-----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, On5nVcynrStliejaA+dLE95MEDlyoN2iDZyrT3pcNKnWOZaRwdYUd3EBadSFK6Qt IHZazWKC62FMWCe7tmEhsg== 0001094889-99-000006.txt : 19991117 0001094889-99-000006.hdr.sgml : 19991117 ACCESSION NUMBER: 0001094889-99-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99755734 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 September 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 September 30, 1999 (Unaudited) and December 31, 1998 Schedule of Portfolio Investments as of September 30, 1999 (Unaudited) Statements of Operations for the Three and Nine Months Ended September 30, 1999 and 1998 (Unaudited) Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998 (Unaudited) Statement of Changes in Partners' Capital for the Nine Months Ended September 30, 1999 (Unaudited) Notes to Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Item 3. Qualitative and Quantitative 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 September 30, 1999 December 31, (Unaudited) 1998 ASSETS Portfolio investments, at fair value (cost $6,189,029 as of September 30, 1999 and $10,197,685 as of December 31, 1998) $ 15,292,593 $ 14,970,273 Short-term investments at amortized cost - 4,488,454 Cash and cash equivalents 5,155,678 423,675 Receivable from securities sold - 475,435 Accrued interest receivable - 1,291 ---------------- ---------------- TOTAL ASSETS $ 20,448,271 $ 20,359,128 ================ ================ LIABILITIES AND PARTNERS' CAPITAL Liabilities: Cash distribution payable $ 4,380,729 $ 4,514,772 Accounts payable and accrued expenses 104,695 85,874 Due to Management Company 116,235 100,410 Due to Independent General Partners 20,154 19,870 ---------------- ---------------- Total liabilities 4,621,813 4,720,926 ---------------- ---------------- Partners' Capital: Managing General Partner 575,786 652,777 Individual General Partners 205 341 Limited Partners (120,000 Units) 6,146,903 10,212,496 Unallocated net unrealized appreciation of portfolio investments 9,103,564 4,772,588 ---------------- ---------------- Total partners' capital 15,826,458 15,638,202 ---------------- ---------------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 20,448,271 $ 20,359,128 ================ ================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS (Unaudited) As of September 30, 1999 Initial Investment Company / Position Date Cost Fair Value Burns International Services Corporation* (A) 500,000 shares of Common Stock Sept. 1988 $ 2,500,000 $ 6,046,875 - ------------------------------------------------------------------------------------------------------------------------------- Brightware, Inc. 200,057 shares of Common Stock May 1995 44,703 300,086 - ------------------------------------------------------------------------------------------------------------------------------- Corporate Express, Inc. (A) (D) 60,000 shares of Common Stock May 1992 12,000 564,375 - ------------------------------------------------------------------------------------------------------------------------------- Diatide, Inc.* (A) (D) 809,704 shares of Common Stock Dec. 1991 2,986,023 7,540,369 - ------------------------------------------------------------------------------------------------------------------------------- I.D.E. Corporation 113,322 shares of Common Stock Mar. 1988 227,000 0 - ------------------------------------------------------------------------------------------------------------------------------- Photon Dynamics, Inc.* (A)(B) (D) 3,643 shares of Common Stock Sept. 1988 0 76,503 - ------------------------------------------------------------------------------------------------------------------------------- Raytel Medical Corporation(A) 62,500 shares of Common Stock Feb. 1990 241,639 135,938 Options to purchase 27,969 shares of Common Stock at $1.42 per share, expiring on 10/31/01 0 21,117 - ------------------------------------------------------------------------------------------------------------------------------- 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 $ 6,189,029 $ 15,292,593 --------------------------------- Supplemental Information: Liquidated Portfolio Investments(E) Net Cost Realized Gain Return Totals from Liquidated Portfolio Investments(C) $ 110,343,967 $ 111,789,338 $ 222,133,305 =============== ============== ============== Combined Net Combined Unrealized and Fair Value Cost Realized Gain and Return Totals from Active & Liquidated Portfolio Investments $ 116,532,996 $ 120,892,902 $ 237,425,898 =============== ============= ==============
ML VENTURE PARTNERS II, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS, continued (Unaudited) As of September 30, 1999 (A) Public company (B) In July 1999, the Partnership sold its remaining 31,736 common shares of Photon Dynamics, Inc. for $365,648, realizing a gain of $182,849. Additionally, in September 1999, the Partnership exchanged its option to purchase 6,062 common shares of Photon at $5.40 per share, for 3,643 common shares in a non-cash transaction. The 3,643 shares were subsequently sold in October 1999 for $76,774. (C) In September 1999, the Partnership sold its remaining investment of 19,063 common shares of CoCensys, Inc. for $19,071, realizing a loss of $173,433. Additionally, the Partnership sold its remaining interest in Ogle Resources Inc., an investment that had previously been written-off, for $8,304, realizing a gain for the entire amount. (D) Subsequent to the end of the quarter, the Partnership sold its remaining investment in Diatide, Inc. and Corporate Express Inc. for $7,692,188 and $582,000, respectively. See Note 10 of Notes to Financial Statements. (E) Amounts provided for "Supplemental Information: Liquidated Portfolio Investments" are cumulative from inception through September 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 Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ------------ --------------- -------------- -------------- INVESTMENT INCOME AND EXPENSES Income: Interest from short-term investments $ 48,422 $ 70,845 $ 97,475 $ 212,918 Interest and other income from portfolio investments 71 - 672 8,496 ------------ ---------------- -------------- -------------- Total investment income 48,493 70,845 98,147 221,414 ------------ ---------------- -------------- -------------- Expenses: Management fee 50,000 50,000 150,000 150,000 Professional fees 21,617 25,077 73,328 79,791 Mailing and printing 20,520 34,781 69,602 75,304 Independent General Partners' fees 19,500 19,500 67,500 63,000 Custodial fees 244 565 2,055 1,517 Miscellaneous 663 382 8,186 4,931 ------------ ---------------- -------------- -------------- Total investment expenses 112,544 130,305 370,671 374,543 ------------ ---------------- -------------- -------------- NET INVESTMENT LOSS (64,051) (59,460) (272,524) (153,129) Net realized gain (loss) from portfolio investments 17,720 (666,740) 510,533 (2,164,119) ------------ ---------------- -------------- -------------- NET REALIZED (LOSS) GAIN FROM OPERATIONS (46,331) (726,200) 238,009 (2,317,248) Change in unrealized appreciation of investments 3,632,959 (3,951,246) 4,330,976 (2,005,115) ------------ ---------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 3,586,628 $ (4,677,446) $ 4,568,985 $ (4,322,363) ============== ================ ============== ================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENTS OF CASH FLOWS (Unaudited) For the Nine Months Ended September 30, 1999 1998 ---------------- ---------------- CASH FLOWS USED FOR OPERATING ACTIVITIES Net investment loss $ (272,524) $ (153,129) Adjustments to reconcile net investment loss to cash used for operating activities: Decrease in accrued interest receivable 1,291 - Decrease (increase) in accrued interest on short-term investments 33,337 (22,171) Increase in liabilities, net 34,930 22,446 ---------------- ---------------- Cash used for operating activities (202,966) (152,854) ---------------- ---------------- CASH FLOWS PROVIDED FROM (USED FOR) INVESTING ACTIVITIES Net return (purchase) of short-term investments 4,455,117 (1,455,886) Net proceeds from the sale of portfolio investments 4,994,624 125,793 ---------------- ---------------- Cash provided from (used for) investing activities 9,449,741 (1,330,093) ---------------- ---------------- CASH FLOWS USED FOR FINANCING ACTIVITIES Cash distributions paid to Partners (4,514,772) - ---------------- ---------------- Increase (decrease) in cash and cash equivalents 4,732,003 (1,482,947) Cash and cash equivalents at beginning of period 423,675 1,918,335 ---------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,155,678 $ 435,388 ================ ================
See notes to financial statements. ML VENTURE PARTNERS II, L.P. STATEMENT OF CHANGES IN PARTNERS' CAPITAL (Unaudited) For the Nine Months Ended September 30, 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 Accrued cash distribution - paid October 7, 1999 (180,589) (140) (4,200,000) - (4,380,729) Net investment loss (2,593) (9) (269,922) - (272,524) Net realized gain from portfolio investments 106,191 13 404,329 - 510,533 Change in unrealized appreciation of investments - - - 4,330,976 4,330,976 ------------- -------- -------------- -------------- ---------------- Balance at end of period $ 575,786 $ 205 $ 6,146,903(A) $ 9,103,564 $ 15,826,458 ============= ======== ============== ============== ================
(A) The net asset value per unit of limited partnership interest, including an assumed allocation of net unrealized appreciation of investments, is $111 as of September 30, 1999. Cumulative cash distributions paid and accrued to limited partners from inception to September 30, 1999 totaled $1,595 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 November 1999, 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, 2001. 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 $9.1 million as of September 30, 1999, which was recorded for financial statement purposes, was not recognized for tax purposes. Additionally, from inception to September 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. 3. Allocation of Partnership Profits and Losses The Partnership Agreement provides that the Managing General Partner will be allocated, on a cumulative basis over the life of the Partnership, 20% of the Partnership's aggregate investment income and net realized gains and losses from venture capital investments, provided that such amount is positive. All other gains and losses of the Partnership are allocated among all the Partners (including the Managing General Partner) in proportion to their respective capital contributions to the Partnership. From its inception to September 30, 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. Portfolio Investments Portfolio investments liquidated during the three and nine months ended September 30, 1999 and 1998, are shown below: Shares Realized Security Sold Cost Gain (Loss) Return Three Months Ended September 30, 1999: CoCensys, Inc. - sale of common stock 19,063 $ 192,504 $ (173,433) $ 19,071 Ogle Resources, Inc. - sale of remaining holdings n/a 0 8,304 8,304 Photon Dynamics, Inc. - sale of common stock 31,736 182,799 182,849 365,648 -------------- ---------------- --------------- Sub-total 375,303 17,720 393,023 -------------- ---------------- --------------- Six Months Ended June 30, 1999: Neocrin Company - write-off remaining cost n/a 363,378 (363,378) 0 MLMS Cancer Research, Inc. - liquidating distribution n/a 0 1,567 1,567 Photon Dynamics, Inc. - sale of common stock 393,500 2,269,427 1,855,172 4,124,599 Clarus Medical Systems, Inc. -write-off remaining cost n/a 1,000,548 (1,000,548) 0 -------------- ---------------- --------------- Sub-total 3,633,353 492,813 4,126,166 -------------- ---------------- --------------- Totals for the nine months ended September 30, 1999 $ 4,008,656 $ 510,533 $ 4,519,189 ============== ================ =============== Three Months Ended September 30, 1998: Sanderling Biomedical, L.P. - partial write-off n/a 666,740 (666,740) 0 -------------- ---------------- --------------- Sub-total 666,740 (666,740) 0 -------------- ---------------- --------------- Six Months Ended June 30, 1998: Biocircuits Corporation - partial write-off n/a 1,488,884 (1,488,884) 0 HCTC Investment, L.P. - sale of options / partial write-off of note n/a 134,288 (8,495) 125,793 -------------- ---------------- --------------- Sub-total 1,623,172 (1,497,379) 125,793 -------------- ---------------- --------------- Totals for the nine months ended September 30, 1998 $ 2,289,912 $ (2,164,119) $ 125,793 ============== ================ ===============
ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS (Unaudited), continued 7. Classification of Portfolio Investments As of September 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 $ 6,011,945 $ 14,965,387 94.56% Preferred Stock 177,084 327,206 2.07% -------------- --------------- ------- Total $ 6,189,029 $ 15,292,593 96.63% ============== =============== ====== Country/Geographic Region Midwestern U.S. $ 2,574,900 $ 6,728,480 42.52% Western U.S. 401,106 1,023,744 6.47% Eastern U.S. 3,213,023 7,540,369 47.64% -------------- --------------- ------ Total $ 6,189,029 $ 15,292,593 96.63% ============== =============== ====== Industry Business Services $ 2,512,000 $ 6,611,250 41.77% Biotechnology 3,163,687 8,147,699 51.49% Semiconductors/Electronics 0 76,503 0.48% Medical Devices and Services 241,639 157,055 0.99% Computer Hardware/Software 271,703 300,086 1.90% -------------- --------------- ------ Total $ 6,189,029 $ 15,292,593 96.63% ============== =============== ======
* Percentage of net assets is based on fair value. 8. Interim Financial Statements In the opinion of MLVPII Co., L.P. the managing general partner of the Partnership, the unaudited financial statements as of September 30, 1999, and for the nine month period then ended, reflect all adjustments necessary for the fair presentation of the results of the interim period. 9. Cash Distributions In August 1999, the General Partners approved a cash distribution to partners totaling $4,380,729. The distribution was paid on October 7, 1999. Limited partners of record on September 30, 1999 received $4,200,000, or $35 per Unit. Additionally, the Individual General Partners received $140 and the Managing General Partner received $180,589. ML VENTURE PARTNERS II, L.P. NOTES TO FINANCIAL STATEMENTS (Unaudited), continued 9. Cash Distributions - continued In November 1999, the General Partners approved an additional cash distribution to partners totaling $8,707,964. The distribution will be paid in January 2000. Limited partners of record on December 31, 1999 will receive $7,320,000, or $61 per Unit. Additionally, the Individual General Partners will receive $244 and the Managing General Partner will receive $1,387,720. 10. Subsequent Events Subsequent to the end of the quarter, in October 1999, the Partnership sold its remaining 3,643 common shares of Photon Dynamics, Inc. for $76,774. As a result, the Partnership will recognize a realized gain of $76,774 for the quarter ending December 31, 1999. Subsequent to the end of the quarter, in October 1999, the Partnership sold its remaining 809,704 common shares of Diatide, Inc. for $7,692,188, or $9.50 per share. As a result, the Partnership will recognize a realized gain of $4,706,165 for the quarter ending December 31, 1999. On October 28, 1999, Corporate Express, Inc. announced the completion of its merger into Buhrmann NV. In connection with the merger, the Partnership sold its remaining 60,000 common shares of Corporate Express for $582,000, or $9.70 per share. As a result, the Partnership will recognize a realized gain of $570,000 for the quarter ending December 31, 1999. Item 2. Management's Discussion and Analysis of Financial Condition and of Operations. Liquidity and Capital Resources As of September 30, 1999, the Partnership held $5,155,678 in an interest-bearing cash account. Interest earned from short-term investments totaled $48,422 and $97,475 for the three and nine months ended September 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 November 1999, 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, 2001. However, the Partnership will terminate as soon as practicable after the completion of the liquidation of its remaining investments and final distribution to partners. As discussed below, during the three and nine months ended September 30, 1999, the Partnership received net proceeds from the sale of certain portfolio securities aggregating $393,023 and $4,519,189, respectively. Additionally, subsequent to the end of the quarter, in October 1999, the Partnership completed further sales of portfolio securities for net proceeds totaling $8,350,962. See Notes 6 and 10 of Notes to Financial Statements. In August 1999, the General Partners approved a cash distribution to partners totaling $4,380,729. The distribution was paid on October 7, 1999. Limited partners of record on September 30, 1999 received $4,200,000, or $35 per unit. Additionally, the Individual General Partners received $140 and the Managing General Partner received $180,589. In November 1999, the General Partners approved a cash distribution to partners totaling $8,707,964. The distribution will be paid in January 2000. Limited partners of record on December 31, 1999 will receive $7,320,000, or $61 per unit. Additionally, the Individual General Partners will receive $244 and the Managing General Partner will receive $1,387,720. Results of Operations - For the three and nine months ended September 30, 1999, the Partnership had a net realized loss from operations of $46,331 and a net realized gain from operations of $238,009, respectively. For the three and nine months ended September 30, 1998, the Partnership had a net realized loss from operations of $726,200 and $2,317,248, respectively. Net realized gain or loss from operations is comprised of 1) net realized gain or loss from portfolio investments and 2) net investment income or loss (interest and dividend income less operating expenses). Realized Gains and Losses from Portfolio Investments - For the three and nine months ended September 30, 1999, the Partnership had a net realized gain from its portfolio investments of $17,720 and $510,533, respectively. During the three months ended September 30, 1999, the Partnership sold its remaining 19,063 shares of CoCensys, Inc. common stock for $19,071, realizing a loss of $173,433, and 31,736 shares of Photon Dynamics, Inc. common stock for $365,648, realizing a gain of $182,849. Additionally, during the three month period, the Partnership sold its remaining interest in Ogle Resources, Inc., an investment that had been previously written-off, for $8,304, realizing a gain for the entire amount. During the six months ended June 30, 1999, the Partnership realized losses of $1,000,548 and $363,378 resulting from the write-off of its remaining investments in Clarus Medical Systems, Inc. and Neocrin Company, respectively, due to continued business and financial difficulties at these companies. Also during the six month period, the Partnership sold 393,500 common shares of Photon Dynamics, Inc. for $4,124,599, realizing a gain of $1,855,172. Finally, during the six month period, the Partnership received a $1,567 liquidating distribution from MLMS Cancer Research, Inc., realizing a gain for the entire amount. For the three and nine months ended September 30, 1998, the Partnership had a net realized loss from its portfolio investments of $666,740 and $2,164,119, respectively. During the three months ended September 30, 1998, the Partnership wrote-off $666,740 of the remaining cost of its investment in Sanderling Biomedical, L.P. to reflect the Partnership's pro-rata share of the cost of Sanderling's remaining assets. During the six months ended June 30, 1998, Biocircuits Corporation ceased operations and began to liquidate its remaining assets. As a result, the Partnership wrote-off its remaining investment in Biocircuits, realizing a loss of $1,488,884. Also during the six month period, the Partnership received $125,793 from Horizon Cellular Telephone Company, L.P. relating to the previous sale of certain options in connection with its investment in Horizon and wrote-off a portion of the remaining notes due from the company, resulting in a net realized loss of $8,495. Investment Income and Expenses - For the three months ended September 30, 1999 and 1998, the Partnership had a net investment loss of $64,051 and $59,460, respectively. The $4,591 increase in net investment loss for the 1999 period compared to the same period in 1998 resulted from a $22,352 decrease in investment income partially offset by a $17,761 decrease in operating expenses. The decline in investment income primarily was attributable to a decrease in interest from short-term investments due to a reduction in funds available for investment in such securities during the 1999 period compared to the same period in 1998. The decline in operating expenses primarily resulted from a decrease in mailing and printing expenses, reflecting a general decrease in such expenses for 1999 period as compared to the same period in 1998. For the nine months ended September 30, 1999 and 1998, the Partnership had a net investment loss of $272,524 and $153,129, respectively. The $119,395 increase in net investment loss for the 1999 period compared to the same period in 1998, primarily was attributable to a $123,267 decrease in investment income partially offset by a $3,872 decrease in operating expenses. The decline in investment income included a $115,443 decrease in interest from short-term investments and a $7,824 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 1999 period as 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 decline in operating expenses for the nine months ended September 30, 1999 primarily was due to a $6,463 decrease in professional fees and a $5,702 decrease in mailing and printing expenses. These reduced expenses were partially offset by an $8,293 increase in other operating expenses, including a $4,500 increase in Independent General Partners' fees relating to an additional special meeting held during the first quarter of 1999. The Management Company is responsible for the management and administrative services necessary for the operation of the Partnership. The Management Company receives a management fee at an annual rate of 2.5% of the gross capital contributions to the Partnership, reduced by selling commissions, organizational and offering expenses paid by the Partnership, return of capital and realized capital losses, with a minimum annual fee of $200,000. Such fee is determined and payable quarterly. The management fee for the three months ended September 30, 1999 and 1998 was $50,000. The management fee for the nine months ended September 30, 1999 and 1998 was $150,000. The management fee will remain at the minimum annual fee of $200,000 for future periods through the liquidation of the Partnership. The management fee and other operating expenses are paid with funds provided from operations and from existing cash reserves. Funds provided from operations for the period were obtained from interest earned from short-term investments and proceeds from the sale of certain portfolio investments. Unrealized Gains and Losses and Changes in Unrealized Appreciation or Depreciation of Investments - For the nine months ended September 30, 1999, the Partnership increased the fair value of its remaining portfolio investments by $4,420,313, due to the net upward revaluation of its publicly held securities. Additionally, during the nine month period, $89,337 of net unrealized gain was transferred to realized gain, relating to portfolio investments sold or written off during the period, as discussed above. As a result, the Partnership had a $4,330,976 favorable change to the net unrealized appreciation of investments for the nine month period ended September 30, 1999. For the nine months ended September 30, 1998, the Partnership reduced the fair value of its portfolio investments by $3,895,855. Additionally, during the nine month period, $1,890,740 of net unrealized loss was transferred to realized loss, relating to portfolio investments sold or written off during the period, as discussed above. As a result, the Partnership had a $2,005,115 unfavorable change to the net unrealized appreciation of investments for the nine month period ended September 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 September 30, 1999, the Partnership's net assets were $15,826,458, an increase of $188,256 from net assets of $15,638,202 as of December 31, 1998. This increase was comprised of the $4,568,985 increase in net assets from operations exceeding the $4,380,729 cash distribution to partners accrued during the nine month period ended September 30, 1999 and paid in October 1999. The increase in net assets from operations was comprised of the $4,330,976 increase in unrealized appreciation of investments and the $238,009 net realized gain from operations for the nine month period ended September 30, 1999. As of September 30, 1998, the Partnership's net assets were $17,384,830, a decrease of $4,322,363 from net assets of $21,707,193 as of December 31, 1997. This decrease was comprised of the $2,005,115 decrease in unrealized appreciation of investments and the $2,317,248 net realized loss from operations for the nine month period ended September 30, 1998. Gains and losses from investments are allocated to partners' capital accounts when realized, in accordance with the Partnership Agreement (see Note 3 of Notes to Financial Statements). However, for purposes of calculating the net asset value per unit of limited partnership interest, net unrealized appreciation of investments has been included as if the net appreciation had been realized and allocated to the limited partners in accordance with the Partnership Agreement. Pursuant to such calculation, the net asset value per $1,000 Unit as of September 30, 1999 and December 31, 1998 was $111 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 in November 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. We have not been informed of any Y2K problems from these outside providers. 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 $15,292,593 as of September 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 $1,529,259. Market risk relating to the Partnership's interest bearing cash equivalents held as of September 30, 1999 is 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. None. 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/ James V. Bruno James V. Bruno Vice President and Treasurer (Principal Financial and Accounting Officer) Date: November 15, 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 SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1999 JAN-1-1999 SEP-30-1999 6,189,029 15,292,593 0 0 5,155,678 20,448,271 0 0 4,621,813 4,621,813 0 0 120,000 120,000 0 0 0 0 9,103,564 15,826,458 0 98,147 0 370,671 (272,524) 510,533 4,330,976 4,568,985 0 0 0 4,380,729 0 0 0 188,256 0 0 0 0 0 0 0 15,732,330 117 (2) 31 0 (35) 0 111 0 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0
-----END PRIVACY-ENHANCED MESSAGE-----