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 June 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 June 30, 1995 and December 31, 1994 3
Statements of Operations - For the Three and Six
Months Ended June 30, 1995 and June 30, 1994 4
Statements of Changes in Net Assets - For the
Six Months Ended June 30, 1995 and June 30, 1994 5
Statements of Cash Flows - For the Six Months Ended
June 30, 1995 and June 30, 1994 6
Statement of Changes in Partner's Capital at
June 30, 1995 7
Schedule of Portfolio Investments - June 30, 1995 8
Notes to Financial Statements 15
Supplemental Schedule of Realized Gains and Losses -
(Schedule 1) 29
Supplemental Schedule of Unrealized Appreciation and
Depreciation - (Schedule 2 ) 30
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 32
Part II. Other Information 42
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ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
June
30,1995 December
(Unaudited) 31, 1994
<S> <C> <C>
ASSETS:
Investments - Notes 2,4
Portfolio Investments, at fair value
Managed Companies
(amortized cost $113,795 at
June 30, 1995 and $114,726 at
December 31, 1994) $117,413 $120,895
Non-Managed Companies
(amortized cost $30,334 at June 30,
1995 and $29,888 at December 31, 1994) 24,780 26,753
Temporary Investments, at amortized
cost (cost $18,815 at June 30, 1995 and
$18,345 at December 31, 1994) 14,479 18,390
Cash 1 1
Accrued Interest and Dividend Receivable -
Note 2 911 1,763
Prepaid Expenses 2 4
TOTAL ASSETS $157,586 $167,806
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities
Legal and Professional Fees Payable $ 172 $ 160
Independent General Partners' Fees
Payable - Note 11 23 46
Deferred Interest Income - Note 2 811 886
Total Liabilities 1,006 1,092
Partners' Capital - Note 2
Individual General Partner 39 40
Managing General Partner 4,291 4,780
Limited Partners (221,745 Units) 152,250 161,894
Total Partners' Capital 156,580 166,714
TOTAL LIABILITIES AND PARTNERS' CAPITAL $157,586 $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 Six Months Ended
June 30, June 30, June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
INVESTMENT INCOME - NOTES 2,6:
Interest $ 1,375 $2,413 $ 3,332 $ 7,858
Discount 246 324 533 888
Dividends 16 - 16 84
TOTAL INCOME 1,637 2,737 3,881 8,830
EXPENSES:
Legal and Professional Fees 246 605 391 995
Investment Advisory Fee - Note 8 393 449 783 895
Fund Administration Fee - Note 9 202 214 403 428
Amortization of Deferred
Organization expenses - Note 2 - 15 - 29
Reimbursable Administrative
Expenses - Note 10 80 163 80 163
Independent General Partners'
Fees and Expenses - Note 11 46 2 80 27
Insurance Expense 1 2 2 3
TOTAL EXPENSES 968 1,450 1,739 2,540
NET INVESTMENT INCOME 669 1,287 2,142 6,290
Net Realized Gain on Investments -
Note 4 and Schedule 1 399 - 7,081 503
Net Change in Unrealized
Appreciation (Depreciation)
on Investments - Note 5 and
Schedule 2:
Publicly Traded Securities 11,305 (7,251) (2,552) (9,866)
Non-Public Securities - (901) (2,421) (2,207)
Subtotal 11,305 (8,152) (4,973) (12,073)
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS 12,373 (6,865) 4,250 (5,280)
Lee: Incentive Fee to Managing
General Partner (1,054) - (3,810) -
NET INCREASE (DECREASE) AVAILABLE
FOR PRO-RATA DISTRIBUTION
TO ALL PARTNERS $11,319 $(6,865) $ 440 $(5,280)
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 Six Months Ended
June 30, June 30,
1995 1994
<S> <C> <C>
FROM OPERATIONS:
Net Investment Income $ 2,142 $ 6,290
Net Realized Gain on Investments 7,081 503
Net Change in Unrealized
Depreciation on Investments (4,973) (12,073)
Net Increase (Decrease) in Net
Assets Resulting From Operations 4,250 (5,280)
Cash Distributions to Partners (14,384) (27,891)
Total Decrease (10,134) (33,171)
NET ASSETS:
Beginning of Year 166,714 297,301
End of Period 156,580 $264,130
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 Six Months Ended
June 30, June 30,
1995 1994
<S> <C> <C>
INCREASE IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest, Discount and Dividends $ 4,217 $ 8,958
Closing Fee Received - 60
Professional Fees (351) (828)
Investment Advisory Fee (783) (895)
Fund Administration Fee (403) (428)
Independent General Partners' Fees and
Expenses (104) (94)
Insurance Expense - -
Reimbursable Administrative Expenses (107) (114)
(Purchase) Sale of Temporary Investments, Net 3,904 20,782
Proceeds from Sales of Portfolio Company
Investments 9,646 11,865
Purchase of Portfolio Company Investments (1,635) (9,170)
Net Cash Provided by Operating Activities 14,384 30,136
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Distributions to Partners (14,384) (27,891)
Net Cash Applied to Financing Activities (14,384) (27,891)
Net Increase in Cash - 2,245
Cash at Beginning of Period 1 1
Cash at End of Period $ 1 $ 2,246
RECONCILIATION OF NET INVESTMENT INCOME
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Investment Income $ 2,142 $ 6,290
Adjustments to Reconcile Net Investment
Income to Net Cash Provided by Operating
Activities:
Decrease in Investments 4,834 23,577
Decrease in Accrued Interest Receivables 336 28
Decrease in Prepaid Expenses 2 3
Amortization of Deferred Organization Expenses - 29
Increase in Professional Fees Payable 12 211
Decrease in Independent General Partners' Fees Payable (23) (62)
Increase in Closing Fee Payable - 60
Decrease in Option Payable - (503)
Net Realized Gain on Investments 7,081 503
Total Adjustments 12,242 23,846
Net Cash Provided by Operating Activities $14,384 $30,136
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 Six Months Ended June 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 1 656 1,485 2,142
Allocation of Net Realized Gain on
Investments 2 1,139 5,940 7,081
Allocation of Net Change in Unrealized
Depreciation on Investments (1) (11) (4,961) (4,973)
Cash Distributions to Partners (3) (2,273) (12,108) (14,384)
Partners' Capital at June 30, 1995 $ 39 $ 4,291 $152,250 $156,580
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 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 9.73
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) (16.6% of fully 12/27/90 4,107 4,107
(diluted common equity)(k) 17,144 17,144 10.94
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)
JUNE 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) 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 03/30/90 0 0
(23.1% of fully diluted common equity assuming exercise of warrants) 14,209 14,209 9.07
FIRST ALERT, INC.(b) - Note 5
2,058,474 Shares First Alert, Inc., Common Stock(a)(d) 07/31/92 $ 3,320 $30,620
(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 30,620 19.54
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 4.62
See the Accompanying Notes to the Financial Statements.
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ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 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 5,16
458,432 Shares Hills Stores Company, Common Stock(a)(j) 04/03/90 $30,246 $11,002
219,156 Rights Hills Stores Company, Common Stock Rights(d) Various 4,530 1,354
(3.7% of fully diluted common equity assuming
exercise of put options) 34,776 12,356 7.89
PETCO ANIMAL SUPPLIES, INC. (b) - Notes 4,5
116,825 Shares Petco Animal Supplies, Common Stock(a)(d) Various 1,915 2,716
(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
Total Realized Gain $ 0
120,143 Shares Common Stock
Purchased various $1,969
Sold 04/26/95 $2,368
Total Realized Gain $ 399 1,915 2,716 1.73
See the Accompanying Notes to Financial Statements.
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<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 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
343,726 Shares Playtex Products, Inc., Common Stock(a)(d) 03/29/90 $ 5,299 $ 3,351
(.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 3,351 2.14
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 0 0
(2.4% of fully diluted common equity) 6,044 6,044 3.86
STANLEY FURNITURE COMPANY, INC. (b) - Note 5
23,105 Shares Stanley Furniture Company, Inc., Common Stock(a)(j) 06/30/91 291 176
(0.4% of fully diluted common equity) 291 176 0.11
SUN PHARMACEUTICALS CORP.(b) - Note 7
$8,318 Sun Pharmaceuticals Corp., 12.5% Sub. Nt. due 12/31/02(c) $ 8,318 $ 8,318
7,444.5 Warrants Banana Boat Holding Corp., Common Stock Purchase Warrants(d)(i) 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 5.31
TOTAL INVESTMENT IN MANAGED COMPANIES $113,795 $117,413 74.94
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 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 $ 688
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
784 796 0.51
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
2,700 12,682 8.09
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 1.55
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 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 2.46
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 3.21
TOTAL INVESTMENT IN NON-MANAGED COMPANIES $30,322 24,780 15.82
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes Various 87,112 83,103 53.04
Partnership Interest 04/14/92 234 234 0.15
Preferred Stock,Common Stock, Warrants and Stock Rights Various 56,771 58,856 37.57
TOTAL MEZZANINE INVESTMENTS $144,117 $142,193 90.76
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 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
$ 498 State Street Bank 3.5% due 07/03/95 06/30/95 $ 498 $ 498
$ 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 1,103 1,103 .70
COMMERCIAL PAPER
$6,000 Ford Motor Credit, 5.94% due 07/03/95 06/01/95 2,074 2,084
$3,730 Mid South, 5.95% due 07/07/95 06/07/95 2,786 2,797
$8,086 General Electric Capital Corp., Inc., 5.95% due 08/12/95 06/19/95 8,478 8,495
TOTAL INVESTMENT IN COMMERCIAL PAPER 13,338 13,376 8.54
TOTAL TEMPORARY INVESTMENTS 14,441 14,479 9.24
TOTAL INVESTMENT PORTFOLIO $158,558 $156,672 100%
(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 $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
JUNE 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.
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 June 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 June 30, 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 June 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 $5,822,848 and $4,479,539, respectively, of
payment-in-kind securities received from notes placed on
non-accrual status. As of June 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.
Interim Financial Statements
The financial information included in this interim report
as of June 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 June 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.
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 given up) 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 6, 1991, the Independent General Partners
approved a reserve for follow-on investments of $24,985,029
for Fund II. As of June 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 quarter
ended June 30, 1995. 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.
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 six months ended June 30, 1995, Fund II recorded
net unrealized depreciation of $4,972,877 (of which,
$2,552,077 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 $12,073,621 for the same period
in 1994. As of this date, Fund II's cumulative net
unrealized depreciation on investments totaled $1,936,825.
For additional information, please refer to the Schedule
of Unrealized Appreciation and Depreciation (Schedule 2 -
pages 30 - 31).
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 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 Incentive Fees paid to the Managing
General Partner (as defined in Note 12). For the six months
ended June 30, 1995 and 1994, Fund II paid $783,300 and
$894,982, 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 six months ended June 30, 1995 and 1994,
Fund II paid $402,618 and $428,211, 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 six months ended
June 30, 1995 and 1994, Fund II incurred $80,134 and
$162,812, 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 six months ended June 30, 1995 and 1994, Fund II
incurred $80,483 and $26,694, 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 six months ended June 30, 1995, Fund II paid
$107,468 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 $2,979 and paid the Managing General
Partner distributions totaling $2,273,318 (which includes
$2,243,531 of incentive fees ("MGP Incentive Fees") and
$29,787 with respect to their interest in Fund II). Of the
MGP Incentive Fees paid, 95% or $2,131,354 was paid to the
Investment Advisor and the remaining 5% totaling $112,177
was paid to ML Mezzanine II Inc. As of June 30, 1995, the
Managing General Partner has earned $16,547,004 in MGP
Incentive Fees of which $3,809,582 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 June
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. Such settlement currently is under
consideration by the court. 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 June 30, 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 June 30, 1994, the Court granted in
part and denied in part the motions to dismiss.
Additionally, by its June 30, 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. 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. 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 August 3, 1995, the Individual General Partners
approved the second quarter 1995 cash distribution totaling
$3,477,482 which represents $126,708 as a return of capital
from the sale of Petco, net investment income and realized
gains of $3,114,723 from Mezzanine Investments and $236,051
from Temporary Investments. The total amount distributed to
Limited Partners was $2,084,403 or $9.40 per Unit, which was
paid on August 14,1995. The Managing General Partner
received a total of $6,215, with respect to its interest in
Fund II, and $1,386,242 in performance incentive fees.
Thomas H. Lee, as an Individual General Partner, received
$622 with respect to his interest in Fund II.
On July 20,1995, Dickstein Partners, Inc. withdrew their
offer to purchase the outstanding common stock of Hills
Stores, Co. for $27 per share.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
ML-LEE ACQUISITION FUND II, L.P.
SUPPLEMENTAL SCHEDULE OF REALIZED GAINS AND LOSSES
FOR THE SIX MONTHS ENDED JUNE 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 JUNE 30, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
UNREALIZED UNREALIZED
APPRECIATION APPRECIATION TOTAL TOTAL
(DEPRECIATION) (DEPRECIATION) UNREALIZED UNREALIZED
FOR THE THREE FOR THE SIX APPRECIATION APPRECIATION
SECURITY INVESTMENT FAIR MONTHS ENDED MONTHS ENDED (DEPRECIATION) AT (DEPRECIATION) AT
COST VALUE JUNE 30, 1995 JUNE 30, 1995 DECEMBER 31, 1994 JUNE 30, 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 30,620 9,263 514 26,785 27,299
Hills Stores Company
Common Stock 30,246 11,002 1,719 1,490 (20,734) (19,244)
Petco Animal Supplies, Inc.
Common Stock 1,915 2,716 (291) 1,249 (449) 800
Playtex Products, Inc.
Common Stock 5,299 3,351 602 903 (2,850) (1,947)
Stanley Furniture
Common Stock 291 176 12 (54) (60) (114)
TOTAL UNREALIZED APPRECIATION
(DEPRECIATION) FROM PUBLICLY
TRADED SECURITIES $11,305 $ (2,552) $ 9,346 6,794
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
ML-LEE ACQUISITION FUND II, L.P.
SUPPLEMENTAL SCHEDULE OF UNREALIZED APPRECIATION (DEPRECIATION)
FOR THE PERIOD ENDED JUNE 30, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
UNREALIZED UNREALIZED
APPRECIATION APPRECIATION TOTAL TOTAL
(DEPRECIATION) (DEPRECIATION) UNREALIZED UNREALIZED
FOR THE THREE FOR THE SIX APPRECIATION APPRECIATION
SECURITY INVESTMENT FAIR MONTHS ENDED MONTHS ENDED DEPRECIATION) AT (DEPRECIATION) AT
COST VALUE JUNE 30, 1995 JUNE 30, 1995 DECEMBER 31, 1994 JUNE 30, 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)
Hills Department Stores, Inc.
Common Stock Rights 4,530 1,355 - - (3,175) (3,175)
Stablex Canada Inc.
Subordinated Notes* 6,631 5,029 - - (1,602) (1,602)
TOTAL UNREALIZED DEPRECIATION -
FROM NON PUBLIC SECURITIES (2,421) (6,310) (8,731)
NET UNREALIZED APPRECIATION (DEPRECIATION) 11,305 (4,973) 3,036 (1,937)
* Restricted security.
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity & Capital Resources
As of June 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 June 30, 1995 were
$161,035,312, after returns of capital to partners, volume
discounts, sales commissions and organizational, offering,
sales and marketing expenses.
At June 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 three months ended June 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 June 30, 1995, Fund II has in its
portfolio of investments $751,907 of payment-in-kind
securities, which excludes $5,822,848 of payment-in-kind
securities received from notes placed on non-accrual status
and $2,293,457 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). 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 18, 1993.
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 June 30, 1995, the
amount that is deferred in payment(the "Deferred
Distribution Amount") to the Managing General Partner in
accordance with the Partnership Agreement is $3,809,582. 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 August 14, 1995,
the Deferred Distribution Amount owed to the Managing
General Partner is $2,937,537.
On August 6, 1991, the Independent General Partners
approved a reserve for follow-on investments of $24,985,029
for Fund II. As of August 14,1995, the reserve balance has
been reduced to $10,904,608 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., $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 has returned
$5,285,079 of the reserve to partners during the six months
ended June 30, 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 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 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.
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 six months ended June 30, 1995, Fund II had
investment income of $3,880,512, as compared to $8,829,744
for the same period in 1994. The decrease of $4,949,232 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 and
second quarters of 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 June 30, 1995, Fund II had
investment income of $1,637,790, compared to $2,736,361 for
the same period in 1994.
Major expenses for the period ended June 30, 1995
consisted of the Investment Advisory Fee, Fund
Administration Fee, legal and 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 six months ended June 30, 1995 and 1994 were $783,300
and $894,982, 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. For the three months
ended June 30, 1995 and 1994, Fund II paid $392,676 and
$449,129, respectively, in Investment Advisory Fees. The
decrease in 1995's as compared to 1994's Investment Advisory
Fee was a direct result of sales of investments, returns of
capital to partners and realized losses on investments.
Legal and professional fees for the six months ended June
30, 1995 and 1994 were $390,524 and $994,788, respectively.
These fees were primarily incurred in connection with the
litigation proceedings as described in Note 12 to the
Financial Statements. For the three months ended June 30,
1995 and 1994 Fund II incurred $245,893 and $604,940,
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.
The Fund Administration Fees paid to the Fund
Administrator for the six months ended June 30, 1995 and
1994 were $402,618 and $428,211, 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. For the three months
ended June 30, 1995 and 1994, Fund II paid $201,540 and
$214,242, respectively, in Fund Administration Fees. The
decrease in 1995's as compared to 1994'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
incurred in connection with the administration of the
Retirement Fund is reimbursable to the Fund Administrator.
Actual out-of-pocket expenses primarily consist of printing,
audits, tax preparation and custodian fees. For the six
months ended June 30, 1995 and 1994, reimbursable expenses
totaled $80,134 and $162,812, respectively. The decrease
from 1994 to 1995 reflects the amounts paid in 1994 for
expenses incurred by the Fund Administrator in prior years.
For the six months ended June 30, 1995 and 1994, Fund II
incurred $80,483 and $26,694, 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 12 to the Financial
Statements).
For the six months ended June 30, 1995, Fund II had net
investment income of $2,141,097, as compared to $6,290,590
for the same period in 1994. For the three months ended
June 30, 1995, Fund II had net investment income of $671,142
as compared to $1,287,144 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'
June 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 $10,134,442 during the
six months ended June 30, 1995, due to the payment of cash
distributions to partners of $14,383,575 ($5,880,315 of the
cash distributions paid was return of capital from the sale
of EquiCredit and the return of a portion of the reserve to
Limited Partners) and net unrealized depreciation of
$4,972,877, partially offset by realized gain from the sale
of EquiCredit and Petco of $7,080,913 and net investment
income of $2,141,097. The 1995 decrease in net assets over
the six months is smaller than the decrease in the
comparable 1994 period. This compares to the six months
ended June 30, 1994's net assets decreasing by $33,171,530
due to the payment of cash distributions to partners of
$27,891,354 ($13,504,423 of the cash distributions paid was
return of capital from the sales portfolio investments) and
net unrealized depreciation of $12,073,621, partially offset
by net investment income of $6,290,590 and net realized
gains of $502,855.
Fund II's net assets increased by $5,642,754 during the
three months ended June 30, 1995, due to net investment
income of $670,142 and realized gains of $398,815 and net
unrealized appreciation of $11,304,697, partially offset by
the payment of cash distributions to partners of $6,731,900
($5,284,822 of the cash distributions paid was from the
return of a portion of the reserve to Limited Partners).
This compares to the three months ended June 30, 1994's net
assets decreasing by $22,953,198 due to the payment of cash
distributions to partners of $16,087,489 ($13,208,769 of the
cash distributions paid was return of capital from the sales
of portfolio investments) and net unrealized depreciation of
$8,152,853, partially offset by net investment income of
$1,287,144.
Unrealized Appreciation and Depreciation on Investments
For the six months ended June 30, 1995, Fund II recorded
net unrealized depreciation of $4,972,877 (of which
$2,552,077 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 $12,073,621 for the same period
in 1994. On June 30, 1995, Fund II's cumulative net
unrealized depreciation on investments totaled $1,936,825.
The decrease in 1995 as compared to 1994 can be attributed
to the increase in value of First Alert at June 30, 1995
offset by the reversal of unrealized appreciation due to the
sale of EquiCredit in the first quarter of 1995.
For the three months ended June 30, 1995, Fund II
recorded net unrealized appreciation on investments of
$11,304,697 (all of which is from publicly traded
securities), compared to a net unrealized depreciation of
$8,152,853 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 June 30, 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 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, Hills 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, 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 June 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 30 - 31).
Realized Gains and Losses
For the six months ended June 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 the three months ended June 30, 1995, Fund II had net
realized gains from investments of $398,815 as compared to
no realized gain or loss for the same period in 1994.
For additional information, please refer to the
Supplemental Schedule of Realized Gains and Losses (Schedule
1 - page 29).
Cash Distributions
On August 3, 1995, the Individual General Partners
approved the second quarter 1995 cash distribution totaling
$3,477,482 which represents $126,708 as return of capital
from the sale of Petco, net investment income and realized
gains of $3,114,723 from Mezzanine Investments and $236,051
from Temporary Investments. The total amount distributed to
Limited Partners was $2,084,403 or $9.40 per Unit, which was
paid on August 14,1995. The Managing General Partner
received a total of $6,215, with respect to its interest in
Fund II, and $1,386,242 in performance incentive fees.
Thomas H. Lee, as an Individual General Partner, received
$622 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 - Financial Data Schedule for the
quarter ending June 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
August, 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: August 14, 1995 /s/ James V. Caruso
James V. Caruso
Executive Vice President and Director
Dated: August 14, 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 14th day of
August, 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: August 14, 1995
James V. Caruso
Executive Vice President and
Director
Dated: August 14, 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 second 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 144,115,397
<INVESTMENTS-AT-VALUE> 142,192,984
<RECEIVABLES> 910,691
<ASSETS-OTHER> 1,705
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 157,585,653
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,006,105
<TOTAL-LIABILITIES> 1,006,105
<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> (1,936,825)
<NET-ASSETS> 156,579,549
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,880,512
<OTHER-INCOME> 0
<EXPENSES-NET> 1,739,415
<NET-INVESTMENT-INCOME> 2,141,097
<REALIZED-GAINS-CURRENT> 7,080,913
<APPREC-INCREASE-CURRENT> (4,972,877)
<NET-CHANGE-FROM-OPS> 4,249,133
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,820,279
<DISTRIBUTIONS-OF-GAINS> 6,683,775
<DISTRIBUTIONS-OTHER> 5,880,316
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (10,134,442)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 783,300
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,739,415
<AVERAGE-NET-ASSETS> 161,646,767
<PER-SHARE-NAV-BEGIN> 663.72
<PER-SHARE-NII> 6.69
<PER-SHARE-GAIN-APPREC> (4.42)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 26.00
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<PER-SHARE-NAV-END> 686.60
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
