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, 1996
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 0-14217
ML VENTURE PARTNERS II, L.P.
===============================================================================
(Exact name of registrant as specified in its charter)
Delaware 13-3324232
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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 10281-1326
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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, 1996 (Unaudited) and December 31, 1995
Schedule of Portfolio Investments as of September 30, 1996 (Unaudited)
Statements of Operations for the Three and Nine Months Ended September 30, 1996
and 1995 (Unaudited)
Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1995
(Unaudited)
Statement of Changes in Partners' Capital for the Nine Months Ended
September 30, 1996 (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, 1996 December 31,
(Unaudited) 1995
ASSETS
Investments - Notes 2, 9 and 10
Portfolio investments, at fair value
(cost $29,117,226 at September 30, 1996
<S> <C> <C> <C> <C> <C>
and $38,000,476 at December 31, 1995) $35,796,958 $ 73,125,660
Short-term investments, at amortized cost 17,976,037 17,369,428
Cash and cash equivalents 404,211 685,917
Accrued interest receivable 329,010 870,177
Dividend receivable 41,492 -
Deposit in escrow - 184,502
Receivable from securities sold - 2,809,725
---------------- -----------------
TOTAL ASSETS $ 54,547,708 $ 95,045,409
================ =================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Cash distribution payable - Note 7 $ 14,547,971 $ 14,336,506
Accounts payable 146,182 118,288
Due to Management Company - Note 4 158,795 224,683
Due to Independent General Partners - Note 5 27,600 23,400
---------------- -----------------
Total liabilities 14,880,548 14,702,877
---------------- -----------------
Partners' Capital:
Managing General Partner 1,318,550 1,471,685
Individual General Partners 1,055 1,457
Limited Partners (120,000 Units) 31,667,823 43,744,206
Unallocated net unrealized appreciation of investments - Note 2 6,679,732 35,125,184
---------------- -----------------
Total partners' capital 39,667,160 80,342,532
---------------- -----------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 54,547,708 $ 95,045,409
================ =================
</TABLE>
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
September 30, 1996
Active Portfolio Investments:
<TABLE>
Initial Investment
Company / Position Date Cost Fair Value
Biocircuits Corporation*(A)
<C> <C> <C> <C>
128,817 shares of Common Stock May 1991 $ 1,422,501 $ 241,532
2,000,000 shares of Preferred Stock 1,000,000 937,500
Warrants to purchase 594,000 shares of Preferred Stock at
$.60 per share, expiring on 12/18/96 0 0
- -------------------------------------------------------------------------------------------------------------------------------
Borg-Warner Automotive, Inc.*(A)(B)
251,694 shares of Common Stock Sept. 1988 1,258,470 6,701,353
- -------------------------------------------------------------------------------------------------------------------------------
Borg-Warner Security Corporation*(A)
500,000 shares of Common Stock Sept. 1988 2,500,000 3,515,625
- -------------------------------------------------------------------------------------------------------------------------------
Brightware, Inc.
140,485 shares of Common Stock Apr. 1993 39,252 84,291
Warrants to purchase 38,737 shares of Common Stock
at $.40 per share, expiring on 4/19/99 1,138 7,748
Warrants to purchase 4,846 shares of Common Stock
at $.40 per share, expiring on 12/16/97 327 969
Warrants to purchase 59,166 shares of Common Stock
at $.80 per share, expiring on 6/10/98 3,986 3,986
- -------------------------------------------------------------------------------------------------------------------------------
Clarus Medical Systems, Inc.*
179,028 shares of Preferred Stock Jan. 1991 2,389,168 895,152
Warrants to purchase 4,048 shares of Common Stock
at $18.75 per share, expiring on 7/31/97 0 0
Warrants to purchase 14,043 shares of Common Stock
at $.05 per share, expiring between 3/7/00 and 7/3/00 0 0
Warrants to purchase 2,826 shares of Preferred Stock
at $5.00 per share, expiring on 3/7/00 0 0
- -------------------------------------------------------------------------------------------------------------------------------
Corporate Express, Inc.(A)(B)
120,503 shares of Common Stock May 1992 36,150 3,747,643
- -------------------------------------------------------------------------------------------------------------------------------
Diatide, Inc.*(A)
809,704 shares of Common Stock Dec. 1991 2,986,023 3,122,160
- -------------------------------------------------------------------------------------------------------------------------------
Elantec, Inc.(A)
23,245 shares of Common Stock Aug. 1988 60,437 130,172
- -------------------------------------------------------------------------------------------------------------------------------
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 0
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED) - continued
September 30, 1996
<TABLE>
Initial Investment
Company / Position Date Cost Fair Value
IDEC Pharmaceuticals Corporation(A):
ML/MS Associates, L.P.*
<S> <C> <C> <C>
34.4% Limited Partnership interest June 1989 $ 3,960,000 $ 6,521,089
MLMS Cancer Research, Inc.*
400,000 shares of Common Stock July 1989 69,566 65,866
- -------------------------------------------------------------------------------------------------------------------------------
Neocrin Company
484,300 shares of Preferred Stock June 1991 4,203,716 193,720
Warrants to purchase 922,050 shares of Preferred Stock
at $.40 per share, expiring on 1/3/01 92 0
- -------------------------------------------------------------------------------------------------------------------------------
Photon Dynamics, Inc.*(A)
425,235 shares of Common Stock Sept. 1988 2,452,226 2,423,840
Warrants to purchase 6,062 shares of Common Stock
at $5.40 per share, expiring on 6/30/00 0 1,819
- -------------------------------------------------------------------------------------------------------------------------------
Raytel Medical Corporation(A)(B)
100,000 shares of Common Stock Feb. 1990 386,622 566,858
Options to purchase 27,969 shares of Common Stock
at $1.42 per share, expiring on 10/31/01 0 262,350
- -------------------------------------------------------------------------------------------------------------------------------
Sanderling Biomedical, L.P.*(B)
80% Limited Partnership interest May 1988 1,786,643 2,923,285
- -------------------------------------------------------------------------------------------------------------------------------
Totals from Active Portfolio Investments $ 29,117,226 $ 35,796,958
---------------------------------
Supplemental Information: Liquidated Portfolio Investments(C)
Cost Realized Gain Return
Totals from Liquidated Portfolio Investments $ 86,941,514 $ 98,723,558 $ 185,665,072
=========================================================
Combined Net Combined
Unrealized and Fair Value
Cost Realized Gain and Return
Totals from Active & Liquidated Portfolio Investments $ 116,058,740 $ 105,403,290 $ 221,462,030
=========================================================
</TABLE>
(A) Public company
(B) During the quarter, the Partnership sold a portion of its equity holdings
of such investment. See Note 9 of Notes to Financial Statements for
summarized information.
(C) Amounts provided for "Supplemental Information: Liquidated Portfolio
Investments" are cumulative from inception through September 30,1996.
* May be deemed an affiliated person of the Partnership as 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,
1996 1995 1996 1995
----------------- --------------- --------------- ----------
INVESTMENT INCOME AND EXPENSES
Income:
<S> <C> <C> <C> <C>
Interest from short-term investments $ 282,021 $ 449,361 $ 898,233 $ 807,456
Interest and other income from portfolio
investments 81,108 81,236 243,541 293,483
Dividend income 41,492 66,700 174,892 200,100
----------------- --------------- --------------- ----------------
Totals 404,621 597,297 1,316,666 1,301,039
---------------------------------------------------- ---------- ------------- ------------
Expenses:
Management fee - Note 4 158,795 295,890 548,104 913,317
Professional fees 59,658 85,870 139,755 222,113
Mailing and printing 20,860 17,418 158,293 182,796
Independent General Partners' fees - Note 5 27,959 23,761 85,425 78,907
Custodial fees 3,194 3,710 10,430 10,752
Miscellaneous 70 87 1,520 572
Litigation settlement - Note 8 1,000,000 0 1,000,000 0
----------------- --------------- --------------- ----------------
Totals 1,270,536 426,736 1,943,527 1,408,457
------------------------------------------------------ ---------- ------------- ------------
NET INVESTMENT INCOME (LOSS) (865,915) 170,561 (626,861) (107,418)
Net realized gain from portfolio investments 9,797,095 21,959,347 47,763,001 39,641,434
----------------- --------------- --------------- ----------------
NET REALIZED GAIN FROM
OPERATIONS
(allocable to Partners) - Note 3 8,931,180 22,129,908 47,136,140 39,534,016
Net change in unrealized appreciation of
investments (12,958,684) (6,225,913) (28,445,452) 5,857,220
------------------ --------------- ---------------- ----------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS $ (4,027,504) $ 15,903,995 $ 18,690,688 $ 45,391,236
================== =============== =============== ================
</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>
1996 1995
---------------- ----------
CASH FLOWS USED FOR OPERATING ACTIVITIES
<S> <C> <C>
Net investment loss $ (626,861) $ (107,418)
Adjustments to reconcile net investment loss to cash used for operating
activities:
Decrease in accrued interest and notes receivable 541,167 20,932
Increase in dividend receivable (41,492) -
(Increase) decrease in accrued interest on short-term investments 13,407 (309,444)
Decrease in payables (33,794) (32,187)
----------------- ----------------
Cash used for operating activities (147,573) (428,117)
----------------- ----------------
CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES
Purchase of short-term investments (620,016) (37,115,367)
Cost of portfolio investments purchased (207,111) (2,175,224)
Deposit released from (placed in) escrow 184,502 (218,233)
Net proceeds from the sale of portfolio investments 59,663,087 49,048,916
Proceeds from repayment of note - 2,019,721
---------------- ----------------
Cash provided from investing activities 59,020,462 11,559,813
---------------- ----------------
CASH FLOWS USED FOR FINANCING ACTIVITIES
Cash distributions to Partners (59,154,595) (11,234,189)
----------------- ----------------
Decrease in cash and cash equivalents (281,706) (102,493)
Cash and cash equivalents at beginning of period 685,917 638,868
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 404,211 $ 536,375
================ ================
</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, 1996
<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 $ 1,471,685 $ 1,457 $ 43,744,206 $ 35,125,184 $ 80,342,532
Cash distribution,
paid April 26, 1996 (3,377,898) (600) (18,000,000) - (21,378,498)
Cash distribution,
paid July 29, 1996 (4,238,951) (640) (19,200,000) - (23,439,591)
Accrued cash distribution,
paid October 11, 1996 (2,547,571) (400) (12,000,000) - (14,547,971)
Net investment loss 76,581 (23) (703,419) - (626,861)
Net realized gain from portfolio
investments 9,934,704 1,261 37,827,036 - 47,763,001
Net change in unrealized
appreciation of investments - - - (28,445,452) (28,445,452)
------------- -------- -------------- --------------- -----------------
Balance at end of period $ 1,318,550 $ 1,055 $ 31,667,823(A) $ 6,679,732 $ 39,667,160
============= ======== ============== ============== ================
</TABLE>
(A) The net asset value per unit of limited partnership interest, including an
assumed allocation of net unrealized appreciation of investments, was $308
at September 30, 1996. Cumulative cash distributions paid or accrued to
Limited Partners from inception to September 30, 1996 totaled $ 1,300 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.
DLJ Capital Management Corporation (the "Sub-Manager"), an indirect subsidiary
of Donaldson, Lufkin & Jenrette, Inc., is the sub-manager of the Partnership,
pursuant to a sub-management agreement among the Partnership, the Management
Company, the Managing General Partner and the Sub-Manager.
The Partnership's objective is to achieve long-term capital appreciation from
its portfolio of venture capital investments in new and developing companies and
other special investment situations. The Partnership does not engage in any
other business or activity. The 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 Sub-Manager under the supervision of the Individual
General Partners and the Managing General Partner. The fair value of
publicly-held portfolio securities is adjusted to the closing public market
price for the last trading day of the accounting period discounted by a factor
of 0% to 50% for sales restrictions. Factors considered in the determination of
an appropriate discount include, underwriter lock-up or Rule 144 trading
restrictions, insider status where the Partnership either has a representative
serving on the company's Board of Directors or is greater than a 10%
shareholder, and other liquidity factors such as the size of the Partnership's
position in a given company compared to the trading history of the public
security. Privately-held portfolio securities are carried at cost until
significant developments affecting the portfolio company provide a basis for
change in valuation. The fair value of private securities is adjusted 1) to
reflect meaningful third-party transactions in the private market or 2) to
reflect significant progress or slippage in the development of the company's
business such that cost is no longer reflective of fair value. As a venture
capital investment fund, the Partnership's portfolio investments involve a high
degree of business and financial risk that can result in substantial losses. The
Sub-Manager considers such risks in determining the fair value of the
Partnership's portfolio investments.
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investment
Transactions - Investment transactions are recorded on the accrual method.
Portfolio investments are recorded on the trade date, the date the Partnership
obtains an enforceable right to demand the securities or payment therefor.
Realized gains and losses on investments sold are computed on a specific
identification basis. Income Taxes - No provision for income taxes has been made
since all income and losses are allocable to the Partners for inclusion in their
respective tax returns. The Partnership's net assets for financial reporting
purposes differ from its net assets for tax purposes. Net unrealized
appreciation of investments of $6.7 million as of September 30, 1996, which was
recorded for financial statement purposes, was not recognized for tax purposes.
Additionally, from inception to September 30, 1996, timing differences primarily
relating to realized losses totaling $1.2 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,
1996, the Partnership had a $102.8 million net gain from its venture capital
investments, which includes interest and other income from portfolio investments
totaling $4 million.
4. Related Party Transactions
The Management Company is responsible for 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.
<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
$1,200 for each audit committee meeting attended ($500 if an audit committee
meeting is held on the same day as a meeting of the Independent General
Partners).
6. Commitments
The Partnership has an outstanding commitment of $370,434 payable on demand,
when and if called for by MLMS Cancer Research, Inc. The Partnership has a 34.8%
ownership interest in 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. The Partnership also owns a 34.4% limited
partnership interest in ML/MS Associates.
7. Cash Distributions
On August 6, 1996, the General Partners approved a cash distribution to Partners
totaling $14,547,971; $12,000,000, or $100 per Unit, to the Limited Partners and
$2,547,971 to the General Partners. This distribution was paid on October 11,
1996 to Limited Partners of record on September 30, 1996.
Cash distributions paid or accrued during the periods presented and cumulative
cash distributions paid to Partners from inception of the Partnership through
September 30, 1996 are listed below:
<TABLE>
General Limited Per $1,000
Distribution Date Partners Partners Unit
- ------------------------------------------------ --------------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
Inception to December 31, 1994 $ 1,400,000 $ 58,800,000 $ 490
April 11, 1995 2,234,189 9,000,000 75
October 5, 1995 5,001,136 27,000,000 225
January 12, 1996 2,336,506 12,000,000 100
April 26, 1996 3,378,498 18,000,000 150
July 29, 1996 4,239,591 19,200,000 160
October 11, 1996 (accrued at September 30,1996) 2,547,971 12,000,000 100
--------------- ---------------- ---------
Cumulative totals as of September 30, 1996 $ 21,137,891 $ 156,000,000 $ 1,300
=============== ================ =========
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
8. Litigation Settlement
The Partnership was named as a defendant, along with other entities and
individuals, in an action involving In-Store Advertising, Inc. ("ISA"). The
action was 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, alleged violations under certain sections of the Securities Act of 1933,
the Securities Exchange Act of 1934 and common law. The plaintiffs sought
rescission of their purchases of ISA common stock together with damages and
certain costs and expenses. Certain defendants, including the Partnership, have
entered into a Memorandum of Understanding with the plaintiffs in respect of the
settlement of this action. In connection therewith, the Partnership delivered
$1,000,000 into escrow on September 20, 1996, representing its share of the
settlement agreement. Additionally, as of September 30, 1996, the Partnership
has incurred cumulative legal expenses totaling $231,000 related to this action.
9. Portfolio Investments
During the three and nine months ended September 30, 1996, the Partnership
liquidated equity securities of the following portfolio companies:
<TABLE>
Number of Realized
Company Shares/Warrants Cost Gain (Loss) Return
- -------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 1996:
- --------------------------------------
<S> <C> <C> <C> <C>
Borg-Warner Automotive, Inc. 192,970 $ 964,850 $ 5,318,254 $ 6,283,104
Corporate Express, Inc. 119,000 88,306 4,315,678 4,403,984
Raytel Medical Corporation 12,500 48,328 0 48,328
Sanderling Biomedical, L.P.(Neopath, Inc.) 6,295 0 163,163 163,163
------------ --------------- ---------------
Sub-total 1,101,484 9,797,095 10,898,579
------------ --------------- ---------------
Six Months Ended June 30, 1996:
CellPro, Incorporated 50,166 93,241 744,215 837,456
Corporate Express, Inc. 320,000 940,025 8,827,460 9,767,485
Elantec, Inc. 220,000 826,137 1,745,113 2,571,250
Inference Corporation 189,424 804,690 2,848,551 3,653,241
Ligand Pharmaceuticals, Inc. 222,942 539,686 2,001,156 2,540,842
Neocrin Company 13,005 130 (130) 0
OccuSystems, Inc. 403,864 2,019,320 7,708,378 9,727,698
Raytel Medical Corporation 583,253 1,614,353 4,370,155 5,984,508
SDL, Inc. 379,155 999,015 9,120,519 10,119,534
Viasoft, Inc. 47,795 152,280 600,489 752,769
--------------- ---------------- ----------------
Sub-total 7,988,877 37,965,906 45,954,783
--------------- ---------------- ----------------
Totals for the nine months ended September 30, 1996 $ 9,090,361 $ 47,763,001 $ 56,853,362
=============== ================ ================
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
10. Classification of Portfolio Investments
As of September 30, 1996, the Partnership's investments in portfolio companies
were categorized as follows:
% of
Type of Investments Cost Fair Value Net Assets*
- ------------------- ---------------- --------------- -----------
<S> <C> <C> <C>
Common Stock $ 11,432,323 $ 21,091,837 53.17%
Limited Partnerships 5,746,643 9,444,374 23.81%
Preferred Stock 8,703,885 2,026,372 5.11%
Debt Securities 3,234,375 3,234,375 8.15%
---------------- --------------- ----------
Total $ 29,117,226 $ 35,796,958 90.24%
================ =============== ==========
Country/Geographic Region
Midwestern U.S. $ 6,183,788 $ 14,859,773 37.46%
Western U.S. 15,386,506 14,365,025 36.21%
Eastern U.S. 7,546,932 6,572,160 16.57%
---------------- --------------- ----------
Total $ 29,117,226 $ 35,796,958 90.24%
================ =============== ==========
Industry
Business Services $ 2,536,150 $ 7,263,268 18.31%
Biotechnology 8,802,232 12,632,400 31.85%
Automotive Parts 1,258,470 6,701,353 16.89%
Semiconductors/Electronics 2,512,663 2,555,831 6.44%
Medical Devices and Services 9,402,099 3,097,112 7.81%
Telecommunications 3,450,000 3,450,000 8.70%
Computer Hardware/Software 1,155,612 96,994 .24%
---------------- --------------- ----------
Total $ 29,117,226 $ 35,796,958 90.24%
================ =============== ==========
</TABLE>
* Percentage of net assets is based on fair value.
11. 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, 1996, 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
As of September 30, 1996, the Partnership held $18.4 million in cash and
short-term investments; $18 million in short-term securities with maturities of
less than one year and $404,000 in an interest-bearing cash account. Interest
earned from such investments totaled $282,000 for the three months ended
September 30, 1996. Interest earned in future periods is subject to fluctuations
in short-term interest rates and changes in amounts available for investment in
such securities.
In August 1996, the General Partners approved a $14.5 million cash distribution
to Partners; $12 million, or $100 per Unit, to Limited Partners of record on
September 30, 1996 and $2.5 million to the General Partners. Such distribution
was paid on October 11, 1996. Cumulative cash distributions paid to Partners,
including the distribution paid in October 1996, total $177.1 million; $156
million to the Limited Partners, or $1,300 per $1,000 Unit and $21.1 million to
the General Partners.
Generally, proceeds 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. 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.
Results of Operations
For the three and nine months ended September 30, 1996, the Partnership had a
net realized gain from operations of $8.9 million and $47.1 million,
respectively. 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. 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, 1996, the Partnership had a net realized gain from
portfolio investments of $9.8 million and $47.8 million, respectively. During
the three months ended September 30, 1996, the Partnership sold shares of common
stock of four publicly-traded portfolio companies for $10.9 million, realizing a
gain of $9.8 million. During the six months ended June 30, 1996, the Partnership
sold shares of common stock of nine of its publicly-traded portfolio companies
for $46 million, realizing a gain of $38 million. See Note 9 of Notes to
Financial Statements for a summary of sales by investment for the three month
and six month periods mentioned above.
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 such 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., 584,682 shares of Regeneron Pharmaceuticals, Inc. (including
67,747 shares received during the quarter as in 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, 204,291 shares of Mobile
Telecommunications Technologies Corporation, 861,000 shares of Regeneron
Pharmaceuticals, 129,435 shares of Corporate Express, 115,267 shares of
Children's Discovery Centers of America, Inc., 144,486 shares of Komag, Inc.,
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 $250,000.
Investment Income and Expenses - For the three months ended September 30, 1996,
the Partnership had a net investment loss of $866,000 compared to net investment
income of $171,000 for the same period in 1995. The increase in net investment
loss for the 1996 period compared to the same period in 1995, primarily was
attributable to a $1 million litigation settlement expense incurred during the
1996 period, relating to the Partnership's investment in In-Store Advertising,
Inc. See Note 8 of Notes to Financial Statements. Additionally, a decrease in
interest earned from short-term investments during the 1996 period was offset by
a decrease in management fees, as discussed below, and a decrease in
professional fees during the 1996 period compared to the 1995 period. Interest
earned from short-term investments declined to $282,000 during the 1996 period
from $449,000 for the 1995 period. This decrease primarily resulted from a
decline in funds available for investment in short-term securities during the
three months ended September 30, 1996 compared to the same period in 1995.
For the nine months ended September 30, 1996 and 1995, the Partnership had a net
investment loss of $627,000 and $107,000, respectively. The increase in net
investment loss for the 1996 period compared to the same period in 1995,
primarily was attributable to the $1 million litigation settlement expense
incurred during the 1996 period, relating to the Partnership's investment in
In-Store Advertising, Inc. See Note 8 of Notes to Financial Statements. The
litigation settlement expense was partially offset by a $365,000 reduction in
the management fee, as discussed below, and a $100,000 net reduction in other
operating expenses for the 1996 period compared to the same period in 1995. The
net reduction in other operating expenses includes an $82,000 reduction in
professional fees, primarily due to reduced legal fees relating to the In-Store
Advertising litigation. Additionally, interest earned from short-term
investments increased to $898,000 during the 1996 period from $807,000 for the
1995 period. This increase primarily resulted from an increase in funds
available for investment in short-term securities during the nine months ended
September 30, 1996 compared to the same period in 1995.
The Management Company is responsible for the management and administrative
services necessary for the operation of the Partnership. The Management Company
receives a management fee at an annual rate of 2.5% of the gross capital
contributions to the Partnership, reduced by selling commissions, organizational
and offering expenses paid by the Partnership, return of capital and realized
capital losses, with a minimum annual fee of $200,000. Such fee is determined
and payable quarterly. The management fee for the three months ended September
30, 1996 and 1995, was $159,000 and $296,000, respectively. The management fee
for the nine months ended September 30, 1996 and 1995, was $548,000 and
$913,000, respectively. The decline in the management fee for the 1996 periods
compared to the same periods in 1995 is due to continued portfolio liquidations
and subsequent distributions made to Partners. The management fee will continue
to decline in future periods as the Partnership's investment portfolio continues
to mature and cash 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 earned from 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,
1996, the Partnership had a $2.6 million net unrealized gain from its portfolio
investments, primarily resulting from the net upward revaluation of its
remaining publicly-traded securities. Additionally, during the nine month
period, $31 million of unrealized gain was transferred to realized gain relating
to portfolio investments sold during the period, as discussed above. The $31
million transfer to realized gain, partially offset by the additional $2.6
million unrealized gain, resulted in a $28.4 million reduction to net unrealized
appreciation of investments for the nine month period.
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.
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, 1996, the Partnership had an $18.7
million net increase in net assets resulting from operations, comprised of the
$47.1 million net realized gain from operations offset by the $28.4 million
decrease in unrealized appreciation of investments for the nine month period. At
September 30, 1996, the Partnership's net assets were $39.7 million, down $40.6
million from $80.3 million at December 31, 1995. This decrease includes the
$18.7 million increase in net assets from operations for the period reduced by
the $59.4 million of cash distributions paid, or accrued, to Partners during the
nine months ended September 30, 1996.
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 increase resulted from the $45.4
million net increase in net assets from operations for the nine month period
reduced by the $43.2 million of cash distributions paid, or accrued, to Partners
during the nine months ended September 30, 1995.
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, 1996 and December 31, 1995 was $308 and $596, respectively.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Partnership has entered into a Memorandum of Understanding with the
plaintiffs and certain defendants regarding the settlement of an action in which
the Partnership was named as a defendant in respect of its ownership of
securities of In-Store Advertising, Inc. ("In-Store Advertising). In connection
therewith, the Partnership delivered $1,000,000 into escrow on September 20,
1996, representing its share of the settlement. Such settlement remains subject
to the entry of a judgment by the court approving the settlement and dismissing
the action against the Partnership and the other defendants involved in the
settlement.
The following is additional information regarding this matter:
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 former individual officers and directors of In-Store
Advertising, the underwriters involved in the Offering, 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. In their
answers to the Amended Complaint, defendants (including the Partnership)
asserted cross-claims for contribution against their then co-defendant KPMG Peat
Marwick (In-Store Advertising's auditors). Plaintiffs' claims against KPMG Peat
Marwick were dismissed as barred by the statute of limitations.
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. See Note 8
of Notes to Financial Statements.
Item 2. Changes in Securities.
Not applicable.
<PAGE>
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the period in which
this report covers.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
<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)
(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>
(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 12, 1996
<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, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 47,072,902
<INVESTMENTS-AT-VALUE> 53,772,995
<RECEIVABLES> 370,502
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 404,211
<TOTAL-ASSETS> 54,547,708
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 14,880,548
<TOTAL-LIABILITIES> 14,880,548
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 120,000
<SHARES-COMMON-PRIOR> 120,000
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<DIVIDEND-INCOME> 174,892
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<OTHER-INCOME> 0
<EXPENSES-NET> 1,943,527
<NET-INVESTMENT-INCOME> (626,861)
<REALIZED-GAINS-CURRENT> 47,763,001
<APPREC-INCREASE-CURRENT> (28,445,452)
<NET-CHANGE-FROM-OPS> 18,690,688
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 59,366,060
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<NET-CHANGE-IN-ASSETS> (40,497,701)
<ACCUMULATED-NII-PRIOR> 0
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<PER-SHARE-NAV-BEGIN> 596
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</TABLE>
