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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-14217
ML VENTURE PARTNERS II, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 13-3324232
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
World Financial Center, North Tower
New York, New York 10281-1326
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 449-1000
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 16, 1998, 119,636 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.
<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
The Partnership has fully invested the net proceeds received from the offering
of Units and will not make investments in any new portfolio companies. However,
the Partnership may make additional follow-on investments in its remaining
portfolio companies. During the year ended December 31, 1997, the Partnership
invested $474,255 in three existing portfolio companies. As of December 31,
1997, the Partnership had invested a total of $116,532,996 in its portfolio of
venture capital investments. During the first quarter of 1997, the Partnership
provided a $228,926 bridge loan to SPTHOR Corporation, in connection with the
Partnership's investment in Horizon Cellular Telephone Company, L.P. During 1997
the Partnership made two follow-on investments in Biocircuits Corporation. The
first investment, made on April 14, 1997 for $106,250, was for the purchase of
106,250 shares of the company's common stock, and the second, on July 2, 1997
for $125,000, was for the purchase of an additional 166,667 common shares and a
warrant to purchase 166,667 common shares for $.75 per share, expiring on
January 2, 1999. Also during 1997, the Partnership satisfied its $370,434
non-interest bearing obligation payable to MLMS Cancer Research, Inc., the
general partner of ML/MS Associates, L.P., by making a final payment of $14,079
in November 1997.
As of December 31, 1997, the Partnership's investment portfolio consisted of 13
active investments with a cost of $13,013,680 and a fair value of $17,021,243.
From its inception through December 31, 1997, the Partnership has fully or
partially liquidated or written-off investments with an aggregate cost basis of
$103,519,316. These liquidated investments returned a total of $216,964,477 to
the Partnership for a realized gain of $113,445,161. Additionally, the
Partnership earned interest and dividend income from its venture capital
investments totaling $4,244,696 from inception to December 31, 1997.
Termination
In July 1997, the Individual General Partners voted to extend the Partnership's
originally scheduled termination date of December 31, 1997 for an additional
two-year period. As a result, the Partnership's scheduled termination date is
December 31, 1999. Pursuant to the Partnership Agreement, the Individual General
Partners can extend the term of the Partnership for an additional two-year
period, if such extension is determined to be in the best interest of the
Partnership.
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 is not a party to any material pending legal proceedings.
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. An established public market for
Registrant's Units does not now exist, and it is not anticipated that such a
market will develop in the future. Accordingly, accurate information as to the
market value of a Unit at any given date is not available. The approximate
number of holders of Units as of March 16, 1998 is 12,898. The Managing General
Partner and the Individual General Partners of the Partnership also hold
interests in the Partnership.
Beginning with the December 1994 client account statements, Merrill Lynch
implemented new guidelines for reporting estimated values of limited
partnerships and other direct investments 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 new guidelines, Merrill Lynch will report estimated
values for limited partnership interests originally sold by Merrill Lynch (such
as Registrant's Units) two times per year. These estimated values will be
provided to Merrill Lynch by independent valuation services 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 statements, and
on (ii) March 31st for reporting on June month-end and subsequent client account
statements through the November month-end client account statements of the same
year.
The Managing General Partner's estimate of net asset value at December 31, 1997
is $162 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 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 15, 1997. 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 services to determine the estimated
value. The estimated value provided by the independent valuation 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 amount upon the liquidation of
Registrant's assets over its remaining life.
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, 1997 are listed below:
<TABLE>
Managing Individual
General General Limited Per $1,000
Distribution Date Partner Partners Partners Unit
- ------------------------------------------------ ----------------- --------------- ---------------- --------
<S> <C> <C> <C> <C> <C> <C>
Inception to December 31, 1994 $ 1,400,000 $ 0 $ 58,800,000 $ 490
April 11, 1995 2,231,929 2,260 9,000,000 75
October 5, 1995 5,000,236 900 27,000,000 225
January 12, 1996 2,336,106 400 12,000,000 100
April 26, 1996 3,377,898 600 18,000,000 150
July 29, 1996 4,238,951 640 19,200,000 160
October 11, 1996 2,547,571 400 12,000,000 100
July 11, 1997 2,590,089 640 19,200,000 160
October 16, 1997 411,084 260 7,800,000 65
----------------- ------------ ----------------- -----------
Cumulative totals at December 31, 1997 $ 24,133,864 $ 6,100 $ 183,000,000 $ 1,525
================= ============ ================= ===========
</TABLE>
<PAGE>
Item 6. Selected Financial Data.
($ In Thousands, Except For Per Unit Information)
<TABLE>
Years Ended December 31,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Net Realized Gain on Investments $ 15,606 $ 46,879 $ 41,368 $ 18,593 $ 10,605
Net Change in Unrealized Appreciation
of Investments (5,873) (25,245) 12,661 (29,444) 9,430
Net Increase (Decrease) in Net Assets
Resulting from Operations 9,786 20,947 54,512 (11,668) 18,581
Cash Distributions to Partners 30,002 59,366 57,572 17,600 15,600
Cumulative Cash Distributions to Partners 207,140 177,138 117,772 60,200 42,600
Total Assets 21,919 42,268 95,045 83,796 113,087
Net Unrealized Appreciation of Investments 4,008 9,880 35,125 22,464 51,908
Purchase of Portfolio Investments 474 207 2,741 2,428 8,050
Cumulative Cost of Portfolio Investments 116,533 116,059 115,851 113,110 110,682
PER UNIT OF LIMITED
PARTNERSHIP INTEREST:
Net Realized Gain on Investments $ 103 $ 309 $ 273 $ 135 $ 87
Net Increase (Decrease) in Net Assets
Resulting from Operations 64 137 358 (79) 120
Cash Distributions 225 410 400 135 130
Cumulative Cash Distributions 1,525 1,300 890 490 355
Net Unrealized Appreciation of Investments 26 65 232 148 355
Net Asset Value, Including Net Unrealized
Appreciation of Investments 162 323 596 638 852
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Liquidity and Capital Resources
As of December 31, 1997, the Partnership held $2,979,552 in short-term
investments with maturities of less than one year and $1,918,335 in an
interest-bearing cash account. For the years ended December 31, 1997, 1996 and
1995, the Partnership earned interest from such investments totaling $638,556,
$979,803 and $1,062,296, 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 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, and after an
adequate reserve for operating expenses and follow-on investments in existing
portfolio companies.
During 1997, the Partnership made cash distributions to Partners totaling
$30,002,073, including $27,000,000, or $225 per Unit, to the Limited Partners
and $3,002,073 to the General Partners. Cumulative cash distributions to
Partners as of December 31, 1997 total $207,139,964, including $183,000,000 to
the Limited Partners, or $1,525 per $1,000 Unit, and $24,139,964 to the General
Partners.
Results of Operations
For the years ended December 31, 1997, 1996 and 1995, the Partnership had a net
realized gain from operations of $15,659,055, $46,191,360 and $41,850,542,
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, 1997, the Partnership had a $15,605,512 net realized gain from its
portfolio investments. During 1997, the Partnership liquidated portfolio
investments, including positions in several of its publicly-traded securities,
for $30,571,957, realizing a gain of $22,400,099. This gain was offset by a
$6,794,587 realized loss, resulting from the partial write-off of the
Partnership's investments in Biocircuits Corporation, Clarus Medical Systems,
Inc., Neocrin Company, Inc. and Horizon Cellular Telephone Company, L.P. See
Note 7 of Notes to Financial Statements for a summary of liquidations by
investment completed during 1997.
For the year ended December 31, 1996, the Partnership had a $46,879,092 net
realized gain from its portfolio investments. During 1996, the Partnership sold
positions in several of its publicly-traded securities for $56,853,362,
realizing a gain of $47,763,001. This gain was offset by an $883,909 realized
loss, resulting from the write-off of 80% of the Partnership's investment in
I.D.E. Corporation.
For the year ended December 31, 1995, the Partnership had a $41,368,447 net
realized gain from its portfolio investments. During 1995, the Partnership sold
positions in several of its publicly-traded securities for $56,779,615,
realizing a gain of $43,339,948. On December 31, 1995, the Partnership wrote-off
its $1,822,751 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.
Investment Income and Expenses - For the year ended December 31, 1997, the
Partnership had net investment income of $53,543. For the year ended December
31, 1996, the Partnership had a net investment loss of $687,732 and for the year
ended December 31, 1995, the Partnership had net investment income of $482,095.
The increase in net investment income for 1997 compared to 1996 was the result
of a $1,560,580 reduction in operating expenses which was partially offset by a
$819,305 decrease in investment income for 1997. The decrease in operating
expenses during 1997 primarily was attributable to the $1.0 million litigation
settlement expensed in 1996 relating to the Partnership's investment in In-Store
Advertising, Inc. The additional $560,580 decrease in operating expenses
includes a decrease in the management fee, as discussed below, and a reduction
to professional fees and mailing and printing expenses incurred during 1997.
Such reduced operating expenses reflect the decreased level of activity as the
Partnership proceeds to liquidate its remaining investments. The decrease in
investment income for 1997 compared to 1996 was comprised of a $478,058 decrease
in interest and dividend income from portfolio investments and a $341,247
decrease in interest from short-term investments. Interest income from portfolio
investments decreased by $303,166 resulting from the reduced amount of
interest-bearing debt securities held by the Partnership during 1997 compared to
the amount of such securities held during 1996. Dividend income also declined by
$174,892 primarily due to the sale of the Partnership's investment in
Borg-Warner Automotive, Inc., which was fully liquidated during the first
quarter of 1997. Interest earned from short-term investments declined during
1997 primarily due to a decline in funds available for investment in short-term
securities during 1997.
The increase in net investment loss for 1996 compared to 1995 was the result of
a $746,580 decrease in investment income and a $423,247 increase in operating
expenses during 1996 compared to 1995. The decrease in investment income was
comprised of a $664,087 decrease in interest and dividend income from portfolio
investments and an $82,493 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 $566,025 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
the $1.0 million litigation settlement expense incurred in 1996 relating to the
Partnership's investment in In-Store Advertising. Partially offsetting the
increase in litigation expense was a $451,507 decrease in the management fee, as
discussed below, and a $143,990 decrease in professional fees, which primarily
resulted from reduced legal fees incurred during 1996 in connection with the
In-Store Advertising litigation.
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, 1997,
1996 and 1995, was $282,686, $686,493 and $1,138,000, respectively. The decline
in the management fee for the years presented primarily resulted from the return
of capital included in the cash distributions made to Partners during such
years. The management fee is expected to decline to its $200,000 minimum fee for
1998 and future years. 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 of Portfolio
Investments - During the year ended December 31, 1997, the Partnership increased
the fair value of its portfolio of investments on a net basis by $1,200,665.
Additionally during 1997, a net $7,073,490 was transferred from unrealized gain
to realized gain relating to portfolio investments sold and written-off during
1997, as discussed above. As a result, unrealized appreciation of investments
was reduced by $5,872,825 for 1997.
During the year ended December 31, 1996, the Partnership increased the fair
value of its portfolio of investments on a net basis by $4,876,621. Additionally
during 1996, a net $30,121,417 of unrealized gain was transferred to realized
gain relating to portfolio investments sold and written-off during 1996, as
discussed above. As a result, unrealized appreciation of investments was reduced
by $25,244,796 for 1996.
During the year ended December 31, 1995, the Partnership increased the fair
value of its portfolio of investments on a net basis by $37,867,207.
Additionally during 1995, a net $25,205,865 of unrealized gain was transferred
to realized gain relating to portfolio investments sold and written-off during
1995, as discussed above. As a result, unrealized appreciation of investments
was increased by $12,661,342 for 1995.
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 the year ended December 31, 1997, the Partnership had a $9,786,230 net
increase in net assets resulting from operations, comprised of the $15,659,055
net realized gain from operations offset by the $5,872,825 decrease in
unrealized appreciation of investments for the year. As of December 31, 1997,
the Partnership's net assets were $21,707,193, down $20,215,843 from $41,923,036
million as of December 31, 1996. This decrease is the result of the $30,002,073
of cash distributions paid to Partners during 1997 exceeding the $9,786,230
increase in net assets from operations for 1997.
For the year ended December 31, 1996, the Partnership had a $20,946,564 net
increase in net assets resulting from operations, comprised of the $46,191,360
net realized gain from operations partially offset by the $25,244,796 decrease
in unrealized appreciation of investments for 1996. As of December 31, 1996, the
Partnership's net assets were $41,923,036, down $38,419,496 from $80,342,532 as
of December 31, 1995. This decrease resulted from the $59,366,060 of cash
distributions, accrued or paid to Partners during 1996, exceeding the
$20,946,564 net increase in net assets resulting from operations for 1996.
For the year ended December 31, 1995, the Partnership had a $54,511,884 net
increase in net assets resulting from operations, comprised of the $41,850,542
net realized gain from operations and the $12,661,342 increase in unrealized
appreciation of investments for 1995. As of December 31, 1995, the Partnership's
net assets were $80,342,532, down $3,059,947 from $83,402,479 as of December 31,
1994. This $3,059,947 decrease resulted from the $57,571,831 of cash
distributions, accrued or paid to Partners during 1995, exceeding the
$54,511,884 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 as of December
31, 1997, 1996 and 1995, was $162, $323, and $596, 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, 1997 and 1996
Schedule of Portfolio Investments as of December 31, 1997
Schedule of Portfolio Investments as of December 31, 1996
Statements of Operations for the years ended December 31, 1997, 1996 and 1995
Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995
Statements of Changes in Partners' Capital for the years ended December 31,
1995, 1996 and 1997
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996 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. as of December
31, 1997 and 1996, 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, 1997 in conformity with generally accepted accounting principles.
As explained in Note 2, the financial statements include securities valued at
$16,497,000 and $37,386,258 as of December 31, 1997 and 1996, respectively,
representing 76% and 89% 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 20, 1998
<PAGE>
ML VENTURE PARTNERS II, L.P.
BALANCE SHEETS
December 31,
<TABLE>
1997 1996
---------------- ----------
ASSETS
Portfolio investments, at fair value (cost $13,013,680 as of
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997 and $27,505,870 as of December 31, 1996) $ 17,021,243 $ 37,386,258
Short-term investments, at amortized cost 2,979,552 4,486,402
Cash and cash equivalents 1,918,335 346,129
Accrued interest receivable - 49,442
---------------- ----------------
TOTAL ASSETS $ 21,919,130 $ 42,268,231
================ ================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 144,890 $ 183,406
Due to Management Company 41,349 138,389
Due to Independent General Partners 25,698 23,400
---------------- ----------------
Total liabilities 211,937 345,195
---------------- ----------------
Partners' Capital:
Managing General Partner 1,416,952 1,158,769
Individual General Partners 543 1,029
Limited Partners (120,000 Units) 16,282,135 30,882,850
Unallocated net unrealized appreciation of investments 4,007,563 9,880,388
---------------- ----------------
Total partners' capital 21,707,193 41,923,036
---------------- ----------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 21,919,130 $ 42,268,231
================ ================
</TABLE>
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 1997
<TABLE>
Initial Investment
Company / Position Date Cost Fair Value
Biocircuits Corporation*(A)(B)(C)
401,734 shares of Common Stock May 1991 $ 468,051 $ 175,759
2,000,000 shares of Preferred Stock 1,000,000 218,750
Warrants to purchase 166,667 shares of Common Stock
at $.75 per share, expiring 1/2/99 20,833 0
- -------------------------------------------------------------------------------------------------------------------------------
Borg-Warner Security Corporation*(A)
<S><C> <C> <C> <C>
500,000 shares of Common Stock Sept. 1988 2,500,000 6,609,375
- -------------------------------------------------------------------------------------------------------------------------------
Brightware, Inc. (D)
144,039 shares of Common Stock May 1995 39,579 216,059
Warrants to purchase 38,737 shares of Common Stock
at $.40 per share, expiring on 4/19/99 1,138 42,611
Warrants to purchase 59,166 shares of Common Stock
at $.80 per share, expiring on 6/10/98 3,986 41,416
- -------------------------------------------------------------------------------------------------------------------------------
Clarus Medical Systems, Inc.*(B)(E)
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)(I)
152,507 shares of Common Stock Feb. 1989 192,504 524,243
- -------------------------------------------------------------------------------------------------------------------------------
Corporate Express, Inc.(A)(B)(F)
60,000 shares of Common Stock May 1992 12,000 618,000
- -------------------------------------------------------------------------------------------------------------------------------
Diatide, Inc.*(A)
809,704 shares of Common Stock Dec. 1991 2,986,023 4,802,557
- -------------------------------------------------------------------------------------------------------------------------------
Horizon Cellular Telephone Company, L.P.:(B)(G)
SPTHOR Corporation
10% Promissory Note due 3/26/98 May 1992 5,073 5,073
5.67% Bridge Loan 9,271 9,271
34.5 shares of Common Stock 154,806 154,806
- -------------------------------------------------------------------------------------------------------------------------------
I.D.E. Corporation
113,322 shares of Common Stock Mar. 1988 227,000 0
- -------------------------------------------------------------------------------------------------------------------------------
Neocrin Company*(B)(H)
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 1,148,135
Warrants to purchase 6,062 shares of Common Stock
at $5.40 per share, expiring on 6/30/00 0 0
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS, continued
December 31, 1997
<TABLE>
Initial Investment
Company / Position Date Cost Fair Value
Raytel Medical Corporation(A)(B)
<S><C> <C> <C> <C>
62,500 shares of Common Stock Feb. 1990 $ 241,639 $ 581,250
Options to purchase 27,969 shares of Common Stock
at $1.42 per share, expiring on 10/31/01 0 220,396
- -------------------------------------------------------------------------------------------------------------------------------
Sanderling Biomedical, L.P.*(I)
80% Limited Partnership interest May 1988 1,335,625 758,390
- -------------------------------------------------------------------------------------------------------------------------------
Total Portfolio Investments(J) $ 13,013,680 $ 17,021,243
---------------------------------
Supplemental Information: Liquidated Portfolio Investments(K)
Liquidation Realized
Company Date Cost Gain (Loss) Return
- -------------------------------------------------------------------------------------------------------------------------------
Allez, Inc. 1992 $ 1,781,320 $ (1,781,320) $ 0
Amdahl Corporation (Key Computer) 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
Biocircuits Corporation(B) 1997 1,164,867 (1,164,867) 0
Borg-Warner Automotive, Inc.(B) 1994-1997 2,500,000 14,628,202 17,128,202
Business Depot, Ltd. 1994 1,214,184 1,539,475 2,753,659
CellPro, Incorporated 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
Clarus Medical Systems(B) 1997 1,388,620 (1,388,620) 0
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
Corporate Express, Inc.(B) 1994-1997 2,987,912 25,499,494 28,487,406
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) 1993-1997 1,412,118 2,105,168 3,517,286
Everex Systems, Inc. 1991-1992 750,000 447,606 1,197,606
- -------------------------------------------------------------------------------------------------------------------------------
Hoffman & Company, L.P. 1993 40,000 (40,000) 0
- -------------------------------------------------------------------------------------------------------------------------------
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS, continued
December 31, 1997
Liquidation Realized
Company Date Cost Gain (Loss) Return
- -------------------------------------------------------------------------------------------------------------------------------
Home Express, Inc. 1995 $ 1,822,751 $ (1,822,751) $ 0
- -------------------------------------------------------------------------------------------------------------------------------
Horizon Cellular Telephone Company, L.P.(B) 1996-1997 3,509,776 1,684,582 5,194,358
IDE Corporation 1996 883,909 (883,909) 0
- -------------------------------------------------------------------------------------------------------------------------------
IDEC Pharmaceuticals Corporation(B) 1994-1997 4,261,036 8,377,068 12,638,104
- -------------------------------------------------------------------------------------------------------------------------------
Inference Corporation 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 4,477,842 6,843,079
- -------------------------------------------------------------------------------------------------------------------------------
Ligand Pharmaceuticals Inc. 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(B) 1996-1997 3,840,560 (3,840,560) 0
- -------------------------------------------------------------------------------------------------------------------------------
OccuSystems, Inc. 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) 1996-1997 1,807,664 4,370,155 6,177,819
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
Sanderling Biomedical, L.P.(B) 1995-1997 471,871 1,944,061 2,415,932
Saxpy Computer Corporation 1988 2,000,000 (2,000,000) 0
SDL, Inc. 1993-1996 4,757,265 10,502,531 15,259,796
SF2 Corporation 1991-1994 2,193,293 (1,856,570) 336,723
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS, continued
December 31, 1997
Liquidation Realized
Company Date Cost Gain (Loss) Return
- -------------------------------------------------------------------------------------------------------------------------------
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. 1995-1996 915,348 2,801,429 3,716,777
- -------------------------------------------------------------------------------------------------------------------------------
Totals from Liquidated Portfolio Investments $ 103,519,316 $ 113,445,161 $ 216,964,477
=========================================================
Combined Net Combined
Unrealized and Fair Value
Cost Realized Gain and Return
Totals from Active & Liquidated Portfolio Investments $ 116,532,996 $ 117,452,724 $ 233,985,720
=========================================================
</TABLE>
(A) Public company
(B) During 1997, the Partnership sold or wrote-off equity securities of such
company. See Note 7 of Notes to Financial Statements for summarized
information.
(C) The preferred shares of Biocircuits Corporation held by the Partnership are
convertible into common shares of the company at a ratio of 4 shares of
preferred stock for 1 share of common stock. During 1997, the Partnership
made two follow-on investments in Biocircuits, the first on April 14, 1997
for $106,250, acquiring an additional 106,250 shares of the company's
common stock, and the second on July 2, 1997 for $125,000, acquiring an
additional 166,667 shares of the company's common stock and a warrant to
purchase 166,667 shares of common stock for $.75 per share, expiring on
1/2/99. Additionally, on April 15, 1997, the Partnership's warrant to
purchase 594,000 shares of Biocircuits preferred stock for $.60 per share,
expired unexercised.
(D) In December 1997, the Partnership exchanged its warrant to purchase 4,846
common shares at $.40 per share for 3,554 common shares of Brightware.
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS, continued
December 31, 1997
(E) On July 31, 1997, the Partnership's warrant to purchase 4,048 shares of
Clarus Medical Systems, Inc. common stock for $18.75 per share, expired
unexercised.
(F) In January 1997, Corporate Express, Inc. issued a 50% stock dividend
resulting in the receipt by the Partnership of an additional 60,252 shares
of the company's common stock. Additionally, the Partnership sold 120,755
shares of Corporate Express during 1997. See Note 7 of Notes to Financial
Statements.
(G) During the first quarter of 1997, the Partnership received cash proceeds
totaling $2,213,626 covering interest and principal on promissory notes due
from HCTC Investment, L.P. and SPTHOR Corporation, net of certain
reclassifications of prior payments. Additionally, during 1997, the
Partnership received an additional $2,085,252, plus interest of $14,873
from the sale of options in connection with its investment in HCTC/SPTHOR.
(H) In February 1997, Neocrin Company effected a one-for-ten reverse stock
split of the company's common stock and preferred stock. Additionally, in
connection with a financial restructuring of the company completed in 1997,
the Partnership's warrants to purchase 92,205 common shares of Neocrin were
canceled and the Partnership wrote-off $3,840,430 of its $4,203,808
investment in the company. See Note 7 of Notes to Financial Statements.
(I) During 1997, the Partnership received three in-kind distributions of common
stock from Sanderling Biomedical, L.P. The first was in July 1997 for 4,645
shares of Graham Fields International, the second in September 1997 for
59,685 shares of Vical, Inc. and the third in October 1997 for 152,507
shares of CoCensys, Inc. The Graham Fields and Vical shares were
subsequently sold during 1997. See Note 7 of Notes to Financial Statements.
(J) During 1997, the Partnership received two in-kind distributions of common
shares of IDEC Pharmaceuticals Corporation from ML/MS Associates, L.P. and
MLMS Cancer Research, Inc. as final liquidating distributions. The first
was in March 1997 for 347,826 shares and the second was in May 1997 for
129,407 shares. All 477,233 were subsequently sold during 1997. Also during
1997, the Partnership completed the liquidation of its investments in
Borg-Warner Automotive, Inc. and Elantec, Inc. See Note 7 of Notes to
Financial Statements.
(K) Amounts provided for "Supplemental Information: Liquidated Portfolio
Investments" are cumulative from inception through December 31, 1997.
* May be deemed an affiliated person of the Partnership as defined in the
Investment Company Act of 1940.
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 1996
<TABLE>
Active Portfolio Investments:
Initial Investment
Company / Position Date Cost Fair Value
Biocircuits Corporation*(A)
<S><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)
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)
120,503 shares of Common Stock May 1992 36,150 2,837,894
- -------------------------------------------------------------------------------------------------------------------------------
Diatide, Inc.*(A)
809,704 shares of Common Stock Dec. 1991 2,986,023 3,691,266
- -------------------------------------------------------------------------------------------------------------------------------
Elantec, Inc.(A)
23,245 shares of Common Stock Aug. 1988 60,437 81,655
- -------------------------------------------------------------------------------------------------------------------------------
Horizon Cellular Telephone Company, L.P:
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
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)
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*
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)
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.*
80% Limited Partnership interest May 1988 1,786,643 2,504,771
- -------------------------------------------------------------------------------------------------------------------------------
Totals from Active Portfolio Investments $ 27,505,870 $ 37,386,258
---------------------------------
Supplemental Information: Liquidated Portfolio Investments
Cost Realized Gain Return
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>
* May be deemed an affiliated person of the Partnership as defined in the
Investment Company Act of 1940.
(A) Public company
<PAGE>
ML VENTURE PARTNERS II, L.P.
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
<TABLE>
1997 1996 1995
--------------- --------------- ---------
INVESTMENT INCOME AND EXPENSES
Income:
<S> <C> <C> <C>
Interest from short-term investments $ 638,556 $ 979,803 $ 1,062,296
Interest and other income from portfolio investments 27,270 330,436 374,344
Dividend income 37,754 212,646 832,825
--------------- ---------------- ----------------
Total investment income 703,580 1,522,885 2,269,465
--------------- ---------------- ----------------
Expenses:
Management fee 282,686 686,493 1,138,000
Professional fees 140,089 175,434 319,424
Mailing and printing 126,589 220,877 211,662
Independent General Partners' fees 94,663 109,262 103,049
Custodial fees 373 13,930 14,602
Miscellaneous 5,637 4,621 633
Litigation settlement - 1,000,000 -
--------------- ---------------- ----------------
Total investment expenses 650,037 2,210,617 1,787,370
--------------- ---------------- ----------------
NET INVESTMENT INCOME (LOSS) 53,543 (687,732) 482,095
Net realized gain from portfolio investments 15,605,512 46,879,092 41,368,447
--------------- ---------------- ----------------
NET REALIZED GAIN FROM OPERATIONS 15,659,055 46,191,360 41,850,542
Net change in unrealized appreciation of investments (5,872,825) (25,244,796) 12,661,342
--------------- ---------------- ----------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 9,786,230 $ 20,946,564 $ 54,511,884
=============== ================ ================
</TABLE>
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
<TABLE>
1997 1996 1995
--------------- --------------- -----------
CASH FLOWS PROVIDED FROM (USED FOR)
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net investment income (loss) $ 53,543 $ (687,732) $ 482,095
Adjustments to reconcile net investment income (loss) to cash provided from
(used for) operating activities:
Decrease (increase) in accrued interest receivable 49,442 820,735 (55,706)
Decrease (increase) in accrued interest on short-term
investments 19,695 (10,369) (8,190)
Decrease in payables (133,258) (21,176) (27,451)
--------------- --------------- ----------------
Cash provided from (used for) operating activities (10,578) 101,458 390,748
--------------- --------------- ----------------
CASH FLOWS PROVIDED FROM INVESTING
ACTIVITIES
Net return (purchase) of short-term investments 1,487,155 12,893,395 (10,426,139)
Cost of portfolio investments purchased (474,255) (207,111) (2,741,249)
Deposits released from (placed in) escrow - 184,502 (184,502)
Net proceeds from the sale of portfolio investments 28,190,298 59,663,087 54,223,795
Repayment of investments in notes 2,381,659 727,447 2,019,721
--------------- --------------- ----------------
Cash provided from investing activities 31,584,857 73,261,320 42,891,626
--------------- --------------- ----------------
CASH FLOWS USED FOR FINANCING ACTIVITIES
Cash distributions to Partners (30,002,073) (73,702,566) (43,235,325)
--------------- --------------- ----------------
Increase (decrease) in cash and cash equivalents 1,572,206 (339,788) 47,049
Cash and cash equivalents at beginning of year 346,129 685,917 638,868
--------------- --------------- ----------------
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 1,918,335 $ 346,129 $ 685,917
=============== =============== ================
</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, 1995, 1996 and 1997
<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 as of December 31, 1994 $ 2,191,479 $ 3,917 $ 58,743,241 $ 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)
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 as of December 31, 1995 1,471,685 1,457 43,744,206(A) 35,125,184 80,342,532
Cash distributions, paid April 26,
1996, July 29, 1996 and
October 11, 1996 (10,164,420) (1,640) (49,200,000) - (59,366,060)
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 as of December 31, 1996 1,158,769 1,029 30,882,850(A) 9,880,388 41,923,036
Cash distribution, paid July 11, 1997 (2,590,089) (640) (19,200,000) - (21,790,729)
Cash distribution, paid
October 16, 1997 (411,084) (260) (7,800,000) - (8,211,344)
Net investment income 13,410 2 40,131 - 53,543
Net realized gain on investments 3,245,946 412 12,359,154 - 15,605,512
Net change in unrealized
appreciation on investments - - - (5,872,825) (5,872,825)
------------- ------- -------------- -------------- ----------------
Balance as of December 31, 1997 $ 1,416,952 $ 543 $ 16,282,135(A) $ 4,007,563 $ 21,707,193
============= ======= ============== ============== ================
</TABLE>
(A) The net asset value per unit of limited partnership interest, including an
assumed allocation of net unrealized appreciation of investments, was $162,
$323 and $596 as of December 31, 1997, 1996 and 1995, respectively.
Cumulative cash distributions paid, or payable, to Limited Partners from
inception to December 31, 1997, 1996 and 1995 totaled $1,525, $1,300 and
$890 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. 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 on 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. 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.
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
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 $4 million as of December 31, 1997,
which was recorded for financial statement purposes, was not recognized for tax
purposes. Additionally, from inception to December 31, 1997, 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.
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,
1997, the Partnership had a $117.7 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.
5. Independent General Partners' Fees
As compensation for services rendered to the Partnership, each of the three
Independent General Partners receives $21,000 annually in quarterly
installments, $1,500 for each meeting of the General Partners attended or for
each other meeting, conference or engagement in connection with Partnership
activities at which attendance by an Independent General Partner is required and
$1,500 for each audit committee meeting attended ($500 if an audit committee
meeting is held on the same day as a meeting of the Independent General
Partners). Such amounts were increased beginning on July 1, 1997 from the
previous amounts received by the Independent General Partners of $20,000 for the
annual fee and $1,400 for each meeting attended. The annual fee will revert back
to $20,000 effective on January 1, 1998.
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
6. Commitments
The Partnership satisfied its $370,434 non-interest bearing obligation payable
to MLMS Cancer Research, Inc., the general partner of ML/MS Associates, L.P., by
making a final payment of $14,079 in November 1997.
7. Portfolio Investments
During 1997 the Partnership fully or partially liquidated the following
portfolio securities:
<TABLE>
Realized
Company Shares Sold Cost Gain (Loss) Return
<S> <C> <C> <C>
Biocircuits Corporation - partial write-off n/a $ 1,164,867 $ (1,164,867) $ 0
Borg-Warner Automotive, Inc. 251,694 1,258,470 8,381,410 9,639,880
Clarus Medical Systems, Inc. - partial write-off n/a 1,388,620 (1,388,620) 0
Corporate Express, Inc. 120,755 24,150 2,561,946 2,586,096
Elantec, Inc. 23,245 60,437 32,945 93,382
Graham Fields International (Sanderling) 4,645 113,964 (50,960) 63,004
IDEC Pharmaceuticals Corporation 477,233 4,043,645 8,594,459 12,638,104
HCTC Investment, L.P. - sale of options n/a 0 2,085,252 2,085,252
HCTC / SPTHOR - note repayment n/a 2,381,659 0 2,381,659
HCTC Investment, L.P. - partial write-off n/a 400,670 (400,670) 0
Neocrin Company - partial write-off n/a 3,840,430 (3,840,430) 0
Raytel Medical Corporation 37,500 144,983 0 144,983
Vical, Inc. (Sanderling) 59,685 144,550 795,047 939,597
-------------- -------------- ----------------
Total $ 14,966,445 $ 15,605,512 $ 30,571,957
-------------- -------------- ----------------
</TABLE>
8. 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, 1997 are listed below:
<TABLE>
Managing Individual
General General Limited Per $1,000
Distribution Date Partner Partners Partners Unit
- ------------------------------------------------ --------------- -------------- ---------------- --------
<S> <C> <C> <C> <C> <C> <C>
Inception to December 31, 1994 $ 1,400,000 $ 0 $ 58,800,000 $ 490
April 11, 1995 2,231,929 2,260 9,000,000 75
October 5, 1995 5,000,236 900 27,000,000 225
January 12, 1996 2,336,106 400 12,000,000 100
April 26, 1996 3,377,898 600 18,000,000 150
July 29, 1996 4,238,951 640 19,200,000 160
October 11, 1996 2,547,571 400 12,000,000 100
July 11, 1997 2,590,089 640 19,200,000 160
October 16, 1997 411,084 260 7,800,000 65
--------------- ------------- ------------------ -----------
Cumulative totals at December 31, 1997 $ 24,133,864 $ 6,100 $ 183,000,000 $ 1,525
=============== ============= ================== ===========
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
9. Litigation Settlement
During 1996, the Partnership settled an action in which it 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. Additionally, the Partnership incurred
legal expenses totaling approximately $246,000 related to the litigation.
10. Classification of Portfolio Investments
As of December 31, 1997, the Partnership's investments in portfolio companies
were categorized as follows:
<TABLE>
% of
Type of Investments Cost Fair Value Net Assets*
- ------------------- -------------- --------------- -----------
<S> <C> <C> <C>
Common Stock and Warrants $ 9,299,785 $ 15,134,607 69.72%
Limited Partnerships 1,335,625 758,390 3.49%
Preferred Stock 2,363,926 1,113,902 5.13%
Debt Securities 14,344 14,344 .07%
-------------- --------------- --------
Total $ 13,013,680 $ 17,021,243 78.41%
============== =============== ======
Country/Geographic Region
Midwestern U.S. $ 3,512,548 $ 8,122,527 37.42%
Western U.S. 6,118,959 3,927,009 18.09%
Eastern U.S. 3,382,173 4,971,707 22.90%
-------------- --------------- ------
Total $ 13,013,680 $ 17,021,243 78.41%
============== =============== ======
Industry
Business Services $ 2,512,000 $ 7,227,375 33.30%
Biotechnology 4,514,152 6,085,190 28.03%
Semiconductors/Electronics 2,452,226 1,148,135 5.29%
Medical Devices and Services 3,094,449 2,091,307 9.63%
Telecommunications 169,150 169,150 .78%
Computer Hardware/Software 271,703 300,086 1.38%
-------------- --------------- --------
Total $ 13,013,680 $ 17,021,243 78.41%
============== =============== ======
</TABLE>
* Percentage of net assets is based on fair value.
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS - continued
11. Short-Term Investments
As of December 31, 1997 and 1996, 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, 1997:
<S> <C> <C> <C> <C> <C> <C>
International Lease Finance 5.55% 1/15/98 $ 1,480,344 $ 1,496,532 $ 1,500,000
National Rule 5.66% 3/13/98 1,474,766 1,483,020 1,500,000
--------------- --------------- ----------------
Total as of December 31, 1997 $ 2,955,110 $ 2,979,552 $ 3,000,000
=============== =============== ================
December 31, 1996:
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 as of December 31, 1996 $ 4,442,265 $ 4,486,402 $ 4,500,000
=============== =============== ================
</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 71
Individual General Partner since 1987
Units of the Partnership beneficially owned at March 16, 1998 - 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. from 1990 to
present; 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 76
Individual General Partner since 1987
Units of the Partnership beneficially owned at March 16, 1998 - 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., and Datawatch Inc.
William M. Kelly (1)
40 Wall Street
New York, New York 10005
Age 54
Individual General Partner since 1991
Units of the Partnership beneficially owned at March 16, 1998 - 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 Fund of America
since 1998 and First Eagle International Fund from 1994 to present.
Kevin K. Albert (2)
World Financial Center
North Tower
New York, New York 10281-1326
Age 45
Individual General Partner since 1990
Units of the Partnership beneficially owned at March 16, 1998 - 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 44
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 54
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 37
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 1992, joined Merrill Lynch in 1984. Ms.
Herte's responsibilities include controllership and financial
management functions for certain partnerships and other entities 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. As of
December 31, 1997, DLJ Capital's most recent limited partnership is Sprout
Capital 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.
Sprout Capital VIII, L.P., a $750 million fund, was scheduled to close after
year end. 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 55
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 52
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 44
Officer or Director since 1984
General Partner of Sprout Group since 1986.
Dr. Robert E. Curry(1)
Vice President
Age 51
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 Presid
ent
Age 44
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 57
Officer or Director since 1989
Director, Executive Vice President and Chief Financial Officer of DLJ.
Marjorie S. White
Secretary, Treasurer and Director
Age 44
Officer or Director since 1997 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 - Beginning on July 1, 1997, the Partnership paid each Independent
General Partner an annual fee of $21,000 in quarterly installments plus $1,500
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 $1,500 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. The fees paid to the
Independent General Partners were increased on July 1, 1997 from the previously
paid amounts of $20,000 for the annual fee and $1,400 for each meeting attended.
Beginning on January 1, 1998, the annual fee will revert back to $20,000. For
the year ended December 31, 1997, the aggregate fees and expenses paid by the
Partnership to the Independent General Partners totaled $94,663.
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, 1997, the Partnership had a net realized
gain of $15,605,512 from the liquidation of certain portfolio investments. On a
cumulative basis, from inception to December 31, 1997, the Partnership had
$117,689,857 of net realized gains and investment income from its portfolio of
venture capital investments. The Partnership made two cash distributions during
1997 totaling $27,000,000 to Limited Partners and $3,002,073 to the General
Partners.
Management Fee - Pursuant to the Management Agreement, the Partnership pays the
Management Company a management fee at the annual rate of 2.5% of the gross
capital contributions to the Partnership (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 based on the adjusted
capital contributions, 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, 1997,
management fees incurred by the Partnership to the Management Company aggregated
$282,686.
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 16, 1998, 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 and Merrill Lynch Pierce Fenner & Smith,
Incorporated owns 230 Units. 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, 1997 and 1996
Schedule of Portfolio Investments as of December 31, 1997
Schedule of Portfolio Investments as of December 31, 1996
Statements of Operations for the years ended December 31,
1997, 1996 and 1995
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
Statements of Changes in Partners' Capital for the years
ended December 31, 1995, 1996 and 1997
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)
(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 31st day of March
1998.
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 31st day of March 1998.
<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>
<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, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 13,013,680
<INVESTMENTS-AT-VALUE> 17,021,243
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 4,897,887
<TOTAL-ASSETS> 21,919,130
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
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<TOTAL-LIABILITIES> 211,937
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<APPREC-INCREASE-CURRENT> (5,872,825)
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<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 0
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<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (20,215,843)
<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 31,815,115
<PER-SHARE-NAV-BEGIN> 323
<PER-SHARE-NII> (.3)
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<PER-SHARE-NAV-END> 162
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
