-----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, TSCeWpOjKuTDeuyRbBx2Anix/emOpZF6X5Q2sb2qhA29Hn2wlVgo9oN81h5B543M fDn5AVrywr34Fwi3uSZxNg== 0000789538-98-000005.txt : 19981116 0000789538-98-000005.hdr.sgml : 19981116 ACCESSION NUMBER: 0000789538-98-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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: SEC FILE NUMBER: 814-00043 FILM NUMBER: 98748798 BUSINESS ADDRESS: STREET 1: WORLD FINANCIAL CTR N TOWER STREET 2: 25TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10281-1330 BUSINESS PHONE: 2124491000 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 1998 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 September 30, 1998 (Unaudited) and December 31, 1997 Schedule of Portfolio Investments as of September 30, 1998 (Unaudited) Statements of Operations for the Three and Nine Months Ended September 30, 1998 and 1997 (Unaudited) Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997 (Unaudited) Statement of Changes in Partners' Capital for the Nine Months Ended September 30, 1998 (Unaudited) Notes to Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Item 2. Changes in Securities. Item 3. Defaults upon Senior Securities. Item 4. Submission of Matters to a Vote of Security Holders. Item 5. Other Information. Item 6. Exhibits and Reports on Form 8-K. PART I - FINANCIAL INFORMATION Item 1. Financial Statements. ML VENTURE PARTNERS II, L.P. BALANCE SHEETS September 30, 1998 December 31, (Unaudited) 1997 ASSETS Portfolio investments, at fair value (cost $10,723,768 as of September 30, 1998 and $13,013,680 as of December 31, 1997) $ 12,726,216 $ 17,021,243 Short-term investments, at amortized cost 4,457,609 2,979,552 Cash and cash equivalents 435,388 1,918,335 ----------------- ------------------ TOTAL ASSETS $ 17,619,213 $ 21,919,130 ================= ================== LIABILITIES AND PARTNERS' CAPITAL Liabilities: Accounts payable and accrued expenses $ 137,436 $ 144,890 Due to Management Company 77,447 41,349 Due to Independent General Partners 19,500 25,698 ----------------- ------------------ Total liabilities 234,383 211,937 ----------------- ------------------ Partners' Capital: Managing General Partner 966,966 1,416,952 Individual General Partners 481 543 Limited Partners (120,000 Units) 14,414,935 16,282,135 Unallocated net unrealized appreciation of investments 2,002,448 4,007,563 ----------------- ------------------ Total partners' capital 17,384,830 21,707,193 ----------------- ------------------ TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 17,619,213 $ 21,919,130 ================= ==================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS (Unaudited) As of September 30, 1998 Initial Investment Company / Position Date Cost Fair Value Borg-Warner Security Corporation* (A) 500,000 shares of Common Stock Sept. 1988 $ 2,500,000 $ 5,250,000 - ------------------------------------------------------------------------------------------------------------------------------- Brightware, Inc. 171,650 shares of Common Stock May 1995 43,565 257,475 Warrants to purchase 38,737 shares of Common Stock at $.40 per share, expiring on 4/19/99 1,138 42,611 - ------------------------------------------------------------------------------------------------------------------------------- Clarus Medical Systems, Inc.* 179,028 shares of Preferred Stock Jan. 1991 1,000,548 895,152 Warrants to purchase 14,043 shares of Common Stock at $.05 per share, expiring between 3/7/00 and 7/3/00 0 0 Warrants to purchase 2,826 shares of Preferred Stock at $5.00 per share, expiring on 3/7/00 0 0 - ------------------------------------------------------------------------------------------------------------------------------- CoCensys, Inc. (A) 152,507 shares of Common Stock Feb. 1989 192,504 201,357 - ------------------------------------------------------------------------------------------------------------------------------- Corporate Express, Inc. (A) 60,000 shares of Common Stock May 1992 12,000 573,000 - ------------------------------------------------------------------------------------------------------------------------------- Depotech Corp., Inc.(A)(B) 93,745 shares of Common Stock Aug. 1990 57,056 64,743 - ------------------------------------------------------------------------------------------------------------------------------- Diatide, Inc.* (A) 809,704 shares of Common Stock Dec. 1991 2,986,023 3,618,365 - ------------------------------------------------------------------------------------------------------------------------------- Horizon Cellular Telephone Company, L.P.: SPTHOR Corporation 10% Promissory Note May 1992 5,073 5,073 5.67% Bridge Loan 9,271 9,271 34.5 shares of Common Stock 20,518 20,518 - ------------------------------------------------------------------------------------------------------------------------------- I.D.E. Corporation 113,322 shares of Common Stock Mar. 1988 227,000 0 - ------------------------------------------------------------------------------------------------------------------------------- Neocrin Company 48,429 shares of Preferred Stock June 1991 363,378 0 - ------------------------------------------------------------------------------------------------------------------------------- Photon Dynamics, Inc.* (A) 425,236 shares of Common Stock Sept. 1988 2,452,226 978,041 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 241,639 228,125 Options to purchase 27,969 shares of Common Stock at $1.42 per share, expiring on 10/31/01 0 62,371 - ------------------------------------------------------------------------------------------------------------------------------- Sanderling Biomedical, L.P.* (B) 80% Limited Partnership interest May 1988 611,829 520,114 - ------------------------------------------------------------------------------------------------------------------------------- Total Portfolio Investments $ 10,723,768 $ 12,726,216 ---------------------------------
ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS (Unaudited), continued As of September 30, 1998 Supplemental Information: Liquidated Portfolio Investments(C) Cost Realized Gain Return Totals from Liquidated Portfolio Investments $ 105,809,228 $ 111,281,042 $ 217,090,270 ========================================================= Combined Net Combined Unrealized and Fair Value Cost Realized Gain and Return Totals from Active & Liquidated Portfolio Investments $ 116,532,996 $ 113,283,490 $ 229,816,486 =========================================================
(A) Public company (B) In August 1998, the Partnership received a liquidating in-kind distribution from Sanderling Biomedical, L.P. of 93,745 common shares of Depotech Corp., Inc. Additionally, in September 1998, the Partnership wrote-off $666,740 of the remaining cost of its investment in Sanderling to reflect the Partnership's pro-rata share of the cost of Sanderling's remaining assets. (C) Amounts provided for "Supplemental Information: Liquidated Portfolio Investments" are cumulative from inception through September 30, 1998. * 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 Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ------------ ------------- ------------- -------------- INVESTMENT INCOME AND EXPENSES Income: Interest from short-term investments $ 70,845 $ 118,572 $ 212,918 $ 566,469 Interest and other income from portfolio investments - 5,333 8,496 27,597 Dividend income from portfolio investments - - - 37,754 ------------- -------------- ------------- -------------- Total investment income 70,845 123,905 221,414 631,820 ------------- -------------- ------------- -------------- Expenses: Management fee 50,000 43,853 150,000 241,337 Professional fees 25,077 23,931 79,791 105,367 Mailing and printing 34,781 37,277 75,304 139,041 Independent General Partners' fees 19,500 20,250 63,000 67,050 Custodial fees 565 (3,727) 1,517 (227) Miscellaneous 382 5,714 4,931 7,191 ------------- -------------- ------------- -------------- Total investment expenses 130,305 127,298 374,543 559,759 ------------- -------------- ------------- -------------- NET INVESTMENT (LOSS) INCOME (59,460) (3,393) (153,129) 72,061 Net realized (loss) gain from portfolio investments (666,740) 5,518,904 (2,164,119) 15,110,952 ------------- -------------- ------------- -------------- NET REALIZED (LOSS) GAIN FROM OPERATIONS (726,200) 5,515,511 (2,317,248) 15,183,013 Change in unrealized appreciation of investments (3,951,246) 1,620,875 (2,005,115) (477,824) ------------- -------------- ------------- -------------- NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (4,677,446) $ 7,136,386 $ (4,322,363) $ 14,705,189 =============== ============== ============= ================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENTS OF CASH FLOWS (Unaudited) For the Nine Months Ended September 30, 1998 1997 ---------------- ---------------- CASH FLOWS (USED FOR) PROVIDED FROM OPERATING ACTIVITIES Net investment (loss) income $ (153,129) $ 72,061 Adjustments to reconcile net investment (loss) income to cash (used for) provided from operating activities: Decrease in accrued interest receivable - 44,693 (Increase) decrease in accrued interest on short-term investments (22,171) 44,137 Increase (decrease) in liabilities, net 22,446 (144,829) ---------------- ---------------- Cash (used for) provided from operating activities (152,854) 16,062 ---------------- ---------------- CASH FLOWS (USED FOR) PROVIDED FROM INVESTING ACTIVITIES Net purchase of short-term investments (1,455,886) (3,539,279) Cost of portfolio investments purchased - (460,176) Net proceeds from the sale of portfolio investments 125,793 24,564,422 Repayment of investments in notes - 2,381,659 ---------------- ---------------- Cash (used for) provided from investing activities (1,330,093) 22,946,626 ---------------- ---------------- CASH FLOWS USED FOR FINANCING ACTIVITIES Cash distributions paid to Partners - (21,790,729) ---------------- ---------------- (Decrease) increase in cash and cash equivalents (1,482,947) 1,171,959 Cash and cash equivalents at beginning of period 1,918,335 346,129 ---------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 435,388 $ 1,518,088 ================ ================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENT OF CHANGES IN PARTNERS' CAPITAL (Unaudited) For the Nine Months Ended September 30, 1998 Unallocated Managing Individual Net Unrealized General General Limited Appreciation Partner Partners Partners of Investments Total Balance at beginning of period $ 1,416,952 $ 543 $ 16,282,135 $ 4,007,563 $ 21,707,193 Net investment loss 151 (5) (153,275) - (153,129) Net realized loss from portfolio investments (450,137) (57) (1,713,925) - (2,164,119) Change in unrealized appreciation of investments - - - (2,005,115) (2,005,115) ------------- -------- -------------- -------------- ---------------- Balance at end of period $ 966,966 $ 481 $ 14,414,935(A) $ 2,002,448 $ 17,384,830 ============= ======== ============== ============== ================
(A) The net asset value per unit of limited partnership interest, including an assumed allocation of net unrealized appreciation of investments, was $133 as of September 30, 1998. Cumulative cash distributions paid to Limited Partners from inception to September 30, 1998 totaled $1,525 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 Managing General Partner is working toward the ultimate termination of the Partnership, with an emphasis on liquidating the remaining assets as soon as practical with the goal of maximizing returns to Partners. In July 1997, the Individual General Partners voted to extend the term of the Partnership for an additional two-year period. The Partnership is now scheduled to terminate no later than December 31, 1999. In addition, the Individual General Partners have the right to extend the term of the Partnership for an additional two-year period if they determine that such extension is in the best interest of the Partnership. 2. Significant Accounting Policies Valuation of Investments - Short-term investments are carried at amortized cost which approximates market. Portfolio investments are carried at fair value as determined quarterly by the Sub-Manager under the supervision of the Individual General Partners and the Managing General Partner. The fair value of publicly-held portfolio securities is adjusted to the closing public market price for the last trading day of the accounting period discounted by a factor of 0% to 50% for sales restrictions. Factors considered in the determination of an appropriate discount include, underwriter lock-up or Rule 144 trading restrictions, insider status where the Partnership either has a representative serving on the company's Board of Directors or is greater than a 10% shareholder, and other liquidity factors such as the size of the Partnership's position in a given company compared to the trading history of the public security. Privately-held portfolio securities are carried at cost until significant developments affecting the portfolio company provide a basis for change in valuation. The fair value of private securities is adjusted 1) to reflect meaningful third-party transactions in the private market or 2) to reflect significant progress or slippage in the development of the company's business such that cost is no longer reflective of fair value. As a venture capital investment fund, the Partnership's portfolio investments involve a high degree of business and financial risk that can result in substantial losses. The Sub-Manager considers such risks in determining the fair value of the Partnership's portfolio investments. 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 approximately $2 million as of September 30, 1998, which was recorded for financial statement purposes, was not recognized for tax purposes. Additionally, from inception to September 30, 1998, timing differences of approximately $6.8 million have been deducted on the Partnership's financial statements and syndication costs relating to the selling of Units totaling $11.3 million were charged to partners' capital on the financial statements. These amounts have not been deducted or charged against partners' capital for tax purposes. Statements of Cash Flows - The Partnership considers its interest-bearing cash account to be cash equivalents. Reclassifications - Certain reclassifications have been made to the prior periods' financial statements to conform with the current period's presentation. 3. Allocation of Partnership Profits and Losses The Partnership Agreement provides that the Managing General Partner will be allocated, on a cumulative basis over the life of the Partnership, 20% of the Partnership's aggregate investment income and net realized gains and losses from venture capital investments, provided that such amount is positive. All other gains and losses of the Partnership are allocated among all the Partners (including the Managing General Partner) in proportion to their respective capital contributions to the Partnership. From its inception to September 30, 1998, the Partnership had a $115.5 million net gain from its venture capital investments, which includes interest and other income from portfolio investments totaling $4.3 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, $1,500 for each meeting of the General Partners attended or for each other meeting, conference or engagement in connection with Partnership activities at which attendance by an Independent General Partner is required and $1,500 for each audit committee meeting attended ($500 if an audit committee meeting is held on the same day as a meeting of the Independent General Partners). 6. Interim Financial Statements In the opinion of MLVPII Co., L.P., the managing general partner of the Partnership, the unaudited financial statements as of September 30, 1998, and for the nine month period then ended, reflect all adjustments necessary for the fair presentation of the results of the interim period. 7. Classification of Portfolio Investments As of September 30, 1998, the Partnership's investments in portfolio companies were categorized as follows: % of Type of Investments Cost Fair Value Net Assets* - ------------------- -------------- --------------- ----------- Common Stock and Warrants $ 8,733,669 $ 11,296,606 64.98% Limited Partnerships 611,829 520,114 2.99% Preferred Stock 1,363,926 895,152 5.15% Debt Securities 14,344 14,344 0.08% -------------- --------------- ------- Total $ 10,723,768 $ 12,726,216 73.20% ============== =============== ====== Country/Geographic Region Midwestern U.S. $ 3,512,548 $ 6,718,152 38.64% Western U.S. 3,963,335 2,354,837 13.55% Eastern U.S. 3,247,885 3,653,227 21.01% -------------- --------------- ------ Total $ 10,723,768 $ 12,726,216 73.20% ============== =============== ====== Industry Business Services $ 2,512,000 $ 5,823,000 33.49% Biotechnology 3,847,412 4,404,579 25.33% Semiconductors/Electronics 2,452,226 978,041 5.63% Medical Devices and Services 1,605,565 1,185,648 6.82% Telecommunications 34,862 34,862 0.20% Computer Hardware/Software 271,703 300,086 1.73% -------------- --------------- ------- Total $ 10,723,768 $ 12,726,216 73.20% ============== =============== ======
* Percentage of net assets is based on fair value. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS (Unaudited), continued 8. Portfolio Investments Portfolio investments liquidated during the three and nine months ended September 30, 1998 and 1997, are shown below: Realized Company Shares Sold Cost Gain (Loss) Return Six Months Ended June 30, 1998: Biocircuits Corporation - partial write-off n/a 1,488,884 (1,488,884) 0 HCTC Investment, L.P. - sale of options / partial write-off of note n/a 134,288 (8,495) 125,793 -------------- -------------- --------------- Sub-total 1,623,172 (1,497,379) 125,793 -------------- -------------- --------------- Three Months Ended September 30, 1998: Sanderling Biomedical, L.P. - partial write-off n/a 666,740 (666,740) 0 -------------- -------------- --------------- Sub-total 666,740 (666,740) 0 -------------- -------------- --------------- Totals for the nine months ended September 30, 1998 $ 2,289,912 $ (2,164,119) $ 125,793 ============== ============== =============== Six Months Ended June 30, 1997: Borg-Warner Automotive, Inc. 251,694 $ 1,258,470 $ 8,381,410 $ 9,639,880 IDEC Pharmaceuticals Corporation 324,390 2,718,916 5,807,909 8,526,825 Raytel Medical Corporation 37,500 144,983 0 144,983 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 HCTC Investment, L.P. - sale of options n/a 0 1,796,646 1,796,646 HCTC Investment, L.P. - note repayment n/a 1,926,168 0 1,926,168 SPTHOR Corporation - note repayment n/a 455,491 0 455,491 -------------- -------------- --------------- Sub-total 12,897,945 9,592,048 22,489,993 -------------- -------------- --------------- Three Months Ended September 30, 1997: IDEC Pharmaceuticals Corporation 152,843 1,324,729 2,786,550 4,111,279 HCTC Investment, L.P. - sale of options n/a 0 188,423 188,423 Elantec, Inc. 23,245 60,437 32,945 93,382 Graham Fields International (Sanderling) 4,645 113,964 (50,960) 63,004 Corporate Express, Inc. 120,755 24,150 2,561,946 2,586,096 -------------- -------------- --------------- Sub-total 1,523,280 5,518,904 7,042,184 -------------- -------------- --------------- Totals for the nine months ended September 30, 1997 $ 14,421,225 $ 15,110,952 $ 29,532,177 ============== ============== ===============
ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS (Unaudited), continued 9. Subsequent Event - Cash Distribution In November 1998, the General Partners approved a cash distribution to Partners totaling $4,514,772. The distribution will be paid in January 1999. Limited Partners of record on December 31, 1998 will receive $4,200,000, or $35 per Unit. Additionally, the Individual General Partners will receive $140 and the Managing General Partner will receive $314,632. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Liquidity and Capital Resources As of September 30, 1998, the Partnership held $4,457,609 in short-term securities with maturities of less than one year and $435,388 in an interest-bearing cash account. Interest earned from such investments totaled $70,845 and $212,918 for the three and nine months ended September 30, 1998, 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 future operating expenses and follow-on investments will be obtained from the Partnership's existing cash reserves, interest and other investment income and proceeds from the sale of portfolio investments. The Managing General Partner is working toward the ultimate termination of the Partnership, with an emphasis on liquidating the remaining assets as soon as practical with the goal of maximizing returns to Partners. Generally, net proceeds received from the sale of portfolio investments are distributed to Partners as soon as practicable, after an adequate reserve for operating expenses and follow-on investments in the remaining portfolio companies. In November 1998, the General Partners approved a cash distribution to Partners totaling $4,514,772. The distribution will be paid in January 1999. Limited Partners of record on December 31, 1998 will receive $4,200,000, or $35 per Unit. Additionally, the Individual General Partners will receive $140 and the Managing General Partner will receive $314,632. Results of Operations For the three and nine months ended September 30, 1998, the Partnership had a net realized loss from operations of $726,200 and $2,317,248, respectively. For the three and nine months ended September 30, 1997, the Partnership had a net realized gain from operations of $5,515,511 and 15,183,013, 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 nine months ended September 30, 1998, the Partnership had a net realized loss from its portfolio investments of $666,740 and $2,164,119, respectively. During the three months ended September 30, 1998, the Partnership wrote-off $666,740 of the remaining cost of its investment in Sanderling Biomedical, L.P. to reflect the Partnership's pro-rata share of the cost of Sanderling's remaining assets. During the nine months ended September 30, 1998, Biocircuits Corporation ceased operations and began to liquidate its remaining assets. As a result, the Partnership wrote-off its remaining investment in Biocircuits, realizing a loss of $1,488,884. Also during the nine month period, the Partnership received $125,793 from Horizon Cellular Telephone Company, L.P. relating to the previous sale of certain options in connection with its investment in Horizon and wrote-off a portion of the remaining notes due from the company, resulting in a realized loss of $8,495. Portfolio Investments liquidated for the respective periods are shown in detail in Note 8 of the Notes to Financial Statements. For the three and nine months ended September 30, 1997, the Partnership had a net realized gain from portfolio investments of $5,518,904 and $15,110,952, respectively, resulting from the liquidation of several portfolio investments. During the three months ended September 30, 1997, the Partnership liquidated investments with a cost of $1,523,280 for a net return of $7,042,184. During the nine months ended September 30, 1997, the Partnership liquidated investments with a cost of $14,421,225 for a net return of $29,532,177. Portfolio Investments liquidated for the respective periods are shown in detail in Note 8 of the Notes to Financial Statements. Investment Income and Expenses - For the three months ended September 30, 1998 and 1997, the Partnership had a net investment loss of $59,460 and $3,393, respectively. The increase in net investment loss for the 1998 period compared to the same period in 1997 resulted from a $53,060 decrease in investment income and a $3,007 increase in operating expenses. The decline in investment income was primarily due to a decrease in interest from short-term investments resulted from a decrease in funds available for investment in such securities during the third quarter of 1998 compared to the same period in 1997. The Partnership completed cash distributions to Partners of $21.8 million in July 1997 and $8.2 million in October 1997. Such amounts were invested in short-term securities prior to distribution. For the nine months ended September 30, 1998 and 1997, the Partnership had a net investment loss of $153,129 and net investment income of $72,061, respectively. The reduced net investment income resulted from a $410,406 decline in investment income, partially offset by a $185,216 decrease in operating expenses. The decline in investment income was due to a $372,652 decrease in interest income and a $37,754 decrease in dividend income from portfolio investments. The decline in interest income primarily was due to decrease in interest from short-term investments resulting from a decrease in funds available for investment in such securities during the nine months ended September 30, 1998 compared to the same period in 1997, as discussed above. The decrease in dividend income from portfolio investments resulted the sale of the Partnership's investment in Borg-Warner Automotive, Inc., which was fully liquidated during the first quarter of 1997. The decline in operating expenses primarily resulted from reduced management fees, as discussed below, and a reduction in professional fees and mailing and printing expenses incurred during the 1998 period. Such reduced operating expenses reflect the decreased level of activity as the Partnership proceeds to liquidate its remaining portfolio investments. 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 September 30, 1998 and 1997 was $50,000 and $43,853, respectively. The management fee for the nine months ended September 30, 1998 and 1997 was $150,000 and $241,337, respectively. The decline in the management fee for the 1998 periods compared to the same periods in 1997 reflects the continued liquidation of the Partnership's remaining portfolio investments and subsequent distribution to Partners. The management fee will remain at the annual minimum fee of $200,000 for 1998 and will remain the same in future periods through the liquidation of the Partnership. The management fee and other operating expenses are paid with funds provided from operations and from existing cash reserves. Funds provided from operations for the period were obtained from interest earned from short-term investments and proceeds from the sale of certain portfolio investments. Unrealized Gains and Losses and Changes in Unrealized Appreciation or Depreciation of Investments - For the nine months ended September 30, 1998, the Partnership had a $3,895,855 unfavorable change in its unrealized appreciation of portfolio investments, primarily resulting from the net downward revaluation of its remaining publicly traded securities. Additionally, during the nine month period, unrealized appreciation increased by $1,890,740 resulting from the transfer from unrealized loss to realized loss relating to the write-off of the Partnership's remaining investments in Biocircuits Corporation and Sanderling Biomedical, L.P., as discussed above. As a result, the Partnership's net unrealized appreciation of investments declined by $2,005,115 for the nine month period ended September 30, 1998. For the nine months ended September 30, 1997, the Partnership had a $6,297,835 favorable change in its unrealized appreciation of portfolio investments, primarily resulting from the net upward revaluation of its remaining publicly traded securities. Additionally, during the nine month period, unrealized appreciation declined $6,775,659 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. As a result, the Partnership's net unrealized appreciation of investments declined by $477,824 for the nine month period ended September 30, 1997. 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. As of September 30, 1998, the Partnership's net assets were $17,384,830, down $4,322,363 from $21,707,193 as of December 31, 1997. This decrease was comprised of the $2,005,115 decrease in unrealized appreciation of investments and the $2,317,248 net realized loss from operations for the nine month period ended September 30, 1998. As of September 30, 1997, the Partnership's net assets were $26,626,152, down $15,296,884 from $41,923,036 as of December 31, 1996. This decrease was due to the $30,002,073 of cash distributions paid, or accrued, to Partners during the nine month period ended September 30, 1997 exceeding the $14,705,189 increase in net assets from operations. The increase in net assets from operations was comprised of the $15,183,013 net realized gain from operations partially offset by the $477,824 decrease in unrealized appreciation of investments for the nine month period ended September 30, 1997. Gains and losses from investments are allocated to Partners' capital accounts when realized, in accordance with the Partnership Agreement (see Note 3 of Notes to Financial Statements). However, for purposes of calculating the net asset value per unit of limited partnership interest, net unrealized appreciation of investments has been included as if the net appreciation had been realized and allocated to the Limited Partners in accordance with the Partnership Agreement. Pursuant to such calculation, the net asset value per $1,000 Unit as of September 30, 1998 and December 31, 1997 was $133 and $162, respectively. PART II - OTHER INFORMATION Item 1. Legal Proceedings. The Partnership is not a party to any legal proceedings. 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: November 13, 1998 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 SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1998 JAN-1-1998 SEP-30-1998 10,723,768 12,726,216 0 0 4,892,997 17,619,213 0 0 234,383 234,383 0 0 120,000 120,000 0 0 0 0 2,002,448 17,384,830 0 221,414 0 374,543 (153,129) (2,164,119) (2,005,115) (4,322,363) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 162.13 (1.27) (27.52) 0 0 0 133.34 0 0 0
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