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 March 31, 1998
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.
<PAGE>
PART I - FINANCIAL INFORMATION
ML-LEE ACQUISITION FUND II, L.P.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements
Statements of Assets, Liabilities and Partners'
Capital as of March 31, 1998 and December 31, 1997
Statements of Operations - For the Three
Months Ended March 31, 1998 and 1997
Statements of Changes in Net Assets -
For the Three Months Ended March 31, 1998 and 1997
Statements of Cash Flows - For the Three Months
Ended March 31, 1998 and 1997
Statement of Changes in Partners' Capital at
March 31, 1998
Schedule of Portfolio Investments - March 31, 1998
Notes to Financial Statements
Supplemental Schedule of Realized Gains and Losses - Schedule 1
Supplemental Schedule of Unrealized Appreciation
and Depreciation - Schedule 2
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II. Other Information
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
<S> <C> <C>
March 31, 1998 December 31, 1997
-------------- -----------------
ASSETS:
Investments - Notes 2,4,5
Portfolio Investments at fair value
Managed Companies (amortized cost $66,583
at March 31, 1998 and $68,023 at December 31, 1997) $ 41,345 $ 34,206
Non-Managed Companies (amortized cost $23,967
at March 31, 1998 and at December 31, 1997) 8,440 8,440
Temporary Investments, at amortized cost (cost $5,295
at March 31, 1998 and $3,612 at December 31, 1997) 5,309 3,627
Cash 5 245
Accrued Interest & Other Receivable - Note 2 495 585
Prepaid Expenses 2 4
---------- ---------
TOTAL ASSETS $ 55,596 $ 47,107
========== =========
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities
Legal and Professional Fees Payable $ 40 $ 100
Reimbursable Administrative Expenses Payable - Note 8 83 11
Independent General Partners' Fees Payable - Note 9 23 12
Deferred Interest Income - Note 2 141 151
---------- ---------
Total Liabilities 287 274
---------- ---------
Partners' Capital - Note 2
Individual General Partner 17 15
Managing General Partner 294 266
Limited Partners (221,745 Units) 54,998 46,552
---------- ---------
Total Partners' Capital 55,309 46,833
---------- ---------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 55,596 $ 47,107
========== =========
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
For the Three Months Ended
----------------------------------
March 31, 1998 March 31, 1997
-------------- --------------
INVESTMENT INCOME - Notes 2,4,6:
Interest $ 737 $ 1,186
Discount and Dividend Income 53 130
------------ ------------
TOTAL INCOME 790 1,316
------------ ------------
EXPENSES:
Investment Advisory Fee - Note 7 175 204
Fund Administration Fee - Note 8 56 158
Legal and Professional Fees 29 99
Reimbursable Administrative Expenses - Note 8 83 26
Independent General Partners' Fees and Expenses - Note 9 33 25
Insurance Expense 1 1
------------ ------------
TOTAL EXPENSES 377 513
------------ ------------
NET INVESTMENT INCOME 413 803
Net Realized Gain on Investments - Note 4 and Schedule 1 297 3
Net Change in Unrealized Appreciation (Depreciation)
on Investments: Note 5 and Schedule 2
Publicly Traded Securities 8,577 (960)
Nonpublic Securities -- (2,439)
------------ ------------
SUBTOTAL 8,577 (3,399)
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 9,287 (2,593)
------------ ------------
Less: Earned MGP Distribution to Managing General Partner 120 --
------------ ------------
NET INCREASE (DECREASE) AVAILABLE FOR PRO-RATA
DISTRIBUTION TO ALL PARTNERS $ 9,167 $ (2,593)
============ ============
See the Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
For the Three Months Ended
------------------------------------
March 31, 1998 March 31, 1997
-------------- --------------
FROM OPERATIONS:
Net Investment Income $ 413 $ 803
Net Realized Gain on Investments 297 3
Net Change in Unrealized Appreciation
(Depreciation) From Investments 8,577 (3,399)
------------- ------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 9,287 (2,593)
Cash Distributions to Partners (811) (1,833)
------------- ------------
Total Increase (Decrease) 8,476 (4,426)
NET ASSETS:
Beginning of Year 46,833 71,115
------------- ------------
End of Period $ 55,309 $ 66,689
============= ============
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
For the Three Months Ended
--------------------------------
March 31, 1998 March 31, 1997
-------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest, Dividends and Discount Income $ 583 $ 1,312
Legal and Professional Fees (89) (191)
Investment Advisory Fee (175) (204)
Fund Administration Fee (55) (158)
Independent General Partners' Fees and Expenses (21) (22)
Reimbursable Administrative Expenses (11) (35)
(Purchase) Sale of Temporary Investments, Net (1,683) 1,115
Proceeds from Sales of Portfolio Company Investments 1,736 7
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 285 1,824
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Distributions to Partners (525) (1,833)
------------ ------------
NET CASH APPLIED TO FINANCING ACTIVITIES (525) (1,833)
------------ ------------
Net Decrease in Cash (240) (9)
Cash at Beginning of Year 245 125
------------ ------------
CASH AT END OF PERIOD $ 5 $ 116
============ ============
RECONCILIATION OF NET INVESTMENT INCOME
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Investment Income $ 413 $ 803
------------ ------------
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME (LOSS)
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
(Increase) Decrease in Investments (244) 1,118
Increase in Accrued Interest,
Dividend and Discount Receivable (206) (4)
Decrease in Prepaid Expenses 2 2
Decrease in Legal and Professional Fees Payable (60) (92)
(Decrease) Increase in Reimbursable Administrative Expenses Payable 72 (9)
Increase in Independent General Partners' Fees Payable 11 3
Net Realized Gain on Sales of Investments 297 3
------------ ------------
TOTAL ADJUSTMENTS (128) 1,021
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 285 $ 1,824
============ ============
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Individual Managing
General General Limited
Partner Partner Partners Total
----------- ----------- -------------- ----------
For the Three Months Ended March 31, 1998
Partners' Capital at January 1, 1998 $ 15 $ 266 $ 46,552 $ 46,833
Allocation of Net Investment Income 0 121 292 413
Allocation of Net Realized Gain on Investments - 1 296 297
Allocation of Net Change in Unrealized
Depreciation From Investments 2 19 8,556 8,577
Cash Distributions to Partners - (113) (698) (811)
--------- --------- --------- --------
Partners' Capital at March 31, 1998 $ 17 $ 294 $ 54,998 $ 55,309
========= ========= ========= ========
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1998
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost(e) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
MEZZANINE INVESTMENTS
MANAGED COMPANIES
BIG V SUPERMARKETS, INC. (b)
$13,037 Big V Supermarkets, Inc., Sr. Sub. Nt. 14.14% due 03/15/01(c) 12/27/90 $ 13,037 $ 13,037
117,333 Shares Big V Holding Corp., Common Stock(d) 12/27/90 4,107 4,107
(16.6% of fully diluted common equity) ------------------------------
17,144 17,144 31.11
------------------------------
CINNABON INTERNATIONAL, INC. - Note 6
(formerly Restaurants Unlimited)
$6,044 Cinnabon, 13% Subordinated Note due 06/30/02(c)(g) 06/03/94 6,044 6,044
391,302 Warrants Cinnabon, Common Stock Warrants(d) 06/03/94 0 0
(2.1% of fully diluted common equity) ------------------------------
6,044 6,044 10.97
------------------------------
COLE NATIONAL CORPORATION
13,161 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
------------------------------
2,058,474 Shares FIRST ALERT, INC., (b) - Notes 4,5,13
First Alert, Inc., Common Stock(a)(d) 07/31/92 3,320 10,742
(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 10,742 19.50
------------------------------
HILLS STORES COMPANY - Note 5
458,432 Shares Hills Stores Company, Common Stock(a)(d) 04/03/90 30,246 2,063
62,616 Shares Hills Stores Company, Common Stock(a) (d) 08/21/95 4,530 282
(4.1% of fully diluted common equity) ------------------------------
34,776 2,345 4.26
------------------------------
PLAYTEX PRODUCTS, INC. (b) - Notes 5,13
343,726 Shares Playtex Products, Inc., Common Stock(a)(d) 03/29/90 5,299 5,070
(.6% 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 5,070 9.20
------------------------------
TOTAL INVESTMENT IN MANAGED COMPANIES $ 66,583 $ 41,345 75.04
==============================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1998
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost(e) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
NON-MANAGED COMPANIES
BIOLEASE, INC.- Note 5
$784 BioLease, Inc., 13% Sub. Nt. due 06/06/04 (c) 06/08/94 $ 676 $ 392
96.56 Shares BioLease, Inc., Common Stock (d) 06/08/94 94 -
10,014 Warrants Biotransplant, Inc., Common Stock Purchase Warrants(d) 06/08/94 14 14
-------------------------------
784 406 .74
-------------------------------
FITZ AND FLOYD - Note 5
$2,420 Fitz and Floyd, 12% Sub. Nt. due 04/15/04 (c) 04/11/97 2,420 2,420
8,470 Shares Fitz and Floyd, Series A Preferred Stock (d) 04/11/97 12,619 3,024
1,324,508 Shares Common Stock
Purchased various $ 20
Surrendered May 1996 $ -
Realized Loss $ (20)
$10,281 Sr. Sub. Note
$2,419 Sr. Sub. Note
Purchased various $12,619
Exchanged 04/14/97
8,470 Sh Series A Preferred Stock and
51,245 Shares Common Stock $12,619
Realized Gain $ 0
Total Realized Loss $ (20) -------------------------------
15,039 5,444 9.88
-------------------------------
FLA. ORTHOPEDICS, INC. - Notes 5,6
19,366 Shares FLA. Holdings, Inc. Series B Preferred Stock(d) 08/02/93 1,513 -
3,822 Warrants FLA. Holdings, Inc. Common Stock Purchase Warrants(d) 08/02/93 - -
$4,842 12.5% Subordinated Note
Purchased 08/02/93 $ 4,842
Surrendered 08/16/96 $ 0
Realized Loss $(4,842)
121,040 Common Stock
Purchased 08/02/93 $ 1,513
Exchanged 08/02/96
19,366 Series B Preferred Stock $ 1,513
Realized Gain $ 0
Total Realized Loss $(4,842)
-------------------------------
1,513 - 0.00
-------------------------------
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1998
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost(e) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
SORETOX - Notes 5,6
$3,503 Stablex Canada, Inc., Sub. Nt. 10% due 06/30/07(c)(f)(g) 06/29/95 $ 3,503 $ 2,590
$3,128 Stablex Canada, Inc., Jr. Sub. Nt. 11% due 06/30/09(c)(f)(g) 06/29/95 3,128 0
2,004 Warrants Seaway TLC, Inc. Common Stock Purchase Warrants 12/06/91 0 0
-----------------------------
6,631 2,590 4.70
-----------------------------
TOTAL INVESTMENT IN NON-MANAGED COMPANIES $ 23,967 $ 8,440 15.32
=============================
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes Various 28,808 24,483 44.44
Preferred Stock, Common Stock, Warrants and Stock Rights Various 61,742 25,302 45.92
-----------------------------
TOTAL MEZZANINE INVESTMENTS $ 90,550 $49,785 90.36
=============================
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$ 3,170 General Electric Corp. 5.54% due 4/2/98 3/06/98 3,157 3,169
$ 2,140 General Electric Corp. 5.57% due 4/1/98 3/25/98 2,138 2,140
-----------------------------
TOTAL INVESTMENT IN COMMERCIAL PAPER 5,295 5,309 9.64
-----------------------------
TOTAL TEMPORARY INVESTMENTS $ 5,295 $ 5,309 9.64
-----------------------------
TOTAL INVESTMENT PORTFOLIO $ 95,845 $ 55,094 100.00%
=============================
(a) Publicly traded class of securities.
(b) Represents investment in affiliates as defined in the Investment Company Act of 1940.
(c) Restricted security.
(d) Restricted non-income producing equity security.
(e) Represents original cost and excludes accretion of discount of $33 for Mezzanine Investments
and $14 for Temporary Investments.
(f) Inclusive of receipt of payment-in-kind securities.
(g) Non-accrual investment status.
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
ML-LEE ACQUISITION FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(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 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 described 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. The preparation of financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts and
disclosures in the financial statements. Actual reported results could vary from
these estimates.
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.
Future confirming events will also affect the estimates of fair value and the
effect of such events on the estimates of fair value could be material.
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,
1998. 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 because the portfolio investments of companies
whose equity is publicly traded are valued at the last price at March 31, 1998,
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, 1998 and December 31,
1997, Fund II has in its portfolio of investments $441,900 of payment-in-kind
notes which excludes $2.5 million of payment-in-kind notes received from notes
placed on non-accrual status. As of March 31, 1998 and December 31, 1997, Fund
II has in its portfolio of investments $29,059 of payment-in-kind equity.
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, as defined in the Partnership Agreement, 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, 1998 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, 1998 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 20.281% 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 6, 1998, Fund II sold its remaining holdings of common stock in
Stanley Furniture Company, Inc. The common stock was sold pursuant to a Form S-3
Registration Statement, which was filed by Stanley on December 22, 1997 and
declared effective by the Securities and Exchange Commission on December 23,
1997. In connection with the sale, Fund II sold its remaining 3,461 shares of
common stock and received net proceeds of $93,447 or $27 per share.
On March 19, 1998 Fund II and affiliates of the Thomas H. Lee Company sold
their remaining holdings in Anchor Advanced Products. Pursuant to this
transaction Fund II sold 410,677 shares of Anchor Common Stock for approximately
$1.6 Million ($4.00 per share) and recognized a gain of $247,192.
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 three months ended March 31, 1998, Fund II recorded net unrealized
appreciation of $8.6 million (of which all is attributable to publicly traded
securities) compared to net unrealized depreciation of $3.4 million for the same
period in 1997. As of March 31, 1998, Fund II's cumulative net unrealized
depreciation on investments totaled $40.8 million.
For additional information, please refer to the Schedule of Unrealized
Appreciation and Depreciation - Schedule 2.
6. Non-Accrual of Investments
In accordance with Fund II's Accounting Policy, the following securities
have been on non-accrual status since the date indicated:
- Cinnabon International on January 1, 1998.
- Florida Orthopedics, Inc., on January 1, 1995.
- Stablex Canada, Inc., on June 29, 1995.
7. 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 and realized losses), 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 10). For the three
months ended March 31, 1998 and 1997, Fund II paid $175,490 and $203,953,
respectively, in Investment Advisory Fees to Thomas H. Lee Advisors II, L.P.
8. Fund Administration Fees and Expenses
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 Administration Fee and reimbursement for certain
out-of-pocket expenses incurred by the Fund Administrator on behalf of the Funds
("reimbursable expenses"). The Fund Administration Fee is calculated and paid
quarterly, in advance, by each Fund. For the three months ended March 31, 1998
and 1996, Fund II paid $55,500 and $157,943, respectively, in Fund
Administration Fees.
Beginning in November of 1997, the Fund Administration Fee changed to an
annual amount of $400,000 for Fund II and the Retirement Fund on a combined
basis, plus 100% of all reimbursable expenses incurred by the Funds.
Reimbursable expenses primarily consist of printing, audit, tax preparation and
custodian fees. For the three months ended March 31, 1998 and 1997, Fund II
incurred $83,097 and $25,810, respectively, in reimbursable expenses.
For the period prior to November 1997, the Fund Administration Fee was
calculated at an annual amount of the greater of $500,000 or 0.45% of the excess
of net offering proceeds less 50% of capital reductions and 50% of realized
losses plus a portion of reimbursable expenses incurred by Fund II.
In addition, ML Mezzanine II Inc., an affiliate of the Fund Administrator
and Merrill Lynch & Co.,Inc., receives 5% of the benefit of any MGP
Distributions paid to the Managing General Partner (see Note 10).
9. 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. Compensation
for each of the Individual General Partners is reviewed annually. For the three
months ended March 31, 1998 and 1997, Fund II incurred $20,515 and $25,374,
respectively, in Independent General Partners' Fees and Expenses.
10. Related Party Transactions
Fund II's investments generally were 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 receive 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.
As provided by the Partnership Agreement, the Managing General Partner of
Fund II is entitled to receive an incentive distribution ("MGP Distributions")
after Limited Partners have received their Priority Return of 10% per annum. The
Managing General Partner is required to defer a portion of any MGP Distribution
earned from the sale of portfolio investments in excess of 20% of realized
capital gains, net realized capital losses and unrealized depreciation, in
accordance with the Partnership Agreement (the "Deferred Distribution Amount").
This Deferred Distribution Amount is distributable 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 are instead
payable to the Managing General Partner until any Deferred Distribution Amount
is paid.
In the first quarter of 1998, Fund II paid the Individual General Partner
distributions totaling $84 and Managing General Partner distributions totaling
$112,846 (which includes $112,010 of MGP Distributions). As of March 31, 1998,
the Managing General Partner has earned a total of $25.0 million in MGP
Distributions none of which is deferred in payment to the Managing General
Partner as a Deferred Distribution Amount. 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.
11. Litigation
On April 10, 1998, Fund II and the Retirement Fund and (together with Fund
II, "the Funds") the parties to Fund II and the Retirement Fund Securities
Litigation No. 92-60(JJF) Seidel, et al v. Thomas H. Lee, et al, No. 94-422
(JJF) and Seidel, et al v. Thomas H. Lee, et al, No. 95-724 (JJF), three class
actions brought on behalf of limited partners of the Funds, filed with United
States District Court for the District of Delaware, a Stipulation of Settlement
preliminarily settling these actions.
The proposed settlement, which is subject to Court approval, provides for
dismissal with prejudice of all claims against the Funds, the Funds' Investment
Adviser and certain of its affiliates, the Funds' Managing General Partner and
certain of its affiliates, the Funds' counsel and the Funds' Independent General
Partners. Although defendants continue to deny all liability in these actions,
defendants, other than the Funds, have agreed to provide cash of $16 million and
certain other considerations to settle the claims asserted in these actions. In
addition, certain affiliates of Thomas H. Lee, a General Partner of the Funds,
have agreed to provide up to $14 million for purchases of the Funds' limited
partnership units pursuant to a liquidity option to be offered to eligible class
members. On May 4, 1998, the Court granted preliminary approval to the
Settlement and scheduled a final hearing to consider the Settlement for July 16,
1998.
12. Income Taxes (Statement of Financial Accounting Standards No. 109)
No provision for income taxes has been made because all income and losses
are allocated to Fund II's partners for inclusion in their respective tax
returns.
Pursuant to the Statement of Financial Accounting Standards No. 109
Accounting for Income Taxes, Fund II is required to disclose any difference in
the tax basis of Fund II's assets and liabilities versus the amounts reported in
the financial statements. As of December 31, 1997, the tax basis of Fund II's
assets are greater than the amounts reported in the financial statements by
$49.9 million. This difference is attributable to net unrealized depreciation on
investments which has not been recognized for tax purposes.
13. Subsequent Events
On February 28, 1998, First Alert and Sunbeam Corporation ("Sunbeam")
executed a definitive merger agreement whereby Sunbeam acquired all of the
outstanding shares of First Alert Common Stock for approximately $175 million
($5.25 per share) by means of a tender offer (the "Tender Offer"), and assumed
all of the debt of First Alert. Pursuant to the Tender Offer, Fund II tendered
all of its shares of First Alert Common Stock and expects to receive proceeds of
approximately $10.8 million. Net Distributable Capital Proceeds of $48.62 per
Unit will be distributed to Limited Partners of record as of April 2, 1998, the
expiration date of this Tender Offer is extended. See Note 13.
On April 22, 1998, the Individual General Partners approved the first
quarter 1998 cash distribution totaling $2,169,870 which represents net
distributable capital proceeds of $1,736,127 from the sale of Stanley Furniture
and Anchor Advanced Holdings common stock (which includes return of capital of
$1,439,068), net investment income of $401,036 from Mezzanine Investments and
$32,494 income from Temporary Investments. The total amount distributed to the
Limited Partners was $9.22 per Unit, which was distributed on May 15, 1998. The
Managing General Partner received a total of $4,610 with respect to its interest
in Fund II and $120,311 as an MGP Distribution. Thomas H. Lee, as an Individual
General Partner, received $461 with respect to his interest in Fund II.
On April 22, 1998, in connection with Fund II's investment in First Alert,
the Individual General Partners approved a cash distribution consisting of net
Distributable Capital Proceeds from the sale of First Alert, of $10,806,989 (of
which $3,320,120 is return of capital), a cash distribution to Limited Partners
of record as of the effective date of such sale in the amount of $48.62 per Unit
(of which $944,837 is Deferred Distribution Amount as defined in Note 10), a
cash distribution of $24,309 to the Managing General Partner in proportion to
its Capital Contribution, and a cash distribution of $2,431 to Thomas H. Lee as
an Individual General Partner, all such distributions to be payable on May 15,
1998, in accordance with the Partnership Agreement.
On April 15, 1998 Playtex filed a registration statement covering all
shares of the common stock owned by Fund II, the Retirement Fund, Fund I, and
the Lee Affiliates pursuant to an underwritten public offering. Such offering is
expected to be consummated during the second quarter of 1998; however, there can
be no assurance that such offering will be consummated or that the selling
stockholders, including the Fund, will be able to sell all of their remaining
shares of Playtex common stock in such offering.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
ML-LEE ACQUISITION FUND II, L.P.
SUPPLEMENTAL SCHEDULE OF REALIZED GAINS AND LOSSES
FOR THE 3 MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Par Value or Investment Net Realized
SECURITY Number of Shares Cost Proceeds Gain
---------------- ---------- ------------ ------------
Stanley Furniture Company Inc.
Common Stock 3,461 $ 44 $ 94 $ 50
Anchor Advanced Products, Inc.
Common Stock 410,677 1,396 1,643 247
------------ ------------ ------------
TOTAL REALIZED GAIN $ 1,440 $ 1,737 $ 297
============ ============ ============
</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, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Total
Unrealized
Appreciation Total Unrealized
(Decpreciation) for Appreciation/(Depreciation)
Investment Fair Three Months Ended at December 31, at March 31,
SECURITY Cost Value March 31, 1998 1997 1998
- ------------------------------------- ----------- ---------- -------------- ------------ -----------
PUBLICLY TRADED/UNDERLYING
SECURITY PUBLICLY TRADED:
First Alert, Inc.
Common Stock (a) 3,320 10,742 $ 6,368 $ 1,054 $ 7,422
Hills Stores Company
Common Stock * 34,776 2,345 716 (33,148) $ (32,432)
Playtex Products, Inc.
Common Stock (a) 5,299 5,070 1,547 (1,776) $ (229)
---------- ---------- ----------
TOTAL UNREALIZED APPRECIATION
(DEPRECIATION) FROM PUBLICLY
TRADED SECURITIES $ 8,631 $ (33,870) $ (25,239)
---------- ---------- ----------
NON PUBLIC SECURITIES:
Fitz and Floyd
Preferred Stock * 12,619 $ 3,024 -- (9,596) $ (9,596)
Biolease
Common Stock* 94 -- -- (94) $ (94)
Subordinated Notes* 676 392 -- (318) $ (318)
FLA. Orthopedics, Inc.
Preferred Stock* 1,513 -- -- (1,513) $ (1,513)
Soretox
Subordinated Notes* 6,631 2,590 -- (4,041) $ (4,041)
---------- ---------- ----------
TOTAL UNREALIZED DEPRECIATION
FROM NON PUBLIC SECURITIES $ -- $ (15,562) $ (15,562)
---------- ---------- ----------
REVERSAL OF UNREALIZED
APPRECIATION FROM SECURITIES SOLD
Stanley
Common Stock (54) 54 --
---------- ---------- ----------
NET UNREALIZED APPRECIATION/
(DEPRECIATION) $ 8,577 $ (49,378) $ (40,801)
========== ========== ==========
(a) See Note 13 to the Financial Statements.
* Restricted Security
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity & Capital Resources
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 December 20, 1989.
At March 31, 1998, Fund II had a total of $49.8 million invested in
Mezzanine Investments representing $41.4 million Managed and $8.4 million
Non-Managed portfolio investments. The remaining proceeds were invested in
Temporary Investments primarily comprised of commercial paper with maturities
less than one month.
Fund II invested substantially all of its net proceeds in Mezzanine
Investments, which consisted 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 twelve months 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 is entitled to receive an incentive distribution ("MGP Distributions")
after Limited Partners have received their Priority Return of 10% per annum. The
Managing General Partner is required to defer a portion of any MGP Distribution
earned from the sale of portfolio investments in excess of 20% of realized
capital gains, net realized capital losses and unrealized depreciation, in
accordance with the Partnership Agreement (the "Deferred Distribution Amount").
Any Deferred Distribution Amount is distributable 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 are instead
payable to the Managing General Partner until the Deferred Distribution Amount
is paid. As of May 15, 1998 there is Deferred Distribution Amount of $944,837
that is payable to the MGP.
On August 6, 1991, the Independent General Partners approved a reserve for
follow-on investments of $24.9 million for Fund II. As of May 15, 1998, the
remaining reserve balance was $3.1 million due to follow-on investments in Petco
Animal Supplies, Fitz and Floyd, Fine Clothing, Inc., Hills Stores, Ghirardelli
Holdings and Anchor Advanced Products. Additionally, $8.29 million of the
reserve has been returned to the partners. 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 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.
The proportion of distributions provided by net investment income has
decreased from prior years due primarily to increased sales and redemptions of
Mezzanine Investments and the resulting decrease in investment income as those
holdings cease to generate interest income. Pursuant to the terms of the
Partnership Agreement, 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. It is expected that the majority of future cash distributions to Limited
Partners will almost entirely be derived from recovered capital and gains, from
asset sales, if any, 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, which are estimated to be less than one dollar per Limited
Partnership Unit each quarter. Distributions therefore are expected to vary
significantly in amount and may not be made in every quarter.
Investment in High-Yield Securities
Fund II invested 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 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 met 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 Securities held by Fund II (Hills and Playtex) have
registered their equity securities in public offerings. Although the equity
securities of the same class presently held by Fund II 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 one
year 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 two 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.
On April 15, 1998 Playtex filed a registration statement covering all
shares of the common stock owned by Fund II, the Retirement Fund, Fund I, and
the Lee Affiliates pursuant to an underwritten public offering. Such offering is
expected to be consummated during the second quarter of 1998; however, there can
be no assurance that such offering will be consummated or that the selling
stockholders, including the Fund, will be able to sell all of their remaining
shares of Playtex common stock in such 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 Mezzanine Investments
and short-term money market instruments.
For the three months ended March 31, 1998, Fund II had investment income of
$789,498, as compared to $1,315,661 for the same period in 1997. The decrease in
1998 investment income as compared to 1997 is due to the sales of income
producing portfolio companies.
Major expenses for the period consisted of Investment Advisory Fees and
Fund Administration Fees.
The Investment Adviser and Fund Administrator both receive their
compensation on a quarterly basis. The Investment Advisory Fee paid to the
Investment Adviser for the quarter ended March 31, 1998 and 1997 was $175,490
and $203,953, respectively, and was calculated at an annual rate of 1.0% of
assets under management (net offering proceeds reduced by cumulative capital
reductions and realized losses), with a minimum annual amount of $1.2 million
for Fund II and the Retirement Fund on a combined basis. The decrease in
Investment Advisory Fees are a direct result of sales of investments, returns of
capital distributed to partners and realized losses on investments.
Beginning in November of 1997, the Fund Administration Fee changed to an
annual amount of $400,000 for Fund II and the Retirement Fund on a combined
basis, plus 100% of all reimbursable expenses (as defined below) incurred by
Fund II. Actual out-of-pocket expenses ("reimbursable expenses") primarily
consist of printing, audit, tax preparation and custodian fees. For the quarters
ended March 31, 1998 and 1997, Fund II incurred $83,097 and $25,810,
respectively, in reimbursable expenses.
The Fund Administration Fees paid to the Fund Administrator for the months
ended March 31, 1998 and 1997 were calculated at an annual rate of 0.45% of the
excess of net offering proceeds, less 50% of capital reductions and 50% of
realized losses. The decrease in Fund Administration Fees were a direct result
of sales of investments, returns of capital distributed to partners and realized
losses on investments. For the months ended March 31, 1998 and 1997, Fund
Administration Fees were $55,500 and $157,943, respectively.
For the three months ended March 31, 1998 and 1997 Fund II had net
investment income of $413,057 and $802,239, respectively. The decrease in 1998
as compared to 1997 net investment income is due to the sale of income producing
portfolio companies, partially offset by lower Investment Advisory Fees.
Net Assets
Fund II's net assets increased by $8.5 million during the three months
ended March 31, 1998, due to net unrealized appreciation of $8.6 milllion, net
investment income of $413,057 and realized gains from the sale of Stanley
Furniture and Anchor common stock of $297,059, partially offset by the payment
of cash distributions to partners of $811,053. This compares to the decrease in
net assets of $4.4 million for the three months ended March 31, 1997 resulting
from the payment of cash distributions to partners of $1,833,047 and net
unrealized depreciation of $3.4 million, partially offset by net investment
income of $802,239 and realized gains from investments of $3,105 million.
Unrealized Appreciation and Depreciation on Investments
For the three months ended March 31, 1998, Fund II recorded net unrealized
appreciation of $8.6 million (of which all is attributable to publicly traded
securities) compared to net unrealized depreciation of $3.4 million for the same
period in 1997. As of March 31, 1998, Fund II's cumulative net unrealized
depreciation on investments totaled $40.8 million.
Fund II's valuation of the Common Stock of First Alert, Hills, Playtex and
Stanley Furniture reflect their closing market prices at March 31, 1998.
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.
Approximately 58% of Fund II's investments (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 Hills 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.
Accordingly, the values referred to in the financial statements for the
remaining Hills and Playtex 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,
1998. 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 Supplemental Schedule of
Unrealized Appreciation and Depreciation - Schedule 2.
Realized Gains and Losses
For the three months ended March 31, 1998, Fund II had net realized gains
from the sale of Stanley and Anchor common stock of $297,059 as compared to
$3,105 for the same period in 1997.
For additional information, please refer to the Supplemental Schedule of
Realized Gains and Losses - Schedule 1.
Cash Distributions
On April 22, 1998, the Individual General Partners approved the first
quarter 1998 cash distribution totaling $2,169,870 which represents net
distributable capital proceeds of $1,736,127 from the sale of Stanley Furniture
and Anchor Advanced Holdings common stock (which includes return of capital of
$1,439,068), net investment income of $401,036 from Mezzanine Investments and
$32,494 income from Temporary Investments. The total amount distributed to the
Limited Partners was $9.22 per Unit, which was distributed on May 15, 1998. The
Managing General Partner received a total of $4,610 with respect to its interest
in Fund II and $120,311 as an MGP Distribution. Thomas H. Lee, as an Individual
General Partner, received $461 with respect to his interest in Fund II.
On April 22, 1998, in connection with Fund II's investment in First Alert,
the Individual General Partners approved a cash distribution consisting of net
Distributable Capital Proceeds from the sale of First Alert, of $10,806,989 (of
which $3,320,120 is return of capital), a cash distribution to Limited Partners
of record as of the effective date of such sale in the amount of $48.62 per Unit
(of which $944,837 is Deferred Distribution Amount as defined in Note 10), a
cash distribution of $24,309 to the Managing General Partner in proportion to
its Capital Contribution, and a cash distribution of $2,431 to Thomas H. Lee as
an Individual General Partner, all such distributions to be payable on May 15,
1998, in accordance with the Partnership Agreement.
Should a Limited Partner decide to sell his Units, any such sale will be
recorded on the books and records of Fund II quarterly, only upon the
satisfactory completion and acceptance of the Fund II's transfer documents.
There can be no assurances that such transfer will be effected before any
specified date. Additionally, pursuant to the Partnership Agreement, until a
transfer is recognized, the Limited Partner of record (i.e. the transferor) is
entitled to receive all the benefits and burdens of ownership of Units, and any
transferee has no rights to distributions of sale proceeds generated at any time
prior to the recognition of the transfer and assignment. Accordingly,
Distributable Cash from Investments for a quarter and Distributable Capital
Proceeds from sales after transfer or assignment have been entered into, but
before such transfer and assignment is recognized, would be payable to the
transferor and not the transferee.
<PAGE>
Part II - Other Information
Item 1 - Litigation
On April 10, 1998, Fund II and the Retirement Fund and (together with Fund
II, "the Funds") the parties to Fund II and the Retirement Fund Securities
Litigation No. 92-60(JJF) Seidel, et al v. Thomas H. Lee, et al, No. 94-422
(JJF) and Seidel, et al v. Thomas H. Lee, et al, No. 95-724 (JJF), three class
actions brought on behalf of limited partners of the Funds, filed with United
States District Court for the District of Delaware, a Stipulation of Settlement
preliminarily settling these actions.
The proposed settlement, which is subject to Court approval, provides for
dismissal with prejudice of all claims against the Funds, the Funds' Investment
Adviser and certain of its affiliates, the Funds' Managing General Partner and
certain of its affiliates, the Funds' counsel and the Funds' Independent General
Partners. Although defendants continue to deny all liability in these actions,
defendants, other than the Funds, have agreed to provide cash of $16 million and
certain other considerations to settle the claims asserted in these actions. In
addition, certain affiliates of Thomas H. Lee, a General Partner of the Funds,
have agreed to provide up to $14 million for purchases of the Funds' limited
partnership units pursuant to a liquidity option to be offered to eligible class
members. On May 4, 1998, the Court granted preliminary approval to the
Settlement and scheduled a final hearing to consider the Settlement for July 16,
1998.
Items 2 - 4 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 March 31,
1998.
(b) Reports on form 8-K: Form 8-K dated February 28, 1998
Filed March 16, 1998 related to
Tender Offer of Sunbeam and First Alert
Form 8-K dated and filed April 10, 1998
related to settlement of litigation
Item 5. Other Information
As of April 10, 1998, John W. Childs resigned as the President and Trustee
of the Investment Adviser to Fund II. In addition, Mr. Childs transferred his
Shares in the Investment Adviser to a limited liability company of which he is
the sole member. At such time, David V. Harkins, formerly the Investment
Adviser's Senior Vice President, was appointment as President. Mr. Harkins will
remain a Trustee of the Investment Adviser. In addition, C. Hunter Boll, a Vice
President of the Investment Adviser, was appointed as a trustee. At the same
time, Mr. Childs also resigned his position of President of the Investment
Adviser to the Retirement Fund and ML-Lee Acquisition Fund, L.P.
<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 15th day of
May, 1998.
ML-LEE ACQUISITION FUND II, L.P.
By: Mezzanine Investments II, L.P.,
Managing General Partner
By: ML Mezzanine II Inc.,
its General Partner
Dated: May 15, 1998 /s/ Audrey Bommer
Audrey Bommer
Vice President and Treasurer
(Chief Financial Officer)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 15th day of
May, 1998.
ML-LEE ACQUISITION FUND II, L.P.
By: Mezzanine Investments II, L.P.,
Managing General Partner
By: ML Mezzanine II Inc.,
its General Partner
Dated: May 15, 1998
Audrey Bommer
Vice President and Treasurer
(Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the
first quarter 1998 Form 10Q Statements of Assets, Liabilities and Partners'
Capital 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 62,212,591
<INVESTMENTS-AT-VALUE> 40,899,217
<RECEIVABLES> 494,730
<ASSETS-OTHER> 7,244
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 55,596,278
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 286,515
<TOTAL-LIABILITIES> 286,515
<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> (40,798,254)
<NET-ASSETS> 55,309,762
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 778,612
<OTHER-INCOME> 10,886
<EXPENSES-NET> 376,441
<NET-INVESTMENT-INCOME> 413,057
<REALIZED-GAINS-CURRENT> 297,059
<APPREC-INCREASE-CURRENT> 8,578,689
<NET-CHANGE-FROM-OPS> 9,288,805
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 766,492
<DISTRIBUTIONS-OF-GAINS> 42,961
<DISTRIBUTIONS-OTHER> 44,106
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 8,477,752
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 175,490
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 376,441
<AVERAGE-NET-ASSETS> 51,070,887
<PER-SHARE-NAV-BEGIN> 209.93
<PER-SHARE-NII> 1.32
<PER-SHARE-GAIN-APPREC> 38.59
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (3.15)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 248.02
<EXPENSE-RATIO> 0.007
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
