $596 and $638 at December 31, 1996, 1995 and 1994, respectively. Cumulative cash distributions paid, or payable, to Limited Partners from inception to December 31, 1996, 1995 and 1994 totaled $1,300, $890 and $490 per Unit, respectively. See notes to financial statements - ------------------------------------------------------------------------------- ML VENTURE PARTNERS II, L.P. - ------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 1. Organization and Purpose ML Venture Partners II, L.P. (the "Partnership") is a Delaware limited partnership formed on February 4, 1986. MLVPII Co., L.P., the managing general partner of the Partnership (the "Managing General Partner"), and four individuals (the "Individual General Partners") are the general partners of the Partnership. The general partner of MLVPII Co., L.P. is Merrill Lynch Venture Capital Inc. (the "Management Company"), an indirect subsidiary of Merrill Lynch & Co., Inc. DLJ Capital Management Corporation (the "Sub-Manager"), an indirect subsidiary of Donaldson, Lufkin & Jenrette, Inc., is the sub-manager of the Partnership, pursuant to a sub-management agreement among the Partnership, the Management Company, the Managing General Partner and the Sub-Manager. The Partnership's objective is to achieve long-term capital appreciation from its portfolio of venture capital investments in new and developing companies and other special investment situations. The Partnership does not engage in any other business or activity. 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 Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Investment Transactions - Investment transactions are recorded on the accrual method. Portfolio investments are recorded on the trade date, the date the Partnership obtains an enforceable right to demand the securities or payment therefor. Realized gains and losses on investments sold are computed on a specific identification basis. Income Taxes - No provision for income taxes has been made since all income and losses are allocable to the Partners for inclusion in their respective tax returns. The Partnership's net assets for financial reporting purposes differ from its net assets for tax purposes. Net unrealized appreciation of investments of $9.9 million at December 31, 1996, which was recorded for financial statement purposes, was not recognized for tax purposes. Additionally, from inception to December 31, 1996, timing differences of approximately $400,000 have been deducted on the Partnership's financial statements and syndication costs relating to the selling of Units totaling $11.3 million were charged to partners' capital on the financial statements. These amounts have not been deducted or charged against partners' capital for tax purposes. Statements of Cash Flows - The Partnership considers its interest-bearing cash account to be cash equivalents. 3. Allocation of Partnership Profits and Losses The Partnership Agreement provides that the Managing General Partner will be allocated, on a cumulative basis over the life of the Partnership, 20% of the Partnership's aggregate investment income and net realized gains and losses from venture capital investments, provided that such amount is positive. All other gains and losses of the Partnership are allocated among all the Partners (including the Managing General Partner) in proportion to their respective capital contributions to the Partnership. From its inception to December 31, 1996, the Partnership had a $102 million net gain from its venture capital investments, which includes interest and other income from portfolio investments totaling $4.2 million. 4. Related Party Transactions The Management Company performs, or arranges for others to perform, the management and administrative services necessary for the operation of the Partnership and receives a management fee at the annual rate of 2.5% of the gross capital contributions to the Partnership, reduced by selling commissions, organizational and offering expenses paid by the Partnership, capital distributed and realized capital losses with a minimum annual fee of $200,000. Such fee is determined and payable quarterly. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS On November 9, 1994, the Securities and Exchange Commission (the "SEC") issued an exemptive order permitting the Partnership to acquire 97,273 shares of Corporate Express, Inc. common stock from the Management Company subject to certain conditions, including review and approval by the Independent General Partners. On December 13, 1994, the Partnership purchased such shares for $1,111,685, representing original cost of $1,069,998 plus interest expense of $41,687. 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 $1,400 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 a $370,434 non-interest bearing obligation payable on demand to MLMS Cancer Research, Inc., the general partner of ML/MS Associates, L.P. 7. Cash Distributions Cash distributions paid or accrued during the periods presented and cumulative cash distributions to Partners from inception of the Partnership through December 31, 1996 are listed below: General Limited Per $1,000 Distribution Date Partners Partners Unit - ------------------------------------------------ --------------- ---------------- --------- Inception to December 31, 1993 $ 0 $ 42,600,000 $ 355 May 26, 1994 0 16,200,000 135 September 1, 1994 1,400,000 0 0 April 11, 1995 2,234,189 9,000,000 75 October 5, 1995 5,001,136 27,000,000 225 January 12, 1996 (accrued at 12/31/96) 2,336,506 12,000,000 100 April 26, 1996 3,378,498 18,000,000 150 July 29, 1996 4,239,591 19,200,000 160 October 11, 1996 2,547,971 12,000,000 100 --------------- ---------------- --------- Cumulative totals at December 31, 1996 $ 21,137,891 $ 156,000,000 $ 1,300 =============== ================ =========
ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS 8. Pending Litigation The Partnership has settled an action in which the Partnership was named as a defendant, along with other entities and individuals, in respect of its ownership of securities of In-Store Advertising, Inc. ("ISA"). The action was a purported class action suit wherein the plaintiffs, who purchased shares of ISA in its July 19, 1990 initial public offering through November 8, 1990, alleged violations under certain sections of the Securities Act of 1933, the Securities Exchange Act of 1934 and common law. The plaintiffs sought rescission of their purchases of ISA common stock together with damages and certain costs and expenses. In connection with the settlement, the Partnership delivered $1,000,000 into escrow on September 20, 1996, representing its share of the settlement agreement. On December 18, 1996, the court entered an order approving the settlement and dismissing the action against the Partnership and the other defendants involved in the settlement. As of December 31, 1996, the Partnership had incurred cumulative legal expenses totaling approximately $235,000 related to the litigation. 9. Portfolio Investments During 1996, the Partnership sold or wrote-off equity securities of the following portfolio companies: Realized Company Shares Cost Gain (Loss) Return - -------------------------------------------------------------------------------------------------------------------------- Borg-Warner Automotive, Inc. 192,970 $ 964,850 $ 5,318,254 $ 6,283,104 CellPro, Incorporated 50,166 93,241 744,215 837,456 Corporate Express, Inc. 439,000 1,028,331 13,143,138 14,171,469 Elantec, Inc. 220,000 826,137 1,745,113 2,571,250 I.D.E. Corporation - 883,909 (883,909) 0 Inference Corporation 189,424 804,690 2,848,551 3,653,241 Ligand Pharmaceuticals, Inc. 222,942 539,686 2,001,156 2,540,842 Neocrin Company - 130 (130) 0 OccuSystems, Inc. 403,864 2,019,320 7,708,378 9,727,698 Raytel Medical Corporation 595,753 1,662,681 4,370,155 6,032,836 Sanderling Biomedical, L.P. (Neopath) 6,295 0 163,163 163,163 SDL, Inc. 379,155 999,015 9,120,519 10,119,534 Viasoft, Inc. 47,795 152,280 600,489 752,769 -------------- -------------- --------------- Totals $ 9,974,270 $ 46,879,092 $ 56,853,362 ============== ============== ===============
ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS 10. Classification of Portfolio Investments As of December 31, 1996, the Partnership's investments in portfolio companies were categorized as follows: % of Type of Investments Cost Fair Value Net Assets* - ------------------- ---------------- --------------- ----------- Common Stock $ 11,659,323 $ 23,808,531 56.79% Limited Partnerships 5,746,643 9,255,427 22.08% Preferred Stock 7,592,976 1,815,372 4.33% Debt Securities 2,506,928 2,506,928 5.98% ---------------- --------------- -------- Total $ 27,505,870 $ 37,386,258 89.18% ================ =============== ======== Country/Geographic Region Midwestern U.S. $ 6,183,788 $ 15,031,960 35.86% Western U.S. 15,386,506 13,967,479 33.31% Eastern U.S. 5,935,576 8,386,819 20.01% ---------------- --------------- -------- Total $ 27,505,870 $ 37,386,258 89.18% ================ =============== ======== Industry Business Services $ 2,536,150 $ 6,869,144 16.39% Biotechnology 8,802,232 13,014,877 31.04% Automotive Parts 1,258,470 7,267,664 17.34% Semiconductors/Electronics 2,512,663 2,675,589 6.38% Medical Devices and Services 9,402,099 2,766,437 6.60% Telecommunications 2,722,553 4,695,553 11.20% Computer Hardware/Software 271,703 96,994 .23% ---------------- --------------- -------- Total $ 27,505,870 $ 37,386,258 89.18% ================ =============== ========
* Percentage of net assets is based on fair value. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS 11. Subsequent Events In January 1997, Corporate Express, Inc. issued a 50% stock dividend. The Partnership received an additional 60,252 shares of the company's common stock. On February 20, 1997, the Partnership sold its remaining 251,694 common shares of Borg Warner Automotive, Inc. The net per share selling price was $38.30, which yielded net proceeds of $9.6 million to the Partnership, resulting in a realized gain of $8.4 million. These shares were valued at $7.3 million at December 31, 1996. The $2.3 million increase in the Partnership's net assets, representing approximately $15.65 per Unit, will be reflected in net asset value to be reported as of March 31, 1997. On March 17, 1997, the Partnership received an in-kind distribution of 347,826 common shares of IDEC Pharmaceuticals Corporation from ML/MS Associates, L.P. As of March 21, 1997, the Partnership had sold 143,902 shares for $3.2 million. These shares were valued at $1.8 million at December 31, 1996. The $1.4 million increase in the Partnership's net assets, representing approximately $9.38 per Unit, will be reflected in the net asset value to be reported March 1997. 12. Short-Term Investments At December 31, 1996 and 1995, the Partnership had short-term investments in commercial paper as detailed below. Maturity Purchase Amortized Value at Issuer Yield Date Price Cost Maturity December 31, 1996: Korean Development Bank 5.35% 1/17/97 $ 2,960,767 $ 2,992,421 $ 3,000,000 Japan Leasing 5.35% 1/27/97 1,481,498 1,493,981 1,500,000 --------------- --------------- ---------------- Total at December 31, 1996 $ 4,442,265 $ 4,486,402 $ 4,500,000 =============== =============== ================ December 31, 1995: IES Utilities, Inc. 5.75% 1/8/96 $ 14,358,600 $ 14,381,600 $ 14,400,000 Golden Managers Acceptance Corporation 5.75% 1/24/96 2,480,434 2,490,417 2,500,000 BIF, Inc. 5.65% 2/2/96 496,626 497,411 500,000 --------------- --------------- ---------------- Total at December 31, 1995 $ 17,335,660 $ 17,369,428 $ 17,400,000 =============== =============== ================
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. None PART III Item 10. Directors and Executive Officers of the Registrant. The Partnership GENERAL PARTNERS The General Partners of the Partnership consist of the four Individual General Partners and the Managing General Partner. The five General Partners are responsible for the management and administration of the Partnership. As required by the Investment Company Act of 1940 (the "1940 Act"), a majority of the General Partners must be individuals who are not "interested persons" of the Partnership as defined in the 1940 Act. In 1987, the Securities and Exchange Commission (the "SEC") issued an order declaring that the three Independent General Partners of the Partnership (the "Independent General Partners") are not "interested persons" of the Partnership as defined in the 1940 Act solely by reason of their being general partners of the Partnership. The Individual General Partners have full authority over the management of the Partnership and provide overall guidance and supervision with respect to the operations of the Partnership and perform the various duties imposed on the directors of business development companies by the 1940 Act. In addition to general fiduciary duties, the Individual General Partners, among other things, supervise the management arrangements of the Partnership. The Managing General Partner, subject to the supervision of the Individual General Partners, has authority to provide, or arrange for the provision of, management services in connection with the venture capital investments of the Partnership. The general partner of the Managing General Partner is Merrill Lynch Venture Capital Inc. (the "Management Company"). The Management Company is an indirect subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."). Individual General Partners Dr. Steward S. Flaschen (1) 592 Weed Street New Canaan, Connecticut 06840 Age 70 Individual General Partner since 1987 Units of the Partnership beneficially owned at March 21, 1997 - None (3) President of Flaschen & Davies, a management consulting firm, since 1986; Corporate Senior Vice President and member of the Management Policy Board of ITT Corporation from 1982 to 1986 and General Technical Director from 1969 to 1986; Chairman of Telco Systems Inc.; Chairman of TranSwitch Corp. from 1989 to present; Director of Sipex Corp. from 1996 to present. Jerome Jacobson (1) 4200 Massachusetts Avenue, N.W. Washington, D.C. 20016 Age 75 Individual General Partner since 1987 Units of the Partnership beneficially owned at March 21, 1997 - None (3) President of Economic Studies Inc., an economic consulting firm, since 1984; Vice Chairman and a director of the Burroughs Corporation from 1980 to 1984; Director of Cerplex Group, Inc., Datawatch Inc. and Easel Corporation. William M. Kelly (1) 40 Wall Street New York, New York 10005 Age 53 Individual General Partner since 1991 Units of the Partnership beneficially owned at March 21, 1997 - None (3) Managing Associate of Lingold Associates, since 1980; Vice President of National Aviation and Technology Company, a registered investment company, from 1977 to 1980; Director of First Eagle International Fund from 1994 to present. Kevin K. Albert (2) World Financial Center North Tower New York, New York 10281-1326 Age 44 Individual General Partner since 1990 Units of the Partnership beneficially owned at March 21, 1997 - None (3) Director and President of the Management Company; Managing Director of Merrill Lynch Investment Banking Division ("MLIBK") since 1988. (1) Independent General Partner and member of the Audit Committee. (2) Interested person of the Partnership as defined in the 1940 Act. (3) Messrs. Flaschen and Jacobson have each contributed $1,000 to the capital of the Partnership. Messrs. Kelly and Albert succeeded to the interest of prior Individual General Partners who each contributed $1,000 to the capital of the Partnership. The Management Company Merrill Lynch Venture Capital Inc. (the "Management Company") serves as the Partnership's management company and performs, or arranges for the performance of, the management and administrative services necessary for the operations of the Partnership pursuant to a management agreement dated May 23, 1991 (the "Management Agreement"). The Management Company has served as the management company for the Partnership since the Partnership commenced operations in 1987. The Management Company is a wholly-owned subsidiary of ML Leasing Equipment Corp., which is an indirect subsidiary of Merrill Lynch & Co., Inc. The Management Company, which was incorporated under Delaware law on January 25, 1982, maintains its principal office at North Tower, World Financial Center, New York, New York 10281-1326. On May 23, 1991, the limited partners of the Partnership approved a sub-management agreement among the Partnership, the Management Company, the Managing General Partner and DLJ Capital Management Corporation (the "Sub-Manager"). Under the terms of such sub-management agreement, the Sub-Manager agreed to provide, subject to the supervision of the Managing General Partner, the Management Company and the Individual General Partners, certain of the management services previously provided by the Management Company. Due to certain transactions involving The Equitable Companies Incorporated, the indirect parent of the Sub-Manager, a substantially similar sub-management agreement (the "Sub-Management Agreement") was approved by the limited partners of the Partnership at their 1992 annual meeting held on May 26, 1992. The Management Company has arranged for Palmeri Fund Administrators, Inc., an independent administrative services company, to provide administrative services to the Partnership. Fees for such services are paid directly by the Management Company. The following table sets forth information concerning the directors of the Management Company and the executive officers of the Management Company involved with the Partnership. Information concerning Kevin K. Albert, Director and President of the Management Company, is set forth under "General Partners - Individual General Partners". The address of Mr. Aufenanger, Mr. Lurie and Ms. Herte is South Tower, World Financial Center, New York, New York 10080. Robert F. Aufenanger Executive Vice President and Director Age 43 Officer or Director since 1990 Vice President of Merrill Lynch & Co. Corporate Credit and Director of the Partnership Management Group since 1991; Director of MLIBK from 1990 to 1991; Vice President of MLIBK from 1984 to 1990. Michael E. Lurie Vice President and Director Age 53 Officer or Director since 1995 First Vice President of Merrill Lynch & Co. Corporate Credit and Director of the Asset Recovery Management Department, joined Merrill Lynch in 1970. Prior to his present position, Mr. Lurie was the Director of Debt and Equity Markets Credit responsible for the global allocation of credit limits and the approval and structuring of specific transactions related to debt and equity products. Mr. Lurie also served as Chairman of the Merrill Lynch International Bank Credit Committee. Diane T. Herte Vice President and Treasurer Age 36 Officer or Director since 1995 Vice President of Merrill Lynch & Co. Investment Banking Group since 1996 and previously an Assistant Vice President of Merrill Lynch & Co. Corporate Credit Group since 1982, joined Merrill Lynch in 1984. Ms. Herte's responsibilities include controllership and financial management functions for certain partnerships for which subsidiaries of Merrill Lynch are the general partner. The directors of the Management Company will serve as directors until the next annual meeting of stockholders and until their successors are elected and qualify. The officers of the Management Company will hold office until the next annual meeting of the Board of Directors of the Management Company and until their successors are elected and qualify. There are no family relationships among any of the Individual General Partners of the Partnership and the officers and directors of the Management Company. DLJ Capital Management Corporation - The Sub-Management Company DLJ Capital Management Corporation (the "Sub-Manager"), a Delaware corporation, is an indirect wholly-owned subsidiary of Donaldson, Lufkin & Jenrette, Inc. ("DLJ"), a holding company which through its subsidiaries engages in the following activities: investment banking, merchant banking, public finance, trading, distribution and research. The Sub-Manager maintains its principal office at 277 Park Avenue, New York, New York 10172. The Sub-Manager is a wholly-owned subsidiary of DLJ Capital Corporation ("DLJ Capital"). DLJ Capital, which was founded in 1969, has established nine institutional venture capital funds ("Sprout Funds") and several smaller funds, with total committed capital of over $800 million. Six of such institutional funds, with capital exceeding $750 million, are currently operating. DLJ Capital's most recent limited partnership is Sprout VII, L.P., which was established in 1994 with an excess of 75 percent of its $250 million capital provided by participants in earlier Sprout Funds. DLJ Capital's principal office is located at 277 Park Avenue, New York, New York 10172, and it maintains additional offices in Menlo Park, California and Boston, Massachusetts. The following table sets forth information concerning the directors, principal executive officers and other officers of the Sub-Manager. Unless otherwise noted, the address of each such person is 277 Park Avenue, New York, New York 10172. Richard E. Kroon President, Chief Executive Officer and Director Age 54 Officer or Director since 1977 Managing General Partner of Sprout Group, the venture capital affiliate of DLJ since 1981. Janet A. Hickey Senior Vice President Age 51 Officer or Director since 1985 General Partner of Sprout Group since 1985; Vice President and Manager of Venture Capital Division of General Electric Investment Corp. from 1970 to 1985. Keith B. Geeslin(1) Senior Vice President Age 43 Officer or Director since 1984 General Partner of Sprout Group since 1986. Dr. Robert E. Curry(1) Vice President Age 50 Officer or Director since 1991 President and Director of the Management Company from 1989 to 1991; Managing Director of MLIBK from 1990 to 1991; President of Merrill Lynch R&D Management Inc. ("ML R&D") from 1990 to 1991, Vice President of ML R&D from 1984 to 1990 and Director of ML R&D from 1987 to 1991; General Partner of Sprout Group since 1991. Robert Finzi(1) Vice President Age 43 Officer or Director since 1991 Vice President of the Management Company from 1985 to 1991; Associate with Menlo Ventures from 1983 to 1984; General Partner of Sprout Group since 1991. Anthony F. Daddino Vice President and Director Age 56 Officer or Director since 1989 Director, Executive Vice President and Chief Financial Officer of DLJ. Thomas E. Siegler Secretary, Treasurer and Director Age 62 Officer or Director since 1971 Senior Vice President and Secretary of DLJ. (1) The address of these officers is 3000 Sand Hill Road, Menlo Park, California 94025. The Managing General Partner MLVPII Co., L.P. (the "Managing General Partner") is a limited partnership organized on February 4, 1986 under the laws of the State of New York. The Managing General Partner maintains its principal office at North Tower, World Financial Center, New York, New York 10281-1326. The Managing General Partner has acted as the managing general partner of the Partnership since the Partnership commenced operations. The Managing General Partner is engaged in no other activities at the date hereof. The general partner of the Managing General Partner is the Management Company. The limited partners of the Managing General Partner include DLJ Capital Management Corporation ("DLJ"), Dr. Robert E. Curry and Robert Finzi. Messrs. Curry and Finzi are currently officers of DLJ and were previously officers of the Management Company. The Partnership Agreement obligates the Managing General Partner to contribute cash to the capital of the Partnership so that the Managing General Partner's capital contribution at all times will be equal to one percent (1%) of the aggregate capital contributions of all partners of the Partnership. The Managing General Partner has contributed $1,212,162 to the capital of the Partnership. Item 11. Executive Compensation. Compensation - The Partnership pays each Independent General Partner an annual fee of $20,000 in quarterly installments plus $1,400 for each meeting of the Individual General Partners attended or for each other meeting, conference or engagement in connection with Partnership activities at which attendance by the Individual General Partner is required. The Partnership pays all actual out-of-pocket expenses incurred by the Independent General Partners relating to attendance at such meetings. The Independent General Partners receive $1,400 for each meeting of the Audit Committee attended unless such committee meeting is held on the same day as a meeting of the Individual General Partners. In such case, the Independent General Partners receive $500 for each meeting of the Audit Committee attended. For the year ended December 31, 1996, the aggregate fees and expenses paid by the Partnership to the Independent General Partners totaled $109,262. Allocations and Distributions - Profits and losses of the Partnership are determined and allocated as of the end of and within sixty days after the end of each calendar year. If the aggregate of the investment income and net realized capital gains and losses from venture capital investments is positive, calculated on a cumulative basis over the life of the Partnership through such year, the Managing General Partner is allocated investment income and net realized capital gains or losses from venture capital investments for such year so that, together with all investment income and gains and losses previously allocated to the Managing General Partner, it has received 20% of the aggregate of such income and gains calculated on a cumulative basis over the life of the Partnership through such year. Such allocation is referred to herein as the "Managing General Partner's Allocation" and is applicable only to the investment income and net realized capital gains and losses resulting from venture capital investments. The Partnership's investment income and net realized capital gains and losses in excess of the Managing General Partner's Allocation and all other profits and losses, including interest or other income on funds not invested in venture capital investments, are allocated among all the Partners (including the Managing General Partner) in proportion to their capital contributions. Cash or other assets otherwise distributable to the Managing General Partner are not distributed to the Managing General Partner to the extent that the net realized gains allocated to the Managing General Partner are offset by an amount equal to 20% of the net unrealized losses of the Partnership. For its fiscal year ended December 31, 1996, the Partnership had a net realized gain of $46.9 million from portfolio investments sold and written-off. On a cumulative basis, from inception to December 31, 1996, the Partnership was in a net gain position of $102.0 million from its investment income and net realized gains and losses from its venture capital portfolio investments. The Partnership made four cash distributions totaling $61.2 million to Limited Partners and four cash distributions totaling $12.5 million to the General Partners during the fiscal year ended December 31, 1996. Management Fee - Pursuant to the Management Agreement, the Partnership pays the Management Company a fee at the annual rate of 2.5% of the amount of the partners' capital contributions (net of selling commissions and organizational and offering expenses paid by the Partnership), reduced by capital distributed to the Partners and realized capital losses, with a minimum annual fee of $200,000. Such fee is payable quarterly on the basis of the amount of the partners' capital contributions, adjusted as described above, at the end of the preceding calendar quarter. As described previously, the Management Company has entered into a Sub-Management Agreement with DLJ, pursuant to which the Management Company compensates DLJ for management services. For the year ended December 31, 1996, management fees incurred by the Partnership to the Management Company aggregated $686,493. Item 12. Security Ownership of Certain Beneficial Owners and Management. Reference is made to Item 10 "Individual General Partners" concerning information with respect to security ownership. As of March 21, 1997, no person or group is known by the Partnership to be the beneficial owner of more than 5 percent of the Units. Mark Clein and Stephen Warner, limited partners of the Managing General Partner, own an aggregate of 134 Units of the Partnership. The Individual General Partners and the directors and officers of the Management Company do not own any Units. The Partnership is not aware of any arrangement which may, at a subsequent date, result in a change of control of the Partnership. Item 13. Certain Relationships and Related Transactions. Kevin K. Albert, a Director and President of the Management Company and a Managing Director of Merrill Lynch Investment Banking Group ("ML Investment Banking"), joined Merrill Lynch in 1981. Robert F. Aufenanger, a Director and Executive Vice President of the Management Company, a Vice President of Merrill Lynch & Co. Corporate Credit and a Director of the Partnership Management Department, joined Merrill Lynch in 1980. Michael E. Lurie, a Director and Vice President of the Management Company, a First Vice President of Merrill Lynch & Co. Corporate Credit and the Director of the Asset Recovery Management Department, joined Merrill Lynch in 1970. Diane T. Herte, a Vice President and Treasurer of the Management Company and a Vice President of Merrill Lynch & Co. Investment Banking Group, joined Merrill Lynch in 1984. Messrs. Albert, Aufenanger, Lurie and Ms. Herte are involved with certain other entities affiliated with Merrill Lynch or its affiliates. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) 1. Financial Statements Balance Sheets as of December 31, 1996 and 1995 Schedule of Portfolio Investments as of December 31, 1996 Schedule of Portfolio Investments as of December 31, 1995 Statements of Operations for the years ended December 31, 1996, 1995 and 1994 Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 Statements of Changes in Partners' Capital for the years ended December 31, 1994, 1995 and 1996 Notes to Financial Statements 2. Exhibits (3) (a) Amended and Restated Certificate of Limited Partnership of the Partnership, dated as of January 12, 1987. (1) (3) (b) Amended and Restated Certificate of Limited Partnership of the Partnership, dated July 27, 1990. (2) (3) (c) Amended and Restated Certificate of Limited Partnership of the Partnership, dated March 25, 1991. (3) (3) (d) Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of May 4, 1987. (4) (3) (e) Amendment No. 1 dated February 14, 1989 to Amended and Restated Agreement of Limited Partnership of the Partnership. (5) (3) (f) Amendment No. 2 dated July 27, 1990 to Amended and Restated Agreement of Limited Partnership of the Partnership. (2) (3) (g) Amendment No. 3 dated March 25, 1991 to Amended and Restated Agreement of Limited Partnership of the Partnership. (3) (3) (h) Amendment No. 4 dated May 23, 1991 to Amended and Restated Agreement of Limited Partnership of the Partnership. (6) (10) (a) Management Agreement dated as of May 23, 1991 among the Partnership, Management Company and the Managing General Partner. (6) (10) (b) Form of Sub-Management Agreement among the Partnership, Management Company, the Managing General Partner and the Sub-Manager. (8) (13) Page 20 of the Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. (27) Financial Data Schedule. (28) Prospectus of the Partnership dated February 10, 1987 filed with the Securities and Exchange Commission pursuant to Rule 424(b) under the Securities Act of 1933, as supplemented by a supplement thereto dated April 21, 1987 filed pursuant to Rule 424(c) under the Securities Act of 1933. (7) (b) No reports on Form 8-K have been filed since the beginning of the last quarter of the period for which this report is filed. (1) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1988 filed with the Securities and Exchange Commission on March 27, 1989. (2) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990 filed with the Securities and Exchange Commission on November 14, 1990. (3) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1990 filed with the Securities and Exchange Commission on March 28, 1991. (4) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 1987 filed with the Securities and Exchange Commission on August 14, 1987. (5) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989 filed with the Securities and Exchange Commission on May 15, 1989. (6) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991 filed with the Securities and Exchange Commission on August 14, 1991. (7) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended March 31, 1987 filed with the Securities and Exchange Commission on May 15, 1987. (8) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1992 filed with the Securities and Exchange Commission on March 26, 1993. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 28th day of March 1997. ML VENTURE PARTNERS II, L.P. /s/ Kevin K. Albert By: Kevin K. Albert Individual General Partner Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 28th day of March 1997. By: MLVPII Co., L.P. By: /s/ Steward S. Flaschen its Managing General Partner Steward S. Flaschen Individual General Partner By: Merrill Lynch Venture Capital Inc. ML Venture Partners II, L.P. its General Partner By: /s/ Kevin K. Albert By: /s/ Jerome Jacobson ------------------------------------------------- --------------------- Kevin K. Albert Jerome Jacobson President Individual General Partner (Principal Executive Officer) ML Venture Partners II, L.P. By: /s/ Diane T. Herte By: /s/ William M. Kelly Diane T. Herte William M. Kelly Vice President and Treasurer Individual General Partner (Principal Financial and Accounting Officer) ML Venture Partners II, L.P.
EX-13 2 EXHIBIT 13 EXHIBIT 13 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. EX-27 3 EXHIBIT 27
6 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ML VENTURE PARTNERS II, L.P.'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 27,505,870 37,386,258 49,442 0 4,832,531 42,268,231 0 0 345,195 345,195 0 0 120,000 120,000 0 0 0 0 9,880,388 41,923,036 212,646 1,310,239 0 2,210,617 (687,732) 46,879,092 (25,244,796) 20,946,564 0 0 0 59,366,060 0 0 0 (52,777,178) 0 0 0 0 0 0 0 61,132,784 596 (7) 144 0 410 0 323 0 0 0
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