-----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, KNINOrvVkEKIkVqBnSpWbsxSR0Euzr58G7OVg+IzqLoRcfOwn03YM9ZEjCeo3g8M 239kN+QkrxwW4QjVXtBbWw== 0000789538-99-000003.txt : 19990817 0000789538-99-000003.hdr.sgml : 19990817 ACCESSION NUMBER: 0000789538-99-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ML VENTURE PARTNERS II LP CENTRAL INDEX KEY: 0000789538 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 133324232 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 814-00043 FILM NUMBER: 99692361 BUSINESS ADDRESS: STREET 1: WORLD FINANCIAL CTR N TOWER STREET 2: 25TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10281-1330 BUSINESS PHONE: 2124491000 10-Q 1 FORM 10Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 1999 Or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number 0-14217 ML VENTURE PARTNERS II, L.P. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3324232 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) World Financial Center, North Tower New York, New York 10281-1326 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 449-1000 Not applicable - ------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ML VENTURE PARTNERS II, L.P. INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Balance Sheets as of June 30, 1999 (Unaudited) and December 31, 1998 Schedule of Portfolio Investments as of June 30, 1999 (Unaudited) Statements of Operations for the Three and Six Months Ended June 30, 1999 and 1998 (Unaudited) Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998 (Unaudited) Statement of Changes in Partners' Capital for the Six Months Ended June 30, 1999 (Unaudited) Notes to Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Item 3. Quantitative and Qualitative Disclosures about Market Risk. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Item 2. Changes in Securities and Use of Proceeds. Item 3. Defaults upon Senior Securities. Item 4. Submission of Matters to a Vote of Security Holders. Item 5. Other Information. Item 6. Exhibits and Reports on Form 8-K. PART I - FINANCIAL INFORMATION Item 1. Financial Statements. ML VENTURE PARTNERS II, L.P. BALANCE SHEETS June 30, 1999 December 31, (Unaudited) 1998 ASSETS Portfolio investments, at fair value (cost $6,564,332 as of June 30, 1999 and $10,197,685 as of December 31, 1998) $ 12,034,937 $ 14,970,273 Short-term investments at amortized cost 2,729,829 4,488,454 Cash and cash equivalents 391,777 423,675 Receivable from securities sold 1,646,859 475,435 Accrued interest receivable 297 1,291 ---------------- ---------------- TOTAL ASSETS $ 16,803,699 $ 20,359,128 ================ ================ LIABILITIES AND PARTNERS' CAPITAL Liabilities: Cash distribution payable $ - $ 4,514,772 Accounts payable and accrued expenses 78,529 85,874 Due to Management Company 79,991 100,410 Due to Independent General Partners 24,620 19,870 ---------------- ---------------- Total liabilities 183,140 4,720,926 ---------------- ---------------- Partners' Capital: Managing General Partner 753,317 652,777 Individual General Partners 347 341 Limited Partners (120,000 Units) 10,396,290 10,212,496 Unallocated net unrealized appreciation of portfolio investments 5,470,605 4,772,588 ---------------- ---------------- Total partners' capital 16,620,559 15,638,202 ---------------- ---------------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 16,803,699 $ 20,359,128 ================ ================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS (Unaudited) As of June 30, 1999 Initial Investment Company / Position Date Cost Fair Value Burns International Services Corporation* (A)(B) 500,000 shares of Common Stock Sept. 1988 $ 2,500,000 $ 7,617,188 - ------------------------------------------------------------------------------------------------------------------------------- Brightware, Inc. 200,057 shares of Common Stock May 1995 44,703 300,086 - ------------------------------------------------------------------------------------------------------------------------------- CoCensys, Inc. (A)(C) 19,063 shares of Common Stock Feb. 1989 192,504 10,068 - ------------------------------------------------------------------------------------------------------------------------------- Corporate Express, Inc. (A) 60,000 shares of Common Stock May 1992 12,000 336,000 - ------------------------------------------------------------------------------------------------------------------------------- Diatide, Inc.* (A) 809,704 shares of Common Stock Dec. 1991 2,986,023 2,499,961 - ------------------------------------------------------------------------------------------------------------------------------- I.D.E. Corporation 113,322 shares of Common Stock Mar. 1988 227,000 0 - ------------------------------------------------------------------------------------------------------------------------------- Photon Dynamics, Inc.* (A)(D) 31,736 of Common Stock Sept. 1988 182,799 365,648 Warrants to purchase 6,062 shares of Common Stock at $5.40 per share, expiring on 6/30/00 0 3,637 - ------------------------------------------------------------------------------------------------------------------------------- Raytel Medical Corporation(A) 62,500 shares of Common Stock Feb. 1990 241,639 231,250 Options to purchase 27,969 shares of Common Stock at $1.42 per share, expiring on 10/31/01 0 63,769 - ------------------------------------------------------------------------------------------------------------------------------- ReGen Biologics, Inc. 72,800 shares of Common Stock Apr. 1991 364 263,900 62,400 shares of Preferred Stock 114,400 226,200 - ------------------------------------------------------------------------------------------------------------------------------- Stereotaxis, Inc. 21,632 shares of Common Stock Apr. 1990 216 16,224 134,674 shares of Preferred Stock 62,684 101,006 - ------------------------------------------------------------------------------------------------------------------------------- Total Portfolio Investments $ 6,564,332 $ 12,034,937 --------------------------------- Supplemental Information: Liquidated Portfolio Investments(F) Net Cost Realized Gain Return Totals from Liquidated Portfolio Investments(E) $ 109,968,664 $ 111,771,618 $ 221,740,282 ========================================================= Combined Net Combined Unrealized and Fair Value Cost Realized Gain and Return Totals from Active & Liquidated Portfolio Investments $ 116,532,996 $ 117,242,223 $ 233,775,219 =========================================================
ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS (Unaudited), continued As of June 30, 1999 (A) Public company (B) Borg-Warner Security Corporation changed its corporate name to Burns International Services Corporation. (C) On April 15, 1999, CoCensys, Inc. effected a 1-for-8 reverse split of its outstanding stock. (D) During the quarter ended June 30, 1999, the Partnership sold 393,500 shares of Photon Dynamics Inc. for $4,124,599, realizing a gain of $1,855,172. In July 1999, the Partnership sold its remaining 31,736 common shares of Photon Dynamics for $365,648. (E) In June 1999, the Partnership wrote-off its remaining investment i n Clarus Medical Systems, Inc., realizing a loss of $1,000,548. Additionally, during the quarter ended June 30, 1999, the Partnership received a $1,567 liquidating distribution from MLMS Cancer Research, Inc. (F) Amounts provided for "Supplemental Information: Liquidated Portfolio Investments" are cumulative from inception through June 30, 1999. * May be deemed an affiliated person of the Partnership as defined in the Investment Company Act of 1940. See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ------------ ------------- ------------- -------------- INVESTMENT INCOME AND EXPENSES Income: Interest from short-term investments $ 26,081 $ 71,485 $ 49,053 $ 142,073 Interest and other income from portfolio investments 71 8,496 601 8,496 ------------- -------------- ------------- -------------- Total investment income 26,152 79,981 49,654 150,569 ------------- -------------- ------------- -------------- Expenses: Management fee 50,000 50,000 100,000 100,000 Professional fees 25,371 24,646 51,711 54,714 Mailing and printing 23,615 13,371 49,082 40,523 Independent General Partners' fees 24,000 19,500 48,000 43,500 Custodial fees 800 853 1,811 952 Miscellaneous 7,049 4,360 7,523 4,549 ------------- -------------- ------------- -------------- Total investment expenses 130,835 112,730 258,127 244,238 ------------- -------------- ------------- -------------- NET INVESTMENT LOSS (104,683) (32,749) (208,473) (93,669) Net realized gain (loss) from portfolio investments 856,191 (1,497,379) 492,813 (1,497,379) -------------- ---------- ------------- -------------- NET REALIZED GAIN (LOSS) FROM OPERATIONS 751,508 (1,530,128) 284,340 (1,591,048) Change in unrealized appreciation of investments 1,490,399 944,548 698,017 1,946,131 -------------- -------------- ------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 2,241,907 $ (585,580) $ 982,357 $ 355,083 ============== ============== ============= ==============
See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENTS OF CASH FLOWS (Unaudited) For the Six Months Ended June 30, 1999 1998 ---------------- ---------------- CASH FLOWS USED FOR OPERATING ACTIVITIES Net investment loss $ (208,473) $ (93,669) Adjustments to reconcile net investment loss to cash used for operating activities: Decrease (increase) in accrued interest from short-term investments 19,889 (282) Decrease in accrued interest receivable 994 - Decrease in liabilities, net (23,014) (31,835) ---------------- ---------------- Cash used for operating activities (210,604) (125,786) ---------------- ---------------- CASH FLOWS PROVIDED FROM (USED FOR) INVESTING ACTIVITIES Net return (purchase) of short-term investments 1,738,736 (1,453,773) Net proceeds from the sale of portfolio investments 2,954,742 125,793 ---------------- ---------------- Cash provided from (used for) investing activities 4,693,478 (1,327,980) ---------------- ---------------- CASH FLOWS USED FOR FINANCING ACTIVITIES Cash distributions paid to partners (4,514,772) - ---------------- ---------------- Decrease in cash and cash equivalents (31,898) (1,453,766) Cash and cash equivalents at beginning of period 423,675 1,918,335 ---------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 391,777 $ 464,569 ================ ================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENT OF CHANGES IN PARTNERS' CAPITAL (Unaudited) For the Six Months Ended June 30, 1999 Unallocated Managing Individual Net Unrealized General General Limited Appreciation Partner Partners Partners of Investments Total Balance at beginning of period $ 652,777 $ 341 $ 10,212,496 $ 4,772,588 $ 15,638,202 Net investment loss (1,966) (7) (206,500) - (208,473) Net realized gain from portfolio investments 102,506 13 390,294 - 492,813 Change in unrealized appreciation of investments - - - 698,017 698,017 ------------- -------- -------------- -------------- ---------------- Balance at end of period $ 753,317 $ 347 $ 10,396,290 (A) $ 5,470,605 $ 16,620,559 ============= ======== ============== ============== ================
(A) The net asset value per unit of limited partnership interest, including an assumed allocation of net unrealized appreciation of investments, is $123 as of June 30, 1999. Cumulative cash distributions paid to limited partners from inception to June 30, 1999 totaled $1,560 per Unit. See notes to financial statements. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. Organization and Purpose ML Venture Partners II, L.P. (the "Partnership") is a Delaware limited partnership formed on February 4, 1986. MLVPII Co., L.P., the managing general partner of the Partnership (the "Managing General Partner"), and four individuals (the "Individual General Partners") are the general partners of the Partnership. The general partner of MLVPII Co., L.P. is Merrill Lynch Venture Capital Inc. (the "Management Company"), an indirect subsidiary of Merrill Lynch & Co., Inc. DLJ Capital Management Corporation (the "Sub-Manager"), an indirect subsidiary of Donaldson, Lufkin & Jenrette, Inc., is the sub-manager of the Partnership, pursuant to a sub-management agreement among the Partnership, the Management Company, the Managing General Partner and the Sub-Manager. The Partnership's objective is to achieve long-term capital appreciation from its portfolio of venture capital investments in new and developing companies and other special investment situations. The Partnership does not engage in any other business or activity. The Managing General Partner is working toward the ultimate termination of the Partnership, with an emphasis on liquidating the remaining assets as soon as practical with the goal of maximizing returns to Partners. In July 1997, the Individual General Partners voted to extend the term of the Partnership for an additional two-year period. The Partnership is now scheduled to terminate no later than December 31, 1999. In addition, the Individual General Partners have the right to extend the term of the Partnership for an additional two-year period if they determine that such extension is in the best interest of the Partnership. 2. Significant Accounting Policies Valuation of Investments - Short-term investments are carried at amortized cost which approximates market. Portfolio investments are carried at fair value as determined quarterly by the Sub-Manager under the supervision of the Individual General Partners and the Managing General Partner. The fair value of publicly-held portfolio securities is adjusted to the closing public market price for the last trading day of the accounting period discounted by a factor of 0% to 50% for sales restrictions. Factors considered in the determination of an appropriate discount include, underwriter lock-up or Rule 144 trading restrictions, insider status where the Partnership either has a representative serving on the company's Board of Directors or is greater than a 10% shareholder, and other liquidity factors such as the size of the Partnership's position in a given company compared to the trading history of the public security. Privately-held portfolio securities are carried at cost until significant developments affecting the portfolio company provide a basis for change in valuation. The fair value of private securities is adjusted 1) to reflect meaningful third-party transactions in the private market or 2) to reflect significant progress or slippage in the development of the company's business such that cost is no longer reflective of fair value. As a venture capital investment fund, the Partnership's portfolio investments involve a high degree of business and financial risk that can result in substantial losses. The Sub-Manager considers such risks in determining the fair value of the Partnership's portfolio investments. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS (Unaudited), continued Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Investment Transactions - Investment transactions are recorded on the accrual method. Portfolio investments are recorded on the trade date, the date the Partnership obtains an enforceable right to demand the securities or payment therefor. Realized gains and losses on investments sold are computed on a specific identification basis. Income Taxes - No provision for income taxes has been made since all income and losses are allocable to the partners for inclusion in their respective tax returns. The Partnership's net assets for financial reporting purposes differ from its net assets for tax purposes. Net unrealized appreciation of investments of approximately $5.5 million as of June 30, 1999, which was recorded for financial statement purposes, was not recognized for tax purposes. Additionally, from inception to June 30, 1999, 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 period financial statements to conform with the current period 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 June 30, 1999, the Partnership had a $116.0 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 (Unaudited), continued 5. Independent General Partners' Fees As compensation for services rendered to the Partnership, each of the three Independent General Partners receives $20,000 annually in quarterly installments, $1,500 for each meeting of the General Partners attended or for each other meeting, conference or engagement in connection with Partnership activities at which attendance by an Independent General Partner is required and $1,500 for each audit committee meeting attended ($500 if an audit committee meeting is held on the same day as a meeting of the Independent General Partners). 6. Interim Financial Statements In the opinion of MLVPII Co., L.P. the managing general partner of the Partnership, the unaudited financial statements as of June 30, 1999, and for the six month period then ended, reflect all adjustments necessary for the fair presentation of the results of the interim period. 7. Classification of Portfolio Investments As of June 30, 1999, the Partnership's investments in portfolio companies were categorized as follows: % of Type of Investments Cost Fair Value Net Assets* - ------------------- -------------- --------------- ----------- Common Stock and Warrants $ 6,387,248 $ 11,707,731 70.44% Preferred Stock 177,084 327,206 1.97% -------------- --------------- ------- Total $ 6,564,332 $ 12,034,937 72.41% ============== =============== ====== Country/Geographic Region Midwestern U.S. $ 2,574,900 $ 8,070,418 48.56% Western U.S. 776,409 1,464,558 8.81% Eastern U.S. 3,213,023 2,499,961 15.04% -------------- --------------- ------ Total $ 6,564,332 $ 12,034,937 72.41% ============== =============== ====== Industry Business Services $ 2,512,000 $ 7,953,188 47.84% Biotechnology 3,356,191 3,117,359 18.76% Semiconductors/Electronics 182,799 369,285 2.22% Medical Devices and Services 241,639 295,019 1.78% Computer Hardware/Software 271,703 300,086 1.81% -------------- --------------- ------- Total $ 6,564,332 $ 12,034,937 72.41% ============== =============== ======
* Percentage of net assets is based on fair value. 8. Subsequent Events Subsequent to the end of the quarter, in July 1999, the Partnership sold its remaining 31,736 common shares of Photon Dynamics, Inc. for $365,648, which resulted in a realized gain of $182,849 for the quarter ending September 30, 1999. In August 1999, the General Partners approved a cash distribution to Partners totaling $4,380,729. The distribution will be paid in October 1999. Limited partners of record on September 30, 1999 will receive $4,200,000, or $35 per Unit. Additionally, the Individual General Partners will receive $140 and the Managing General Partner will receive $180,589. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Liquidity and Capital Resources As of June 30, 1999, the Partnership held $2,729,829 in short-term investments with maturities of less than one year and $391,777 in an interest-bearing cash account. Interest earned from such investments totaled $26,081 and $49,053 for the three and six months ended June 30, 1999, respectively. Interest earned in future periods is subject to fluctuations in short-term interest rates and changes in amounts available for investment in such securities. Funds needed to cover future operating expenses and follow-on investments will be obtained from the Partnership's existing cash reserves, interest and other investment income and proceeds from the sale of portfolio investments. The Managing General Partner is working toward the 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. However, 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 additional investments in any new portfolio companies. 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. As discussed below, during the quarter the Partnership sold 393,500 common shares of Photon Dynamics, Inc. for $4,124,599. Additionally, subsequent to the end of the quarter, in July 1999, the Partnership sold its remaining 31,736 common shares of Photon Dynamics for $365,648. See Note 7 of Notes to Financial Statements. In August 1999, the General Partners approved a cash distribution to Partners totaling $4,380,729. The distribution will be paid in October 1999. Limited Partners of record on September 30, 1999 will receive $4,200,000, or $35 per Unit. Additionally, the Individual General Partners will receive $140 and the Managing General Partner will receive $180,589. Results of Operations For the three and six months ended June 30, 1999, the Partnership had a net realized gain from operations of $751,508 and $284,340, respectively. For the three and six months ended June 30, 1998, the Partnership had a net realized loss from operations of $1,530,128 and $1,591,048, respectively. Net realized gain or loss from operations is comprised of 1) net realized gain or loss from portfolio investments and 2) net investment income or loss (interest and dividend income less operating expenses). Realized Gains and Losses from Portfolio Investments - For the three and six months ended June 30, 1999, the Partnership had a net realized gain from its portfolio investments of $856,191 and $492,813, respectively. In June 1999, the Partnership realized a loss of $1,000,548 resulting from the write-off of its remaining investment in Clarus Medical Systems, Inc. due to continued business and financial difficulties at the company. Also during the quarter ended June 30, 1999, the Partnership sold 393,500 shares of Photon Dynamics, Inc., realizing a gain of $1,855,172. The Partnership also received a $1,567 liquidating distribution from MLMS Cancer Research, Inc. during the quarter, which was recorded as a realized gain. For both the three and six months ended June 30, 1998, the Partnership had a net realized loss from its portfolio investments of $1,497,379. In June 1998, the Partnership realized a loss of $1,488,884 resulting from the write-off of its remaining investment in Biocircuits Corporation. Also during the quarter, the Partnership received $125,793 from Horizon Cellular Telephone Company, L.P. relating to the previous sale of certain options in connection with its investment in Horizon, resulting in a realized loss of $8,495. Investment Income and Expenses - For the three months ended June 30, 1999 and 1998, the Partnership had a net investment loss of $104,683 and $32,749, respectively. The $71,934 increase in investment loss for the 1999 period compared to the same period in 1998 resulted from a $53,829 decrease in investment income and an $18,105 increase in operating expenses. The decline in investment income was attributable to a $45,404 decrease in interest from short-term investments and an $8,425 decrease in interest and other income from portfolio investments. The decrease in interest from short-term investments primarily was due to a decrease in funds available for investment in such securities during the second quarter of 1999 compared to the same period in 1998. The decline in interest and other income from portfolio investments resulted from a decrease in interest income from Horizon Cellular Telephone Company, an interest bearing portfolio investment that was liquidated in 1998. The increase in operating expenses primarily resulted from an increase in mailing and printing and other operating expenses incurred during the 1999 period. For the six months ended June 30, 1999 and 1998, the Partnership had a net investment loss of $208,473 and $93,669, respectively. The increase in net investment loss for the 1999 period compared to the same period in 1998, primarily was attributable to a $100,915 decrease in investment income and a $13,889 increase in operating expenses. The decline in investment income was due to a $93,020 decrease in interest from short-term investments and a $7,895 decrease in income from portfolio investments. The decrease in interest from short-term investments primarily was due to a decrease in funds available for investments in such securities during the six months ended June 30, 1999 compared to the same period in 1998. The decrease in income from portfolio investments primarily resulted from a decrease in interest income from Horizon Cellular Telephone Company, an interest bearing portfolio investment that was liquidated in 1998. The increase in operating expenses primarily was due to an increase in mailing and printing and other operating expenses incurred during the 1999 period. The Management Company is responsible for the management and administrative services necessary for the operation of the Partnership. The Management Company receives a management fee at an annual rate of 2.5% of the gross capital contributions to the Partnership, reduced by selling commissions, organizational and offering expenses paid by the Partnership, return of capital and realized capital losses, with a minimum annual fee of $200,000. Such fee is determined and payable quarterly. The management fee for the three months ended June 30, 1999 and 1998 was $50,000 . The management fee for the six months ended June 30, 1999 and 1998 was $100,000. The management fee will remain at the annual minimum fee of $200,000 for 1999 and will remain the same in future periods through the liquidation of the Partnership. The management fee and other operating expenses are paid with funds provided from operations and from existing cash reserves. Funds provided from operations for the period were obtained from interest earned from short-term investments and proceeds from the sale of certain portfolio investments. Unrealized Gains and Losses and Changes in Unrealized Appreciation or Depreciation of Investments -For the six months ended June 30, 1999, the Partnership had a $786,941 net unrealized gain from its portfolio investments, resulting from the net upward revaluation of its remaining portfolio investments. Additionally, during the six month period, $88,924 of unrealized gain was transferred to realized gain, relating to portfolio investments sold or written off during the period, as discussed above. The $786,941 unrealized gain and the $88,924 net transfer from unrealized gain to realized gain, resulted in a $698,017 favorable change to the Partnership's net unrealized appreciation of investments for the six month period ended June 30, 1999. For the six months ended June 30, 1998, the Partnership had a $722,131 net unrealized gain from its portfolio investments, resulting from the net upward revaluation of its remaining portfolio investments. Additionally, during the six month period, unrealized appreciation increased by $1,224,000 resulting from the transfer from unrealized loss to realized loss relating to the write-off of the Partnership's remaining investment in Biocircuits Corporation, as discussed above. The $722,131 unrealized gain and the $1,224,000 transfer from unrealized loss to realized loss, resulted in a $1,946,131 favorable change to the Partnership's net unrealized appreciation of investments for the six month period ended June 30, 1998. Net Assets - Changes to net assets resulting from operations are comprised of 1) net realized gain or loss from operations and 2) changes to net unrealized appreciation or depreciation of portfolio investments. As of June 30, 1999, the Partnership's net assets were $16,620,559, up $982,357 from $15,638,202 as of December 31, 1998. This increase was comprised of the $698,017 increase in unrealized appreciation of investments and the $284,340 net realized gain from operations for the six month period ended June 30, 1999. As of June 30, 1998, the Partnership's net assets were $22,062,276, up $355,083 from $21,707,193 as of December 31, 1997. This increase was comprised of the $1,946,131 increase in unrealized appreciation of investments, partially offset by the $1,591,048 net realized loss from operations for the six month period ended June 30, 1998. Gains and losses from investments are allocated to partners' capital accounts when realized, in accordance with the Partnership Agreement (see Note 3 of Notes to Financial Statements). However, for purposes of calculating the net asset value per unit of limited partnership interest, net unrealized appreciation of investments has been included as if the net appreciation had been realized and allocated to the limited partners in accordance with the Partnership Agreement. Pursuant to such calculation, the net asset value per $1,000 Unit as of June 30, 1999 and December 31, 1998 was $123 and $117, 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 has assessed its computer hardware and software systems, specifically as they relate to the operations of the Partnership. As part of this investigation of potential Y2K concerns, the Administrator contracted with an outside computer service provider to examine all of the Administrator's computer hardware and software applications. This review and evaluation has been completed. Additionally, the Administrator has completed the purchase and installation of the necessary software upgrades and patches and new computer hardware required to ensure that all of its computer systems are Y2K compliant. The Administrator expects to complete the testing of its systems by October 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 concerns 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 may 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 3. 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 $12,034,937 as of June 30, 1999. An assumed 10% decline from this 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 $1,203,494. As of June 30, 1999, the Partnership held discounted commercial paper with a remaining maturity of less than 60 days. This short-term investment was carried at an aggregate amortized cost of $2,729,829 as of June 30, 1999. An assumed 10% increase in the market interest rates of such short-term investments held by the Partnership as of June 30, 1999, 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 June 30, 1999 is also considered to be immaterial. PART II - OTHER INFORMATION Item 1. Legal Proceedings. The Partnership is not a party to any legal proceedings. Item 2. Changes in Securities and Use of Proceeds. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of security holders during the period in which this report covers. Item 5. Other Information. Not applicable Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits (3) (a) Amended and Restated Certificate of Limited Partnership of the Partnership, dated as of January 12, 1987. (1) (3) (b) Amended and Restated Certificate of Limited Partnership of the Partnership, dated July 27, 1990.(2) (3) (c) Amended and Restated Certificate of Limited Partnership of the Partnership, dated March 25, 1991. (3) (3) (d) Amended and Restated Agreement of Limited Partnership of the Partnership,dated as of May 4, 1987. (4) (3) (e) Amendment No. 1 dated February 14, 1989 to Amended and Restated Agreement of Limited Partnership of the Partnership. (5) (3) (f) Amendment No. 2 dated July 27, 1990 to Amended and Restated Agreement of Limited Partnership of the Partnership. (2) (3) (g) Amendment No. 3 dated March 25, 1991 to Amended and Restated Agreement of Limited Partnership of the Partnership. (3) (3) (h) Amendment No. 4 dated May 23, 1991 to Amended and Restated Agreement of Limited Partnership of the Partnership. (6) (10) (a) Management Agreement dated as of May 23, 1991 among the Partnership, Management Company and the Managing General Partner. (6) (10) (b) Sub-Management Agreement dated as of May 23, 1991 among the Partnership, Management Company, the Managing General Partner and the Sub-Manager. (8) (27) Financial Data Schedule. (28) Prospectus of the Partnership dated February 10, 1987 filed with the Securities and Exchange Commission pursuant to Rule 424(b) under the Securities Act of 1933, as supplemented by a supplement thereto dated April 21, 1987 filed pursuant to Rule 424(c) under the Securities Act of 1933. (7) (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. (1) Incorporated by reference to the Partnership's Annual Report on For 10-K for the year ended December 31, 1988 filed with the Securities and Exchange Commission on March 27, 1989. (2) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990 filed with the Securities and Exchange Commission on November 14, 1990. (3) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1990 filed with the Securities and Exchange Commission on March 28, 1991. (4) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 1987 filed with the Securities and Exchange Commission on August 14, 1987. (5) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989 filed with the Securities and Exchange Commission on May 15, 1989. (6) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991 filed with the Securities and Exchange Commission on August 14, 1991. (7) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended March 31, 1987 filed with the Securities and Exchange Commission on May 15, 1987. (8) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1992 filed with the Securities and Exchange Commission on March 26, 1993. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ML VENTURE PARTNERS II, L.P. By: MLVPII Co., L.P. its Managing General Partner By: Merrill Lynch Venture Capital Inc. its General Partner By: /s/ Kevin K. Albert Kevin K. Albert President (Principal Executive Officer) By: /s/ David G. Cohen David G. Cohen Vice President By: /s/ Diane T. Herte Diane T. Herte Vice President and Treasurer (Principal Financial and Accounting Officer) Date: August 16, 1999 EX-27 2 EXHIBIT 27 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ML VENTURE PARTNERS II, L.P.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1999 JAN-1-1999 JUN-30-1999 6,564,332 12,034,937 1,647,156 0 3,121,606 16,803,699 0 0 183,140 183,140 0 0 120,000 120,000 0 0 0 0 5,470,605 16,620,559 0 49,654 0 258,127 (208,473) 492,813 698,017 982,357 0 0 0 0 0 0 0 982,357 0 0 0 0 0 0 0 16,129,381 117 (2) 8 0 0 0 123 0 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0
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