UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Period Ended September 30, 1995
Commission File Number 0-17383
ML-LEE ACQUISITION FUND II, L.P.
(Exact name of registrant as specified in its Charter)
Delaware 04-3028398
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
World Financial Center
South Tower - 23rd Floor
New York, New York 10080-6123
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:
(212) 236-7339.
Securities registered pursuant to Section 12(b) of the Act: None.
Name on each exchange on which registered: Not Applicable Securities registered
pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of class)
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 .
Aggregate market value of voting securities held by non-
affiliates: Not Applicable.
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PART I - FINANCIAL INFORMATION
ML-LEE ACQUISITION FUND II, L.P.
TABLE OF CONTENTS
Part I. Financial Information
Page
Item 1. Financial Statements
Statements of Assets, Liabilities and Partners'
Capital as of September 30, 1995 and
December 31, 1994 3
Statements of Operations - For the Three and Nine
Months Ended September 30, 1995 and
September 30, 1994 4
Statements of Changes in Net Assets -
For the Nine Months Ended September 30, 1995
and September 30, 1994 5
Statements of Cash Flows - For the Nine Months
Ended September 30, 1995 and September 30, 1994 6
Statement of Changes in Partners' Capital at
September 30, 1995 7
Schedule of Portfolio Investments -
September 30, 1995 8
Notes to Financial Statements 15
Supplemental Schedule of Realized Gains and
Losses -(Schedule 1) 27
Supplemental Schedule of Unrealized Appreciation
and Depreciation - (Schedule 2 ) 28
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 30
Part II. Other Information 37
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ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
September
30,1995 December
(Unaudited) 31, 1994
<S> <C> <C>
ASSETS:
Investments - Notes 2,4,5
Portfolio Investments, at fair value
Managed Companies
(amortized cost $113,795 at
September 30, 1995 and $114,726 at
December 30, 1994) $112,746 $120,895
Non-Managed Companies
(amortized cost $30,338 at September 30,
1995 and $29,888 at December 31, 1994) 24,783 26,753
Temporary Investments, at amortized
cost (cost $11,614 at September 30, 1995
and $18,345 at December 31, 1994) 11,655 18,390
Cash 1 1
Accrued Interest and Dividend Receivable - Note 2 1,320 1,763
Prepaid Expenses 1 4
TOTAL ASSETS $150,506 $167,806
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities
Professional Fees Payable $ 529 $ 160
Independent General Partners' Fees
Payable - Note 11 25 46
Deferred Interest Income - Note 2 773 886
Total Liabilities 1,327 1,092
Partners' Capital - Note 2
Individual General Partner 37 40
Managing General Partner 2,890 4,780
Limited Partners (221,745 Units) 146,252 161,894
Total Partners' Capital 149,179 166,714
TOTAL LIABILITIES AND PARTNERS' CAPITAL $150,506 $167,806
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Three Months Ended For the Nine Months Ended
September September September September
30, 1995 30, 1994 30, 1995 30, 1994
<S> <C> <C> <C> <C>
INVESTMENT INCOME - NOTES 2,6:
Interest $ 1,765 $ 2,551 $ 5,097 $ 10,409
Discount 185 229 718 1,117
Dividends 30 - 47 84
TOTAL INCOME 1,980 2,780 5,862 11,610
EXPENSES:
Investment Advisory Fee - Note 8 374 399 1,157 1,294
Fund Administration Fee - Note 9 197 203 600 631
Amortization of Deferred Organization Expenses - Note 2 - 15 - 44
Professional Fees 614 744 1,003 1,739
Reimbursable Administrative Expenses - Note 10 10 31 90 194
Independent General Partners' Fees and Expenses - Note 11 42 53 122 80
Insurance Expense 1 1 4 4
TOTAL EXPENSES 1,238 1,446 2,976 3,986
NET INVESTMENT INCOME 742 1,334 2,886 7,624
Net Realized Gain on Investments - Note 4 and Schedule 1 - - 7,081 503
Net Change in Unrealized Appreciation (Depreciation) on Investments - Note 5 and
Schedule 2:
Publicly Traded Securities (4,668) (17,917) (7,220) (26,144)
Non-Public Securities - (1,910) (2,421) (5,756)
(4,668) (19,827) (9,641) (31,900)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (3,926) (18,493) 326 (23,773)
Less: Incentive Fee to Managing General Partner - Note 12 (892) - (2,938) -
NET DECREASE AVAILABLE FOR PRO-RATA
DISTRIBUTION TO ALL PARTNERS $ (4,818) $ (18,493) $ (2,612) $ (23,773)
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Nine Months Ended
September 30, September 30,
1995 1994
<S> <C> <C>
FROM OPERATIONS:
Net Investment Income $ 2,886 $ 7,624
Net Realized Gain on Investments 7,081 503
Net Change in Unrealized
Depreciation on Investments (9,641) (31,900)
Net Increase (Decrease) in Net
Assets Resulting From Operations 326 (23,773)
Cash Distributions to Partners (17,861) (32,106)
Total Decrease (17,535) (55,879)
NET ASSETS:
Beginning of Year 166,714 297,301
End of Period $149,179 $241,422
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Nine Months Ended
September 30, September 30,
1995 1994
<S> <C> <C>
INCREASE IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest, Discount and Dividends $ 5,746 $ 11,150
Closing Fee Received - 60
Professional Fees (570) (1,289)
Investment Advisory Fee (1,157) (1,294)
Fund Administration Fee (600) (631)
Independent General Partners' Fees and Expenses (144) (149)
Reimbursable Administrative Expenses (156) (114)
Sale of Temporary Investments, Net 6,731 23,943
Purchase of Portfolio Company Investments (1,635) (9,868)
Proceeds from Sales of Portfolio Company Investments 9,646 11,865
Net Cash Provided by Operating Activities 17,861 33,673
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Distributions to Partners (17,861) (32,106)
Net Cash Applied to Financing Activities (17,861) (32,106)
Net Increase in Cash - 1,567
Cash at Beginning of Year 1 1
Cash at End of Year $ 1 $ 1,568
RECONCILIATION OF NET INVESTMENT INCOME
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Investment Income $ 2,886 $ 7,624
Adjustments to Reconcile Net Investment
Income to Net Cash Provided by Operating
Activities:
Decrease in Investments 7,659 25,926
(Increase) in Accrued Interest Receivables (116) (460)
Decrease in Prepaid Expenses 3 18
Amortization of Deferred Organization Expenses - 43
Increase in Professional Fees Payable 369 525
Decrease in Independent General Partners' Fees Payable (21) (64)
Increase in Closing Fee Payable - 61
Decrease in Option Payable - (503)
Net Realized Gain on Investments 7,081 503
Total Adjustments 14,975 26,049
Net Cash Provided by Operating Activities $ 17,861 $ 33,673
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND II, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Individual Managing
General General Limited
Partner Partner Partner Total
<S> <C> <C> <C> <C>
For the Nine Months Ended
September 30, 1995 - Notes 2,3,4,5
Partners' Capital at January 1, 1995 $ 40 $ 4,780 $161,894 $166,714
Allocation of Net Investment Income 1 1,019 1,866 2,886
Allocation of Net Realized Gain on Investments 1 779 6,301 7,081
Allocation of Net Change in Unrealized
Depreciation on Investments (2) (22) (9,617) (9,641)
Cash Distributions to Partners (3) (3,666) (14,192) (17,861)
Partners' Capital at September 30, 1995 $ 37 $ 2,890 $146,252 $149,179
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost (Note 2) Investments
<S> <C> <C> <C> <C> <C>
MEZZANINE INVESTMENTS
MANAGED COMPANIES
ANCHOR ADVANCED PRODUCTS, INC. (b)
$5,867 Anchor Advanced Products, Inc., Sr. Sub. Nt.11.67% due 04/30/00(c) 04/30/90 $5,867 $5,867
$7,822 Anchor Advanced Products, Inc., Jr. Sub. Nt.17.5% due 04/30/00(c) 04/30/90 7,822 7,822
162,967 Shares Anchor Holdings Inc., Common Stock (d) 04/30/90 1,548 1,548
247,710 Warrants Anchor Holdings Inc., Common Stock Purchase Warrants(d) 04/30/90 0 0
(26.5% of fully diluted common equity assuming exercise
of warrants) 15,237 15,237 10.21
BIG V SUPERMARKETS, INC. (b)
$13,037 Big V Supermarkets, Inc., Sr. Sub. Nt. 14.14% due 03/15/01(c) 12/27/90 13,037 13,037
117,333 Shares Big V Holding Corp., Common Stock(d) 12/27/90 4,107 4,107
(16.6% of fully diluted common equity) 17,144 17,144 11.49
COLE NATIONAL CORPORATION
1,341 Warrants Cole National Corporation, Common Stock Purchase Warrants(d) 09/26/90 0 0
(0.0% of fully diluted common equity assuming exercise
of warrants)
$1,393 13% Sr. Secured Bridge Note
Purchased 09/25/90 $1,393
Repaid 11/15/90 $1,393
Realized Gain $ 0
0 0 0.00
See the Accompanying Notes to the Financial Statements.
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ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost (Note 2) Investments
<S> <C> <C> <C> <C> <C>
CST OFFICE PRODUCTS, INC.(b) - Note 6
$6,355 Lee-CST Acquisition Corp., Sr. Sub. Nt. 12% due 03/31/00(c)(h) 03/30/90 $ 6,355 $ 6,355
$6,355 Lee-CST Acquisition Corp., Jr. Sub. Nt. 18% due 03/30/90(c)(h) 03/30/90 6,355 6,355
$2,294 CST Office Products Corp., Sr. Sub. Nt. 15% due 03/31/00(c)(f)(h) Various 195 195
$3,047 CST Office Products Corp., Jr. Sub. Nt. 15% due 06/30/96(c)(f)(h) Various 0 0
162,949 Shares Lee-CST Holding Corp., Common Stock (d) 03/30/90 1,304 1,304
177,207 Warrants Lee-CST Holding Corp., Common Stock Purchase Warrants(d) 03/30/90 0 0
(23.1% of fully diluted common equity assuming exercise of warrants) 14,209 14,209 9.52
FIRST ALERT, INC.(b) - Note 5
2,058,474 Shares First Alert, Inc., Common Stock(a)(d) 07/31/92 3,320 32,421
(8.1% of fully diluted common equity)
$ 10,198 12.5% Sub. Note
Purchased 07/31/92 $10,198
Repaid 03/28/94 $10,198
Realized Gain $ 0
3,320 32,421 21.72
GHIRARDELLI HOLDINGS CORPORATION (b) - Note 4
$4,672 Ghirardelli Holdings Corporation, 13% Subordinated Note
due 03/31/02(c) 03/31/92 4,672 4,672
467,200 Shares Ghirardelli Holdings Corporation, Common Stock(d) 03/31/92 934 934
73,692 Shares Ghirardelli Holdings Corporation, Common Stock(d) 05/12/95 234 234
14,016 Shares Ghirardelli Holdings Corporation, Series A Preferred Stock(d) 05/12/95 1,402 1,402
(8.2% of fully diluted common equity)
$7,008 Sr. Bridge Note
Purchased 03/31/92 $7,008
Repaid 06/11/92 $7,008
Realized Gain $ 0
7,242 7,242 4.84
See the Accompanying Notes to the Financial Statements.
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ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost (Note 2) Investments
<S> <C> <C> <C> <C> <C>
HILLS STORES COMPANY (b) - Notes 4,5
458,432 Shares Hills Stores Company, Common Stock(a)(j) 04/03/90 $30,246 $ 5,215
62,616 Shares Hills Stores Company, Common Stock(d) 08/21/95 4,530 712
(3.7% of fully diluted common equity) 34,776 5,927 3.97
PETCO ANIMAL SUPPLIES, INC. (b) - Notes 4,5
116,825 Shares Petco Animal Supplies, Common Stock(a)(d) Various 1,915 3,037
(1.3% of fully diluted common equity)
$52 14% Sr. Sub. Bridge Notes
Purchased various $ 52
Repaid 04/19/91 $ 52
Realized Gain $ 0
$1,667 12.5% Sr. Sub. Notes
Purchased various $1,667
Repaid 03/28/94 $1,667
Realized Gain $ 0
120,143 Shares Common Stock
Purchased various $1,969
Sold 04/26/95 $2,368
Realized Gain $ 399
Total Realized Gain $ 399
1,915 3,037 2.04
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost (Note 2) Investments
<S> <C> <C> <C> <C> <C>
PLAYTEX PRODUCTS, INC. - Note 5,7,16
343,726 Shares Playtex Products, Inc., Common Stock(a)(d) 03/29/90 $ 5,299 $ 2,965
(.66% of fully diluted common equity)
$7,333 15% Subordinated Note
Purchased 03/29/90 $7,333
Sold 09/28/90 $7,349
Realized Gain $ 16
84,870 Shares Common Stock
Purchased 03/29/90 $ 282
Sold 12/20/91 $ 328
Realized Gain $ 46
$7,334 15% Subordinated Note
Purchased 03/29/90 $7,334
Sold 02/01/93 $7,327
Realized Loss $ (7)
Total Net Realized Gain $ 55
5,299 2,965 1.99
RESTAURANTS UNLIMITED
$6,044 Restaurants Unlimited, 11% Subordinated Note due 06/30/02(c) 06/03/94 6,044 6,044
391,302 Warrants Restaurants Unlimited, Common Stock Warrants(d) 06/03/94 06/03/94 0 0
(2.4% of fully diluted common equity)
6,044 6,044 4.05
STANLEY FURNITURE COMPANY, INC. (b) - Note 5
23,105 Shares Stanley Furniture Company, Inc., Common Stock(a)(j) 06/30/91 291 202
(0.4% of fully diluted common equity)
291 202 0.15
SUN PHARMACEUTICALS CORP.(b) - Note 7,16
$8,318 Sun Pharmaceuticals Corp., 12.5% Sub. Nt. due 12/31/02(c) 12/03/92 8,318 8,318
7,444.5 Warrants Banana Boat Holding Corp., Common Stock Purchase Warrants(d)(i) 12/03/92 0 0
(5.9% of fully diluted common equity assuming exercise of warrants)
$11,051 Sr. Bridge Note
Purchased 12/03/92 $11,051
Repaid 12/18/92 $11,051
Realized Gain $ 0
8,318 8,318 5.58
TOTAL INVESTMENT IN MANAGED COMPANIES $113,795 $112,746 75.56
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost (Note 2) Investments
<S> <C> <C> <C> <C> <C>
NON-MANAGED COMPANIES
BIOLEASE, INC.
$784 Biolease, Inc., 13% Sub. Nt. due 06/06/04 (c) 06/08/94 $ 676 $ 691
96.56 Shares BioLease, Inc., Common Stock (d) 06/08/94 94 94
40,057 Warrants Biotransplant, Inc., Common Stock Purchase Warrants(d) 06/08/94 14 14
784 799 0.54
FITZ AND FLOYD/SYLVESTRI -Notes 4,5,6
$10,281 FFSC, Inc., Adjustable Rate Sr. Sub. Nt. due 03/31/03(c) 03/31/93 10,266 10,268
$ 2,419 FFSC, Inc., Adjustable Rate Sr. Sub. Nt. due 03/31/03(c) 07/30/93 2,414 2,414
1,511,856 Shares FF Holding Co., Common Stock (d) 03/31/93 15 0
514,636 Shares FF Holding Co., Common Stock (d) 07/30/93 5 0
515,845 Shares FF Holding Co., Common Stock (d) 12/22/94 0 0
12,700 12,682 8.50
FLA. ORTHOPEDICS, INC. - Notes 5,6,14
$4,842 FLA. Acquisition Corp., 12.5% Sub. Nt. due 07/31/99(c)(h) 08/02/93 4,842 2,421
121,040 Shares FLA. Holdings, Inc. Common Stock(d) 08/02/93 1,513 0
72,624 Warrants FLA. Holdings, Inc. Common Stock Purchase Warrants(d) 08/02/93 0 0
6,355 2,421 1.62
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost (Note 2) Investments
<S> <C> <C> <C> <C> <C>
NATIONAL TOBACCO COMPANY, L.P.
$3,503 National Tobacco Company, 13% Sub. Nt. due 10/15/98(c) 04/14/92 $ 3,503 $ 3,503
$ 115 National Tobacco Company, 16% Sub. Nt. due 10/15/98(c)(f) 06/30/93 115 115
$ 234 National Tobacco Company, Class A Partnership Int.(d) 04/14/92 234 234
3,852 3,852 2.58
SORETOX - Notes 4,5,6
$3,503 Stablex Canada, Inc., Sub. Nt. 10% due 06/30/07(c)(h) 06/29/95 3,503 2,590
$3,128 Stablex Canada, Inc., Jr. Sub. Nt. 11% due 06/30/09(c)(h) 06/29/95 3,128 2,439
2,004 Warrants Seaway TLC, Inc. Common Stock Purchase Warrants 06/29/95 0 0
6,631 5,029 3.37
TOTAL INVESTMENT IN NON-MANAGED COMPANIES $30,322 24,783 16.61
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes Various 87,112 83,106 55.70
Partnership Interest 04/14/92 234 234 0.16
Preferred Stock,Common Stock, Warrants and Stock Rights Various 56,771 54,189 36.32
TOTAL MEZZANINE INVESTMENTS $144,117 $137,529 92.18
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost (Note 2) Investments
<S> <C> <C> <C> <C> <C>
TEMPORARY INVESTMENTS
CERTIFICATES OF DEPOSIT AND TIME DEPOSITS
$ 134 State Street Bank 2.5% due 10/02/95 09/29/95 $ 134 $ 134
$ 605 Banque Nationale de Paris, 3.875% due 03/29/96 - Note 14 08/18/93 605 605
TOTAL INVESTMENT IN C/D'S AND TIME DEPOSITS 739 739 0.51
COMMERCIAL PAPER
$4,530 Ford Motor Credit, 5.72% due 10/20/95 09/22/95 4,510 4,516
$6,401 Avco Financial, 5.73% due 10/02/95 08/28/95 6,365 6,400
TOTAL INVESTMENT IN COMMERCIAL PAPER 10,875 10,916 7.32
TOTAL TEMPORARY INVESTMENTS 11,614 11,655 7.83
TOTAL INVESTMENT PORTFOLIO $155,731 $149,184 100.00%
(a) Publicly traded class of securities.
(b) Represents investment in affiliates as defined in the Investment Company Act of 1940.
(c) Restricted security.
(d) Restricted non-income producing equity security.
(e) Represents original cost and excludes accretion of discount of $11,722 for Mezzanine Investments and $38,365 for
Temporary Investments.
(f) Inclusive of receipt of payment-in-kind securities.
(g) Represents a dollar amount of less than one thousand dollars.
(h) Non-accrual investment status.
(i) Call option written against this security.
(j) Non-income producing equity security.
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(UNAUDITED)
1. Organization and Purpose
ML-Lee Acquisition Fund II, L.P. ("Fund II") (formerly T.H. Lee Acquisition
Fund II, L.P.) was formed along with ML-Lee Acquisition Fund (Retirement
Accounts) II, L.P. (the "Retirement Fund"; collectively referred to as the
"Funds") and the Certificates of Limited Partnership were filed under the
Delaware Revised Uniform Limited Partnership Act on September 23, 1988. The
Funds' operations commenced on November 10, 1989.
Mezzanine Investments II, L.P. (the "Managing General
Partner"), subject to the supervision of the Individual General Partners, is
responsible for overseeing and monitoring Fund II's investments. The Managing
General Partner is a Delaware limited partnership in which ML Mezzanine II Inc.
is the general partner and Thomas H. Lee Advisors II, L.P., the Investment
Adviser to the Funds, is the limited partner. The Individual General Partners
are Vernon R. Alden, Joseph L. Bower and Stanley H. Feldberg (the "Independent
General Partners") and Thomas H. Lee.
Fund II has elected to operate as a business development company under the
Investment Company Act of 1940. Fund II's primary investment objective is to
provide current income and capital appreciation potential by investing in
privately-structured, friendly leveraged buyouts and other leveraged
transactions. Fund II pursues this objective by investing primarily in
subordinated debt and related equity securities issued in conjunction with the
"mezzanine financing" of friendly leveraged buyout transactions, leveraged
acquisitions and leveraged recapitalizations. Fund II may also invest in "bridge
investments" if it is believed that such investments would facilitate the
consummation of a mezzanine financing.
As stated in the Prospectus, Fund II will terminate no later than January 5,
2000, subject to the right of the Individual General Partners to extend the term
for up to one additional two-year period and one additional one-year period if
it is in the best interest of Fund II. Fund II will then have five additional
years to liquidate its remaining investments.
2. Significant Accounting Policies
Basis of Accounting
For financial reporting purposes, the records of Fund II are maintained
using the accrual method of accounting. For Federal income tax reporting
purposes, the results of operations are adjusted to reflect statutory
requirements arising from book to tax differences.
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Valuation of Investments
Securities for which market quotations are readily available are valued by
reference to such market quotation using the last trade price (if reported) or
the last bid price for the period. For securities without a readily
ascertainable market value (including securities restricted as to resale for
which a corresponding publicly traded class exists), fair value is determined,
on a quarterly basis, in good faith by the Managing General Partner and the
Investment Adviser with final approval from the Individual General Partners of
Fund II. For privately issued securities in which Fund II typically invests, the
fair value of an investment is its original cost plus accrued value in the case
of original issue discount or deferred pay securities. Such investments will be
revalued if there is an objective basis for doing so at a different price.
Investments will be written down in value if the Managing General Partner and
Investment Adviser believe adverse credit developments of a significant nature
require a write-down of such securities. Investments will be written up in value
only if there has been an arms'-length third party transaction to justify the
increased valuation. Although the Managing General Partner and Investment
Adviser use their best judgment in estimating the fair value of these
investments, there are inherent limitations in any estimation technique.
Therefore, the fair value estimates presented herein are not necessarily
indicative of the amount which Fund II could realize in a current transaction.
Temporary Investments with maturities of less than 60 days are stated at
amortized cost, which approximates market.
The information presented herein is based on pertinent information available
to the Managing General Partner and Investment Adviser as of September 30, 1995.
Although the Managing General Partner and Investment Adviser are not aware of
any factors not disclosed herein that would significantly affect the estimated
fair value amounts, such amounts have not been comprehensively revalued since
that time, and especially in light of the fact that the portfolio investments of
companies whose equity is publicly traded are valued at the trading price at
September 29, 1995, the current estimated fair value of these investments may
have changed significantly since that point in time.
Interest Receivable on Investments
Investments generally will be placed on non-accrual status in the event of a
default (after the applicable grace period expires) or if the Investment Adviser
and the Managing General Partner determine that there is no reasonable assurance
of collecting interest.
<PAGE>
Payment-In-Kind Securities
All payment-in-kind securities received in lieu of cash interest payments by
Fund II's portfolio companies are recorded at face value (which approximates
accrued interest), unless the Investment Adviser and the Managing General
Partner determine that there is no reasonable assurance of collecting the full
principal amounts of such securities. As of September 30, 1995 and December 31,
1994, Fund II had in its portfolio of investments $751,907 and $310,007,
respectively, of payment-in-kind debt securities which excludes $7,278,058 and
$4,479,539, respectively, of payment-in-kind securities received from notes
placed on non-accrual status. As of September 30, 1995 and December 31, 1994,
Fund II had in its portfolio of investments $2,293,457 of payment-in-kind equity
securities.
Deferred Organization Expenses
Organization costs of $292,128 for Fund II were fully amortized on a
straight-line basis as of November 10, 1994.
Investment Transactions
Fund II records investment transactions on the date on which it obtains an
enforceable right to demand the securities or payment therefor. Fund II records
Temporary Investment transactions on the trade date.
Realized gains and losses on investments are determined on the basis of
specific identification for accounting and tax purposes.
Sales and Marketing Expenses, Offering Expenses and Sales Commissions
Sales commissions and selling discounts were allocated to the specific
Partners' accounts in which they were applied. Sales and marketing expenses and
offering expenses were allocated between the Funds in proportion to the number
of Units issued by each fund and to the Partners in proportion to their capital
contributions.
Deferred Interest Income
All fees received by Fund II upon the funding of Mezzanine or Bridge
Investments are treated as deferred interest income and amortized over the
maturity of such investments.
Partners' Capital
Partners' Capital represents Fund II's equity divided in proportion to the
Partners' Capital Contributions and does not represent the Partners' Capital
Accounts. Profits and losses, when realized, are allocated in accordance with
the provisions of the Partnership Agreement summarized in Note 3.
<PAGE>
Interim Financial Statements
The financial information included in this interim report as of September
30, 1995 and for the period then ended has been prepared by management without
an audit by independent certified public accountants. The results for the period
ended September 30, 1995 are not necessarily indicative of the results of the
operations expected for the year and reflect adjustments, all of a normal and
recurring nature, necessary for the fair presentation of the results of the
interim period. In the opinion of Mezzanine Investments II, L.P., the Managing
General Partner of Fund II, all necessary adjustments have been made to the
aforementioned financial information for a fair presentation in accordance with
generally accepted accounting principles.
3. Allocations of Profits and Losses
Pursuant to the Partnership Agreement, all profits from Temporary
Investments generally are allocated 99.75% to the Limited Partners, 0.23% to the
Managing General Partner and 0.02% to the Individual General Partner. Profits
from Mezzanine Investments will, in general, be allocated as follows:
first, if the capital accounts of any partners have negative balances, to
such partners in proportion to the negative balances in their capital
accounts until the balances of all such capital accounts equal zero,
second, 99.75% to the Limited Partners, 0.23% to the Managing General
Partner and 0.02% to the Individual General Partner until the sum allocated
to the Limited Partners equals any previous losses allocated together with a
cumulative Priority Return of 10% on the average daily amount in Mezzanine
Investments, and any outstanding Compensatory Payments,
third, 69.75% to the Limited Partners, 30.225% to the Managing General
Partner and 0.025% to the Individual General Partner until the Managing
General Partner has received 20.225% of the total profits allocated,
thereafter, 79.75% to the Limited Partners, 20.225% to the Managing General
Partner and 0.025% to the Individual General Partner.
Losses will be allocated in reverse order of profits previously allocated
and thereafter 99.75% to the Limited Partners, 0.23% to the Managing General
Partners and 0.02% to the Individual General Partner.
4. Investment Transactions
On January 27, 1995, Fund II sold 227,437 shares of EquiCredit Common Stock
realizing a gain of $6,682,098 on an original investment of $595,886. The
proceeds from the sale were distributed to Fund II's partners in a special
distribution on February 14, 1995.
<PAGE>
On April 27, 1995, Petco Animal Supplies, Inc. ("Petco") completed a public
offering of approximately 3.6 million shares of Common Stock (the "Petco
Offering") at a net price of $19.71 per share. Of the shares sold, approximately
2.4 million shares were offered by Petco and approximately 1.2 million were
offered by certain existing shareholders, including Fund II. As part of the
Petco Offering, Fund II sold 120,143 shares (including shares sold as a result
of the exercise of the underwriters' overallotment option on May 26, 1995)
representing 51% of its Petco holdings. Fund II received proceeds of $2,368,319
and realized a gain of $398,415 on the sale of the equity.
On May 12, 1995, Fund II made a follow-on investment in Ghirardelli Holdings
Corp. for a total of $1,635,200. Fund II received 14,016 shares of Series A
Preferred Stock for $1,401,600 and 73,692 additional shares of Common Stock
for $233,600.
Effective June 29, 1995, Soretox structured a management led buyout of the
company. As a result, the Stablex Canada, Inc. $6,189,075, 14% Subordinated Note
and the 183,921 shares of 176347 Canada Inc. Common Stock Purchase Warrants held
by Fund II were exchanged for a Stablex Canada, Inc. $3,503,250 principal amount
10% Subordinated Note, a $2,685,825 principal amount (plus capitalized interest
of $441,900 from the note exchanged) 11% Junior Subordinated Note and 2,004
shares of Seaway TLC, Inc. Common Stock Purchase Warrants. No gain or loss was
recorded on the transaction.
On August 21, 1995, Fund II entered into a stock purchase and exchange
agreement with Hills Stores Company and exchanged the 219,156 Common Stock
Rights held by Fund II for 62,616 shares of Hills Stores Common Stock. No gain
or loss was recognized on the transaction. The common shares received will be
registered with the Securities and Exchange Commission in the fourth quarter of
1995.
On August 6, 1991, the Independent General Partners approved a reserve for
follow-on investments of $24,985,029 for Fund II. As of September 30, 1995, the
reserve balance was reduced to $10,904,608 due to follow-on investments of $286
in Petco Animal Supplies, Inc., $2,418,970 in Fitz and Floyd, Inc., $240,060 in
Fine Clothing, Inc. and $4,500,826 for a Certificate of Deposit related to the
reorganization of Hills Stores. Fund II made a follow-on investment in
Ghirardelli Holdings Corp. of $1,635,200 and has returned $5,285,079 of the
reserve to partners during the nine months ended September 30, 1995. The
Independent General Partners have approved an additional distribution of the
reserve of $1,000,000 to Partners to be made on November 14, 1995. See Note 16
for further information. The level of the reserve was based upon an analysis of
potential follow-on investments in specific portfolio companies that may become
necessary to protect or enhance its existing investment.
Because Fund II primarily invests in high-yield private placement
securities, the risk of loss upon default by an issuer is greater than with
investment grade securities because high-yield securities are generally
unsecured and are often subordinated to other creditors of the issuer. Also,
high-yield issuers usually have higher levels of indebtedness and are more
sensitive to adverse economic conditions.
<PAGE>
Although Fund II cannot eliminate the risks associated with its investments
in high-yield securities, it has procedures in place to continually monitor the
risks associated with its investments under a variety of market conditions. Any
potential Fund II loss would generally be limited to its investment in the
portfolio company as reflected in the portfolio of investments.
Should bankruptcy proceedings commence, either voluntarily or by action of
the court against a portfolio company, the ability of Fund II to liquidate the
position or collect proceeds from the action may be delayed or limited.
5. Unrealized Appreciation and Depreciation of Investments
For the nine months ended September 30, 1995, Fund II recorded net
unrealized depreciation of $9,640,975 (of which, $7,220,175 is net unrealized
depreciation from publicly traded securities and $2,420,800 is net unrealized
depreciation from non-public securities) compared to a net unrealized
depreciation of $31,899,722 for the same period in 1994. As of this date, Fund
II's cumulative net unrealized depreciation on investments totaled $6,604,923.
For additional information, please refer to the Schedule of Unrealized
Appreciation and Depreciation (Schedule 2 - pages 28 - 29).
6. Non-Accrual of Investments
In accordance with Fund II's Accounting Policy, the following notes have
been on non-accrual status since the date indicated:
- CST Office Products, Inc. on October 1, 1992.
- Fitz and Floyd/Sylvestri Corporation on January 1, 1994.
- FLA. Orthopedics, Inc., on January 1, 1995.
- Stablex Canada, Inc., on June 29, 1995.
7. Covered Call and Put Options
Concurrently with the Funds' investment in Sun Pharmaceuticals Corp.
("Sun"), Playtex Products Inc. ("Playtex") entered into a distribution agreement
with Sun pursuant to which Playtex agreed to act as the principal distributor
for Sun's products in the ordinary course of business. As additional
consideration for entering into this agreement, Playtex obtained an option to
purchase at a formula price (under certain conditions) the Banana Boat Holding
Corp. Common Stock held by other investors in the transaction, including the
Common Stock purchasable upon exercise of the Funds' warrants. Playtex exercised
this option in the fourth quarter of 1995. See Note 16 for further information.
<PAGE>
8. Investment Advisory Fee
The Investment Adviser provides the identification, management and
liquidation of portfolio investments for the Funds. As compensation for services
rendered to the Funds, the Investment Adviser receives a quarterly fee at the
annual rate of 1% of assets under management (net offering proceeds reduced by
cumulative capital reductions), with a minimum annual fee of $1.2 million for
Fund II and the Retirement Fund on a combined basis. The Investment Advisory Fee
is calculated and paid quarterly in advance. In addition, the Investment Adviser
receives 95% of the benefit of any MGP Incentive Fees (as defined in Note 12)
paid to the Managing General Partner. For the nine months ended September 30,
1995 and 1994, Fund II paid $1,156,833 and $1,293,686, respectively, in
Investment Advisory Fees to Thomas H. Lee Advisors II, L.P.
9. Fund Administration Fee
As compensation for its services, ML Fund Administrators Inc. (the "Fund
Administrator"; an affiliate of the Managing General Partner) is entitled to
receive from the Funds an annual amount of the greater of $500,000 or 0.45% of
the excess of net offering proceeds less 50% of capital reductions. In addition,
ML Mezzanine II, Inc., an affiliate of the Fund Administrator and Merrill Lynch
& Co., receives 5% of the benefit of any MGP Incentive Fees paid to the Managing
General Partner (as defined in Note 12). The Fund Administration Fee is
calculated and paid quarterly, in advance, by each Fund in proportion with the
net offering proceeds. For the nine months ended September 30, 1995 and 1994,
Fund II paid $599,851 and $631,107, respectively, in Fund Administration Fees.
10. Administrative Expenses
Pursuant to the administrative services agreement between Fund II and the
Fund Administrator, effective November 10, 1993, a portion of the actual
out-of-pocket expenses incurred in connection with the administration of the
Retirement Fund is being reimbursed to the Fund Administrator. Actual
out-of-pocket expenses ("reimbursable expenses") primarily consist of printing,
audits, tax preparation and custodian fees. For the nine months ended September
30, 1995 and 1994, Fund II incurred $90,182 and $194,337, respectively, in
reimbursable expenses.
11. Independent General Partners' Fees and Expenses
As compensation for their services, each Independent General Partner will
receive a combined annual fee of $40,000 (payable quarterly) from the Funds in
addition to a $1,000 fee for each meeting attended ($500 if a meeting is held on
the same day as a committee meeting of the General Partners) plus reimbursement
for any out-of-pocket expenses incurred. Fees and expenses are allocated between
the Funds in proportion to the number of units issued by each fund and
compensation for each of the Individual General Partners is reviewed annually by
the Independent General Partners. For the nine months ended September 30, 1995
and 1994, Fund II incurred $122,394 and $80,184, respectively, in Independent
General Partners' Fees and Expenses.
<PAGE>
12. Related Party Transactions
Fund II's investments generally are made as co-investments with the
Retirement Fund. In addition, certain of the Mezzanine Investments and Bridge
Investments which were made by Fund II involve co-investments with entities
affiliated with the Investment Adviser. Such co-investments are generally
prohibited absent exemptive relief from the Securities and Exchange Commission
(the "Commission"). As a result of these affiliations and Fund II's expectation
of engaging in such co-investments, the Funds together with ML-Lee Acquisition
Fund, L.P., sought an exemptive order from the Commission allowing such
co-investments, which was received on September 1, 1989. Fund II's
co-investments in Managed Companies, and in certain cases its co-investments in
Non-Managed Companies, typically involve the entry by the Funds and other equity
security holders into stockholders' agreements. While the provisions of such
stockholders' agreements vary, such agreements may include provisions as to
corporate governance, registration rights, rights of first offer or first
refusal, rights to participate in sales of securities to third parties, rights
of majority stockholders to compel minority stockholders to participate in sales
of securities to third parties, transfer restrictions, and preemptive rights.
Thomas H. Lee Company, a sole proprietorship owned by Thomas H. Lee, an
Individual General Partner of Fund II and an affiliate of the Investment
Advisor, typically performs certain management services for Managed Companies
and receives management fees in connection therewith, usually pursuant to
written agreements with such companies. In addition, certain of the portfolio
companies have contractual or other relationships pursuant to which they do
business with one another.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") is an
affiliate of the Managing General Partner. MLPF&S and certain of its affiliates,
in the ordinary course of their business, perform various financial services for
various portfolio companies of the Funds, which may include investment banking
services, broker/dealer services and economic forecasting, and receives in
consideration therewith various fees, commissions and reimbursements.
Furthermore, MLPF&S and its affiliates or investment companies advised by
affiliates of MLPF&S may, from time to time, purchase or sell securities issued
by portfolio companies of the Funds in connection with its ordinary investment
operations.
For the nine months ended September 30, 1995, Fund II paid $156,459 to the
Fund Administrator for reimbursable out-of-pocket expenses (please refer to Note
10 for further information).
In 1995, the Fund II paid the Individual General Partner distributions
totaling $3,600 and paid the Managing General Partner distributions totaling
$3,665,776 (which includes $3,629,773 of incentive fees ("MGP Incentive Fees")
and $36,003 with respect to their interest in Fund II). Of the MGP Incentive
Fees paid, 95% or $3,448,284 was paid to the Investment Advisor and the
remaining 5% totaling $181,489 was paid to ML Mezzanine II Inc. As of September
30, 1995, the Managing General Partner has earned $16,547,004 in MGP Incentive
Fees of which $2,937,537 is deferred in payment to the Managing General Partner
as a Deferred Distribution amount (the "Deferred Distribution") in accordance
with the Partnership Agreement. To the extent not payable to the Managing
General Partner, this Deferred Distribution is distributed to the Partners
pro-rata in accordance with their capital contributions, and certain amounts
otherwise later payable to Partners from distributable cash from operations
would instead be payable solely to the Managing General Partner until the
Deferred Distribution amount is paid in full.
13. Litigation
On April 5, 1991, two Limited Partners of Fund II filed a putative class
action in the United States District Court for the Southern District of New
York, purportedly on behalf of the class of all Limited Partners of record as of
September 30, 1990, against Fund II, the Managing General Partner, the
Individual General Partners and the Investment Adviser. The complaint alleges
that the disclosure in Fund II's proxy statement for the Special Meeting of
Limited Partners held May 22, 1990 violated Federal statutes and rules
promulgated by the Securities and Exchange Commission. The complaint seeks
monetary damages, which are not quantified, and other relief. On December 30,
1992, the United States District Court for the Southern District of New York
granted the defendants' motion to dismiss the plaintiffs' complaint, with leave
to the plaintiffs to file an amended complaint no later than February 15, 1993.
On February 11, 1993, plaintiffs filed an amended complaint alleging, in
addition to the allegation set forth in the original complaint, that if certain
facts were disclosed in the 1990 proxy statement, plaintiffs and the other
members of the class would have voted differently in the elections to which the
proxy statement pertained. The defendants thereafter moved to dismiss the
amended complaint. In December 1994, the parties entered into a proposed
stipulation and settlement to resolve the litigation and on August 7, 1995 there
was a settlement hearing pursuant to which the settlement was approved on August
10, 1995. The settlement was thereafter effected. Fund II has advanced amounts
to the indemnified parties based upon amounts which are deemed reimbursable in
accordance with the indemnification provisions and has included these amounts in
professional fees.
On February 3, 1992 and February 5, 1992, respectively, one Limited Partner
from Fund II and one Limited Partner from the Retirement Fund each commenced
class actions in the US District Court for the District of Delaware, purportedly
on behalf of all persons who purchased limited partnership interests in the
Funds between November 10, 1989 and January 5, 1990, against the Funds, the
Managing General Partner, the Individual General Partners, the Investment
Adviser to the Funds and certain named affiliates of such persons. These
actions, alleging that the defendants in the action made material
misrepresentations or omitted material information in the offering materials for
the Funds concerning the investment purposes of the Funds, were consolidated by
the court on March 31, 1992, and a consolidated complaint was filed by the
plaintiffs on May 14, 1992. In April 1993, plaintiffs filed an amended
complaint, adding claims that certain transactions by the Funds were prohibited
by the federal securities laws applicable to the Funds and their affiliates
under the Investment Company Act of 1940, as amended. The amended complaint also
named the Funds' counsel as a defendant. Defendants moved to dismiss the amended
complaint, and, by Opinion and Order dated March 31, 1994, the Court granted in
part and denied in part the motions to dismiss.
<PAGE>
Additionally, by its March 31, 1994 Opinion and Order, the Court certified
the case as a class action, and ordered plaintiffs to replead by filing a new
complaint reflecting the Court's rulings. On April 15, 1994, plaintiffs served
and filed a new complaint, which defendants moved to strike for not conforming
to the court's ruling. On August 3, 1994, the Court granted defendants' motion
to strike the new complaint. Plaintiffs thereafter filed a revised second
amended complaint dated September 26, 1994. Factual discovery in this litigation
has concluded. Expert discovery is currently set to conclude in early 1996. The
defendants in this action believe that the remaining claims are without merit,
although whether or not the plaintiffs prevail, the Funds may be obligated to
indemnify and advance litigation expenses to certain of the defendants under the
terms and conditions of various indemnity provisions in the Funds' Partnership
Agreements and separate indemnification agreements, and the amount of such
indemnification and expenses could be material. Fund II has advanced amounts to
the indemnified parties based upon amounts which are deemed reimbursable in
accordance with the indemnification provisions and has included these amounts in
professional fees. The outcome of this case is not determinable at this time.
On August 9, 1994, the same two Limited Partners from Fund II and the
Retirement Fund commenced another putative class action in the US District Court
for the District of Delaware, purportedly on behalf of all persons who owned
limited partnership interests in the Funds on November 4, 1993, against the
Funds, the Managing General Partners, the Individual General Partners, the
Investment Adviser to the Funds and certain named affiliates of such persons.
Plaintiffs allege that the defendants violated certain provisions of the
Investment Company Act of 1940 and the common law in connection with the sale by
certain of the defendants of shares of common stock of Snapple Beverage Corp. in
a November 1993 secondary offering and seek actual and punitive damages and an
accounting in connection therewith. The defendants have filed papers in
opposition to the motion for partial summary judgment on January 10, 1995. On
August 4, 1995, plaintiffs filed an amended complaint alleging additional
violations of the Investment Company Act of 1940 and common law arising out of
the secondary offering. The plaintiffs moved for summary judgment on certain of
these claims. On October 13, 1995, the defendants in this litigation each filed
briefs in opposition to plaintiffs motion. Because the defendants in this action
believe that the claims are without merit, each defendant also filed a separate
motion to dismiss, although whether or not the plaintiffs prevail, the Funds may
be obligated to indemnify and advance litigation expenses to certain of the
defendants under the terms and conditions of various indemnity provisions in the
Funds' Partnership Agreements and separate indemnification agreements. The
outcome of this case is not determinable at this time.
<PAGE>
On November 2, 3 and 4, 1994, stockholders of Snapple Beverage Corp.
commenced approximately twenty putative class actions in the Delaware Chancery
Court, purportedly on behalf of all public stockholders of Snapple, against
Snapple, the Funds, Thomas H. Lee Equity Partners, L.P., and some or all of
Snapple's directors. Since then, the plaintiffs have filed a Consolidated
Amended Complaint against Snapple, the Funds, Thomas H. Lee Equity Partners,
L.P., some or all of Snapple's directors and Quaker Oats. The complaint alleges
that the sale of Snapple to Quaker Oats is at an unfair price and in violation
of the defendants' fiduciary duties to public stockholders. The plaintiffs
sought an injunction against the merger transaction, an accounting for any
damages suffered by the public stockholders, and attorneys' fees and related
expenses. The Court on November 15, 1994, denied plaintiffs application to take
expedited discovery and request to schedule a preliminary injunction hearing.
The defendants in these actions believe that the claims are without merit,
although whether or not the plaintiffs prevail, the Funds may be obligated to
indemnify and advance litigation expenses to certain of the defendants under the
terms and conditions of various indemnity provisions in the Funds' Partnership
Agreements and separate indemnification agreements. The outcome of this case is
not determinable at this time.
14. Commitments
On August 2, 1993, Fund II established a letter of credit from Banque
Nationale de Paris in favor of FLA. Orthopedics, a Non-Managed portfolio
company. Fund II posted as collateral a $605,200 Banque Nationale de Paris
certificate of deposit which pays an annual interest rate of 3.875%. If the
commitment is drawn upon, Fund II will receive additional subordinated notes and
equity of FLA. Orthopedics. The letter of credit will expire on May 1, 1996.
15. Income Taxes (Statement of Financial Accounting Standards No. 109)
No provision for income taxes has been made since all income and losses are
allocated to Fund II's partners for inclusion in their respective tax returns.
Pursuant to the Statement of Financial Accounting Standards No. 109 -
Accounting for Income Taxes, Fund II is required to disclose any difference in
the tax basis of Fund II's assets and liabilities versus the amounts reported in
the financial statements. Generally, the tax basis of the Fund II's assets
approximate the amortized cost amounts reported in the financial statements.
This amount is computed annually and as of December 31, 1994, the tax basis of
Fund II's assets are less than the amounts reported in the financial statements
by $4,416,180. This difference is primarily attributable to net unrealized
appreciation on investments which has not been recognized for tax purposes.
<PAGE>
16. Subsequent Events
On October 17, 1995 Playtex Products, Inc. and Banana Boat Holding Corp.
entered an Agreement and Plan of Merger (the "Agreement") pursuant to which
Playtex agreed to acquire all of the outstanding equity of Banana Boat not
already owned by Playtex. In accordance with the Agreement, the 12.5% Senior
Subordinated Note held by the Fund, plus all accrued interest, was paid in full
by Playtex upon consummation of the merger. Additionally, the Fund received net
proceeds of $173.55 per share for the 7444.5 Common Stock Purchase Warrants that
were exercised pursuant to the Agreement. As a result, the Fund received total
proceeds of $9,699,527 on October 31, 1995 which resulted in a gain of
$1,291,993. These proceeds will be distributed to the partners in December 1995
in a special distribution.
On November 3, 1995, the Individual General Partners approved the third
quarter 1995 cash distribution totaling $2,019,087 which represents net
investment income of $892,051 from Mezzanine Investments, $1,000,326 from a
return of the reserve for follow on investments and $126,710 from Temporary
Investments. The total amount distributed to Limited Partners was $1,124,247 or
$5.07 per Unit, which was paid on November 14,1995. The Managing General Partner
received a total of $2,535, with respect to its interest in Fund II, and
$892,051 in performance incentive fees. Thomas H. Lee, as an Individual General
Partner, received $254 with respect to his interest in Fund II.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
ML-LEE ACQUISITION FUND II, L.P.
SUPPLEMENTAL SCHEDULE OF REALIZED GAINS AND LOSSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NUMBER OF INVESTMENT NET REALIZED
SECURITY SHARES COST PROCEEDS GAIN
<S> <C> <C> <C> <C>
EquiCredit Corp.
Common Stock 227,437 $ 596 $7,278 $6,682
Petco Animal Supplies
Common Stock 120,143(a) 1,969 2,368 399
TOTAL $2,565 $9,646 $7,081
(a) Includes the underwriters overallotment option exercised on May 26, 1995.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
ML-LEE ACQUISITION FUND II, L.P.
SUPPLEMENTAL SCHEDULE OF UNREALIZED APPRECIATION (DEPRECIATION)
FOR THE PERIOD ENDED SEPTEMBER 30, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
UNREALIZED UNREALIZED
APPRECIATION APPRECIATION TOTAL
(DEPRECIATION) (DEPRECIATION) TOTAL UNREALIZED
FOR THE THREE FOR THE NINE UNREALIZED APPRECIATION
SECURITY MONTHS ENDED MONTHS ENDED APPRECIATION (DEPRECIATION) AT
INVESTMENT FAIR SEPTEMBER 30, SEPTEMBER 30, (DEPRECIATION) AT SEPTEMBER 30,
COST VALUE 1995 1995 DECEMBER 31, 1994 1995
<S> <C> <C> <C> <C> <C> <C>
PUBLICLY TRADED/UNDERLYING
SECURITY PUBLICLY TRADED:
EquiCredit Corp.
Common Stock* $ - $ - $ - $(6,654) $ 6,654 $ -
First Alert, Inc.
Common Stock 3,320 32,421 1,802 2,316 26,785 29,101
Hills Stores Company
Common Stock 34,776 5,927 (6,430) (4,940) (23,909) (28,849)
Petco Animal Supplies, Inc.
Common Stock 1,915 3,037 322 1,571 (449) 1,122
Playtex Products, Inc.
Common Stock 5,299 2,965 (387) 516 (2,850) (2,334)
Stanley Furniture
Common Stock 291 202 25 (29) (60) (89)
TOTAL UNREALIZED APPRECIATION
(DEPRECIATION) FROM PUBLICLY
TRADED SECURITIES $(4,668) $(7,220) $ 6,171 $(1,049)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
ML-LEE ACQUISITION FUND II, L.P.
SUPPLEMENTAL SCHEDULE OF UNREALIZED APPRECIATION (DEPRECIATION)
FOR THE PERIOD ENDED SEPTEMBER 30, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
UNREALIZED UNREALIZED
APPRECIATION APPRECIATION TOTAL
(DEPRECIATION) (DEPRECIATION) TOTAL UNREALIZED
FOR THE THREE FOR THE NINE UNREALIZED APPRECIATION
SECURITY MONTHS ENDED MONTHS ENDED APPRECIATION (DEPRECIATION) AT
INVESTMENT FAIR SEPTEMBER 30, SEPTEMBER 30, (DEPRECIATION) AT SEPTEMBER 30,
COST VALUE 1995 1995 DECEMBER 31, 1994 1995
<S> <C> <C> <C> <C> <C> <C>
NON PUBLIC SECURITIES:
Fitz and Floyd/Sylvestri
Common Stock $ 20 $ - $ - $ - $ (20) $ (20)
FLA. Orthopedics, Inc.
Common Stock* 1,513 - - - (1,513) (1,513)
Subordinated Note 4,842 2,421 - (2,421) - (2,421)
Stablex Canada Inc.
Subordinated Notes* 6,631 5,029 - - (1,602) (1,602)
TOTAL UNREALIZED APPRECIATION
(DEPRECIATION)FROM NON PUBLIC
SECURITIES (2,421) (3,135) (5,556)
NET UNREALIZED APPRECIATION
(DEPRECIATION) $(4,668) $(9,641) $ 3,036 $(6,605)
* Restricted security.
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity & Capital Resources
As of September 30, 1995, capital contributions from the Limited Partners
and the General Partners totaled $222,295,000 in the public offering of ML-Lee
Acquisition Fund II, L.P. ("Fund II"), the final closing for which was held on
January 5, 1990. Net proceeds which were available for investment to Fund II as
of September 30, 1995 were $160,908,803, after returns of capital to partners,
volume discounts, sales commissions and organizational, offering, sales and
marketing expenses.
At September 30, 1995, Fund II had outstanding a total of $144,115,397
invested in Mezzanine Investments representing $113,794,255 Managed and
$30,321,142 Non-Managed portfolio investments. The remaining proceeds were
invested in Temporary Investments primarily comprised of commercial paper and
bankers' acceptances with maturities of less than two months.
Excluding subordinated notes placed on non-accrual status, Fund II during
the nine months ending September 30, 1995 received $441,900 in additional debt
securities in lieu of cash interest payments ("payment-in-kind" securities) as
provided in certain of its subordinated note investments. As of September 30,
1995, Fund II has in its portfolio of investments $751,907 of payment-in-kind
debt securities and $2,293,457 of payment-in-kind equity securities, which
excludes $7,278,058 of payment-in-kind securities received from notes placed on
non-accrual status.
Fund II invested substantially all of its net proceeds in Mezzanine
Investments consisting of high-yield subordinated debt and/or preferred stock
linked with an equity participation, of middle market companies in connection
with friendly leveraged acquisitions, recapitalizations and other leveraged
financings. Fund II's Mezzanine Investments typically were issued in private
placement transactions which are generally subject to certain restrictions on
sales thereby limiting their liquidity. Fund II was fully invested as of
December 20, 1992, which was within 36 months from the date of the final closing
(after including the reserve for follow-on investments and exclusive of amounts
available for reinvestment). The reinvestment period for various amounts of
capital proceeds received during the last quarter of Fund II's investment period
terminated at various times through December 21, 1993.
<PAGE>
As provided by the Partnership Agreement, the Managing General Partner of
Fund II receives incentive fees from transactions to the extent certain returns
of capital and priority returns are achieved. As of September 30, 1995, the
amount that was deferred in payment(the "Deferred Distribution Amount") to the
Managing General Partner in accordance with the Partnership Agreement is
$2,937,537. To the extent not payable to the Managing General Partner, this
Deferred Distribution Amount is distributed to the Partners pro-rata in
accordance with their capital contributions, and certain amounts otherwise later
payable to Limited Partners from distributable cash from operations would
instead be payable to the Managing General Partner until the Deferred
Distribution Amount is paid in full. As of November 14, 1995, the Deferred
Distribution Amount owed to the Managing General Partner is $2,045,486.
On August 6, 1991, the Independent General Partners approved a reserve for
follow-on investments of $24,985,029 for Fund II. As of November 14,1995, the
reserve balance has been reduced to $9,904,608 due to follow-on investments of
$286 in Petco Animal Supplies, $2,418,970 in Fitz and Floyd, Inc., $240,060 in
Fine Clothing, Inc. and $4,500,826 for a Certificate of Deposit related to the
reorganization of Hills. Fund II also made a follow-on investment in Ghirardelli
Holdings Corp. of $1,635,000 and returned $5,285,079 of the reserve to partners
during the nine months ended September 30, 1995. The Independent General
Partners have approved an additional reserve of $1,000,000 to be distributed to
the partners on November 14, 1995. The level of the reserve was based upon an
analysis of potential follow-on investments in specific portfolio companies,
which may become necessary to protect or enhance Fund II's existing investment.
All net proceeds from the sale of Mezzanine Investments received by Fund II
in the future will be distributed to its partners unless applied to or set aside
for expenses or follow-on investments.
The proportion of distributions provided by net investment income has
dropped significantly from prior years, due primarily to increased sales and
redemptions of Mezzanine Investments, a resulting decrease in investment income
as those holdings cease to generate interest income. Given the outstanding
Deferred Distribution Amount noted above, it is expected that all net investment
income from Mezzanine Investments will be distributed to the Managing General
Partner until the Managing General Partner receives an amount equal to any
outstanding Deferred Distribution Amount. Given these circumstances, it is
expected that the majority of any future cash distributions to Limited Partners
for the next few years will almost entirely be derived from gains and recovered
capital from asset sales, which are subject to market conditions and are
inherently unpredictable as to timing. Assuming there are no asset sales in a
particular quarter, Limited Partners are expected to receive only small amounts
of net distributable cash from Temporary Investments, estimated to be less than
one dollar per Limited Partnership Unit each quarter for the next few years.
Distributions therefore are expected to vary significantly in amount and may not
be made in every quarter.
<PAGE>
Investment In High-Yield Securities
Fund II invests primarily in subordinated debt and preferred stock
securities ("High-Yield Securities"), generally linked with an equity
participation, issued in conjunction with the mezzanine financing of privately
structured, friendly leveraged acquisitions, recapitalizations and other
leveraged financings. High-Yield Securities are debt and preferred equity
securities that are unrated or are rated by Standard & Poor's Corporation as BB
or lower and by Moody's Investor Services, Inc. as Ba or lower. Risk of loss
upon default by the issuer is significantly greater with High-Yield Securities
than with investment grade securities because High-Yield Securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Also, these issuers usually have high levels of indebtedness and are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates, than investment grade issuers. Most of these securities are
subject to resale restrictions and generally there is no quoted market for such
securities.
Although Fund II cannot eliminate the risks associated with its investments
in High-Yield Securities, it has established and implemented risk management
policies. Fund II subjected each prospective investment to rigorous analysis,
and made only those investments that were recommended by the Investment Adviser
and that meet Fund II's investment guidelines or that had otherwise been
approved by the Managing General Partner and the Independent General Partners.
Fund II's investments were measured against specified Fund II investment and
performance guidelines. To limit the exposure of Fund II's capital in any single
issuer, Fund II limited the amount of its investment in a particular issuer.
Fund II's Investment Adviser also continually monitors portfolio companies in
order to minimize the risks associated with its investments in High-Yield
Securities.
Certain issuers of High-Yield Securities held by Fund II
(First Alert, Hills, Petco, Playtex and Stanley Furniture) have registered their
equity securities in public offerings. Although the equity securities of the
same class presently held by Fund II (other than Stanley Furniture) were not
registered in these offerings, Fund II has the ability under Rule 144 of the
Securities Act of 1933 to sell publicly traded equity securities held by it for
at least two years on the open market, subject to the volume restrictions set
forth in that rule. The Rule 144 volume restrictions generally are not
applicable to equity securities of non-affiliated companies held by Fund II for
at least three years. In certain cases, Fund II has agreed not to make any sales
of equity securities for a specified hold-back period following a public
offering.
The Investment Adviser reviews each portfolio company's financial statements
quarterly. In addition, the Investment Adviser routinely reviews and discusses
financial and operating results with the company's management and where
appropriate, attends board of director meetings. In some cases, representatives
of the Investment Adviser, acting on behalf of the Funds (and affiliated
investors where applicable), serve as one or more of the directors on the boards
of portfolio companies. Fund II may from time to time make follow-on investments
to the extent necessary to protect or enhance its existing investments.
<PAGE>
Results of Operations
Investment Income and Expenses
The investment income from operations for the quarter consists primarily of
interest and discount income earned on the investment of proceeds from partners'
contributions in Mezzanine Investments and short-term money market instruments.
For the nine months ended September 30, 1995, Fund II had investment income
of $5,861,519, as compared to $11,610,226 for the same period in 1994. The
decrease of $5,748,707 in 1995 investment income from 1994 is due primarily to
the recognition of previously unrecorded interest, dividend and discount income
of $3,071,447 related to Petco Animal Supplies that was recorded in the first
quarter 1994. Also contributing to this decrease is (i) the amount of temporary
investments held by Fund II in 1995 after distributions of return of capital to
partners and (ii) the placement of two debt securities on non-accrual status
during 1995.
For the three months ended September 30, 1995, Fund II had investment income
of $1,981,008, compared to $2,780,482 for the same period in 1994.
Major expenses for the period ended September 30, 1995 consisted of the
Investment Advisory Fee, legal and professional fees, Fund Administration Fee,
the Independent General Partners' Fees and Expenses.
The Investment Adviser and Fund Administrator both receive their
compensation on a quarterly basis. The total Investment Advisory Fees paid to
the Investment Adviser for the nine months ended September 30, 1995 and 1994
were $1,156,833 and $1,293,686, respectively, and are calculated at an annual
rate of 1.0% of assets under management (net offering proceeds reduced by
cumulative capital reductions), with a minimum annual amount of $1,200,000 for
Fund II and the Retirement Fund on a combined basis. For the three months ended
September 30, 1995 and 1994, Fund II paid $373,533 and $398,704, respectively,
in Investment Advisory Fees. The decrease in 1995's as compared to 1994's
Investment Advisory Fee was a direct result of returns of capital to partners
and realized losses on investments.
Legal and professional fees for the nine months ended September 30, 1995 and
1994 were $1,003,338 and $1,738,726, respectively. These fees were primarily
incurred in connection with the litigation proceedings as described in Note 13
to the Financial Statements. For the three months ended September 30, 1995 and
1994 Fund II incurred $613,814 and $743,938, respectively, in legal and
professional fees. The decrease is attributable to a decrease in legal fees
incurred and advanced on behalf of indemnified defendants as well as fees
incurred directly by Fund II in connection with the aforementioned litigation
proceedings.
<PAGE>
The Fund Administration Fees paid to the Fund Administrator for the nine
months ended September 30, 1995 and 1994 were $599,851 and $631,107,
respectively, and are calculated at an annual rate of 0.45% of the excess of net
offering proceeds less 50% of capital reductions. For the three months ended
September 30, 1995 and 1994, Fund II paid $197,233 and $202,896, respectively,
in Fund Administration Fees. The decrease in 1995's as compared to 1994's Fund
Administration Fees was a direct result of returns of capital to partners and
realized losses on investments.
Pursuant to the administrative services agreement between Fund II and the
Fund Administrator, effective November 10, 1993, a portion of the actual
out-of-pocket expenses incurred in connection with the administration of the
Retirement Fund is reimbursable to the Fund Administrator. Actual out-of-pocket
expenses ("reimbursable expenses") primarily consist of printing, audits, tax
preparation and custodian fees. For the nine months ended September 30, 1995 and
1994, reimbursable expenses totaled $90,182 and $194,337, respectively. The
decrease from 1994 to 1995 is due to an increase in the accrual for reimbursable
expenses in 1994.
For the nine months ended September 30, 1995 and 1994, Fund II incurred
$122,394 and $80,184, respectively, in Independent General Partners' Fees and
Expenses. The increase in Independent General Partners' Fees and Expenses was
primarily attributable to the increase in legal fees incurred and advanced on
behalf of indemnified Independent General Partners in connection with the
aforementioned litigation proceedings. (See Note 13 to the Financial
Statements).
For the nine months ended September 30, 1995, Fund II had net investment
income of $2,885,370, as compared to $7,624,420 for the same period in 1994. For
the three months ended September 30, 1995, Fund II had net investment income of
$742,273 as compared to $1,333,830 for the same period in 1994. This decrease in
1995 as compared to 1994 is primarily attributable to higher interest, discount
and dividend income recorded from Mezzanine Investments in 1994 due to Petco
Animal Supplies' September 17, 1994 initial public offering.
Net Assets
Fund II's net assets decreased by $17,533,115 during the nine months ended
September 30, 1995, due to the payment of cash distributions to partners of
$17,861,057 ($6,006,824 of the cash distributions paid was return of capital
from the sale of portfolio investments and the return of a portion of the
reserve to Limited Partners) and net unrealized depreciation of $9,640,975,
partially offset by realized gain from the sale of EquiCredit and Petco of
$7,080,913 and net investment income of $2,885,370. The 1995 decrease in net
assets over the nine months is smaller than the decrease in the comparable 1994
period. This compares to the nine months ended September 30, 1994's net assets
decreasing by $55,878,511 due to the payment of cash distributions to partners
of $32,106,064 ($16,225,312 of the cash distributions paid was return of capital
from the sales portfolio investments) and net unrealized depreciation of
$31,899,722, partially offset by net investment income of $7,624,420 and net
realized gains of $502,855.
<PAGE>
Fund II's net assets decreased by $7,402,308 during the three months ended
September 30, 1995, due to net investment income of $742,273 partially offset by
net unrealized depreciation of $4,668,098 and the payment of cash distributions
to partners of $3,477,483 ($125,641 of the cash distributions paid was from the
return of capital from the sale of Petco). This compares to the three months
ended September 30, 1994's net assets decreasing by $22,706,981 due to the
payment of cash distributions to partners of $4,214,710 ($2,720,889 of the cash
distributions paid was return of capital from the sales of portfolio
investments) and net unrealized depreciation of $19,826,101, partially offset by
net investment income of $1,333,830.
Unrealized Appreciation and Depreciation on Investments
For the nine months ended September 30, 1995, Fund II recorded net
unrealized depreciation of $9,640,975 (of which $7,220,175 is net unrealized
depreciation from publicly traded securities and $2,420,800 is net unrealized
depreciation from non-public securities) compared to a net unrealized
depreciation of $31,899,722 for the same period in 1994. On September 30, 1995,
Fund II's cumulative net unrealized depreciation on investments totaled
$6,604,923. The decrease in 1995 depreciation as compared to 1994 can be
attributed to the increase in value of First Alert at September 30, 1995 offset
by the unrealized depreciation recorded in the investment in Hills Stores and
reversal of unrealized appreciation due to the sale of EquiCredit in the first
quarter of 1995.
For the three months ended September 30, 1995, Fund II recorded net
unrealized depreciation on investments of $4,668,098 (all of which is from
publicly traded securities), compared to a net unrealized depreciation of
$19,826,101 for the same period in 1994.
Fund II's valuation of the Common Stock of First Alert, Hills, Petco,
Playtex and Stanley Furniture reflect their closing market prices at September
29, 1995.
The Managing General Partner and the Investment Adviser review the valuation
of Fund II's portfolio investments that do not have a readily ascertainable
market value on a quarterly basis with final approval from the Individual
General Partners. Portfolio investments are valued at original cost plus accrued
value in the case of original issue discount or deferred pay securities. Such
investments will be revalued if there is an objective basis for doing so at a
different price. Investments will be written down in value if the Managing
General Partner and Investment Adviser believe adverse credit developments of a
significant nature require a write-down of such securities. Investments will be
written up in value only if there has been an arms'-length third party
transaction to justify the increased valuation.
A number of Fund II's assets (at cost) are invested in private placement
securities for which there are no ascertainable market values. Although the
Managing General Partner and Investment Adviser use their best judgment in
estimating the fair value of these investments, there are inherent limitations
in any estimation technique. Therefore, the fair value estimates presented
herein are not necessarily indicative of the amount which Fund II could realize
in a current transaction.
<PAGE>
The First Alert, Petco and Playtex securities held by Fund II are restricted
securities under the SEC's Rule 144 and can only be sold under that rule, in a
registered public offering, or pursuant to an exemption from the registration
requirement. In addition, resale in some cases is restricted by lockup or other
agreements. Fund II may be considered an affiliate of First Alert and Stanley
Furniture under the SEC's Rule 144, and therefore any resale of securities of
those companies under Rule 144 is limited by the volume limitations in that
rule. Accordingly, the values referred to in the financial statements for the
remaining First Alert, Petco, Playtex and Stanley Furniture securities held by
Fund II do not necessarily represent the prices at which these securities could
currently be sold.
The information presented herein is based on pertinent information available
to the Managing General Partner and Investment Adviser as of September 30, 1995.
Although the Managing General Partner and Investment Adviser are not aware of
any factors not disclosed herein that would significantly affect the estimated
fair value amounts, such amounts have not been comprehensively revalued since
that time, and the current estimated fair value of these investments may have
changed significantly since that point in time.
For additional information, please refer to the Supplemental Schedule of
Unrealized Appreciation and Depreciation (Schedule 2 - pages 28 - 29).
Realized Gains and Losses
For the nine months ended September 30, 1995, Fund II had net realized gains
from the sales of EquiCredit and Petco Animal Supplies of $7,080,913 as compared
to $502,855 for the same period in 1994.
For additional information, please refer to the Supplemental Schedule of
Realized Gains and Losses (Schedule 1 - page 27).
Cash Distributions
On November 3, 1995, the Individual General Partners approved the third
quarter 1995 cash distribution totaling $2,019,087 which represents net
investment income of $892,051 from Mezzanine Investments, $1,000,326 from a
return of the reserve for follow on investments and $126,710 from Temporary
Investments. The total amount distributed to Limited Partners was $1,124,247 or
$5.07 per Unit, which was paid on November 14,1995. The Managing General Partner
received a total of $2,535, with respect to its interest in Fund II, and
$892,051 in performance incentive fees. Thomas H. Lee, as an Individual General
Partner, received $254 with respect to his interest in Fund II.
<PAGE>
Part II - Other Information
Items 1 - 4 are herewith omitted as the response to all items is either
none or not applicable.
Item 5. Other Information
On October 17, 1995 Playtex Products, Inc. and Banana Boat Holding Corp.
entered an Agreement and Plan of Merger (the "Agreement") pursuant to which
Playtex agreed to acquire all of the outstanding equity of Banana Boat not
already owned by Playtex. In accordance with the Agreement, the 12.5% Senior
Subordinated Note held by the Fund, plus all accrued interest, was paid in full
by Playtex upon consummation of the merger. Additionally, the Fund received net
proceeds of $173.55 per share for the 7444.5 Common Stock Purchase Warrants that
were exercised pursuant to the Agreement. As a result, the Fund received total
proceeds of $9,699,527 on October 31, 1995 which resulted in a gain of
$1,291,993. These proceeds will be distributed to the partners in December 1995
in a special distribution.
On November 1, 1995, the Fund entered into a Partnership Interest
Redemption Agreement (the "Agreement") with National Tobacco Company, LP.
Pursuant to the Agreement, National Tobacco will redeem the Class A Partnership
Interests and repay all Subordinated Notes, plus unpaid and accrued interest,
held by Fund II. As consideration, National Tobacco shall pay a 2.5% prepayment
penalty on the principal amount of the 13% subordinated note and pay a
contingent interest amount to be determined in accordance with the Agreement.
The prepayment penalty and contingent interest amounts will be calculated as of
the closing date which is anticipated to occur by December 20, 1995. This
Agreement may be terminated by either party if the closing does not occur on or
before December 20, 1995.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule for the quarter ending September
30, 1995.
(b) Reports on form 8-K: None
<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 this
14th day of November, 1995.
ML-LEE ACQUISITION FUND II, L.P.
By: Mezzanine Investments II, L.P.,
Managing General Partner
By: ML Mezzanine II Inc.,
its General Partner
Dated: November 14, 1995 /s/ James V. Caruso
James V. Caruso
Executive Vice President and Director
Dated: November 14, 1995 /s/ Audrey Bommer
Audrey Bommer
Vice President and Treasurer
(Chief Financial Officer)
<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 this
14th day of November, 1995.
ML-LEE ACQUISITION FUND II, L.P.
By: Mezzanine Investments II, L.P.,
Managing General Partner
By: ML Mezzanine II Inc.,
its General Partner
Dated: November 14, 1995
James V. Caruso
Executive Vice President and
Director
Dated: November 14, 1995
Audrey Bommer
Vice President and Treasurer
(Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the third
quarter of 1995 Form 10Q Balance Sheets and Statements of Operations and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 144,115,397
<INVESTMENTS-AT-VALUE> 137,527,601
<RECEIVABLES> 1,319,045
<ASSETS-OTHER> 508
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 150,505,178
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,325,937
<TOTAL-LIABILITIES> 1,325,937
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 221,745
<SHARES-COMMON-PRIOR> 221,745
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (6,604,923)
<NET-ASSETS> 149,177,242
<DIVIDEND-INCOME> 46,660
<INTEREST-INCOME> 5,096,841
<OTHER-INCOME> 718,019
<EXPENSES-NET> 2,977,149
<NET-INVESTMENT-INCOME> 2,884,370
<REALIZED-GAINS-CURRENT> 7,080,913
<APPREC-INCREASE-CURRENT> (9,640,975)
<NET-CHANGE-FROM-OPS> 325,308
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,927,816
<DISTRIBUTIONS-OF-GAINS> 8,926,453
<DISTRIBUTIONS-OTHER> 6,006,825
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (17,536,749)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,156,833
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,977,149
<AVERAGE-NET-ASSETS> 157,945,617
<PER-SHARE-NAV-BEGIN> 730.09
<PER-SHARE-NII> 8.41
<PER-SHARE-GAIN-APPREC> (14.96)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (64.00)
<RETURNS-OF-CAPITAL> 26.54
<PER-SHARE-NAV-END> 659.55
<EXPENSE-RATIO> 0.005
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
