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, 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
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(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]
As of March 15, 2000, 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.
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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 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. The Partnership made no new or follow-on investments during
the years ended December 31, 1999 and 1998.
As of December 31, 1999, the Partnership's investment portfolio consisted of
five active investments with a cost of $2,964,006 and a fair value of
$5,414,349. During the year ended December 31, 1999, the Partnership liquidated
certain portfolio investments, realizing a net return of $13,259,269, resulting
in a net realized gain of $6,025,590. Portfolio investments sold or written-off
during 1999 are listed below:
Portfolio Liquidations for the
Year Ended December 31, 1999 (1):
<TABLE>
Shares Realized
Investment Sold Cost Gain (Loss) Return
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Clarus Medical Systems, Inc. - write-off n/a $ 1,000,548 $ (1,000,548) $ 0
CoCensys, Inc. (Sanderling) 19,063 (2) 192,504 (173,433) 19,071
Corporate Express, Inc. 60,000 12,000 570,000 582,000
Diatide, Inc. 809,704 2,986,023 4,706,165 7,692,188
Horizon Cellular Telephone
Company, L.P. - liquidation n/a 0 389,118 389,118
IDE Corporation - write-off n/a 227,000 (227,000) 0
MLMS Cancer Research, Inc. - liquidation n/a 0 1,567 1,567
Neocrin Company - write-off n/a 363,378 (363,378) 0
Ogle Resources, Inc. n/a 0 8,304 8,304
Photon Dynamics, Inc. 428,879 (3) 2,452,226 2,114,795 4,567,021
-------------- ---------------- ---------------
Total $ 7,233,679 $ 6,025,590 $ 13,259,269
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</TABLE>
(1) See Schedule of Portfolio Investments, included in the December 31, 1999
audited financial statements for the cumulative results of liquidations
of these investments.
(2) Adjusted for a 1-for-8 reverse stock split effective in April 1999.
(3) Includes 3,643 shares received in a non-cash exchange for the Partnership's
warrant to purchase 6,062 shares.
Additionally, in March 1999, in a non-cash transaction, the Partnership
exchanged its warrant to purchase 38,737 common shares of Brightware, Inc. at
$.40 per share for 28,407 shares of Brightware common stock.
As of December 31, 1999, the Partnership had invested $116,532,996 in its
portfolio of venture capital investments. From its inception through December
31, 1999, the Partnership had fully or partially sold or wrote-off investments
with an aggregate cost basis of $113,568,990. These liquidated investments
returned $230,873,385 to the Partnership, resulting in a net realized gain of
$117,304,395. Additionally, the Partnership earned interest and dividend income
from its venture capital investments totaling $4,258,437 from inception to
December 31, 1999.
Termination
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 Managing
General Partner continues to work toward liquidating the Partnership's remaining
assets and terminating the Partnership as soon as practicable with the goal of
maximizing returns to partners.
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 was frequently a co-investor with
other professional venture capital investors and these relationships generally
had expanded the Partnership's access to investment opportunities. However, as
discussed above, the Partnership will not make any new portfolio investments.
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 is responsible for the management and administrative
services necessary for the operation of the Partnership including 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.
Item 2. Properties.
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The Partnership does not own or lease physical properties.
Item 3. Legal Proceedings.
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The Partnership is not a party to any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
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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.
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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 15, 2000 was 12,434. The Managing General
Partner and the Individual General Partners of the Partnership also hold
interests in the Partnership.
Merrill Lynch has implemented guidelines pursuant to which it reports estimated
values of limited partnership interests originally sold by Merrill Lynch (such
as Registrant's Units) two times per year. Such 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) the prior 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 of the Partnership as
of December 31, 1999 is $43 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 the prior August 15th as
stated above. 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.
Cash Distributions
Cash distributions paid or accrued during the periods covered by this report and
cumulative cash distributions paid to partners from inception of the Partnership
through December 31, 1999 are listed below:
<TABLE>
Managing Individual Per
General General Limited $1,000
Distribution Date Partner Partners Partners Unit
- ------------------------------------------------ ----------------- ------------- ----------------- -------
<S> <C> <C> <C> <C> <C> <C>
Inception to December 31, 1996 $ 21,132,691 $ 5,200 $ 156,000,000 $ 1,300
July 11, 1997 2,590,089 640 19,200,000 160
October 16, 1997 411,084 260 7,800,000 65
January 26, 1999 314,632 140 4,200,000 35
October 7, 1999 180,589 140 4,200,000 35
January 25, 2000 (accrued) 1,384,720 244 7,320,000 61
----------------- ---------- ----------------- ---------
Cumulative totals as of December 31, 1999 $ 26,013,805 $ 6,624 $ 198,720,000 $ 1,656
================= ========== ================= =========
</TABLE>
<PAGE>
Item 6. Selected Financial Data.
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<TABLE>
($ In Thousands, Except For Per Unit Information)
Years Ended December 31,
1999 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
Net Realized Gain (Loss) on Investments $ 6,026 $ (2,166) $ 15,606 $ 46,879 $ 41,368
Net Change in Unrealized Appreciation
of Investments (2,322) 765 (5,873) (25,245) 12,661
Net Increase (Decrease) in Net Assets
Resulting from Operations 3,430 (1,554) 9,786 20,947 54,512
Cash Distributions paid or accrued to Partners 13,086 4,515 30,002 59,366 57,572
Cumulative Cash Distributions paid or accrued
to Partners 224,741 211,655 207,140 177,138 117,772
Total Assets 14,946 20,359 21,919 42,268 95,045
Net Unrealized Appreciation of Investments 2,450 4,773 4,008 9,880 35,125
PER UNIT OF LIMITED
PARTNERSHIP INTEREST:
Net Realized Gain (Loss) on Investments $ 40 $ (14) $ 103 $ 309 $ 273
Net Increase (Decrease) in Net Assets
Resulting from Operations 22 (10) 64 137 358
Cash Distributions 96 35 225 410 400
Cumulative Cash Distributions 1,656 1,560 1,525 1,300 890
Net Unrealized Appreciation of Investments 16 32 26 65 232
Net Asset Value, including Net Unrealized
Appreciation of Investments 43 117 162 323 596
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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Liquidity and Capital Resources
As of December 31, 1999, the Partnership held $8,471,368 in short-term
investments with maturities of less than one year and $1,059,973 in an
interest-bearing cash account. For the years ended December 31, 1999, 1998 and
1997, the Partnership earned interest from such investments totaling $202,271,
$280,896 and $638,556, 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, if any, will
be obtained from the Partnership's existing cash reserves, interest and other
investment income and proceeds received from the sale of portfolio investments.
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 Managing
General Partner continues to work toward liquidating the Partnership's remaining
assets and terminating the Partnership as soon as practicable with the goal of
maximizing returns to partners.
The Partnership will not make any new portfolio investments. Generally, net
proceeds received from the sale of portfolio investments are distributed to
partners as soon as practicable, after an adequate reserve for operating
expenses and follow-on investments in the remaining portfolio companies.
Subsequent to the end of the year, on January 25, 2000, the Partnership made a
cash distribution to partners totaling $8,704,964, including $7,320,000, or $61
per Unit, to Limited Partners of record on December 31, 1999. The Managing
General Partner received $1,384,720 and the Individual General Partners received
$244. Cumulative cash distributions to partners as of December 31, 1999,
including the accrued distribution paid in January 2000, total $224,740,429,
including $198,720,000 to the Limited Partners, or $1,656 per $1,000 Unit,
$26,013,805 to the Managing General Partner and $6,624 to the Individual General
Partners.
Results of Operations
For the year ended December 31, 1999, the Partnership had a net realized gain
from operations of $5,752,709. For the years ended December 31, 1998 and 1997,
the Partnership had a net realized loss from operations of $2,319,244 and a net
realized gain from operations of $15,659,055, 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, dividend and other
income less operating expenses).
Realized Gains and Losses from Portfolio Investments - For the year ended
December 31, 1999, the Partnership had a $6,025,590 net realized gain from its
portfolio investments. During 1999, the Partnership sold its 809,704 common
shares of Diatide, Inc. in connection with a cash tender offer of the company's
outstanding shares for $7,692,188, or $9.50 per share, resulting in a realized
gain of $4,706,165. Also during 1999, the Partnership sold the following
securities in the public market: 428,879 common shares of Photon Dynamics, Inc.
for $4,567,021, realizing a gain of $2,114,795; 19,063 common shares of
CoCensys, Inc. for $19,071, realizing a loss of $173,433; and 60,000 common
shares of Corporate Express, Inc. for $582,000, realizing a gain of $570,000.
Also during 1999, the Partnership realized a gain of $389,118 reflecting the
receipt of the final liquidation payment from Horizon Cellular Telephone
Company, L.P. The Partnership realized additional gains during 1999 resulting
from the receipt of $8,304 from the sale of its remaining interest in Ogle
Resources, Inc., an investment that had been previously written-off, and $1,567
from a final liquidating distribution payment from MLMS Cancer Research, Inc.
Finally during 1999, the Partnership realized losses of $1,000,548, $227,000 and
$363,378 resulting from the write-off of its remaining investments in Clarus
Medical Systems, Inc., IDE Corporation and Neocrin Company, respectively, due to
continued business and financial difficulties at these companies.
For the year ended December 31, 1998, the Partnership had a $2,166,356 net
realized loss from its portfolio investments. During 1998, Sanderling
Biomedical, L.P. completed the liquidation of its remaining portfolio
investments, resulting in the termination of Sanderling in December 1998. The
Partnership, which had an 80% limited partnership interest in Sanderling,
received three in-kind liquidating distributions and a $325,567 cash
distribution from Sanderling during 1998. The in-kind distributions included
93,745 shares of Depotech Corp. Inc., a public company. The Partnership sold its
shares of Depotech in November 1998 for $136,878, resulting in a realized gain
of $79,822. The Partnership also realized a loss of $775,338 during 1998
resulting from the write-off of the unreturned cost of its Sanderling
investment. Also during 1998, the Partnership received $187,194 plus interest of
$13,069 from Horizon Cellular Telephone Company, L.P., representing the
liquidation payments relating to the sale of the Partnership's investment in
Horizon. These payments and the corresponding write-off of the unreturned cost
of the Partnership's investment in Horizon resulted in a net realized loss of
$18,044 for 1998. Finally, during 1998, the Partnership realized a loss of
$1,488,884 from the write-off of its remaining investment in Biocircuits
Corporation, which ceased operations during the year.
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. during 1997.
Investment Income and Expenses - For the years ended December 31, 1999 and 1998
the Partnership had a net investment loss of $272,881 and $152,888,
respectively. For the year ended December 31, 1997, the Partnership had net
investment income of $53,543.
The unfavorable change in net investment income for 1999 compared to 1998
resulted from a decrease in investment income of $91,022 and an increase in
operating expenses of $28,971. The decline in investment income primarily was
due to a $78,625 decrease in interest income from short-term investments
resulting from a decrease in funds available for investment in such securities
during 1999 compared to 1998. The small increase in operating expenses reflects
increases in professional fees of $14,331, fees paid to the Independent General
Partners of $9,000 and small increases in mailing and printing and other
expenses.
The unfavorable change in net investment income for 1998 compared to 1997
resulted from a decrease in investment income of $409,615 partially offset by a
decrease of $203,184 in operating expenses. The decline in investment income was
due to a $357,660 decrease in interest income from short-term investments and a
$51,955 decrease in interest, dividend and other income from portfolio
investments for 1998 compared to 1997. The decline in interest income from
short-term investments primarily resulted from a decrease in funds available for
investment in such securities during 1998 compared to 1997. The decrease in
interest, dividend and other income from portfolio investments primarily was due
to the elimination of dividend income from Borg-Warner Automotive, Inc. during
1998. The Partnership sold its investment in Borg-Warner Automotive and received
a final dividend payment of $37,754 during the first quarter of 1997. The
decline in operating expenses primarily resulted from reduced management fees,
as discussed below, and a reduction in professional fees and mailing and
printing expenses incurred during the 1998 period.
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, 1999,
1998 and 1997, was $200,000, $200,000 and $282,686, respectively. 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, 1999, the Partnership reduced
the fair value of its portfolio of investments on a net basis by $2,723,316.
Additionally during 1999, a net $5,045,561 was transferred from unrealized gain
to realized gain relating to portfolio investments liquidated and written-off
during 1999, as discussed above. As a result, unrealized appreciation of
investments decreased by $2,322,245 for 1999.
During the year ended December 31, 1998, the Partnership reduced the fair value
of its portfolio of investments on a net basis by $1,209,743. Additionally
during 1998, a net $1,974,768 was transferred from unrealized loss to realized
loss relating to portfolio investments liquidated and written-off during 1998,
as discussed above. As a result, unrealized appreciation of investments
increased by $765,025 for 1998.
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.
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.
For the year ended December 31, 1999, the Partnership had a $3,430,464 net
increase in net assets resulting from operations, comprised of the $5,752,709
net realized gain from operations offset by the $2,322,245 decrease in
unrealized appreciation of investments for 1999. As of December 31, 1999, the
Partnership's net assets were $5,982,973 down $9,655,229 from $15,638,202 as of
December 31, 1998. This decrease is the result of the $13,085,693 of cash
distributions paid or accrued to partners during 1999 exceeding the $3,430,464
increase in net assets from operations for 1999.
For the year ended December 31, 1998, the Partnership had a $1,554,219 net
decrease in net assets resulting from operations, comprised of the $2,319,244
net realized loss from operations partially offset by the $765,025 increase in
unrealized appreciation of investments for the year. As of December 31, 1998,
the Partnership's net assets were $15,638,202, down $6,068,991 from $21,707,193
as of December 31, 1997. This decrease is the result of the $4,514,772 cash
distribution to partners, which was accrued as of December 31, 1998 and the
$1,554,219 decrease in net assets from operations for 1998.
For 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
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.
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 unrealized 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, 1999, 1998 and 1997, was $43, $117 and $162,
respectively.
Item 7A. 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
$5,414,349 as of December 31, 1999. An assumed 10% decline from this December
31, 1999 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
$541,435.
As of December 31, 1999, the Partnership held short-term investments consisting
of two separate discounted commercial paper instruments with remaining
maturities of 20 days or less. These short-term investments were carried at an
aggregate amortized cost of $8,471,368 as of December 31, 1999. An assumed 10%
increase in the market interest rates of such short-term investments held by the
Partnership as of December 31, 1999, would result in a reduction to the fair
value of such investments and an unrealized loss which is considered to be
immaterial.
Market risk relating to the Partnership's interest-bearing cash equivalents held
as of December 31, 1999 is also considered to be immaterial.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
ML VENTURE PARTNERS II, L.P.
INDEX
Independent Auditors' Report
Balance Sheets as of December 31, 1999 and 1998
Schedule of Portfolio Investments as of December 31, 1999
Schedule of Portfolio Investments as of December 31, 1998
Statements of Operations for the years ended December 31, 1999, 1998 and 1997
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997
Statements of Changes in Partners' Capital for the years ended
December 31, 1997, 1998 and 1999
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998 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, 1999 and 1998, 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, 1999 in conformity with generally accepted accounting principles.
As explained in Note 2, the financial statements include securities valued at
$5,414,349 and $14,970,273 as of December 31, 1999 and 1998, respectively,
representing 90% and 96% 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, 2000
<PAGE>
ML VENTURE PARTNERS II, L.P.
BALANCE SHEETS
<TABLE>
As of December 31,
1999 1998
---------------- ----------
ASSETS
Portfolio investments, at fair value (cost $2,964,006 as of
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1999 and $10,197,685 as of December 31, 1998) $ 5,414,349 $ 14,970,273
Short-term investments, at amortized cost 8,471,368 4,488,454
Cash and cash equivalents 1,059,973 423,675
Receivable from securities sold - 475,435
Accrued interest receivable - 1,291
---------------- ----------------
TOTAL ASSETS $ 14,945,690 $ 20,359,128
================ ================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Cash distribution payable $ 8,704,964 $ 4,514,772
Accounts payable and accrued expenses 91,518 85,874
Due to Management Company 166,235 100,410
Due to Independent General Partners - 19,870
---------------- ----------------
Total liabilities 8,962,717 4,720,926
---------------- ----------------
Partners' Capital:
Managing General Partner 338,194 652,777
Individual General Partners 107 341
Limited Partners (120,000 Units) 3,194,329 10,212,496
Unallocated net unrealized appreciation of investments 2,450,343 4,772,588
---------------- ----------------
Total partners' capital 5,982,973 15,638,202
---------------- ----------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 14,945,690 $ 20,359,128
================ ================
</TABLE>
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
<TABLE>
As of December 31, 1999
<S> <C> <C> <C> <C> <C> <C>
Initial Investment
Company / Position Date Cost Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
Burns International Services Corporation* (A)
Protective services
500,000 shares of Common Stock Sept. 1988 $ 2,500,000 $ 4,325,000
- -------------------------------------------------------------------------------------------------------------------------------
Brightware, Inc. (B)
Client/server and internet software development tools
and services
200,057 shares of Common Stock May 1995 44,703 300,086
- -------------------------------------------------------------------------------------------------------------------------------
Raytel Medical Corporation(A)
Pacemaker monitoring service and MRI centers
62,500 shares of Common Stock Feb. 1990 241,639 153,125
Options to purchase 27,969 shares of Common Stock
at $1.42 per share, expiring on 10/31/01 0 28,808
- -------------------------------------------------------------------------------------------------------------------------------
ReGen Biologics, Inc.
Joint and spine regeneration products
72,800 shares of Common Stock Apr. 1991 364 263,900
62,400 shares of Preferred Stock 114,400 226,200
- -------------------------------------------------------------------------------------------------------------------------------
Stereotaxis, Inc.
Drug delivery and brain surgery systems
21,632 shares of Common Stock Apr. 1990 216 16,224
134,674 shares of Preferred Stock 62,684 101,006
- -------------------------------------------------------------------------------------------------------------------------------
Total Portfolio Investments (C) $ 2,964,006 $ 5,414,349
---------------------------------
</TABLE>
Supplemental Information: Liquidated Portfolio Investments(D)
<TABLE>
Liquidation Realized
Company Date Cost Gain (Loss) Return
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allez, Inc. 1992 $ 1,781,320 $ (1,781,320) $ 0
Amdahl Corporation 1989 729,742 1,837,787 2,567,529
Aqua Group, Inc. 1990 2,000,000 (1,999,999) 1
BBN Advanced Computer Partners, L.P. 1990 868,428 (864,028) 4,400
BBN Integrated Switch Partners, L.P. 1990-1992 5,022,380 (4,822,797) 199,583
Biocircuits Corporation 1997-1998 2,653,751 (2,653,751) 0
Borg-Warner Automotive, Inc. 1994-1997 2,500,000 14,628,202 17,128,202
Business Depot, Ltd. 1994 1,214,184 1,539,476 2,753,660
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS, continued
<TABLE>
As of December 31, 1999
Supplemental Information: Liquidated Portfolio Investments(D)
Liquidation Realized
Company Date Cost Gain (Loss) Return
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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, Inc. (C) 1997-1999 2,389,168 (2,389,168) 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. (C) 1994-1999 2,999,912 26,069,494 29,069,406
Data Recording Systems, Inc. 1988 1,615,129 (1,499,999) 115,130
Diatide, Inc.(C) 1999 2,986,023 4,706,165 7,692,188
Eckerd Corporation 1995 857,004 2,019,272 2,876,276
Elantec, Inc. 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
Home Express, Inc. 1995 1,822,751 (1,822,751) 0
Horizon Cellular Telephone Company, L.P.(C) 1996-1999 3,678,926 2,091,744 5,770,670
I.D.E Corporation (C) 1996-1999 1,110,909 (1,110,909) 0
IDEC Pharmaceuticals Corporation 1994-1997 4,261,036 8,378,635 12,639,671
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 (C) 1996-1999 4,203,938 (4,203,938) 0
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS, continued
As of December 31, 1999
Supplemental Information: Liquidated Portfolio Investments(F)
Liquidation Realized
Company Date Cost Gain (Loss) Return
- ------------------------------------------------------------------------------------------------------------------------------------
OccuSystems, Inc. 1994-1996 $ 2,657,000 $ 9,353,722 $ 12,010,722
Ogle Resources, Inc. (C) 1993-1999 1,974,286 (1,965,882) 8,404
Pandora Industries, Inc. 1990 2,060,139 (2,060,138) 1
Photon Dynamics, Inc. (C) 1999 2,452,226 2,114,795 4,567,021
Pyxis Corporation 1993 634,598 7,169,424 7,804,022
Raytel Medical Corp. 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, Inc. 1991-1992 1,600,150 (1,555,149) 45,001
Sanderling Biomedical, L.P. (C) 1995-1999 1,822,336 1,075,112 2,897,448
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
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
- ----------------------------------------------------------------------------------------------------------------------------------
Net
Cost Realized Gain Return
Totals from Liquidated Portfolio Investments $ 113,568,990 $117,304,395 $ 230,873,385
=========================================================
Combined Net Combined
Unrealized and Fair Value
Cost Realized Gain and Return
Totals from Active and Liquidated Portfolio Investments $ 116,532,996 $ 119,754,738 $ 236,287,734
=========================================================
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS, continued
As of December 31, 1999
(A) Public company
(B) In March 1999, in a non-cash transaction, the Partnership exchanged its
warrant to purchase 38,737 common shares of Brightware, inc. at $.40 per
share for 28,407 shares of Brightware common stock.
(C) See Note 5 of Notes to Financial Statements for portfolio investments sold
or written-off during 1999.
(D) Amounts provided for "Supplemental Information: Liquidated Portfolio
Investments" are cumulative from inception through December 31, 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.
SCHEDULE OF PORTFOLIO INVESTMENTS
As of December 31, 1998
Initial Investment
Company / Position Date Cost Fair Value
Borg-Warner Security Corporation* (A)
500,000 shares of Common Stock Sept. 1988 $ 2,500,000 $ 7,031,250
- -------------------------------------------------------------------------------------------------------------------------------
Brightware, Inc.
171,650 shares of Common Stock May 1995 43,565 257,475
Warrants to purchase 38,737 shares of Common Stock
at $.40 per share, expiring on 4/19/99 1,138 42,611
- -------------------------------------------------------------------------------------------------------------------------------
Clarus Medical Systems, Inc.*
179,028 shares of Preferred Stock Jan. 1991 1,000,548 895,152
Warrants to purchase 14,043 shares of Common Stock
at $.05 per share, expiring between 3/7/00 and 7/3/00 0 0
Warrants to purchase 2,826 shares of Preferred Stock
at $5.00 per share, expiring on 3/7/00 0 0
- -------------------------------------------------------------------------------------------------------------------------------
CoCensys, Inc. (A)
152,507 shares of Common Stock Feb. 1989 192,504 30,978
- -------------------------------------------------------------------------------------------------------------------------------
Corporate Express, Inc. (A)
60,000 shares of Common Stock May 1992 12,000 249,000
- -------------------------------------------------------------------------------------------------------------------------------
Diatide, Inc.* (A)
809,704 shares of Common Stock Dec. 1991 2,986,023 3,815,731
- -------------------------------------------------------------------------------------------------------------------------------
I.D.E. Corporation
113,322 shares of Common Stock Mar. 1988 227,000 0
- -------------------------------------------------------------------------------------------------------------------------------
Neocrin Company
48,429 shares of Preferred Stock June 1991 363,378 0
- -------------------------------------------------------------------------------------------------------------------------------
Photon Dynamics, Inc.* (A)
425,236 shares of Common Stock Sept. 1988 2,452,226 1,743,464
Warrants to purchase 6,062 shares of Common Stock
at $5.40 per share, expiring on 6/30/00 0 0
- -------------------------------------------------------------------------------------------------------------------------------
Raytel Medical Corporation (A)
62,500 shares of Common Stock Feb. 1990 241,639 232,813
Options to purchase 27,969 shares of Common Stock
at $1.42 per share, expiring on 10/31/01 0 64,469
- -------------------------------------------------------------------------------------------------------------------------------
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 $ 10,197,685 $ 14,970,273
---------------------------------
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS, continued
<TABLE>
As of December 31, 1998
Net
Cost Realized Gain Return
<S> <C> <C> <C>
Totals from Liquidated Portfolio Investments (B) $ 106,335,311 $ 111,278,805 $ 217,614,116
====================================================================
Combined Net Combined
Unrealized and Fair Value
Cost Realized Gain and Return
Totals from Active & Liquidated Portfolio Investments $ 116,532,996 $ 116,051,393 $ 232,584,389
=========================================================
</TABLE>
(A) Public company
(B) Amounts provided for "Supplemental Information: Liquidated Portfolio
Investments" are cumulative from inception through December 31, 1998.
* May be deemed an affiliated person of the Partnership as defined in the
Investment Company Act of 1940.
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
STATEMENTS OF OPERATIONS
<TABLE>
For the Years Ended December 31,
1999 1998 1997
--------------- --------------- ---------
INVESTMENT INCOME AND EXPENSES
Income:
<S> <C> <C> <C>
Interest from short-term investments $ 202,271 $ 280,896 $ 638,556
Interest and other income from portfolio investments 672 13,069 27,270
Dividend income from portfolio investments - - 37,754
--------------- --------------- ----------------
Total investment income 202,943 293,965 703,580
--------------- --------------- ----------------
Expenses:
Management fee 200,000 200,000 282,686
Professional fees 92,921 78,590 140,089
Mailing and printing 80,953 77,897 126,589
Independent General Partners' fees 91,500 82,500 91,800
Custodial fees 2,222 2,198 373
Other 8,228 5,668 8,500
--------------- --------------- ----------------
Total investment expenses 475,824 446,853 650,037
--------------- --------------- ----------------
NET INVESTMENT (LOSS) INCOME (272,881) (152,888) 53,543
Net realized gain (loss) from portfolio investments 6,025,590 (2,166,356) 15,605,512
--------------- --------------- ----------------
NET REALIZED GAIN (LOSS) FROM OPERATIONS 5,752,709 (2,319,244) 15,659,055
Change in unrealized appreciation of investments (2,322,245) 765,025 (5,872,825)
--------------- --------------- ----------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 3,430,464 $ (1,554,219) $ 9,786,230
=============== =============== ================
</TABLE>
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
Years Ended December 31,
1999 1998 1997
--------------- --------------- -----------
CASH FLOWS USED FOR OPERATING ACTIVITIES
<S> <C> <C> <C>
Net investment (loss) income $ (272,881) $ (152,888) $ 53,543
Adjustments to reconcile net investment (loss) income to cash used for operating
activities:
(Increase) decrease in accrued interest from short-term
investments (13,201) (8,895) 19,695
Decrease (increase) in accrued interest receivable 1,291 (1,291) 49,442
Increase (decrease) in payables, net 51,599 (5,783) (133,258)
--------------- --------------- ----------------
Cash used for operating activities (233,192) (168,857) (10,578)
--------------- --------------- ----------------
CASH FLOWS PROVIDED FROM (USED FOR)
INVESTING ACTIVITIES
Net (purchase) return of short-term investments (3,969,713) (1,500,007) 1,487,155
Cost of portfolio investments purchased - - (474,255)
Net proceeds from the sale of portfolio investments 13,734,704 174,204 28,190,298
Repayment of investments in notes - - 2,381,659
--------------- --------------- ----------------
Cash provided from (used for) investing activities 9,764,991 (1,325,803) 31,584,857
--------------- --------------- ----------------
CASH FLOWS USED FOR FINANCING ACTIVITIES
Cash distributions paid to Partners (8,895,501) - (30,002,073)
--------------- --------------- -----------
Increase (decrease) in cash and cash equivalents 636,298 (1,494,660) 1,572,206
Cash and cash equivalents at beginning of year 423,675 1,918,335 346,129
--------------- --------------- ----------------
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 1,059,973 $ 423,675 $ 1,918,335
=============== =============== ================
</TABLE>
See notes to financial statements.
<PAGE>
ML VENTURE PARTNERS II, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
Years Ended December 31, 1997, 1998 and 1999
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, 1996 $ 1,158,769 $ 1,029 $ 30,882,850 $ 9,880,388 $ 41,923,036
Cash distributions paid or accrued (3,001,173) (900) (27,000,000) - (30,002,073)
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
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
Cash distributions - paid or accrued (314,632) (140) (4,200,000) - (4,514,772)
Net investment income (loss) 1,059 (5) (153,942) - (152,888)
Net realized loss on investments (450,602) (57) (1,715,697) - (2,166,356)
Change in unrealized
appreciation on investments - - - 765,025 765,025
------------- ------- -------------- -------------- ----------------
Balance as of December 31, 1998 652,777 341 10,212,496(A) 4,772,588 15,638,202
Cash distributions - paid or accrued (1,565,309) (384) (11,520,000) - (13,085,693)
Net investment loss (2,597) (9) (270,275) - (272,881)
Net realized gain on investments 1,253,323 159 4,772,108 - 6,025,590
Change in unrealized
appreciation on investments - - - (2,322,245) (2,322,245)
------------- ------- -------------- -------------- ----------------
Balance as of December 31, 1999 $ 338,194 $ 107 $ 3,194,329(A) $ 2,450,343 $ 5,982,973
============= ======= ============== ============== ================
</TABLE>
(A) The net asset value per unit of limited partnership interest ("Unit"),
including an assumed allocation of net unrealized appreciation of
investments, was $43, $117, and $162 as of December 31, 1999, 1998 and
1997, respectively. Cumulative cash distributions paid, or payable, to
limited partners from inception to December 31, 1999, 1998 and 1997 totaled
$1,656, $1,560 and $1,525 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 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 Managing General Partner is working toward liquidating the
Partnership's remaining assets and terminating the Partnership as soon as
practical with the goal of maximizing returns to partners.
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. Publicly-held portfolio
securities are valued at the closing public market price on the valuation date,
discounted by a factor of up to 50% for sales restrictions, if any. 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 to
reflect 1) meaningful third-party transactions in the private market or 2)
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 approximately $2.5 million as of December 31, 1999, was recorded for
financial statement purposes, but was not recognized for tax purposes.
Additionally, from inception to December 31, 1999, timing differences of
approximately $2.4 million have been deducted on the Partnership's financial
statements and syndication costs relating to the offering of limited partnership
interests 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 a cash equivalent.
3. Allocation of Partnership Profits and Losses
Pursuant to the Partnership Agreement, the Managing General Partner is
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 such amount is positive. All other gains
and losses of the Partnership are allocated among all partners (including the
Managing General Partner) in proportion to each partners' respective capital
contribution to the Partnership. From its inception to December 31, 1999, the
Partnership had a $121.6 million net realized gain from its venture capital
investments, including interest and other income from portfolio investments
totaling $4.3 million.
4. Related Party Transactions
The Management Company is responsible for 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 paid
quarterly.
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).
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
5. Portfolio Investments
<TABLE>
Portfolio investments liquidated during the years ended December 31, 1999 and
1998 are shown below:
Shares Realized
Investment Sold Cost Gain (Loss) Return
- --------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999 (1):
<S> <C> <C> <C>
Clarus Medical Systems, Inc. - write-off n/a $ 1,000,548 $ (1,000,548) $ 0
CoCensys, Inc. (Sanderling) 19,063 (2) 192,504 (173,433) 19,071
Corporate Express, Inc. 60,000 12,000 570,000 582,000
Diatide, Inc. 809,704 2,986,023 4,706,165 7,692,188
Horizon Cellular Telephone
Company, L.P. - liquidation n/a 0 389,118 389,118
IDE Corporation - write-off n/a 227,000 (227,000) 0
MLMS Cancer Research, Inc. - liquidation n/a 0 1,567 1,567
Neocrin Company - write-off n/a 363,378 (363,378) 0
Ogle Resources, Inc. n/a 0 8,304 8,304
Photon Dynamics, Inc. 428,879 (3) 2,452,226 2,114,795 4,567,021
-------------- ---------------- ---------------
Total $ 7,233,679 $ 6,025,590 $ 13,259,269
============== ================ ===============
</TABLE>
(1) See Schedule of Portfolio Investments for the cumulative results of
liquidations of these investments. (2) Adjusted for a 1-for-8 reverse stock
split effective in April 1999. (3) Includes 3,643 shares received in a non-cash
exchange for the Partnership's warrant to purchase 6,062 shares.
Year ended December 31, 1998:
<TABLE>
<S> <C> <C> <C>
Biocircuits Corporation - partial write-off n/a $ 1,488,884 $ (1,488,884) $ 0
Depotech Corp., Inc. (Sanderling) 93,745 57,056 79,822 136,878
Horizon Cellular Telephone
Company Investment, L.P. - sale of options n/a 0 187,194 187,194
Horizon Cellular Telephone
Company Investment, L.P. - partial write-off n/a 169,150 (169,150) 0
Sanderling Biomedical, L.P. - liquidation n/a 1,100,905 (775,338) 325,567
-------------- ---------------- ---------------
Total $ 2,815,995 $ (2,166,356) $ 649,639
============== ================ ===============
</TABLE>
6. 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, 1999 are listed below:
<TABLE>
Managing Individual Per
General General Limited $1,000
Distribution Date Partner Partners Partners Unit
- -------------------------------------- ---------------- -------- ------------------ ------
<S> <C> <C> <C> <C> <C> <C>
Inception to December 31, 1996 $ 21,132,691 $ 5,200 $ 156,000,000 $ 1,300
July 11, 1997 2,590,089 640 19,200,000 160
October 16, 1997 411,084 260 7,800,000 65
January 26, 1999 314,632 140 4,200,000 35
October 7, 1999 180,589 140 4,200,000 35
January 25, 2000 (accrued) 1,384,720 244 7,320,000 61
---------------- ---------- ------------------ ----------
Cumulative totals as of December 31, 1999 $ 26,013,805 $ 6,624 $ 198,720,000 $ 1,656
================ ========== ================== ==========
</TABLE>
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
7. Classification of Portfolio Investments
As of December 31, 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 $ 2,786,922 $ 5,087,143 85.03%
Preferred Stock 177,084 327,206 5.47%
-------------- --------------- -------
Total $ 2,964,006 $ 5,414,349 90.50%
============== =============== ======
Country/Geographic Region
Midwestern U.S. $ 2,562,900 $ 4,442,230 74.25%
Western U.S. 401,106 972,119 16.25%
-------------- --------------- ------
Total $ 2,964,006 $ 5,414,349 90.50%
============== =============== ======
Industry
Business Services $ 2,500,000 $ 4,325,000 72.29%
Biotechnology 177,664 607,330 10.15%
Medical Devices and Services 241,639 181,933 3.04%
Computer Hardware/Software 44,703 300,086 5.02%
-------------- --------------- ------
Total $ 2,964,006 $ 5,414,349 90.50%
============== =============== ======
</TABLE>
* Percentage of net assets is based on fair value.
As of December 31, 1998, the Partnership's investments in portfolio companies
were categorized as follows:
<TABLE>
% of
Type of Investments Cost Fair Value Net Assets*
- ------------------- -------------- --------------- -----------
<S> <C> <C> <C>
Common Stock and Warrants $ 8,656,675 $ 13,747,915 87.91%
Preferred Stock 1,541,010 1,222,358 7.82%
-------------- --------------- -------
Total $ 10,197,685 $ 14,970,273 95.73%
============== =============== ======
Country/Geographic Region
Midwestern U.S. $ 3,575,448 $ 8,292,632 53.03%
Western U.S. 3,409,214 2,861,910 18.30%
Eastern U.S. 3,213,023 3,815,731 24.40%
-------------- --------------- ------
Total $ 10,197,685 $ 14,970,273 95.73%
============== =============== ======
Industry
Business Services $ 2,512,000 $ 7,280,250 46.55%
Biotechnology 3,356,191 4,454,039 28.48%
Semiconductors/Electronics 2,452,226 1,743,464 11.15%
Medical Devices and Services 1,605,565 1,192,434 7.63%
Computer Hardware/Software 271,703 300,086 1.92%
-------------- --------------- -------
Total $ 10,197,685 $ 14,970,273 95.73%
============== =============== ======
</TABLE>
* Percentage of net assets is based on fair value.
<PAGE>
ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
<TABLE>
8. Short-Term Investments
As of December 31, 1999 and 1998, the Partnership had short-term investments in commercial paper as detailed below.
Maturity Purchase Amortized Value at
Issuer Yield Date Price Cost Maturity
- ----------------------------------------------------------------------------------------------------------------------------
December 31, 1999:
<S> <C> <C> <C> <C> <C> <C>
Lexington Parker Capital Corp. 6.10% 1/20/00 $ 492,884 $ 498,306 $ 500,000
Golden Crown Managers 6.38% 1/19/00 7,931,947 7,973,062 8,000,000
--------------- --------------- ----------------
Total as of December 31, 1999 $ 8,424,831 $ 8,471,368 $ 8,500,000
=============== =============== ================
December 31, 1998:
Amoco Managers Acceptance Corp. 5.58% 1/12/99 $ 1,485,818 $ 1,497,211 $ 1,500,000
Star Marketers Acceptance Corp. 5.45% 1/19/99 1,487,510 1,495,685 1,500,000
Park Avenue Receivables Corp. 5.33% 1/20/99 1,481,789 1,495,558 1,500,000
--------------- --------------- ----------------
Total as of December 31, 1998 $ 4,455,117 $ 4,488,454 $ 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 are 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 73
Individual General Partner since 1987
Units of the Partnership beneficially owned as of March 15, 2000 - 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
1998; 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 78
Individual General Partner since 1987
Units of the Partnership beneficially owned as of March 15, 2000 - None (3)
President of Economic Studies Inc., an economic consulting firm, since
1984.
William M. Kelly (1)
500 Fifth Ave, 50th Floor
New York, New York 10110
Age 56
Individual General Partner since 1991
Units of the Partnership beneficially owned as of March 15, 2000 - 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, First Eagle International Fund from 1994 to present, First
Eagle Sogen Funds from 1999 to present.
Kevin K. Albert (2)
World Financial Center
North Tower, 26th Floor
New York, New York 10281-1326
Age 47
Individual General Partner since 1990
Units of the Partnership beneficially owned as of March 15, 2000 - 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 by 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. Caruso, Mr. Giobbe and Mr.
Bruno is South Tower, World Financial Center, New York, New York 10080.
James V. Caruso
Executive Vice President and Director
Age 48
Officer or Director since 1998
Director of MLIBK, joined Merrill Lynch in January 1975. Mr. Caruso is
the director of Technology for the Global Investment Banking Group. He
is responsible for ensuring that the business requirements of MLIBK are
supported by managing the development of new technologies and enhancing
existing systems.
Michael Giobbe
Vice President and Director
Age 41
Officer or Director since 2000
Vice President of MLIBK, joined Merrill Lynch in 1986. Mr. Giobbe's
responsibilities include the business management function for certain
partnerships and other entities for which subsidiaries of Merrill Lynch
are the general partner.
<PAGE>
James V. Bruno
Vice President and Treasurer
Age 33
Officer or Director since 1998
Vice President of MLIBK, joined Merrill Lynch in 1997. Mr. Bruno's
responsibilities include controllership and financial management
functions for certain partnerships and other entities for which
subsidiaries of Merrill Lynch are the general partner or manager.
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 ten
institutional venture capital funds ("Sprout Funds") and several smaller funds,
with total committed capital of over $1.6 billion. Six of such institutional
funds, with capital exceeding $1.5 billion, are currently operating. As of
December 31, 1999, DLJ Capital's most recent limited partnership is Sprout
Capital VIII, L.P., which was established in 1998 with an excess of 72 percent
of its $750 million capital provided by participants in earlier Sprout Funds.
DLJ Capital's principal office is located at 277 Park Avenue, New York, New York
10172, and it maintains additional offices in Menlo Park, California and
Deerfield, Illinois.
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 57
Officer or Director since 1977
Managing General Partner of Sprout Group, the venture capital affiliate
of DLJ, since 1981.
Dr. Robert E. Curry(1)
Vice President
Age 53
Officer or Director since 1991
President and Director of the Management Company from 1989 to 1991;
Managing Director of MLIBK from 1990 to 1991; President of Merrill
Lynch R&D Management Inc. ("ML R&D") from 1990 to 1991, Vice President
of ML R&D from 1984 to 1990 and Director of ML R&D from 1987 to 1991;
General Partner of Sprout Group since 1991.
Robert Finzi(1)
Vice President
Age 46
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 59
Officer or Director since 1989
Director, Executive Vice President and Chief Financial Officer of DLJ.
Marjorie S. White
Secretary, Treasurer and Director
Age 46
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.
The Managing General Partner
MLVPII Co., L.P. (the "Managing General Partner") is a limited partnership
organized on February 4, 1986 under the laws of the State of New York. The
Managing General Partner maintains its principal office at North Tower, World
Financial Center, New York, New York 10281-1326. The Managing General Partner
has acted as the managing general partner of the Partnership since the
Partnership commenced operations. The Managing General Partner is engaged in no
other activities at the date hereof.
The general partner of the Managing General Partner is the Management
Company. The limited partners of the Managing General Partner include DLJ
Capital Management Corporation ("DLJ"), Dr. Robert E. Curry and Robert Finzi.
Messrs. Curry and Finzi are currently officers of DLJ and were previously
officers of the Management Company.
The Partnership Agreement obligates the Managing General Partner to contribute
cash to the capital of the Partnership so that the Managing General Partner's
capital contribution at all times will be equal to one percent (1%) of the
aggregate capital contributions of all partners of the Partnership. The Managing
General Partner has contributed $1,212,162 to the capital of the Partnership.
Item 11. Executive Compensation.
----------------------
Compensation - The Partnership currently pays each Independent General Partner
an annual fee of $20,000 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. For the year ended December 31, 1999,
the aggregate fees paid by the Partnership to the Independent General Partners
totaled $91,500.
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, 1999, the Partnership had a net realized
gain of $6,025,590 from the liquidation of certain portfolio investments. On a
cumulative basis, from inception to December 31, 1999, the Partnership had
$121,562,832 of net realized gains and investment income from its portfolio of
venture capital investments. On October 7, 1999, the Partnership made a cash
distribution to partners totaling $4,380,729. Limited Partners of record
received $4,200,000 or $35 per Unit, the Managing General Partner received
$180,589 and the Individual General Partners received $140. Additionally,
subsequent to the end of the year, on January 25, 2000, the Partnership made a
cash distribution to partners totaling $8,704,964 including $7,320,000, or $61
per Unit, to Limited Partners of record on December 31, 1999. The Managing
General Partners received $1,384,720 and the Individual General Partners
received $244.
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 provided to the Partnership. For the
year ended December 31, 1999, management fees incurred by the Partnership to the
Management Company aggregated $200,000.
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 15, 2000, 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. James V. Caruso, a Director and
Executive Vice President of the Management Company and a Director of ML
Investment Banking, joined Merrill Lynch in 1975. Michael Giobbe, Director and
Vice President of the Management Company and a Vice President of ML Investment
Banking, joined Merrill Lynch in 1986. James V. Bruno, a Vice President and
Treasurer of the Management Company and a Vice President of ML Investment
Banking, joined Merrill Lynch in 1997. Messrs. Albert, Caruso, Giobbe and Bruno
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, 1999 and 1998
Schedule of Portfolio Investments as of December 31, 1999
Schedule of Portfolio Investments as of December 31, 1998
Statements of Operations for the years ended
December 31, 1999, 1998 and 1997
Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
Statements of Changes in Partners' Capital for the years
ended December 31, 1997, 1998 and 1999
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 29th day of March
2000.
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 29th day of March 2000.
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/ James V. Bruno By: /s/ William M. Kelly
------------------------------------- ----------------------
James V. Bruno William M. Kelly
Vice President and Treasurer Individual General Partner
(Principal Financial and Accounting Office ML Venture Partners II, L.P.
By: /s/ Michael Giobbe
Michael Giobbe
Vice President
<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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 2,964,006
<INVESTMENTS-AT-VALUE> 5,414,349
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 9,531,341
<TOTAL-ASSETS> 14,945,690
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,962,717
<TOTAL-LIABILITIES> 8,962,717
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 120,000
<SHARES-COMMON-PRIOR> 120,000
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,450,343
<NET-ASSETS> 5,982,973
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 202,943
<OTHER-INCOME> 0
<EXPENSES-NET> 475,824
<NET-INVESTMENT-INCOME> (272,881)
<REALIZED-GAINS-CURRENT> 6,025,590
<APPREC-INCREASE-CURRENT> (2,322,245)
<NET-CHANGE-FROM-OPS> 3,430,464
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 13,085,693
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (9,655,229)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 10,810,587
<PER-SHARE-NAV-BEGIN> 117
<PER-SHARE-NII> (2)
<PER-SHARE-GAIN-APPREC> 24
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (96)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 43
<EXPENSE-RATIO> 0
</TABLE>
