SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended June 30, 1994
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
incorporation or organization) Identification No.)
World Financial Center, North Tower
New York, New York 10281-1327
(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
INDEX
ML VENTURE PARTNERS II, L.P.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Balance Sheets as of June 30, 1994 (Unaudited) and December 31, 1993
Schedule of Portfolio Investments as of June 30, 1994 (Unaudited)
Statements of Operations for the Three and Six Months Ended June 30, 1994
and 1993 (Unaudited)
Statements of Cash Flows for the Six Months Ended June 30, 1994 (Unaudited)
Statement of Changes in Partners' Capital for the Six Months Ended June 30,
1994 (Unaudited)
Notes to Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
ML VENTURE PARTNERS II, L.P.
BALANCE SHEETS
June 30, 1994 December 31,
(Unaudited) 1993
ASSETS
Investments - Note 2
Portfolio investments, at fair value
(cost $53,789,117 at June 30, 1994
and $55,130,444 at December 31, 1993) $ 74,595,330 $ 107,038,636
Short-term investments, at amortized cost 4,032,300 3,991,697
Cash and cash equivalents 833,924 1,412,882
Accrued interest receivable 382,523 220,067
Notes receivable 206,113 102,579
Receivable from securities sold - 321,300
TOTAL ASSETS $ 80,050,190 $ 113,087,161
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable $ 278,864 $ 41,535
Due to Management Company - Note 4 328,705 353,242
Due to Independent General Partners - Note 5 17,850 21,450
Total liabilities 625,419 416,227
Partners' Capital:
Managing General Partner 2,667,807 1,033,457
Individual General Partners 3,823 3,410
Limited Partners (120,000 Units) 55,946,928 59,725,875
Unallocated net unrealized appreciation
of investments - Note 2 20,806,213 51,908,192
Total partners' capital 79,424,771 112,670,934
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 80,050,190 $ 113,087,161
See notes to financial statements.
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 30, 1994
ACTIVE PORTFOLIO INVESTMENTS:
Initial
Investment Fair
Company / Position Date Cost Value
Biocircuits Corporation*(A)
515,269 shares of Common Stock May 1991 $ 1,422,501 $ 226,074
Borg-Warner Automotive, Inc.*(A)
500,000 shares of Common Stock Sept. 1988 2,500,000 8,587,500
Borg-Warner Security Corporation*(A)
500,000 shares of Common Stock Sept. 1988 2,500,000 4,350,000
CellPro, Incorporated*(A)
413,333 shares of Common Stock Mar. 1989 768,242 5,198,696
Children's Discovery Centers of America, Inc.*(A)
115,267 shares of Common Stock July 1988 2,000,259 1,281,193
Clarus Medical Systems, Inc.*
507,458 shares of Preferred Stock Jan. 1991 2,037,290 807,350
Warrants to purchase 20,238 shares of Common Stock
at $3.75 per share, expiring on 7/31/97 0 0
Corporate Express, Inc.*
442,136 shares of Common Stock May 1992 99,478 2,431,748
914,250 shares of Preferred Stock 1,830,435 5,028,375
Diatech, Inc.*
1,258,006 shares of Preferred Stock Dec. 1991 2,620,015 3,145,015
Eckerd Corporation*(A)
92,843 shares of Common Stock July 1992 857,004 1,404,831
Elantec, Inc.
2,889,947 shares of Preferred Stock Aug. 1988 1,069,569 1,069,569
852,273 shares of Common Stock 340,909 340,909
Home Express, Inc.*
486,067 shares of Preferred Stock June 1992 1,822,751 2,303,957
Horizon Cellular Telephone Company, L.P.:
HCTC Investment, L.P.
10% Promissory Note May 1992 2,587,500 2,587,500
SPTHOR Corporation
10% Promissory Note May 1992 646,875 646,875
34.5 shares of Common Stock 215,625 215,625
I.D.E. Corporation*
493,391 shares of Preferred Stock Mar. 1988 1,110,909 555,455
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 30, 1994
ACTIVE PORTFOLIO INVESTMENTS (CONTINUED):
Initial
Investment Fair
Company / Position Date Cost Value
IDEC Pharmaceuticals Corporation(A):
ML/MS Associates, L.P.*
34.4% Limited Partnership interest June 1989$ 3,960,000 $ 3,960,000
Warrants to purchase 380,000 shares of Common Stock
of IDEC Pharmaceuticals Corporation at $7.25 per
share, expiring on 2/17/95 217,391 0
MLMS Cancer Research, Inc.
400,000 shares of Common Stock July 1989 46,957 46,957
Inference Corporation
702,427 shares of Preferred Stock Apr. 1993 785,032 785,032
Warrants to purchase 193,682 shares of Preferred Stock
at $1 per share, expiring on 4/19/99 22,777 22,777
Warrants to purchase 24,233 shares of Preferred Stock
at $1.05 per share, expiring on 12/16/97 6,531 6,531
Warrants to purchase 295,827 shares of Common Stock
at $1 per share, expiring on 6/10/98 79,725 79,725
Komag, Incorporated(A)
144,486 shares of Common Stock Aug. 1988 1,331,561 2,402,441
Ligand Pharmaceuticals Inc.*(A)
115,440 shares of Class A Common Stock Apr. 1989 304,116 853,535
346,323 shares of Class B Common Stock 912,350 1,414,486
Warrants to purchase 5,158 shares of Common Stock
at $4.80 per share, expiring between
1/18/96 and 7/31/97 0 3,347
Micro Linear Corporation
800,214 shares of Common Stock Aug. 1988 1,120,300 1,120,300
Neocrin Corporation
1,586,831 shares of Preferred Stock June 1991 3,369,046 2,102,381
9.25% Convertible Note due 6/22/95 317,592 317,592
OccuSystems, Inc.(B)
504,830 shares of Preferred Stock June 1993 2,524,150 3,155,188
Photon Dynamics, Inc.*
1,222,828 shares of Preferred Stock Sept. 1988 2,452,226 1,435,181
Raytel Medical Corporation*
1,000,000 shares of Preferred Stock Feb. 1990 1,000,000 2,000,000
Options to purchase 55,938 shares of Preferred Stock
at $.71 per share, expiring 10/31/01 0 72,160
Regeneron Pharmaceuticals, Inc.*(A)
1,377,895 shares of Common Stock Jan. 1988 1,616,740 4,947,194
Sanderling Biomedical, L.P.*(C)
80% Limited Partnership interest May 1988 2,000,000 2,055,965
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 30, 1994
ACTIVE PORTFOLIO INVESTMENTS (CONTINUED):
Initial
Investment Fair
Company / Position Date Cost Value
Shared Resource Exchange, Inc.
2,777 shares of Common Stock Apr. 1987 $ 250,000 $ 0
SDL, Inc.*
8% Subordinated Note July 1992 2,019,721 2,019,721
97,011 shares of Common Stock 169,769 169,769
26,270 shares of Preferred Stock 849,834 849,834
Target Vision, Inc.*
395,000 shares of Preferred Stock Apr. 1987 395,000 0
The Business Depot Ltd.* (D)
94,435 shares of Preferred Stock May 1992 1,214,184 1,885,303
United States Paging Corporation*(A)
450,053 shares of Common Stock Apr. 1987 1,479,405 1,214,018
Warrants to purchase 16,887 shares of Common Stock
at $3.33 per share, expiring between
2/27/95 and 4/28/95 0 0
Warrants to purchase 25,330 shares of Common Stock
at $.89 per share, expiring between
12/15/95 and 3/8/96 0 30,016
Viasoft, Inc.
861,885 shares of Preferred Stock Dec. 1987 915,348 1,465,205
TOTALS FROM ACTIVE PORTFOLIO INVESTMENTS $ 53,789,117$ 74,595,330
SUPPLEMENTAL INFORMATION: LIQUIDATED PORTFOLIO INVESTMENTS(E)
Cost Realized Gain Return
TOTALS FROM LIQUIDATED
PORTFOLIO INVESTMENTS $ 57,698,058 $ 5,394,623 $ 63,092,681
Combined Net Combined
Unrealized and Fair Value
Cost Realized Gain and Return
TOTALS FROM ACTIVE & LIQUIDATED
PORTFOLIO INVESTMENTS $ 111,487,175 $ 26,200,836 $ 137,688,011
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 30, 1994
ACTIVE PORTFOLIO INVESTMENTS (CONTINUED):
(A) Public company
(B) During the quarter, the Partnership sold 26,570 shares of preferred
stock of OccuSystems, Inc. for $173,000, realizing a gain of $40,000.
(C) Indirectly, the Partnership has an additional investment in Regeneron
Pharmaceuticals, Inc. through its 80% limited partnership interest in
Sanderling Biomedical, L.P.
(D) In February 1994, the Partnership sold an option to purchase all of
its 94,435 preferred shares of The Business Depot Ltd. for $208,000.
The option is exercisable by the holder at 33 Canadian dollars per
share (approximately $23.85 per share) before August 1994 or 38
Canadian dollars per share (approximately $26.74 per share) before
February 1995.
(E) Amounts provided for "Supplemental Information: Liquidated Portfolio
Investments" are cumulative from inception through June 30, 1994.
* Company may be deemed an affiliated person of the Partnership as such
term is defined in the Investment Company Act of 1940.
See notes to financial statements.
ML VENTURE PARTNERS II, L.P.
STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
INVESTMENT INCOME AND EXPENSES
Income:
Interest from short-term
investments $134,524 $112,149 $236,811 $266,298
Interest and other income from
portfolio investments 134,503 133,240 537,390 253,332
Totals 269,027 245,389 774,201 519,630
Expenses:
Management fee - Note 4 328,705 353,837 681,322 737,919
Professional fees 112,881 50,095 219,064 144,180
Mailing and printing 31,668 8,707 160,539 156,935
Independent General Partners' fees
- Note 5 21,816 29,025 44,081 53,802
Custodial fees 3,574 3,194 7,438 7,878
Miscellaneous 100 - 1,275 -
Bad debt expense - Note 9 - - - 406,355
Totals 498,744 444,858 1,113,719 1,507,069
NET INVESTMENT LOSS (229,717) (199,469) (339,518) (987,439)
Net realized gain from investments
sold or written-off 50,262 2,198,501 14,395,334 10,350,672
NET REALIZED GAIN (LOSS) FROM
OPERATIONS (allocable to Partners)
- Note 3 (179,455) 1,999,032 14,055,816 9,363,233
Net change in unrealized appreciation
of investments (9,816,191) 4,264,010 (31,101,979) (4,108,619)
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS $(9,995,646) $6,263,042 $(17,046,163) $5,254,614
See notes to financial statements.
ML VENTURE PARTNERS II, L.P.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
1994 1993
CASH FLOWS USED FOR OPERATING ACTIVITIES
Net investment loss $ (339,518)$ (987,439)
Adjustments to reconcile net investment loss
to cash used for operating activities:
(Increase) decrease in receivables and other assets (265,990) 406,525
(Increase) decrease in accrued interest on short-term
investments (10,242) 13,620
Increase in payables 209,192 129,444
Cash used for operating activities (406,558) (437,850)
CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES
Net return (purchase) of short-term investments (30,361) 4,164,998
Purchase of portfolio investments (804,776) (5,949,722)
Net proceeds from the sale of portfolio investments 16,862,737 15,455,582
Proceeds from repayment of note - 1,717,941
Cash provided from investing activities 16,027,600 15,388,799
CASH FLOWS USED FOR FINANCING ACTIVITIES
Cash distributions to Limited Partners - Note 7 (16,200,000) (15,600,000)
Decrease in cash and cash equivalents (578,958) (649,051)
Cash and cash equivalents at beginning of period 1,412,882 2,306,339
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 833,924 $ 1,657,288
See notes to financial statements.
ML VENTURE PARTNERS II, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1994
Unallocated
Managing Individual Net Unrealized
General General Limited Appreciation
Partner Partners Partners of Investments Total
Balance at
beginning of
period $ 1,033,457 $ 3,410 $ 59,725,875 $ 51,908,192$ 112,670,934
Cash distribution
paid May 26, 1994
- - Note 7 - - (16,200,000) - (16,200,000)
Allocation of
net investment
loss - Note 3 103,008 (16) (442,510) - (339,518)
Allocation of net
realized gain on
investments
- - Note 3 1,531,342 429 12,863,563 - 14,395,334
Net change in
unrealized
appreciation of
investments - - - (31,101,979) (31,101,979)
Balance at end
of period $ 2,667,807 $ 3,823$ 55,946,928(A)$ 20,806,213 $ 79,424,771
(A) The net asset value per unit of limited partnership interest,
including an assumed allocation of net unrealized appreciation of
investments, was $604 at June 30, 1994. Cumulative cash distributions
paid to Limited Partners from inception to June 30, 1994 totaled $490
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.
The Partnership's objective is to achieve long-term capital appreciation
from its portfolio of venture capital investments, originally made in new
and developing companies and other special investment situations. The
Partnership does not engage in any other business or activity. The
Partnership is scheduled to terminate on December 31, 1997. The Individual
General Partners can extend the termination date for up to two additional
two-year periods if they determine that such extensions would be 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 Managing General Partner under the
supervision of the Individual General Partners. The fair value of publicly-
held portfolio securities is adjusted to the average closing public market
price for the last five trading days of each quarter 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 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 clearly 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 Managing General Partner
considers such risks in determining the fair value of the Partnership's
portfolio investments.
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.
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 June 30, 1994, the Partnership had a $7.5 million net
realized gain from its venture capital investments.
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 ("IGP's") receives $19,000 annually in
quarterly installments, $1,200 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 IGP is required and
$1,200 for each committee meeting attended ($500 if a committee meeting is
held on the same day as a meeting of the General Partners).
6. Commitments
At June 30, 1994, the Partnership had a commitment to make a follow-on
investment of $1.1 million in Corporate Express, Inc. The Management
Company purchased this investment on behalf of the Partnership and will
hold the investment until the Partnership obtains an exemptive order from
the Securities and Exchange Commission allowing the Partnership to acquire
this investment from the Management Company. The purchase price to the
Partnership will be the lesser of the fair value of the investment or the
Management Company's cost, plus interest, as of the date of acquisition by
the Partnership. Additionally, the Partnership has guaranteed $1.8 million
of bank debt of SDL, Inc. which is payable by the company on or before June
30, 1995. The Partnership also has a $393,043 non-interest bearing
obligation payable on demand to MLMS Cancer Research, Inc.
7. Cash Distributions
On May 26, 1994, the Partnership made a cash distribution to Limited
Partners of record on March 31, 1994 totaling $16.2 million, or $135 per
$1,000 Unit. On May 26, 1993, the Partnership made a cash distribution to
Limited Partners of record on March 31, 1993 totaling $15.6 million, or
$130 per $1,000 Unit. These distributions primarily represented proceeds
received by the Partnership from the sale of certain portfolio investments.
Cumulative cash distributions paid to Limited Partners total $58.8 million,
or $490 per $1,000 Unit.
8. Pending Litigation
The Partnership has been named as a defendant, along with other entities
and individuals, in an action involving In-Store Advertising, Inc. ("ISA").
The action is a purported class action suit wherein the plaintiffs, who
purchased shares of ISA in its July 19, 1990 initial public offering
through November 8, 1990, allege violations under certain sections of the
Securities Act of 1933, the Securities Exchange Act of 1934 and common law.
The plaintiffs seek rescission of their purchases of ISA common stock
together with damages and certain costs and expenses. The Partnership
believes it has meritorious defenses to the allegations and that the cost
of resolution of the litigation will not have a material impact on the
financial condition and results of operations of the Partnership.
9. Bad Debt Expense
On March 31, 1993, the Partnership wrote off its $1.7 million promissory
note dated May 17, 1988 due from Ogle Resources, Inc. As a result, the
Partnership realized a bad debt expense of $406,355 representing accrued
interest receivable from the note.
10. Interim Financial Statements
In the opinion of MLVPII Co., L.P., the managing general partner of the
Partnership, the unaudited financial statements as of June 30, 1994, and
for the three and six month periods then ended, reflect all adjustments
necessary for the fair presentation of the results of the interim periods.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Liquidity and Capital Resources
During the quarter ended June 30, 1994, the Partnership invested $736,000
in two existing portfolio investments. From its inception through June 30,
1994, the Partnership invested $111.5 million in 58 portfolio investments.
Additionally, the Partnership has a commitment to make a follow-on
investment of $1.1 million in Corporate Express, Inc. As of June 30, 1994,
28 of the Partnership's 58 portfolio investments had been fully liquidated
and 9 investments had been partially liquidated. Portfolio investments
liquidated through June 30, 1994, had a cost of $57.7 million and returned
$63.1 million, resulting in a cumulative net realized gain of $5.4 million.
Generally, all cash received from the sale of portfolio investments, after
an adequate reserve for operating expenses and follow-on investments in
existing portfolio companies, is distributed to Partners as soon as
practicable after receipt. Accordingly, on May 26, 1994, the Partnership
made a cash distribution to Limited Partners of record on March 31, 1994
totaling $16.2 million, or $135 per $1,000 Unit. The distribution
primarily represented proceeds received from the sale of certain portfolio
investments and brings cumulative cash distributions to Limited Partners to
$58.8 million, or $490 per $1,000 Unit.
At June 30, 1994, the Partnership held $4.87 million in cash and short-term
investments; $4.03 million in short-term securities with maturities of less
than one year and $834,000 in an interest-bearing cash account. Funds
needed to cover future operating expenses and follow-on investments will be
obtained from the Partnership's existing cash reserves and from proceeds
received from the future sale of portfolio investments.
Results of Operations
Net realized gain or loss from operations is comprised of 1) net realized
gains or losses from portfolio investments sold or written-off and 2) net
investment income or loss. For the three and six months ended June 30,
1994, the Partnership had a net realized loss from operations of $179,000
and a net realized gain from operations of $14.1 million, respectively.
For the three and six months ended June 30, 1993, the Partnership had a net
realized gain from operations of $2 million and $9.4 million, respectively.
Realized Gains and Losses from Portfolio Investments - For the three and
six months ended June 30, 1994, the Partnership had a $50,000 and a $14.4
million net realized gain from portfolio investments sold or written-off,
respectively. In June 1994, the Partnership sold 26,570 shares of
OccuSystems, Inc. in a private transaction for $173,000, realizing a gain
of $40,000. Also during the three months ended June 30, 1994, the
Partnership realized a gain of $10,000 from the receipt of a final escrow
payment relating to the sale of its investment in R-Byte Inc. During the
three months ended March 31, 1994, the Partnership sold the following
securities in the public market: 370,000 common shares of CellPro,
Incorporated for $11.3 million, realizing a gain of $10.6 million, 140,000
common shares of Regeneron Pharmaceuticals, Inc. for $2.3 million,
realizing a gain of $2.2 million, 90,000 common shares of Komag,
Incorporated for $2.4 million, realizing a gain of $1.6 million and 78,271
common shares of Ringer Corporation for $254,000, realizing a gain of
$20,000. Also during the three months ended March 31, 1994, the
Partnership realized gains totaling $44,000 from the receipt of R-Byte
escrow payments. Additionally, the Partnership wrote off its $100,000
investment in Research Applications, Inc.
For the three and six months ended June 30, 1993, the Partnership had a $2.2
million and a $10.4 million net realized gain from portfolio investments
sold and written-off, respectively. During the three months ended June 30,
1993, the Partnership sold 230,000 common shares of Regeneron in the public
market for $3.7 million, realizing a gain of $3.4 million. In-Store
Advertising, Inc. ("ISA") filed for protection under Chapter 11 of the
federal Bankruptcy Code resulting in the write-off of the Partnership's
remaining $1.1 million investment in the company. The Partnership received
a final liquidation payment from InteLock Corporation resulting in the write-
off of the Partnership's remaining $123,000 investment in the company.
During the three months ended March 31, 1993, the Partnership sold its
investment in Pyxis Corporation in a private transaction for $7.8 million,
realizing a gain of $7.2 million and sold 275,000 common shares of Regeneron
for $4.2 million, realizing a gain of $3.9 million. The Partnership also
sold 187,912 common shares of Ringer for $567,000, realizing a gain of
$4,000. The Partnership wrote-off its $2 million investment in Ogle
Resources, Inc. and the remaining $900,000 of its investment in
Communications International, Inc. ("CII") due to continued operational and
financial difficulties at these companies.
Investment Income and Expenses - For the three months ended June 30, 1994
and 1993, the Partnership had a net investment loss of $230,000 and
$199,000, respectively. The increase in net investment loss for the 1994
period compared to the 1993 period primarily is attributable to an increase
in operating expenses, primarily professional fees relating to the ISA
Litigation (see Note 8 of Notes to Financial Statements). For the six
months ended June 30, 1994 and 1993, the Partnership had a net investment
loss of $340,000 and $987,000, respectively. The decrease in net
investment loss for the 1994 period compared to the 1993 period primarily
is attributable to an increase in interest and other income from portfolio
investments for the 1994 period and a bad debt expense recorded during
1993, as discussed below. These decreases to net investment loss were
partially offset by an increase in professional fees related to the ISA
litigation. For the six months ended June 30, 1994 and 1993, interest and
other income from portfolio investments was $537,000 and $253,000,
respectively. The increase in interest and other income from portfolio
investments for the 1994 period compared to the 1993 period primarily is
due to the receipt of purchase option income of $208,000 in the 1994
period. Such income resulted from the sale by the Partnership of an option
to purchase its preferred shares of The Business Depot Ltd. The bad debt
expense of $406,000 recorded during the 1993 period represented accrued
interest on a $1.7 million promissory note due from Ogle Resources, Inc.,
which was written-off on June 30, 1993.
The Management Company performs, or arranges for others to perform, the
management and administrative services necessary for the operation of the
Partnership. The Management Company receives a management fee at an annual
rate of 2.5% of the gross capital contributions to the Partnership, reduced
by selling commissions, organizational and offering expenses paid by the
Partnership, return of capital and realized capital losses, with a minimum
annual fee of $200,000. Such fee is determined and payable quarterly. The
management fee for the three months ended June 30, 1994 and 1993, was
$329,000 and $354,000, respectively. The management fee for the six months
ended June 30, 1994 and 1993, was $681,000 and $738,000, respectively. The
management fee will continue to decline in future periods as the
Partnership's investment portfolio continues to mature. The management fee
and other operating expenses are paid with funds provided from operations.
Funds provided from operations for the period were obtained from interest
received on 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 or
Depreciation of Portfolio Investments - For the six months ended June 30,
1994, the Partnership had a net unrealized loss from its portfolio
investments of $19.0 million primarily resulting from the net downward
revaluation of the Partnership's publicly traded securities. Additionally,
during the six months ended June 30, 1994, a net $12.1 million was
transferred from unrealized gain to realized gain relating to the sale of
CellPro, Regeneron, Ringer and Komag shares, as discussed above. The $19.0
million unrealized loss and the $12.1 million net transfer from unrealized
gain to realized gain resulted in a $31.1 million reduction to the
Partnership's net unrealized appreciation of investments for the six month
period.
For the six months ended June 30, 1993, the Partnership had a net
unrealized gain from its portfolio investments of $7.2 million, primarily
resulting from the upward revaluation of the Partnership's investment in
Regeneron. During the six months ended June 30, 1993, a net $11.3 million
was transferred from unrealized gain to realized gain primarily relating to
the sale of Pyxis and Regeneron shares, as discussed above. The $7.2
million unrealized gain and the $11.3 million net transfer from unrealized
gain to realized gain, resulted in a $4.1 million reduction to the
Partnership's net unrealized appreciation of investments for the six month
period.
Net Assets - Changes to net assets resulting from operations is comprised
of 1) net realized gains and losses from operations and 2) changes to net
unrealized appreciation or depreciation of portfolio investments. For the
six months ended June 30, 1994 and 1993, the Partnership had a net decrease
in net assets resulting from operations of $17.1 million and a net increase
in net assets resulting from operations of $5.2 million, respectively.
At June 30, 1994, the Partnership's net assets were $79.4 million, a
decrease of $33.3 million from $112.7 million at December 31, 1993. This
decrease resulted from the $16.2 million cash distribution paid to Limited
Partners in May 1994 and the $17.1 million net decrease in net assets
resulting from operations for the six month period.
At June 30, 1993, the Partnership's net assets were $99.3 million, a
decrease of $10.4 million from $109.7 million at December 31, 1992. This
decrease resulted from the $15.6 million cash distribution to Limited
Partners paid in May 1993 exceeding the $5.2 million net increase in net
assets resulting from operations for the six month period.
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 at June 30, 1994 and December 31, 1993,
was $604 and $852, respectively. The reduction to the Partnership's net
asset value of $248 per Unit for the six months ended June 30, 1994,
reflects the cash distribution of $135 per Unit and the decrease in net
assets resulting from operations of $113 per Unit.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Partnership has been named as a defendant in an action relating to its
ownership of securities of In-Store Advertising, Inc. ("In-Store
Advertising"). On or about July 16, 1993, a Second Amended Consolidated
Class Action Complaint (the "Amended Complaint") was filed in the United
States District Court for the Southern District of New York in the In Re In-
Store Advertising Securities Litigation. The action is a purported class
action suit wherein the plaintiffs (the "Plaintiffs") are persons who
allegedly purchased shares of In-Store Advertising common stock in the July
19, 1990 initial public offering (the "Offering") and through November 8,
1990. The defendants named in the Amended Complaint include present and
former individual officers and directors of In-Store Advertising, the
underwriters involved in the Offering, KPMG Peat Marwick (In-Store
Advertising's auditors) and certain other defendants, including the
Partnership, who owned In-Store Advertising securities prior to the
Offering (the "Venture Capital Defendants"). Prior to the filing of the
Amended Complaint, In-Store Advertising filed a "prepackaged" plan in U.S.
Bankruptcy Court pursuant to Chapter XI of the U.S. Bankruptcy Code.
The Amended Complaint alleges violations under Sections 11, 12(2) and 15 of
the Securities Act of 1933, as amended (the "1933 Act"), Section 10(b) and
20 of the Securities Exchange Act of 1934, as amended (the "1934 Act") and
Rule 10b-5 promulgated thereunder, and common law claims of negligent
misrepresentation, fraud and deceit in connection with the sale of
securities. The Plaintiffs seek rescission of the purchases of In-Store
Advertising's common stock to the extent the members of the alleged classes
still hold their shares, together with damages and certain costs and
expenses.
The Amended Complaint alleges that the Venture Capital Defendants are
liable under Section 10(b) of the 1934 Act and Rule 10b-5, and are also
liable as controlling persons of In-Store Advertising within the meaning of
Section 15 of the 1933 Act and Section 20(a) of the 1934 Act. The Venture
Capital Defendants are also being sued as alleged knowing and substantial
aiders and abettors of the other defendants' wrongful conduct and under
common law fraud and negligence theories. An individual director of In-
Store Advertising, named as a defendant in the action, was a Vice President
of Merrill Lynch Venture Capital Inc., the General Partner of the Managing
General Partner of the Partnership. The Partnership believes that it has
meritorious defenses to the allegations in the Amended Complaint (see Note
8 of Notes to Financial Statements).
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the quarter
covered by this report.
Item 5. Other Information.
On May 23, 1994, the Partnership purchased 232,298 shares of preferred
stock of Photon Dynamics, Inc. for $418,136. This investment is in
addition to the 990,530 shares of preferred stock previously owned by the
Partnership.
On June 21, 1994, the Partnership purchased a 9.25% convertible note of
Neocrin Corporation for $317,592. This investment is in addition to the
1,586,831 shares of preferred stock previously owned by the Partnership.
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)
(28) Prospectus of the Partnership dated February
10, 1987 filed with the Securities and Exchange
Commission pursuant to Rule 424(b) under the
Securities Act of 1933, as supplemented by a
supplement thereto dated April 21, 1987 filed
pursuant to Rule 424(c) under the Securities Act
of 1933. (7)
(b) No reports on Form 8-K have been filed during the
quarter for which this report is filed.
(1) Incorporated by reference to the Partnership's Annual Report on Form
10-K for the year ended December 31, 1988 filed with the Securities
and Exchange Commission on March 27, 1989.
(2) Incorporated by reference to the Partnership's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1990 filed with the
Securities and Exchange Commission on November 14, 1990.
(3) Incorporated by reference to the Partnership's Annual Report on Form
10-K for the year ended December 31, 1990 filed with the Securities
and Exchange Commission on March 28, 1991.
(4) Incorporated by reference to the Partnership's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1987 filed with the
Securities and Exchange Commission on August 14, 1987.
(5) Incorporated by reference to the Partnership's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1989 filed with the
Securities and Exchange Commission on May 15, 1989.
(6) Incorporated by reference to the Partnership's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1991 filed with the
Securities and Exchange Commission on August 14, 1991.
(7) Incorporated by reference to the Partnership's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1987 filed with the
Securities and Exchange Commission on May 15, 1987.
(8) Incorporated by reference to the Partnership's Annual Report on Form
10-K for the year ended December 31, 1992 filed with the Securities
and Exchange Commission on March 26, 1993.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ML VENTURE PARTNERS II, L.P.
By: /s/ Kevin K. Albert
Kevin K. Albert
General Partner
By: MLVPII Co., L.P.
its Managing General Partner
By: Merrill Lynch Venture Capital Inc.
its General Partner
By: /s/ Kevin K. Albert
Kevin K. Albert
President
(Principal Executive Officer)
By: /s/ Joseph W. Sullivan
Joseph W. Sullivan
Treasurer
(Principal Financial and Accounting Officer)
Date: August 12, 1994
Exhibit Index
Exhibits Page
(3) (a) Amended and Restated Certificate of Limited
Partnership of the Partnership, dated 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)
(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)
______________________________
(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.
