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 Quarter Ended March 31, 1995
Commission File Number 0-17383
ML-LEE ACQUISITION FUND II, L.P.
(Exact name of registrant as specified in its Governing
Instruments)
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) 236-7303
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.
<PAGE>
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 March 31, 1995 and December 31, 1994 3
Statements of Operations - For the Quarters Ended
March 31, 1995 and March 31, 1994 4
Statements of Changes in Net Assets - For the
Quarters Ended March 31, 1995 and March 31, 1994 5
Statements of Cash Flows - For the Quarters Ended
March 31, 1995 and March 31, 1994 6
Statement of Changes in Partner's Capital 7
Schedule of Portfolio Investments - March 31, 1995 8
Notes to Financial Statements 14
Supplemental Schedule of Realized Gains and Losses -
(Schedule 1) 28
Supplemental Schedule of Unrealized Appreciation and
Depreciation - (Schedule 2 ) 29
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 31
Part II. Other Information 40
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
March
31,1995 December
(Unaudited) 31, 1994
ASSETS:
<S> <C> <C>
Investments - Notes 2,4
Portfolio Investments, at fair value
Managed Companies $106,443 $120,895
(amortized cost $114,129 at
March 31, 1995 and $114,726 at
December 31, 1994) $106,443 $120,895
Non-Managed Companies
(amortized cost $29,891 at March 31,
1995 and $29,888 at December 31, 1994) 24,335 26,753
Temporary Investments, at amortized
cost (cost $18,815 at March 31, 1995 and
$18,345 at December 31, 1994) 18,914 18,390
Cash 6 1
Accrued Interest Receivable - Note 2 2,222 1,763
Prepaid Expenses 3 4
TOTAL ASSETS 151,923 $167,806
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities
Professional Fees Payable $113 $160
Independent General Partners' Fees
Payable - Note 11 34 46
Deferred Interest Income - Note 2 849 886
Total Liabilities 996 1,092
Partners' Capital - Note 2
Individual General Partner 36 40
Managing General Partner 4,814 4,780
Limited Partners (221,745 Units) 146,077 161,894
Total Partners' Capital 150,927 166,714
TOTAL LIABILITIES AND PARTNERS' CAPITAL $151,923 $167,806
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Quarters Ended
March 31, March 31,
1995 1994
<S> <C> <C>
INVESTMENT INCOME - NOTES 2,6:
Interest $1,957 $5,445
Discount 286 564
Dividends - 84
TOTAL INCOME 2,243 6,093
EXPENSES:
Investment Advisory Fee - Note 8 391 446
Fund Administration Fee - Note 9 201 214
Amortization of Deferred
Organization expenses - Note 2 - 14
Professional Fees 144 390
Reimbursable Administrative
Expenses - Note 10 1 -
Independent General Partners' Fees
and Expenses - Note 11 44 25
Insurance Expense 1 1
TOTAL EXPENSES 782 1,090
NET INVESTMENT INCOME 1,461 5,003
Net Realized Gain on Investments -
Note 4 and Schedule 1 6,682 503
Net Change in Unrealized
Depreciation on Investments -
Note 5 and Schedule 2 (16,278) (3,921)
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS (8,135) 1,585
Lee: Incentive Fee to Managing
General Partner (4,863) -
NET INCREASE (DECREASE) AVAILABLE
FOR PRO-RATA DISTRIBUTION TO ALL
PARTNERS $(12,998) $1,585
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Quarters Ended
March 31, March 31,
1995 1994
<S> <C> <C>
FROM OPERATIONS:
Net Investment Income $ 1,461 $ 5,003
Net Realized Gain on Investments -
Note 4 and Schedule 1 6,682 503
Net Change in Unrealized
Depreciation on Investments - Note
5 and Schedule 2 (16,278) (3,921)
Net Increase (Decrease) in Net
Assets Resulting From Operations (8,135) 1,585
Cash Distributions to Partners (7,652) (11,804)
Total Decrease (15,787) (10,219)
NET ASSETS:
Beginning of Year 166,714 297,301
End of Period $ 150,927 $287,082
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Quarters Ended
March 31, March 31,
1995 1994
<S> <C> <C>
INCREASE IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest, Discount and Dividends $ 1,689 $ 6,473
Professional Fees (153) (431)
Investment Advisory Fee (391) (446)
Fund Administration Fee (201) (214)
Independent General Partners' Fees and
Expenses (56) (52)
Insurance Expense - -
Reimbursable Administrative Expenses (39) -
(Purchase) Sale of Temporary Investments,
Net (470) 5,976
Proceeds from Sales of Portfolio Company
Investments 7,278 1,667
Net Cash Provided by Operating Activities 7,657 12,973
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Distributions to Partners (7,652) (11,804)
Net Cash Applied to Financing Activities (7,652) (11,804)
Net Increase in Cash 5 1,169
Cash at Beginning of Year 1 1
Cash at End of Period $ 6 $ 1,170
RECONCILIATION OF NET INVESTMENT INCOME
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES
Net Investment Income $ 1,461 $ 5,003
Adjustments to Reconcile Net Investment
Income to Net Cash Provided by Operating
Activities:
Decrease in Investments 126 17,841
Increase in Receivable for Investment Sold - (10,198)
(Increase)Decrease in Accrued Interest
Receivables (554) 380
Decrease in Prepaid Expenses 1 2
Amortization of Deferred Organization - 14
Expenses
Decrease in Professional Fees Payable (47) (46)
Decrease in Independent General Partners'
Fees Payable (12) (23)
Decrease in Option Payable - (503)
Net Realized Gain on Investments 6,682 503
Total Adjustments 6,196 7,970
Net Cash Provided by Operating Activities $ 7,657 $ 12,973
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Individual Managing Limited
General General Partners Total
Partner Partner
<S> <C> <C> <C> <C>
For the Quarter Ended March 31, 1995
Partners' Capital at January 1,
1995 $ 40 $ 4,780 $161,894 $166,714
Allocation of Net Investment Income
- Note 3 - 386 1,075 1,461
Allocation of Net Realized Gain on
Investments - Notes 3,4 2 734 5,946 6,682
Allocation of Net Change in
Unrealized Depreciation on
Investments - Notes 2,5 (4) (37) (16,237) (16,278)
Cash Distributions to Partners (2) (1,049) (6,601) (7,652)
Partners' Capital at March 31, 1995
- Notes 2,3 $ 36 $ 4,814 $146,077 $150,927
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
Fair
Principal Investmen Investmen Value % Of
Amount Investment t t (Note 2) Total
Shares Date Cost Investme
nts
<S> <C> <C> <C> <C> <C>
MEZZANINE INVESTMENTS
MANAGED COMPANIES
ANCHOR ADVANCED PRODUCTS, INC. (b)
$5,867 Anchor Advanced Products, Inc., Sr. Sub. Nt. 04/30/90 $5,867 $5,867
11.67% due 04/30/00 (c)
$7,822 Anchor Advanced Products, Inc., Jr. Sub. Nt. 04/30/90 7,822 7,822
17.5% due 04/30/00 (c)
162,967 Anchor Holdings Inc., Common Stock (d) 04/30/90 1,548 1,548
Shares
247,710 Anchor Holdings Inc., Common Stock Purchase 04/30/90 0 0
Warrants Warrants (d)
(26.5% of fully diluted common equity assuming 15,237 15,237 10.18
exercise of warrants)
BIG V SUPERMARKETS, INC. (b)
$13,037 Big V Supermarkets, Inc., Sr. Sub. Nt. 14.14% 12/27/90 13,037 13,037
due 03/15/01(c)
117,333 Big V Holding Corp., Common Stock (d) 12/27/90 4,107 4,107
Shares
(16.6% of fully diluted common equity)(k) 17,144 17,144 11.45
COLE NATIONAL CORPORATION
1,341 Cole National Corporation, Common Stock 09/26/90 0 0
Warrants Purchase Warrants(d)
(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
CST OFFICE PRODUCTS, INC. (b) - Note 6
$6,355 Lee-CST Acquisition Corp., Sr. Sub. Nt. 12% due 03/30/90 6,355 6,355
03/31/00(c)(h)
$6,355 Lee-CST Acquisition Corp., Jr. Sub. Nt. 18% due 03/30/90 6,355 6,355
03/31/00(c)(h)
$2,294 CST Office Products Corp., Sr. Sub. Nt. 15% due Various 195 195
03/31/00(c)(f)(h)
$3,047 CST Office Products Corp., Jr. Sub. Nt. 15% due Various 0 0
06/30/96(c)(f)(h)
162,949 Lee-CST Holding Corp., Common Stock (d) 03/30/90 1,304 1,304
Shares
177,207 Lee-CST Holding Corp., Common Stock Purchase 03/30/90 0 0
Warrants Warrants (d)
(23.1% of fully diluted common equity assuming 14,209 14,209 9.49
exercise of warrants)
</TABLE>
See the Accompanying Notes to the Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
Fair
Principal Investmen Investmen Value % Of
Amount Investment t t (Note 2) Total
Shares Date Cost Investmen
ts
<S> <C> <C> <C> <C> <C>
FIRST ALERT, INC.(b) - Note 5
2,058,474 First Alert, Inc., Common Stock(a)(d) 07/31/92 $3,320 $21,357
Shares
(8.1% of fully diluted common equity)(k)
$ 10,198 12.5% Sub. Note
Purchased 07/31/92 $10,198
Repaid 03/28/94 $10,198
Realized Gain $ 0 3,320 21,357 14.26
GHIRARDELLI HOLDINGS CORPORATION (b) - Note 16
$4,672 Ghirardelli Holdings Corporation, 13% 03/31/92 4,672 4,672
Subordinated Note due 03/31/02(c)
467,200 Ghirardelli Holdings Corporation, Common 03/31/92 934 934
Shares Stock(d)
(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 5,606 5,606 3.74
HILLS STORES COMPANY (b) - Notes 4,5,16
458,432 Hills Stores Company, Common Stock(a)(j) 04/03/90 30,246 9,283
Shares
219,156 Hills Stores Company, Common Stock Rights (d) Various 4,530 1,354
Rights
(3.7% of fully diluted common equity assuming 34,776 10,637 7.11
exercise of put options)
PETCO ANIMAL SUPPLIES, INC. (b) - Notes 5,16
236,968 Petco Animal Supplies, Common Stock(a)(d) Various 3,885 4,976
Shares
(3.9% 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
Total Realized Gain $ 0 3,885 4,976 3.32
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
Fair
Principal Investmen Investmen Value % Of
Amount Investment t t (Note 2) Total
Shares Date Cost Investmen
ts
<S> <C> <C> <C> <C> <C>
PLAYTEX PRODUCTS, INC. - Notes 5,7
343,726 Playtex Products, Inc., Common Stock (a) (d) 03/29/90 $5,299 $2,750
Shares
(1.1% 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 2,750 1.84
RESTAURANTS UNLIMITED
$6,044 Restaurants Unlimited, 11% Subordinated Note 06/03/94 6,044 6,044
due 06/30/02(c)
391,302 Restaurants Unlimited, Common Stock Warrants(d) 06/03/94 0 0
Warrants
(2.4% of fully diluted common equity) 6,044 6,044 4.04
STANLEY FURNITURE COMPANY, INC. (b) - Note 5
23,105 Shares Stanley Furniture Company, Inc., Common 06/30/91 291 165
Stock(a)(j)
(0.4% of fully diluted common equity) 291 165 0.12
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
Fair
Principal Investmen Investmen Value % Of
Amount Investment t t (Note 2) Total
Shares Date Cost Investmen
ts
<S> <C> <C> <C> <C> <C>
SUN PHARMACEUTICALS CORP.(b) - Note 7
$8,318 Sun Pharmaceuticals Corp., 12.5% Sub. Nt. due $ 8,318 $ 8,318
12/31/02 (c)
7,444.5 Banana Boat Holding Corp., Common Stock 0 0
Warrants Purchase Warrants (d) (i)
(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 5.56
TOTAL INVESTMENT IN MANAGED COMPANIES $114,129 $106,443 71.11
NON-MANAGED COMPANIES
BIOLEASE, INC.
$784 Biolease, Inc., 13% Sub. Nt. due 06/06/04 (c) 06/08/94 676 685
96.56 Shares BioLease, Inc., Common Stock (d) 06/08/94 94 94
40,057 Biotransplant, Inc., Common Stock Purchase 06/08/94 14 14
Warrants Warrants (d)
784 793 0.53
FITZ AND FLOYD/SYLVESTRI -Notes 4,5,6
$10,281 FFSC, Inc., Adjustable Rate Sr. Sub. Nt. due 03/31/93 10,266 10,268
03/31/03(c)
$ 2,419 FFSC, Inc., Adjustable Rate Sr. Sub. Nt. due 07/30/93 2,414 2,414
03/31/03(c)
1,511,856 FF Holding Co., Common Stock (d) 03/31/93 15 0
Shares
514,636 FF Holding Co., Common Stock (d) 07/30/93 5 0
Shares
12,700 12,682 8.47
FLA. ORTHOPEDICS, INC. - Note 6
$4,842 FLA. Acquisition Corp., 12.5% Sub. Nt. due 08/02/93 4,842 2,421
07/31/99(c)
121,040 FLA. Holdings, Inc. Common Stock(d) 08/02/93 1,513 0
Shares
72,624 FLA. Holdings, Inc. Common Stock Purchase 08/02/93 0 0
Warrants Warrants(d)
6,355 2,421 1.62
NATIONAL TOBACCO COMPANY, L.P.
$3,503 National Tobacco Company, 13% Sub. Nt. due 04/14/92 3,503 3,503
10/15/98(c)
$ 115 National Tobacco Company, 16% Sub. Nt. due 06/30/93 115 115
10/15/98(c)(f)
$ 234 National Tobacco Company, Class A Partnership 04/14/92 234 234
Int.(d)
3,852 3,852 2.57
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
Fair
Principal Investmen Investmen Value % Of
Amount Investment t t (Note 2) Total
Shares Date Cost Investmen
ts
<S> <C> <C> <C> <C> <C>
SORETOX
$6,189 Stablex Canada, Inc., Sub. Nt. 14% due 11/30/01 12/06/91 $ 6,189 $ 4,587
(c)
183,921 176347 Canada, Inc., Common Stock Purchase 12/06/91 0 0
Warrants Warrants (d)
6,189 4,587 3.06
TOTAL INVESTMENT IN NON-MANAGED COMPANIES $29,880 24,335 16.25
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes Various 86,670 82,658 55.22
Partnership Interest 04/14/92 234 234 0.16
Common Stock, Warrants and Stock Rights Various 57,105 47,886 31.98
TOTAL MEZZANINE INVESTMENTS $144,009 $130,778 87.36
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
Fair
Principal Investmen Investmen Value % Of
Amount Investment t t (Note 2) Total
Shares Date Cost Investmen
ts
<S> <C> <C> <C> <C> <C>
TEMPORARY INVESTMENTS
CERTIFICATES OF DEPOSIT AND TIME DEPOSITS
$ 605 Banque Nationale de Paris, 3.875% due 03/29/96 8/18/93 $ 605 $ 6
- Note 14 05
TOTAL INVESTMENT IN C/D'S AND TIME DEPOSITS 605 605 .40
COMMERCIAL PAPER
$6,000 BMW, 6.0% due 04/03/95 02/14/95 5,952 5,998
$3,730 BMW 5.95% due 04/03/95 03/15/95 3,718 3,729
$8,086 Ford Motor Corp., 5.94 due 04/03/95 03/01/94 8,042 8,083
$ 500 General Electric Capital Services, Inc., 5.6% 03/21/95 498 499
due 04/18/95
TOTAL INVESTMENT IN COMMERCIAL PAPER 18,210 18,309 12.22
TOTAL TEMPORARY INVESTMENTS $ 18,815 $ 18,914 12.62
TOTAL INVESTMENT PORTFOLIO $162,824 $149,692 100%
(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 $9 for Mezzanine Investments and
$45 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.
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
ML-LEE ACQUISITION FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 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.
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 March 31, 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
March 31, 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.
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 March 31, 1995 and
December 31, 1994, Fund II had in its portfolio of investments
$310,007 of payment-in-kind debt securities which excludes
$5,145,942 and $4,479,539, respectively, of payment-in-kind
securities received from notes placed on non-accrual status. As
of March 31, 1995 and December 31, 1994, Fund II had in its
portfolio of investments $2,322,516 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.
Interim Financial Statements
The financial information included in this interim report as
of March 31, 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 March 31, 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.
On August 6, 1991, the Independent General Partners approved
a reserve for follow-on investments of $24,985,029 for Fund II.
As of March 31, 1995, the reserve balance was reduced to
$17,824,887 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. 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. As
further discussed in Note 16, Fund II approved a follow-on
investment in Ghirardelli of $1,635,200 and has returned
$5,285,079 of the reserve to partners subsequent to the quarter
ended March 31, 1995.
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.
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 quarter ended March 31, 1995, Fund II recorded net
unrealized depreciation of $16,277,574 and as of this date, Fund
II's cumulative net unrealized depreciation on investments
totaled $13,241,518.
For the quarter ended March 31, 1994, Fund II recorded net
unrealized depreciation on investments of $3,920,768.
For additional information, please refer to the Schedule of
Unrealized Appreciation and Depreciation (Schedule 2 - pages 29-
30).
6. Non-Accrual of Investments
In accordance with Fund II's Accounting Policy, the following
notes has 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.
7. Covered Call and Put Options
Concurrently with the Funds' investment in Sun
Pharmaceuticals Corp. ("Sun"), Playtex Family Products
Corporation ("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.
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 Distributions paid to the Managing General
Partner (see Note 12). For the quarters ended March 31, 1995 and
1994, Fund II paid $390,624 and $445,853, 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
Distributions paid to the Managing General Partner (see 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 quarters ended March 31, 1995 and 1994, Fund
II paid $201,078 and $213,969, 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 Fund II is being reimbursed
to the Fund Administrator. Actual out-of-pocket expenses
primarily consist of printing, audits, tax preparation and
custodian fees. For the quarter ended March 31, 1995, Fund II
paid $38,153 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. During the first quarter of 1995, Fund II paid each
Independent General Partner $2,501 as non-recurring, additional
compensation with respect to 1994. For the quarters ended March
31, 1995 and 1994, Fund II incurred $31,911 and $24,520,
respectively, in Independent General Partners' Fees and Expenses.
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 quarter ended March 31, 1995, Fund II paid $38,153
owed to the Fund Administrator for reimbursable out-of-pocket
expenses (please refer to Note 10 for further information).
In the first quarter of 1995, the Fund II paid the Individual
General Partner distributions totaling $1,737 and paid the
Managing General Partner $1,048,588 (which includes $1,031,219 of
incentive fees and $17,369 with respect to their interest in Fund
II). Of this incentive fee amount, 95% or $979,659 was paid to
the Investment Advisor and the remaining 5% totaling $51,560 was
paid to ML Mezzanine II Inc. As of March 31, 1995, the Managing
General Partner has earned $15,874,202 in Incentive Fees of which
$4,863,286 is deferred in payment to the Managing General Partner
as a Deferred Distribution Amount in accordance with the
Partnership Agreement. 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 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 March 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.
Such settlement currently is under consideration by the court.
The defendants believe that the claim is without merit, although
whether or not the plaintiffs prevail Fund II 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 Partnership Agreement and separate
indemnification agreements. 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 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. 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. 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. On December 12, 1994, defendants moved to dismiss
plaintiffs' claims; plaintiffs filed their opposition papers on
or about January 10, 1995. This motion remains pending. The
defendants in this action 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.
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 have moved to dismiss the
complaint. 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 bases of Fund II's assets and
liabilities versus the amounts reported in the financial
statements. Generally, the tax bases 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 bases 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.
16. Subsequent Events
On May 8, 1995, the Individual General Partners approved the
first quarter 1995 cash distribution totaling $6,731,899 which
represents $5,283,954 as a return of the reserve for follow-on
investments, net investment income of $1,212,311 from Mezzanine
Investments and $235,634 from Temporary Investments. The total
amount distributed to Limited Partners was $5,505,928 or $24.83
per Unit, which was paid on May 15,1995. The Managing General
Partner received a total of $12,418, with respect to its interest
in Fund II, and $1,212,311 in performance incentive fees. Thomas
H. Lee, as an Individual General Partner, received $1,242 with
respect to his interest in Fund II.
On March 31, 1995 Petco Animal Supplies, Inc. announced a
public offering of 3 million shares of common stock, of which
approximately 2 million would be sold by Petco and approximately
1 million would be sold by Petco's shareholders, including Fund
II. The offering was effected on April 27, 1995 and Fund II sold
109,674 shares for a net price of $19.7125 per share. Fund II
received proceeds of approximately $2.2 million, realizing a gain
of approximately $364,000. Fund II may sell up to 16,451
additional shares which represents the underwriters'
overallotment option, which may be exercised until May 27, 1995.
On May 3, 1995 Dickstein Partners, Inc. offered to buy the
outstanding common stock of Hills Stores, Co. for $25 per share.
On May 8, 1995, the Independent General Partners approved a
return of the reserve for follow-on investments to Fund II's
partners of $5,285,079 and approved a follow-on investment in
Ghirardelli Holdings Corp. of $1,635,200, which will then reduce
the reserve for follow-on investments to $10,904,608. The follow-
on investment in Ghirardelli is contingent upon Fund II receiving
certain documents related to the transaction.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
ML-LEE ACQUISITION FUND II, L.P.
SUPPLEMENTAL SCHEDULE OF REALIZED GAINS AND LOSSES
FOR THE QUARTER ENDED MARCH 31, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NUMBER OF INVESTMENT NET
SECURITY SHARES COST PROCEEDS REALIZED GAIN
<S> <C> <C> <C> <C>
EquiCredit Corp.
Common Stock 227,437 $ 596 $ 7,278 $ 6,682
TOTAL $ 596 $ 7,278 $ 6,682
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
ML-LEE ACQUISITION FUND II, L.P.
SUPPLEMENTAL SCHEDULE OF UNREALIZED APPRECIATION (DEPRECIATION)
FOR THE PERIOD ENDED MARCH 31, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
UNREALIZED
APPRECIATION TOTAL TOTAL
(DEPRECIATION UNREALIZED UNREALIZED
INVESTMEN FAIR ) FOR THE APPRECIATION APPRECIATION
SECURITY T VALUE QUARTER ENDED (DEPRECIATIO (DEPRECIATIO
COST MARCH 31, N) AT N) AT MARCH
1995 DECEMBER 31, 31, 1995
1994
<S> <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 21,357 (8,749) 26,785 18,036
Hills Stores Company
Common Stock 30,247 9,283 (229) (20,734) (20,963)
Petco Animal Supplies, Inc.
Common Stock 3,885 4,976 1,540 (449) 1,091
Playtex Products, Inc.
Common Stock 5,299 2,750 301 (2,850) (2,549)
Stanley Furniture
Preferred Stock - - - - -
Common Stock 291 165 (66) (60) (126)
TOTAL UNREALIZED APPRECIATION
(DEPRECIATION) FROM PUBLICLY
TRADED SECURITIES $ (13,857) $ 9,346 $ (4,511)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
ML-LEE ACQUISITION FUND II, L.P.
SUPPLEMENTAL SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
FOR THE PERIOD ENDED MARCH 31, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Unrealized Total Total
Appreciation Unrealized Unrealized
/ Appreciation Appreciation
(Depreciatio / /
Investme Fair n) for the (Depreciatio (Depreciatio
SECURITY nt Value Quarter n) At n) At March
Cost Ended March December 31, 31, 1995
31, 1995 1994
<S> <C> <C> <C> <C> <C>
NON PUBLIC SECURITIES:
Fitz and Floyd/Sylvestri
Common Stock $ 20 $ - $ - $ (20) $ (20)
20
FLA. Orthopedics, Inc.
Common Stock* 1,513 - - (1,513) (1,513)
Subordinated Note 4,842 2,421 (2,421) - (2,421)
Hills Department Stores, Inc.
Subordinated Note - - - - -
Common Stock Purchase Warrants - - - - -
Common Stock Rights 4,529 1,354 - (3,175) (3,175)
Stablex Canada Inc.
Subordinated Note* 6,189 4,587 - (1,602) (1,602)
TOTAL UNREALIZED (DEPRECIATION) FROM
NON PUBLIC SECURITIES - (6,310) (8,731)
NET UNREALIZED APPRECIATION $(16,278) $ 3,036 $(13,242)
(DEPRECIATION)
* Restricted security.
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity & Capital Resources
As of March 31, 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
March 31, 1995 were $166,320,134, after returns of capital to
partners, volume discounts, sales commissions and organizational,
offering, sales and marketing expenses.
At March 31, 1995, Fund II had an outstanding total of
$144,007,814 invested in Mezzanine Investments representing
$114,128,574 Managed and $29,879,240 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 quarter ended March 31, 1995, received no
additional debt securities in lieu of cash interest payments
("payment-in-kind" securities) as provided in certain of its
subordinated note investments. As of March 31, 1995, Fund II has
in its portfolio of investments $310,007 of payment-in-kind
securities, which excludes $5,145,942 of payment-in-kind
securities received from notes placed on non-accrual status and
$2,322,516 of payment-in-kind equity securities.
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).
On January 27, 1995, the Fund completed its sale of 227,437
shares of EquiCredit common stock to Barnett Bank at $32 per
share (see Note 4 to the Financial Statements). As provided by
the Partnership Agreement, the Managing General Partner of Fund
II received incentive fees of $898,426 and $16,826 with respect
to its interest in Fund II and the Limited Partners received
approximately $6.4 million or $28.68 per Unit. These amounts
were distributed on February 14, 1995. As provided by the
Partnership Agreement, the Managing General Partner of Fund II
received incentive fees from this transaction to the extent
certain returns of capital and priority returns were achieved.
As of February 14, 1995, the amount that is deferred in
payment(the "Deferred Distribution Amount") to the Managing
General Partner in accordance with the Partnership Agreement was
$4,863,286. 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 May 12, 1995, the Deferred
Distribution Amount owed to the Managing General Partner is
$3,650,975.
On August 6, 1991, the Independent General Partners approved
a reserve for follow-on investments of $24,985,029 for Fund II.
As of May 12,1995, the reserve balance was reduced to $12,539,808
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., $4,500,826 for a Certificate of Deposit related to the
reorganization of Hills and a return of the reserve to Fund II's
partners of $5,285,079. The return of the reserve will be
distributed with the first quarter distribution on May 15, 1995.
Additionally, Fund II has approved a $1,635,200 follow-on
investment in Ghirardelli. The follow-on investment is
contingent upon Fund II receiving certain documents related to
the transaction. 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 large 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 year to two 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.
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 Hills and Stanley Furniture) were not registered in
these offerings, Fund II has the ability under Rule 144 under 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.
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 quarter ended March 31, 1995, Fund II had investment
income of $2,242,722, as compared to $6,093,383 for the same
period in 1994. The decrease of $3,850,661 in 1995 investment
income from 1994 is due primarily to the recognition of
previously unrecorded interest, dividend and discount income
related to Petco Animal Supplies of $3,071,447 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 the
first quarter of 1995 after distributions of return of capital to
partners and (ii) the placement of a debt security on non-accrual
status, effective January 1, 1995.
Major expenses for the period consisted of the Investment
Advisory Fee, Fund Administration Fee, professional fees and 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 quarters
ended March 31, 1995 and 1994 were $390,624 and $445,853,
respectively, and were 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. The decrease in 1995's as compared to 1994's Investment
Advisory Fees was a direct result of sales of investments,
returns of capital to partners and realized losses on
investments.
Professional fees for the quarters ended March 31, 1995 and
1994 were $144,631 and $389,848, respectively. Professional fees
were primarily incurred in connection with the litigation
proceedings as described in Note 12 to the Financial Statements.
The decrease is attributable to the decreased 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.
The Fund Administration Fees paid to the Fund Administrator
for the quarters ended March 31, 1995 and 1994 were $201,078 and
$213,969, respectively, and were calculated at an annual rate of
0.45% of the excess of net offering proceeds less 50% of capital
reductions, plus a percentage of out-of-pocket expenses. The
decrease in 1995's as compared to 1995's Fund Administration Fees
was a direct result of sales of investments, 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 primarily consist
of printing, audits, tax preparation and custodian fees. For the
quarter ended March 31, 1995, reimbursable expenses totaled $604.
For the quarters ended March 31, 1995 and 1994, Fund II
incurred $44,243 and $24,520, 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.
For the quarter ended March 31, 1995, Fund II had net
investment income of $1,460,371, as compared to $5,003,446 for
the same period in 1994. This decrease in 1995 as compared to
1994 is primarily attributable to higher investment income
recorded on Mezzanine Investments in 1994 due to Petco Animal
Supplies March 17, 1994 initial public offering and recognition
of thirty-eight and one half months of interest, discount and
dividend income.
Net Assets
Fund II's net assets decreased by $15,786,780 during the
quarter ended March 31, 1995, due to the payment of cash
distributions to partners of $7,651,674 ($595,886 of the cash
distributions paid was return of capital from the sale of
EquiCredit) and net unrealized depreciation of $16,277,574,
partially offset by realized gain from the sale of EquiCredit of
$6,682,098 and net investment income of $1,460,371. The 1995
decrease in net assets over the quarter is larger than the
decrease in the comparable 1994 period. This compares to the
quarter ended March 31, 1994 net assets decreasing by $10,218,332
due to payment of cash distributions to partners of $11,803,865
and net unrealized depreciation of $3,920,768, partially offset
by net investment income of $5,003,446 and net realized gains of
$502,855.
Unrealized Appreciation and Depreciation on Investments
For the quarter ended March 31, 1995, Fund II recorded net
unrealized depreciation of $16,277,574 and on this date, Fund
II's cumulative net unrealized depreciation on investments
totaled $13,241,518. The decrease in 1995 as compared to 1994
can be attributed to the reversal of unrealized appreciation due
to the sale of EquiCredit in the first quarter of 1995 and the
decrease in value of First Alert as of March 31, 1995.
For the quarter ended March 31, 1994, Fund II recorded net
unrealized depreciation on investments of $3,920,768.
Fund II's valuation of the Common Stock of First Alert,
Hills, Petco, Playtex and Stanley Furniture reflect their closing
market prices at March 31, 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 substantial 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.
The First Alert, Petco, Playtex and 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 Hills and of 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, Hills, 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 March 31, 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 Depreciation (Schedule 2
Pages 29-30).
Realized Gains and Losses
For the quarter ended March 31, 1995, Fund II had net
realized gains from the sale of EquiCredit of $6,682,098, as
compared to $502,855 for the same period in 1994.
For additional information, please refer to Supplemental
Schedule of Realized Gains and Losses (Schedule 1 - page 28).
Cash Distributions
On May 8, 1995, the Individual General Partners approved the
first quarter 1995 cash distribution totaling $6,731,899 which
represents $5,283,954 as a return of the reserve for follow-on
investments, net investment income of $1,212,311 from Mezzanine
Investments and $235,634 from Temporary Investments. The total
amount distributed to Limited Partners was $5,505,928 or $24.83
per Unit, which was paid on May 15, 1995. The Managing General
Partner received a total of $12,418, with respect to its interest
in Fund II, and $1,212,311 in performance incentive fees. Thomas
H. Lee, as an Individual General Partner, received $1,242 with
respect to his interest in Fund II.
<PAGE>
Part II - Other Information
Items 1 - 5 are herewith omitted as the response to all
items is either none or not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27, Article 6 - Financial Data Schedule for the
quarter ending March 31, 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 12th day of May, 1995.
ML-LEE ACQUISITION FUND II, L.P.
By: Mezzanine Investments, L.P.,
Managing General Partner
By: ML Mezzanine II Inc.,
its General Partner
Dated: May 12, 1995 /s/ Joseph W. Sullivan
Joseph W. Sullivan
Vice President and Treasurer
(Chief Financial Officer)
Dated: May 12, 1995 /s/ Audrey Bommer
Audrey Bommer
Vice President and Assistant
Treasurer
(Chief Accounting 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 12th day of May, 1995.
ML-LEE ACQUISITION FUND II, L.P.
By: Mezzanine Investments, L.P.,
Managing General Partner
By: ML Mezzanine II Inc.,
its General Partner
Dated: May 12, 1995
Joseph W. Sullivan
Vice President and Treasurer
(Chief Financial Officer)
Dated: May 12, 1995
Audrey Bommer
Vice President and Assistant
Treasurer
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the first
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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<INVESTMENTS-AT-COST> 162,822,955
<INVESTMENTS-AT-VALUE> 149,691,906
<RECEIVABLES> 2,222,979
<ASSETS-OTHER> 2,889
<OTHER-ITEMS-ASSETS> 5,515
<TOTAL-ASSETS> 151,923,289
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 996,079
<TOTAL-LIABILITIES> 996,079
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 221,745
<SHARES-COMMON-PRIOR> 221,745
<ACCUMULATED-NII-CURRENT> 4,828,724
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (13,241,522)
<NET-ASSETS> 150,927,208
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,242,722
<OTHER-INCOME> 0
<EXPENSES-NET> 782,351
<NET-INVESTMENT-INCOME> 1,460,371
<REALIZED-GAINS-CURRENT> 6,682,098
<APPREC-INCREASE-CURRENT> (16,277,574)
<NET-CHANGE-FROM-OPS> (8,135,106)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 372,742
<DISTRIBUTIONS-OF-GAINS> 6,683,183
<DISTRIBUTIONS-OTHER> 595,749
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (15,786,780)
<ACCUMULATED-NII-PRIOR> 4,289,653
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 390,624
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 782,351
<AVERAGE-NET-ASSETS> 158,820,601
<PER-SHARE-NAV-BEGIN> 730.09
<PER-SHARE-NII> 6.57
<PER-SHARE-GAIN-APPREC> (43.17)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 26.00
<RETURNS-OF-CAPITAL> 3.77
<PER-SHARE-NAV-END> 663.72
<EXPENSE-RATIO> 0.005
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
