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, 1997
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 10281-1326
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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, 1997 (Unaudited) and December 31, 1996
Schedule of Portfolio Investments as of September 30, 1997 (Unaudited)
Statements of Operations for the Three and Nine Months Ended September 30, 1997
and 1996 (Unaudited)
Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996
(Unaudited)
Statement of Changes in Partners' Capital for the Nine Months Ended September
30, 1997 (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,
1997 December 31,
(Unaudited) 1996
ASSETS
Portfolio investments at fair value (cost $13,558,900 as of
<S> <C> <C> <C> <C> <C> <C> <C>
September 30, 1997 and $27,505,870 as of December 31, 1996) $ 22,961,464 $ 37,386,258
Short-term investments at amortized cost 7,981,544 4,486,402
Cash and cash equivalents 1,518,088 346,129
Accrued interest receivable 4,749 49,442
Receivable from securities sold 2,586,096 -
---------------- -----------------
TOTAL ASSETS $ 35,051,941 $ 42,268,231
================ =================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Cash distribution payable $ 8,211,344 $ -
Accounts payable and accrued expenses 150,342 183,406
Due to Management Company 43,853 138,389
Due to Independent General Partners 20,250 23,400
---------------- -----------------
Total liabilities 8,425,789 345,195
---------------- -----------------
Partners' Capital:
Managing General Partner 1,314,334 1,158,769
Individual General Partners 530 1,029
Limited Partners (120,000 Units) 15,908,724 30,882,850
Unallocated net unrealized appreciation of investments 9,402,564 9,880,388
---------------- -----------------
Total partners' capital 26,626,152 41,923,036
---------------- -----------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 35,051,941 $ 42,268,231
================ =================
</TABLE>
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
September 30, 1997
<TABLE>
Initial Investment
Company / Position Date Cost Fair Value
Biocircuits Corporation*(A)(B)
<S> <C> <C> <C>
401,734 shares of Common Stock May 1991 $ 468,051 $ 200,867
2,000,000 shares of Preferred Stock 1,000,000 250,000
Warrants to purchase 166,667 shares of Common Stock
at $.75 per share, expiring 1/2/99 20,833 0
- -------------------------------------------------------------------------------------------------------------------------------
Borg-Warner Security Corporation*(A)
500,000 shares of Common Stock Sept. 1988 2,500,000 7,312,500
- -------------------------------------------------------------------------------------------------------------------------------
Brightware, Inc.
140,485 shares of Common Stock May 1995 39,252 245,849
Warrants to purchase 38,737 shares of Common Stock
at $.40 per share, expiring on 4/19/99 1,138 52,295
Warrants to purchase 4,846 shares of Common Stock
at $.40 per share, expiring on 12/16/97 327 6,542
Warrants to purchase 59,166 shares of Common Stock
at $.80 per share, expiring on 6/10/98 3,986 56,208
- -------------------------------------------------------------------------------------------------------------------------------
Clarus Medical Systems, Inc.*(C)
179,028 shares of Preferred Stock Jan. 1991 1,000,548 895,152
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)(D)
60,000 shares of Common Stock May 1992 12,000 1,014,000
- -------------------------------------------------------------------------------------------------------------------------------
Diatide, Inc.*(A)
809,704 shares of Common Stock Dec. 1991 2,986,023 6,315,692
- -------------------------------------------------------------------------------------------------------------------------------
Horizon Cellular Telephone Company, L.P.:(E)
SPTHOR Corporation
10% Promissory Note due 3/26/98 May 1992 125,269 5,073
5.67% Bridge Loan 228,926 9,271
34.5 shares of Common Stock 215,625 256,339
- -------------------------------------------------------------------------------------------------------------------------------
I.D.E. Corporation
113,322 shares of Common Stock Mar. 1988 227,000 0
- -------------------------------------------------------------------------------------------------------------------------------
Neocrin Company*
48,430 shares of Preferred Stock June 1991 363,378 0
Warrants to purchase 92,205 shares of Common Stock
at $4.00 per share, expiring on 1/3/01 0 0
- -------------------------------------------------------------------------------------------------------------------------------
Photon Dynamics, Inc.*(A)
425,235 shares of Common Stock Sept. 1988 2,452,226 2,530,148
Warrants to purchase 6,062 shares of Common Stock
at $5.40 per share, expiring on 6/30/00 0 0
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED), continued
September 30, 1997
<TABLE>
Initial Investment
Company / Position Date Cost Fair Value
Raytel Medical Corporation(A)
<C> <C> <C> <C>
62,500 shares of Common Stock Feb. 1990 $ 241,639 $ 725,000
Options to purchase 27,969 shares of Common Stock
at $1.42 per share, expiring on 10/31/01 0 284,724
- -------------------------------------------------------------------------------------------------------------------------------
Sanderling Biomedical, L.P.*(F)
80% Limited Partnership interest May 1988 1,528,129 1,958,753
- -------------------------------------------------------------------------------------------------------------------------------
Vical, Inc.(A)(F)
59,685 shares of Common Stock Aug. 1990 144,550 843,051
- -------------------------------------------------------------------------------------------------------------------------------
Total Portfolio Investments(G) $ 13,558,900 $ 22,961,464
---------------------------------
Supplemental Information - Liquidated Portfolio Investments(H):
Cost Realized Gain Return
Totals from Liquidated Portfolio Investments $ 102,974,096 $ 112,950,601 $ 215,924,697
=========================================================
Combined Net Combined
Unrealized and Fair Value
Cost Realized Gain and Return
Totals from Active & Liquidated Portfolio Investments $ 116,532,996 $ 122,353,165 $ 238,886,161
=========================================================
</TABLE>
(A) Public company
(B) The preferred shares of Biocircuits Corporation held by the Partnership are
convertible into common shares of the company at a ratio of 4 shares of
preferred stock for 1 share of common stock. On July 2, 1997, the
Partnership made a follow-on investment in Biocircuits Corporation of
$125,000, acquiring an additional 166,667 shares of the company's common
stock and a warrant to purchase 166,667 shares of common stock for $.75 per
share, expiring on 1/2/99.
(C) On July 31, 1997, the Partnership's warrant to purchase 4,048 shares of
Clarus Medical Systems, Inc. common stock for $18.75 per share, expired
unexercised.
(D) On September 30, 1997, the Partnership sold 120,755 shares of
Corporate Express, Inc. common stock for $2,586,096,
realizing a gain of $2,561,946.
(E) In August 1997, the Partnership received an additional $188,423, plus
interest of $5,245, from the sale of options in
connection with its investment in HCTC/SPTHOR.
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED), continued
September 30, 1997
(F) In July and September 1997, the Partnership received in-kind distributions
of 4,645 shares of Graham Fields International common stock and 59,685
shares of Vical, Inc. common stock, respectively, from Sanderling
Biomedical, L.P. In July 1997, the Partnership sold its 4,645 shares of
Graham Fields common stock for $63,004 realizing a loss of $50,960.
Subsequent to the end of the quarter, in October 1997, the Partnership sold
its 59,685 shares of Vical common stock for $939,597, realizing a gain of
$795,047.
(G) In July 1997, the Partnership sold its remaining 152,843 common shares of
IDEC Pharmaceuticals Corporation for $4.1 million, realizing a gain of $2.8
million. Also in July 1997, the Partnership sold its remaining 23,245
common shares of Elantec, Inc., for $93,382 realizing a gain of $32,945.
(H) Amounts provided for "Supplemental Information: Liquidated Portfolio
Investments" are cumulative from inception through September 30, 1997.
* 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,
1997 1996 1997 1996
----------------- --------------- --------------- ----------
INVESTMENT INCOME AND EXPENSES
Income:
<S> <C> <C> <C> <C>
Interest from short-term investments $ 118,572 $ 282,021 $ 566,469 $ 898,233
Interest and other income from portfolio
investments 5,333 81,108 27,597 243,541
Dividend income - 41,492 37,754 174,892
--------------- --------------- --------------- ----------------
Totals 123,905 404,621 631,820 1,316,666
------------------------------------------------------ ---------- ----------- ------------
Expenses:
Management fee 43,853 158,795 241,337 548,104
Professional fees 23,931 59,658 105,367 139,755
Mailing and printing 37,277 20,860 139,041 158,293
Independent General Partners' fees 20,623 27,959 68,604 85,425
Custodial fees (3,727) 3,194 (227) 10,430
Miscellaneous 5,341 70 5,637 1,520
Litigation settlement - 1,000,000 - 1,000,000
--------------- --------------- --------------- ----------------
Totals 127,298 1,270,536 559,759 1,943,527
------------------------------------------------------ ------------ ----------- ------------
NET INVESTMENT INCOME (LOSS) (3,393) (865,915) 72,061 (626,861)
Net realized gain from portfolio investments 5,518,904 9,797,095 15,110,952 47,763,001
--------------- --------------- --------------- ----------------
NET REALIZED GAIN FROM
OPERATIONS - (allocable to Partners) 5,515,511 8,931,180 15,183,013 47,136,140
Net change in unrealized appreciation of
investments 1,620,875 (12,958,684) (477,824) (28,445,452)
--------------- --------------- --------------- ----------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS $ 7,136,386 $ (4,027,504) $ 14,705,189 $ 18,690,688
=============== =============== =============== ================
</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>
1997 1996
---------------- ----------
CASH FLOWS PROVIDED FROM (USED FOR)
OPERATING ACTIVITIES
<S> <C> <C>
Net investment income (loss) $ 72,061 $ (626,861)
Adjustments to reconcile net investment income (loss) to cash provided from
(used for) operating activities:
Decrease in accrued interest and notes receivable 44,693 541,167
Increase in dividend receivable - (41,492)
Decrease in accrued interest on short-term investments 44,137 13,407
Decrease in payables (144,829) (33,794)
---------------- ----------------
Cash provided from (used for) operating activities 16,062 (147,573)
---------------- ----------------
CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES
Net purchase of short-term investments (3,539,279) (620,016)
Cost of portfolio investments purchased (460,176) (207,111)
Deposit released from escrow - 184,502
Net proceeds from the sale of portfolio investments 24,564,422 59,663,087
Proceeds from repayment of note 2,381,659 -
---------------- ----------------
Cash provided from investing activities 22,946,626 59,020,462
---------------- ----------------
CASH FLOWS USED FOR FINANCING ACTIVITIES
Cash distributions paid to Partners (21,790,729) (59,154,595)
---------------- ----------------
Increase (decrease) in cash and cash equivalents 1,171,959 (281,706)
Cash and cash equivalents at beginning of period 346,129 685,917
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,518,088 $ 404,211
================ ================
</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, 1997
<TABLE>
Unallocated
Net Unrealized
Managing Individual Appreciation
General General Limited (Depreciation)
Partner Partners Partners of Investments Total
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 1,158,769 $ 1,029 $ 30,882,850 $ 9,880,388 $ 41,923,036
Cash distribution, paid 7/11/97 (2,590,089) (640) (19,200,000) - (21,790,729)
Cash distribution, accrued (411,084) (260) (7,800,000) - (8,211,344)
Net investment income 13,660 2 58,399 - 72,061
Net realized gain from portfolio
investments 3,143,078 399 11,967,475 - 15,110,952
Net change in unrealized
appreciation (depreciation)
of investments - - - (477,824) (477,824)
------------- -------- -------------- -------------- ----------------
Balance at end of period $ 1,314,334 $ 530 $ 15,908,724(A) $ 9,402,564 $ 26,626,152
============= ======== ============== ============== ================
</TABLE>
(A) The net asset value per unit of limited partnership interest, including an
assumed allocation of net unrealized appreciation of investments, was $195
at September 30, 1997. Cumulative cash distributions paid or accrued to
Limited Partners from inception to September 30, 1997 totaled $1,525 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. In July 1997, the Individual General Partners voted
to extend the term of the Partnership for an additional two-year period. As a
result, the Partnership is scheduled to terminate on December 31, 1999. The
Individual General Partners have the right to extend the term of the Partnership
for an additional two-year period if they determine that such extension is 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) - continued
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 $9.4 million at September 30, 1997, which was
recorded for financial statement purposes, was not recognized for tax purposes.
Additionally, from inception to September 30, 1997, timing differences of
approximately $400,000 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,
1997, the Partnership had a $117.2 million net gain from its venture capital
investments, which includes interest and other income from portfolio investments
totaling $4.2 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.
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - continued
5. Independent General Partners' Fees
As compensation for services rendered to the Partnership,
each of the three Independent General Partners receives $21,000 annually
in quarterly installments, $1,500 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 $1,500 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). Prior to July 1, 1997, the Independent General Partners had
received a $20,000 annual fee and $1,400 for each meeting attended.
6. Commitments
The Partnership had a $370,434 non-interest obligation payable on demand to MLMS
Cancer Research, Inc., the general partner of ML/MS Associates, L.P. This
obligation was satisfied in November 1997 by making a final payment of $14,079
to MLMS Cancer Research, Inc.
7. Portfolio Investments
During the three and nine months ended September 30, 1997, the Partnership
liquidated or wrote-off the following portfolio securities:
<TABLE>
Realized
Company Shares Sold Cost Gain (Loss) Return
Six Months Ended June 30, 1997:
<S> <C> <C> <C> <C>
Borg-Warner Automotive, Inc. 251,694 $ 1,258,470 $ 8,381,410 $ 9,639,880
IDEC Pharmaceuticals Corporation 324,390 2,718,916 5,807,909 8,526,825
Raytel Medical Corporation 37,500 144,983 0 144,983
Biocircuits Corporation - partial write-off n/a 1,164,867 (1,164,867) 0
Clarus Medical Systems, Inc. - partial write-off n/a 1,388,620 (1,388,620) 0
Neocrin Company - partial write-off n/a 3,840,430 (3,840,430) 0
HCTC Investment, L.P. - sale of options n/a 0 1,796,646 1,796,646
HCTC Investment, L.P. - note repayment n/a 1,926,168 0 1,926,168
SPTHOR Corporation - note repayment n/a 455,491 0 455,491
-------------- -------------- ---------------
Sub-total 12,897,945 9,592,048 22,489,993
-------------- -------------- ---------------
Three Months Ended September 30, 1997:
IDEC Pharmaceuticals Corporation 152,843 1,324,729 2,786,550 4,111,279
HCTC Investment, L.P. - sale of options n/a 0 188,423 188,423
Elantec, Inc. 23,245 60,437 32,945 93,382
Graham Fields International (Sanderling) 4,645 113,964 (50,960) 63,004
Corporate Express, Inc. 120,755 24,150 2,561,946 2,586,096
-------------- -------------- ---------------
Sub-total 1,523,280 5,518,904 7,042,184
-------------- -------------- ---------------
Totals for the nine months ended September 30, 1997 $ 14,421,225 $ 15,110,952 $ 29,532,177
============== ============== ===============
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - continued
8. 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, 1997, 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.
9. Cash Distribution
On October 16, 1997, the Partnership made a cash distribution to Partners
totaling $8,211,344. Limited Partners of record on September 30, 1997 received
$7,800,000, or $65 per Unit, and the General Partners received $411,344.
10. Subsequent Event
Subsequent to the end of the quarter, in October 1997, the Partnership sold its
59,685 common shares of Vical, Inc. for $939,597, realizing a gain of $795,047.
11. Classification of Portfolio Investments
As of September 30, 1997, the Partnership's investments in portfolio companies
were categorized as follows:
<TABLE>
% of
Type of Investments Cost Fair Value Net Assets*
- ------------------- -------------- --------------- -----------
<S> <C> <C> <C>
Common Stock $ 9,312,650 $ 19,843,215 74.52%
Limited Partnerships 1,528,129 1,958,753 7.36%
Preferred Stock 2,363,926 1,145,152 4.30%
Debt Securities 354,195 14,344 .06%
-------------- --------------- ------
Total $ 13,558,900 $ 22,961,464 86.24%
============== =============== ======
Country/Geographic Region
Midwestern U.S. $ 3,512,548 $ 9,221,652 34.63%
Western U.S. 6,263,509 7,153,437 26.87%
Eastern U.S. 3,782,843 6,586,375 24.74%
-------------- --------------- ------
Total $ 13,558,900 $ 22,961,464 86.24%
============== =============== ======
Industry
Business Services $ 2,512,000 $ 8,326,500 31.27%
Biotechnology 4,658,702 9,117,496 34.25%
Semiconductors/Electronics 2,452,226 2,530,148 9.50%
Medical Devices and Services 3,094,449 2,355,743 8.84%
Telecommunications 569,820 270,683 1.02%
Computer Hardware/Software 271,703 360,894 1.36%
-------------- --------------- ---------
Total $ 13,558,900 $ 22,961,464 86.24%
============== =============== ======
</TABLE>
* Percentage of net assets is based on fair value.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Liquidity and Capital Resources
During the quarter ended September 30, 1997, the Partnership sold certain
portfolio investments for net proceeds totaling $7,042,184, of which $2,586,096
was a receivable at September 30, 1997. Also during the quarter, the Partnership
made follow-on investments totaling $139,079.
As of September 30, 1997, the Partnership held $9,499,632 in cash and short-term
investments; $7,981,544 in short-term securities with maturities of less than
one year and $1,518,088 in an interest-bearing cash account. Interest earned
from such investments totaled $118,572 and $566,469 for the three and nine
months ended September 30, 1997. Interest earned in future periods is subject to
fluctuations in short-term interest rates and changes in amounts available for
investment in such securities.
The Partnership will not make any new portfolio investments. Therefore, all cash
received from the sale of portfolio investments is distributed to Partners as
soon as practicable after an adequate reserve for operating expenses and
follow-on investments in the remaining portfolio companies.
Subsequent to the end of the quarter, on October 16, 1997, the Partnership made
a cash distribution to Partners totaling $8,211,344. Limited Partners of record
on September 30, 1997 received $7,800,000, or $65 per Unit, and the General
Partners received $411,344.
Results of Operations
For the three and nine months ended September 30, 1997, the Partnership had a
net realized gain from operations of $5,515,511 and $15,183,013, respectively.
For the three and nine months ended September 30, 1996, the Partnership had a
net realized gain from operations of $8,931,180 and $47,136,140, 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, 1997, the Partnership had a net realized gain from
portfolio investments of $5,518,904 and $15,110,952, respectively. During the
three months ended September 30, 1997, the Partnership sold investments with a
cost of $1,523,280 for a net return of $7,042,184. These liquidations included
the sale of the Partnership's remaining 152,843 common shares of IDEC
Pharmaceuticals Corporation and an additional 120,755 common shares of Corporate
Express, Inc. For the nine months ended September 30, 1997, the Partnership sold
investments with a cost of $14,421,225 for a net return of $29,532,177.
Portfolio liquidations during the nine month period include the sale of the
Partnership's entire position of 477,233 common shares of IDEC and its remaining
251,694 common shares of Borg-Warner Automotive, Inc. These liquidations also
include the partial write-off of the Partnership's investments in Biocircuits
Corporation, Clarus Medical Systems, Inc. and Neocrin Company resulting in an
aggregate realized loss of $6,393,917. Portfolio investments liquidated for the
respective periods are shown in detail in Note 7 of the Notes to Financial
Statements.
For the three and nine months ended September 30, 1996, the Partnership had a
net realized gain from portfolio investments of $9,797,095 and $47,763,001,
respectively. During the three months ended September 30, 1996, the Partnership
sold shares of common stock of four publicly-traded portfolio companies for
$10,898,579, realizing a gain of $9,797,095. During the six months ended June
30, 1996, the Partnership sold shares of common stock of nine of its
publicly-traded portfolio companies for $45,954,783, realizing a gain of
$37,965,906.
Investment Income and Expenses - For the three months ended September 30, 1997,
the Partnership had a net investment loss of $3,393 compared to a net investment
loss of $865,915 for the three months ended September 30, 1996. The decrease in
net investment loss for the 1997 period compared to the same period in 1996,
primarily was attributable to a $1.0 million litigation settlement expense
incurred during the 1996 period, relating to the Partnership's investment in
In-Store Advertising, Inc. Additionally, a $280,716 decrease in investment
income during the 1997 period was partially offset by a $143,238 decrease in
operating expenses, including the management fee, as discussed below, and
professional fees incurred during the 1997 period compared to the 1996 period.
Interest earned from short-term investments declined to $118,572 during the 1997
period from $282,021 for the 1996 period. This decrease primarily resulted from
a decline in funds available for investment in short-term securities during the
three months ended September 30, 1997 compared to the same period in 1996.
Additionally, interest income from portfolio investments decreased by $75,775
resulting from the reduced amount of interest-bearing debt securities held by
the Partnership during the 1997 period compared to the same period in 1996.
Dividend income also declined by $41,492 due to the sale of the Partnership's
investment in Borg-Warner Automotive, which was fully liquidated during the
first quarter of 1997.
For the nine months ended September 30, 1997, the Partnership had net investment
income of $72,061 compared to a net investment loss of $626,861 for the same
period in 1996. The increase in net investment income for the 1997 period
compared to the same period in 1996, primarily was attributable to the $1.0
million litigation settlement expense incurred during the 1996 period, as
discussed above, partially offset by a $684,846 decrease in investment income
for the 1997 period compared to the same period in 1996. Interest earned from
short-term investments decreased to $566,469 for the 1997 period from $898,233
for the 1996 period, primarily resulting from a decrease in funds available for
investment in short-term securities during the nine months ended September 30,
1997 compared to the same period in 1996. Additionally, interest from portfolio
investments decreased by $215,944 resulting from the reduced amount of
interest-bearing debt securities held by the Partnership during the 1997 period
compared to the same period in 1996. Dividend income also decreased by $137,138
due to the sale of the Partnership's investment in Borg-Warner Automotive, as
discussed above. Additionally, operating expenses declined by $383,768 for the
1997 period compared to the same period in 1996, primarily resulting from
reduced management fees, as discussed below.
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, 1997 and 1996, was $43,853 and $158,795, respectively. The management fee
for the nine months ended September 30, 1997 and 1996, was $241,337 and
$548,104, respectively. The decline in the management fee for the 1997 periods
compared to the same periods in 1996 is due to continued portfolio liquidations
and subsequent distributions made to Partners.
The management fee and other operating expenses are paid with funds provided
from operations. Funds provided from operations are 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 - During the nine months ended September
30, 1997, the Partnership recorded net unrealized gains of $6,297,835, primarily
resulting from the net upward revaluation of certain publicly-traded securities.
Additionally, during the nine month period, $6,775,659 of unrealized gain was
transferred to realized gain in connection with the portfolio investments sold
during the period, as discussed above. As a result, unrealized appreciation of
investments was reduced by $477,824 for the nine month period.
For the nine months ended September 30, 1996, the Partnership recorded net
unrealized gains of $2,559,874, primarily resulting from the net upward
revaluation of certain publicly-traded securities. Additionally, during the nine
month period, $31,005,326 of unrealized gain was transferred to realized gain in
connection with the portfolio investments sold during the period, as discussed
above. As a result, unrealized appreciation of investments was reduced by
$28,445,452 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 of portfolio investments.
For the nine months ended September 30, 1997, the Partnership had an $14,705,189
net increase in net assets resulting from operations, comprised of the
$15,183,013 net realized gain from operations offset by the $477,824 decrease in
unrealized appreciation of investments for the nine month period. At September
30, 1997, the Partnership's net assets were $26,626,152, down $15,296,884 from
$41,923,036 million at December 31, 1996. This decrease is the result of the
$30,002,073 of cash distributions paid, or accrued, to Partners during the nine
months ended September 30, 1997 exceeding the $14,705,189 increase in net assets
from operations for the nine month period.
For the nine months ended September 30, 1996, the Partnership had an $18,690,688
net increase in net assets resulting from operations, comprised of the
$47,136,140 net realized gain from operations offset by the $28,445,452 decrease
in unrealized appreciation of investments for the nine month period. At
September 30, 1996, the Partnership's net assets were $39,667,160, down
$40,675,372 from $80,342,532 at December 31, 1995. This decrease is the result
of the $59,366,060 of cash distributions paid, or accrued, to Partners during
the nine months ended September 30, 1996 exceeding the $18,690,688 increase in
net assets from operations for the nine month period.
Gains and losses from investments are allocated to Partners' capital accounts
when realized, in accordance with the Partnership Agreement (see Note 3 of Notes
to Financial Statements). However, for purposes of calculating the net asset
value per unit of limited partnership interest, net unrealized appreciation of
investments has been included as if the net appreciation had been realized and
allocated to the Limited Partners in accordance with the Partnership Agreement.
Pursuant to such calculation, the net asset value per $1,000 Unit at September
30, 1997 and December 31, 1996 was $195 and $323, respectively.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
No mater 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
(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.
(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, 1997
<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, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 13,558,900
<INVESTMENTS-AT-VALUE> 22,961,464
<RECEIVABLES> 2,590,845
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 9,499,632
<TOTAL-ASSETS> 35,051,941
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<OTHER-ITEMS-LIABILITIES> 8,425,789
<TOTAL-LIABILITIES> 8,425,789
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<OTHER-INCOME> 27,597
<EXPENSES-NET> 559,759
<NET-INVESTMENT-INCOME> 72,061
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