SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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.
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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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
===============================================================================
(Title of class)
<PAGE>
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At March 21, 1997, 119,866 units of limited partnership interest ("Units") were
held by non-affiliates of the registrant. There is no established public trading
market for such Units.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Prospectus of the Registrant dated February 10, 1987, as
supplemented by a supplement thereto dated April 21, 1987, are incorporated by
reference in Part I and Part II hereof.
Portions of the Registrant's Form 10-Q for the quarter ended March 31, 1996
filed with the Securities and Exchange Commission on May 14, 1996 are
incorporated by reference in Part I hereof.
<PAGE>
PART I
Item 1. Business.
Formation
ML Venture Partners II, L.P. (the "Partnership" or the "Registrant") is a
Delaware limited partnership organized on February 4, 1986. The General Partners
of the Partnership consist of four individuals (the "Individual General
Partners") and MLVPII Co., L.P. (the "Managing General Partner"), a New York
limited partnership in which Merrill Lynch Venture Capital Inc. (the "Management
Company") is the general partner. The Management Company is an indirect
subsidiary of Merrill Lynch & Co., Inc. and an affiliate of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). DLJ Capital Management
Corporation (the "Sub-Manager"), an affiliate of Donaldson, Lufkin and Jenrette,
Inc., is the sub-manager pursuant to a sub-management agreement, dated May 23,
1991, among the Partnership, the Managing General Partner, the Management
Company and the Sub-Manager.
The Partnership operates as a business development company under the Investment
Company Act of 1940. The Partnership's investment objective is to seek long-term
capital appreciation from its portfolio of venture capital investments. The
Partnership considers this activity to constitute the single industry segment of
venture capital investing.
Through Merrill Lynch, the Partnership publicly offered 120,000 units of limited
partnership interest (the "Units") at $1,000 per Unit. The Units were registered
under the Securities Act of 1933 pursuant to a Registration Statement on Form
N-2 (File No. 33-3220) which was declared effective on February 10, 1987. The
Partnership held its initial and final closings on March 31, 1987 and June 10,
1987, respectively. A total of 120,000 Units were accepted at such closings and
the additional limited partners (the "Limited Partners") were admitted to the
Partnership.
The information set forth under the captions "Risk and Other Important Factors"
(pages 8 through 11), "Investment Objective and Policies" (pages 14 through 16),
"Venture Capital Operations" (pages 17 through 20) and "Portfolio Valuation"
(pages 27 and 28) in the 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 and filed pursuant to Rule 424(c) under the Securities Act of 1933 (the
"Prospectus"), is incorporated herein by reference.
The Venture Capital Investments
During the year ended December 31, 1996, the Partnership invested $207,000 in
two existing portfolio companies. As of December 31, 1996, the Partnership had
invested $116.06 million in a portfolio of venture capital companies. At
December 31, 1996, the Partnership's investment portfolio consisted of 15 active
investments with a cost of $27.5 million and a fair value of $37.4 million. From
its inception through December 31, 1996, the Partnership has fully or partially
liquidated investments with an aggregate cost basis of $88.55 million. These
liquidated investments returned a total of $186.4 million to the Partnership for
a realized gain of $97.84 million. The Partnership also realized interest and
dividend income from its venture capital investments totaling $4.2 million from
inception to December 31, 1996.
The description of the Partnership's follow-on investments in Neocrin Company
and ML/MS Cancer Research, Inc. set forth in Item 5 of Part II of the
Partnership's quarterly report on Form 10-Q for the quarter ended March 31, 1996
is incorporated herein by reference.
Competition
The Partnership encounters competition from other entities having similar
investment objectives, including other entities affiliated with Merrill Lynch &
Co., Inc. Primary competition for venture capital investments has been from
venture capital partnerships, venture capital affiliates of large industrial and
financial companies, small business investment companies and wealthy
individuals. Competition has also been from foreign investors and from large
industrial and financial companies investing directly rather than through
venture capital affiliates. The Partnership has frequently been a co-investor
with other professional venture capital groups and these relationships generally
have expanded the Partnership's access to investment opportunities.
Employees
The Partnership has no employees. The Partnership Agreement provides that the
Managing General Partner, subject to the supervision of the Individual General
Partners, manages and controls the Partnership's venture capital investments.
The Management Company performs, or arranges for others to perform, the
management and administrative services necessary for the operation of the
Partnership and is responsible for managing the Partnership's short-term
investments. The Sub-Manager, subject to the supervision of the Management
Company and Individual General Partners, provides management services in
connection with the Partnership's venture capital investments and investments of
the Partnership in unaffiliated venture capital funds.
Item 2. Properties.
The Partnership does not own or lease physical properties.
Item 3. Legal Proceedings.
The Partnership has settled 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. On December 18, 1996, the court entered an order 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 was a purported class action suit wherein the plaintiffs
(the "Plaintiffs") were 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 included 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 alleged 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
sought rescission of the purchases of In-Store Advertising's common stock to the
extent the members of the alleged classes still held their shares, together with
damages and certain costs and expenses.
The Amended Complaint alleged that the Venture Capital Defendants were liable
under Section 10(b) of the 1934 Act and Rule 10b-5, and were 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
were 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 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the fiscal year covered by
this report to a vote of security holders.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The information with respect to the market for the Units set forth under the
subcaption "Substituted Limited Partners" on pages 30 and 31 of the Prospectus
is incorporated herein by reference. There is no established public trading
market for the Units as of March 21, 1997. The approximate number of holders of
Units as of March 21, 1997 is 13,125. The Managing General Partner and the
Individual General Partners of the Partnership also hold interests in the
Partnership.
Effective November 9, 1992, Registrant was advised that Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") introduced a new limited
partnership secondary service available to its clients through Merrill Lynch's
Limited Partnership Secondary Transaction Department. Beginning with the
December 1994 client account statements, Merrill Lynch implemented new
guidelines for providing estimated values of limited partnerships and other
direct investments reported on client account statements. As a result, Merrill
Lynch no longer reports general partner estimates of limited partnership net
asset value on its client account statements, although the Registrant may
continue to provide its estimate of net asset value to Unit holders. Pursuant to
the guidelines, estimated values for limited partnership interests originally
sold by Merrill Lynch (such as Registrant's Units) will be provided two times
per year to Merrill Lynch by independent valuation services. These estimated
values will be based on financial and other information available to the
independent services on (i) the prior August 15th for reporting on December
year-end and subsequent client account statements through the following May's
month-end client account statement, and on (ii) March 31st for reporting on June
month-end and subsequent client account statements through the November
month-end client account statement of the same year.
The Managing General Partner's estimate of net asset value at December 31, 1996
is $323 per Unit, including an assumed allocation of net unrealized appreciation
of investments. The Managing General Partner's estimate of net asset value as
set forth above reflects the value of the Partnership's underlying assets
remaining at fiscal year-end, whereas the value provided by the independent
services reflects the estimated value of the Partnership Units themselves based
on information that was available on August 15th. Merrill Lynch clients may
contact their Merrill Lynch Financial Consultants or telephone the number
provided to them on their account statements to obtain a general description of
the methodology used by the independent valuation services to determine their
estimates of value. The estimated values provided by the independent services
and the Registrant's current net asset value are not market values and Unit
holders may not be able to sell their Units or realize either amount upon a sale
of their Units. In addition, Unit holders may not realize the independent
estimated value or the Registrant's current net asset value upon the liquidation
of the Registrant's assets over its remaining life.
Cash distributions to Partners, paid or accrued, during 1996, 1995 and 1994 and
cumulative cash distributions to Partners from the inception of the Partnership
through December 31, 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, 1993 $ 0 $ 42,600,000 $ 355
May 26, 1994 0 16,200,000 135
September 1, 1994 1,400,000 0 0
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 2,547,971 12,000,000 100
--------------- ---------------- ---------
Cumulative totals at December 31, 1996 $ 21,137,891 $ 156,000,000 $ 1,300
=============== ================ =========
</TABLE>
<PAGE>
Item 6. Selected Financial Data.
($ In Thousands, Except For Per Unit Information)
<TABLE>
Years Ended December 31,
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Net Realized Gain (Loss) on Investments $ 46,879 $ 41,368 $ 18,593 $ 10,605 $ (5,677)
Net Change in Unrealized Appreciation
of Investments (25,245) 12,661 (29,444) 9,430 11,657
Net Increase (Decrease) in Net Assets
Resulting from Operations 20,947 54,512 (11,668) 18,581 4,809
Cash Distributions to Partners 59,366 57,572 17,600 15,600 9,000
Cumulative Cash Distributions to Partners 177,138 117,772 60,200 42,600 27,000
Total Assets 42,268 95,045 83,796 113,087 110,149
Net Unrealized Appreciation of Investments 9,880 35,125 22,464 51,908 42,478
Purchase of Portfolio Investments 207 2,741 2,428 8,050 13,781
Cumulative Cost of Portfolio Investments 116,059 115,851 113,110 110,682 102,633
PER UNIT OF LIMITED
PARTNERSHIP INTEREST:
Net Realized Gain (Loss) on Investments $ 309 $ 273 $ 135 $ 87 $ (47)
Net Increase (Decrease) in Net Assets
Resulting from Operations 137 358 (79) 120 29
Cash Distributions 410 400 135 130 75
Cumulative Cash Distributions 1,300 890 490 355 225
Net Unrealized Appreciation of Investments 65 232 148 355 310
Net Asset Value, Including Net Unrealized
Appreciation of Investments 323 596 638 852 862
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Liquidity and Capital Resources
At December 31, 1996, the Partnership held $4.5 million in short-term
investments with maturities of less than one year and $346,000 in an
interest-bearing cash account. For the years ended December 31, 1996, 1995 and
1994, the Partnership earned interest from such investments totaling $980,000,
$1.06 million and $373,000, respectively. Interest earned in future periods is
subject to fluctuations in short-term interest rates and changes in amounts
available for investment in such securities. Funds needed to cover the
Partnership's future operating expenses and follow-on investments will be
obtained from these existing cash reserves, from interest and other investment
income received and from proceeds received from the sale of portfolio
investments. The Partnership will not make any new portfolio investments.
Therefore, generally all cash received from the sale of portfolio investments is
distributed to Partners as soon as practicable after receipt, after an adequate
reserve for operating expenses and follow-on investments in existing portfolio
companies.
In January 1996, the Partnership paid a cash distribution, that had been accrued
at December 31, 1995, totaling $14.3 million. During 1996, the Partnership made
additional cash distributions to Partners totaling $59.4 million; $49.2 million,
or $410 per Unit, to Limited Partners and $10.2 million to the General Partners.
Cumulative cash distributions to Partners total $177.1 million; $156.0 million
to the Limited Partners, or $1,300 per $1,000 Unit and $21.1 million to the
General Partners.
Results of Operations
For the years ended December 31, 1996, 1995 and 1994, the Partnership had a net
realized gain from operations of $46.2 million, $41.9 million and $17.8 million,
respectively. Net realized gain or loss from operations is comprised of 1) net
realized gains or losses from portfolio investments and 2) net investment income
or loss (interest, dividend and other income less operating expenses).
Realized Gains and Losses from Portfolio Investments - For the year ended
December 31, 1996, the Partnership had a $46.9 million net realized gain from
portfolio investments. During the year, the Partnership sold positions in
several of its publicly-held companies for $56.9 million realizing a gain of
$47.8 million. See Note 9 of Notes to Financial Statements for a summary of
sales by investment completed in 1996. This gain was offset by an $884,000
realized loss, resulting from the write-off of 75% of the Partnership's
investment in I.D.E. Corporation due to continued operating difficulties at the
company.
For the year ended December 31, 1995, the Partnership had a $41.4 million net
realized gain from portfolio investments. During the year, the Partnership sold
positions in several of its publicly-held portfolio companies for $56.8 million,
realizing a gain of $43.3 million. On December 31, 1995, the Partnership
wrote-off its $1.8 million investment in Home Express, Inc. due to financial and
operating difficulties at the company. Additionally, during 1995, the
Partnership realized a $148,750 loss on its remaining $395,000 investment in
Target Vision, Inc. which was sold in 1995 for $246,250 plus interest.
For the year ended December 31, 1994, the Partnership had an $18.6 million net
realized gain from portfolio investments. During 1994, the Partnership sold
positions in several of its publicly-held investments for $20.2 million,
realizing a gain of $17.5 million. Additionally, in two private transactions
completed during 1994, the Partnership sold its 94,435 preferred shares of The
Business Depot Ltd. for $2.8 million, realizing a gain of $1.5 million, and sold
26,570 preferred shares of OccuSystems, Inc. for $173,000, realizing a gain of
$40,000. Also during 1994, the Partnership wrote-off its $100,000 investment in
Research Applications, Inc. and sold its investment in Shared Resource Exchange,
Inc., realizing a loss of $250,000. The Partnership also wrote-off the cost of
its warrant to purchase 380,000 common shares of IDEC Pharmaceuticals
Corporation, which expired in February 1995, realizing a loss of $217,000. The
Partnership also realized gains in 1994 totaling $54,000 from the receipt of
final escrow payments relating to the 1992 sale of its investment in R-Byte,
Inc.
Investment Income and Expenses - For the year ended December 31, 1996, the
Partnership had a net investment loss of $688,000. For the years ended December
31, 1995 and 1994, the Partnership had a net investment gain of $482,000 and a
net investment loss of $817,000, respectively. The $1.2 million increase in net
investment loss for the 1996 period compared to the 1995 period was the result
of a $747,000 decrease in investment income and a $423,000 increase in operating
expenses during 1996 compared to 1995. The decrease in investment income was
comprised of a $664,000 decrease in interest and dividend income from portfolio
investments and an $82,000 decrease in interest from short-term investments. The
decrease in interest and dividend income from portfolio investments for 1996
compared to 1995 primarily was attributable to a one-time dividend from Raytel
Medical Corporation totaling $566,000 received in 1995. The decrease in interest
income from short-term investments primarily was due to a decrease in funds
available for investment in such securities during 1996. The increase in
operating expenses during 1996 compared to 1995 primarily was attributable to a
$1.0 million litigation settlement expense incurred in 1996 relating to the
Partnership's investment in In-Store Advertising. See Note 8 of the Notes to the
Financial Statements for more information regarding this litigation. Partially
offsetting the increase in litigation expense was a $452,000 decrease in the
management fee as discussed below, and a $144,000 decrease in professional fees,
which primarily resulted from reduced legal fees incurred during 1996 in
connection with the In-Store Advertising litigation.
The $1.3 million increase in net investment income for 1995 compared to 1994
resulted from a $1.1 million increase in investment income and a $219,000
decrease in operating expenses during 1995 as compared to 1994. The increase in
investment income was due to a $690,000 increase in interest earned from
short-term investments and a $390,000 increase in interest and dividend income
from portfolio investments. The increase in interest income from short-term
investments was due to an increase in amounts invested in such securities during
1995, resulting from proceeds received from the liquidation of portfolio
investments during 1995. Such proceeds are invested in short-term securities
until distributions are made to Partners. In 1995, the Partnership received
$56.2 million from the liquidation of portfolio investments compared to $23.5
million received in 1994. The increase in interest and dividend income from
portfolio investments for 1995 compared to 1994 was attributable to a one-time
dividend totaling $566,025 from Raytel received in 1995. Such dividend income,
received in the form of 70,753 shares of common stock of Raytel, was offset by a
$152,000 decrease in interest earned during 1995 on a promissory note due from
SDL, Inc., due to the maturity of such note in March 1995. The Partnership's
operating expenses declined for 1995 compared to 1994, primarily due to a
$195,000 decrease in the management fee for 1995, as discussed below, and a
non-recurring interest expense charge of $42,000 incurred during 1994, which is
also 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 years ended December 31, 1996,
1995 and 1994, was $686,000 $1.1 million and $1.3 million, respectively. The
decline in the management fee for the years presented resulted from the
distributions made to Partners during such years. The management fee will
continue to decline in future periods as the Partnership's investment portfolio
continues to mature and distributions are paid to Partners. The management fee
and other operating expenses are paid with funds provided from operations. Funds
provided from operations for the periods presented were obtained from interest
received 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 year ended December 31, 1996,
the Partnership had a $4.9 million net unrealized gain from its portfolio
investments, primarily resulting from the net upward revaluation of its publicly
traded securities. Additionally during 1996, a net $30.1 million of unrealized
gain was transferred to realized gain relating to portfolio investments sold and
written-off during 1996, as discussed above. The $4.9 million unrealized gain
was more than offset by the $30.1 million transfer from unrealized gain to
realized gain, resulting in a $25.2 million decrease to net unrealized
appreciation of investments for 1996.
For the year ended December 31, 1995, the Partnership had a $37.9 million net
unrealized gain from its portfolio investments, primarily resulting from the net
upward revaluation of its publicly traded securities. Additionally during 1995,
a net $25.2 million of unrealized gain was transferred to realized gain relating
to portfolio investments sold and written-off during 1995, as discussed above.
The $37.9 million unrealized gain offset by the $25.2 million transfer from
unrealized gain to realized gain resulted in a $12.7 million increase to net
unrealized appreciation of investments for 1995.
For the year ended December 31, 1994, the Partnership had a $14.4 million net
unrealized loss from its portfolio investments, primarily resulting from the net
downward revaluation of its publicly traded securities. Additionally during
1994, a net $15 million was transferred from unrealized gain to realized gain
relating to portfolio investments sold and written-off during 1994, as discussed
above. The $15 million transfer from unrealized gain to realized gain combined
with the $14.4 million unrealized loss, resulted in a $29.4 million reduction to
the Partnership's net unrealized appreciation of investments for 1994.
Net Assets - Changes to net assets resulting from operations is comprised of
1) net realized gains and losses from operations and 2) changes to net
unrealized appreciation or depreciation of portfolio investments.
For the year ended December 31, 1996, the Partnership had a $21.0 million net
increase in net assets resulting from operations, comprised of the $46.2 million
net realized gain from operations partially offset by the $25.2 million decrease
in unrealized appreciation of investments for 1996. At December 31, 1996, the
Partnership's net assets were $41.9 million, down $38.4 million from $80.3
million at December 31, 1995. This $38.4 million decrease resulted from the
$59.4 million of cash distributions, paid or accrued to Partners during 1996,
exceeding the $21.0 million net increase in net assets resulting from operations
for 1996.
For the year ended December 31, 1995, the Partnership had a $54.5 million net
increase in net assets resulting from operations, comprised of the $41.9 million
net realized gain from operations and the $12.7 million increase in unrealized
appreciation of investments for 1995. At December 31, 1995, the Partnership's
net assets were $80.3 million, down $3.1 million from $83.4 million at December
31, 1994. This $3.1 million decrease resulted from the $57.6 million of cash
distributions, paid or accrued to Partners during 1995, exceeding the $54.5
million net increase in net assets resulting from operations for 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 December
31, 1996, 1995 and 1994, was $323, $596 and $638, respectively.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
ML VENTURE PARTNERS II, L.P.
INDEX
Independent Auditors' Report
Balance Sheets as of December 31, 1996 and 1995
Schedule of Portfolio Investments as of December 31, 1996
Schedule of Portfolio Investments as of December 31, 1995
Statements of Operations for the years ended December 31, 1996, 1995 and 1994
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994
Statements of Changes in Partners' Capital for the years ended December 31,
1994, 1995 and 1996
Notes to Financial Statements
NOTE - All other schedules are omitted because of the absence of conditions
under which they are required or because the required information is included in
the financial statements or the notes thereto.
<PAGE>
INDEPENDENT AUDITORS' REPORT
ML Venture Partners II, L.P.:
We have audited the accompanying balance sheets of ML Venture Partners II, L.P.
(the "Partnership"), including the schedules of portfolio investments, as of
December 31, 1996 and 1995, and the related statements of operations, cash
flows, and changes in partners' capital for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned at December 31, 1996 and 1995 by correspondence
with the custodian; where confirmation was not possible, we performed other
audit procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of ML Venture Partners II, L.P. at December 31,
1996 and 1995, and the results of its operations, its cash flows and the changes
in its partners' capital for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
As explained in Note 2, the financial statements include securities valued at
$37,386,258 and $73,125,660 at December 31, 1996 and 1995, respectively,
representing 89% and 91% of net assets, respectively, whose values have been
estimated by the Sub-Manager under the supervision of the Individual General
Partners and the Managing General Partner in the absence of readily
ascertainable market values. We have reviewed the procedures used by the
Sub-Manager in arriving at its estimate of value of such securities and have
inspected underlying documentation, and, in the circumstances, we believe the
procedures are reasonable and the documentation appropriate. However, because of
the inherent uncertainty of valuation, those estimated values may differ
significantly from the values that would have been used had a ready market for
the securities existed, and the differences could be material.
Deloitte & Touche LLP
New York, New York
February 18, 1997, except for Note 11 as to which the date is March 24, 1997
<PAGE>
ML VENTURE PARTNERS II, L.P.
BALANCE SHEETS
December 31,
<TABLE>
1996 1995
---------------- ----------
ASSETS
Investments - Notes 2 and 9
Portfolio investments, at fair value
(cost $27,505,870 at December 31, 1996
<S> <C> <C> <C> <C> <C>
and $38,000,476 at December 31, 1995) $ 37,386,258 $ 73,125,660
Short-term investments, at amortized cost - Note 12 4,486,402 17,369,428
Cash and cash equivalents 346,129 685,917
Accrued interest receivable 49,442 870,177
Deposit in escrow - 184,502
Receivable from securities sold - 2,809,725
---------------- ----------------
TOTAL ASSETS $ 42,268,231 $ 95,045,409
================ ================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Cash distribution payable - Note 7 $ - $ 14,336,506
Accounts payable 183,406 118,288
Due to Management Company - Note 4 138,389 224,683
Due to Independent General Partners - Note 5 23,400 23,400
---------------- ----------------
Total liabilities 345,195 14,702,877
---------------- ----------------
Partners' Capital:
Managing General Partner 1,158,769 1,471,685
Individual General Partners 1,029 1,457
Limited Partners (120,000 Units) 30,882,850 43,744,206
Unallocated net unrealized appreciation of investments - Note 2 9,880,388 35,125,184
---------------- ----------------
Total partners' capital 41,923,036 80,342,532
---------------- ----------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 42,268,231 $ 95,045,409
================ ================
</TABLE>
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 1996
<TABLE>
Active Portfolio Investments:
Initial Investment
Company / Position Date Cost Fair Value
Biocircuits Corporation*(A)(C)
<C> <C> <C> <C>
128,817 shares of Common Stock May 1991 $ 1,422,501 $ 187,171
2,000,000 shares of Preferred Stock 1,000,000 726,500
Warrants to purchase 594,000 shares of Preferred Stock at
$.60 per share, expiring on 4/15/97 0 0
- -------------------------------------------------------------------------------------------------------------------------------
Borg-Warner Automotive, Inc.*(A)(B)
251,694 shares of Common Stock Sept. 1988 1,258,470 7,267,664
- -------------------------------------------------------------------------------------------------------------------------------
Borg-Warner Security Corporation*(A)
500,000 shares of Common Stock Sept. 1988 2,500,000 4,031,250
- -------------------------------------------------------------------------------------------------------------------------------
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 2,837,894
- -------------------------------------------------------------------------------------------------------------------------------
Diatide, Inc.*(A)(D)
809,704 shares of Common Stock Dec. 1991 2,986,023 3,691,266
- -------------------------------------------------------------------------------------------------------------------------------
Elantec, Inc.(A)(B)
23,245 shares of Common Stock Aug. 1988 60,437 81,655
- -------------------------------------------------------------------------------------------------------------------------------
Horizon Cellular Telephone Company, L.P:(E)
HCTC Investment, L.P.
10% Promissory Note due 3/26/98 May 1992 1,926,168 1,926,168
SPTHOR Corporation
10% Promissory Note due 3/26/98 May 1992 580,760 580,760
34.5 shares of Common Stock 215,625 2,188,625
- -------------------------------------------------------------------------------------------------------------------------------
I.D.E. Corporation(B)(F)
113,322 shares of Common Stock Mar. 1988 227,000 0
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS continued
December 31, 1996
<TABLE>
Initial Investment
Company / Position Date Cost Fair Value
IDEC Pharmaceuticals Corporation(A)(G)
ML/MS Associates, L.P.*
<S> <C> <C> <C>
34.4% Limited Partnership interest June 1989 $ 3,960,000 $ 6,750,656
MLMS Cancer Research, Inc.*
400,000 shares of Common Stock July 1989 69,566 68,184
- -------------------------------------------------------------------------------------------------------------------------------
Neocrin Company*(B)(H)
484,300 shares of Preferred Stock June 1991 4,203,716 193,720
Warrants to purchase 922,050 shares of Common 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 2,593,934
Warrants to purchase 6,062 shares of Common Stock
at $5.40 per share, expiring on 6/30/00 0 0
- -------------------------------------------------------------------------------------------------------------------------------
Raytel Medical Corporation(A)(B)
100,000 shares of Common Stock Feb. 1990 386,622 557,483
Options to purchase 27,969 shares of Common Stock
at $1.42 per share, expiring on 10/31/01 0 206,411
- -------------------------------------------------------------------------------------------------------------------------------
Sanderling Biomedical, L.P.*(B)
80% Limited Partnership interest May 1988 1,786,643 2,504,771
- -------------------------------------------------------------------------------------------------------------------------------
Totals from Active Portfolio Investments $ 27,505,870 $ 37,386,258
---------------------------------
</TABLE>
Supplemental Information: Liquidated Portfolio Investments(I)
<TABLE>
Liquidation Realized
Company Date Cost Gain (Loss) Return
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allez, Inc. 1992 $ 1,781,320 $ (1,781,320) $ 0
Amdahl Corporation 1989 729,742 1,837,787 2,567,529
Aqua Group, Inc. 1990 2,000,000 (1,999,999) 1
BBN Advanced Computer Partners, L.P. 1990 868,428 (864,028) 4,400
BBN Integrated Switch Partners, L.P. 1990-1992 5,022,380 (4,822,797) 199,583
Borg-Warner Automotive, Inc.(B) 1994-1996 1,241,530 6,246,792 7,488,322
Business Depot, Ltd. 1994 1,214,184 1,539,475 2,753,659
CellPro, Incorporated(B) 1994-1996 1,560,944 15,999,505 17,560,449
Children's Discovery Centers of America, Inc. 1995 2,000,259 (236,187) 1,764,072
Communications International, Inc. 1992-1994 1,819,332 (1,819,331) 1
Computer-Aided Design Group 1990-1991 1,131,070 (1,131,069) 1
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS - continued
December 31, 1996
<TABLE>
Liquidation Realized
Company Date Cost Gain (Loss) Return
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Corporate Express, Inc.(B) 1994-1996 $ 2,963,761 $ 22,937,548 $ 25,901,309
Data Recording Systems, Inc. 1988 1,615,129 (1,499,999) 115,130
Eckerd Corporation 1995 857,004 2,019,272 2,876,276
Elantec, Inc.(B) 1993-1996 1,351,681 2,072,223 3,423,904
Everex Systems, Inc. 1991-1992 750,000 447,606 1,197,606
- -------------------------------------------------------------------------------------------------------------------------------
Hoffman & Company, L.P. 1993 40,000 (40,000) 0
- -------------------------------------------------------------------------------------------------------------------------------
Home Express, Inc. 1995 1,822,751 (1,822,751) 0
- -------------------------------------------------------------------------------------------------------------------------------
Horizon Cellular Telephone Company, L.P.(E) 1996 727,447 0 727,447
IDE Corporation(B) 1996 883,909 (883,909) 0
IDEC Pharmaceuticals Corporation 1994 217,391 (217,391) 0
Inference Corporation(B) 1995-1996 849,362 3,280,433 4,129,795
- -------------------------------------------------------------------------------------------------------------------------------
In-Store Advertising, Inc. 1992 2,259,741 (2,259,741) 0
InteLock Corporation 1992 1,254,125 (1,251,274) 2,851
Komag, Incorporated 1991-1995 2,365,237 4,477,843 6,843,080
Ligand Pharmaceuticals Inc.(B) 1992-1996 1,414,435 4,227,245 5,641,680
Magnesys 1989 1,440,997 (1,412,049) 28,948
Meteor Message Corporation 1990 1,501,048 (1,501,047) 1
- -------------------------------------------------------------------------------------------------------------------------------
Micro Linear Corporation 1994-1995 1,120,300 2,897,886 4,018,186
- -------------------------------------------------------------------------------------------------------------------------------
Mobile Telecommunications
Technologies Corporation 1995 1,558,155 3,439,923 4,998,078
- -------------------------------------------------------------------------------------------------------------------------------
Neocrin Company 1996 130 (130) 0
OccuSystems, Inc.(B) 1994-1996 2,657,000 9,353,722 12,010,722
Ogle Resources, Inc. 1993 1,974,286 (1,974,186) 100
- -------------------------------------------------------------------------------------------------------------------------------
Pandora Industries, Inc. 1990 2,060,139 (2,060,138) 1
- -------------------------------------------------------------------------------------------------------------------------------
Pyxis Corporation 1993 634,598 7,169,424 7,804,022
- -------------------------------------------------------------------------------------------------------------------------------
Raytel Medical Corp.(B) 1996 1,662,681 4,370,155 6,032,836
R-Byte Inc. 1992-1994 1,991,098 (443,566) 1,547,532
Regeneron Pharmaceuticals, Inc. 1991-1995 2,678,135 30,203,091 32,881,226
Research Applications, Inc. 1994 100,000 (100,000) 0
Ringer Corporation 1991-1994 3,029,652 (2,208,012) 821,640
S & J Industries 1991-1992 1,600,150 (1,555,149) 45,001
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS - continued
December 31, 1996
<TABLE>
Liquidation Realized
Company Date Cost Gain (Loss) Return
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sanderling Biomedical, L.P.(B) 1995-1996 $ 213,357 $ 1,199,974 $ 1,413,331
Saxpy Computer Corporation 1988 2,000,000 (2,000,000) 0
SDL, Inc.(B) 1993-1996 4,757,265 10,502,531 15,259,796
SF2 Corporation 1991-1994 2,193,293 (1,856,570) 336,723
Shared Resource Exchange, Inc. 1990-1994 999,999 (999,998) 1
Special Situations, Inc. 1988 215,000 (187,175) 27,825
Storage Technology Corporation 1990 2,174,000 1,466,802 3,640,802
- -------------------------------------------------------------------------------------------------------------------------------
Target Vision, Inc. 1992-1995 1,500,000 (1,253,750) 246,250
- -------------------------------------------------------------------------------------------------------------------------------
TCOM Systems, Inc. 1990-1992 4,715,384 (4,711,536) 3,848
- -------------------------------------------------------------------------------------------------------------------------------
Telecom USA, Inc. 1989 5,000,000 3,361,778 8,361,778
Touch Communications Incorporated 1991 1,119,693 (1,119,693) 0
Viasoft, Inc.(B) 1995-1996 915,348 2,801,429 3,716,777
Totals from Liquidated Portfolio Investments $ 88,552,870 $ 97,839,649 $ 186,392,519
=========================================================
Combined Net Combined
Unrealized and Fair Value
Cost Realized Gain and Return
Totals from Active & Liquidated Portfolio Investments $ 116,058,740 $ 107,720,037 $ 223,778,777
=========================================================
</TABLE>
(A) Public company
(B) During 1996, the Partnership sold or wrote-off equity securities of such
company. See Note 9 of Notes to Financial Statements for summarized
information.
(C) The preferred shares of Biocircuits Corporation are convertible into common
shares at a ratio of 4 shares of preferred stock for 1 share of common
stock.
(D) During the quarter ended March 31, 1996, Diatech, Inc. changed its name to
Diatide, Inc. On June 13, 1996, Diatide completed its initial public
offering at $8.50 per share. In connection with the offering and a 6-for-10
reverse split of its outstanding common stock, the Partnership exchanged
its 1,349,508 preferred shares of Diatide for 809,704 shares of the
company's common stock.
(E) During 1996, the Partnership received cash distributions totaling
$1,673,826 relating to its Horizon Cellular investment. The distributions
included $946,379 in payment of accrued interest and $727,447 return of
principal on promissory notes due from HCTC Investment, L.P. and SPTHOR
Corporation.
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS - continued
December 31, 1996
(F) In connection with a recapitalization of IDE Corporation completed in
September 1996, the Partnership's 493,391 shares of IDE preferred stock
were converted into 113,322 shares of the company's common stock.
(G) In January 1996, the Partnership paid $22,609 to MLMS Cancer Research, Inc.
in connection with a call on the non-interest bearing promissory note
payable on demand to MLMS. The payment increased the cost basis of the
Partnership's common stock investment in the company from $46,957 to
$69,566 and reduced the outstanding obligation under the promissory note
from $393,043 to $370,434.
(H) In January 1996, the Partnership's warrant to purchase 13,005 shares of
Neocrin Company preferred stock at $5 per share expired. Additionally, in
January, 1996, the Partnership purchased 36,882 shares of preferred stock
of Neocrin Company and a warrant to purchase 922,050 shares of Neocrin
preferred stock at $.40 per share for $184,502.
(I) Amounts provided for "Supplemental Information: Liquidated Portfolio
Investments" are cumulative from inception through December 31, 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.
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 1995
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 $ 678,223
2,000,000 shares of Preferred Stock 1,000,000 1,000,000
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)
444,664 shares of Common Stock Sept. 1988 2,223,320 10,505,187
- -------------------------------------------------------------------------------------------------------------------------------
Borg-Warner Security Corporation*(A)
500,000 shares of Common Stock Sept. 1988 2,500,000 4,668,750
- -------------------------------------------------------------------------------------------------------------------------------
CellPro, Incorporated(A)
50,166 shares of Common Stock Mar. 1989 93,241 648,145
- -------------------------------------------------------------------------------------------------------------------------------
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 14,048 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)
559,503 shares of Common Stock May 1992 1,064,481 12,588,818
- -------------------------------------------------------------------------------------------------------------------------------
Diatech, Inc.*
1,349,508 shares of Preferred Stock Dec. 1991 2,986,023 4,454,528
- -------------------------------------------------------------------------------------------------------------------------------
Elantec, Inc.(A)
243,245 shares of Common Stock Aug. 1988 886,574 1,334,503
- -------------------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------------------
IDEC Pharmaceuticals Corporation(A):
ML/MS Associates, L.P.*
34.4% Limited Partnership interest June 1989 3,960,000 5,995,956
MLMS Cancer Research, Inc.*
400,000 shares of Common Stock July 1989 46,957 60,566
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS - continued
December 31, 1995
<TABLE>
Initial Investment
Company / Position Date Cost Fair Value
Inference Corporation(A)
<C> <C> <C> <C>
189,424 shares of Common Stock Apr. 1993 $ 804,690 $ 2,293,214
Brightware, Inc.
140,485 shares of Common Stock Apr. 1993 39,252 100,000
Warrants to purchase 38,737 shares of Common Stock
at $.40 per share, expiring on 4/19/99 1,138 0
Warrants to purchase 4,846 shares of Common Stock
at $.40 per share, expiring on 12/16/97 327 0
Warrants to purchase 59,166 shares of Common Stock
at $.80 per share, expiring on 6/10/98 3,986 0
- -------------------------------------------------------------------------------------------------------------------------------
Ligand Pharmaceuticals Inc.(A)
219,775 shares of Common Stock Apr. 1989 539,686 1,877,893
Warrants to purchase 3,167 shares of Common Stock at
$7.22 per share to $9.60 per share, expiring between
5/31/97 and 7/31/97 0 0
- -------------------------------------------------------------------------------------------------------------------------------
Neocrin Company*
447,418 shares of Preferred Stock June 1991 4,019,306 559,305
Warrants to purchase 13,005 shares of Preferred Stock
at $5.00 per share, expiring on 1/20/96 130 0
- -------------------------------------------------------------------------------------------------------------------------------
OccuSystems, Inc.(A)
403,864 shares of Common Stock June 1993 2,019,320 6,292,201
- -------------------------------------------------------------------------------------------------------------------------------
Photon Dynamics, Inc.*(A)
425,235 shares of Common Stock Sept. 1988 2,452,226 1,711,571
Warrants to purchase 6,062 shares of Common Stock
at $5.40 per share, expiring on 6/30/00 0 0
- -------------------------------------------------------------------------------------------------------------------------------
Raytel Medical Corporation*(A)
695,753 shares of Common Stock Feb. 1990 2,049,303 2,988,374
Options to purchase 27,969 shares of Common Stock
at $1.42 per share, expiring on 10/31/01 0 81,600
- -------------------------------------------------------------------------------------------------------------------------------
Sanderling Biomedical, L.P.*(B)
80% Limited Partnership interest May 1988 1,786,643 3,352,688
- -------------------------------------------------------------------------------------------------------------------------------
SDL, Inc.*(A)
379,155 shares of Common Stock July 1992 999,015 7,112,948
- -------------------------------------------------------------------------------------------------------------------------------
Viasoft, Inc.(A)
47,795 shares of Common Stock Dec. 1987 152,280 476,038
- -------------------------------------------------------------------------------------------------------------------------------
Totals from Active Portfolio Investments $ 38,000,476 $ 73,125,660
=================================
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS - continued
December 31, 1995
<TABLE>
Supplemental Information: Liquidated Portfolio Investments(B)
<S> <C> <C> <C>
Totals from Liquidated Portfolio Investments $ 77,851,153 $ 50,960,557 $ 128,811,710
=========================================================
Combined Net Combined
Unrealized and Fair Value
Cost Realized Gain and Return
Totals from Active & Liquidated Portfolio Investments $ 115,851,629 $ 86,085,741 $ 201,937,370
=========================================================
</TABLE>
(A) Public company
(B) Amounts provided for "Supplemental Information: Liquidated Portfolio
Investments" are cumulative from inception through December 31, 1995.
* 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
For the Years Ended December 31,
<TABLE>
1996 1995 1994
--------------- --------------- ---------
INVESTMENT INCOME AND EXPENSES
<S> <C> <C> <C>
Interest from short-term investments $ 979,803 $ 1,062,296 $ 372,789
Interest and other income from portfolio investments 330,436 374,344 537,731
Dividend income 212,646 832,825 279,298
--------------- ---------------- ----------------
Total investment income 1,522,885 2,269,465 1,189,818
--------------- ---------------- ----------------
Expenses:
Management fee - Note 4 686,493 1,138,000 1,333,363
Professional fees 175,434 319,424 326,655
Mailing and printing 220,877 211,662 197,083
Independent General Partners' fees - Note 5 109,262 103,049 92,584
Custodial fees 13,930 14,602 14,097
Miscellaneous 4,621 633 1,275
Interest expense - Note 4 - - 41,687
Litigation settlement - Note 8 1,000,000 - -
--------------- ---------------- ----------------
Total expenses 2,210,617 1,787,370 2,006,744
--------------- ---------------- ----------------
NET INVESTMENT INCOME (LOSS) (687,732) 482,095 (816,926)
Net realized gain from portfolio investments - Note 9 46,879,092 41,368,447 18,592,821
--------------- ---------------- ----------------
NET REALIZED GAIN FROM OPERATIONS
(allocable to Partners) - Note 3 46,191,360 41,850,542 17,775,895
Net change in unrealized appreciation of investments (25,244,796) 12,661,342 (29,444,350)
--------------- ---------------- ----------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 20,946,564 $ 54,511,884 $ (11,668,455)
=============== ================ ================
</TABLE>
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
<TABLE>
1996 1995 1994
--------------- --------------- -----------
CASH FLOWS PROVIDED FROM (USED FOR)
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net investment income (loss) $ (687,732) $ 482,095 $ (816,926)
Adjustments to reconcile net investment income (loss) to cash provided from
(used for) operating activities:
(Increase) decrease in accrued interest and notes receivable 820,735 (55,706) (491,825)
Increase in accrued interest on short-term
investments (10,369) (8,190) (14,089)
Decrease in payables, net (21,176) (27,451) (22,405)
--------------- --------------- ----------------
Cash provided from (used for) operating activities 101,458 390,748 (1,345,245)
--------------- --------------- ----------------
CASH FLOWS PROVIDED FROM INVESTING
ACTIVITIES
Net return (purchase) of short-term investments 12,893,395 (10,426,139) (2,929,313)
Cost of portfolio investments purchased (207,111) (2,741,249) (2,427,981)
Deposits released from (placed in) escrow 184,502 (184,502) -
Net proceeds from the sale of portfolio investments 59,663,087 54,223,795 23,528,525
Repayment of investments in notes 727,447 2,019,721 -
--------------- --------------- ----------------
Cash provided from investing activities 73,261,320 42,891,626 18,171,231
--------------- --------------- ----------------
CASH FLOWS FOR FINANCING ACTIVITIES
Cash distributions to Partners (73,702,566) (43,235,325) (17,600,000)
--------------- --------------- ----------------
Increase (decrease) in cash and cash equivalents (339,788) 47,049 (774,014)
Cash and cash equivalents at beginning of period 685,917 638,868 1,412,882
--------------- --------------- ----------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 346,129 $ 685,917 $ 638,868
=============== =============== ================
</TABLE>
See notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
ML VENTURE PARTNERS II, L.P.
- -------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Years Ended December 31, 1994, 1995 and 1996
<TABLE>
Unallocated
Managing Individual Net Unrealized
General General Limited Appreciation of
Partner Partners Partners Investments Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 1,033,457 $ 3,410 $ 59,725,875 $ 51,908,192 $ 112,670,934
Cash distributions, paid May 26,
1994 and September 1, 1994 (1,400,000) - (16,200,000) - (17,600,000)
Net investment loss 153,602 (32) (970,496) - (816,926)
Net realized gain on investments 2,404,420 539 16,187,862 - 18,592,821
Net change in unrealized
appreciation of investments - - - (29,444,350) (29,444,350)
------------- ------- -------------- -------------- ----------------
Balance at December 31, 1994 2,191,479 3,917 58,743,241(A) 22,463,842 83,402,479
Cash distributions, paid April 11,
1995 and October 5, 1995 (7,232,165) (3,160) (36,000,000) - (43,235,325)
Accrued cash distribution,
paid January 12, 1996 (2,336,106) (400) (12,000,000) - (14,336,506)
Net investment income 243,840 7 238,248 - 482,095
Net realized gain on investments 8,604,637 1,093 32,762,717 - 41,368,447
Net change in unrealized
appreciation of investments - - - 12,661,342 12,661,342
------------- ------- -------------- -------------- ----------------
Balance at December 31, 1995 1,471,685 1,457 43,744,206(A) 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)
Cash distribution, paid
October 11, 1996 (2,547,571) (400) (12,000,000) - (14,547,971)
Net investment income (loss) 100,653 (26) (788,359) - (687,732)
Net realized gain on investments 9,750,851 1,238 37,127,003 - 46,879,092
Net change in unrealized
appreciation on investments - - - (25,244,796) (25,244,796)
------------- ------- -------------- -------------- ----------------
Balance at December 31, 1996 $ 1,158,769 $ 1,029 $ 30,882,850(A) $ 9,880,388 $ 41,923,036
============= ======= ============== ============== ================
</TABLE>
(A) The net asset value per unit of limited partnership interest, including an
assumed allocation of net unrealized appreciation of investments, was $323,
$596 and $638 at December 31, 1996, 1995 and 1994, respectively. Cumulative
cash distributions paid, or payable, to Limited Partners from inception to
December 31, 1996, 1995 and 1994 totaled $1,300, $890 and $490 per Unit,
respectively.
See notes to financial statements
<PAGE>
- -------------------------------------------------------------------------------
ML VENTURE PARTNERS II, L.P.
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
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
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 $9.9 million at December 31, 1996, which was
recorded for financial statement purposes, was not recognized for tax purposes.
Additionally, from inception to December 31, 1996, 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 December 31,
1996, the Partnership had a $102 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
On November 9, 1994, the Securities and Exchange Commission (the "SEC") issued
an exemptive order permitting the Partnership to acquire 97,273 shares of
Corporate Express, Inc. common stock from the Management Company subject to
certain conditions, including review and approval by the Independent General
Partners. On December 13, 1994, the Partnership purchased such shares for
$1,111,685, representing original cost of $1,069,998 plus interest expense of
$41,687.
5. Independent General Partners' Fees
As compensation for services rendered to the Partnership, each of the three
Independent General Partners receives $20,000 annually in quarterly
installments, $1,400 for each meeting of the General Partners attended or for
each other meeting, conference or engagement in connection with Partnership
activities at which attendance by an Independent General Partner is required and
$1,400 for each 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 a $370,434 non-interest bearing obligation payable on demand
to MLMS Cancer Research, Inc., the general partner of ML/MS Associates, L.P.
7. Cash Distributions
Cash distributions paid or accrued during the periods presented and cumulative
cash distributions to Partners from inception of the Partnership through
December 31, 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, 1993 $ 0 $ 42,600,000 $ 355
May 26, 1994 0 16,200,000 135
September 1, 1994 1,400,000 0 0
April 11, 1995 2,234,189 9,000,000 75
October 5, 1995 5,001,136 27,000,000 225
January 12, 1996 (accrued at 12/31/96) 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 2,547,971 12,000,000 100
--------------- ---------------- ---------
Cumulative totals at December 31, 1996 $ 21,137,891 $ 156,000,000 $ 1,300
=============== ================ =========
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS
8. Pending Litigation
The Partnership has settled an action in which the Partnership was named as a
defendant, along with other entities and individuals, in respect of its
ownership of securities of 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. In connection with the settlement, the Partnership delivered
$1,000,000 into escrow on September 20, 1996, representing its share of the
settlement agreement. On December 18, 1996, the court entered an order approving
the settlement and dismissing the action against the Partnership and the other
defendants involved in the settlement. As of December 31, 1996, the Partnership
had incurred cumulative legal expenses totaling approximately $235,000 related
to the litigation.
9. Portfolio Investments
During 1996, the Partnership sold or wrote-off equity securities of the
following portfolio companies:
<TABLE>
Realized
Company Shares Cost Gain (Loss) Return
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Borg-Warner Automotive, Inc. 192,970 $ 964,850 $ 5,318,254 $ 6,283,104
CellPro, Incorporated 50,166 93,241 744,215 837,456
Corporate Express, Inc. 439,000 1,028,331 13,143,138 14,171,469
Elantec, Inc. 220,000 826,137 1,745,113 2,571,250
I.D.E. Corporation - 883,909 (883,909) 0
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 - 130 (130) 0
OccuSystems, Inc. 403,864 2,019,320 7,708,378 9,727,698
Raytel Medical Corporation 595,753 1,662,681 4,370,155 6,032,836
Sanderling Biomedical, L.P. (Neopath) 6,295 0 163,163 163,163
SDL, Inc. 379,155 999,015 9,120,519 10,119,534
Viasoft, Inc. 47,795 152,280 600,489 752,769
-------------- -------------- ---------------
Totals $ 9,974,270 $ 46,879,092 $ 56,853,362
============== ============== ===============
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS
10. Classification of Portfolio Investments
As of December 31, 1996, 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 $ 11,659,323 $ 23,808,531 56.79%
Limited Partnerships 5,746,643 9,255,427 22.08%
Preferred Stock 7,592,976 1,815,372 4.33%
Debt Securities 2,506,928 2,506,928 5.98%
---------------- --------------- --------
Total $ 27,505,870 $ 37,386,258 89.18%
================ =============== ========
Country/Geographic Region
Midwestern U.S. $ 6,183,788 $ 15,031,960 35.86%
Western U.S. 15,386,506 13,967,479 33.31%
Eastern U.S. 5,935,576 8,386,819 20.01%
---------------- --------------- --------
Total $ 27,505,870 $ 37,386,258 89.18%
================ =============== ========
Industry
Business Services $ 2,536,150 $ 6,869,144 16.39%
Biotechnology 8,802,232 13,014,877 31.04%
Automotive Parts 1,258,470 7,267,664 17.34%
Semiconductors/Electronics 2,512,663 2,675,589 6.38%
Medical Devices and Services 9,402,099 2,766,437 6.60%
Telecommunications 2,722,553 4,695,553 11.20%
Computer Hardware/Software 271,703 96,994 .23%
---------------- --------------- --------
Total $ 27,505,870 $ 37,386,258 89.18%
================ =============== ========
</TABLE>
* Percentage of net assets is based on fair value.
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS
11. Subsequent Events
In January 1997, Corporate Express, Inc. issued a 50% stock dividend. The
Partnership received an additional 60,252 shares of the company's common stock.
On February 20, 1997, the Partnership sold its remaining 251,694 common shares
of Borg Warner Automotive, Inc. The net per share selling price was $38.30,
which yielded net proceeds of $9.6 million to the Partnership, resulting in a
realized gain of $8.4 million. These shares were valued at $7.3 million at
December 31, 1996. The $2.3 million increase in the Partnership's net assets,
representing approximately $15.65 per Unit, will be reflected in net asset value
to be reported as of March 31, 1997.
On March 17, 1997, the Partnership received an in-kind distribution of 347,826
common shares of IDEC Pharmaceuticals Corporation from ML/MS Associates, L.P. As
of March 21, 1997, the Partnership had sold 143,902 shares for $3.2 million.
These shares were valued at $1.8 million at December 31, 1996. The $1.4 million
increase in the Partnership's net assets, representing approximately $9.38 per
Unit, will be reflected in the net asset value to be reported March 1997.
12. Short-Term Investments
At December 31, 1996 and 1995, the Partnership had short-term investments in
commercial paper as detailed below.
<TABLE>
Maturity Purchase Amortized Value at
Issuer Yield Date Price Cost Maturity
December 31, 1996:
<S> <C> <C> <C> <C> <C> <C>
Korean Development Bank 5.35% 1/17/97 $ 2,960,767 $ 2,992,421 $ 3,000,000
Japan Leasing 5.35% 1/27/97 1,481,498 1,493,981 1,500,000
--------------- --------------- ----------------
Total at December 31, 1996 $ 4,442,265 $ 4,486,402 $ 4,500,000
=============== =============== ================
December 31, 1995:
IES Utilities, Inc. 5.75% 1/8/96 $ 14,358,600 $ 14,381,600 $ 14,400,000
Golden Managers Acceptance
Corporation 5.75% 1/24/96 2,480,434 2,490,417 2,500,000
BIF, Inc. 5.65% 2/2/96 496,626 497,411 500,000
--------------- --------------- ----------------
Total at December 31, 1995 $ 17,335,660 $ 17,369,428 $ 17,400,000
=============== =============== ================
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Partnership
GENERAL PARTNERS
The General Partners of the Partnership consist of the four Individual General
Partners and the Managing General Partner. The five General Partners are
responsible for the management and administration of the Partnership. As
required by the Investment Company Act of 1940 (the "1940 Act"), a majority of
the General Partners must be individuals who are not "interested persons" of the
Partnership as defined in the 1940 Act. In 1987, the Securities and Exchange
Commission (the "SEC") issued an order declaring that the three Independent
General Partners of the Partnership (the "Independent General Partners") are not
"interested persons" of the Partnership as defined in the 1940 Act solely by
reason of their being general partners of the Partnership.
The Individual General Partners have full authority over the management of the
Partnership and provide overall guidance and supervision with respect to the
operations of the Partnership and perform the various duties imposed on the
directors of business development companies by the 1940 Act. In addition to
general fiduciary duties, the Individual General Partners, among other things,
supervise the management arrangements of the Partnership.
The Managing General Partner, subject to the supervision of the Individual
General Partners, has authority to provide, or arrange for the provision of,
management services in connection with the venture capital investments of the
Partnership. The general partner of the Managing General Partner is Merrill
Lynch Venture Capital Inc. (the "Management Company"). The Management
Company is an indirect subsidiary of Merrill Lynch & Co., Inc. ("ML & Co.").
Individual General Partners
Dr. Steward S. Flaschen (1)
592 Weed Street
New Canaan, Connecticut 06840
Age 70
Individual General Partner since 1987
Units of the Partnership beneficially owned at March 21, 1997 - None (3)
President of Flaschen & Davies, a management consulting firm, since
1986; Corporate Senior Vice President and member of the Management
Policy Board of ITT Corporation from 1982 to 1986 and General Technical
Director from 1969 to 1986; Chairman of Telco Systems Inc.; Chairman of
TranSwitch Corp. from 1989 to present; Director of Sipex Corp. from
1996 to present.
Jerome Jacobson (1)
4200 Massachusetts Avenue, N.W.
Washington, D.C. 20016
Age 75
Individual General Partner since 1987
Units of the Partnership beneficially owned at March 21, 1997 - None (3)
President of Economic Studies Inc., an economic consulting firm, since
1984; Vice Chairman and a director of the Burroughs Corporation from
1980 to 1984; Director of Cerplex Group, Inc., Datawatch Inc. and Easel
Corporation.
William M. Kelly (1)
40 Wall Street
New York, New York 10005
Age 53
Individual General Partner since 1991
Units of the Partnership beneficially owned at March 21, 1997 - None (3)
Managing Associate of Lingold Associates, since 1980; Vice President of
National Aviation and Technology Company, a registered investment
company, from 1977 to 1980; Director of First Eagle International Fund
from 1994 to present.
Kevin K. Albert (2)
World Financial Center
North Tower
New York, New York 10281-1326
Age 44
Individual General Partner since 1990
Units of the Partnership beneficially owned at March 21, 1997 - None (3)
Director and President of the Management Company; Managing Director of
Merrill Lynch Investment Banking Division ("MLIBK") since 1988.
(1) Independent General Partner and member of the Audit Committee.
(2) Interested person of the Partnership as defined in the 1940 Act.
(3) Messrs. Flaschen and Jacobson have each contributed $1,000 to the
capital of the Partnership. Messrs. Kelly and Albert succeeded to the
interest of prior Individual General Partners who each contributed
$1,000 to the capital of the Partnership.
The Management Company
Merrill Lynch Venture Capital Inc. (the "Management Company") serves as the
Partnership's management company and performs, or arranges for the performance
of, the management and administrative services necessary for the operations of
the Partnership pursuant to a management agreement dated May 23, 1991 (the
"Management Agreement"). The Management Company has served as the management
company for the Partnership since the Partnership commenced operations in 1987.
The Management Company is a wholly-owned subsidiary of ML Leasing Equipment
Corp., which is an indirect subsidiary of Merrill Lynch & Co., Inc. The
Management Company, which was incorporated under Delaware law on January 25,
1982, maintains its principal office at North Tower, World Financial Center, New
York, New York 10281-1326.
On May 23, 1991, the limited partners of the Partnership approved a
sub-management agreement among the Partnership, the Management Company, the
Managing General Partner and DLJ Capital Management Corporation (the
"Sub-Manager"). Under the terms of such sub-management agreement, the
Sub-Manager agreed to provide, subject to the supervision of the Managing
General Partner, the Management Company and the Individual General Partners,
certain of the management services previously provided by the Management
Company. Due to certain transactions involving The Equitable Companies
Incorporated, the indirect parent of the Sub-Manager, a substantially similar
sub-management agreement (the "Sub-Management Agreement") was approved by the
limited partners of the Partnership at their 1992 annual meeting held on May 26,
1992.
The Management Company has arranged for Palmeri Fund Administrators, Inc., an
independent administrative services company, to provide administrative services
to the Partnership. Fees for such services are paid directly by the Management
Company.
The following table sets forth information concerning the directors of the
Management Company and the executive officers of the Management Company involved
with the Partnership. Information concerning Kevin K. Albert, Director and
President of the Management Company, is set forth under "General Partners -
Individual General Partners". The address of Mr. Aufenanger, Mr.
Lurie and Ms. Herte is South Tower, World Financial Center, New York,
New York 10080.
Robert F. Aufenanger
Executive Vice President and Director
Age 43
Officer or Director since 1990
Vice President of Merrill Lynch & Co. Corporate Credit and Director of
the Partnership Management Group since 1991; Director of MLIBK from
1990 to 1991; Vice President of MLIBK from 1984 to 1990.
Michael E. Lurie
Vice President and Director
Age 53
Officer or Director since 1995
First Vice President of Merrill Lynch & Co. Corporate Credit and
Director of the Asset Recovery Management Department, joined Merrill
Lynch in 1970. Prior to his present position, Mr. Lurie was the
Director of Debt and Equity Markets Credit responsible for the
global allocation of credit limits and the approval and
structuring of specific transactions related to debt and equity
products. Mr. Lurie also served as Chairman of the Merrill
Lynch International Bank Credit Committee.
<PAGE>
Diane T. Herte
Vice President and Treasurer
Age 36
Officer or Director since 1995
Vice President of Merrill Lynch & Co. Investment Banking Group since
1996 and previously an Assistant Vice President of Merrill Lynch & Co.
Corporate Credit Group since 1982, joined Merrill Lynch in 1984. Ms.
Herte's responsibilities include controllership and financial
management functions for certain partnerships for which subsidiaries of
Merrill Lynch are the general partner.
The directors of the Management Company will serve as directors until the next
annual meeting of stockholders and until their successors are elected and
qualify. The officers of the Management Company will hold office until the next
annual meeting of the Board of Directors of the Management Company and until
their successors are elected and qualify.
There are no family relationships among any of the Individual General Partners
of the Partnership and the officers and directors of the Management Company.
DLJ Capital Management Corporation - The Sub-Management Company
DLJ Capital Management Corporation (the "Sub-Manager"), a Delaware corporation,
is an indirect wholly-owned subsidiary of Donaldson, Lufkin & Jenrette, Inc.
("DLJ"), a holding company which through its subsidiaries engages in the
following activities: investment banking, merchant banking, public finance,
trading, distribution and research. The Sub-Manager maintains its principal
office at 277 Park Avenue, New York, New York 10172.
The Sub-Manager is a wholly-owned subsidiary of DLJ Capital Corporation ("DLJ
Capital"). DLJ Capital, which was founded in 1969, has established nine
institutional venture capital funds ("Sprout Funds") and several smaller funds,
with total committed capital of over $800 million. Six of such institutional
funds, with capital exceeding $750 million, are currently operating. DLJ
Capital's most recent limited partnership is Sprout VII, L.P., which was
established in 1994 with an excess of 75 percent of its $250 million capital
provided by participants in earlier Sprout Funds. DLJ Capital's principal office
is located at 277 Park Avenue, New York, New York 10172, and it maintains
additional offices in Menlo Park, California and Boston, Massachusetts.
The following table sets forth information concerning the directors, principal
executive officers and other officers of the Sub-Manager. Unless otherwise
noted, the address of each such person is 277 Park Avenue, New York, New York
10172.
Richard E. Kroon
President, Chief Executive Officer and Director
Age 54
Officer or Director since 1977
Managing General Partner of Sprout Group, the venture capital affiliate
of DLJ since 1981.
<PAGE>
Janet A. Hickey
Senior Vice President
Age 51
Officer or Director since 1985
General Partner of Sprout Group since 1985; Vice President and Manager
of Venture Capital Division of General Electric Investment Corp.
from 1970 to 1985.
Keith B. Geeslin(1)
Senior Vice President
Age 43
Officer or Director since 1984
General Partner of Sprout Group since 1986.
Dr. Robert E. Curry(1)
Vice President
Age 50
Officer or Director since 1991
President and Director of the Management Company from 1989 to 1991;
Managing Director of MLIBK from 1990 to 1991; President of Merrill
Lynch R&D Management Inc. ("ML R&D") from 1990 to 1991, Vice President
of ML R&D from 1984 to 1990 and Director of ML R&D from 1987 to 1991;
General Partner of Sprout Group since 1991.
Robert Finzi(1)
Vice President
Age 43
Officer or Director since 1991
Vice President of the Management Company from 1985 to 1991; Associate
with Menlo Ventures from 1983 to 1984; General Partner of Sprout Group
since 1991.
Anthony F. Daddino
Vice President and Director
Age 56
Officer or Director since 1989
Director, Executive Vice President and Chief Financial Officer of DLJ.
Thomas E. Siegler
Secretary, Treasurer and Director
Age 62
Officer or Director since 1971
Senior Vice President and Secretary of DLJ.
(1) The address of these officers is 3000 Sand Hill Road, Menlo Park,
California 94025.
<PAGE>
The Managing General Partner
MLVPII Co., L.P. (the "Managing General Partner") is a limited partnership
organized on February 4, 1986 under the laws of the State of New York. The
Managing General Partner maintains its principal office at North Tower, World
Financial Center, New York, New York 10281-1326. The Managing General Partner
has acted as the managing general partner of the Partnership since the
Partnership commenced operations. The Managing General Partner is engaged in no
other activities at the date hereof.
The general partner of the Managing General Partner is the Management Company.
The limited partners of the Managing General Partner include DLJ Capital
Management Corporation ("DLJ"), Dr. Robert E. Curry and Robert Finzi.
Messrs. Curry and Finzi are currently officers of DLJ and were previously
officers of the Management Company.
The Partnership Agreement obligates the Managing General Partner to contribute
cash to the capital of the Partnership so that the Managing General Partner's
capital contribution at all times will be equal to one percent (1%) of the
aggregate capital contributions of all partners of the Partnership. The Managing
General Partner has contributed $1,212,162 to the capital of the Partnership.
Item 11. Executive Compensation.
Compensation - The Partnership pays each Independent General Partner an annual
fee of $20,000 in quarterly installments plus $1,400 for each meeting of the
Individual General Partners attended or for each other meeting, conference or
engagement in connection with Partnership activities at which attendance by the
Individual General Partner is required. The Partnership pays all actual
out-of-pocket expenses incurred by the Independent General Partners relating to
attendance at such meetings. The Independent General Partners receive $1,400 for
each meeting of the Audit Committee attended unless such committee meeting is
held on the same day as a meeting of the Individual General Partners. In such
case, the Independent General Partners receive $500 for each meeting of the
Audit Committee attended. For the year ended December 31, 1996, the aggregate
fees and expenses paid by the Partnership to the Independent General Partners
totaled $109,262.
Allocations and Distributions - Profits and losses of the Partnership are
determined and allocated as of the end of and within sixty days after the end of
each calendar year. If the aggregate of the investment income and net realized
capital gains and losses from venture capital investments is positive,
calculated on a cumulative basis over the life of the Partnership through such
year, the Managing General Partner is allocated investment income and net
realized capital gains or losses from venture capital investments for such year
so that, together with all investment income and gains and losses previously
allocated to the Managing General Partner, it has received 20% of the aggregate
of such income and gains calculated on a cumulative basis over the life of the
Partnership through such year. Such allocation is referred to herein as the
"Managing General Partner's Allocation" and is applicable only to the investment
income and net realized capital gains and losses resulting from venture capital
investments. The Partnership's investment income and net realized capital gains
and losses in excess of the Managing General Partner's Allocation and all other
profits and losses, including interest or other income on funds not invested in
venture capital investments, are allocated among all the Partners (including the
Managing General Partner) in proportion to their capital contributions. Cash or
other assets otherwise distributable to the Managing General Partner are not
distributed to the Managing General Partner to the extent that the net realized
gains allocated to the Managing General Partner are offset by an amount equal to
20% of the net unrealized losses of the Partnership.
For its fiscal year ended December 31, 1996, the Partnership had a net realized
gain of $46.9 million from portfolio investments sold and written-off. On a
cumulative basis, from inception to December 31, 1996, the Partnership was in a
net gain position of $102.0 million from its investment income and net realized
gains and losses from its venture capital portfolio investments. The Partnership
made four cash distributions totaling $61.2 million to Limited Partners and four
cash distributions totaling $12.5 million to the General Partners during the
fiscal year ended December 31, 1996.
Management Fee - Pursuant to the Management Agreement, the Partnership pays the
Management Company a fee at the annual rate of 2.5% of the amount of the
partners' capital contributions (net of selling commissions and organizational
and offering expenses paid by the Partnership), reduced by capital distributed
to the Partners and realized capital losses, with a minimum annual fee of
$200,000. Such fee is payable quarterly on the basis of the amount of the
partners' capital contributions, adjusted as described above, at the end of the
preceding calendar quarter. As described previously, the Management Company has
entered into a Sub-Management Agreement with DLJ, pursuant to which the
Management Company compensates DLJ for management services. For the year ended
December 31, 1996, management fees incurred by the Partnership to the Management
Company aggregated $686,493.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Reference is made to Item 10 "Individual General Partners" concerning
information with respect to security ownership.
As of March 21, 1997, no person or group is known by the Partnership to be the
beneficial owner of more than 5 percent of the Units. Mark Clein and Stephen
Warner, limited partners of the Managing General Partner, own an aggregate of
134 Units of the Partnership. The Individual General Partners and the directors
and officers of the Management Company do not own any Units.
The Partnership is not aware of any arrangement which may, at a subsequent date,
result in a change of control of the Partnership.
Item 13. Certain Relationships and Related Transactions.
Kevin K. Albert, a Director and President of the Management Company and a
Managing Director of Merrill Lynch Investment Banking Group ("ML Investment
Banking"), joined Merrill Lynch in 1981. Robert F. Aufenanger, a Director and
Executive Vice President of the Management Company, a Vice President of
Merrill Lynch & Co. Corporate Credit and a Director of the Partnership
Management Department, joined Merrill Lynch in 1980. Michael E. Lurie, a
Director and Vice President of the Management Company, a First Vice
President of Merrill Lynch & Co. Corporate Credit and the Director of the
Asset Recovery Management Department, joined Merrill Lynch in 1970. Diane T.
Herte, a Vice President and Treasurer of the Management Company and a Vice
President of Merrill Lynch & Co. Investment Banking Group, joined Merrill Lynch
in 1984. Messrs. Albert, Aufenanger, Lurie and Ms. Herte are involved with
certain other entities affiliated with Merrill Lynch or its affiliates.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements
Balance Sheets as of December 31, 1996 and 1995
Schedule of Portfolio Investments as of December 31, 1996
Schedule of Portfolio Investments as of December 31, 1995
Statements of Operations for the years ended December 31,
1996, 1995 and 1994
Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Statements of Changes in Partners' Capital for the years
ended December 31, 1994, 1995 and 1996
Notes to Financial Statements
2. 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) Form of Sub-Management Agreement among the
Partnership, Management Company, the Managing General
Partner and the Sub-Manager. (8)
(13) Page 20 of the Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996.
(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 since the beginning
of the last quarter of the period 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 Section 13 or 15(d) 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 on the 28th day of March
1997.
ML VENTURE PARTNERS II, L.P.
/s/ Kevin K. Albert
By: Kevin K. Albert
Individual General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on the 28th day of March 1997.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
By: MLVPII Co., L.P. By: /s/ Steward S. Flaschen
its Managing General Partner Steward S. Flaschen
Individual General Partner
By: Merrill Lynch Venture Capital Inc. ML Venture Partners II, L.P.
its General Partner
By: /s/ Kevin K. Albert By: /s/ Jerome Jacobson
------------------------------------------------- ---------------------
Kevin K. Albert Jerome Jacobson
President Individual General Partner
(Principal Executive Officer) ML Venture Partners II, L.P.
By: /s/ Diane T. Herte By: /s/ William M. Kelly
Diane T. Herte William M. Kelly
Vice President and Treasurer Individual General Partner
(Principal Financial and Accounting Officer) ML Venture Partners II, L.P.
</TABLE>
EXHIBIT 13
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
In January 1996, the Partnership purchased 36,882 shares of preferred stock of
Neocrin Company and a warrant to purchase 922,050 shares of Neocrin preferred
stock at $.40 per share for $184,502.
Also in January 1996, the Partnership paid $22,609 to MLMS Cancer Research, Inc.
in connection with a call on the non-interest bearing promissory note payable on
demand to MLMS. The payment increased the cost basis of the Partnership's common
stock investment in the company from $46,957 to $69,566 and reduced the
outstanding obligation under the promissory note from $393,043 to $370,434.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ML
VENTURE PARTNERS II, L.P.'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 27,505,870
<INVESTMENTS-AT-VALUE> 37,386,258
<RECEIVABLES> 49,442
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 4,832,531
<TOTAL-ASSETS> 42,268,231
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 345,195
<TOTAL-LIABILITIES> 345,195
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 120,000
<SHARES-COMMON-PRIOR> 120,000
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,880,388
<NET-ASSETS> 41,923,036
<DIVIDEND-INCOME> 212,646
<INTEREST-INCOME> 1,310,239
<OTHER-INCOME> 0
<EXPENSES-NET> 2,210,617
<NET-INVESTMENT-INCOME> (687,732)
<REALIZED-GAINS-CURRENT> 46,879,092
<APPREC-INCREASE-CURRENT> (25,244,796)
<NET-CHANGE-FROM-OPS> 20,946,564
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 59,366,060
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (52,777,178)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 61,132,784
<PER-SHARE-NAV-BEGIN> 596
<PER-SHARE-NII> (7)
<PER-SHARE-GAIN-APPREC> 144
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 410
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 323
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
