10-K 1 0001.txt 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, 2000 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) 4 World Financial Center, 26th Floor New York, New York 10080 -------------------------------------------------------------------------------- (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 15, 2001, 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 three 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 Credit Suisse First Boston (USA), Inc., is the sub-manager pursuant to a sub-management agreement 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. The Partnership made no new or follow-on investments during the years ended December 31, 2000 and 1999. As of December 31, 2000, the Partnership's only remaining portfolio investment, Raytel Medical Corporation had a cost of $241,639 and a fair value of $40,625. During the year ended December 31, 2000, the Partnership liquidated certain portfolio investments, realizing a net return of $10,360,859 and a net gain of $7,638,492. Portfolio investments sold and written-off during 2000 are listed below: Portfolio Liquidations for the Year Ended December 31, 2000 (a): Shares Realized Investment Sold Cost Gain (Loss) Return ------------------------------------------------------------------------------------------------------------------------------ ReGen Biologics, Inc. (Sanderling) 135,200 $ 114,764 $ (52,410) $ 62,354 Stereotaxis, Inc. (Sanderling) 156,306 62,900 35,613 98,513 Burns International Services Corporation 500,000 2,500,000 7,619,992 10,119,992 Brightware, Inc. - write-off n/a 44,703 (44,703) 0 Research Applications, Inc. n/a - 80,000 80,000 ------------ ------------- ---------------- Total $ 2,722,367 $ 7,638,492 $ 10,360,859 ============= ============== ================
(a) See Schedule of Portfolio Investments included in the December 31, 2000 audited financial statements for cumulative results of liquidations of these investments. As of December 31, 2000, the Partnership had invested $116,532,996 in its portfolio of venture capital investments. From its inception through December 31, 2000, the Partnership had liquidated investments with an aggregate cost basis of $116,291,357. These liquidated investments returned $241,234,244 to the Partnership, resulting in a net realized gain of $124,942,887. Additionally, the Partnership earned interest and dividend income from its venture capital investments totaling $4,258,728 from inception to December 31, 2000. Termination In March 2001, the Partnership completed the liquidation of its portfolio investments with the sale of its holdings of Raytel Medical Corporation for $28,866, which resulted in a realized loss of $212,773. As a result, the Partnership terminated its operations and made its final cash distribution to partners on March 29, 2001. 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. However, 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 is responsible for the management and administrative services necessary for the operation of the Partnership including 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. 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 15, 2001 was 12,415. 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. As of December 31, 2000, the Managing General Partner's estimate of the net asset value of the Partnership is $3 per Unit, including an assumed allocation of net unrealized depreciation of investments. The Managing General Partner's estimate of net asset value as set forth above reflects the fair value of the Partnership's underlying assets remaining at year-end, whereas the value provided by the independent valuation 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. Since the Partnership terminated and made its final cash distribution to Partners on March 29, 2001, the net asset value of the Partnership is zero. Cash Distributions Cash distributions paid or accrued during the three years ended December 31, 2000 and cumulative cash distributions paid to partners from inception of the Partnership through December 31, 2000 and through March 29, 2001 (date of termination) are listed below: Managing Individual Per General General Limited $1,000 Distribution Date Partner Partners Partners Unit ------------------------------------ --------------- ------------- ----------------- ------------- Inception to December 31, 1997 $ 24,133,864 $ 6,100 $ 183,000,000 $ 1,525.00 January 26, 1999 (accrued as of 12/31/98) 314,632 140 4,200,000 35.00 October 7, 1999 180,589 140 4,200,000 35.00 January 25, 2000 (accrued as of 12/31/99) 1,384,720 244 7,320,000 61.00 October 5, 2000 1,747,212 284 8,520,000 71.00 --------------- ---------- ----------------- -------------- Cumulative totals as of December 31, 2000 27,761,017 6,908 207,240,000 1,727.00 March 29, 2001 132,595 7 201,600 1.68 --------------- ---------- ----------------- -------------- Cumulative totals as of March 29, 2001 (Date of termination) $ 27,893,612 $ 6,915 $ 207,441,600 $ 1,728.68 =============== ========== ================= ============== Item 6. Selected Financial Data. ----------------------- ($ In Thousands, Except For Per Unit Information) Years Ended December 31, 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- Net realized gain (loss) from investments $ 7,638 $ 6,026 $ (2,166) $ 15,606 $ 46,879 Net change in unrealized appreciation of investments (2,651) (2,322) 765 (5,873) (25,245) Net increase (decrease) in net assets resulting from operations 4,738 3,430 (1,554) 9,786 20,947 Cash distributions - paid or accrued 10,267 13,086 4,515 30,002 59,366 Cumulative cash distributions - paid or accrued 235,008 224,741 211,655 207,140 177,138 Total assets 716 14,946 20,359 21,919 42,268 Net unrealized appreciation (depreciation) of investments (201) 2,450 4,773 4,008 9,880 Per unit of limited partnership interest: Net realized gain (loss) from investments $ 50 $ 40 $ (14) $ 103 $ 309 Net increase (decrease) in net assets resulting from operations 31 22 (10) 64 137 Cash distributions - paid or accrued 71 96 35 225 410 Cumulative cash distributions - paid or accrued 1,727 1,656 1,560 1,525 1,300 Net unrealized appreciation (depreciation) of investments (1) 16 32 26 65 Net asset value 3 43 117 162 323
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. --------------------------------------------------------------- Liquidity and Capital Resources The Partnership invests its cash balances in short-term investments with maturities of less than one year and in an interest-bearing cash account. As of December 31, 2000, the Partnership held $675,009 in an interest-bearing cash account and had no short-term investments. For the years ended December 31, 2000, 1999 and 1998, the Partnership earned interest from such investments totaling $181,090, $202,271 and $280,896, 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 will be obtained from these existing cash reserves and from interest, other investment income and proceeds from the sale of the Partnership's remaining portfolio investments. During the year ended December 31, 2000, the Partnership liquidated certain portfolio investments, realizing a net return of $10,360,859, resulting in a net realized gain of $7,638,492. The Partnership's only remaining portfolio investment as of December 31, 2000 was Raytel Medical Corporation. In March 2001, the Partnership completed the liquidation of its portfolio investments with the sale of its Raytel holdings for $28,866, which resulted in a realized loss of $212,773. On October 5, 2000, the Partnership made a cash distribution to partners totaling $10,267,496. Limited partners of record on September 30, 2000 received $8,520,000, or $71 per Unit, the Individual General Partners received $284 and the Managing General Partner received $1,747,212. In addition, the Partnership made its final cash distribution to partners totaling $334,202, on March 29, 2001. Limited Partners received $201,600 or $1.68 per Unit, the Individual General Partners received $7 and the Managing General Partner received $132,595. Results of Operations For the year ended December 31, 2000, the Partnership had a net realized gain from operations of $7,389,031. For the years ended December 31, 1999 and 1998, the Partnership had a net realized gain from operations of a $5,752,709 and a net realized loss from operations of $2,319,244, 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, 2000, the Partnership had a $7,638,492 net realized gain from its portfolio investments. During 2000, the Partnership sold its 500,000 common shares of Burns International Services Corporation for net proceeds totaling $10,119,992 compared to a cost of $2,500,000, for a realized gain of $7,619,992. Also, during 2000, the Partnership received $80,000 from Research Applications, Inc., a portfolio investment that had been previously written off, resulting in a realized gain for the entire amount. Additionally, the Partnership sold its investments in Stereotaxis, Inc. and ReGen Biologics, Inc. in a private transaction for $160,867, resulting in a net realized loss of $16,797. Finally, the Partnership wrote-off its investment in Brightware, Inc. on December 31, 2000, which resulted in a realized loss of $44,703. For the year ended December 31, 1999, the Partnership had a $6,025,590 net realized gain from its portfolio investments. During 1999, the Partnership sold its 809,704 common shares of Diatide, Inc. in connection with a cash tender offer of the company's outstanding shares for $7,692,188, or $9.50 per share, resulting in a realized gain of $4,706,165. Also during 1999, the Partnership sold the following securities in the public market: 428,879 common shares of Photon Dynamics, Inc. for $4,567,021, realizing a gain of $2,114,795; 19,063 common shares of CoCensys, Inc. for $19,071, realizing a loss of $173,433; and 60,000 common shares of Corporate Express, Inc. for $582,000, realizing a gain of $570,000. Also during 1999, the Partnership realized a gain of $389,118 reflecting the receipt of the final liquidation payment from Horizon Cellular Telephone Company, L.P. The Partnership realized additional gains during 1999 resulting from the receipt of $8,304 from the sale of its remaining interest in Ogle Resources, Inc., an investment that had been previously written-off, and $1,567 from a final liquidating distribution payment from MLMS Cancer Research, Inc. Finally during 1999, the Partnership realized losses of $1,000,548, $227,000 and $363,378 resulting from the write-off of its remaining investments in Clarus Medical Systems, Inc., IDE Corporation and Neocrin Company, respectively, due to continued business and financial difficulties at these companies. 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 liquidation payments relating to the sale of the Partnership's investment in Horizon. These 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. Investment Income and Expenses - For the years ended December 31, 2000, 1999 and 1998 the Partnership had a net investment loss of $249,461, $272,881 and $152,888, respectively. The favorable change in net investment loss for 2000 compared to 1999 resulted from a decrease in operating expenses of $44,982, partially offset by a decrease in investment income of $21,562. The decline in investment income primarily was due to a $21,181 decrease in interest income from short-term investments resulting from a decrease in funds available for investment in such securities during 2000 compared to 1999. The reduction in operating expenses for 2000 compared to 1999, includes a $25,500 decline in fees paid to the Independent General Partners ("IGPs"), resulting from the change from three to two IGPs beginning in the second quarter of 2000. The reduction in operating expenses also reflects declines in professional fees, mailing and printing and other operating expenses. The decline in professional fees is due to lower legal and outside accounting fees, reflecting the decreased level of activity as the Partnership proceeds with the liquidation of its remaining investments. The decline in mailing and printing expenses is due to costs incurred from additional limited partner notifications mailed during 1999 and the decline in other operating expenses primarily resulted from a one-time insurance costs incurred during 1999. The unfavorable change in net investment income for 1999 compared to 1998 resulted from a decrease in investment income of $91,022 and an increase in operating expenses of $28,971. The decline in investment income primarily was due to a $78,625 decrease in interest income from short-term investments resulting from a decrease in funds available for investment in such securities during 1999 compared to 1998. The small increase in operating expenses reflects increases in professional fees of $14,331, fees paid to the Independent General Partners of $9,000 and small increases in mailing and printing and other expenses. 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 each of the years ended December 31, 2000, 1999 and 1998, reflected the $200,000 minimum fee. 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 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, 2000, the Partnership increased the fair value of its portfolio of investments on a net basis by $533,692. Additionally during 2000, $3,185,049 was transferred from unrealized gain to realized gain relating to portfolio investments sold during 2000, as discussed above. As a result, unrealized appreciation of investments was reduced by $2,651,357 for 2000. During the year ended December 31, 1999, the Partnership reduced the fair value of its portfolio of investments on a net basis by $2,723,316. Additionally during 1999, a net $5,045,561 was transferred from unrealized gain to realized gain relating to portfolio investments liquidated and written-off during 1999, as discussed above. As a result, unrealized appreciation of investments decreased by $2,322,245 for 1999. 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. 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, 2000, the Partnership had a $4,737,674 increase in net assets resulting from operations, comprised of the $7,389,031 net realized gain from operations offset by the $2,651,357 decrease in unrealized appreciation of investments for the 2000. As of December 31, 2000, the Partnership's net assets were $453,151, reflecting a decrease of $5,529,822 from net assets of $5,982,973 as of December 31, 1999. This decrease is the result of the $10,267,496 cash distribution paid to partners during 2000 exceeding the $4,737,674 increase in net assets from operations for 2000. For the year ended December 31, 1999, the Partnership had a $3,430,464 increase in net assets resulting from operations, comprised of the $5,752,709 net realized gain from operations offset by the $2,322,245 decrease in unrealized appreciation of investments for 1999. As of December 31, 1999, the Partnership's net assets were $5,982,973 reflecting a decrease of $9,655,229 from net assets of $15,638,202 as of December 31, 1998. This decrease is the result of the $13,085,693 of cash distributions paid or accrued to partners during 1999 exceeding the $3,430,464 increase in net assets from operations for 1999. 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, reflecting a decrease of $6,068,991 from net assets of $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. 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, 2000, 1999 and 1998, was $3, $43 and $117, respectively. Cumulative cash distributions paid to limited partners from inception to December 31, 2000, 1999, and 1998 totaled $1,727, $1,656, and $1,560 per Unit, respectively. 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 remaining portfolio investment had an aggregate fair value of $40,625 as of December 31, 2000. An assumed 10% decline from such fair value, including an assumed 10% decline of the per share market price of the security, would result in a reduction to the fair value of such investment and an unrealized loss of $4,063. As noted above, the Partnership sold its portfolio investment in Raytel Medical Corporation in March 2001 for $28,866, realizing a loss of $212,773. The Partnership had no short-term investments as of December 31, 2000 and the market risk relating to the Partnership's interest-bearing cash equivalents held as of December 31, 2000 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, 2000 and 1999 Schedule of Portfolio Investments as of December 31, 2000 Schedule of Portfolio Investments as of December 31, 1999 Statements of Operations for the years ended December 31, 2000, 1999 and 1998 Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 Statements of Changes in Partners' Capital for the years ended December 31, 1998, 1999 and 2000 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, 2000 and 1999, 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, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999 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, 2000 and 1999, 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, 2000 in conformity with accounting principles generally accepted in the United States of America. As explained in Note 2, the financial statements include securities valued at $40,625 and $5,414,349 as of December 31, 2000 and 1999, respectively, representing 9% and 90% of net assets, respectively, whose values have been estimated by the Sub-Manager under the supervision of the Individual General Partners and the Managing General Partner in the absence of readily ascertainable market values. We have reviewed the procedures used by the Sub-Manager in arriving at its estimate of value of such securities and have inspected underlying documentation, and, in the circumstances, we believe the procedures are reasonable and the documentation appropriate. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. Deloitte & Touche LLP New York, New York February 28, 2001 (March 29, 2001 as to Note 9) ML VENTURE PARTNERS II, L.P. BALANCE SHEETS As of December 31, 2000 1999 ---------------- ---------------- ASSETS Portfolio investments, at fair value (cost $241,639 as of December 31, 2000 and $2,964,006 as of December 31, 1999) $ 40,625 $ 5,414,349 Short-term investments, at amortized cost - 8,471,368 Cash and cash equivalents 675,009 1,059,973 ---------------- ---------------- TOTAL ASSETS $ 715,634 $ 14,945,690 ================ ================ LIABILITIES AND PARTNERS' CAPITAL Liabilities: Cash distribution payable $ - $ 8,704,964 Accounts payable and accrued expenses 100,483 91,518 Due to Management Company 162,000 166,235 ---------------- ---------------- Total liabilities 262,483 8,962,717 ---------------- ---------------- Partners' Capital: Managing General Partner $ 177,350 338,194 Individual General Partners 17 107 Limited Partners (120,000 Units) 476,798 3,194,329 Unallocated net unrealized (depreciation) appreciation of investments (201,014) 2,450,343 ---------------- ---------------- Total partners' capital 453,151 5,982,973 ---------------- ---------------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 715,634 $ 14,945,690 ================ ================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS As of December 31, 2000 Initial Investment Company / Position Date Cost Fair Value ------------------------------------------------------------------------------------------------------------------------------- Raytel Medical Corporation (A) Pacemaker monitoring service and MRI centers 62,500 shares of Common Stock Feb. 1990 241,639 40,625 Options to purchase 27,969 shares of Common Stock at $1.42 per share, expiring on 10/31/01 0 0 ------------------------------------------------------------------------------------------------------------------------------- Total Portfolio Investments (B) $ 241,639 $ 40,625 --------------------------------- Supplemental Information: Liquidated Portfolio Investments (C) Liquidation Realized Company Date Cost Gain (Loss) Return Allez, Inc. 1992 $ 1,781,320 $ (1,781,320) $ 0 ------------------------------------------------------------------------------------------------------------------------------- Amdahl Corporation 1989 729,742 1,837,787 2,567,529 Aqua Group, Inc. 1990 2,000,000 (1,999,999) 1 ------------------------------------------------------------------------------------------------------------------------------- BBN Advanced Computer Partners, L.P. 1990 868,428 (864,028) 4,400 ------------------------------------------------------------------------------------------------------------------------------- BBN Integrated Switch Partners, L.P. 1990-1992 5,022,380 (4,822,797) 199,583 ------------------------------------------------------------------------------------------------------------------------------- Biocircuits Corporation 1997-1998 2,653,751 (2,653,751) 0 Borg-Warner Automotive, Inc. 1994-1997 2,500,000 14,628,202 17,128,202 ------------------------------------------------------------------------------------------------------------------------------- Brightware, Inc. (B) 2000 44,703 (44,703) 0 Burns International Services Corporation (B) 2000 2,500,000 7,619,992 10,119,992 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, Inc. 1997-1999 2,389,168 (2,389,168) 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. 1994-1999 2,999,912 26,069,494 29,069,406 ------------------------------------------------------------------------------------------------------------------------------- Data Recording Systems, Inc. 1988 1,615,129 (1,499,999) 115,130 ------------------------------------------------------------------------------------------------------------------------------- Diatide, Inc. 1999 2,986,023 4,706,165 7,692,188 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 ------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------
ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS, continued As of December 31, 2000 Liquidation Realized Company Date Cost Gain (Loss) Return ------------------------------------------------------------------------------------------------------------------------------- Home Express, Inc. 1995 $ 1,822,751 $ (1,822,751) $ 0 ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- Horizon Cellular Telephone Company, L.P. 1996-1999 3,678,926 2,091,744 5,770,670 ------------------------------------------------------------------------------------------------------------------------------- I.D.E Corporation 1996-1999 1,110,909 (1,110,909) 0 IDEC Pharmaceuticals Corporation 1994-1997 4,261,036 8,378,635 12,639,671 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 ------------------------------------------------------------------------------------------------------------------------------- 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 1996-1999 4,203,938 (4,203,938) 0 OccuSystems, Inc. 1994-1996 2,657,000 9,353,722 12,010,722 Ogle Resources, Inc. 1993-1999 1,974,286 (1,965,882) 8,404 ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- Pandora Industries, Inc. 1990 2,060,139 (2,060,138) 1 ------------------------------------------------------------------------------------------------------------------------------- Photon Dynamics, Inc. 1999 2,452,226 2,114,795 4,567,021 ------------------------------------------------------------------------------------------------------------------------------- Pyxis Corporation 1993 634,598 7,169,424 7,804,022 Raytel Medical Corporation 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. (B) 1994-2000 100,000 (20,000) 80,000 Ringer Corporation 1991-1994 3,029,652 (2,208,012) 821,640 S & J Industries, Inc. 1991-1992 1,600,150 (1,555,149) 45,001 Sanderling Biomedical, L.P. (B) 1995-2000 2,000,000 1,058,315 3,058,315 ------------------------------------------------------------------------------------------------------------------------------- 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
ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS, continued As of December 31, 2000 Liquidation Realized Company Date Cost Gain (Loss) Return ------------------------------------------------------------------------------------------------------------------------------- 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 Totals from Liquidated Portfolio Investments $ 116,291,357 $ 124,942,887 $ 241,234,244 --------------------------------------------------------- Combined Net Combined Unrealized and Fair Value Cost Realized Gain and Return Totals from Active and Liquidated Portfolio Investments $ 116,532,996 $ 124,741,873 $ 241,274,869 =========================================================
(A) Public company (B) See Note 5 of Notes to Financial Statements for portfolio investments sold or written-off during 2000. (C) Amounts provided for "Supplemental Information: Liquidated Portfolio Investments" are cumulative from inception through December 31, 2000. See notes to financial statements. ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS As of December 31, 1999 Initial Investment Company / Position Date Cost Fair Value Burns International Services Corporation* (A) Protective services 500,000 shares of Common Stock Sept. 1988 $ 2,500,000 $ 4,325,000 ------------------------------------------------------------------------------------------------------------------------------- Brightware, Inc. Client/server and internet software development tools and services 200,057 shares of Common Stock May 1995 44,703 300,086 ------------------------------------------------------------------------------------------------------------------------------- Raytel Medical Corporation(A) Pacemaker monitoring service and MRI centers 62,500 shares of Common Stock Feb. 1990 241,639 153,125 Options to purchase 27,969 shares of Common Stock at $1.42 per share, expiring on 10/31/01 0 28,808 ------------------------------------------------------------------------------------------------------------------------------- ReGen Biologics, Inc. Joint and spine regeneration products 72,800 shares of Common Stock Apr. 1991 364 263,900 62,400 shares of Preferred Stock 114,400 226,200 ------------------------------------------------------------------------------------------------------------------------------- Stereotaxis, Inc. Drug delivery and brain surgery systems 21,632 shares of Common Stock Apr. 1990 216 16,224 134,674 shares of Preferred Stock 62,684 101,006 ------------------------------------------------------------------------------------------------------------------------------- Total Portfolio Investments (B) $ 2,964,006 $ 5,414,349 --------------------------------- Net Supplemental Information: Cost Realized Gain Return --------------------------------------------------------- Liquidated Portfolio Investments (C) $ 113,568,990 $117,304,395 $230,873,385 ========================================================= Combined Net Combined Unrealized and Fair Value Cost Realized Gain and Return Totals from Active and Liquidated Portfolio Investments $ 116,532,996 $ 119,754,738 $236,287,734 =========================================================
(A) Public company (B) See Note 5 of Notes to Financial Statements for portfolio investments sold or written-off during 1999. (C) Amounts provided for "Supplemental Information: Liquidated Portfolio Investments" are cumulative from inception through December 31, 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 For the Years Ended December 31, 2000 1999 1998 --------------- --------------- --------------- INVESTMENT INCOME AND EXPENSES Income: Interest from short-term investments $ 181,090 $ 202,271 $ 280,896 Interest and other income from portfolio investments 291 672 13,069 --------------- --------------- ---------------- Total investment income 181,381 202,943 293,965 --------------- --------------- ---------------- Expenses: Management fee 200,000 200,000 200,000 Professional fees 90,975 92,921 78,590 Mailing and printing 70,116 80,953 77,897 Independent General Partners' fees 66,000 91,500 82,500 Custodial fees 2,863 2,222 2,198 Other 888 8,228 5,668 --------------- --------------- ---------------- Total investment expenses 430,842 475,824 446,853 --------------- --------------- ---------------- NET INVESTMENT LOSS (249,461) (272,881) (152,888) Net realized gain (loss) from portfolio investments 7,638,492 6,025,590 (2,166,356) --------------- --------------- ---------------- NET REALIZED GAIN (LOSS) FROM OPERATIONS 7,389,031 5,752,709 (2,319,244) Change in unrealized appreciation of investments (2,651,357) (2,322,245) 765,025 --------------- --------------- ---------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 4,737,674 $ 3,430,464 $ (1,554,219) =============== =============== ================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENTS OF CASH FLOWS Years Ended December 31, 2000 1999 1998 --------------- --------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES Net investment loss $ (249,461) $ (272,881) $ (152,888) Adjustments to reconcile net investment loss to cash used for operating activities: Decrease (increase) in accrued interest from short-term investments 46,538 (13,201) (8,895) Decrease (increase) in accrued interest receivable - 1,291 (1,291) Increase (decrease) in payables, net 4,730 51,599 (5,783) --------------- --------------- ---------------- Cash used for operating activities (198,193) (233,192) (168,857) --------------- --------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES Net return (purchase) of short-term investments 8,424,830 (3,969,713) (1,500,007) Net proceeds from the sale of portfolio investments 10,360,859 13,734,704 174,204 --------------- --------------- ---------------- Cash provided from (used for) investing activities 18,785,689 9,764,991 (1,325,803) --------------- --------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES Cash distributions paid to Partners (18,972,460) (8,895,501) - --------------- --------------- ---------------- (Decrease) increase in cash and cash equivalents (384,964) 636,298 (1,494,660) Cash and cash equivalents at beginning of year 1,059,973 423,675 1,918,335 --------------- --------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 675,009 $ 1,059,973 $ 423,675 =============== =============== ================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENTS OF CHANGES IN PARTNERS' CAPITAL Years Ended December 31, 1998, 1999 and 2000 Unallocated Managing Individual Net Unrealized General General Limited Appreciation of Partner Partners Partners Investments Total ------------------------------------------------------------------------------------------------------------ ---------------- Balance as of December 31, 1997 $ 1,416,952 $ 543 $ 16,282,135 $ 4,007,563 $ 21,707,193 Cash distributions (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 Cash distributions (1,565,309) (384) (11,520,000) - (13,085,693) Net investment loss (2,597) (9) (270,275) - (272,881) Net realized gain on investments 1,253,323 159 4,772,108 - 6,025,590 Change in unrealized appreciation on investments - - - (2,322,245) (2,322,245) ------------- ------- -------------- -------------- ---------------- Balance as of December 31, 1999 338,194 107 3,194,329(A) 2,450,343 5,982,973 Cash distributions (1,747,212) (284) (8,520,000) - (10,267,496) Net investment loss (2,438) (8) (247,015) - (249,461) Net realized gain on investments 1,588,806 202 6,049,484 - 7,638,492 Change in unrealized appreciation on investments - - - (2,651,357) (2,651,357) ------------- ------- -------------- -------------- ---------------- Balance as of December 31, 2000 $ 177,350 $ 17 $ 476,798(A) $ (201,014) $ 453,151 ============= ======= ============== ============== ================
(A) The net asset value per $1,000 unit of limited partnership interest ("Unit"), including an assumed allocation of net unrealized appreciation or depreciation of investments, was $3, $43, and $117 as of December 31, 2000, 1999, and 1998, respectively. Cumulative cash distributions paid or accrued to limited partners from inception to December 31, 2000, 1999, and 1998 totaled $1,727, $1,656, and $1,560 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 Credit Suisse First Boston (USA), 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. As a result of the sale of the Partnership's last portfolio investment in March 2001, the Partnership terminated its operations and made its final cash distribution to Partners on March 29, 2001. See Note 9 below. 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. Publicly-held portfolio securities are valued at the closing public market price on the valuation date, discounted by a factor of up to 50% for sales restrictions, if any. 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 to reflect 1) meaningful third-party transactions in the private market or 2) 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. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS, continued 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 depreciation of investments of $201,014 as of December 31, 2000, was recorded for financial statement purposes, but was not recognized for tax purposes. Additionally, syndication costs relating to the offering of limited partnership interests 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 a cash equivalent. 3. Allocation of Partnership Profits and Losses Pursuant to the Partnership Agreement, the Managing General Partner is 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 such amount is positive. All other gains and losses of the Partnership are allocated among all partners (including the Managing General Partner) in proportion to each partners' respective capital contribution to the Partnership. From its inception to December 31, 2000 and March 29, 2001 (date of termination), the Partnership had net realized gains from its venture capital investments of $129.2 million and $129.0 million, respectively, including interest and other income from portfolio investments totaling $4.3 million. 4. Related Party Transactions The Management Company is responsible for 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. Each of the 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). The Independent General Partners agreed to waive fees for meetings held subsequent to December 31, 2000. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS, continued 5. Portfolio Investments Portfolio investments liquidated during the years ended December 31, 2000 and 1999 are shown below: Shares Realized Investment Sold Cost Gain (Loss) Return ------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 2000 (a): ReGen Biologics, Inc. (Sanderling) 135,200 $ 114,764 $ (52,410) $ 62,354 Stereotaxis, Inc. (Sanderling) 156,306 62,900 35,613 98,513 Burns International Services Corporation 500,000 2,500,000 7,619,992 10,119,992 Brightware, Inc. - write-off n/a 44,703 (44,703) 0 Research Applications, Inc. n/a - 80,000 80,000 ------------ ------------- ---------------- Total $ 2,722,367 $ 7,638,492 $ 10,360,859 ============= ============== ================ Year Ended December 31, 1999: Clarus Medical Systems, Inc. - write-off n/a $ 1,000,548 $ (1,000,548) $ 0 CoCensys, Inc. (Sanderling) 19,063 (b) 192,504 (173,433) 19,071 Corporate Express, Inc. 60,000 12,000 570,000 582,000 Diatide, Inc. 809,704 2,986,023 4,706,165 7,692,188 Horizon Cellular Telephone Company, L.P. - liquidation n/a 0 389,118 389,118 IDE Corporation - write-off n/a 227,000 (227,000) 0 MLMS Cancer Research, Inc. - liquidation n/a 0 1,567 1,567 Neocrin Company - write-off n/a 363,378 (363,378) 0 Ogle Resources, Inc. n/a 0 8,304 8,304 Photon Dynamics, Inc. 428,879 (c) 2,452,226 2,114,795 4,567,021 ------------- -------------- ---------------- Total $ 7,233,679 $ 6,025,590 $ 13,259,269 ============= ============== ================
(a) See Schedule of Portfolio Investments for cumulative results of liquidations of these investments. (b) Adjusted for a 1-for-8 reverse stock split effective in April 1999. (c) Includes 3,643 shares received in a non-cash exchange for the Partnership's warrant to purchase 6,062 shares. 6. Cash Distributions Cash distributions paid or accrued during the three years ended December 31, 2000 and cumulative cash distributions to partners from inception of the Partnership through December 31, 2000 and through March 29, 2001 (date of termination) listed below: Managing Individual Per General General Limited $1,000 Distribution Date Partner Partners Partners Unit ------------------------------------ --------------- ------------- ----------------- -------------- Inception to December 31, 1997 $ 24,133,864 $ 6,100 $ 183,000,000 $ 1,525.00 January 26, 1999 (accrued as of 12/31/98) 314,632 140 4,200,000 35.00 October 7, 1999 180,589 140 4,200,000 35.00 January 25, 2000 (accrued as of 12/31/99) 1,384,720 244 7,320,000 61.00 October 5, 2000 1,747,212 284 8,520,000 71.00 --------------- --------- ----------------- -------------- Cumulative totals as of December 31, 2000 27,761,017 6,908 207,240,000 1,727.00 March 29, 2001 132,595 7 201,600 1.68 --------------- --------- ----------------- -------------- Cumulative totals as of March 29, 2001 (Date of termination) $ 27,893,612 $ 6,915 $ 207,441,600 $ 1,728.68 =============== ========= ================= ==============
ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS, continued 7. Classification of Portfolio Investments The Partnership's investments in portfolio companies were categorized as follows, as of December 31, 2000 and December 31, 1999: December 31, 2000: % of Type of Investments Cost Fair Value Net Assets* ------------------- ------------ ------------ ------------ Common Stock and Warrants $ 241,639 $ 40,625 8.97% ============ ============ ===== Country/Geographic Region Western U.S. $ 241,639 $ 40,625 8.97% ============ ============ ===== Industry Medical Devices and Services $ 241,639 $ 40,625 8.97% ============ ============ ===== December 31, 1999: Type of Investments Common Stock and Warrants $ 2,786,922 $ 5,087,143 85.03% Preferred Stock 177,084 327,206 5.47% ------------ ------------ ------- Total $ 2,964,006 $ 5,414,349 90.50% ============ ============ ====== Country/Geographic Region Midwestern U.S. $ 2,562,900 $ 4,442,230 74.25% Western U.S. 401,106 972,119 16.25% ------------ ------------ ------ Total $ 2,964,006 $ 5,414,349 90.50% ============ ============ ====== Industry Business Services $ 2,500,000 $ 4,325,000 72.29% Biotechnology 177,664 607,330 10.15% Medical Devices and Services 241,639 181,933 3.04% Computer Hardware/Software 44,703 300,086 5.02% ------------ ------------ ------- Total $ 2,964,006 $ 5,414,349 90.50% ============ ============ ======
* Percentage of net assets is based on fair value. 8. Short-Term Investments The Partnership had no short-term investments as of December 31, 2000. As of December 31, 1999, 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, 1999: Lexington Parker Capital Corp. 6.10% 1/20/00 $ 492,884 $ 498,306 $ 500,000 Golden Crown Managers 6.38% 1/19/00 7,931,947 7,973,062 8,000,000 --------------- --------------- ---------------- Total as of December 31, 1999 $ 8,424,831 $ 8,471,368 $ 8,500,000 =============== =============== ================
ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS, continued 9. Subsequent Events In March 2001, the Partnership sold its holdings of Raytel Medical Corporation for $28,866, which resulted in a realized loss of $212,773 in 2001. As a result of the sale of the Partnership's holdings of Raytel Medical Corporation, the Partnership terminated its operations by making its final cash distribution to partners totaling $334,202 on March 29, 2001. Limited Partners received $201,600, or $1.68 per Unit, the Individual General Partners received $7 and the Managing General Partner received $132,595. 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 General Partners The General Partners of the Partnership consist of the three Individual General Partners and the Managing General Partner. The four 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 Individual 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 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 --------------------------- Jerome Jacobson (1) 4200 Massachusetts Avenue, N.W. Washington, D.C. 20016 Age 79 Individual General Partner since 1987 Units of the Partnership beneficially owned as of March 15, 2001 - None (3) President of Economic Studies Inc., an economic consulting firm, since 1984. William M. Kelly (1) 500 Fifth Ave, 50th Floor New York, New York 10110 Age 57 Individual General Partner since 1991 Units of the Partnership beneficially owned as of March 15, 2001 - 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, First Eagle International Fund from 1994 to present, First Eagle Sogen Funds from 1999 to present. Kevin K. Albert (2) 4 World Financial Center - 26th Floor New York, New York 10080 Age 48 Individual General Partner since 1990 Units of the Partnership beneficially owned as of March 15, 2001 - 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. 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 4 World Financial Center - 26th Floor, New York, New York 10080. 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, Ms. Herte and Mr. Bruno is 2 World Financial Center, New York, New York 10281. James V. Caruso Executive Vice President and Director Age 49 Officer or Director since 1998 Director of MLIBK, joined Merrill Lynch in January 1975. Mr. Caruso is the director of Technology for the Global Investment Banking Group. He is responsible for ensuring that the business requirements of MLIBK are supported by managing the development of new technologies and enhancing existing systems. Diane T. Herte Vice President and Director Age 40 Officer or Director since 2000 Director of Merrill Lynch Investment Managers ("MLIM") joined Merrill Lynch in 1984. Ms. Herte's responsibilities include the management of the Partnership Analysis and Finance Group with responsibilities including controllership, financial management, administrative and operational functions for certain partnerships and other entities for which subsidiaries of Merrill Lynch are the general partner or manager. James V. Bruno Vice President and Treasurer Age 34 Officer or Director since 1998 Vice President of MLIM, joined Merrill Lynch in 1997. Mr. Bruno's responsibilities include controllership and financial management functions for certain partnerships and other entities for which subsidiaries of Merrill Lynch are the general partner or manager. 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. The Sub-Management Company DLJ Capital Management Corporation (the "Sub-Manager"), a Delaware corporation, is an indirect wholly-owned subsidiary of Credit Suisse First Boston (USA), Inc. ("CSFB"), 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 institutional venture capital funds ("Sprout Funds") and several other smaller funds, with total committed capital of over $3.0 billion. Seven of such institutional funds, with capital exceeding $2.7 billion, are currently operating. As of December 31, 2000, DLJ Capital's most recent limited partnership is Sprout Capital IX, L.P., which was established in 2000 with an excess of 56 percent of its $1.44 billion 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 an additional office in Menlo Park, California. 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 58 Officer or Director since 1977 Chairman of Sprout Group, the venture capital affiliate of CSFB, since 1981. Dr. Robert E. Curry (1) Vice President Age 54 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 47 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 Senior Vice President and Director Age 60 Officer or Director since 1989 Chief Administrative Officer of CSFB. (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 4 World Financial Center - 26th Floor, New York, New York 10080. 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 - Through December 31, 2000, the Partnership paid each of the Independent General Partners 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. Through December 31, 2000, the Independent General Partners received $1,500 for each meeting of the Audit Committee attended unless such committee meeting was held on the same day as a meeting of the Individual General Partners. In such case, the Independent General Partners received $500 for each meeting of the Audit Committee attended. For the year ended December 31, 2000, the aggregate fees paid by the Partnership to the Independent General Partners totaled $66,000. The Independent General Partners agreed to waive fees for meetings held subsequent to December 31, 2000. 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, 2000, the Partnership had a net realized gain of $7,638,492 from the liquidation of certain portfolio investments. On a cumulative basis, from inception to December 31, 2000, the Partnership had $129,201,615 of net realized gains and investment income from its portfolio of venture capital investments. On October 5, 2000, the Partnership made a cash distribution to partners totaling $10,267,496. Limited partners of record on September 30, 2000 received $8,520,000, or $71 per Unit, the Individual General Partners received $284 and the Managing General Partner received $1,747,212. 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 provided to the Partnership. For the year ended December 31, 2000, 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 15, 2001, 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 that 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. Diane T. Herte, Director and Vice President of the Management Company and a Director of MLIM, joined Merrill Lynch in 1984. James V. Bruno, a Vice President and Treasurer of the Management Company and a Vice President of MLIM, joined Merrill Lynch in 1997. Messrs. Albert, Caruso, and Bruno 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, 2000 and 1999 Schedule of Portfolio Investments as of December 31, 2000 Schedule of Portfolio Investments as of December 31, 1999 Statements of Operations for the years ended December 31, 2000, 1999 and 1998 Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 Statements of Changes in Partners' Capital for the years ended December 31, 1998, 1999 and 2000 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) (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 30th day of March 2001. 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 30th day of March 2001. By: MLVPII Co., L.P. its Managing General Partner By: Merrill Lynch Venture Capital Inc. 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/ James V. Bruno By: /s/ William M. Kelly ------------------------------ ------------------------------ James V. Bruno William M. Kelly Vice President and Treasurer Individual General Partner (Principal Financial and ML Venture Partners II, L.P. Accounting Officer) By: /s/ Diane T. Herte ----------------------------- Diane T. Herte Vice President