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, 1995
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.
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(Exact name of registrant as specified in its charter)
Delaware 13-3324232
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(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
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(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
<PAGE>
ML VENTURE PARTNERS II, L.P.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Balance Sheets as of September 30, 1995 (Unaudited) and December 31, 1994
Schedule of Portfolio Investments as of September 30, 1995 (Unaudited)
Statements of Operations for the Three and Nine Months Ended September 30, 1995
and 1994 (Unaudited)
Statements of Cash Flows for the Nine Months Ended September 30, 1995 and 1994
(Unaudited)
Statement of Changes in Partners' Capital for the Nine Months Ended September
30, 1995 (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, 1995 December 31,
(Unaudited) 1994
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
Investments - Note 2
Portfolio investments, at fair value (cost $40,619,365 at
September 30, 1995 and $52,936,366 at December 31, 1994) $ 68,940,427 $ 75,400,208
Short-term investments, at amortized cost 44,359,910 6,935,099
Cash and cash equivalents 536,375 638,868
Deposit in escrow 218,233 -
Accrued interest receivable 793,539 563,815
Notes receivable - 250,656
Receivable from securities sold 3,072,677 7,655
------------------ -----------------
TOTAL ASSETS $ 117,921,161 $ 83,796,301
================== =================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Cash distribution payable - Note 7 $ 32,001,136 $ -
Accounts payable 42,345 43,472
Due to Management Company - Note 4 295,890 325,000
Due to Independent General Partners - Note 5 23,400 25,350
------------------ -----------------
Total liabilities 32,362,771 393,822
------------------ -----------------
Partners' Capital:
Managing General Partner 3,301,387 2,191,479
Individual General Partners 1,797 3,917
Limited Partners (120,000 Units) 53,934,144 58,743,241
Unallocated net unrealized appreciation of investments - Note 2 28,321,062 22,463,842
------------------ -----------------
Total partners' capital 85,558,390 83,402,479
------------------ -----------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 117,921,161 $ 83,796,301
================== =================
</TABLE>
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
September 30, 1995
Active Portfolio Investments:
<TABLE>
Initial Investment
Company / Position Date Cost Fair Value
<C> <C> <C> <C>
Biocircuits Corporation*(A)
515,269 shares of Common Stock May 1991 $ 1,422,501 $ 682,577
2,000,000 shares of Preferred Stock 1,000,000 1,000,000
Warrants to purchase 1,207,062 shares of Preferred Stock at
$.60 per share, exercisable after 12/1/95 and expiring 12/18/96 0 0
- -------------------------------------------------------------------------------------------------------------------------------
Borg-Warner Automotive, Inc.*(A)
444,664 shares of Common Stock Sept. 1988 2,223,320 10,313,426
- -------------------------------------------------------------------------------------------------------------------------------
Borg-Warner Security Corporation*(A)
500,000 shares of Common Stock Sept. 1988 2,500,000 3,243,750
- -------------------------------------------------------------------------------------------------------------------------------
CellPro, Incorporated(A)(B)
64,333 shares of Common Stock Mar. 1989 119,573 724,550
- -------------------------------------------------------------------------------------------------------------------------------
Clarus Medical Systems, Inc.*
895,152 shares of Preferred Stock Jan. 1991 2,389,168 895,152
Warrants to purchase 20,238 shares of Common Stock
at $3.75 per share, expiring on 7/31/97 0 0
Warrants to purchase 70,203 shares of Common Stock
at $.01 per share, expiring between 3/7/00 and 7/3/00 0 0
Warrants to purchase 14,127 shares of Preferred Stock
at $1.00 per share, expiring on 3/7/00 0 0
- -------------------------------------------------------------------------------------------------------------------------------
Corporate Express, Inc.*(A)(C)
559,503 shares of Common Stock May 1992 1,064,481 9,257,872
- -------------------------------------------------------------------------------------------------------------------------------
Diatech, Inc.*
1,349,508 shares of Preferred Stock Dec. 1991 2,986,023 4,454,528
- -------------------------------------------------------------------------------------------------------------------------------
Elantec, Inc.(D)
2,889,947 shares of Preferred Stock Aug. 1988 1,069,569 1,362,585
852,273 shares of Common Stock 340,909 216,027
- -------------------------------------------------------------------------------------------------------------------------------
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 due 3/26/98 May 1992 2,587,500 2,587,500
SPTHOR Corporation
10% Promissory Note due 3/26/98 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
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED) - continued
September 30, 1995
<TABLE>
Initial Investment
Company / Position Date Cost Fair Value
<C> <C> <C> <C>
IDEC Pharmaceuticals Corporation(A)*:
ML/MS Associates, L.P.*
34.4% Limited Partnership interest June 1989 $ 3,960,000 $ 3,770,609
MLMS Cancer Research, Inc.*
400,000 shares of Common Stock July 1989 46,957 38,087
- -------------------------------------------------------------------------------------------------------------------------------
Inference Corporation(A)(E)
214,424 shares of Common Stock Apr. 1993 794,065 1,945,898
Brightware, Inc.
140,485 shares of Common Stock Apr. 1993 100,000 100,000
Warrants to purchase 38,736 shares of Common Stock
at $5 per share, expiring on 4/19/99 0 0
Warrants to purchase 4,846 shares of Common Stock
at $5.25 per share, expiring on 12/16/97 0 0
Warrants to purchase 59,165 shares of Common Stock
at $5 per share, expiring on 6/10/98 0 0
- -------------------------------------------------------------------------------------------------------------------------------
Ligand Pharmaceuticals Inc.*(A)(F)
427,275 shares of Common Stock Apr. 1989 1,044,663 2,927,027
Warrants to purchase 3,167 shares of Common Stock at
$7.22 per share to $9.60 per share, expiring between
5/31/97 and 7/31/97 0 0
- -------------------------------------------------------------------------------------------------------------------------------
Neocrin Company
447,418 shares of Preferred Stock June 1991 4,019,306 2,237,090
Warrants to purchase 13,005 shares of Preferred Stock
at $5.00 per share, expiring on 1/20/96 130 130
- -------------------------------------------------------------------------------------------------------------------------------
OccuSystems, Inc.(A)(G)
403,864 shares of Common Stock June 1993 2,019,320 4,210,282
- -------------------------------------------------------------------------------------------------------------------------------
Photon Dynamics, Inc.*
1,222,828 shares of Preferred Stock Sept. 1988 2,452,226 1,435,181
- -------------------------------------------------------------------------------------------------------------------------------
Raytel Medical Corporation*
1,250,000 shares of Preferred Stock Feb. 1990 1,483,278 2,483,278
Options to purchase 55,938 shares of Preferred Stock
at $.71 per share, expiring on 10/31/01 0 72,160
- -------------------------------------------------------------------------------------------------------------------------------
Sanderling Biomedical, L.P.*(H)
80% Limited Partnership interest May 1988 1,838,639 3,264,931
- -------------------------------------------------------------------------------------------------------------------------------
SDL, Inc.*(A)(I)
379,155 shares of Common Stock July 1992 999,015 6,805,579
- -------------------------------------------------------------------------------------------------------------------------------
Viasoft, Inc.(A)(J)
113,795 shares of Common Stock Dec. 1987 362,562 1,190,296
- -------------------------------------------------------------------------------------------------------------------------------
Totals from Active Portfolio Investments $ 40,619,365 $ 68,940,427
---------------------------------
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED) - continued
September 30, 1995
Supplemental Information: Liquidated Portfolio Investments(L)
<TABLE>
Cost Realized Gain Return
<S> <C> <C> <C>
Totals from Liquidated Portfolio Investments(K) $ 74,666,239 $ 49,233,544 $ 123,899,783
======================================================
Combined Net Combined
Unrealized and Fair Value
Cost Realized Gain and Return
Totals from Active & Liquidated Portfolio Investments $ 115,285,604 $ 77,554,606 $ 192,840,210
======================================================
</TABLE>
(A) Public company
(B) In July and August 1995, the Partnership sold 252,000 common shares of
CellPro, Incorporated for $3.8 million, realizing a gain of $3.3 million.
(C) In July and September 1995, the Partnership sold 303,196 common shares of
Corporate Express, Inc. for $6.8 million, realizing a gain of $5.3 million.
(D) Subsequent to the end of the quarter, on October 11, 1995, Elantec, Inc.
completed its initial public offering at $7 per share. In connection with
the offering and a 10-for-1 reverse split of its outstanding common stock,
the Partnership exchanged its 2,889,947 preferred shares and 852,273 common
shares of Elantec for 374,222 common shares of the company. Additionally,
the Partnership sold 130,976 of its post-split shares for $853,000,
realizing a gain of $329,000.
(E) During the quarter, in a non-cash transaction, the Partnership exchanged
its warrants to purchase 102,747 shares of Inference Corporation common
stock for 73,939 shares of common stock.
(F) In September 1995, the Partnership sold 75,000 shares of Ligand
Pharmaceuticals Inc. common stock for $731,000, realizing a gain of
$549,000. Additionally, the Partnership exercised warrants to purchase
2,417 shares of Ligand common stock for $10,719.
(G) In September 1995, the Partnership sold 100,966 shares of OccuSystems, Inc.
common stock for $2.1 million, realizing a gain of $1.6 million.
(H) During the quarter, the Partnership received 67,747 shares of Regeneron
Pharmaceuticals, Inc. common stock resulting from an in-kind distribution
made by Sanderling Biomedical, L.P. The Partnership sold such shares during
the quarter for $1.1 million, realizing a gain of $907,000.
(I) In August 1995, the Partnership sold 40,000 shares of SDL, Inc. common
stock for $1.4 million, realizing a gain of $1.4 million.
(J) In July 1995, the Partnership sold 113,500 common shares of Viasoft, Inc.
for $1.5 million, realizing a gain of $1.2 million.
(K) During the quarter, the Partnership sold its 92,843 shares of Eckerd
Corporation for $2.9 million, realizing a gain of $2 million and sold its
516,895 shares of Regeneron Pharmaceuticals, Inc. for $6.3 million,
realizing a gain of $5.7 million.
(L) Amounts provided for "Supplemental Information: Liquidated Portfolio
Investments" are cumulative from inception through September 30, 1995.
* 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,
1995 1994 1995 1994
---------------- -------------- --------------- ---------
INVESTMENT INCOME AND EXPENSES
Income:
<S> <C> <C> <C> <C>
Interest from short-term investments $ 449,361 $ 52,980 $ 807,456 $ 289,791
Interest and other income from portfolio
investments 81,236 132,950 293,483 607,840
Dividend income 66,700 150,000 200,100 212,500
---------------- -------------- --------------- ---------------
Totals 597,297 335,930 1,301,039 1,110,131
-------------------------- ----------- -------------- -------------
Expenses:
Management fee - Note 4 295,890 327,041 913,317 1,008,363
Professional fees 85,870 60,078 222,113 279,142
Mailing and printing 17,418 30,373 182,796 190,912
Independent General Partners' fees - Note 5 23,761 22,190 78,907 66,271
Custodial fees 3,710 3,289 10,752 10,727
Miscellaneous 87 - 572 1,275
---------------- -------------- --------------- ---------------
Totals 426,736 442,971 1,408,457 1,556,690
----------------- ----------- -------------- -------------
NET INVESTMENT INCOME (LOSS) 170,561 (107,041) (107,418) (446,559)
Net realized gain from portfolio investments 21,959,347 1,331,614 39,641,434 15,726,948
---------------- -------------- --------------- ---------------
NET REALIZED GAIN FROM
OPERATIONS (allocable to Partners) 22,129,908 1,224,573 39,534,016 15,280,389
Net change in unrealized appreciation of
investments (6,225,913) 6,891,653 5,857,220 (24,210,326)
---------------- -------------- --------------- ---------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS $ 15,903,995 $ 8,116,226 $ 45,391,236 $ (8,929,937)
================ ============== =============== ===============
</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>
1995 1994
---------------- ----------
CASH FLOWS USED FOR OPERATING ACTIVITIES
<S> <C> <C>
Net investment loss $ (107,418) $ (446,559)
Adjustments to reconcile net investment loss to cash used for operating
activities:
(Increase) decrease in accrued interest and notes receivable 20,932 (429,282)
Increase in accrued interest on short-term investments (309,444) (8,794)
Increase (decrease) in payables (32,187) 43,762
---------------- ----------------
Cash used for operating activities (428,117) (840,873)
---------------- ----------------
CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES
Purchase of short-term investments (37,115,367) (735,830)
Cost of portfolio investments purchased (2,175,224) (909,776)
Deposit placed in escrow (218,233) -
Net proceeds from the sale of portfolio investments 49,048,916 19,408,535
Proceeds from repayment of note 2,019,721 -
---------------- ----------------
Cash provided from investing activities 11,559,813 17,762,929
---------------- ----------------
CASH FLOWS USED FOR FINANCING ACTIVITIES
Cash distributions to Partners - Note 7 (11,234,189) (17,600,000)
---------------- ----------------
Decrease in cash and cash equivalents (102,493) (677,944)
Cash and cash equivalents at beginning of period 638,868 1,412,882
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 536,375 $ 734,938
================ ================
</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, 1995
<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 $ 2,191,479 $ 3,917 $ 58,743,241 $ 22,463,842 $ 83,402,479
Cash distribution, paid
April 11, 1995 (2,231,929) (2,260) (9,000,000) - (11,234,189)
Accrued cash distribution,
payable October 5, 1995 (5,000,236) (900) (27,000,000) - (32,001,136)
Net investment loss 96,655 (7) (204,066) - (107,418)
Net realized gain from portfolio
investments 8,245,418 1,047 31,394,969 - 39,641,434
Net change in unrealized
appreciation of investments - - - 5,857,220 5,857,220
------------- -------- -------------- -------------- ----------------
Balance at end of period $ 3,301,387 $ 1,797 $ 53,934,144(A) $ 28,321,062 $ 85,558,390
============= ======== ============== ============== ================
</TABLE>
(A) The net asset value per unit of limited partnership interest, including an
assumed allocation of net unrealized appreciation of investments, was $636
at September 30, 1995. Cumulative cash distributions paid, or payable, to
Limited Partners from inception to September 30, 1995 totaled $790 per
Unit.
See notes to financial statements.
<PAGE>
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 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. However, pursuant to the Partnership Agreement, 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 company's Board
of Directors or is greater than a 10% shareholder, and other liquidity factors
such as the size of the Partnership's position in a given company compared to
the trading history of the public security. Privately-held portfolio securities
are carried at cost until significant developments affecting the portfolio
company provide a basis for change in valuation. The fair value of private
securities is adjusted 1) to reflect meaningful third-party transactions in the
private market or 2) to reflect significant progress or slippage in the
development of the company's business such that cost is no longer reflective of
fair value. As a venture capital investment fund, the Partnership's portfolio
investments involve a high degree of business and financial risk that can result
in substantial losses. The 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.
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Income Taxes - No provision for income taxes has been made since all income and
losses are allocable to the Partners for inclusion in their respective tax
returns. The Partnership's net assets for financial reporting purposes differ
from its net assets for tax purposes. Net unrealized appreciation of investments
of $29.2 million at September 30, 1995, which was recorded for financial
statement purposes, was not recognized for tax purposes. Additionally, from
inception to September 30, 1995, timing differences relating to realized losses
totaling $1.7 million have been deducted on the Partnership's financial
statements and syndication costs relating to the selling of Units totaling $11.3
million were charged to partners' capital on the financial statements. These
amounts have not been deducted or charged against partners' capital for tax
purposes.
Statements of Cash Flows - The Partnership considers its interest-bearing cash
account to be cash equivalents.
3. Allocation of Partnership Profits and Losses
The Partnership Agreement provides that the Managing General Partner will be
allocated, on a cumulative basis over the life of the Partnership, 20% of the
Partnership's aggregate investment income and net realized gains and losses from
venture capital investments, provided that such amount is positive. All other
gains and losses of the Partnership are allocated among all the Partners
(including the Managing General Partner) in proportion to their respective
capital contributions to the Partnership. From its inception to September 30,
1995, the Partnership had a $52.2 million net gain from its venture capital
investments, which includes interest and other income from portfolio investments
totaling $2.9 million.
4. Related Party Transactions
The Management Company performs, or arranges for others to perform, the
management and administrative services necessary for the operation of the
Partnership and receives a management fee at the annual rate of 2.5% of the
gross capital contributions to the Partnership, reduced by selling commissions,
organizational and offering expenses paid by the Partnership, capital
distributed and realized capital losses with a minimum annual fee of $200,000.
Such fee is determined and payable quarterly.
On November 9, 1994, the Securities and Exchange Commission (the "SEC") issued
an exemptive order permitting the Partnership to acquire 97,273 shares of
Corporate Express, Inc. common stock from the Management Company subject to
certain conditions, including review and approval by the Independent General
Partners. On December 13, 1994, the Partnership purchased such shares for
$1,111,685, representing original cost of $1,069,998 plus interest expense of
$41,687.
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
5. Independent General Partners' Fees
As compensation for services rendered to the Partnership, each of the three
Independent General Partners receives $20,000 annually in quarterly
installments, $1,400 for each meeting of the General Partners attended or for
each other meeting, conference or engagement in connection with Partnership
activities at which attendance by an Independent General Partner is required and
$1,400 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
The Partnership has a $393,043 commitment to fund MLMS Cancer Research, Inc. The
Partnership is a shareholder of MLMS Cancer Research which is the general
partner of ML/MS Associates, L.P., formerly a research and development joint
venture with IDEC Pharmaceuticals Corporation.
7. Cash Distributions
On August 1, 1995, the General Partners approved a cash distribution to Partners
totaling $32,001,136; $27,000,000, or $225 per Unit, to Limited Partners of
record on September 30, 1995, and $5,001,136 to the General Partners. The
distribution was paid on October 5, 1995.
Cash distributions paid or approved during the periods presented and cumulative
cash distributions to Partners from inception of the Partnership to September
30, 1995 are listed below.
<TABLE>
General Limited Per $1,000
Distribution Date Partners Partners Unit
- ------------------------------------------------ -------------- --------------- ---------
<S> <C> <C> <C> <C>
October 5, 1995 $ 5,001,136 $ 27,000,000 $ 225
April 11, 1995 2,234,189 9,000,000 75
September 1, 1994 1,400,000 0 0
May 26, 1994 0 16,200,000 135
Inception to December 31, 1993 0 42,600,000 355
-------------- --------------- ------
Cumulative totals at September 30, 1995 $ 8,635,325 $ 94,800,000 $ 790
============== =============== ======
</TABLE>
8. Subsequent Event
At a meeting held on November 3, 1995, the General Partners approved a cash
distribution to Partners totaling $14,336,506; $12,000,000, or $100 per Unit, to
the Limited Partners and $2,336,506 to the General Partners. The distribution is
scheduled to be paid in January 1996 to Limited Partners of record on December
31, 1995.
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
9. 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. As of September 30, 1995, the Partnership has incurred
cumulative legal expenses totaling $205,000 related to the litigation.
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, 1995, 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 three months ended September 30, 1995, the Partnership made follow-on
investments of $70,000 in Clarus Medical Systems, Inc. and $11,000 in Ligand
Pharmaceuticals, Inc. From its inception to September 30, 1995, the Partnership
had invested $115.3 million in 58 portfolio companies. At September 30, 1995,
the Partnership had fully liquidated 37 of its portfolio company investments and
partially liquidated an additional 10 investments. Liquidated investments at
September 30, 1995 had an aggregate cost of $74.7 million and had returned
$123.9 million to the Partnership, resulting in a cumulative net realized gain
of $49.2 million.
Generally, 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. The Partnership does not intend to make investments in new portfolio
companies, however, it may make follow-on investments in certain existing
portfolio companies.
At September 30, 1995, the Partnership held $44.9 million in cash and short-term
investments; $44.4 million in short-term securities with maturities of less than
one year and $536,000 in an interest-bearing cash account. Interest earned from
such investments totaled $449,000 and $807,000 for the three and nine months
ended September 30, 1995, respectively. Funds needed to cover future operating
expenses and follow-on investments will be obtained from the Partnership's
existing cash reserves, from interest and other investment income and from
proceeds received from the sale of portfolio investments.
On October 5, 1995, the Partnership made a cash distribution to Partners
totaling $32 million; $27 million, or $225 per Unit, to Limited Partners of
record on September 30, 1995, and $5 million to the General Partners.
Additionally, in November 1995, the General Partners approved a cash
distribution to be paid in January 1996 totaling $14.3 million; $12 million, or
$100 per Unit, to Limited Partners of record on December 31, 1995, and $2.3
million to the General Partners. These distributions will bring cumulative cash
distributions paid to Partners to $117.8 million; $106.8 million, or $890 per
Unit, to the Limited Partners and $11 million to the General Partners.
Results of Operations
For the three and nine months ended September 30, 1995, the Partnership had a
net realized gain from operations of $22.1 million and $39.5 million,
respectively. 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. Net realized gain or loss from operations is comprised of
1) net realized gain or loss from portfolio investments and 2) net investment
income or loss (interest and dividend income less operating expenses).
Realized Gains and Losses from Portfolio Investments - For the three and nine
months ended September 30, 1995, the Partnership had a net realized gain from
portfolio investments of $22 million and $39.6 million, respectively. During the
three months ended September 30, 1995, the Partnership sold shares of common
stock of eight of its portfolio companies in the public market for $26.6
million, realizing a gain of $22 million. The public securities liquidated
during the three month period were: 252,000 shares of CellPro, Incorporated,
303,196 shares of Corporate Express, Inc., 92,843 shares of Eckerd Corporation,
75,000 shares of Ligand Pharmaceuticals Inc., 100,966 shares of OccuSystems,
Inc., 584,642 shares of Regeneron Pharmaceuticals, Inc. (including 67,747 shares
received during the quarter as an in-kind distribution from Sanderling
Biomedical Ventures, L.P.), 40,000 shares of SDL, Inc. and 113,500 shares of
Viasoft, Inc. Additionally, during the six months ended June 30, 1995, the
Partnership sold shares of common stock in the public market of eight of its
portfolio companies for $25.3 million, realizing a gain of $17.8 million. The
shares sold during the six month period were: 213,419 shares of Micro Linear
Corporation, 95,000 shares of CellPro, Incorporated, 204,291 shares of Mobile
Telecommunications Technologies Corporation, 861,000 shares of Regeneron
Pharmaceuticals, Inc., 129,435 shares of Corporate Express, Inc., 115,267 shares
of Children's Discovery Centers of America, Inc., 144,486 shares of Komag,
Incorporated and 60,000 shares of Viasoft. Additionally, on March 31, 1995, the
Partnership wrote-off $145,000 of its $395,000 remaining investment in Target
Vision, Inc. which was sold in April 1995 for $100,000 in cash and a $150,000
promissory note. The Partnership received payment for the promissory note in
July 1995.
For the three and nine months ended September 30, 1994, the Partnership had a
net realized gain from portfolio investments 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 six month period ended June 30, 1994, the Partnership
sold common stock of the following portfolio companies in the public market for
$16.3 million, realizing a gain of $14.4 million. The shares sold during the six
month period were: 370,000 shares of CellPro, 90,000 shares of Komag, 140,000
shares of Regeneron and 78,271 shares of Ringer Corporation. 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.
Investment Income and Expenses - For the three months ended September 30, 1995
and 1994, the Partnership had net investment income of $171,000 and a net
investment loss of $107,000, respectively. The $278,000 increase in net
investment income for the 1995 period compared to the 1994 period primarily was
attributable to a $396,000 increase in interest earned from short-term
investments partially offset by a $135,000 decrease in interest and dividend
income from portfolio investments. The increase in interest earned from
short-term investments was the result of an increase the average amount of funds
invested in such securities and higher short-term interest rates during the 1995
period compared to the 1994 period. The increase in funds available for
investment in short-term securities was the result of proceeds totaling $26.5
million received by the Partnership from the sale of portfolio investments for
the 1995 period compared to $2.5 million for the same period in 1994. Such funds
are invested in short-term securities until cash distributions to Partners are
made. The decline in interest and dividend income from portfolio investments was
the result of a decrease in the interest bearing debt securities in the
Partnership's portfolio of investments during the 1995 period as compared to the
1994 period.
Net investment loss for the nine months ended September 30, 1995 and 1994 was
$107,000 and $447,000, respectively. The decrease in net investment loss was the
result of a $517,000 increase in interest earned from short-term investments and
a $148,000 decrease in operating expenses for the 1995 period, which were
partially offset by a $326,000 decrease in interest and dividend income from
portfolio investments for the 1995 period. The increase in interest from
short-term investments was the result of an increase in funds invested in such
securities and higher short-term interest rates during the 1995 period. The
increase in funds available for investment in short-term securities was the
result of proceeds totaling $49 million received by the Partnership from the
sale of portfolio investments for the 1995 period compared to $19.4 million for
the same period in 1994. The decrease in interest and dividend income from
portfolio investments for the 1995 period was the result of a decrease in the
interest bearing debt securities in the Partnership's portfolio of investments
during the 1995 period compared to the 1994 period. The $148,000 decrease in
operating expenses primarily resulted from a reduction in legal fees incurred
during the 1995 period and a decrease in the management fee, as discussed below.
The Management Company provides for the management and administrative services
necessary for the operation of the Partnership. The Management Company receives
a management fee at an annual rate of 2.5% of the gross capital contributions to
the Partnership, reduced by selling commissions, organizational and offering
expenses paid by the Partnership, return of capital and realized capital losses,
with a minimum annual fee of $200,000. Such fee is determined and payable
quarterly. The management fee for the three months ended September 30, 1995 and
1994, was $296,000 and $327,000, respectively. The management fee for the nine
months ended September 30, 1995 and 1994, was $913,000 and $1 million,
respectively. The management fee will continue to decline in future periods as
the Partnership's investment portfolio continues to mature and cash
distributions are made 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 dividend income from portfolio investments and
proceeds from the sale of portfolio investments.
Unrealized Gains and Losses and Changes in Unrealized Appreciation or
Depreciation of Portfolio Investments - For the nine months ended September 30,
1995, the Partnership had a $28.5 million net unrealized gain from its portfolio
investments, primarily resulting from the net upward revaluation of its publicly
traded securities. Additionally, during the nine month period, $22.6 million of
unrealized gain was transferred to realized gain relating to portfolio
investments sold during the period, as discussed above. The $28.5 million
unrealized gain offset by the $22.6 million transfer from unrealized gain to
realized gain resulted in a $5.9 million increase to net unrealized appreciation
of investments for the nine month period.
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, $12.8 million of
unrealized gain was transferred to realized gain primarily relating to portfolio
investments sold during the period, 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 net unrealized
appreciation of investments for the nine month period.
Net Assets - Changes to net assets resulting from operations are comprised of 1)
net realized gain or loss from operations and 2) changes to net unrealized
appreciation or depreciation of portfolio investments.
For the nine months ended September 30, 1995, the Partnership had a $45.4
million net increase in net assets resulting from operations, comprised of the
$39.5 million net realized gain from operations and the $5.9 million increase in
unrealized appreciation of investments for the nine month period. At September
30, 1995, the Partnership's net assets were $85.6 million, up $2.2 million from
$83.4 million at December 31, 1994. This $2.2 million increase resulted from the
$45.4 million net increase in net assets resulting from operations for the nine
month period offset by the $11.2 million cash distribution paid to Partners in
April 1995 and the $32 million accrued cash distribution paid to Partners in
October 1995.
For the nine months ended September 30, 1994, the Partnership had an $8.9
million net decrease in net assets resulting from operations, comprised of the
$24.2 million decrease in net unrealized appreciation of investments offset by
the $15.3 million net realized gain from operations for the nine month period.
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 $26.5
million decrease resulted from the $8.9 million net decrease in net assets
resulting from operations for the nine month period and the $17.6 million of
cash distributions paid to Partners during the 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 was $636 and
$638 at September 30, 1995 and December 31, 1994, respectively.
<PAGE>
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 9 of Notes to Financial Statements).
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
The 1995 Annual Meeting of the Limited Partners was held on June 30, 1995 with
respect to 1) the election of the Individual General Partners, 2) the election
of the Managing General Partner, 3) the ratification of the independent auditors
and 4) the ratification of the Management Agreement and the Sub-Management
Agreement. 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 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 was adjourned to a meeting held on July 27, 1995, at which time such
proposal was approved.
<TABLE>
Affirmative Negative
Votes Votes Abstentions
<S> <C> <C> <C> <C> <C>
Ratification of the selection of Deloitte & Touche LLP
as independent auditors of the Partnership for its fiscal
year ending December 31, 1995. 69,907 1,823 2,962
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. 65,391 4,976 4,325
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. 60,428 10,406 5,721
</TABLE>
Item 5. Other Information.
On July 3, 1995, the Partnership purchased 70,202 shares of preferred stock of
Clarus Medical Systems, Inc. and a warrant to purchase 23,401 shares of Clarus
common stock at $0.01 per share for a total of $70,202.
In September 1995, the Partnership exercised warrants to purchase 2,417 shares
of Ligand Pharmaceuticals Inc. for $10,719.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
<TABLE>
<S> <C> <C> <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)
(27) Financial Data Schedule.
(28) Prospectus of the Partnership dated February 10,
1987 filed with the Securities and Exchange
Commission pursuant to Rule 424(b) under the
Securities Act of 1933, as supplemented by a
supplement thereto dated April 21, 1987 filed
pursuant to Rule 424(c) under the Securities Act
of 1933. (7)
(b) No reports on Form 8-K have been filed during the quarter for which this report is filed.
</TABLE>
<PAGE>
(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.
<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/ Diane T. Herte
Diane T. Herte
Vice President and Treasurer
(Principal Financial and Accounting Officer)
Date: November 13, 1995
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ML VENTURE
PARTNERS II, L.P.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER
30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-1-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 84,644,253
<INVESTMENTS-AT-VALUE> 113,300,337
<RECEIVABLES> 3,866,216
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 754,608
<TOTAL-ASSETS> 117,921,161
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 32,362,771
<TOTAL-LIABILITIES> 32,362,771
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 28,321,062
<NET-ASSETS> 85,558,390
<DIVIDEND-INCOME> 200,100
<INTEREST-INCOME> 1,100,939
<OTHER-INCOME> 0
<EXPENSES-NET> 1,408,457
<NET-INVESTMENT-INCOME> (107,418)
<REALIZED-GAINS-CURRENT> 39,641,434
<APPREC-INCREASE-CURRENT> 5,857,220
<NET-CHANGE-FROM-OPS> 45,391,236
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 11,234,189
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 34,124,860
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 638
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 636
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
