-----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, Wj9sCS32UZYPUm90t7ZQFMj7Vx4PLhU1w6MDv3WBXdyJwsGyh1/6tuLevuaf5b9l vD9E2jxT0LlPWO5mzn25eA== 0000789538-97-000003.txt : 19970815 0000789538-97-000003.hdr.sgml : 19970815 ACCESSION NUMBER: 0000789538-97-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ML VENTURE PARTNERS II LP CENTRAL INDEX KEY: 0000789538 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 133324232 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 814-00043 FILM NUMBER: 97663044 BUSINESS ADDRESS: STREET 1: WORLD FINANCIAL CTR N TOWER STREET 2: 25TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10281-1330 BUSINESS PHONE: 2124491000 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 1997 Or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number 0-14217 ML VENTURE PARTNERS II, L.P. =============================================================================== (Exact name of registrant as specified in its charter) Delaware 13-3324232 =============================================================================== (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) World Financial Center, North Tower New York, New York 10281-1326 =============================================================================== (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 449-1000 Not applicable =============================================================================== Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ML VENTURE PARTNERS II, L.P. INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Balance Sheets as of June 30, 1997 (Unaudited) and December 31, 1996 Schedule of Portfolio Investments as of June 30, 1997 (Unaudited) Statements of Operations for the Three and Six Months Ended June 30, 1997 and 1996 (Unaudited) Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996 (Unaudited) Statement of Changes in Partners' Capital for the Six Months Ended June 30, 1997 (Unaudited) Notes to Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Item 2. Changes in Securities. Item 3. Defaults upon Senior Securities. Item 4. Submission of Matters to a Vote of Security Holders. Item 5. Other Information. Item 6. Exhibits and Reports on Form 8-K. PART I - FINANCIAL INFORMATION Item 1. Financial Statements. ML VENTURE PARTNERS II, L.P. BALANCE SHEETS June 30, 1997 December 31, (Unaudited) 1996 ASSETS Portfolio investments at fair value (cost $14,943,101 as of June 30, 1997 and $27,505,870 as of December 31, 1996) $ 22,724,790 $ 37,386,258 Short-term investments at amortized cost 22,469,598 4,486,402 Cash and cash equivalents 1,191,620 346,129 Accrued interest receivable 4,749 49,442 Receivable from securities sold 3,330,509 - ---------------- ----------------- TOTAL ASSETS $ 49,721,266 $ 42,268,231 ================ ================= LIABILITIES AND PARTNERS' CAPITAL Liabilities: Cash distribution payable $ 21,790,729 $ - Accounts payable and accrued expenses 146,932 183,406 Due to Management Company 59,095 138,389 Due to Independent General Partners 23,400 23,400 ---------------- ----------------- Total liabilities 22,020,156 345,195 ---------------- ----------------- Partners' Capital: Managing General Partner 575,417 1,158,769 Individual General Partners 644 1,029 Limited Partners (120,000 Units) 19,343,360 30,882,850 Unallocated net unrealized appreciation of investments 7,781,689 9,880,388 ---------------- ----------------- Total partners' capital 27,701,110 41,923,036 ---------------- ----------------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 49,721,266 $ 42,268,231 ================ =================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED) June 30, 1997 Active Portfolio Investments: Initial Investment Company / Position Date Cost Fair Value Biocircuits Corporation*(A)(B)(E) 235,067 shares of Common Stock May 1991 $ 363,884 $ 158,582 2,000,000 shares of Preferred Stock 1,000,000 203,125 - ------------------------------------------------------------------------------------------------------------------------------- Borg-Warner Security Corporation*(A) 500,000 shares of Common Stock Sept. 1988 2,500,000 6,703,125 - ------------------------------------------------------------------------------------------------------------------------------- Brightware, Inc. 140,485 shares of Common Stock May 1995 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.*(E) 179,028 shares of Preferred Stock Jan. 1991 1,000,548 895,152 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) 180,755 shares of Common Stock May 1992 36,150 2,087,720 - ------------------------------------------------------------------------------------------------------------------------------- Diatide, Inc.*(A) 809,704 shares of Common Stock Dec. 1991 2,986,023 2,861,798 - ------------------------------------------------------------------------------------------------------------------------------- Elantec, Inc.(A) 23,245 shares of Common Stock Aug. 1988 60,437 93,385 - ------------------------------------------------------------------------------------------------------------------------------- Horizon Cellular Telephone Company, L.P.:(C) SPTHOR Corporation 10% Promissory Note due 3/26/98 May 1992 125,269 125,269 5.67% Bridge Loan 228,926 228,926 34.5 shares of Common Stock 215,625 110,093 - ------------------------------------------------------------------------------------------------------------------------------- I.D.E. Corporation 113,322 shares of Common Stock Mar. 1988 227,000 0 - -------------------------------------------------------------------------------------------------------------------------------
ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED), continued June 30, 1997 Initial Investment Company / Position Date Cost Fair Value IDEC Pharmaceuticals Corporation(A)(D) 152,843 shares of Common Stock June 1989 $ 1,310,650 $ 3,706,443 - ------------------------------------------------------------------------------------------------------------------------------- Neocrin Company*(E)(F) 48,430 shares of Preferred Stock June 1991 363,378 193,720 Warrants to purchase 92,205 shares of Common Stock at $4.00 per share, expiring on 1/3/01 0 0 - ------------------------------------------------------------------------------------------------------------------------------- Photon Dynamics, Inc.*(A) 425,235 shares of Common Stock Sept. 1988 2,452,226 2,211,221 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) 62,500 shares of Common Stock Feb. 1990 241,639 575,000 Options to purchase 27,969 shares of Common Stock at $1.42 per share, expiring on 10/31/01 0 217,599 - ------------------------------------------------------------------------------------------------------------------------------- Sanderling Biomedical, L.P.* 80% Limited Partnership interest May 1988 1,786,643 2,256,638 - ------------------------------------------------------------------------------------------------------------------------------- Totals from Active Portfolio Investments $ 14,943,101 $ 22,724,790 --------------------------------- Supplemental Information: Liquidated Portfolio Investments(G) Cost Realized Gain Return Totals from Liquidated Portfolio Investments $ 101,450,816 $ 107,431,697 $ 208,882,513 ========================================================= Combined Net Combined Unrealized and Fair Value Cost Realized Gain and Return Totals from Active & Liquidated Portfolio Investments $ 116,393,917 $ 115,213,386 $ 231,607,303 =========================================================
ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED), continued June 30, 1997 (A) Public company (B) The preferred shares of Biocircuits Corporation held by the Partnership are convertible into common shares of the company at a ratio of 4 shares of preferred stock for 1 share of common stock. On April 14, 1997, the Partnership made a follow-on investment in Biocircuits Corporation of $106,250, acquiring an additional 106,250 shares of the company's common stock. (C) In May 1997, the Partnership received an additional $109,350 from the sale of options attached to its investment in HCTC/SPTHOR. (D) In May 1997, the Partnership received an additional 129,407 common shares of IDEC Pharmaceuticals Corporation common stock from the final liquidating distribution of ML/MS Associates and ML/MS Cancer Research, Inc. In June 1997, the Partnership sold 126,828 shares of IDEC common stock for $3,330,509, realizing a gain of $2,267,484. Subsequent to the end of the quarter, in July 1997, the Partnership sold its remaining 152,843 common shares of IDEC for $4.1 million, realizing a gain of $2.8 million. (E) As of June 30, 1997, the Partnership wrote-off a portion of the cost of its investments in Biocircuits Corporation for $1,164,867, Clarus Medical Systems, Inc. for $1,388,620, and Neocrin Company for $3,840,430. (F) In February 1997, Neocrin Company effected a one-for-ten reverse stock split of the company's common stock and preferred stock. (G) Amounts provided for "Supplemental Information: Liquidated Portfolio Investments" are cumulative from inception through June 30, 1997. * May be deemed an affiliated person of the Partnership as defined in the Investment Company Act of 1940. See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 --------------- ---------------- --------------- ---------- INVESTMENT INCOME AND EXPENSES Income: Interest from short-term investments $ 319,820 $ 405,480 $ 453,185 $ 616,212 Interest and other income from portfolio investments 537 81,124 16,976 162,433 Dividend income - 66,700 37,754 133,400 --------------- ---------------- --------------- ---------------- Totals 320,357 553,304 507,915 912,045 --------------- ---------------- --------------- ---------------- Expenses: Management fee 59,095 184,121 197,484 389,309 Professional fees 37,461 47,026 81,436 80,097 Mailing and printing 29,065 29,307 101,764 137,433 Independent General Partners' fees 24,509 28,210 47,981 57,466 Custodial fees - 3,618 3,500 7,236 Miscellaneous - 800 296 1,450 --------------- ---------------- --------------- ---------------- Totals 150,130 293,082 432,461 672,991 --------------------------------------------------------- --------- --------- --------- NET INVESTMENT INCOME 170,227 260,222 75,454 239,054 Net realized (loss) gain from portfolio investments (4,017,085) 10,141,055 9,592,048 37,965,906 --------------- ---------------- --------------- ---------------- NET REALIZED (LOSS) GAIN FROM OPERATIONS (allocable to Partners) (3,846,858) 10,401,277 9,667,502 38,204,960 Net change in unrealized appreciation of investments 7,939,497 (175,590) (2,098,699) (15,486,768) --------------- ---------------- --------------- ---------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 4,092,639 $ 10,225,687 $ 7,568,803 $ 22,718,192 =============== ================ =============== ================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENTS OF CASH FLOWS (UNAUDITED) For the Six Months Ended June 30, 1997 1996 ---------------- ---------- CASH FLOWS USED FOR OPERATING ACTIVITIES Net investment income $ 75,454 $ 239,054 Adjustments to reconcile net investment income to cash used for operating activities: (Increase) decrease in accrued interest receivable 44,693 (160,282) Increase in accrued interest on short-term investments (14,467) (137,556) Decrease in payables (115,768) (57,298) ---------------- ---------------- Cash used for operating activities (10,088) (116,082) ---------------- ---------------- CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES Net purchase of short-term investments (17,968,729) (13,247,020) Cost of portfolio investments purchased (335,176) (207,111) Deposit released from escrow - 184,502 Net proceeds from the sale of portfolio investments 16,777,825 48,764,508 Proceeds from repayment of note 2,381,659 - ---------------- ---------------- Cash provided from investing activities 855,579 35,494,879 ---------------- ---------------- CASH FLOWS USED FOR FINANCING ACTIVITIES Cash distributions to Partners - (35,715,004) ---------------- ---------------- Increase (decrease) in cash and cash equivalents 845,491 (336,207) Cash and cash equivalents at beginning of period 346,129 685,917 ---------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,191,620 $ 349,710 ================ ================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENT OF CHANGES IN PARTNERS' CAPITAL (UNAUDITED) For the Six Months Ended June 30, 1997 Unallocated Net Unrealized Managing Individual Appreciation General General Limited (Depreciation) Partner Partners Partners of Investments Total Balance at beginning of period $ 1,158,769 $ 1,029 $ 30,882,850 $ 9,880,388 $ 41,923,036 Cash distribution, accrued (2,590,089) (640) (19,200,000) - (21,790,729) Net investment income 11,591 2 63,861 - 75,454 Net realized gain from portfolio investments 1,995,146 253 7,596,649 - 9,592,048 Net change in unrealized appreciation (depreciation) of investments - - - (2,098,699) (2,098,699) ------------- -------- -------------- -------------- ---------------- Balance at end of period $ 575,417 $ 644 $ 19,343,360(A) $ 7,781,689 $ 27,701,110 ============= ======== ============== ============== ================
(A) The net asset value per unit of limited partnership interest, including an assumed allocation of net unrealized appreciation of investments, was $213 at June 30, 1997. Cumulative cash distributions paid or accrued to Limited Partners from inception to June 30, 1997 totaled $1,460 per Unit. See notes to financial statements. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. Organization and Purpose ML Venture Partners II, L.P. (the "Partnership") is a Delaware limited partnership formed on February 4, 1986. MLVPII Co., L.P., the managing general partner of the Partnership (the "Managing General Partner"), and four individuals (the "Individual General Partners") are the general partners of the Partnership. The general partner of MLVPII Co., L.P. is Merrill Lynch Venture Capital Inc. (the "Management Company"), an indirect subsidiary of Merrill Lynch & Co., Inc. DLJ Capital Management Corporation (the "Sub-Manager"), an indirect subsidiary of Donaldson, Lufkin & Jenrette, Inc., is the sub-manager of the Partnership, pursuant to a sub-management agreement among the Partnership, the Management Company, the Managing General Partner and the Sub-Manager. The Partnership's objective is to achieve long-term capital appreciation from its portfolio of venture capital investments in new and developing companies and other special investment situations. The Partnership does not engage in any other business or activity. The Partnership is scheduled to terminate on December 31, 1997. However, pursuant to the Partnership Agreement, the Individual General Partners can extend the termination date for up to two additional two-year periods if they determine that such extensions would be in the best interest of the Partnership. 2. Significant Accounting Policies Valuation of Investments - Short-term investments are carried at amortized cost which approximates market. Portfolio investments are carried at fair value as determined quarterly by the Sub-Manager under the supervision of the Individual General Partners and the Managing General Partner. The fair value of publicly-held portfolio securities is adjusted to the closing public market price for the last trading day of the accounting period discounted by a factor of 0% to 50% for sales restrictions. Factors considered in the determination of an appropriate discount include, underwriter lock-up or Rule 144 trading restrictions, insider status where the Partnership either has a representative serving on the company's Board of Directors or is greater than a 10% shareholder, and other liquidity factors such as the size of the Partnership's position in a given company compared to the trading history of the public security. Privately-held portfolio securities are carried at cost until significant developments affecting the portfolio company provide a basis for change in valuation. The fair value of private securities is adjusted 1) to reflect meaningful third-party transactions in the private market or 2) to reflect significant progress or slippage in the development of the company's business such that cost is no longer reflective of fair value. As a venture capital investment fund, the Partnership's portfolio investments involve a high degree of business and financial risk that can result in substantial losses. The Sub-Manager considers such risks in determining the fair value of the Partnership's portfolio investments. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - continued Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Investment Transactions - Investment transactions are recorded on the accrual method. Portfolio investments are recorded on the trade date, the date the Partnership obtains an enforceable right to demand the securities or payment therefor. Realized gains and losses on investments sold are computed on a specific identification basis. Income Taxes - No provision for income taxes has been made since all income and losses are allocable to the Partners for inclusion in their respective tax returns. The Partnership's net assets for financial reporting purposes differ from its net assets for tax purposes. Net unrealized appreciation of investments of $7.8 million at June 30, 1997, which was recorded for financial statement purposes, was not recognized for tax purposes. Additionally, from inception to June 30, 1997, timing differences of approximately $400,000 have been deducted on the Partnership's financial statements and syndication costs relating to the selling of Units totaling $11.3 million were charged to partners' capital on the financial statements. These amounts have not been deducted or charged against partners' capital for tax purposes. Statements of Cash Flows - The Partnership considers its interest-bearing cash account to be cash equivalents. 3. Allocation of Partnership Profits and Losses The Partnership Agreement provides that the Managing General Partner will be allocated, on a cumulative basis over the life of the Partnership, 20% of the Partnership's aggregate investment income and net realized gains and losses from venture capital investments, provided that such amount is positive. All other gains and losses of the Partnership are allocated among all the Partners (including the Managing General Partner) in proportion to their respective capital contributions to the Partnership. From its inception to June 30, 1997, the Partnership had a $111.7 million net gain from its venture capital investments, which includes interest and other income from portfolio investments totaling $4.2 million. 4. Related Party Transactions The Management Company performs, or arranges for others to perform, the management and administrative services necessary for the operation of the Partnership and receives a management fee at the annual rate of 2.5% of the gross capital contributions to the Partnership, reduced by selling commissions, organizational and offering expenses paid by the Partnership, capital distributed and realized capital losses with a minimum annual fee of $200,000. Such fee is determined and payable quarterly. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - continued 5. Independent General Partners' Fees As compensation for services rendered to the Partnership, each of the three Independent General Partners receives $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). Beginning on July 1, 1997, the compensation of each Independent General Partner will increase to $21,000 annually and $1,500 for each meeting attended. 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. Portfolio Investments During the three and six months ended June 30, 1997, the Partnership liquidated or wrote-off securities of the following portfolio companies: Realized Company Shares Sold Cost Gain (Loss) Return Three Months Ended March 31, 1997: Borg-Warner Automotive, Inc. 251,694 $ 1,258,470 $ 8,381,410 $ 9,639,880 IDEC Pharmaceuticals Corporation 197,562 1,655,891 3,540,427 5,196,318 Raytel Medical Corporation 37,500 144,983 0 144,983 SPTHOR Corporation - sale of options n/a 0 1,687,296 1,687,296 SPTHOR Corporation - note repayment n/a 455,491 0 455,491 HCTC Investment, L.P. - note repayment n/a 1,926,168 0 1,926,168 -------------- -------------- --------------- Sub-total $ 5,441,003 $ 13,609,133 $ 19,050,136 -------------- -------------- --------------- Three Months Ended June 30, 1997: IDEC Pharmaceuticals Corporation 126,828 $ 1,063,025 $ 2,267,482 $ 3,330,507 HCTC Investment, L.P. - sale of options n/a 0 109,350 109,350 Biocircuits Corporation - partial write-off n/a 1,164,867 (1,164,867) 0 Clarus Medical Systems, Inc. - partial write-off n/a 1,388,620 (1,388,620) 0 Neocrin Company - partial write-off n/a 3,840,430 (3,840,430) 0 -------------- -------------- --------------- Sub-total $ 7,456,942 $ (4,017,085) $ 3,439,857 -------------- -------------- --------------- Totals for the six months ended June 30, 1997 $ 12,897,945 $ 9,592,048 $ 22,489,993 ============== ============== ===============
ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - continued 8. Interim Financial Statements In the opinion of MLVPII Co., L.P., the managing general partner of the Partnership, the unaudited financial statements as of June 30, 1997, and for the three month period then ended, reflect all adjustments necessary for the fair presentation of the results of the interim period. 9. Cash Distribution On July 11, 1997, the Partnership made a cash distribution to Partners totaling $21,790,729. Limited Partners of record on June 30, 1997 received $19,200,000, or $160 per Unit, and the General Partners received $2,590,729. 10. Subsequent Event Subsequent to the end of the quarter, in July 1997, the Partnership sold its remaining 152,843 common shares of IDEC Pharmaceuticals for $4.1 million, realizing a gain of $2.8 million. Also in July 1997, the Partnership sold its remaining 23,245 common shares of Elantec, Inc. for $93,385, realizing a gain of $32,948. As a result, in July 1997, the General Partners approved an additional cash distribution to Partners totaling $8,211,344; $7,800,000, or $65 per Unit, to the Limited Partners and $411,344 to the General Partners. Such distribution will be paid in October 1997 to Partners of record on September 30, 1997. 11. Classification of Portfolio Investments As of June 30, 1997, the Partnership's investments in portfolio companies were categorized as follows: % of Type of Investments Cost Fair Value Net Assets* - ------------------- -------------- --------------- ----------- Common Stock $ 10,438,337 $ 18,821,960 67.95% Limited Partnerships 1,786,643 2,256,638 8.15% Preferred Stock 2,363,926 1,291,997 4.66% Debt Securities 354,195 354,195 1.28% -------------- --------------- ------- Total $ 14,943,101 $ 22,724,790 82.04% ============== =============== ====== Country/Geographic Region Midwestern U.S. $ 3,536,698 $ 9,685,997 34.97% Western U.S. 7,623,560 9,712,707 35.06% Eastern U.S. 3,782,843 3,326,086 12.01% -------------- --------------- ------ Total $ 14,943,101 $ 22,724,790 82.04% ============== =============== ====== Industry Business Services $ 2,536,150 $ 8,790,845 31.74% Biotechnology 6,083,316 8,824,879 31.86% Semiconductors/Electronics 2,512,663 2,304,606 8.32% Medical Devices and Services 2,969,449 2,243,178 8.09% Telecommunications 569,820 464,288 1.68% Computer Hardware/Software 271,703 96,994 .35% -------------- --------------- -------- Total $ 14,943,101 $ 22,724,790 82.04% ============== =============== ======
* Percentage of net assets is based on fair value. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Liquidity and Capital Resources During June 1997, the Partnership sold 126,828 common shares of IDEC Pharmaceuticals Corporation for $3.3 million, realizing a gain of $2.3 million. The $3.3 million, which was a receivable as of June 30, 1997, was collected in July 1997. Also during the quarter ended June 30, 1997, the Partnership received $109,350 from the sale of options attached to its investment in Horizon Cellular Telephone Company and made a $106,000 follow-on investment in Biocircuits Corporation. As of June 30, 1997, the Partnership held $23.7 million in cash and short-term investments; $22.5 million in short-term securities with maturities of less than one year and $1.2 million in an interest-bearing cash account. Interest earned from such investments totaled $320,000 and $453,000 for the three and six months ended June 30, 1997, 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. The Partnership will not make any new portfolio investments. Therefore, all cash received from the sale of portfolio investments is distributed to Partners as soon as practicable after an adequate reserve for operating expenses and follow-on investments in the remaining portfolio companies. In July 1997, the Partnership made a cash distribution to Partners totaling $21,790,729. Limited Partners received $19,200,000, or $160 per Unit, and the General Partners received $2,590,729. Subsequent to the end of the quarter, in July 1997, the Partnership sold its remaining 152,843 common shares of IDEC Pharmaceuticals for $4.1 million, realizing a gain of $2.8 million. Also in July 1997, the Partnership sold its remaining 23,245 common shares of Elantec, Inc. for $93,385, realizing a gain of $32,948. As a result, in July 1997 the General Partners approved an additional cash distribution totaling $8,211,344 to be paid in October 1997. Limited Partners of record on September 30, 1997 will receive $7,800,000, or $65 per Unit, and the General Partners will receive $411,344. Results of Operations For the three and six months ended June 30, 1997, the Partnership had a net realized loss from operations of $3.8 million and a net realized gain from operations of $9.7 million, respectively. For the three and six months ended June 30, 1996, the Partnership had a net realized gain from operations of $10.4 million and $38.2 million, respectively. Net realized gain or loss from operations is comprised of 1) net realized gain or loss from portfolio investments and 2) net investment income or loss (interest and dividend income less operating expenses). Realized Gains and Losses from Portfolio Investments - For the three and six months ended June 30, 1997, the Partnership had a net realized loss from portfolio investments of $4.0 million and a net realized gain from portfolio investments of $9.6 million, respectively. In March 1997 and in May 1997, the Partnership received 347,826 and 129,407 common shares of IDEC Pharmaceuticals Corporation, respectively, from ML/MS Associates, L.P. and MLMS Cancer Research, Inc. (MLMS), representing the final liquidating distribution from MLMS. The Partnership sold 197,562 shares of IDEC in March 1997 and sold an additional 126,828 shares in June 1997. These transactions resulted in a net realized gain of $2.3 million and $5.8 million for the three and six months ended June 30, 1997, respectively. During the three and six months ended June 30, 1997, the Partnership also recognized a realized gain of $109,350 and $1.8 million from the sale of options in connection with its investment in Horizon Cellular Telephone Company. During the three months ended March 31, 1997, the Partnership sold its remaining 251,694 common shares of Borg-Warner Automotive, Inc. for $9.6 million, realizing a gain of $8.4 million. These gains were more than offset by the partial write-off as of June 30, 1997 of the Partnership's investments in Biocircuits Corporation, Clarus Medical Systems, Inc. and Neocrin Company, Inc., which resulted in an aggregate realized loss of $6.4 million. These write-offs were due to the continued operating and financial difficulties at these companies. See Note 7 of Notes to Financial Statements for a summary of portfolio liquidations for the three and six months ended June 30, 1997. For the three and six months ended June 30, 1996, the Partnership had a net realized gain from portfolio investments of $10.1 million and $37.9 million, respectively. During the three months ended June 30, 1996, the Partnership sold shares of common stock of five of its publicly-traded portfolio companies for $13.6 million, realizing a gain of $10.1 million. During the three months ended March 31, 1996, the Partnership sold shares of common stock of eight of its publicly-traded portfolio companies for $32.4 million, realizing a gain of $27.8 million. Investment Income and Expenses - For the three months ended June 30, 1997, the Partnership had net investment income of $170,000 compared to net investment income of $260,000 for the same period in 1996. The decrease in net investment income for the three months ended June 30, 1997, compared to the same period in 1996, primarily was attributable to a $233,000 decrease in investment income partially offset by a $143,000 decrease in operating expenses. The decline in investment income resulted from an $86,000 decrease in interest from short-term investments, primarily due to a reduced amount of funds invested in such securities during the 1997 period compared to the same period in 1996. Additionally interest from portfolio investments decreased by $81,000 resulting from the reduced amount of interest-bearing debt securities held by the Partnership during the 1997 period compared to the same period in 1996. Dividend income also decreased by $67,000 due to the sale of the Partnership's investment in Borg-Warner Automotive, which was fully liquidated during the first quarter of 1997. The decline in operating expenses primarily resulted from reduced management fees for the 1997 period, as discussed below. For the six months ended June 30, 1997 and 1996, the Partnership had net investment income of $75,000 and $239,000, respectively. The decrease in net investment income for the six months ended June 30, 1997, compared to the same period in 1996 primarily was attributable to a $404,000 decrease in investment income partially offset by a $240,000 decrease in operating expenses. The decline in investment income resulted from a $163,000 decrease in interest from short-term investments, primarily due to a reduced amount of funds invested in such securities during the six months ended June 30, 1997 compared to the same period in 1996. Income from portfolio investments decreased by $145,000 resulting from the reduced amount in interest bearing debt securities held by the Partnership during the six months ended June 30, 1997 compared to the same period in 1996. In addition, dividend income decreased by $96,000, due to the sale of the Partnership's investment in Borg-Warner Automotive as discussed above. The decline in operating expenses primarily resulted from decreased management fees, as discussed below, and also from reduced mailing and printing expenses for the 1997 period. The Management Company is responsible for the management and administrative services necessary for the operation of the Partnership. The Management Company receives a management fee at an annual rate of 2.5% of the gross capital contributions to the Partnership, reduced by selling commissions, organizational and offering expenses paid by the Partnership, return of capital and realized capital losses, with a minimum annual fee of $200,000. Such fee is determined and payable quarterly. The management fee for the three months ended June 30, 1997 and 1996, was $59,000 and $184,000, respectively. The management fee for the six months ended June 30, 1997 and 1996, was $197,000 and $389,000, respectively. The decline in the management fee for the 1997 periods compared to the same periods in 1996 reflects the realized losses incurred on June 30, 1997 and the continued portfolio liquidations and subsequent distributions made to Partners. The management fee will continue to decline in future periods as the Partnership's investment portfolio continues to mature and cash distributions are paid to Partners. The management fee and other operating expenses are paid with funds provided from operations. Funds provided from operations are obtained from interest earned from short-term investments, interest and other income from portfolio investments and proceeds from the sale of portfolio investments. Unrealized Gains and Losses and Changes in Unrealized Appreciation or Depreciation of Investments - For the six months ended June 30, 1997, the Partnership had a $950,000 net unrealized gain from its portfolio investments, primarily resulting from the net upward revaluation of its remaining publicly traded securities. Additionally, during the six month period, unrealized appreciation declined $3.0 million resulting from the net transfer from unrealized gain to realized gain related to the portfolio investments sold and written-off during the period, as discussed above. The $950,000 unrealized gain partially offset by the $3.0 million transfer from unrealized gain to realized gain, resulted in a $2.1 million decrease to the Partnership's net unrealized appreciation of investments for the six month period ended June 30, 1997. For the six months ended June 30, 1996, the Partnership had a $6.9 million net unrealized gain from its portfolio investments, primarily resulting from the net upward revaluation of its remaining publicly traded securities. Additionally, during the six month period, $22.4 million was transferred from unrealized gain to realized gain related to the portfolio investments sold during the period, as discussed above. The $22.4 million transfer from unrealized gain to realized gain, partially offset by the $6.9 million unrealized gain, resulted in a $15.5 million decrease to the Partnership's net unrealized appreciation of investments for the six month period ended June 30, 1996. Net Assets - Changes to net assets resulting from operations are comprised of 1) net realized gain or loss from operations and 2) changes to net unrealized appreciation or depreciation of portfolio investments. For the six months ended June 30, 1997, the Partnership had a $7.6 million net increase in net assets resulting from operations, comprised of the $9.7 million net realized gain from operations offset by the $2.1 million decrease in unrealized appreciation of investments for the six month period. At June 30, 1997, the Partnership's net assets were $27.7 million, down $14.2 million from $41.9 million at December 31, 1996. This decrease was due to the $21.8 million accrued cash distribution, paid to Partners in July 1997, exceeding the $7.6 million increase in net assets from operations for the six month period. For the six months ended June 30, 1996, the Partnership had a $22.7 million net increase in net assets resulting from operations, comprised of the $38.2 million net realized gain from operations offset by the $15.5 million decrease in unrealized appreciation of investments for the six month period. At June 30, 1996, the Partnership's net assets were $58.2 million, down $22.1 million from $80.3 million at December 31, 1995. This decrease was due to the $21.4 million cash distribution, paid to Partners in April 1996, and the $23.4 million accrued cash distribution, paid to Partners in July 1996, exceeding the $22.7 million increase in net assets from operations for the six month period. Gains and losses from investments are allocated to Partners' capital accounts when realized, in accordance with the Partnership Agreement (see Note 3 of Notes to Financial Statements). However, for purposes of calculating the net asset value per unit of limited partnership interest, net unrealized appreciation of investments has been included as if the net appreciation had been realized and allocated to the Limited Partners in accordance with the Partnership Agreement. Pursuant to such calculation, the net asset value per $1,000 Unit at June 30, 1997 and December 31, 1996 was $213 and $323, respectively. PART II - OTHER INFORMATION Item 1. Legal Proceedings. Not applicable. Item 2. Changes in Securities. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of security holders during the period in which this report covers. Item 5. Other Information. Not applicable Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits (3) (a) Amended and Restated Certificate of Limited Partnership of the Partnership, dated as of January 12, 1987. (1) (3) (b) Amended and Restated Certificate of Limited Partnership of the Partnership, dated July 27, 1990. (2) (3) (c) Amended and Restated Certificate of Limited Partnership of the Partnership, dated March 25, 1991. (3) (3) (d) Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of May 4, 1987. (4) (3) (e) Amendment No. 1 dated February 14, 1989 to Amended and Restated Agreement of Limited Partnership of the Partnership. (5) (3) (f) Amendment No. 2 dated July 27, 1990 to Amended and Restated Agreement of Limited Partnership of the Partnership. (2) (3) (g) Amendment No. 3 dated March 25, 1991 to Amended and Restated Agreement of Limited Partnership of the Partnership. (3) (3) (h) Amendment No. 4 dated May 23, 1991 to Amended and Restated Agreement of Limited Partnership of the Partnership. (6) (10) (a) Management Agreement dated as of May 23, 1991 among the Partnership, Management Company and the Managing General Partner. (6) (10) (b) Sub-Management Agreement dated as of May 23, 1991 among the Partnership, Management Company, the Managing General Partner and the Sub-Manager. (8) (27) Financial Data Schedule. (28) Prospectus of the Partnership dated February 10, 1987 filed with the Securities and Exchange Commission pursuant to Rule 424(b) under the Securities Act of 1933, as supplemented by a supplement thereto dated April 21, 1987 filed pursuant to Rule 424(c) under the Securities Act of 1933. (7) (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. (1) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1988 filed with the Securities and Exchange Commission on March 27, 1989. (2) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990 filed with the Securities and Exchange Commission on November 14, 1990. (3) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1990 filed with the Securities and Exchange Commission on March 28, 1991. (4) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 1987 filed with the Securities and Exchange Commission on August 14, 1987. (5) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989 filed with the Securities and Exchange Commission on May 15, 1989. (6) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991 filed with the Securities and Exchange Commission on August 14, 1991. (7) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended March 31, 1987 filed with the Securities and Exchange Commission on May 15, 1987. (8) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1992 filed with the Securities and Exchange Commission on March 26, 1993. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ML VENTURE PARTNERS II, L.P. By: /s/ Kevin K. Albert Kevin K. Albert General Partner By: MLVPII Co., L.P. its Managing General Partner By: Merrill Lynch Venture Capital Inc. its General Partner By: /s/ Kevin K. Albert Kevin K. Albert President (Principal Executive Officer) By: /s/ Diane T. Herte Diane T. Herte Vice President and Treasurer (Principal Financial and Accounting Officer) Date: August 14, 1997 EX-27 2 EXHIBIT 27
6 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ML VENTURE PARTNERS II, L.P.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1997 JAN-1-1997 JUN-30-1997 14,943,101 22,724,790 3,335,258 23,661,218 0 49,721,266 0 0 22,020,156 22,020,156 0 0 120,000 120,000 0 0 0 0 7,781,689 27,701,110 37,754 470,161 0 432,461 75,454 9,667,502 (2,098,699) 7,568,803 0 0 0 21,790,729 0 0 0 (14,221,926) 0 0 0 0 0 0 0 34,812,073 323 1 49 0 (160) 0 213 0 0 0
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