SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended September 30, 1998
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 0-14217
ML VENTURE PARTNERS II, L.P.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3324232
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
World Financial Center, North Tower
New York, New York 10281-1326
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 449-1000
Not applicable
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
<PAGE>
ML VENTURE PARTNERS II, L.P.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Balance Sheets as of September 30, 1998 (Unaudited) and December 31, 1997
Schedule of Portfolio Investments as of September 30, 1998 (Unaudited)
Statements of Operations for the Three and Nine Months Ended September 30, 1998
and 1997 (Unaudited)
Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997
(Unaudited)
Statement of Changes in Partners' Capital for the Nine Months Ended September
30, 1998 (Unaudited)
Notes to Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
ML VENTURE PARTNERS II, L.P.
BALANCE SHEETS
<TABLE>
September 30,
1998 December 31,
(Unaudited) 1997
ASSETS
Portfolio investments, at fair value (cost $10,723,768 as of
<S> <C> <C> <C> <C> <C> <C> <C>
September 30, 1998 and $13,013,680 as of December 31, 1997) $ 12,726,216 $ 17,021,243
Short-term investments, at amortized cost 4,457,609 2,979,552
Cash and cash equivalents 435,388 1,918,335
----------------- ------------------
TOTAL ASSETS $ 17,619,213 $ 21,919,130
================= ==================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 137,436 $ 144,890
Due to Management Company 77,447 41,349
Due to Independent General Partners 19,500 25,698
----------------- ------------------
Total liabilities 234,383 211,937
----------------- ------------------
Partners' Capital:
Managing General Partner 966,966 1,416,952
Individual General Partners 481 543
Limited Partners (120,000 Units) 14,414,935 16,282,135
Unallocated net unrealized appreciation of investments 2,002,448 4,007,563
----------------- ------------------
Total partners' capital 17,384,830 21,707,193
----------------- ------------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 17,619,213 $ 21,919,130
================= ==================
</TABLE>
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (Unaudited)
As of September 30, 1998
<TABLE>
Initial Investment
Company / Position Date Cost Fair Value
Borg-Warner Security Corporation* (A)
<S><C> <C> <C> <C>
500,000 shares of Common Stock Sept. 1988 $ 2,500,000 $ 5,250,000
- -------------------------------------------------------------------------------------------------------------------------------
Brightware, Inc.
171,650 shares of Common Stock May 1995 43,565 257,475
Warrants to purchase 38,737 shares of Common Stock
at $.40 per share, expiring on 4/19/99 1,138 42,611
- -------------------------------------------------------------------------------------------------------------------------------
Clarus Medical Systems, Inc.*
179,028 shares of Preferred Stock Jan. 1991 1,000,548 895,152
Warrants to purchase 14,043 shares of Common Stock
at $.05 per share, expiring between 3/7/00 and 7/3/00 0 0
Warrants to purchase 2,826 shares of Preferred Stock
at $5.00 per share, expiring on 3/7/00 0 0
- -------------------------------------------------------------------------------------------------------------------------------
CoCensys, Inc. (A)
152,507 shares of Common Stock Feb. 1989 192,504 201,357
- -------------------------------------------------------------------------------------------------------------------------------
Corporate Express, Inc. (A)
60,000 shares of Common Stock May 1992 12,000 573,000
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Depotech Corp., Inc.(A)(B)
93,745 shares of Common Stock Aug. 1990 57,056 64,743
- -------------------------------------------------------------------------------------------------------------------------------
Diatide, Inc.* (A)
809,704 shares of Common Stock Dec. 1991 2,986,023 3,618,365
- -------------------------------------------------------------------------------------------------------------------------------
Horizon Cellular Telephone Company, L.P.:
SPTHOR Corporation
10% Promissory Note May 1992 5,073 5,073
5.67% Bridge Loan 9,271 9,271
34.5 shares of Common Stock 20,518 20,518
- -------------------------------------------------------------------------------------------------------------------------------
I.D.E. Corporation
113,322 shares of Common Stock Mar. 1988 227,000 0
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Neocrin Company
48,429 shares of Preferred Stock June 1991 363,378 0
- -------------------------------------------------------------------------------------------------------------------------------
Photon Dynamics, Inc.* (A)
425,236 shares of Common Stock Sept. 1988 2,452,226 978,041
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)
62,500 shares of Common Stock Feb. 1990 241,639 228,125
Options to purchase 27,969 shares of Common Stock
at $1.42 per share, expiring on 10/31/01 0 62,371
- -------------------------------------------------------------------------------------------------------------------------------
Sanderling Biomedical, L.P.* (B)
80% Limited Partnership interest May 1988 611,829 520,114
- -------------------------------------------------------------------------------------------------------------------------------
Total Portfolio Investments $ 10,723,768 $ 12,726,216
---------------------------------
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (Unaudited), continued
As of September 30, 1998
Supplemental Information: Liquidated Portfolio Investments(C)
<TABLE>
Cost Realized Gain Return
<S> <C> <C> <C>
Totals from Liquidated Portfolio Investments $ 105,809,228 $ 111,281,042 $ 217,090,270
=========================================================
Combined Net Combined
Unrealized and Fair Value
Cost Realized Gain and Return
Totals from Active & Liquidated Portfolio Investments $ 116,532,996 $ 113,283,490 $ 229,816,486
=========================================================
</TABLE>
(A) Public company
(B) In August 1998, the Partnership received a liquidating in-kind distribution
from Sanderling Biomedical, L.P. of 93,745 common shares of Depotech Corp.,
Inc. Additionally, in September 1998, the Partnership wrote-off $666,740 of
the remaining cost of its investment in Sanderling to reflect the
Partnership's pro-rata share of the cost of Sanderling's remaining assets.
(C) Amounts provided for "Supplemental Information: Liquidated Portfolio
Investments" are cumulative from inception through September 30, 1998.
* May be deemed an affiliated person of the Partnership as defined in the
Investment Company Act of 1940.
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------- ------------- --------------
INVESTMENT INCOME AND EXPENSES
Income:
<S> <C> <C> <C> <C>
Interest from short-term investments $ 70,845 $ 118,572 $ 212,918 $ 566,469
Interest and other income from portfolio
investments - 5,333 8,496 27,597
Dividend income from portfolio investments - - - 37,754
------------- -------------- ------------- --------------
Total investment income 70,845 123,905 221,414 631,820
------------- -------------- ------------- --------------
Expenses:
Management fee 50,000 43,853 150,000 241,337
Professional fees 25,077 23,931 79,791 105,367
Mailing and printing 34,781 37,277 75,304 139,041
Independent General Partners' fees 19,500 20,250 63,000 67,050
Custodial fees 565 (3,727) 1,517 (227)
Miscellaneous 382 5,714 4,931 7,191
------------- -------------- ------------- --------------
Total investment expenses 130,305 127,298 374,543 559,759
------------- -------------- ------------- --------------
NET INVESTMENT (LOSS) INCOME (59,460) (3,393) (153,129) 72,061
Net realized (loss) gain from portfolio
investments (666,740) 5,518,904 (2,164,119) 15,110,952
------------- -------------- ------------- --------------
NET REALIZED (LOSS) GAIN FROM
OPERATIONS (726,200) 5,515,511 (2,317,248) 15,183,013
Change in unrealized appreciation of investments (3,951,246) 1,620,875 (2,005,115) (477,824)
------------- -------------- ------------- --------------
NET (DECREASE) INCREASE IN
NET ASSETS RESULTING FROM
OPERATIONS $ (4,677,446) $ 7,136,386 $ (4,322,363) $ 14,705,189
=============== ============== ============= ================
</TABLE>
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30,
<TABLE>
1998 1997
---------------- ----------------
CASH FLOWS (USED FOR) PROVIDED FROM
OPERATING ACTIVITIES
<S> <C> <C>
Net investment (loss) income $ (153,129) $ 72,061
Adjustments to reconcile net investment (loss) income to cash (used for)
provided from operating activities:
Decrease in accrued interest receivable - 44,693
(Increase) decrease in accrued interest on short-term investments (22,171) 44,137
Increase (decrease) in liabilities, net 22,446 (144,829)
---------------- ----------------
Cash (used for) provided from operating activities (152,854) 16,062
---------------- ----------------
CASH FLOWS (USED FOR) PROVIDED FROM
INVESTING ACTIVITIES
Net purchase of short-term investments (1,455,886) (3,539,279)
Cost of portfolio investments purchased - (460,176)
Net proceeds from the sale of portfolio investments 125,793 24,564,422
Repayment of investments in notes - 2,381,659
---------------- ----------------
Cash (used for) provided from investing activities (1,330,093) 22,946,626
---------------- ----------------
CASH FLOWS USED FOR FINANCING ACTIVITIES
Cash distributions paid to Partners - (21,790,729)
---------------- ----------------
(Decrease) increase in cash and cash equivalents (1,482,947) 1,171,959
Cash and cash equivalents at beginning of period 1,918,335 346,129
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 435,388 $ 1,518,088
================ ================
</TABLE>
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (Unaudited)
For the Nine Months Ended September 30, 1998
<TABLE>
Unallocated
Managing Individual Net Unrealized
General General Limited Appreciation
Partner Partners Partners of Investments Total
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 1,416,952 $ 543 $ 16,282,135 $ 4,007,563 $ 21,707,193
Net investment loss 151 (5) (153,275) - (153,129)
Net realized loss from
portfolio investments (450,137) (57) (1,713,925) - (2,164,119)
Change in unrealized
appreciation of investments - - - (2,005,115) (2,005,115)
------------- -------- -------------- -------------- ----------------
Balance at end of period $ 966,966 $ 481 $ 14,414,935(A) $ 2,002,448 $ 17,384,830
============= ======== ============== ============== ================
</TABLE>
(A) The net asset value per unit of limited partnership interest, including an
assumed allocation of net unrealized appreciation of investments, was $133
as of September 30, 1998. Cumulative cash distributions paid to Limited
Partners from inception to September 30, 1998 totaled $1,525 per Unit.
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. Organization and Purpose
ML Venture Partners II, L.P. (the "Partnership") is a Delaware limited
partnership formed on February 4, 1986. MLVPII Co., L.P., the managing general
partner of the Partnership (the "Managing General Partner"), and four
individuals (the "Individual General Partners") are the general partners of the
Partnership. The general partner of MLVPII Co., L.P. is Merrill Lynch Venture
Capital Inc. (the "Management Company"), an indirect subsidiary of Merrill Lynch
& Co., Inc. DLJ Capital Management Corporation (the "Sub-Manager"), an indirect
subsidiary of Donaldson, Lufkin & Jenrette, Inc., is the sub-manager of the
Partnership, pursuant to a sub-management agreement among the Partnership, the
Management Company, the Managing General Partner and the Sub-Manager.
The Partnership's objective is to achieve long-term capital appreciation from
its portfolio of venture capital investments in new and developing companies and
other special investment situations. The Partnership does not engage in any
other business or activity. The Managing General Partner is working toward the
ultimate termination of the Partnership, with an emphasis on liquidating the
remaining assets as soon as practical with the goal of maximizing returns to
Partners. In July 1997, the Individual General Partners voted to extend the term
of the Partnership for an additional two-year period. The Partnership is now
scheduled to terminate no later than December 31, 1999. In addition, the
Individual General Partners have the right to extend the term of the Partnership
for an additional two-year period if they determine that such extension is in
the best interest of the Partnership.
2. Significant Accounting Policies
Valuation of Investments - Short-term investments are carried at amortized cost
which approximates market. Portfolio investments are carried at fair value as
determined quarterly by the Sub-Manager under the supervision of the Individual
General Partners and the Managing General Partner. The fair value of
publicly-held portfolio securities is adjusted to the closing public market
price for the last trading day of the accounting period discounted by a factor
of 0% to 50% for sales restrictions. Factors considered in the determination of
an appropriate discount include, underwriter lock-up or Rule 144 trading
restrictions, insider status where the Partnership either has a representative
serving on the company's Board of Directors or is greater than a 10%
shareholder, and other liquidity factors such as the size of the Partnership's
position in a given company compared to the trading history of the public
security. Privately-held portfolio securities are carried at cost until
significant developments affecting the portfolio company provide a basis for
change in valuation. The fair value of private securities is adjusted 1) to
reflect meaningful third-party transactions in the private market or 2) to
reflect significant progress or slippage in the development of the company's
business such that cost is no longer reflective of fair value. As a venture
capital investment fund, the Partnership's portfolio investments involve a high
degree of business and financial risk that can result in substantial losses. The
Sub-Manager considers such risks in determining the fair value of the
Partnership's portfolio investments.
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited), continued
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Transactions - Investment transactions are recorded on the accrual
method. Portfolio investments are recorded on the trade date, the date the
Partnership obtains an enforceable right to demand the securities or payment
therefor. Realized gains and losses on investments sold are computed on a
specific identification basis.
Income Taxes - No provision for income taxes has been made since all income and
losses are allocable to the Partners for inclusion in their respective tax
returns. The Partnership's net assets for financial reporting purposes differ
from its net assets for tax purposes. Net unrealized appreciation of investments
of approximately $2 million as of September 30, 1998, which was recorded for
financial statement purposes, was not recognized for tax purposes. Additionally,
from inception to September 30, 1998, timing differences of approximately $6.8
million have been deducted on the Partnership's financial statements and
syndication costs relating to the selling of Units totaling $11.3 million were
charged to partners' capital on the financial statements. These amounts have not
been deducted or charged against partners' capital for tax purposes.
Statements of Cash Flows - The Partnership considers its interest-bearing cash
account to be cash equivalents.
Reclassifications - Certain reclassifications have been made to the prior
periods' financial statements to conform with the current period's presentation.
3. Allocation of Partnership Profits and Losses
The Partnership Agreement provides that the Managing General Partner will be
allocated, on a cumulative basis over the life of the Partnership, 20% of the
Partnership's aggregate investment income and net realized gains and losses from
venture capital investments, provided that such amount is positive. All other
gains and losses of the Partnership are allocated among all the Partners
(including the Managing General Partner) in proportion to their respective
capital contributions to the Partnership. From its inception to September 30,
1998, the Partnership had a $115.5 million net gain from its venture capital
investments, which includes interest and other income from portfolio investments
totaling $4.3 million.
4. Related Party Transactions
The Management Company performs, or arranges for others to perform, the
management and administrative services necessary for the operation of the
Partnership and receives a management fee at the annual rate of 2.5% of the
gross capital contributions to the Partnership, reduced by selling commissions,
organizational and offering expenses paid by the Partnership, capital
distributed and realized capital losses with a minimum annual fee of $200,000.
Such fee is determined and payable quarterly.
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited), continued
5. Independent General Partners' Fees
As compensation for services rendered to the Partnership, each of the three
Independent General Partners receives $20,000 annually in quarterly
installments, $1,500 for each meeting of the General Partners attended or for
each other meeting, conference or engagement in connection with Partnership
activities at which attendance by an Independent General Partner is required and
$1,500 for each audit committee meeting attended ($500 if an audit committee
meeting is held on the same day as a meeting of the Independent General
Partners).
6. Interim Financial Statements
In the opinion of MLVPII Co., L.P., the managing general partner of the
Partnership, the unaudited financial statements as of September 30, 1998, and
for the nine month period then ended, reflect all adjustments necessary for the
fair presentation of the results of the interim period.
7. Classification of Portfolio Investments
As of September 30, 1998, 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 and Warrants $ 8,733,669 $ 11,296,606 64.98%
Limited Partnerships 611,829 520,114 2.99%
Preferred Stock 1,363,926 895,152 5.15%
Debt Securities 14,344 14,344 0.08%
-------------- --------------- -------
Total $ 10,723,768 $ 12,726,216 73.20%
============== =============== ======
Country/Geographic Region
Midwestern U.S. $ 3,512,548 $ 6,718,152 38.64%
Western U.S. 3,963,335 2,354,837 13.55%
Eastern U.S. 3,247,885 3,653,227 21.01%
-------------- --------------- ------
Total $ 10,723,768 $ 12,726,216 73.20%
============== =============== ======
Industry
Business Services $ 2,512,000 $ 5,823,000 33.49%
Biotechnology 3,847,412 4,404,579 25.33%
Semiconductors/Electronics 2,452,226 978,041 5.63%
Medical Devices and Services 1,605,565 1,185,648 6.82%
Telecommunications 34,862 34,862 0.20%
Computer Hardware/Software 271,703 300,086 1.73%
-------------- --------------- -------
Total $ 10,723,768 $ 12,726,216 73.20%
============== =============== ======
</TABLE>
* Percentage of net assets is based on fair value.
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited), continued
8. Portfolio Investments
Portfolio investments liquidated during the three and nine months ended
September 30, 1998 and 1997, are shown below:
<TABLE>
Realized
Company Shares Sold Cost Gain (Loss) Return
Six Months Ended June 30, 1998:
<S> <C> <C> <C>
Biocircuits Corporation - partial write-off n/a 1,488,884 (1,488,884) 0
HCTC Investment, L.P. - sale of options /
partial write-off of note n/a 134,288 (8,495) 125,793
-------------- -------------- ---------------
Sub-total 1,623,172 (1,497,379) 125,793
-------------- -------------- ---------------
Three Months Ended September 30, 1998:
Sanderling Biomedical, L.P. - partial write-off n/a 666,740 (666,740) 0
-------------- -------------- ---------------
Sub-total 666,740 (666,740) 0
-------------- -------------- ---------------
Totals for the nine months ended September 30, 1998 $ 2,289,912 $ (2,164,119) $ 125,793
============== ============== ===============
Six Months Ended June 30, 1997:
Borg-Warner Automotive, Inc. 251,694 $ 1,258,470 $ 8,381,410 $ 9,639,880
IDEC Pharmaceuticals Corporation 324,390 2,718,916 5,807,909 8,526,825
Raytel Medical Corporation 37,500 144,983 0 144,983
Biocircuits Corporation - partial write-off n/a 1,164,867 (1,164,867) 0
Clarus Medical Systems, Inc. - partial write-off n/a 1,388,620 (1,388,620) 0
Neocrin Company - partial write-off n/a 3,840,430 (3,840,430) 0
HCTC Investment, L.P. - sale of options n/a 0 1,796,646 1,796,646
HCTC Investment, L.P. - note repayment n/a 1,926,168 0 1,926,168
SPTHOR Corporation - note repayment n/a 455,491 0 455,491
-------------- -------------- ---------------
Sub-total 12,897,945 9,592,048 22,489,993
-------------- -------------- ---------------
Three Months Ended September 30, 1997:
IDEC Pharmaceuticals Corporation 152,843 1,324,729 2,786,550 4,111,279
HCTC Investment, L.P. - sale of options n/a 0 188,423 188,423
Elantec, Inc. 23,245 60,437 32,945 93,382
Graham Fields International (Sanderling) 4,645 113,964 (50,960) 63,004
Corporate Express, Inc. 120,755 24,150 2,561,946 2,586,096
-------------- -------------- ---------------
Sub-total 1,523,280 5,518,904 7,042,184
-------------- -------------- ---------------
Totals for the nine months ended September 30, 1997 $ 14,421,225 $ 15,110,952 $ 29,532,177
============== ============== ===============
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited), continued
9. Subsequent Event - Cash Distribution
In November 1998, the General Partners approved a cash distribution to Partners
totaling $4,514,772. The distribution will be paid in January 1999. Limited
Partners of record on December 31, 1998 will receive $4,200,000, or $35 per
Unit. Additionally, the Individual General Partners will receive $140 and the
Managing General Partner will receive $314,632.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
As of September 30, 1998, the Partnership held $4,457,609 in short-term
securities with maturities of less than one year and $435,388 in an
interest-bearing cash account. Interest earned from such investments totaled
$70,845 and $212,918 for the three and nine months ended September 30, 1998,
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 future operating expenses and follow-on
investments will be obtained from the Partnership's existing cash reserves,
interest and other investment income and proceeds from the sale of portfolio
investments.
The Managing General Partner is working toward the ultimate termination of the
Partnership, with an emphasis on liquidating the remaining assets as soon as
practical with the goal of maximizing returns to Partners. Generally, net
proceeds received from the sale of portfolio investments are distributed to
Partners as soon as practicable, after an adequate reserve for operating
expenses and follow-on investments in the remaining portfolio companies.
In November 1998, the General Partners approved a cash distribution to Partners
totaling $4,514,772. The distribution will be paid in January 1999. Limited
Partners of record on December 31, 1998 will receive $4,200,000, or $35 per
Unit. Additionally, the Individual General Partners will receive $140 and the
Managing General Partner will receive $314,632.
Results of Operations
For the three and nine months ended September 30, 1998, the Partnership had a
net realized loss from operations of $726,200 and $2,317,248, respectively. For
the three and nine months ended September 30, 1997, the Partnership had a net
realized gain from operations of $5,515,511 and 15,183,013, respectively. Net
realized gain or loss from operations is comprised of 1) net realized gain or
loss from portfolio investments and 2) net investment income or loss (interest
and dividend income less operating expenses).
Realized Gains and Losses from Portfolio Investments - For the three and nine
months ended September 30, 1998, the Partnership had a net realized loss from
its portfolio investments of $666,740 and $2,164,119, respectively. During the
three months ended September 30, 1998, the Partnership wrote-off $666,740 of the
remaining cost of its investment in Sanderling Biomedical, L.P. to reflect the
Partnership's pro-rata share of the cost of Sanderling's remaining assets.
During the nine months ended September 30, 1998, Biocircuits Corporation ceased
operations and began to liquidate its remaining assets. As a result, the
Partnership wrote-off its remaining investment in Biocircuits, realizing a loss
of $1,488,884. Also during the nine month period, the Partnership received
$125,793 from Horizon Cellular Telephone Company, L.P. relating to the previous
sale of certain options in connection with its investment in Horizon and
wrote-off a portion of the remaining notes due from the company, resulting in a
realized loss of $8,495. Portfolio Investments liquidated for the respective
periods are shown in detail in Note 8 of the Notes to Financial Statements.
<PAGE>
For the three and nine months ended September 30, 1997, the Partnership had a
net realized gain from portfolio investments of $5,518,904 and $15,110,952,
respectively, resulting from the liquidation of several portfolio investments.
During the three months ended September 30, 1997, the Partnership liquidated
investments with a cost of $1,523,280 for a net return of $7,042,184. During the
nine months ended September 30, 1997, the Partnership liquidated investments
with a cost of $14,421,225 for a net return of $29,532,177. Portfolio
Investments liquidated for the respective periods are shown in detail in Note 8
of the Notes to Financial Statements.
Investment Income and Expenses - For the three months ended September 30, 1998
and 1997, the Partnership had a net investment loss of $59,460 and $3,393,
respectively. The increase in net investment loss for the 1998 period compared
to the same period in 1997 resulted from a $53,060 decrease in investment income
and a $3,007 increase in operating expenses. The decline in investment income
was primarily due to a decrease in interest from short-term investments resulted
from a decrease in funds available for investment in such securities during the
third quarter of 1998 compared to the same period in 1997. The Partnership
completed cash distributions to Partners of $21.8 million in July 1997 and $8.2
million in October 1997. Such amounts were invested in short-term securities
prior to distribution.
For the nine months ended September 30, 1998 and 1997, the Partnership had a net
investment loss of $153,129 and net investment income of $72,061, respectively.
The reduced net investment income resulted from a $410,406 decline in investment
income, partially offset by a $185,216 decrease in operating expenses. The
decline in investment income was due to a $372,652 decrease in interest income
and a $37,754 decrease in dividend income from portfolio investments. The
decline in interest income primarily was due to decrease in interest from
short-term investments resulting from a decrease in funds available for
investment in such securities during the nine months ended September 30, 1998
compared to the same period in 1997, as discussed above. The decrease in
dividend income from portfolio investments resulted the sale of the
Partnership's investment in Borg-Warner Automotive, Inc., which was fully
liquidated during the first quarter of 1997. The decline in operating expenses
primarily resulted from reduced management fees, as discussed below, and a
reduction in professional fees and mailing and printing expenses incurred during
the 1998 period. Such reduced operating expenses reflect the decreased level of
activity as the Partnership proceeds to liquidate its remaining portfolio
investments.
The Management Company is responsible for the management and administrative
services necessary for the operation of the Partnership. The Management Company
receives a management fee at an annual rate of 2.5% of the gross capital
contributions to the Partnership, reduced by selling commissions, organizational
and offering expenses paid by the Partnership, return of capital and realized
capital losses, with a minimum annual fee of $200,000. Such fee is determined
and payable quarterly. The management fee for the three months ended September
30, 1998 and 1997 was $50,000 and $43,853, respectively. The management fee for
the nine months ended September 30, 1998 and 1997 was $150,000 and $241,337,
respectively. The decline in the management fee for the 1998 periods compared to
the same periods in 1997 reflects the continued liquidation of the Partnership's
remaining portfolio investments and subsequent distribution to Partners. The
management fee will remain at the annual minimum fee of $200,000 for 1998 and
will remain the same in future periods through the liquidation of the
Partnership. The management fee and other operating expenses are paid with funds
provided from operations and from existing cash reserves. Funds provided from
operations for the period were obtained from interest earned from short-term
investments and proceeds from the sale of certain portfolio investments.
Unrealized Gains and Losses and Changes in Unrealized Appreciation or
Depreciation of Investments - For the nine months ended September 30, 1998, the
Partnership had a $3,895,855 unfavorable change in its unrealized appreciation
of portfolio investments, primarily resulting from the net downward revaluation
of its remaining publicly traded securities. Additionally, during the nine month
period, unrealized appreciation increased by $1,890,740 resulting from the
transfer from unrealized loss to realized loss relating to the write-off of the
Partnership's remaining investments in Biocircuits Corporation and Sanderling
Biomedical, L.P., as discussed above. As a result, the Partnership's net
unrealized appreciation of investments declined by $2,005,115 for the nine month
period ended September 30, 1998.
For the nine months ended September 30, 1997, the Partnership had a $6,297,835
favorable change in its unrealized appreciation of portfolio investments,
primarily resulting from the net upward revaluation of its remaining publicly
traded securities. Additionally, during the nine month period, unrealized
appreciation declined $6,775,659 resulting from the net transfer from unrealized
gain to realized gain related to the portfolio investments sold and written-off
during the period, as discussed above. As a result, the Partnership's net
unrealized appreciation of investments declined by $477,824 for the nine month
period ended September 30, 1997.
Net Assets - Changes to net assets resulting from operations are comprised of
1) net realized gain or loss from operations and 2) changes to net unrealized
appreciation or depreciation of portfolio investments.
As of September 30, 1998, the Partnership's net assets were $17,384,830, down
$4,322,363 from $21,707,193 as of December 31, 1997. This decrease was comprised
of the $2,005,115 decrease in unrealized appreciation of investments and the
$2,317,248 net realized loss from operations for the nine month period ended
September 30, 1998.
As of September 30, 1997, the Partnership's net assets were $26,626,152, down
$15,296,884 from $41,923,036 as of December 31, 1996. This decrease was due to
the $30,002,073 of cash distributions paid, or accrued, to Partners during the
nine month period ended September 30, 1997 exceeding the $14,705,189 increase in
net assets from operations. The increase in net assets from operations was
comprised of the $15,183,013 net realized gain from operations partially offset
by the $477,824 decrease in unrealized appreciation of investments for the nine
month period ended September 30, 1997.
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 as of
September 30, 1998 and December 31, 1997 was $133 and $162, respectively.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Partnership is not a party to any legal proceedings.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the period in which
this report covers.
Item 5. Other Information.
Not applicable
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(3) (a) Amended and Restated Certificate of Limited
Partnership of the Partnership, dated as of January
12, 1987. (1)
(3) (b) Amended and Restated Certificate of Limited
Partnership of the Partnership, dated July 27, 1990.
(2)
(3) (c) Amended and Restated Certificate of Limited
Partnership of the Partnership, dated March 25,
1991. (3)
(3) (d) Amended and Restated Agreement of Limited
Partnership of the Partnership, dated as of May 4,
1987. (4)
(3) (e) Amendment No. 1 dated February 14, 1989 to
Amended and Restated Agreement of Limited Partnership
of the Partnership. (5)
(3) (f) Amendment No. 2 dated July 27, 1990 to Amended
and Restated Agreement of Limited Partnership of
the Partnership. (2)
(3) (g) Amendment No. 3 dated March 25, 1991 to Amended
and Restated Agreement of Limited Partnership of
the Partnership. (3)
(3) (h) Amendment No. 4 dated May 23, 1991 to Amended
and Restated Agreement of Limited Partnership of
the Partnership. (6)
(10) (a) Management Agreement dated as of May 23, 1991
among the Partnership, Management Company and the
Managing General Partner. (6)
(10) (b) Sub-Management Agreement dated as of May 23,
1991 among the Partnership, Management Company, the
Managing General Partner and the Sub-Manager. (8)
(27) Financial Data Schedule.
(28) Prospectus of the Partnership dated February 10,
1987 filed with the Securities and Exchange
Commission pursuant to Rule 424(b) under the
Securities Act of 1933, as supplemented by a
supplement thereto dated April 21, 1987 filed
pursuant to Rule 424(c) under the Securities Act
of 1933. (7)
(b) No reports on Form 8-K have been filed during the
quarter for which this report is filed.
<PAGE>
(1) Incorporated by reference to the Partnership's Annual Report on Form
10-K for the year ended December 31, 1988 filed
with the Securities and Exchange Commission on March 27, 1989.
(2) Incorporated by reference to the Partnership's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1990
filed with the Securities and Exchange Commission on November 14, 1990.
(3) Incorporated by reference to the Partnership's Annual Report on Form
10-K for the year ended December 31, 1990 filed
with the Securities and Exchange Commission on March 28, 1991.
(4) Incorporated by reference to the Partnership's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1987 filed
with the Securities and Exchange Commission on August 14, 1987.
(5) Incorporated by reference to the Partnership's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1989
filed with the Securities and Exchange Commission on May 15, 1989.
(6) Incorporated by reference to the Partnership's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1991 filed
with the Securities and Exchange Commission on August 14, 1991.
(7) Incorporated by reference to the Partnership's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1987
filed with the Securities and Exchange Commission on May 15, 1987.
(8) Incorporated by reference to the Partnership's Annual Report on Form
10-K for the year ended December 31, 1992 filed
with the Securities and Exchange Commission on March 26, 1993.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ML VENTURE PARTNERS II, L.P.
By: /s/ Kevin K. Albert
Kevin K. Albert
General Partner
By: MLVPII Co., L.P.
its Managing General Partner
By: Merrill Lynch Venture Capital Inc.
its General Partner
By: /s/ Kevin K. Albert
Kevin K. Albert
President
(Principal Executive Officer)
By: /s/ Diane T. Herte
Diane T. Herte
Vice President and Treasurer
(Principal Financial and Accounting Officer)
Date: November 13, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ML VENTURE
PARTNERS II, L.P.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 10,723,768
<INVESTMENTS-AT-VALUE> 12,726,216
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 4,892,997
<TOTAL-ASSETS> 17,619,213
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 234,383
<TOTAL-LIABILITIES> 234,383
<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
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<ACCUM-APPREC-OR-DEPREC> 2,002,448
<NET-ASSETS> 17,384,830
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 221,414
<OTHER-INCOME> 0
<EXPENSES-NET> 374,543
<NET-INVESTMENT-INCOME> (153,129)
<REALIZED-GAINS-CURRENT> (2,164,119)
<APPREC-INCREASE-CURRENT> (2,005,115)
<NET-CHANGE-FROM-OPS> (4,322,363)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
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<ACCUMULATED-NII-PRIOR> 0
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<PER-SHARE-NAV-BEGIN> 162.13
<PER-SHARE-NII> (1.27)
<PER-SHARE-GAIN-APPREC> (27.52)
<PER-SHARE-DIVIDEND> 0
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<PER-SHARE-NAV-END> 133.34
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
