SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended September 30, 1999
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 0-14217
ML VENTURE PARTNERS II, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 13-3324232
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
World Financial Center, North Tower
New York, New York 10281-1326
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 449-1000
Not applicable
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
<PAGE>
ML VENTURE PARTNERS II, L.P.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Balance Sheets as of September 30, 1999 (Unaudited) and December 31, 1998
Schedule of Portfolio Investments as of September 30, 1999 (Unaudited)
Statements of Operations for the Three and Nine Months Ended September 30, 1999
and 1998 (Unaudited)
Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
Statement of Changes in Partners' Capital for the Nine Months Ended September
30, 1999 (Unaudited)
Notes to Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 3. Qualitative and Quantitative Disclosures About Market Risk.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities and Use of Proceeds.
Item 3. Defaults upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
ML VENTURE PARTNERS II, L.P.
BALANCE SHEETS
<TABLE>
September 30,
1999 December 31,
(Unaudited) 1998
ASSETS
Portfolio investments, at fair value (cost $6,189,029 as of
<S> <C> <C> <C> <C> <C> <C> <C>
September 30, 1999 and $10,197,685 as of December 31, 1998) $ 15,292,593 $ 14,970,273
Short-term investments at amortized cost - 4,488,454
Cash and cash equivalents 5,155,678 423,675
Receivable from securities sold - 475,435
Accrued interest receivable - 1,291
---------------- ----------------
TOTAL ASSETS $ 20,448,271 $ 20,359,128
================ ================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Cash distribution payable $ 4,380,729 $ 4,514,772
Accounts payable and accrued expenses 104,695 85,874
Due to Management Company 116,235 100,410
Due to Independent General Partners 20,154 19,870
---------------- ----------------
Total liabilities 4,621,813 4,720,926
---------------- ----------------
Partners' Capital:
Managing General Partner 575,786 652,777
Individual General Partners 205 341
Limited Partners (120,000 Units) 6,146,903 10,212,496
Unallocated net unrealized appreciation of portfolio investments 9,103,564 4,772,588
---------------- ----------------
Total partners' capital 15,826,458 15,638,202
---------------- ----------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 20,448,271 $ 20,359,128
================ ================
</TABLE>
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (Unaudited)
As of September 30, 1999
<TABLE>
Initial Investment
Company / Position Date Cost Fair Value
<S> <C> <C> <C> <C> <C> <C>
Burns International Services Corporation* (A)
500,000 shares of Common Stock Sept. 1988 $ 2,500,000 $ 6,046,875
- -------------------------------------------------------------------------------------------------------------------------------
Brightware, Inc.
200,057 shares of Common Stock May 1995 44,703 300,086
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Corporate Express, Inc. (A) (D)
60,000 shares of Common Stock May 1992 12,000 564,375
- -------------------------------------------------------------------------------------------------------------------------------
Diatide, Inc.* (A) (D)
809,704 shares of Common Stock Dec. 1991 2,986,023 7,540,369
- -------------------------------------------------------------------------------------------------------------------------------
I.D.E. Corporation
113,322 shares of Common Stock Mar. 1988 227,000 0
- -------------------------------------------------------------------------------------------------------------------------------
Photon Dynamics, Inc.* (A)(B) (D)
3,643 shares of Common Stock Sept. 1988 0 76,503
- -------------------------------------------------------------------------------------------------------------------------------
Raytel Medical Corporation(A)
62,500 shares of Common Stock Feb. 1990 241,639 135,938
Options to purchase 27,969 shares of Common Stock
at $1.42 per share, expiring on 10/31/01 0 21,117
- -------------------------------------------------------------------------------------------------------------------------------
ReGen Biologics, Inc.
72,800 shares of Common Stock Apr. 1991 364 263,900
62,400 shares of Preferred Stock 114,400 226,200
- -------------------------------------------------------------------------------------------------------------------------------
Stereotaxis, Inc.
21,632 shares of Common Stock Apr. 1990 216 16,224
134,674 shares of Preferred Stock 62,684 101,006
- -------------------------------------------------------------------------------------------------------------------------------
Total Portfolio Investments $ 6,189,029 $ 15,292,593
---------------------------------
Supplemental Information: Liquidated Portfolio Investments(E)
Net
Cost Realized Gain Return
Totals from Liquidated Portfolio Investments(C) $ 110,343,967 $ 111,789,338 $ 222,133,305
=============== ============== ==============
Combined Net Combined
Unrealized and Fair Value
Cost Realized Gain and Return
Totals from Active & Liquidated Portfolio
Investments $ 116,532,996 $ 120,892,902 $ 237,425,898
=============== ============= ==============
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS, continued (Unaudited)
As of September 30, 1999
(A) Public company
(B) In July 1999, the Partnership sold its remaining 31,736 common shares of
Photon Dynamics, Inc. for $365,648, realizing a gain of $182,849.
Additionally, in September 1999, the Partnership exchanged its option to
purchase 6,062 common shares of Photon at $5.40 per share, for 3,643 common
shares in a non-cash transaction. The 3,643 shares were subsequently sold
in October 1999 for $76,774.
(C) In September 1999, the Partnership sold its remaining investment of 19,063
common shares of CoCensys, Inc. for $19,071, realizing a loss of $173,433.
Additionally, the Partnership sold its remaining interest in Ogle Resources
Inc., an investment that had previously been written-off, for $8,304,
realizing a gain for the entire amount.
(D) Subsequent to the end of the quarter, the Partnership sold its remaining
investment in Diatide, Inc. and Corporate Express Inc. for $7,692,188 and
$582,000, respectively. See Note 10 of Notes to Financial Statements.
(E) Amounts provided for "Supplemental Information: Liquidated Portfolio
Investments" are cumulative from inception through September 30, 1999.
* May be deemed an affiliated person of the Partnership as defined in the
Investment Company Act of 1940.
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ --------------- -------------- --------------
INVESTMENT INCOME AND EXPENSES
Income:
<S> <C> <C> <C> <C>
Interest from short-term investments $ 48,422 $ 70,845 $ 97,475 $ 212,918
Interest and other income from portfolio
investments 71 - 672 8,496
------------ ---------------- -------------- --------------
Total investment income 48,493 70,845 98,147 221,414
------------ ---------------- -------------- --------------
Expenses:
Management fee 50,000 50,000 150,000 150,000
Professional fees 21,617 25,077 73,328 79,791
Mailing and printing 20,520 34,781 69,602 75,304
Independent General Partners' fees 19,500 19,500 67,500 63,000
Custodial fees 244 565 2,055 1,517
Miscellaneous 663 382 8,186 4,931
------------ ---------------- -------------- --------------
Total investment expenses 112,544 130,305 370,671 374,543
------------ ---------------- -------------- --------------
NET INVESTMENT LOSS (64,051) (59,460) (272,524) (153,129)
Net realized gain (loss) from portfolio investments 17,720 (666,740) 510,533 (2,164,119)
------------ ---------------- -------------- --------------
NET REALIZED (LOSS) GAIN FROM
OPERATIONS (46,331) (726,200) 238,009 (2,317,248)
Change in unrealized appreciation of investments 3,632,959 (3,951,246) 4,330,976 (2,005,115)
------------ ---------------- -------------- --------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS $ 3,586,628 $ (4,677,446) $ 4,568,985 $ (4,322,363)
============== ================ ============== ================
</TABLE>
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30,
<TABLE>
1999 1998
---------------- ----------------
CASH FLOWS USED FOR OPERATING ACTIVITIES
<S> <C> <C>
Net investment loss $ (272,524) $ (153,129)
Adjustments to reconcile net investment loss to cash used for operating
activities:
Decrease in accrued interest receivable 1,291 -
Decrease (increase) in accrued interest on short-term investments 33,337 (22,171)
Increase in liabilities, net 34,930 22,446
---------------- ----------------
Cash used for operating activities (202,966) (152,854)
---------------- ----------------
CASH FLOWS PROVIDED FROM (USED FOR)
INVESTING ACTIVITIES
Net return (purchase) of short-term investments 4,455,117 (1,455,886)
Net proceeds from the sale of portfolio investments 4,994,624 125,793
---------------- ----------------
Cash provided from (used for) investing activities 9,449,741 (1,330,093)
---------------- ----------------
CASH FLOWS USED FOR FINANCING ACTIVITIES
Cash distributions paid to Partners (4,514,772) -
---------------- ----------------
Increase (decrease) in cash and cash equivalents 4,732,003 (1,482,947)
Cash and cash equivalents at beginning of period 423,675 1,918,335
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,155,678 $ 435,388
================ ================
</TABLE>
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (Unaudited)
For the Nine Months Ended September 30, 1999
<TABLE>
Unallocated
Managing Individual Net Unrealized
General General Limited Appreciation
Partner Partners Partners of Investments Total
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 652,777 $ 341 $ 10,212,496 $ 4,772,588 $ 15,638,202
Accrued cash distribution - paid
October 7, 1999 (180,589) (140) (4,200,000) - (4,380,729)
Net investment loss (2,593) (9) (269,922) - (272,524)
Net realized gain from
portfolio investments 106,191 13 404,329 - 510,533
Change in unrealized
appreciation of investments - - - 4,330,976 4,330,976
------------- -------- -------------- -------------- ----------------
Balance at end of period $ 575,786 $ 205 $ 6,146,903(A) $ 9,103,564 $ 15,826,458
============= ======== ============== ============== ================
</TABLE>
(A) The net asset value per unit of limited partnership interest, including an
assumed allocation of net unrealized appreciation of investments, is $111
as of September 30, 1999. Cumulative cash distributions paid and accrued to
limited partners from inception to September 30, 1999 totaled $1,595 per
unit.
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. Organization and Purpose
ML Venture Partners II, L.P. (the "Partnership") is a Delaware limited
partnership formed on February 4, 1986. MLVPII Co., L.P., the managing general
partner of the Partnership (the "Managing General Partner"), and four
individuals (the "Individual General Partners") are the general partners of the
Partnership. The general partner of MLVPII Co., L.P. is Merrill Lynch Venture
Capital Inc. (the "Management Company"), an indirect subsidiary of Merrill Lynch
& Co., Inc. DLJ Capital Management Corporation (the "Sub-Manager"), an indirect
subsidiary of Donaldson, Lufkin & Jenrette, Inc., is the sub-manager of the
Partnership, pursuant to a sub-management agreement among the Partnership, the
Management Company, the Managing General Partner and the Sub-Manager.
The Partnership's objective is to achieve long-term capital appreciation from
its portfolio of venture capital investments in new and developing companies and
other special investment situations. The Partnership does not engage in any
other business or activity. The Managing General Partner is working toward the
ultimate termination of the Partnership, with an emphasis on liquidating the
remaining assets as soon as practical with the goal of maximizing returns to
Partners. In November 1999, the Individual General Partners voted to extend the
term of the Partnership for an additional two-year period. The Partnership is
now scheduled to terminate no later than December 31, 2001. In addition, the
Individual General Partners have the right to extend the term of the Partnership
for an additional two-year period if they determine that such extension is in
the best interest of the Partnership.
2. Significant Accounting Policies
Valuation of Investments - Short-term investments are carried at amortized cost,
which approximates market. Portfolio investments are carried at fair value, as
determined quarterly by the Sub-Manager under the supervision of the Individual
General Partners and the Managing General Partner. The fair value of
publicly-held portfolio securities is adjusted to the closing public market
price for the last trading day of the accounting period discounted by a factor
of 0% to 50% for sales restrictions. Factors considered in the determination of
an appropriate discount include, underwriter lock-up or Rule 144 trading
restrictions, insider status where the Partnership either has a representative
serving on the company's Board of Directors or is greater than a 10%
shareholder, and other liquidity factors such as the size of the Partnership's
position in a given company compared to the trading history of the public
security. Privately-held portfolio securities are carried at cost until
significant developments affecting the portfolio company provide a basis for
change in valuation. The fair value of private securities is adjusted 1) to
reflect meaningful third-party transactions in the private market or 2) to
reflect significant progress or slippage in the development of the company's
business such that cost is no longer reflective of fair value. As a venture
capital investment fund, the Partnership's portfolio investments involve a high
degree of business and financial risk that can result in substantial losses. The
Sub-Manager considers such risks in determining the fair value of the
Partnership's portfolio investments.
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited), continued
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Transactions - Investment transactions are recorded on the accrual
method. Portfolio investments are recorded on the trade date, the date the
Partnership obtains an enforceable right to demand the securities or payment
therefor. Realized gains and losses on investments sold are computed on a
specific identification basis.
Income Taxes - No provision for income taxes has been made since all income and
losses are allocable to the partners for inclusion in their respective tax
returns. The Partnership's net assets for financial reporting purposes differ
from its net assets for tax purposes. Net unrealized appreciation of investments
of approximately $9.1 million as of September 30, 1999, which was recorded for
financial statement purposes, was not recognized for tax purposes. Additionally,
from inception to September 30, 1999, timing differences of approximately $6.4
million have been deducted on the Partnership's financial statements and
syndication costs relating to the selling of Units totaling $11.3 million were
charged to partners' capital on the financial statements. These amounts have not
been deducted or charged against partners' capital for tax purposes.
Statements of Cash Flows - The Partnership considers its interest-bearing cash
account to be cash equivalents.
3. Allocation of Partnership Profits and Losses
The Partnership Agreement provides that the Managing General Partner will be
allocated, on a cumulative basis over the life of the Partnership, 20% of the
Partnership's aggregate investment income and net realized gains and losses from
venture capital investments, provided that such amount is positive. All other
gains and losses of the Partnership are allocated among all the Partners
(including the Managing General Partner) in proportion to their respective
capital contributions to the Partnership. From its inception to September 30,
1999, the Partnership had a $116.0 million net realized gain from its venture
capital investments, which includes interest and other income from portfolio
investments totaling $4.3 million.
4. Related Party Transactions
The Management Company performs, or arranges for others to perform, the
management and administrative services necessary for the operation of the
Partnership and receives a management fee at the annual rate of 2.5% of the
gross capital contributions to the Partnership, reduced by selling commissions,
organizational and offering expenses paid by the Partnership, capital
distributed and realized capital losses with a minimum annual fee of $200,000.
Such fee is determined and payable quarterly.
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited), continued
5. Independent General Partners' Fees
As compensation for services rendered to the Partnership, each of the three
Independent General Partners receives $20,000 annually in quarterly
installments, $1,500 for each meeting of the General Partners attended or for
each other meeting, conference or engagement in connection with Partnership
activities at which attendance by an Independent General Partner is required and
$1,500 for each audit committee meeting attended ($500 if an audit committee
meeting is held on the same day as a meeting of the Independent General
Partners).
6. Portfolio Investments
Portfolio investments liquidated during the three and nine months ended
September 30, 1999 and 1998, are shown below:
<TABLE>
Shares Realized
Security Sold Cost Gain (Loss) Return
Three Months Ended September 30, 1999:
<S> <C> <C> <C> <C>
CoCensys, Inc. - sale of common stock 19,063 $ 192,504 $ (173,433) $ 19,071
Ogle Resources, Inc. - sale of remaining holdings n/a 0 8,304 8,304
Photon Dynamics, Inc. - sale of common stock 31,736 182,799 182,849 365,648
-------------- ---------------- ---------------
Sub-total 375,303 17,720 393,023
-------------- ---------------- ---------------
Six Months Ended June 30, 1999:
Neocrin Company - write-off remaining cost n/a 363,378 (363,378) 0
MLMS Cancer Research, Inc. - liquidating
distribution n/a 0 1,567 1,567
Photon Dynamics, Inc. - sale of common stock 393,500 2,269,427 1,855,172 4,124,599
Clarus Medical Systems, Inc. -write-off
remaining cost n/a 1,000,548 (1,000,548) 0
-------------- ---------------- ---------------
Sub-total 3,633,353 492,813 4,126,166
-------------- ---------------- ---------------
Totals for the nine months ended September 30, 1999 $ 4,008,656 $ 510,533 $ 4,519,189
============== ================ ===============
Three Months Ended September 30, 1998:
Sanderling Biomedical, L.P. - partial write-off n/a 666,740 (666,740) 0
-------------- ---------------- ---------------
Sub-total 666,740 (666,740) 0
-------------- ---------------- ---------------
Six Months Ended June 30, 1998:
Biocircuits Corporation - partial write-off n/a 1,488,884 (1,488,884) 0
HCTC Investment, L.P. - sale of options /
partial write-off of note n/a 134,288 (8,495) 125,793
-------------- ---------------- ---------------
Sub-total 1,623,172 (1,497,379) 125,793
-------------- ---------------- ---------------
Totals for the nine months ended September 30, 1998 $ 2,289,912 $ (2,164,119) $ 125,793
============== ================ ===============
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited), continued
7. Classification of Portfolio Investments
As of September 30, 1999, 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 $ 6,011,945 $ 14,965,387 94.56%
Preferred Stock 177,084 327,206 2.07%
-------------- --------------- -------
Total $ 6,189,029 $ 15,292,593 96.63%
============== =============== ======
Country/Geographic Region
Midwestern U.S. $ 2,574,900 $ 6,728,480 42.52%
Western U.S. 401,106 1,023,744 6.47%
Eastern U.S. 3,213,023 7,540,369 47.64%
-------------- --------------- ------
Total $ 6,189,029 $ 15,292,593 96.63%
============== =============== ======
Industry
Business Services $ 2,512,000 $ 6,611,250 41.77%
Biotechnology 3,163,687 8,147,699 51.49%
Semiconductors/Electronics 0 76,503 0.48%
Medical Devices and Services 241,639 157,055 0.99%
Computer Hardware/Software 271,703 300,086 1.90%
-------------- --------------- ------
Total $ 6,189,029 $ 15,292,593 96.63%
============== =============== ======
</TABLE>
* Percentage of net assets is based on fair value.
8. Interim Financial Statements
In the opinion of MLVPII Co., L.P. the managing general partner of the
Partnership, the unaudited financial statements as of September 30, 1999, and
for the nine month period then ended, reflect all adjustments necessary for the
fair presentation of the results of the interim period.
9. Cash Distributions
In August 1999, the General Partners approved a cash distribution to partners
totaling $4,380,729. The distribution was paid on October 7, 1999. Limited
partners of record on September 30, 1999 received $4,200,000, or $35 per Unit.
Additionally, the Individual General Partners received $140 and the Managing
General Partner received $180,589.
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited), continued
9. Cash Distributions - continued
In November 1999, the General Partners approved an additional cash distribution
to partners totaling $8,707,964. The distribution will be paid in January 2000.
Limited partners of record on December 31, 1999 will receive $7,320,000, or $61
per Unit. Additionally, the Individual General Partners will receive $244 and
the Managing General Partner will receive $1,387,720.
10. Subsequent Events
Subsequent to the end of the quarter, in October 1999, the Partnership sold its
remaining 3,643 common shares of Photon Dynamics, Inc. for $76,774. As a result,
the Partnership will recognize a realized gain of $76,774 for the quarter ending
December 31, 1999.
Subsequent to the end of the quarter, in October 1999, the Partnership sold its
remaining 809,704 common shares of Diatide, Inc. for $7,692,188, or $9.50 per
share. As a result, the Partnership will recognize a realized gain of $4,706,165
for the quarter ending December 31, 1999.
On October 28, 1999, Corporate Express, Inc. announced the completion of its
merger into Buhrmann NV. In connection with the merger, the Partnership sold its
remaining 60,000 common shares of Corporate Express for $582,000, or $9.70 per
share. As a result, the Partnership will recognize a realized gain of $570,000
for the quarter ending December 31, 1999.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
of Operations.
Liquidity and Capital Resources
As of September 30, 1999, the Partnership held $5,155,678 in an interest-bearing
cash account. Interest earned from short-term investments totaled $48,422 and
$97,475 for the three and nine months ended September 30, 1999, respectively.
Interest earned in future periods is subject to fluctuations in short-term
interest rates and changes in amounts available for investment in such
securities. Funds needed to cover future operating expenses and follow-on
investments will be obtained from the Partnership's existing cash reserves,
interest and other investment income and proceeds from the sale of portfolio
investments.
The Managing General Partner is working toward the termination of the
Partnership as soon as practical, with the goal of maximizing returns to
partners. In November 1999, the Individual General Partners voted to extend the
term of the Partnership for an additional two-year period. The Partnership is
now scheduled to terminate no later than December 31, 2001. However, the
Partnership will terminate as soon as practicable after the completion of the
liquidation of its remaining investments and final distribution to partners.
As discussed below, during the three and nine months ended September 30, 1999,
the Partnership received net proceeds from the sale of certain portfolio
securities aggregating $393,023 and $4,519,189, respectively. Additionally,
subsequent to the end of the quarter, in October 1999, the Partnership completed
further sales of portfolio securities for net proceeds totaling $8,350,962. See
Notes 6 and 10 of Notes to Financial Statements.
In August 1999, the General Partners approved a cash distribution to partners
totaling $4,380,729. The distribution was paid on October 7, 1999. Limited
partners of record on September 30, 1999 received $4,200,000, or $35 per unit.
Additionally, the Individual General Partners received $140 and the Managing
General Partner received $180,589.
In November 1999, the General Partners approved a cash distribution to partners
totaling $8,707,964. The distribution will be paid in January 2000. Limited
partners of record on December 31, 1999 will receive $7,320,000, or $61 per
unit. Additionally, the Individual General Partners will receive $244 and the
Managing General Partner will receive $1,387,720.
Results of Operations - For the three and nine months ended September 30, 1999,
the Partnership had a net realized loss from operations of $46,331 and a net
realized gain from operations of $238,009, respectively. For the three and nine
months ended September 30, 1998, the Partnership had a net realized loss from
operations of $726,200 and $2,317,248, respectively. Net realized gain or loss
from operations is comprised of 1) net realized gain or loss from portfolio
investments and 2) net investment income or loss (interest and dividend income
less operating expenses).
Realized Gains and Losses from Portfolio Investments - For the three and nine
months ended September 30, 1999, the Partnership had a net realized gain from
its portfolio investments of $17,720 and $510,533, respectively. During the
three months ended September 30, 1999, the Partnership sold its remaining 19,063
shares of CoCensys, Inc. common stock for $19,071, realizing a loss of $173,433,
and 31,736 shares of Photon Dynamics, Inc. common stock for $365,648, realizing
a gain of $182,849. Additionally, during the three month period, the Partnership
sold its remaining interest in Ogle Resources, Inc., an investment that had been
previously written-off, for $8,304, realizing a gain for the entire amount.
During the six months ended June 30, 1999, the Partnership realized losses of
$1,000,548 and $363,378 resulting from the write-off of its remaining
investments in Clarus Medical Systems, Inc. and Neocrin Company, respectively,
due to continued business and financial difficulties at these companies. Also
during the six month period, the Partnership sold 393,500 common shares of
Photon Dynamics, Inc. for $4,124,599, realizing a gain of $1,855,172. Finally,
during the six month period, the Partnership received a $1,567 liquidating
distribution from MLMS Cancer Research, Inc., realizing a gain for the entire
amount.
For the three and nine months ended September 30, 1998, the Partnership had a
net realized loss from its portfolio investments of $666,740 and $2,164,119,
respectively. During the three months ended September 30, 1998, the Partnership
wrote-off $666,740 of the remaining cost of its investment in Sanderling
Biomedical, L.P. to reflect the Partnership's pro-rata share of the cost of
Sanderling's remaining assets. During the six months ended June 30, 1998,
Biocircuits Corporation ceased operations and began to liquidate its remaining
assets. As a result, the Partnership wrote-off its remaining investment in
Biocircuits, realizing a loss of $1,488,884. Also during the six month period,
the Partnership received $125,793 from Horizon Cellular Telephone Company, L.P.
relating to the previous sale of certain options in connection with its
investment in Horizon and wrote-off a portion of the remaining notes due from
the company, resulting in a net realized loss of $8,495.
Investment Income and Expenses - For the three months ended September 30, 1999
and 1998, the Partnership had a net investment loss of $64,051 and $59,460,
respectively. The $4,591 increase in net investment loss for the 1999 period
compared to the same period in 1998 resulted from a $22,352 decrease in
investment income partially offset by a $17,761 decrease in operating expenses.
The decline in investment income primarily was attributable to a decrease in
interest from short-term investments due to a reduction in funds available for
investment in such securities during the 1999 period compared to the same period
in 1998. The decline in operating expenses primarily resulted from a decrease in
mailing and printing expenses, reflecting a general decrease in such expenses
for 1999 period as compared to the same period in 1998.
For the nine months ended September 30, 1999 and 1998, the Partnership had a net
investment loss of $272,524 and $153,129, respectively. The $119,395 increase in
net investment loss for the 1999 period compared to the same period in 1998,
primarily was attributable to a $123,267 decrease in investment income partially
offset by a $3,872 decrease in operating expenses. The decline in investment
income included a $115,443 decrease in interest from short-term investments and
a $7,824 decrease in income from portfolio investments. The decrease in interest
from short-term investments primarily was due to a decrease in funds available
for investments in such securities during the 1999 period as compared to the
same period in 1998. The decrease in income from portfolio investments primarily
resulted from a decrease in interest income from Horizon Cellular Telephone
Company, an interest bearing portfolio investment that was liquidated in 1998.
The decline in operating expenses for the nine months ended September 30, 1999
primarily was due to a $6,463 decrease in professional fees and a $5,702
decrease in mailing and printing expenses. These reduced expenses were partially
offset by an $8,293 increase in other operating expenses, including a $4,500
increase in Independent General Partners' fees relating to an additional special
meeting held during the first quarter of 1999.
The Management Company is responsible for the management and administrative
services necessary for the operation of the Partnership. The Management Company
receives a management fee at an annual rate of 2.5% of the gross capital
contributions to the Partnership, reduced by selling commissions, organizational
and offering expenses paid by the Partnership, return of capital and realized
capital losses, with a minimum annual fee of $200,000. Such fee is determined
and payable quarterly. The management fee for the three months ended September
30, 1999 and 1998 was $50,000. The management fee for the nine months ended
September 30, 1999 and 1998 was $150,000. The management fee will remain at the
minimum annual fee of $200,000 for future periods through the liquidation of the
Partnership. The management fee and other operating expenses are paid with funds
provided from operations and from existing cash reserves. Funds provided from
operations for the period were obtained from interest earned from short-term
investments and proceeds from the sale of certain portfolio investments.
Unrealized Gains and Losses and Changes in Unrealized Appreciation or
Depreciation of Investments - For the nine months ended September 30, 1999, the
Partnership increased the fair value of its remaining portfolio investments by
$4,420,313, due to the net upward revaluation of its publicly held securities.
Additionally, during the nine month period, $89,337 of net unrealized gain was
transferred to realized gain, relating to portfolio investments sold or written
off during the period, as discussed above. As a result, the Partnership had a
$4,330,976 favorable change to the net unrealized appreciation of investments
for the nine month period ended September 30, 1999.
For the nine months ended September 30, 1998, the Partnership reduced the fair
value of its portfolio investments by $3,895,855. Additionally, during the nine
month period, $1,890,740 of net unrealized loss was transferred to realized
loss, relating to portfolio investments sold or written off during the period,
as discussed above. As a result, the Partnership had a $2,005,115 unfavorable
change to the net unrealized appreciation of investments for the nine month
period ended September 30, 1998.
Net Assets - Changes to net assets resulting from operations are comprised of
1) net realized gain or loss from operations and
2) changes to net unrealized appreciation or depreciation of portfolio
investments.
As of September 30, 1999, the Partnership's net assets were $15,826,458, an
increase of $188,256 from net assets of $15,638,202 as of December 31, 1998.
This increase was comprised of the $4,568,985 increase in net assets from
operations exceeding the $4,380,729 cash distribution to partners accrued during
the nine month period ended September 30, 1999 and paid in October 1999. The
increase in net assets from operations was comprised of the $4,330,976 increase
in unrealized appreciation of investments and the $238,009 net realized gain
from operations for the nine month period ended September 30, 1999.
As of September 30, 1998, the Partnership's net assets were $17,384,830, a
decrease of $4,322,363 from net assets of $21,707,193 as of December 31, 1997.
This decrease was comprised of the $2,005,115 decrease in unrealized
appreciation of investments and the $2,317,248 net realized loss from operations
for the nine month period ended September 30, 1998.
Gains and losses from investments are allocated to partners' capital accounts
when realized, in accordance with the Partnership Agreement (see Note 3 of Notes
to Financial Statements). However, for purposes of calculating the net asset
value per unit of limited partnership interest, net unrealized appreciation of
investments has been included as if the net appreciation had been realized and
allocated to the limited partners in accordance with the Partnership Agreement.
Pursuant to such calculation, the net asset value per $1,000 Unit as of
September 30, 1999 and December 31, 1998 was $111 and $117, respectively.
Year 2000 Issue - The Year 2000 ("Y2K") concern arose because many existing
computer programs use only the last two digits to refer to a year. Therefore,
these computer programs do not properly recognize a year that begins with "20"
instead of "19". If not corrected, many computer applications could fail or
create erroneous results. The impact of the Y2K concern on the Partnership's
operations is currently being assessed.
The Management Company is responsible to provide or arrange for the provision of
administrative services necessary to support the Partnership's operations. The
Management Company has arranged for Palmeri Fund Administrators, Inc. (the
"Administrator") to provide certain administrative and accounting services for
the Partnership, including maintenance of the books and records of the
Partnership, maintenance of the limited partner database, issuance of financial
reports and tax information to limited partners and processing distribution
payments to limited partners. Fees charged by the Administrator are paid
directly by the Management Company.
The Administrator has assessed its computer hardware and software systems,
specifically as they relate to the operations of the Partnership. As part of
this investigation of potential Y2K concerns, the Administrator contracted with
an outside computer service provider to examine all of the Administrator's
computer hardware and software applications. This review and evaluation has been
completed. Additionally, the Administrator has completed the purchase and
installation of the necessary software upgrades and patches and new computer
hardware required to ensure that all of its computer systems are Y2K compliant.
The Administrator expects to complete the testing of its systems in November
1999.
Additionally, the Administrator has contacted the outside service providers used
to assist the Administrator or the Management Company with the administration of
the Partnership's operations to ascertain whether these entities are addressing
the Y2K issue within their own operation. We have not been informed of any Y2K
problems from these outside providers. There can be no guarantee that the
Administrator's systems or that systems of other companies providing services to
the Partnership will be corrected in a timely manner.
Since the Partnership does not own any equipment and all of its administrative
needs are provided by the Management Company, any costs relating to the
investigation and correction of potential Y2K concerns affecting the
Partnership's operations will be incurred by the Administrator, the Management
Company or the outside service providers. Therefore, the Management Company and
the Managing General Partner do not expect the Partnership to incur any costs
relating to the investigation or correction of Y2K concerns.
Finally the Y2K issue is a global concern that may affect all business entities,
including the Partnership's portfolio companies. The General Partner is
continuing to assess the impact of Y2K concerns affecting its portfolio
companies. However, the extent to which any potential Y2K problems could affect
the valuations of these companies is presently unknown. At the time that
specific Y2K problems are identified, if any, the Managing General Partner will
take such issues into consideration in adjusting the fair value of the
Partnership's portfolio investments.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Partnership is subject to market risk arising from changes in the value of
its portfolio investments, short-term investments and interest-bearing cash
equivalents, which may result from fluctuations in interest rates and equity
prices. The Partnership has calculated its market risk related to its holdings
of these investments based on changes in interest rates and equity prices
utilizing a sensitivity analysis. The sensitivity analysis estimates the
hypothetical change in fair values, cash flows and earnings based on an assumed
10% change (increase or decrease) in interest rates and equity prices. To
perform the sensitivity analysis, the assumed 10% change is applied to market
rates and prices on investments held by the Partnership at the end of the
accounting period.
The Partnership's portfolio investments had an aggregate fair value of
$15,292,593 as of September 30, 1999. An assumed 10% decline from this fair
value, including an assumed 10% decline of the per share market prices of the
Partnership's publicly-traded securities, would result in a reduction to the
fair value of such investments and an unrealized loss of $1,529,259.
Market risk relating to the Partnership's interest bearing cash equivalents
held as of September 30, 1999 is considered to be immaterial.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Partnership is not a party to any legal proceedings.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the period in which
this report covers.
Item 5. Other Information.
None.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(3) (a) Amended and Restated Certificate of Limited
Partnership of the Partnership, dated as of
January 12, 1987. (1)
(3) (b) Amended and Restated Certificate of Limited
Partnership of the Partnership, dated July 27,
1990.
(2)
(3) (c) Amended and Restated Certificate of Limited
Partnership of the Partnership,
dated March 25, 1991. (3)
(3) (d) Amended and Restated Agreement of Limited
Partnership of the Partnership,dated as of May 4,
1987. (4)
(3) (e) Amendment No. 1 dated February 14, 1989 to
Amended and Restated Agreement of Limited
Partnership of the Partnership. (5)
(3) (f) Amendment No. 2 dated July 27, 1990 to Amended
and Restated Agreement of Limited Partnership
of the Partnership. (2)
(3) (g) Amendment No. 3 dated March 25, 1991 to Amended
and Restated Agreement of Limited Partnership
of the Partnership. (3)
(3) (h) Amendment No. 4 dated May 23, 1991 to Amended
and Restated Agreement of Limited Partnership
of the Partnership. (6)
(10) (a) Management Agreement dated as of May 23, 1991
among the Partnership, Management Company and the
Managing General Partner. (6)
(10) (b) Sub-Management Agreement dated as of May 23,
1991 among the Partnership, Management Company,
the Managing General Partner and the Sub-Manager.
(8)
(27) Financial Data Schedule.
(28) Prospectus of the Partnership dated February 10,
1987 filed with the Securities and Exchange
Commission pursuant to Rule 424(b) under the
Securities Act of 1933, as supplemented by a
supplement thereto dated April 21, 1987 filed
pursuant to Rule 424(c) under the Securities Act
of 1933. (7)
(b) No reports on Form 8-K have been filed during the
quarter for which this report is filed.
<PAGE>
(1) Incorporated by reference to the Partnership's Annual Report on For
10-K for the year ended December 31, 1988 filed with the Securities
and Exchange Commission on March 27, 1989.
(2) Incorporated by reference to the Partnership's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1990
filed with the Securities and Exchange Commission on November 14, 1990.
(3) Incorporated by reference to the Partnership's Annual Report on
Form 10-K for the year ended December 31, 1990 filed
with the Securities and Exchange Commission on March 28, 1991.
(4) Incorporated by reference to the Partnership's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1987 filed
with the Securities and Exchange Commission on August 14, 1987.
(5) Incorporated by reference to the Partnership's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1989
filed with the Securities and Exchange Commission on May 15, 1989.
(6) Incorporated by reference to the Partnership's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1991 filed
with the Securities and Exchange Commission on August 14, 1991.
(7) Incorporated by reference to the Partnership's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1987
filed with the Securities and Exchange Commission on May 15, 1987.
(8) Incorporated by reference to the Partnership's Annual Report on Form
10-K for the year ended December 31, 1992 filed
with the Securities and Exchange Commission on March 26, 1993.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ML VENTURE PARTNERS II, L.P.
By: MLVPII Co., L.P.
its Managing General Partner
By: Merrill Lynch Venture Capital Inc.
its General Partner
By: /s/ Kevin K. Albert
Kevin K. Albert
President
(Principal Executive Officer)
By: /s/ David G. Cohen
David G. Cohen
Vice President
By: /s/ James V. Bruno
James V. Bruno
Vice President and Treasurer
(Principal Financial and Accounting Officer)
Date: November 15, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ML VENTURE
PARTNERS II, L.P.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER
30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> SEP-30-1999
<INVESTMENTS-AT-COST> 6,189,029
<INVESTMENTS-AT-VALUE> 15,292,593
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 5,155,678
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<EXPENSES-NET> 370,671
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<PER-SHARE-NAV-BEGIN> 117
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<PER-SHARE-GAIN-APPREC> 31
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