-----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, LNW/OmGhCwrtxW3Ttbr8Wq1INxbB6xtPhNgsS6aXCSaYwtdFv/wOIiO5WmmrI2SY xeDkLCHxcRv6IdoTeLlpHg== 0000789538-99-000001.txt : 19990413 0000789538-99-000001.hdr.sgml : 19990413 ACCESSION NUMBER: 0000789538-99-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990412 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ML VENTURE PARTNERS II LP CENTRAL INDEX KEY: 0000789538 STANDARD INDUSTRIAL CLASSIFICATION: 0000 IRS NUMBER: 133324232 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 814-00043 FILM NUMBER: 99584060 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 10K 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, 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 NewYork,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] As of March 16, 1999, 119,636 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. 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 The Partnership has fully invested the net proceeds received from the offering of Units and will not make investments in any new portfolio companies. However, the Partnership may make additional follow-on investments in its remaining portfolio companies. As of December 31, 1998, the Partnership's investment portfolio consisted of 12 active investments with a cost of $10,197,685 and a fair value of $14,970,273. During the year ended December 31, 1998, the Partnership liquidated certain portfolio investments, realizing a net return of $649,639. Following is a detail of portfolio activity during 1998: o In June 1998, in a non-cash transaction, the Partnership exchanged its warrant to purchase 59,166 common shares of Brightware, Inc. at $.80 per share for 27,611 shares of Brightware common stock. o On May 18, 1998, Biocircuits Corporation announced that it ceased all ordinary business and began to liquidate its remaining assets. As a result, the Partnership wrote-off the remaining $1,488,884 cost of its investment in Biocircuits as of June 30, 1998. o During 1998, the Partnership received three liquidating in-kind distributions from Sanderling Biomedical, L.P.: 93,745 common shares of Depotech Corp., Inc., 72,800 common shares and 62,400 preferred shares of ReGen Biologics, Inc., and 21,632 common shares and 134,674 preferred shares of Stereotaxis, Inc. The Depotech shares were subsequently sold by the Partnership in November 1998 for $136,878, resulting in a realized gain of $79,822. Additionally, the Partnership received a final liquidating cash distribution of $325,567 from Sanderling in February 1999. This distribution was accrued as of December 31, 1998. The Partnership also recorded a realized loss of $775,338 during 1998 to reflect the write-off of the unreturned cost of its Sanderling investment. o During 1998, the Partnership received $187,194, plus interest of $13,069, from the sale of options in connection with its investment in HCTC/SPTHOR. Because it is anticipated that no further funds will be received from this investment, the Partnership wrote-off it's remaining cost of $169,150 in HCTC during 1998. As of December 31, 1998, the Partnership had invested a total of $116,532,996 in its portfolio of venture capital investments. From its inception through December 31, 1998, the Partnership had fully or partially liquidated or wrote-off investments with an aggregate cost basis of $106,335,311. These liquidated investments returned a total of $217,614,116 to the Partnership, resulting in a realized gain of $111,278,805. Additionally, the Partnership earned interest and dividend income from its venture capital investments totaling $4,257,765 from inception to December 31, 1998. Termination The Managing General Partner is working toward the termination of the Partnership 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. 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 was frequently a co-investor with other professional venture capital investors and these relationships generally had expanded the Partnership's access to investment opportunities. As discussed above, the Partnership will not make any new portfolio investments. 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 is not a party to any material pending legal proceedings. 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. An established public market for Registrant's Units does not now exist, and it is not anticipated that such a market will develop in the future. Accordingly, accurate information as to the market value of a Unit at any given date is not available. The approximate number of holders of Units as of March 16, 1999 was 12,696. The Managing General Partner and the Individual General Partners of the Partnership also hold interests in the Partnership. Merrill Lynch has implemented guidelines pursuant to which it reports estimated values of limited partnership interests originally sold by Merrill Lynch (such as Registrant's Units) two times per year. Such estimated values will be provided to Merrill Lynch by independent valuation services 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 statements, and on (ii) the prior March 31st for reporting on June month-end and subsequent client account statements through the November month-end client account statements of the same year. The Managing General Partner's estimate of net asset value of the Partnership as of December 31, 1998 is $117 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 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 the prior August 15th as stated above. The estimated value provided by the independent valuation 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 amount upon the liquidation of Registrant. Cash Distributions Cash distributions paid or accrued during the periods covered by this report and cumulative cash distributions to Partners from inception of the Partnership through December 31, 1998 are listed below: Managing Individual Per General General Limited $1,000 Distribution Date Partner Partners Partners Unit - - ------------------------------------------------ ------------------ -------- --------------- ------------- Inception to December 31, 1995 $ 8,632,165 $ 3,160 $ 94,800,000 $ 790 January 12, 1996 2,336,106 400 12,000,000 100 April 26, 1996 3,377,898 600 18,000,000 150 July 29, 1996 4,238,951 640 19,200,000 160 October 11, 1996 2,547,571 400 12,000,000 100 July 11, 1997 2,590,089 640 19,200,000 160 October 16, 1997 411,084 260 7,800,000 65 January 26, 1999 (accrued) 314,632 140 4,200,000 35 --------------- --------- ------------------ ---------- Cumulative totals as of December 31, 1998 $ 24,448,496 $ 6,240 $ 187,200,000 $ 1,560 =============== ========= ================== ==========
Item 6. Selected Financial Data. ($ In Thousands, Except For Per Unit Information) Years Ended December 31, 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- Net Realized (Loss) Gain on Investments $ (2,166) $ 15,606 $ 46,879 $ 41,368 $ 18,593 Net Change in Unrealized Appreciation of Investments 765 (5,873) (25,245) 12,661 (29,444) Net (Decrease) Increase in Net Assets Resulting from Operations (1,554) 9,786 20,947 54,512 (11,668) Cash Distributions to Partners 4,515 30,002 59,366 57,572 17,600 Cumulative Cash Distributions to Partners 211,655 207,140 177,138 117,772 60,200 Total Assets 20,359 21,919 42,268 95,045 83,796 Net Unrealized Appreciation of Investments 4,773 4,008 9,880 35,125 22,464 Cost of Portfolio Investments purchased - 474 207 2,741 2,428 Cumulative Cost of Portfolio Investments 116,533 116,533 116,059 115,851 113,110 PER UNIT OF LIMITED PARTNERSHIP INTEREST: Net Realized (Loss) Gain on Investments $ (14) $ 103 $ 309 $ 273 $ 135 Net (Decrease) Increase in Net Assets Resulting from Operations (10) 64 137 358 (79) Cash Distributions 35 225 410 400 135 Cumulative Cash Distributions 1,560 1,525 1,300 890 490 Net Unrealized Appreciation of Investments 32 26 65 232 148 Net Asset Value, including Net Unrealized Appreciation of Investments 117 162 323 596 638
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Liquidity and Capital Resources As of December 31, 1998, the Partnership held $4,488,454 in short-term investments with maturities of less than one year and $423,675 in an interest-bearing cash account. For the years ended December 31, 1998, 1997 and 1996, the Partnership earned interest from such investments totaling $280,896, $638,556 and $979,803, 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 the Partnership's existing cash reserves, from interest and other investment income and from proceeds received from the sale of portfolio investments. The Managing General Partner is working toward the termination of the Partnership 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. The Partnership will not make any new portfolio investments. 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. Subsequent to the end of the year, on January 26, 1999 the Partnership made a cash distribution to partners totaling $4,514,772, including $4,200,000, or $35 per Unit, to limited partners of record on December 31, 1998. The Managing General Partner received $314,632 and the Individual General Partners received $140. Cumulative cash distributions to partners as of December 31, 1998, including the accrued distribution paid in January 1999, total $211,654,736, including $187,200,000 to the limited partners, or $1,560 per $1,000 Unit, $24,448,496 to the Managing General Partner and $6,240 to the Individual General Partners. Results of Operations For the year ended December 31, 1998, the Partnership had a net realized loss from operations of $2,319,244. For the years ended December 31, 1997 and 1996, the Partnership had a net realized gain from operations of $15,659,055 and $46,191,360, 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, dividend and other income less operating expenses). Realized Gains and Losses from Portfolio Investments - For the year ended December 31, 1998, the Partnership had a $2,166,356 net realized loss from its portfolio investments. During 1998, Sanderling Biomedical, L.P. completed the liquidation of its remaining portfolio investments, resulting in the termination of Sanderling in December 1998. The Partnership, which had an 80% limited partnership interest in Sanderling, received three in-kind liquidating distributions and a $325,567 cash distribution from Sanderling during 1998. The in-kind distributions included 93,745 shares of Depotech Corp. Inc., a public company. The Partnership sold its shares of Depotech in November 1998 for $136,878, resulting in a realized gain of $79,822. The Partnership also realized a loss of $775,338 during 1998 resulting from the write-off of the unreturned cost of its Sanderling investment. Also during 1998, the Partnership received $187,194 plus interest of $13,069 from Horizon Cellular Telephone Company, L.P., representing the final payments relating to the sale of the Partnership's investment in Horizon. These final payments and the corresponding write-off of the unreturned cost of the Partnership's investment in Horizon resulted in a net realized loss of $18,044 for 1998. Finally, during 1998, the Partnership realized a loss of $1,488,884 from the write-off of its remaining investment in Biocircuits Corporation, which ceased operations during the year. See Note 6 of Notes to Financial Statements for a summary of liquidations by investment completed during 1998. For the year ended December 31, 1997, the Partnership had a $15,605,512 net realized gain from its portfolio investments. During 1997, the Partnership liquidated portfolio investments, including positions in several of its publicly-traded securities, for $30,571,957, realizing a gain of $22,400,099. This gain was offset by a $6,794,587 realized loss, resulting from the partial write-off of the Partnership's investments in Biocircuits Corporation, Clarus Medical Systems, Inc., Neocrin Company, Inc. and Horizon Cellular Telephone Company, L.P. See Note 6 of Notes to Financial Statements for a summary of liquidations by investment completed during 1997. For the year ended December 31, 1996, the Partnership had a $46,879,092 net realized gain from its portfolio investments. During 1996, the Partnership sold positions in several of its publicly-traded securities for $56,853,362, realizing a gain of $47,763,001. This gain was offset by an $883,909 realized loss, resulting from the write-off of 80% of the Partnership's investment in I.D.E. Corporation. Investment Income and Expenses - For the year ended December 31, 1998, the Partnership had a net investment loss of $152,888. For the year ended December 31, 1997, the Partnership had net investment income of $53,543 and for the year ended December 31, 1996, the Partnership had a net investment loss of $687,732. The reduced net investment income for 1998 compared to 1997 resulted from a decrease in investment income of $409,615 partially offset by a decrease of $203,184 in operating expenses. The decline in investment income was due to a $357,660 decrease in interest income from short-term investments and a $51,955 decrease in interest, dividend and other income from portfolio investments for 1998 compared to 1997. The decline in interest income from short-term investments primarily resulted from a decrease in funds available for investment in such securities during 1998 compared to 1997. The decrease in interest, dividend and other income from portfolio investments primarily resulted from a $37,754 decrease in dividend income relating to 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 increase in net investment income for 1997 compared to 1996 was the result of a $1,560,580 reduction in operating expenses which was partially offset by a $819,305 decrease in investment income for 1997. The decrease in operating expenses during 1997 primarily was attributable to the $1.0 million litigation settlement expensed in 1996 relating to the Partnership's investment in In-Store Advertising, Inc. The additional $560,580 decrease in operating expenses includes a decrease in the management fee, as discussed below, and a reduction to professional fees and mailing and printing expenses incurred during 1997. Such reduced operating expenses reflect the decreased level of activity as the Partnership proceeds to liquidate its remaining investments. The decrease in investment income for 1997 compared to 1996 was comprised of a $478,058 decrease in interest and dividend income from portfolio investments and a $341,247 decrease in interest from short-term investments. Interest income from portfolio investments decreased by $303,166 resulting from the reduced amount of interest-bearing debt securities held by the Partnership during 1997 compared to the amount of such securities held during 1996. Dividend income also declined by $174,892 primarily due to the sale of the Partnership's investment in Borg-Warner Automotive, Inc., as discussed above. The decline in interest from short-term investments resulted primarily from a decrease in funds available for investment in such securities during the year ended December 31, 1997 compared to the same period in 1996. 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, 1998, 1997 and 1996, was $200,000, $282,686 and $686,493, respectively. The decline in the management fee for the years presented reflects the continued liquidation of the Partnership's remaining portfolio investments and subsequent distribution 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 of Portfolio Investments - During the year ended December 31, 1998, the Partnership reduced the fair value of its portfolio of investments on a net basis by $1,209,743. Additionally during 1998, a net $1,974,768 was transferred from unrealized loss to realized loss relating to portfolio investments liquidated and written-off during 1998, as discussed above. As a result, unrealized appreciation of investments increased by $765,025 for 1998. During the year ended December 31, 1997, the Partnership increased the fair value of its portfolio of investments on a net basis by $1,200,665. Additionally during 1997, a net $7,073,490 was transferred from unrealized gain to realized gain relating to portfolio investments sold and written-off during 1997, as discussed above. As a result, unrealized appreciation of investments was reduced by $5,872,825 for 1997. During the year ended December 31, 1996, the Partnership increased the fair value of its portfolio of investments on a net basis by $4,876,621. Additionally during 1996, a net $30,121,417 of unrealized gain was transferred to realized gain relating to portfolio investments sold and written-off during 1996, as discussed above. As a result, unrealized appreciation of investments was reduced by $25,244,796 for 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 year ended December 31, 1998, the Partnership had a $1,554,219 net decrease in net assets resulting from operations, comprised of the $2,319,244 net realized loss from operations partially offset by the $765,025 increase in unrealized appreciation of investments for the year. As of December 31, 1998, the Partnership's net assets were $15,638,202, down $6,068,991 from $21,707,193 as of December 31, 1997. This decrease is the result of the $4,514,772 cash distribution to partners, which was accrued as of December 31, 1998 and the $1,554,219 decrease in net assets from operations for 1998. For the year ended December 31, 1997, the Partnership had a $9,786,230 net increase in net assets resulting from operations, comprised of the $15,659,055 net realized gain from operations offset by the $5,872,825 decrease in unrealized appreciation of investments for the year. As of December 31, 1997, the Partnership's net assets were $21,707,193, down $20,215,843 from $41,923,036 as of December 31, 1996. This decrease is the result of the $30,002,073 of cash distributions paid to partners during 1997 exceeding the $9,786,230 increase in net assets from operations for 1997. For the year ended December 31, 1996, the Partnership had a $20,946,564 net increase in net assets resulting from operations, comprised of the $46,191,360 net realized gain from operations partially offset by the $25,244,796 decrease in unrealized appreciation of investments for 1996. As of December 31, 1996, the Partnership's net assets were $41,923,036, down $38,419,496 from $80,342,532 as of December 31, 1995. This decrease resulted from the $59,366,060 of cash distributions, accrued or paid to partners during 1996, exceeding the $20,946,564 net increase in net assets resulting from operations for 1996. 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 unrealized 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 December 31, 1998, 1997 and 1996, was $117, $162, and $323, respectively. Year 2000 Issue - The Year 2000 ("Y2K") concern arose because many existing computer programs use only the last two digits to refer to a year. Therefore, these computer programs do not properly recognize a year that begins with "20" instead of "19". If not corrected, many computer applications could fail or create erroneous results. The impact of the Y2K concern on the Partnership's operations is currently being assessed. The Management Company is responsible to provide or arrange for the provision of administrative services necessary to support the Partnership's operations. The Management Company has arranged for Palmeri Fund Administrators, Inc. (the "Administrator") to provide certain administrative and accounting services for the Partnership, including maintenance of the books and records of the Partnership, maintenance of the limited partner database, issuance of financial reports and tax information to limited partners and processing distribution payments to limited partners. Fees charged by the Administrator are paid directly by the Management Company. The Administrator is currently assessing its computer hardware and software systems, specifically as they relate to the operations of the Partnership. As part of this investigation of potential Y2K problems, the Administrator has contracted with an outside computer service provider to examine all of the Administrator's computer hardware and software applications, to identify any Y2K concerns. This review and evaluation is in process and is expected to be completed by May 1999. If Y2K problems are identified, the Administrator will purchase, install and test the necessary software patches and new computer hardware to ensure that all of its computer systems are Y2K compliant. This correction phase, if required, is expected to be completed by September 1999. Additionally, the Administrator has contacted the outside service providers used to assist the Administrator or the Management Company with the administration of the Partnership's operations to ascertain whether these entities are addressing the Y2K issue within their own operation. There can be no guarantee that the Administrator's systems or that systems of other companies providing services to the Partnership will be corrected in a timely manner. Since the Partnership does not own any equipment and all of its administrative needs are provided by the Management Company, any costs relating to the investigation and correction of potential Y2K problems affecting the Partnership's operations will be incurred by the Administrator, the Management Company or the outside service providers. Therefore, the Management Company and the Managing General Partner do not expect the Partnership to incur any costs relating to the investigation or correction of Y2K concerns. Finally the Y2K issue is a global concern that my affect all business entities, including the Partnership's portfolio companies. The General Partner is continuing to assess the impact of Y2K concerns affecting its portfolio companies. However, the extent to which any potential Y2K problems could affect the valuations of these companies is presently unknown. At the time that specific Y2K problems are identified, if any, the Managing General Partner will take such issues into consideration in adjusting the fair value of the Partnership's portfolio investments. Item 7A. Quantitative and Qualitative Disclosures about Market Risk The Partnership is subject to market risk arising from changes in the value of its portfolio investments, short-term investments and interest-bearing cash equivalents, which may result from fluctuations in interest rates and equity prices. The Partnership has calculated its market risk related to its holdings of these investments based on changes in interest rates and equity prices utilizing a sensitivity analysis. The sensitivity analysis estimates the hypothetical change in fair values, cash flows and earnings based on an assumed 10% change (increase or decrease) in interest rates and equity prices. To perform the sensitivity analysis, the assumed 10% change is applied to market rates and prices on investments held by the Partnership at the end of the accounting period. The Partnership's portfolio investments had an aggregate fair value of $14,970,273 as of December 31, 1998. An assumed 10% decline from this December 31, 1998 fair value, including an assumed 10% decline of the per share market prices of the Partnership's publicly-traded securities, would result in a reduction to the fair value of such investments and an unrealized loss of $1,497,027. As of December 31, 1998, the Partnership held short-term investments consisting of three separate discounted commercial paper instruments with remaining maturities of 20 days or less. These short-term investments were carried at an aggregate amortized cost of $4,488,454 as of December 31, 1998. An assumed 10% increase in the market interest rates of such short-term investments held by the Partnership as of December 31, 1998, would result in a reduction to the fair value of such investments and an unrealized loss which is considered to be immaterial. Market risk relating to the Partnership's interest-bearing cash equivalents\ held as of December 31, 1998 is considered to be immaterial. Item 8. Financial Statements and Supplementary Data. ML VENTURE PARTNERS II, L.P. INDEX Independent Auditors' Report Balance Sheets as of December 31, 1998 and 1997 Schedule of Portfolio Investments as of December 31, 1998 Schedule of Portfolio Investments as of December 31, 1997 Statements of Operations for the years ended December 31, 1998, 1997 and 1996 Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Statements of Changes in Partners' Capital for the years ended December 31, 1996, 1997 and 1998 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997 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. as of December 31, 1998 and 1997, 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, 1998 in conformity with generally accepted accounting principles. As explained in Note 2, the financial statements include securities valued at $14,970,273 and $16,497,000 as of December 31, 1998 and 1997, respectively, representing 96% and 76% 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 March 24, 1999 ML VENTURE PARTNERS II, L.P. BALANCE SHEETS As of December 31, 1998 1997 ---------------- ---------------- ASSETS Portfolio investments, at fair value (cost $10,197,685 as of December 31, 1998 and $13,013,680 as of December 31, 1997) $ 14,970,273 $ 17,021,243 Short-term investments, at amortized cost 4,488,454 2,979,552 Cash and cash equivalents 423,675 1,918,335 Receivable from liquidated securities 475,435 - Accrued interest receivable 1,291 - ---------------- ---------------- TOTAL ASSETS $ 20,359,128 $ 21,919,130 ================ ================ LIABILITIES AND PARTNERS' CAPITAL Liabilities: Cash distribution payable $ 4,514,772 $ - Accounts payable and accrued expenses 85,874 144,890 Due to Management Company 100,410 41,349 Due to Independent General Partners 19,870 25,698 ---------------- ---------------- Total liabilities 4,720,926 211,937 ---------------- ---------------- Partners' Capital: Managing General Partner 652,777 1,416,952 Individual General Partners 341 543 Limited Partners (120,000 Units) 10,212,496 16,282,135 Unallocated net unrealized appreciation of investments 4,772,588 4,007,563 ---------------- ---------------- Total partners' capital 15,638,202 21,707,193 ---------------- ---------------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 20,359,128 $ 21,919,130 ================ ================
See notes to financial statements ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS As of December 31, 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 $ 7,031,250 - - ------------------------------------------------------------------------------------------------------------------------------- Brightware, Inc. (B) 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 30,978 - - ------------------------------------------------------------------------------------------------------------------------------- Corporate Express, Inc. (A) 60,000 shares of Common Stock May 1992 12,000 249,000 - - ------------------------------------------------------------------------------------------------------------------------------- Diatide, Inc.* (A) 809,704 shares of Common Stock Dec. 1991 2,986,023 3,815,731 - - ------------------------------------------------------------------------------------------------------------------------------- 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 1,743,464 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 241,639 232,813 Options to purchase 27,969 shares of Common Stock at $1.42 per share, expiring on 10/31/01 0 64,469 - - ------------------------------------------------------------------------------------------------------------------------------- ReGen Biologics, Inc.(C) 72,800 shares of Common Stock Apr. 1991 364 263,900 62,400 shares of Preferred Stock 114,400 226,200 - - ------------------------------------------------------------------------------------------------------------------------------- Stereotaxis, Inc. (C) 21,632 shares of Common Stock Apr. 1990 216 16,224 134,674 shares of Preferred Stock 62,684 101,006 - - ------------------------------------------------------------------------------------------------------------------------------- Total Portfolio Investments $ 10,197,685 $ 14,970,273 ---------------------------------
ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS, continued As of December 31, 1998 Supplemental Information: Liquidated Portfolio Investments(F) Liquidation Realized Company Date Cost Gain (Loss) Return - - ------------------------------------------------------------------------------------------------------------------------------- Allez, Inc. 1992 $ 1,781,320 $ (1,781,320) $ 0 Amdahl Corporation (Key Computer) 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 Biocircuits Corporation(D) 1997-1998 2,653,751 (2,653,751) 0 Borg-Warner Automotive, Inc. 1994-1997 2,500,000 14,628,202 17,128,202 Business Depot, Ltd. 1994 1,214,184 1,539,476 2,753,660 CellPro, Incorporated 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 Clarus Medical Systems 1997 1,388,620 (1,388,620) 0 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 Corporate Express, Inc. 1994-1997 2,987,912 25,499,494 28,487,406 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. 1993-1997 1,412,118 2,105,168 3,517,286 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) 1996-1998 3,678,926 1,702,626 5,381,552 - - ------------------------------------------------------------------------------------------------------------------------------- IDE Corporation 1996 883,909 (883,909) 0 IDEC Pharmaceuticals Corporation 1994-1997 4,261,036 8,377,068 12,638,104 Inference Corporation 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 4,477,842 6,843,079 Ligand Pharmaceuticals Inc. 1992-1996 1,414,435 4,227,245 5,641,680
ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS, continued December 31, 1998 Liquidation Realized Company Date Cost Gain (Loss) Return 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 1996-1997 3,840,560 (3,840,560) 0 OccuSystems, Inc. 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. 1996-1997 1,807,664 4,370,155 6,177,819 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 Sanderling Biomedical, L.P.(C) 1995-1998 1,629,832 1,248,545 2,878,377 Saxpy Computer Corporation 1988 2,000,000 (2,000,000) 0 SDL, Inc. 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. 1995-1996 915,348 2,801,429 3,716,777
ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS, continued December 31, 1998 Net Cost Realized Gain Return Totals from Liquidated Portfolio Investments $ 106,335,311 $ 111,278,805 $ 217,614,116 ========================================================= Combined Net Combined Unrealized and Fair Value Cost Realized Gain and Return Totals from Active & Liquidated Portfolio Investments $ 116,532,996 $ 116,051,393 $ 232,584,389 =========================================================
(A) Public company (B) In June 1998, in a non-cash transaction, the Partnership exchanged its warrant to purchase 59,166 common shares of Brightware, Inc. at $.80 per share for 27,611 shares of Brightware common stock. (C) During 1998, the Partnership received three liquidating in-kind distributions from Sanderling Biomedical, L.P.: 93,745 common shares of Depotech Corp., Inc., 72,800 common shares and 62,400 preferred shares of ReGen Biologics, Inc., and 21,632 common shares and 134,674 preferred shares of Stereotaxis, Inc. The Depotech shares were subsequently sold by the Partnership in November 1998 for $136,878, resulting in a realized gain of $79,822. Additionally, the Partnership received a final liquidating cash distribution of $325,567 from Sanderling in February 1999. The Partnership also recorded a realized loss of $775,338 during 1998 to reflect the write-off of the unreturned cost of its Sanderling investment. (D) On May 18, 1998, Biocircuits Corporation announced that it ceased all ordinary business and began to liquidate its remaining assets. As a result, the Partnership wrote-off the remaining $1,488,884 cost of its investment in Biocircuits as of June 30, 1998. (E) During 1998, the Partnership received $187,194, plus interest of $13,069, from the sale of options in connection with its investment in HCTC/SPTHOR. Because it is anticipated that no further funds will be received from this investment, the Partnership wrote-off it's remaining cost of $169,150 in HCTC during 1998. (F) Amounts provided for "Supplemental Information: Liquidated Portfolio Investments" are cumulative from inception through December 31, 1998. See Note 6 of Notes to Financial Statements for portfolio investments sold or written- off during 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. SCHEDULE OF PORTFOLIO INVESTMENTS As of December 31, 1997 Initial Investment Company / Position Date Cost Fair Value Biocircuits Corporation*(A) 401,734 shares of Common Stock May 1991 $ 468,051 $ 175,759 2,000,000 shares of Preferred Stock 1,000,000 218,750 Warrants to purchase 166,667 shares of Common Stock at $.75 per share, expiring 1/2/99 20,833 0 - - ------------------------------------------------------------------------------------------------------------------------------- Borg-Warner Security Corporation*(A) 500,000 shares of Common Stock Sept. 1988 2,500,000 6,609,375 - - ------------------------------------------------------------------------------------------------------------------------------- Brightware, Inc. 144,039 shares of Common Stock May 1995 39,579 216,059 Warrants to purchase 38,737 shares of Common Stock at $.40 per share, expiring on 4/19/99 1,138 42,611 Warrants to purchase 59,166 shares of Common Stock at $.80 per share, expiring on 6/10/98 3,986 41,416 - - ------------------------------------------------------------------------------------------------------------------------------- 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 192,504 524,243 - - ------------------------------------------------------------------------------------------------------------------------------- Corporate Express, Inc. (A) 60,000 shares of Common Stock May 1992 12,000 618,000 - - ------------------------------------------------------------------------------------------------------------------------------- Diatide, Inc.*(A) 809,704 shares of Common Stock Dec. 1991 2,986,023 4,802,557 - - ------------------------------------------------------------------------------------------------------------------------------- Horizon Cellular Telephone Company, L.P.: SPTHOR Corporation 10% Promissory Note due 3/26/98 May 1992 5,073 5,073 5.67% Bridge Loan 9,271 9,271 34.5 shares of Common Stock 154,806 154,806 - - ------------------------------------------------------------------------------------------------------------------------------- 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 1,148,135 Warrants to purchase 6,062 shares of Common Stock at $5.40 per share, expiring on 6/30/00 0 0 - - -------------------------------------------------------------------------------------------------------------------------------
ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS, continued As of December 31, 1997 Initial Investment Company / Position Date Cost Fair Value Raytel Medical Corporation(A) 62,500 shares of Common Stock Feb. 1990 $ 241,639 $ 581,250 Options to purchase 27,969 shares of Common Stock at $1.42 per share, expiring on 10/31/01 0 220,396 - - ------------------------------------------------------------------------------------------------------------------------------- Sanderling Biomedical, L.P.* 80% Limited Partnership interest May 1988 1,335,625 758,390 - - ------------------------------------------------------------------------------------------------------------------------------- Total Portfolio Investments $ 13,013,680 $ 17,021,243 --------------------------------- Supplemental Information: Liquidated Portfolio Investments(B) Net Realized Cost Gain Return Totals from Liquidated Portfolio Investments $ 103,519,316 $ 113,445,161 $ 216,964,477 ========================================================= Combined Net Combined Unrealized and Fair Value Cost Realized Gain and Return Totals from Active & Liquidated Portfolio Investments $ 116,532,996 $ 117,452,724 $ 233,985,720 =========================================================
(A) Public company (B) Amounts provided for "Supplemental Information: Liquidated Portfolio Investments" are cumulative from inception through December 31, 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 For the Years Ended December 31, 1998 1997 1996 --------------- --------------- --------------- INVESTMENT INCOME AND EXPENSES Income: Interest from short-term investments $ 280,896 $ 638,556 $ 979,803 Interest and other income from portfolio investments 13,069 27,270 330,436 Dividend income - 37,754 212,646 --------------- --------------- ---------------- Total investment income 293,965 703,580 1,522,885 --------------- --------------- ---------------- Expenses: Management fee 200,000 282,686 686,493 Professional fees 78,590 140,089 175,434 Mailing and printing 77,897 126,589 220,877 Independent General Partners' fees 82,500 91,800 107,100 Custodial fees 2,198 373 13,930 Miscellaneous 5,668 8,500 6,783 Litigation settlement - - 1,000,000 --------------- --------------- ---------------- Total investment expenses 446,853 650,037 2,210,617 --------------- --------------- ---------------- NET INVESTMENT (LOSS) INCOME (152,888) 53,543 (687,732) Net realized (loss) gain from portfolio investments (2,166,356) 15,605,512 46,879,092 --------------- --------------- ---------------- NET REALIZED (LOSS) GAIN FROM OPERATIONS (2,319,244) 15,659,055 46,191,360 Change in unrealized appreciation of investments 765,025 (5,872,825) (25,244,796) --------------- --------------- ---------------- NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (1,554,219) $ 9,786,230 $ 20,946,564 =============== =============== ================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1998 1997 1996 --------------- --------------- ---------------- CASH FLOWS (USED FOR) PROVIDED FROM OPERATING ACTIVITIES Net investment (loss) income $ (152,888) $ 53,543 $ (687,732) Adjustments to reconcile net investment (loss) income to cash (used for) provided from operating activities: (Increase) decrease in accrued interest receivable (1,291) 49,442 820,735 (Increase) decrease in accrued interest from short-term investments (8,895) 19,695 (10,369) Decrease in payables (5,783) (133,258) (21,176) ---------------- --------------- ---------------- Cash (used for ) provided from operating activities (168,857) (10,578) 101,458 --------------- --------------- ---------------- CASH FLOWS (USED FOR) PROVIDED FROM INVESTING ACTIVITIES Net (purchase) return of short-term investments (1,500,007) 1,487,155 12,893,395 Cost of portfolio investments purchased - (474,255) (207,111) Deposits released from escrow - - 184,502 Net proceeds from the sale of portfolio investments 174,204 28,190,298 59,663,087 Repayment of investments in notes - 2,381,659 727,447 --------------- --------------- ---------------- Cash (used for) provided from investing activities (1,325,803) 31,584,857 73,261,320 --------------- --------------- ---------------- CASH FLOWS USED FOR FINANCING ACTIVITIES Cash distributions paid to Partners - (30,002,073) (73,702,566) --------------- ----------- ---------------- (Decrease) increase in cash and cash equivalents (1,494,660) 1,572,206 (339,788) Cash and cash equivalents at beginning of year 1,918,335 346,129 685,917 --------------- --------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 423,675 $ 1,918,335 $ 346,129 =============== =============== ================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENTS OF CHANGES IN PARTNERS' CAPITAL For the Years Ended December 31, 1996, 1997 and 1998 Unallocated Managing Individual Net Unrealized General General Limited Appreciation of Partner Partners Partners Investments Total Balance as of December 31, 1995 $ 1,471,685 $ 1,457 $ 43,744,206 $ 35,125,184 $ 80,342,532 Cash distributions accrued (10,164,420) (1,640) (49,200,000) - (59,366,060) 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 Change in unrealized appreciation on investments - - - (25,244,796) (25,244,796) ------------- ------- -------------- -------------- ---------------- Balance as of December 31, 1996 1,158,769 1,029 30,882,850(A) 9,880,388 41,923,036 Cash distributions paid or accrued (3,001,173) (900) (27,000,000) - (30,002,073) Net investment income 13,410 2 40,131 - 53,543 Net realized loss on investments 3,245,946 412 12,359,154 - 15,605,512 Change in unrealized appreciation on investments - - - (5,872,825) (5,872,825) ------------- ------- -------------- -------------- ---------------- Balance as of December 31, 1997 1,416,952 543 16,282,135(A) 4,007,563 21,707,193 Cash distribution - accrued (314,632) (140) (4,200,000) - (4,514,772) Net investment income (loss) 1,059 (5) (153,942) - (152,888) Net realized loss on investments (450,602) (57) (1,715,697) - (2,166,356) Change in unrealized appreciation on investments - - - 765,025 765,025 ------------- ------- -------------- -------------- ---------------- Balance as of December 31, 1998 $ 652,777 $ 341 $ 10,212,496(A) $ 4,772,588 $ 15,638,202 ============= ======= ============== ============== ================
(A) The net asset value per unit of limited partnership interest, including an assumed allocation of net unrealized appreciation of investments, was $117, $162, and $323 as of December 31, 1998, 1997 and 1996, respectively. Cumulative cash distributions paid, or payable, to limited partners from inception to December 31, 1998, 1997 and 1996 totaled $1,560, $1,525 and $1,300 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 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, 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 $4.8 million as of December 31, 1998, which was recorded for financial statement purposes, was not recognized for tax purposes. Additionally, from inception to December 31, 1998, timing differences of approximately $6.4 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 December 31, 1998, the Partnership had a $115.5 million net realized 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, 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. Portfolio Investments Portfolio investments liquidated during the years ended December 31, 1998 and 1997, are shown below: Realized Company Shares Sold Cost Gain (Loss) Return - - ------------------------------------------------------------------------------------------------------------------------------ Year ended December 31, 1998: Biocircuits Corporation - partial write-off n/a $ 1,488,884 $ (1,488,884) $ 0 Depotech Corp., Inc. (Sanderling) 93,745 57,056 79,822 136,878 HCTC Investment, L.P. - sale of options n/a 0 187,194 187,194 HCTC Investment, L.P. - partial write-off n/a 169,150 (169,150) 0 Sanderling Biomedical, L.P. - liquidation n/a 1,100,905 (775,338) 325,567 -------------- -------------- --------------- Total $ 2,815,995 $ (2,166,356) $ 649,639 ============== ============== =============== Year ended December 31, 1997: Biocircuits Corporation - partial write-off n/a $ 1,164,867 $ (1,164,867) $ 0 Borg-Warner Automotive, Inc. 251,694 1,258,470 8,381,410 9,639,880 Clarus Medical Systems, Inc. - partial write-off n/a 1,388,620 (1,388,620) 0 Corporate Express, Inc. 120,755 24,150 2,561,946 2,586,096 Elantec, Inc. 23,245 60,437 32,945 93,382 Graham Fields International (Sanderling) 4,645 113,964 (50,960) 63,004 IDEC Pharmaceuticals Corporation 477,233 4,043,645 8,594,459 12,638,104 HCTC Investment, L.P. - sale of options n/a 0 2,085,252 2,085,252 HCTC / SPTHOR - note repayment n/a 2,381,659 0 2,381,659 HCTC Investment, L.P. - partial write-off n/a 400,670 (400,670) 0 Neocrin Company - partial write-off n/a 3,840,430 (3,840,430) 0 Raytel Medical Corporation 37,500 144,983 0 144,983 Vical, Inc. (Sanderling) 59,685 144,550 795,047 939,597 -------------- -------------- ---------------- Total $ 14,966,445 $ 15,605,512 $ 30,571,957 ============== ============== ================
ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS, continued 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, 1998 are listed below: Managing Individual Per General General Limited $1,000 Distribution Date Partner Partners Partners Unit - - ------------------------------------------------ ------------------ -------- --------------- ------------- Inception to December 31, 1995 $ 8,632,165 $ 3,160 $ 94,800,000 $ 790 January 12, 1996 2,336,106 400 12,000,000 100 April 26, 1996 3,377,898 600 18,000,000 150 July 29, 1996 4,238,951 640 19,200,000 160 October 11, 1996 2,547,571 400 12,000,000 100 July 11, 1997 2,590,089 640 19,200,000 160 October 16, 1997 411,084 260 7,800,000 65 January 26, 1999 (accrued) 314,632 140 4,200,000 35 --------------- --------- ------------------ ---------- Cumulative totals as of December 31, 1998 $ 24,448,496 $ 6,240 $ 187,200,000 $ 1,560 =============== ========= ================== ==========
8. Short-Term Investments As of December 31, 1998 and 1997, 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, 1998: Amoco Managers Acceptance Corp. 5.58% 1/12/99 $ 1,485,818 $ 1,497,211 $ 1,500,000 Star Marketers Acceptance Corp. 5.45% 1/19/99 1,487,510 1,495,685 1,500,000 Park Avenue Receivables Corp. 5.33% 1/20/99 1,481,789 1,495,558 1,500,000 --------------- --------------- ---------------- Total as of December 31, 1998 $ 4,455,117 $ 4,488,454 $ 4,500,000 =============== =============== ================ December 31, 1997: International Lease Finance 5.55% 1/15/98 $ 1,480,344 $ 1,496,532 $ 1,500,000 National Rule 5.66% 3/13/98 1,474,766 1,483,020 1,500,000 --------------- --------------- ---------------- Total as of December 31, 1997 $ 2,955,110 $ 2,979,552 $ 3,000,000 =============== =============== ================
ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS, continued 9. Litigation Settlement During 1996, the Partnership settled an action in which it 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. Additionally, the Partnership incurred legal expenses totaling approximately $246,000 related to the litigation. 10. Classification of Portfolio Investments As of December 31, 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 $ 8,656,675 $ 13,747,915 87.91% Preferred Stock 1,541,010 1,222,358 7.82% -------------- --------------- ------- Total $ 10,197,685 $ 14,970,273 95.73% ============== =============== ====== Country/Geographic Region Midwestern U.S. $ 3,575,448 $ 8,292,632 53.03% Western U.S. 3,409,214 2,861,910 18.30% Eastern U.S. 3,213,023 3,815,731 24.40% -------------- --------------- ------ Total $ 10,197,685 $ 14,970,273 95.73% ============== =============== ====== Industry Business Services $ 2,512,000 $ 7,280,250 46.55% Biotechnology 3,356,191 4,454,039 28.48% Semiconductors/Electronics 2,452,226 1,743,464 11.15% Medical Devices and Services 1,605,565 1,192,434 7.63% Computer Hardware/Software 271,703 300,086 1.92% -------------- --------------- ------- Total $ 10,197,685 $ 14,970,273 95.73% ============== =============== ======
* Percentage of net assets is based on fair value. 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 are 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 72 Individual General Partner since 1987 Units of the Partnership beneficially owned as of March 16, 1999 - 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. from 1990 to 1998; 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 77 Individual General Partner since 1987 Units of the Partnership beneficially owned as of March 16, 1999 - 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 Datawatch Inc. William M. Kelly (1) 40 Wall Street New York, New York 10005 Age 55 Individual General Partner since 1991 Units of the Partnership beneficially owned as of March 16, 1999 - 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 Fund of America since 1998 and First Eagle International Fund from 1994 to present. Kevin K. Albert (2) World Financial Center North Tower New York, New York 10281-1326 Age 46 Individual General Partner since 1990 Units of the Partnership beneficially owned as of March 16, 1999 - 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 by 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. Caruso, Mr. Cohen and Ms. Herte is South Tower, World Financial Center, New York, New York 10080. James V. Caruso Executive Vice President and Director Age 47 Officer or Director since 1998 Director of MLIBK, joined Merrill Lynch in January 1975. Mr. Caruso manages the Investment Banking Group Corporate Accounting, master Leases and off Balance Sheet accounting functions as well as the Controller's area of the Partnership Analysis and Finance Group. David G. Cohen Vice President and Director Age 36 Officer or Director since 1997 Vice President of MLIBK, joined Merrill Lynch in 1987. Diane T. Herte Vice President and Treasurer Age 38 Officer or Director since 1995 Vice President of MLIBK since 1996 and previously an Assistant Vice President of Merrill Lynch & Co. Corporate Credit Group since 1992, joined Merrill Lynch in 1984. Ms. Herte's responsibilities include controllership and financial management functions for certain partnerships and other entities for which subsidiaries of Merrill Lynch are the general partner, manager or administrator 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 ten institutional venture capital funds ("Sprout Funds") and several smaller funds, with total committed capital of over $1.6 billion. Six of such institutional funds, with capital exceeding $1.5 billion, are currently operating. As of December 31, 1998, DLJ Capital's most recent limited partnership is Sprout Capital VIII, L.P., which was established in 1998 with an excess of 72 percent of its $750 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 Deerfield, Illinois. 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 56 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 53 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 45 Officer or Director since 1984 General Partner of Sprout Group since 1986. Dr. Robert E. Curry(1) Vice President Age 52 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 45 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 58 Officer or Director since 1989 Director, Executive Vice President and Chief Financial Officer of DLJ. Marjorie S. White Secretary, Treasurer and Director Age 45 Officer or Director since 1997 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 currently pays each Independent General Partner an annual fee of $20,000 in quarterly installments plus $1,500 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 $1,500 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, 1998, the aggregate fees paid by the Partnership to the Independent General Partners totaled $82,500. 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, 1998, the Partnership had a net realized loss of $2,166,356 from the liquidation of certain portfolio investments. On a cumulative basis, from inception to December 31, 1998, the Partnership had $115,536,570 of net realized gains and investment income from its portfolio of venture capital investments. No cash distributions were paid by the Partnership during 1998. Subsequent to the end of the year, on January 26, 1999, the Partnership made a cash distribution to partners totaling $4,514,772, including $4,200,000, or $35 per Unit, to Limited Partners of record on December 31, 1998. The Managing General Partners received $314,632 and the Individual General Partners received $140. Management Fee - Pursuant to the Management Agreement, the Partnership pays the Management Company a management fee at the annual rate of 2.5% of the gross capital contributions to the Partnership (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 based on the adjusted capital contributions, 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, 1998, management fees incurred by the Partnership to the Management Company aggregated $200,000. 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 16, 1999, 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 and Merrill Lynch Pierce Fenner & Smith, Incorporated owns 230 Units. 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. James V. Caruso, a Director and Executive Vice President of the Management Company and a Director of ML Investment Banking, joined Merrill Lynch in 1975. David G. Cohen, Director and Vice President of the Management Company and a Vice President of ML Investment Banking, joined Merrill Lynch in 1987. Diane T. Herte, a Vice President and Treasurer of the Management Company and a Vice President of ML Investment Banking, joined Merrill Lynch in 1984. Messrs. Albert, Caruso, Cohen 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, 1998 and 1997 Schedule of Portfolio Investments as of December 31, 1998 Schedule of Portfolio Investments as of December 31, 1997 Statements of Operations for the years ended December 31, 1998, 1997 and 1996 Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Statements of Changes in Partners' Capital for the years ended December 31, 1996, 1997 and 1998 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) (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 31st day of March 1999. 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 31st day of March 1999. 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. By: /s/ David G. Cohen David G. Cohen Vice President EX-27 2 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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 10,197,685 14,970,273 476,726 0 4,912,129 20,359,128 0 0 4,720,926 4,720,926 0 0 120,000 120,000 0 0 0 0 4,772,588 15,638,202 0 293,965 0 446,853 (152,888) (2,166,356) 765,025 (1,554,219) 0 0 0 4,514,772 0 0 0 (6,068,991) 0 0 0 0 0 0 0 18,672,697 162 (1) (9) 0 35 0 117 0 0 0
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