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, 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 June 30, 1998 and December 31, 1997
Statements of Operations - For the Three and Six
Months Ended June 30, 1998 and 1997
Statements of Changes in Net Assets -
For the Six Months Ended June 30, 1998 and 1997
Statements of Cash Flows - For the Three and Six Months
Ended June 30, 1998 and 1997
Statement of Changes in Partners' Capital at
June 30, 1998
Schedule of Portfolio Investments - June 30, 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>
(UNAUDITED)
June 30, 1998 December 31, 1997
------------- -----------------
Assets:
Investments - Notes 2,4,5
Portfolio Investments at fair value
Managed Companies (amortized cost $57,964
at June 30, 1998 and $68,022 at December 31, 1997) $ 26,184 $ 34,206
Non-Managed Companies (amortized cost $23,967
at June 30, 1998 and at December 31, 1997) 8,440 8,440
Temporary Investments, at amortized cost (cost $7,936
at June 30, 1998 and $3,612 at December 31, 1997) 7,950 3,627
Cash 2 245
Accrued Interest & Other Receivable - Note 2 334 257
Due from Affiliate - 328
Prepaid Expenses 1 4
------------- -----------
Total Assets $ 42,911 $ 47,107
============= ===========
Liabilities and Partners' Capital:
Liabilities
Legal and Professional Fees Payable $ 75 $ 100
Reimbursable Administrative Expenses Payable - Note 8 103 11
Independent General Partners' Fees Payable - Note 9 23 12
Deferred Interest Income - Note 2 129 151
------------- -----------
Total Liabilities 330 274
------------- -----------
Partners' Capital - Note 2
Individual General Partner 14 15
Managing General Partner 1,091 266
Limited Partners (221,745 Units) 41,476 46,552
------------- -----------
Total Partners' Capital 42,581 46,833
------------- -----------
Total Liabilities and Partners' Capital $ 42,911 $ 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 For the Six Months Ended
------------- ------------ ------------------------
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
---------- ---------- ---------- ----------
Investment Income - Notes 2,4,6:
Interest $ 416 $ 1,622 $ 1,153 $ 2,808
Dividend & Other Income 161 5,539 214 5,669
---------- ---------- ---------- ----------
Total Income 577 7,161 1,367 8,477
---------- ---------- ---------- ----------
Expenses:
Investment Advisory Fee - Note 7 177 214 352 418
Fund Administration Fee - Note 8 55 162 111 320
Reimbursable Administrative Expenses - Note 8 103 53 186 79
Legal and Professional Fees 158 -- 187 99
Independent General Partners' Fees and Expenses - Note 9 22 51 55 76
Insurance Expense 1 1 2 2
---------- ---------- ---------- ----------
Total Expenses 516 481 893 994
---------- ---------- ---------- ----------
Net Investment Income 61 6,680 474 7,483
---------- ---------- ---------- ----------
Net Realized Gain on Investments - Note 4 and Schedule 1 6,731 47 7,028 50
---------- ---------- ---------- ----------
Net Change in Unrealized Appreciation (Depreciation)
on Investments: Note 5 and Schedule 2
Publicly Traded Securities (6,542) (1,085) 2,035 (2,045)
Nonpublic Securities -- 63 -- (2,376)
---------- ---------- ---------- ----------
Subtotal (6,542) (1,022) 2,035 (4,421)
---------- ---------- ---------- ----------
Net Increase in Net Assets
Resulting form Operations 250 5,705 9,537 3,112
Less: Earned MGP Distributions to Managing General Partner (945) (2,137) (1,065) (2,137)
---------- ---------- ---------- ----------
Net Increase (Decrease) Available For Pro-Rata
Distribution to All Partners $ (695) $ 3,568 $ 8,472 $ 975
========== ========== ========== ==========
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 Six Months Ended
------------- -----------
June 30, 1998 June 30, 1997
------------- -----------
From Operations:
Net Investment Income $ 474 $ 7,483
Net Realized Gain on Investments 7,028 50
Net Change in Unrealized Appreciation
(Depreciation) from Investments 2,035 (4,421)
----------- -----------
Net Increase in Net Assets
Resulting from Operations 9,537 3,112
Cash Distributions to Partners (13,789) (22,493)
----------- -----------
Total Decrease (4,252) (19,381)
Net Assets:
Beginning of Year 46,833 71,115
----------- -----------
End of Period $ 42,581 $ 51,734
=========== ===========
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 Six Months Ended
----------- -----------
June 30, 1998 June 30, 1997
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows From Operating Activities:
Interest, Dividends, Discount and Other Income $ 1,310 $ 7,974
Legal and Professional Fees (212) (32)
Investment Advisory Fee (352) (418)
Fund Administration Fee (111) (320)
Independent General Partners' Fees and Expenses (43) (86)
Reimbursable Administrative Expenses (94) (71)
(Purchase) Sale of Temporary Investments, Net (4,323) 2,869
Purchase of Follow On Investments -- (2,420)
Proceeds from Sales of Portfolio Company Investments 17,085 14,872
----------- -----------
Net Cash Provided by Operating Activities 13,260 22,368
----------- -----------
Cash Flows from Financing Activities:
Cash Distributions to Partners (13,503) (22,493)
----------- -----------
Net Cash Applied to Financing Activities (13,503) (22,493)
----------- -----------
Net Decrease in Cash (243) (125)
Cash at Beginning of the Period 245 125
----------- -----------
Cash at End of Period $ 2 $ --
=========== ===========
Reconciliation of Net Investment Income
to Net Cash Provided by Operating Activities
Net Investment Income $ 474 $ 7,483
----------- -----------
Adjustments to Reconcile Net Investment Income
to Net Cash Provided by Operating Activities
Decrease in Investments 5,734 15,276
Increase in Accrued Interest Receivable (57) (504)
Decrease in Prepaid Expenses 3 2
Increase (Decrease) in Legal and Professional Fees Payable (25) 63
Increase in Reimbursable Administrative Expenses Payable 92 8
Increase (Decrease) in Independent General Partners' Fees Payable 11 (10)
Net Realized Gain on Sales of Investments 7,028 50
----------- -----------
Total Adjustments 12,786 14,885
----------- -----------
Net Cash Provided by Operating Activities $ 13,260 $ 22,368
=========== ===========
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 Six Months Ended June 30, 1998
Partners' Capital at January 1, 1998 $ 15 $ 266 $ 46,552 $ 46,833
Allocation of Net Investment Income -- 18 456 474
Allocation of Net Realized Gain on Investments 2 1,064 5,962 7,028
Allocation of Net Change in Unrealized
Depreciation From Investments -- 5 2,030 2,035
Cash Distributions to Partners (3) (262) (13,524) (13,789)
----------- ----------- ----------- -----------
Partners' Capital at June 30, 1998 $ 14 $ 1,091 $ 41,476 $ 42,581
=========== =========== =========== ===========
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
June 30, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
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 40.27
------------------------------
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 14.20
------------------------------
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
------------------------------
HILLS STORES COMPANY - Note 5
458,432 Shares Hills Stores Company, Common Stock(a)(d) 04/03/90 30,246 2,636
62,616 Shares Hills Stores Company, Common Stock(a)(d) 08/21/95 4,530 360
(4.1% of fully diluted common equity) ------------------------------
34,776 2,996 7.04
------------------------------
TOTAL INVESTMENT IN MANAGED COMPANIES $ 57,964 $ 26,184 61.51
==============================
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
June 30, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
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 .95
-------------------------------
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
51,425 Shares Fitz and Floyd, Common Stock (d) 04/11/97 -- --
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 04/11/97
8,470 Sh Series A Preferred Stock and
51,425 Shares Common Stock $12,619
Total Realized Loss $ (20) -------------------------------
15,039 5,444 12.79
-------------------------------
FLA. ORTHOPEDICS, INC. - Notes 5,6
19,366 Shares FLA. Holdings, Inc. Series B Preferred Stock(d)(g) 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
June 30, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
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(d) 12/06/91 0 0
-----------------------------
6,631 2,590 6.08
-----------------------------
TOTAL INVESTMENT IN NON-MANAGED COMPANIES $ 23,967 $ 8,440 19.82
=============================
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes Various 28,808 24,483 57.51
Preferred Stock, Common Stock and Warrants Various 53,123 10,141 23.82
-----------------------------
TOTAL MEZZANINE INVESTMENTS $ 81,931 $34,624 81.33
=============================
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$ 7,950 Ford Moter Credit, 5.43% due 7/1/98 6/19/98 7,936 7,950
-----------------------------
TOTAL INVESTMENT IN COMMERCIAL PAPER 7,936 7,950 18.67
-----------------------------
TOTAL TEMPORARY INVESTMENTS $ 7,936 $ 7,950 18.67
-----------------------------
TOTAL INVESTMENT PORTFOLIO $ 89,867 $ 42,574 100.00%
=============================
(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 $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
June 30, 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.
<PAGE>
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of June 30,
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 June 30, 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 June 30, 1998 and December 31, 1997,
Fund II has in its portfolio of investments $441,900 of payment-in-kind debt
securities. As of June 30, 1998 and December 31, 1997, Fund II has in its
portfolio of investments $29,059 of payment-in-kind equity securities.
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 report as of June 30, 1998 and
for the period then ended has been prepared by management without an audit by
independent cetified public accountants. The results for the period ended June
30, 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.
<PAGE>
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.
On March 2, 1998, Sunbeam Corporation and First Alert executed a definitive
merger agreement whereby Sunbeam agreed to acquire all of the outstanding shares
of First Alert for $175 million or $5.25 per share and assume all of First
Alert's debt. Pursuant to this transaction Fund II tendered all of their shares
of First Alert and received proceeds of $10.8 million. Net Distributable
Proceeds of $48.62 per unit were distributed to Limited Partners of record as of
the date of the closing of this transaction, April 2, 1998.
On May 27, 1998, Playtex Products Inc., ("Playtex"), completed a public
offering in the international markets of approximately 4 million shares of
Common Stock at a net price of $13.215 per share (the "Playtex Offering"). Of
the 4 million shares offered, approximately 3.8 million shares were offered by
affiliates of the Thomas H. Lee Company, including Fund II. As part of the
Playtex Offering, Fund II sold its remaining investment in Playtex, consisting
of approximately 343,726 shares of Common Stock. Fund II received proceeds of
$4.5 million and recognized a loss on the sale of approximately $756,000. Net
Distributable Proceeds will be distributed to Limited Partners of record as of
May 27, 1998. (See Note 13)
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 information, please refer to the Schedule of Unrealized Appreciation
and Depreciation - Schedule 2.
<PAGE>
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 six
months ended June 30, 1998 and 1997, Fund II paid $352,093 and $417,570,
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 six months ended June 30, 1998 and
1997, Fund II paid $111,000 and $320,329, 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 Fund
Administrator. Reimbursable expenses primarily consist of printing, audit, tax
preparation and custodian fees. For the six months ended June 30, 1998 and 1997,
Fund II incurred $185,660 and $78,793, respectively, in reimbursable expenses.
For the period ended 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
receives 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 six
months ended June 30, 1998 and 1997, Fund II incurred $54,456 and $76,394,
respectively, in Independent General Partners' Fees and Expenses.
<PAGE>
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.
For the six months ending June 30, 1998, Fund II paid the Individual
General Partner distributions totaling $3,931 and Managing General Partner
distributions totaling $348,549 (which includes $309,239 of MGP Incentive Fees).
As of June 30, 1998, the Managing General Partner has earned a total of $26
million in MGP Incentive Fees of which $944,837 was 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.
<PAGE>
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 settlement, which was approved by the Court at a hearing on July 16,
1998, 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 members of the class 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.
The Funds have advanced legal expenses incurred by certain defendants and
has included such expenses in Legal and Professional Fees in the Financial
Statements.
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 July 30, 1998, the Individual General Partners approved the second
quarter 1998 cash distribution consisting of Distributable Cash from Temporary
Investments of $77,607, Distributable Cash from Mezzanine Investments of
$189,123, Distributable Capital Proceeds of $4,541,487 from the sale of common
stock of Playtex Products Inc. (all of which is Return of Capital), the
following distributions: a cash distribution to Limited Partners in the amount
of $20.78 per Unit, a cash distribution of $10,391 to the Managing General
Partner in proportion to its Capital Contribution, a cash distribution of
$188,928 to the Managing General Partner as an MGP Distribution and a cash
distribution of $1,039 to Thomas H. Lee as an Individual General Partner, all
such distributions to be payable on or before August 14, 1998.
<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, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Par Value or Investment Net Realized
SECURITY Number of Shares Cost Proceeds Gain/(Loss)
---------------- --------------- ------------ -------------
For the Three Months Ended March 31, 1998
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 for the Three Months Ended March 31, 1998 1,440 1,737 297
--------- --------- -------
For the Three Months Ended June 30, 1998
First Alert, Inc.
Common Stock 2,058,474 3,320 10,807 7,487
Playtex Products, Inc.
Common Stock 343,726 5,298 4,542 (756)
--------- --------- -------
Total for the Three Months Ended June 30, 1998 8,618 15,349 6,731
--------- --------- -------
Total for the Six Months Ended June 30, 1998 10,058 17,086 7,028
========= ========= =======
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
ML-LEE ACQUISITION FUND II, L.P.
SUPPLEMENTAL SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
FOR THE PERIOD ENDED June 30, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Unrealized Unrealized Total Total
Appreciation/ Appreciation/ Unrealized Unrealized
(Depreciation) (Depreciation) Appreciation/ Appreciation/
for the Three for the Six (Depreciation) (Depreciation)
Investment Fair Months Ended Months Ended at December 31, at June 30,
SECURITY Cost Value June 30, 1998 June 30, 1998 1997 1998
- --------------------------------- ----------- ------ --------------- -------------- -------------- -------------
Publicly Traded:
Hills Stores Company
Common Stock * $ 34,776 $ 2,996 $ 651 $ 1,367 $ (33,148) $ (31,781)
-------- ------------ ------------ ------------
Total Unrealized Appreciation
(Depreciation) from Publicly
Traded Securities 651 1,367 (33,148) (31,781)
-------- ------------ ------------ ------------
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
First Alert, Inc.
Common Stock -- -- (7,422) (1,054) 1,054 --
Playtex Products, Inc.
Common Stock -- -- 229 1,776 (1,776) --
Stanley
Common Stock -- -- -- (54) 54 --
-------- ------------ ------------ ------------
Total Unrealized Appreciation
(Depreciation) from Securities Sold (7,193) 668 (668) --
-------- ------------ ------------ ------------
Net Unrealized Appreciation (Depreciation) $ (6,542) $ 2,035 $ (49,378) $ (47,343)
========= ============ ============ ============
* Restricted Security
See the Accompanying Notes to Financial Statements.
</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.
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 June 30, 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 both
Managed and Non-Managed Portfolio Companies. 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.
<PAGE>
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 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.
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 six months ended June 30, 1998, Fund II had investment income of
$1,366,543, as compared to $8,476,482 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. Additionally, as of January 1, 1998, Fund II
began receiving interest in the form of payment-in-kind securities which has not
been recognized as income for the six months ending June 30, 1998.
Major expenses for the period consisted of Investment Advisory Fees and
Fund Administration Fees and Reimbursable Administrative Expenses.
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 six months ended June 30, 1998 and 1997 was $352,093
and $417,570, 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 six
months ended June 30, 1998 and 1997, Fund II incurred $185,660 and $78,793,
respectively, in reimbursable expenses. For the three months ended June 30, 1998
and 1997 reimbursable expenses totaled $102,563 and $52,983, respectively.
<PAGE>
The Fund Administration Fees paid to the Fund Administrator for the period
ending November 10, 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 six months ended June 30, 1998 and 1997, Fund
Administration Fees were $111,000 and $320,329, respectively. For the three
months ended June 30, 1998 and 1997, the Fund Administration Fee paid to the
Fund Administrator was $55,500 and 162,386, repectively.
Pursuant to the administrative services agreement between Fund II and the
Fund Administrator, for the period ending November 10, 1997, a portion of the
actual out-of-pocket expenses incurred in connection with the administration of
Fund II was reimbursable to the Fund Administrator.
Legal and Professional Fees were primarily incurred in connection with the
litigation proceedings as described in Note 11 to the Financial Statements.
Legal and Professional fees for the six months ended June 30, 1998 and 1997 were
$186,549 and $99,293, respectively. These expenses are attributable to 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.
For the six months ended June 30, 1998 and 1997 Fund II had net investment
income of $474,678 and $7,482,625, 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. For the
three months ended June 30, 1998, Fund II had net investment income of $61,622
as compared to $6,680,385 for the same period in 1997.
Net Assets
Fund II's net assets decreased by $4.3 million during the six months ended
June 30, 1998, due to cash distributions to partners of 13,788,906 partially
offset by net unrealized appreciation of $2.0 million, net investment income of
$474,678 and realized gains from the sale of portfolio investments of
$7,027,580. This compares to the decrease in net assets of $19.4 million for the
six months ended June 30, 1997 resulting from the payment of cash distributions
to partners of $22,492,551 and net unrealized depreciation of $4.4 million,
partially offset by net investment income of $7,482,625 and realized gains from
investments of $49,688.
Unrealized Appreciation and Depreciation on Investments
Fund II's valuation of the Common Stock of Hills reflect its closing market
prices at June 30, 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 91% of Fund II's investments 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.
Certain 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 securities do not necessarily represent the prices at which
these securities could currently be sold.
<PAGE>
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of June 30,
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 six months ended June 30, 1998, Fund II had net realized gains from
the sale of portfolio investments of $7,027,580 as compared to $49,688 for the
same period in 1997. For the quarter ended June 30, 1998, Fund II had net
realized gains from investments of $6,730,521 as compared to $46,582 recorded in
the second quarter of 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.
On July 30, 1998, the Individual General Partners approved the second
quarter 1998 cash distribution consisting of Distributable Cash from Temporary
Investments of $77,607, Distributable Cash from Mezzanine Investments of
$189,123, Distributable Capital Proceeds of $4,541,487 from the sale of common
stock of Playtex Products Inc. (all of which is Return of Capital), the
following distributions: a cash distribution to Limited Partners in the amount
of $20.78 per Unit, a cash distribution of $10,391 to the Managing General
Partner in proportion to its Capital Contribution, a cash distribution of
$188,928 to the Managing General Partner as an MGP Distribution and a cash
distribution of $1,039 to Thomas H. Lee as an Individual General Partner, all
such distributions to be payable on or before August 14, 1998.
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
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,
1998.
(b) Reports on form 8-K: 8-K Filed April 10, 1998
Regarding Litigation Settlement
<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, 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: August 14, 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 14th day of
August, 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: August 14, 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
second quarter 1998 Form 10-Q 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 89,866,782
<INVESTMENTS-AT-VALUE> 42,573,482
<RECEIVABLES> 334,721
<ASSETS-OTHER> 3,422
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 42,581,549
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 330,074
<TOTAL-LIABILITIES> 330,074
<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> (47,340,757)
<NET-ASSETS> 42,581,549
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,329,539
<OTHER-INCOME> 37,004
<EXPENSES-NET> 891,865
<NET-INVESTMENT-INCOME> 474,678
<REALIZED-GAINS-CURRENT> 7,027,580
<APPREC-INCREASE-CURRENT> 2,036,186
<NET-CHANGE-FROM-OPS> 9,538,443
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,201,229
<DISTRIBUTIONS-OF-GAINS> 7,826,889
<DISTRIBUTIONS-OTHER> 4,803,294
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (4,250,462)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 352,093
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 891,865
<AVERAGE-NET-ASSETS> 44,706,780
<PER-SHARE-NAV-BEGIN> 209.93
<PER-SHARE-NII> 2.06
<PER-SHARE-GAIN-APPREC> 9.16
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (60.99)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 187.04
<EXPENSE-RATIO> 0.020
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
