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 March 31, 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 March 31, 1994 (Unaudited) and December 31, 1993
Schedule of Portfolio Investments as of March 31, 1994 (Unaudited)
Statements of Operations for the Three Months Ended March 31, 1994 and 1993
(Unaudited)
Statements of Cash Flows for the Three Months Ended March 31, 1994 and 1993
(Unaudited)
Statement of Changes in Partners' Capital for the Three Months Ended March
31, 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
March 31, 1994 December 31,
(Unaudited) 1993
ASSETS
Investments - Note 2
Portfolio investments, at fair value
(cost $53,186,239 at March 31, 1994
and $55,130,444 at December 31, 1993) $ 83,808,643 $ 107,038,636
Short-term investments, at amortized cost 20,929,291 3,991,697
Cash and cash equivalents 1,048,352 1,412,882
Accrued interest receivable 300,928 220,067
Notes receivable 153,729 102,579
Receivable from securities sold - 321,300
TOTAL ASSETS $ 106,240,943 $ 113,087,161
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Cash distribution payable - Note 7 $ 16,200,000
Accounts payable 246,459 $ 41,535
Due to Management Company - Note 4 352,617 353,242
Due to Independent General Partners - Note 5 21,450 21,450
Total liabilities 16,820,526 416,227
Partners' Capital:
Managing General Partner 2,633,019 1,033,457
Individual General Partners 3,830 3,410
Limited Partners (120,000 Units) 56,161,164 59,725,875
Unallocated net unrealized appreciation
of investments - Note 2 30,622,404 51,908,192
Total partners' capital 89,420,417 112,670,934
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 106,240,943 $ 113,087,161
See notes to financial statements.
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
MARCH 31, 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 $594,492
Borg-Warner Automotive, Inc.*(A)
500,000 shares of Common Stock Sept. 1988 2,500,000 11,700,000
Borg-Warner Security Corporation*(A)
500,000 shares of Common Stock Sept. 1988 2,500,000 6,346,875
CellPro, Incorporated*(A)(B)
413,333 shares of Common Stock Mar. 1989 768,242 6,662,928
Children's Discovery Centers of America, Inc.*(A)
115,267 shares of Common Stock July 1988 2,000,259 1,327,876
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 1,542,355
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)
MARCH 31, 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)(B)
144,486 shares of Common Stock Aug. 1988 1,331,561 3,075,385
Ligand Pharmaceuticals Inc.*(A)
115,440 shares of Class A Common Stock Apr. 1989 304,116 994,227
346,323 shares of Class B Common Stock 912,350 1,919,149
Warrants to purchase 5,158 shares of Common Stock
at $4.80 per share, expiring between
1/18/96 and 7/31/97 0 7,872
Micro Linear Corporation
800,214 shares of Common Stock Aug. 1988 1,120,300 960,257
Neocrin Corporation
1,586,831 shares of Preferred Stock June 1991 3,369,046 2,102,381
OccuSystems, Inc.
531,400 shares of Preferred Stock June 1993 2,657,000 2,657,000
Photon Dynamics, Inc.*
990,530 shares of Preferred Stock Sept. 1988 2,034,090 375,000
Raytel Medical Corporation*
1,000,000 shares of Preferred Stock Feb. 1990 1,000,000 2,000,000
Regeneron Pharmaceuticals, Inc.*(A)(B)
1,377,895 shares of Common Stock Jan. 1988 1,616,740 7,633,538
Sanderling Biomedical, L.P.*(C)
80% Limited Partnership interest May 1988 2,000,000 2,442,069
Shared Resource Exchange, Inc.
2,777 shares of Common Stock Apr. 1987 250,000 0
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
MARCH 31, 1994
ACTIVE PORTFOLIO INVESTMENTS (CONTINUED):
Initial
Investment Fair
Company / Position Date Cost Value
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 1,214,184
United States Paging Corporation*(A)
450,053 shares of Common Stock Apr. 1987 1,479,405 1,689,386
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 5,537 shares of Common Stock
at $4.22 per share, expiring on 6/23/94 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 50,597
Viasoft, Inc.
861,885 shares of Preferred Stock Dec. 1987 915,348 1,440,348
TOTALS FROM ACTIVE PORTFOLIO INVESTMENTS $53,186,239 $83,808,643
SUPPLEMENTAL INFORMATION: LIQUIDATED PORTFOLIO INVESTMENTS(E)
Cost Realized Gain Return
TOTALS FROM LIQUIDATED
PORTFOLIO INVESTMENTS $57,565,208 $5,344,361 $62,909,569
Combined Net Combined
Unrealized and Fair Value
Cost Realized Gain and Return
TOTALS FROM ACTIVE & LIQUIDATED
PORTFOLIO INVESTMENTS $110,751,447 $35,966,765 $146,718,212
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
MARCH 31, 1994
ACTIVE PORTFOLIO INVESTMENTS (CONTINUED):
(A) Public company
(B) During the quarter, 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 and 90,000 common shares of Komag, Incorporated
for $2.4 million, realizing a gain of $1.6 million.
(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 $26.40 per share) before August 1994 or 38
Canadian dollars per share (approximately $30.40 per share) before
February 1995.
(E) Amounts provided for "Supplemental Information: Liquidated Portfolio
Investments" are cumulative from inception through March 31, 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)
FOR THE THREE MONTHS ENDED MARCH 31,
1994 1993
INVESTMENT INCOME AND EXPENSES
Income:
Interest from short-term investments $ 102,287 $ 154,149
Interest and other income from portfolio investments 402,887 120,092
Totals 505,174 274,241
Expenses:
Management fee - Note 4 352,617 384,082
Mailing and printing 128,871 148,228
Professional fees 106,183 94,085
Independent General Partners' fees - Note 5 22,265 24,777
Custodial fees 3,864 4,684
Miscellaneous 1,175 -
Bad debt expense - Note 9 - 406,355
Totals 614,975 1,062,211
NET INVESTMENT LOSS (109,801) (787,970)
Net realized gain from investments sold or
written-off 14,345,072 8,152,171
NET REALIZED GAIN FROM OPERATIONS
(allocable to Partners) - Note 3 14,235,271 7,364,201
Net change in unrealized appreciation of investments (21,285,788) (8,372,629)
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ (7,050,517)$ (1,008,428)
See notes to financial statements.
ML VENTURE PARTNERS II, L.P.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
1994 1993
CASH FLOWS USED FOR OPERATING ACTIVITIES
Net investment loss $ (109,801) $ (787,970)
Adjustments to reconcile net investment loss
to cash used for operating activities:
(Increase) decrease in receivables and other assets (132,011) 289,369
Increase in accrued interest on short-term
investments (64,882) (57,606)
Increase in payables 204,299 209,701
Cash used for operating activities (102,395) (346,506)
CASH FLOWS PROVIDED FROM (USED FOR)
INVESTING ACTIVITIES
Net return (purchase) of short-term investments (16,872,712) (10,762,924)
Purchase of portfolio investments (69,048) (1,109,120)
Net proceeds from the sale of portfolio investments 16,679,625 12,542,018
Cash provided from (used for) investing activities (262,135) 669,974
Increase (decrease) in cash and cash equivalents (364,530) 323,468
Cash and cash equivalents at beginning of period 1,412,882 2,306,339
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,048,352 $ 2,629,807
See notes to financial statements.
ML VENTURE PARTNERS II, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 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
Accrued cash
distribution payable
May 1994 - Note 7 - - (16,200,000) - (16,200,000)
Allocation of
net investment
loss - Note 3 78,674 (7) (188,468) - (109,801)
Allocation of net
realized gain on
investments
- - - Note 3 1,520,888 427 12,823,757 - 14,345,072
Net change in
unrealized
appreciation of
investments - - - (21,285,788) (21,285,788)
Balance at end
of period $2,633,019 $3,830 $56,161,164(A) $30,622,404 $89,420,417
(A) The net asset value per unit of limited partnership interest,
including an assumed allocation of net unrealized appreciation of
investments, was $670 at March 31, 1994. Cumulative cash
distributions paid or accrued to Limited Partners from inception to
March 31, 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 March 31, 1994, the Partnership had a $7.4 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 March 31, 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, 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. This distribution primarily represented proceeds received by
the Partnership from the sale of certain portfolio investments.
Additionally, on March 2, 1994, the General Partners approved a cash
distribution to Limited Partners of $16.2 million, or $135 per Unit. This
distribution will be paid in May 1994 to Limited Partners of record on
March 31, 1994 and will bring cumulative cash distributions paid to Limited
Partners to $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 relating to its ownership interest in 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 March 31, 1994, and
for the three month period then ended, reflect all adjustments necessary
for the fair presentation of the results of the interim period.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Liquidity and Capital Resources
During the quarter ended March 31, 1994, the Partnership invested $69,000
in one existing portfolio investment. From its inception through March 31,
1994, the Partnership had invested $110.8 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
March 31, 1994, 28 of the Partnership's 58 portfolio investments had been
fully liquidated and 8 investments had been partially liquidated.
Portfolio investments liquidated through March 31, 1994, had a cost of
$57.6 million and returned $62.9 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 March 2, 1994, the General
Partners approved a cash distribution to Limited Partners of $16.2 million,
or $135 per $1,000 Unit, primarily representing proceeds received from the
sale of certain portfolio investments. This distribution will be paid in
May 1994 to Limited Partners of record on March 31, 1994 and will bring
cumulative cash distributions to Limited Partners to $58.8 million, or $490
per $1,000 Unit.
At March 31, 1994, the Partnership held $22 million in cash and short-term
investments; $20.9 million in short-term securities with maturities of less
than one year and $1 million in an interest-bearing cash account. As
discussed above, $16.2 million of the $22 million in cash and short-term
investments will be distributed to Limited Partners in May 1994.
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 months ended March 31, 1994 and
1993, the Partnership had a net realized gain from operations of $14.2
million and $7.4 million, respectively.
Realized Gains and Losses from Portfolio Investments - For the three months
ended March 31, 1994, the Partnership had a $14.3 million net realized gain
from portfolio investments sold or written-off. During the quarter, 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 quarter, the Partnership received the final
escrow payment from the sale of its investment in R-Byte Inc. resulting in
a realized gain of $44,000. Additionally, the Partnership wrote off its
$100,000 investment in Research Applications, Inc.
For the three months ended March 31, 1993, the Partnership had an $8.2
million net realized gain from portfolio investments sold or written-off.
In January 1993, the Partnership sold its investment in Pyxis Corporation
in a private transaction for $7.8 million, realizing a gain of $7.2
million. During the quarter, the Partnership sold 275,000 common shares of
Regeneron in the public market for $4.2 million, realizing a gain of $3.9
million. The Partnership also sold 187,912 common shares of Ringer in the
public market for $567,000, realizing a gain of $4,000. Also during the
quarter, the Partnership wrote off its $2 million investment in Ogle
Resources, Inc. and its $900,000 remaining 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 March 31, 1994
and 1993, the Partnership had a net investment loss of $110,000 and
$788,000, respectively. The lower 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 of $406,000 recorded during 1993, as discussed
below. Interest and other income from portfolio investments for the three
months ended March 31, 1994 and 1993 was $403,000 and $120,000,
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. for 33 Canadian
dollars per share before August 1994 or 38 Canadian dollars before February
1995. The bad debt expense of $406,000 recorded during the quarter ended
March 31, 1993 represented accrued interest on a $1.7 million promissory
note due from Ogle Resources, Inc., which was written-off on March 31,
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 March 31, 1994 and 1993, was
$353,000 and $384,000, 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 quarter ended March 31,
1994, the Partnership had a net unrealized loss from its portfolio
investments of $9.2 million primarily resulting from the net downward
revaluation of the Partnership's publicly traded securities. During the
quarter ended March 31, 1994, the Partnership transferred a net $12.1
million from unrealized gain to realized gain related to the sale of
CellPro, Regeneron, Komag and Ringer shares, as discussed above. The $9.2
million unrealized loss and the $12.1 million net transfer from unrealized
gain to realized gain, resulted in a $21.3 million reduction to the
Partnership's net unrealized appreciation of investments for the three
month period.
For the quarter ended March 31, 1993, the Partnership had a net unrealized
gain from its portfolio investments of $1.4 million, primarily resulting
from the upward revaluation of the Partnership's publicly traded
securities. During the quarter ended March 31, 1993, the Partnership
transferred a net $9.8 million from unrealized gain to realized gain
related to the sale of Regeneron, Pyxis and Ringer shares and the write-off
of CII and Ogle, as discussed above. The $9.8 million net transfer from
unrealized gain to realized gain, offset by the $1.4 million unrealized
gain, resulted in an $8.4 million reduction to the Partnership's net
unrealized appreciation of investments for the three 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
three months ended March 31, 1994 and 1993, the Partnership had a net
decrease in net assets resulting from operations of $7.1 million and $1
million, respectively.
At March 31, 1994, the Partnership's net assets were $89.4 million, a
decrease of $23.3 million from $112.7 million at December 31, 1993. This
decrease resulted from the $16.2 million accrued cash distribution to
Limited Partners payable in May 1994 and the $7.1 million net decrease to
net assets resulting from operations.
At March 31, 1993, the Partnership's net assets were $93.1 million, a
decrease of $16.6 million from $109.7 million at December 31, 1992. This
decrease resulted from the $15.6 million accrued cash distribution to
Limited Partners payable in May 1993 and the $1 million net decrease to net
assets resulting from operations.
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 March 31, 1994 and December 31,
1993, was $670 and $852, respectively. The reduction in the Partnership's
net asset value of $182 per Unit reflects the accrued cash distribution of
$135 per Unit and a decrease in net assets resulting from operations of $47
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 February 1, 1994, the Partnership purchased 55,238 shares of preferred
stock of Viasoft, Inc. for $69,048. This investment is in addition to the
806,647 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: May 13, 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.
