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, 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)
<TABLE>
<S> <C>
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 10281-1327
(Address of principal executive offices) (Zip Code)
</TABLE>
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
<PAGE>
INDEX
ML VENTURE PARTNERS II, L.P.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Balance Sheets as of September 30, 1994 (Unaudited) and December 31, 1993
Schedule of Portfolio Investments as of September 30, 1994 (Unaudited)
Statements of Operations for the Three and Nine Months Ended September 30, 1994
and 1993 (Unaudited)
Statements of Cash Flows for the Nine Months Ended September 30, 1994 and 1993
(Unaudited)
Statement of Changes in Partners' Capital for the Nine Months Ended September
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.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
ML VENTURE PARTNERS II, L.P.
BALANCE SHEETS
<TABLE>
September 30, 1994 December 31,
(Unaudited) 1993
<S> <C> <C>
ASSETS
Investments - Note 2
Portfolio investments, at fair value (cost $52,679,933 at
September 30, 1994 and $55,130,444 at December 31, 1993) $ 80,377,799 $ 107,038,636
Short-term investments, at amortized cost 4,736,321 3,991,697
Cash and cash equivalents 734,938 1,412,882
Accrued interest and other receivables 545,789 220,067
Notes receivable 206,139 102,579
Receivable from securities sold - 321,300
- -------
TOTAL ASSETS $ 86,600,986 $ 113,087,161
= ========== = ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable $ 110,666 $ 41,535
Due to Management Company - Note 4 327,873 353,242
Due to Independent General Partners - Note 5 21,450 21,450
------ ------
Total liabilities 459,989 416,227
------- -------
Partners' Capital:
Managing General Partner 1,599,737 1,033,457
Individual General Partners 3,853 3,410
Limited Partners (120,000 Units) 56,839,541 59,725,875
Unallocated net unrealized appreciation of investments - Note 2 27,697,866 51,908,192
---------- ----------
Total partners' capital 86,140,997 112,670,934
---------- -----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 86,600,986 $ 113,087,161
= ========== = ===========
</TABLE>
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1994
ACTIVE PORTFOLIO INVESTMENTS:
<TABLE>
Initial Investment
Company / Position Date Cost Fair Value
<S> <C> <C> <C>
Biocircuits Corporation*(A)
515,269 shares of Common Stock May 1991 $ 1,422,501 $ 326,552
- ------------------------------ -------- - --------- - -------
Borg-Warner Automotive, Inc.*(A)(B)
500,000 shares of Common Stock Sept. 1988 2,500,000 9,690,970
- ------------------------------ ---------- --------- ---------
Borg-Warner Security Corporation*(A)
500,000 shares of Common Stock Sept. 1988 2,500,000 4,068,750
- ------------------------------ ---------- --------- ---------
CellPro, Incorporated*(A)
423,333 shares of Common Stock Mar. 1989 873,242 6,453,182
- ------------------------------ --------- ------- ---------
Children's Discovery Centers of America, Inc.(A)
115,267 shares of Common Stock July 1988 2,000,259 1,292,915
- ------------------------------ --------- --------- ---------
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.*(A)(C)
678,193 shares of Common Stock May 1992 1,929,913 9,446,159
- ------------------------------ -------- --------- ---------
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 1,786,067
- ----------------------------- --------- ------- ---------
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
- --------------------------------- --------- --------- -------
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
------------------------------ --------- ------ ------
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1994
ACTIVE PORTFOLIO INVESTMENTS (CONTINUED):
<TABLE>
Initial Investment
Company / Position Date Cost Fair Value
<S> <C> <C> <C>
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 3,329,611
- ------------------------------ --------- --------- ---------
Ligand Pharmaceuticals Inc.*(A)
115,440 shares of Class A Common Stock Apr. 1989 304,116 904,186
346,323 shares of Class B Common Stock 912,350 1,587,340
Warrants to purchase 5,158 shares of Common Stock at
$4.80 per share, expiring between 1/18/96 and 7/31/97 0 3,912
----------------------------------------------------- - -----
Micro Linear Corporation(A)(D)
800,214 shares of Common Stock Aug. 1988 1,120,300 1,749,692
- ------------------------------ --------- --------- ---------
Neocrin Company(E)
317,366 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.
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 5,581,026
- -------------------------------- --------- --------- ---------
Sanderling Biomedical, L.P.*(F)
80% Limited Partnership interest May 1988 2,000,000 2,199,127
- -------------------------------- -------- --------- ---------
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
- --------------------------------- --------- ------- -
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1994
ACTIVE PORTFOLIO INVESTMENTS (CONTINUED):
<TABLE>
Initial Investment
Company / Position Date Cost Fair Value
<S> <C> <C> <C>
United States Paging Corporation*(A)
450,053 shares of Common Stock Apr. 1987 $ 1,479,405 $ 1,715,827
Warrants to purchase 16,887 shares of Common Stock at
$3.33 per share, expiring between 2/27/95 and 4/28/95 0 8,148
Warrants to purchase 25,330 shares of Common Stock at
$.89 per share, expiring between 12/15/95 and 3/8/96 0 74,027
---------------------------------------------------- - ------
Viasoft, Inc.
861,885 shares of Preferred Stock Dec. 1987 915,348 1,465,205
- --------------------------------- --------- ------- ---------
TOTALS FROM ACTIVE PORTFOLIO INVESTMENTS $ 52,679,933 $ 80,377,799
- ---------- - ----------
SUPPLEMENTAL INFORMATION: LIQUIDATED PORTFOLIO INVESTMENTS(H)
Cost Realized Gain Return
TOTALS FROM LIQUIDATED PORTFOLIO
INVESTMENTS(G) $ 58,912,242 $ 6,726,237 $ 65,638,479
- ---------- - --------- - ----------
Combined Net Combined
Unrealized and Fair Value
Cost Realized Gain and Return
TOTALS FROM ACTIVE & LIQUIDATED PORTFOLIO
INVESTMENTS $ 111,592,175 $ 34,424,103 $ 146,016,278
= =========== = ========== = ===========
</TABLE>
(A) Public company
(B) Subsequent to the end of the quarter, on October 6, 1994, Borg-Warner
Automotive, Inc. completed a public offering of its common stock. In
connection with the offering, the Partnership sold 54,678 shares of
common stock for $1.2 million, realizing a gain of $917,000.
(C) On September 23, 1994, Corporate Express, Inc. completed its initial
public offering of common stock. In connection with the offering and a
one-for-two reverse split of its common stock, the Partnership
exchanged its 914,250 preferred shares and 442,136 common shares for
678,193 common shares of the company.
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1994
ACTIVE PORTFOLIO INVESTMENTS (CONTINUED):
(D) Subsequent to the end of the quarter, on October 13, 1994, Micro Linear
Corporation completed its initial public offering of common stock. In
connection with the offering, the company effected a 1-for-2.5 reverse
split of its outstanding stock. As a result, the Partnership exchanged
its 800,214 common shares for 320,085 common shares of the company.
Additionally, the Partnership sold 106,666 shares in the offering for
$843,000, realizing a gain of $693,000.
(E) During the quarter, Neocrin Company effected a one-for-five reverse
split of its common and preferred stock. As a result, the Partnership
exchanged its 1,586,831 preferred shares for 317,366 preferred shares
of the company.
(F) Indirectly, the Partnership has an additional investment in
Regeneron Pharmaceuticals, Inc. through its 80% limited partnership
interest in Sanderling Biomedical, L.P.
(G) During the quarter, the Partnership sold its $1.2 million investment in
preferred stock of The Business Depot Ltd. for $2.5 million, realizing
a gain of $1.3 million.
(H) Amounts provided for "Supplemental Information: Liquidated Portfolio
Investments" are cumulative from inception through September 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.
<PAGE>
ML VENTURE PARTNERS II, L.P.
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
INVESTMENT INCOME AND EXPENSES
Income:
Interest from short-term investments $ 52,980 $ 54,514 $ 289,791 $ 320,812
Interest and other income from portfolio
investments 282,950 151,176 820,340 404,508
------- ------- ------- -------
Totals 335,930 205,690 1,110,131 725,320
------- ------- --------- -------
Expenses:
Management fee - Note 4 327,041 353,827 1,008,363 1,091,746
Professional fees 60,078 19,234 279,142 163,414
Mailing and printing 30,373 28,822 190,912 185,757
Independent General Partners' fees - Note 5 22,190 18,219 66,271 72,021
Custodial fees 3,289 3,351 10,727 11,229
Miscellaneous - 94 1,275 94
Bad debt expense - Note 9 - - - 406,355
- - - -------
Totals 442,971 423,547 1,556,690 1,930,616
------- ------- --------- ---------
NET INVESTMENT LOSS (107,041) (217,857) (446,559) (1,205,296)
Net realized gain from investments sold or
written-off 1,331,614 46,650 15,726,948 10,397,322
--------- ------ ---------- ----------
NET REALIZED GAIN (LOSS) FROM
OPERATIONS (allocable to Partners)
- Note 3 1,224,573 (171,207) 15,280,389 9,192,026
Net change in unrealized appreciation of
investments 6,891,653 1,454,491 (24,210,326) (2,654,128)
--------- --------- ----------- ----------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS $ 8,116,226 $ 1,283,284 $ (8,929,937) $ 6,537,898
= ========= = ========= = ========== = =========
</TABLE>
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
1994 1993
---- ----
<S> <C> <C>
CASH FLOWS USED FOR OPERATING ACTIVITIES
Net investment loss $ (446,559) $ (1,205,296)
Adjustments to reconcile net investment loss to cash used for operating
activities:
(Increase) decrease in receivables and other assets (429,282) 295,739
(Increase) decrease in accrued interest on short-term investments (8,794) 9,078
Increase (decrease) in payables 43,762 (25,123)
------ -------
Cash used for operating activities (840,873) (925,602)
-------- --------
CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES
Net return (purchase) of short-term investments (735,830) 5,662,696
Purchase of portfolio investments (909,776) (8,016,529)
Net proceeds from the sale of portfolio investments 19,408,535 16,260,582
Proceeds from repayment of note - 2,044,011
- ---------
Cash provided from investing activities 17,762,929 15,950,760
---------- ----------
CASH FLOWS USED FOR FINANCING ACTIVITIES
Cash distributions to Partners - Note 7 (17,600,000) (15,600,000)
----------- -----------
Decrease in cash and cash equivalents (677,944) (574,842)
Cash and cash equivalents at beginning of period 1,412,882 2,306,339
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 734,938 $ 1,731,497
= ======= = =========
</TABLE>
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994
<TABLE>
Unallocated
Managing Individual Net Unrealized
General General Limited Appreciation of
Partner Partners Partners Investments Total
<S> <C> <C> <C> <C> <C>
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)
Cash distribution paid
September 1, 1994
- - Note 7 (1,400,000) - - - (1,400,000)
Allocation of net
investment loss - Note 3 157,962 (21) (604,500) - (446,559)
Allocation of net realized
gain on investments
- - Note 3 1,808,318 464 13,918,166 - 15,726,948
Net change in
unrealized appreciation
of investments - - - (24,210,326) (24,210,326)
- - - ----------- -----------
Balance at end
of period $ 1,599,737 $ 3,853 $ 56,839,541(A) $ 27,697,866 $ 86,140,997
= ========= = ===== = ========== = ========== = ==========
</TABLE>
(A) The net asset value per unit of limited partnership interest, including
an assumed allocation of net unrealized appreciation of investments,
was $656 at September 30, 1994. Cumulative cash distributions paid to
Limited Partners from inception to September 30, 1994 totaled $490 per
Unit.
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. Organization and Purpose
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.
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
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,
1994, the Partnership had a $9.2 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.
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
In January 1994, the Management Company made a $1.1 million investment in
Corporate Express, Inc. on behalf of the Partnership and is holding such
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.
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
7. Cash Distributions
On September 1, 1994, the Partnership made a $1.4 million cash distribution to
the Managing General Partner. 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. Cash distributions paid to Limited Partners from the inception of
the Partnership to September 30, 1994 totaled $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 September 30, 1994, and
for the three and nine month periods then ended, reflect all adjustments
necessary for the fair presentation of the results of the interim periods.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
During the quarter ended September 30, 1994, the Partnership purchased 10,000
shares of CellPro, Incorporated, an existing portfolio investment, for $105,000.
From its inception through September 30, 1994, the Partnership invested $111.6
million in 58 portfolio investments. Additionally, the Partnership has a
commitment to purchase a $1.1 million investment in Corporate Express, Inc.,
purchased by the Management Company on behalf of the Partnership (see Note 6 of
Notes to Financial Statements). As of September 30, 1994, 29 of the
Partnership's 58 portfolio investments had been fully liquidated and 9
investments had been partially liquidated. Portfolio investments liquidated
through September 30, 1994, had a cost of $58.9 million and returned $65.6
million, resulting in a cumulative net realized gain of $6.7 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. On September 1, 1994, the Partnership made a $1.4 million cash
distribution to the Managing General Partner. At September 30, 1994, cumulative
cash distributions paid to Limited Partners totaled $58.8 million, or $490 per
$1,000 Unit.
At September 30, 1994, the Partnership held $5.5 million in cash and short-term
investments; $4.7 million in short-term securities with maturities of less than
one year and $735,000 in an interest-bearing cash account. Funds needed to cover
future operating expenses and follow-on investments primarily will be obtained
from the Partnership's existing cash reserves and from proceeds received from
the future sale of portfolio investments.
Results of Operations
For the three and nine months ended September 30, 1994, the Partnership had a
net realized gain from operations of $1.2 million and $15.3 million,
respectively. For the three and nine months ended September 30, 1993, the
Partnership had a net realized loss from operations of $171,000 and a net
realized gain from operations of $9.2 million, respectively. 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.
Realized Gains and Losses from Portfolio Investments - For the three and nine
months ended September 30, 1994, the Partnership had a net realized gain from
portfolio investments sold or written-off of $1.3 million and $15.7 million,
respectively. In August 1994, the Partnership sold its 94,435 preferred shares
of The Business Depot Ltd. for $2.5 million, realizing a gain of $1.3 million.
Additionally, during the nine month period, the Partnership sold common stock of
the following portfolio companies in the public market: 370,000 shares of
CellPro, Incorporated for $11.3 million, realizing a gain of $10.6 million;
90,000 shares of Komag, Incorporated for $2.4 million, realizing a gain of $1.6
million; 140,000 shares of Regeneron Pharmaceuticals, Inc. for $2.3 million,
realizing a gain of $2.2 million; and 78,271 shares of Ringer Corporation for
$254,000, realizing a gain of $20,000. Also, in a private transaction, the
Partnership sold 26,570 preferred shares of OccuSystems, Inc. for $173,000,
realizing a gain of $40,000. Additionally, the Partnership realized a $54,000
gain from the receipt of final escrow payments relating to the sale of its
investment in R-Byte, Inc. and wrote off its remaining $100,000 investment in
Research Applications, Inc.
For the three and nine months ended September 30, 1993, the Partnership had a
net realized gain from portfolio investments sold and written-off of $47,000 and
$10.4 million, respectively. During September 1993, the Partnership received
$326,000 from MTI Technology Corporation ("MTI") representing repayment of a
promissory note obtained in connection with MTI's acquisition of the
Partnership's investment in SF2 Corporation. This transaction resulted in a
realized gain of $48,000. During August 1993, the Partnership's warrant to
purchase 164,030 common shares of Elantec, Inc. expired resulting in a realized
loss of $1,000. Additionally, during nine month period, the Partnership sold
505,000 common shares of Regeneron for $7.9 million, realizing a gain of $7.3
million; 195,262 common shares of Pyxis Corporation for $7.8 million, realizing
a gain of $7.2 million; and 187,912 common shares of Ringer Corporation for
$567,000, realizing a gain of $4,000. Additionally, the Partnership wrote off
its $2 million investment in Ogle Resources, Inc., its remaining $1.1 million
investment in In-Store Advertising, Inc. ("ISA") and its remaining $900,000
investment in Communications International, Inc. due to financial difficulties
at the companies. The Partnership also received a final liquidation payment from
InteLock Corporation resulting in realized loss of $123,000.
Investment Income and Expenses - For the three months ended September 30, 1994
and 1993, the Partnership had a net investment loss of $107,000 and $218,000,
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 reflecting dividends
received from Borg-Warner Automotive, Inc. which began during the 1994 period.
This increase was partially offset by a $41,000 increase in professional fees
for the 1994 period, which included legal fees totaling $50,000 relating to the
ISA litigation (see Note 8 of Notes to Financial Statements).
For the nine months ended September 30, 1994 and 1993, the Partnership had a net
investment loss of $447,000 and $1.2 million, 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. The increase in interest and other income from portfolio
investments was partially offset by an increase in professional fees for the
1994 period, which included legal fees totaling $132,000 relating to the ISA
litigation. The $416,000 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 and
dividends received from Borg-Warner, as discussed above. The purchase option
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 September 30, 1994 and 1993, was
$327,000 and $354,000, respectively. The management fee for the nine months
ended September 30, 1994 and 1993, was $1 million and $1.1 million,
respectively. The management fee will continue to decline in future periods as
the Partnership's investment portfolio continues to mature and distributions are
paid to Partners. 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 nine months ended September 30,
1994, the Partnership had an $11.4 million net unrealized loss from its
portfolio investments primarily resulting from the net downward revaluation of
the Partnership's publicly traded securities. Additionally, during the nine
month period, a net $12.8 million was transferred from unrealized gain to
realized gain primarily relating to the sale of CellPro and Regeneron shares, as
discussed above. The $11.4 million unrealized loss and the $12.8 million net
transfer from unrealized gain to realized gain resulted in a $24.2 million
reduction to the Partnership's net unrealized appreciation of investments for
the nine month period.
For the nine months ended September 30, 1993, the Partnership had an $8.5
million net unrealized gain from its portfolio investments primarily resulting
from the upward revaluation of the Partnership's investments in Regeneron,
CellPro and Corporate Express, Inc. Additionally, during the nine month period,
the Partnership transferred a net $11.2 million from unrealized gain to realized
gain relating to investments sold or written-off, as discussed above. The $8.5
million unrealized gain offset by the $11.2 million net transfer from unrealized
gain to realized gain resulted in a $2.7 million reduction to the Partnership's
net unrealized appreciation of investments for the nine 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 nine months ended
September 30, 1994, the Partnership had a net decrease in net assets resulting
from operations of $8.9 million. For the nine months ended September 30, 1993,
the Partnership had a net increase in net assets resulting from operations of
$6.5 million.
At September 30, 1994, the Partnership's net assets were $86.1 million, a
decrease of $26.5 million from $112.7 million at December 31, 1993. This
decrease resulted from the $17.6 million of cash distributions paid to Partners
during the period and the $8.9 million net decrease in net assets resulting from
operations for the nine month period.
At September 30, 1993, the Partnership's net assets were $100.6 million, a
decrease of $9.1 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 $6.5 million net increase in net assets resulting from
operations for the nine 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 September
30, 1994 and December 31, 1993, was $656 and $852, respectively. The reduction
to the Partnership's net asset value of $196 per Unit for the nine months ended
September 30, 1994, reflects the cash distribution of $135 per Unit and a
decrease in net assets resulting from operations of $61 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).
<PAGE>
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.
The 1994 Annual Meeting of the Limited Partners was held on August 4, 1994. At
the meeting the four Individual General Partners, Kevin K. Albert, Steward S.
Flaschen, Jerome Jacobson and William M. Kelly, were elected to continue to
serve as Individual General Partners and MLVPII Co., L.P. was elected to
continue to serve as the Managing General Partner. The following other matters
were also voted on and, with the exception of the proposal to amend Paragraph
11.4 of the Amended and Restated Agreement of Limited Partnership with respect
to the requirement to hold Annual Meetings of Limited Partners, were approved:
<TABLE>
Affirmative Negative
Votes Votes Abstentions
<S> <C> <C> <C>
Ratification of the selection of Deloitte & Touche LLP
as independent auditors of the Partnership for its fiscal
year ending December 31, 1994. 61,393 1,149 2,602
Approval of the continuance of the Management Agreement among the Partnership,
the Management Company and the Managing General Partner and the continuance of
the Sub-Management Agreement among the Partnership, the Managing General
Partner, the
Management Company and the Sub-Manager. 58,991 2,849 3,304
Proposal to amend Paragraph 11.4 of the Amended and Restated Agreement of
Limited Partnership with respect to the requirement to hold Annual Meetings of
Limited
Partners. 51,821 8,393 4,930
</TABLE>
Item 5. Other Information.
During the quarter, the Partnership purchased 10,000 shares of CellPro,
Incorporated for $105,000. This investment is in addition to the 413,333 shares
of common stock previously owned by the Partnership.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
<TABLE>
<S> <C>
(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)
</TABLE>
(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.
<PAGE>
<TABLE>
<C> <C>
(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.
</TABLE>
<PAGE>
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: November 11, 1994
<PAGE>
Exhibit Index
<TABLE>
Exhibits Page
<S> <C>
(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)
</TABLE>
(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)
<PAGE>
<TABLE>
<S> <C>
(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.
</TABLE>
