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 Quarterly Period Ended September 30, 1999
Commission File Number 0-17383
ML-LEE ACQUISITION FUND II, L.P.
(Exact name of registrant as specified in its governing instruments)
Delaware 04-3028398
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
World Financial Center
South Tower - 14th Floor
New York, New York 10080-6114
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (212) 236-6577
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
None 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__ .
<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 September 30, 1999 and December 31, 1998
Statements of Operations - For the Three and Nine Months
Ended September 30, 1999 and 1998
Statements of Changes in Net Assets - For the Nine Months
Ended September 30, 1999 and 1998
Statements of Cash Flows - For the Nine Months
Ended September 30, 1999 and 1998
Statement of Changes in Partners' Capital - For the Nine Months
Ended September 30, 1999
Schedule of Portfolio Investments as of September 30, 1999
Notes to Financial Statements
Supplemental Schedule of Realized Gains and Losses - Schedule 1
Supplemental Schedule of Unrealized Appreciation
(Depreciation) - Schedule 2
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantative and Qualitative Disclosure About Market Risk
Part II. Other Information
Item 6. Exibits and Reports on 8-K
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
Statements of Assets, Liabilities and Partners' Capital
(Dollars in Thousands)
(Unaudited)
<S> <C> <C>
September 30, 1999 December 31, 1998
------------------ -----------------
Assets:
Investments - Notes 2,4,5
Portfolio Investments at fair value
Managed Companies (amortized cost $17,144
at September 30, 1999 and at December 31, 1998) $ 17,144 $ 17,144
Non-Managed Companies (amortized cost $2,330
at September 30, 1999 and $23,967 at December 31, 1998) 407 8,440
Temporary Investments, at amortized cost (cost $14,903
at September 30, 1999 and $3,401 at December 31, 1998) 14,984 3,408
Cash 59 5
Accrued Interest & Other Receivable - Note 2 276 1,395
Receivable for Investment Sold - 782
Prepaid Expenses - 3
------------ -----------
Total Assets $ 32,870 $ 31,177
============ ===========
Liabilities and Partners' Capital:
Liabilities
Legal and Professional Fees Payable $ 2 $ 30
Reimbursable Administrative Expenses Payable Note 8 46 22
Independent General Partners' Fees Payable - Note 9 5 18
Deferred Interest Income - Note 2 53 81
------------ -----------
Total Liabilities 106 151
------------ -----------
Partners' Capital - Note 2
Individual General Partner 13 13
Managing General Partner 236 525
Limited Partners (221,745 Units) 32,515 30,488
------------ -----------
Total Partners' Capital 32,764 31,026
------------ -----------
Total Liabilities and Partners' Capital $ 32,870 $ 31,177
============ ===========
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
Statements of Operations
(Dollars in Thousands)
(Unaudited)
<S> <C> <C> <C> <C>
For the Three Months Ended For the Nine Months Ended
-------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- ------------
Investment Income - Notes 2,4,6
Interest $ 562 $ 573 $ 1,706 $ 1,726
Discount and Other Income 93 76 223 290
--------- --------- --------- ---------
Total Investment Income 655 649 1,929 2,016
--------- --------- --------- ---------
Expenses:
Investment Advisory Fee - Note 7 167 156 500 508
Fund Administration Fee - Note 8 56 55 167 167
Reimbursable Administrative Expenses - Note 8 48 87 173 273
Legal and Professional Fees 37 68 37 255
Independent General Partners' Fees and Expenses - Note 9 23 20 64 74
Insurance Expense 1 1 3 3
--------- --------- --------- ---------
Total Expenses 332 387 944 1,280
--------- --------- --------- ---------
Net Investment Income 323 262 985 736
Net Realized Gain (Loss) on Investments - Note 4 and Schedule 1 (3,507) - (4,533) 7,028
Net Change in Unrealized Appreciation (Depreciation)
on Investments - Note 5 and Schedule 2
Publicly Traded Securities - (1,823) - 212
Nonpublic Securities 9,596 - 13,637 -
--------- --------- --------- ---------
Subtotal 9,596 (1,823) 13,637 212
--------- --------- --------- ---------
Net Increase (Decrease) in Net Assets
Resulting from Operations 6,412 (1,561) 10,089 7,976
Less: Earned MGP Distributions to Managing General Partner (109) - (293) (945)
--------- --------- --------- ---------
Net Increase (Decrease) Available For Pro-Rata
Distribution to All Partners $ 6,303 $ (1,561) $ 9,796 $ 7,031
========= ========= ========= =========
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<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 Nine Months Ended
------------------------------------------
September 30, 1999 September 30, 1998
------------------ ------------------
From Operations:
Net Investment Income $ 985 $ 736
Net Realized Gain (Loss) on Investments (4,533) 7,028
Net Change in Unrealized Appreciation from Investments 13,637 212
--------------- ---------------
Net Increase in Net Assets Resulting from Operations 10,089 7,976
Cash Distributions to Partners (8,351) (18,597)
--------------- ---------------
Total Increase (Decrease) 1,738 (10,621)
Net Assets:
Beginning of Year 31,026 46,833
--------------- ---------------
End of Period $ 32,764 $ 36,212
=============== ===============
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
<S> <C> <C>
For the Nine Months Ended
--------------------------------------------
September 30, 1999 September 30, 1998
------------------ ------------------
Increase (Decrease) in Cash
Cash Flows From Operating Activities:
Interest, Discount and Other Income $ 2,946 $ 1,960
Legal and Professional Fees (65) (280)
Investment Advisory Fee (500) (508)
Fund Administration Fee (167) (167)
Independent General Partners' Fees and Expenses (77) (64)
Reimbursable Administrative Expenses (149) (202)
(Purchase) Sale of Temporary Investments, Net (11,502) 466
Proceeds from Sales of Portfolio Company Investments 17,919 17,085
--------------- --------------
Net Cash Provided by Operating Activities 8,405 18,290
--------------- --------------
Cash Flows from Financing Activities:
Cash Distributions to Partners (8,351) (18,311)
--------------- --------------
Net Cash Used in Financing Activities (8,351) (18,311)
--------------- --------------
Net Increase (Decrease) in Cash 54 (21)
Cash at Beginning of Year 5 245
--------------- --------------
Cash at End of Period $ 59 $ 224
=============== ==============
Reconciliation of Net Investment Income
to Net Cash Provided by Operating Activities
Net Investment Income $ 985 $ 736
--------------- --------------
Adjustments to Reconcile Net Investment Income
to Net Cash Provided by Operating Activities
Decrease in Investments 10,168 10,523
Decrease in Receivable for Investments Sold 782 -
(Increase) Decrease in Accrued Interest,
Dividend and Discount Receivable 1,017 (56)
Decrease in Prepaid Expenses 3 3
Decrease in Legal and Professional Fees Payable (28) (25)
Increase in Reimbursable Administrative Expenses Payable 24 71
Increase (Decrease) in Independent General Partners' Fees Payable (13) 10
Net Realized Gain (Loss) on Sales of Investments (4,533) 7,028
--------------- --------------
Total Adjustments 7,420 17,554
--------------- --------------
Net Cash Provided by Operating Activities $ 8,405 $ 18,290
=============== ==============
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<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 Nine Months Ended September 30, 1999
Partners' Capital at January 1, 1999 $ 13 $ 525 $ 30,488 $ 31,026
Allocation of Net Investment Income - 312 673 985
Allocation of Net Realized Loss on Investments (1) (26) (4,506) (4,533)
Allocation of Net Change in Unrealized
Appreciation From Investments 3 31 13,603 13,637
Cash Distributions to Partners (2) (606) (7,743) (8,351)
---------- ---------- ----------- ---------
Partners' Capital at September 30, 1999 $ 13 $ 236 $ 32,515 $ 32,764
========== ========== =========== =========
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
Schedule of Portfolio Investments
September 30, 1999
(Dollars in Thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C>
Fair % Of
Principal Investment Investment Value Total
Amount/Shares Investment Date Cost(f) (Note 2) Investments
MEZZANINE INVESTMENTS
MANAGED COMPANIES
BIG V SUPERMARKETS, INC. (a)
$13,037 Big V Supermarkets, Inc., Sr. Sub. Nt. 14.14% due 03/15/01(b) 12/27/90 $ 13,037 $ 13,037
117,333 Shares Big V Holding Corp., Common Stock(c) 12/27/90 4,107 4,107
(16.6% of fully diluted common equity) (e) --------------------------------
17,144 17,144 52.70%
--------------------------------
COLE NATIONAL CORPORATION
13,161 Warrants Cole National Corporation, Common Stock Purchase Warants (c) 9/26/90 - -
(0.0% of fully diluted common equity
assuming exercise of warrants)
$1,393 13% Sr. Secured Bridge Note
Purchased 9/25/90 $ 1,393
Repaid 11/15/90 $ 1,393
Realized Gain $ 0
-------------------------------
- - 0.00%
-------------------------------
TOTAL INVESTMENT IN MANAGED COMPANIES $17,144 $ 17,144 52.70%
===============================
NON-MANAGED COMPANIES
BIOLEASE, INC.- Note 5
$784 BioLease, Inc., 13% Sub. Nt. due 06/06/04 (b) 06/08/94 $ 676 $ 392
96.56 Shares BioLease, Inc., Common Stock (c) 06/08/94 94 -
10,014 Warrants Biotransplant, Inc., Common Stock Purchase Warrants(c) 06/08/94 14 14
-------------------------------
784 406 1.25%
-------------------------------
FLA. ORTHOPEDICS, INC. - Notes 5,6
19,366 Shares FLA. Holdings, Inc. Series B Preferred Stock (a) (c) (d) 08/02/93 1,513 -
3,822 Warrants FLA. Holdings, Inc. Common Stock Purchase Warrants (a) (c) (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 Shares Series B Preferred
Stock $ 1,513
Realized Gain $ 0
Total Realized Loss $(4,842)
-------------------------------
1,513 - 0.00%
-------------------------------
TOTAL INVESTMENT IN NON-MANAGED COMPANIES $ 2,297 $ 406 1.25%
================================
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
Schedule of Portfolio Investments
September 30, 1999
(Dollars in Thousands)
(Unaudited)
(Continued)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost(f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes Various $ 13,713 $ 13,429 41.28%
Preferred Stock, Common Stock, Warrants and Stock Rights Various 5,728 4,121 12.67%
-----------------------------
TOTAL MEZZANINE INVESTMENTS $ 19,441 $ 17,550 53.95%
=============================
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$10,000 Prudential Funding, 5.24% due 10/1/99 8/27/99 9,949 10,000
$ 3,300 Ford Motor Credit, 5.21% due 10/1/99 8/17/99 3,279 3,300
$ 1,675 State Street Corp., 5.23% due 10/1/99 8/27/99 1,675 1,684
-----------------------------
TOTAL INVESTMENT IN COMMERCIAL PAPER $ 14,903 $ 14,984 46.05%
-----------------------------
TOTAL TEMPORARY INVESTMENTS $ 14,903 $ 14,984 46.05%
-----------------------------
TOTAL INVESTMENT PORTFOLIO $ 34,344 $ 32,534 100.00%
=============================
(a) Represents investment in affiliates as defined in the Investment
Company Act of 1940.
(b) Restricted security.
(c) Restricted non-income producing equity security.
(d) Non-accrual investment status.
(e) Percentages of Common Equity have not been audited by
PricewaterhouseCoopers LLP.
(f) Represents orignal cost and excludes accretion of discount of $33
for Mezzanine Investments and $81 for Temporary Investments.
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
ML-LEE ACQUISITION FUND II, L.P.
Notes to Financial Statements
September 30, 1999
(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 of 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 on 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 generally its original cost plus accrued value in
the case of original issue discount or deferred pay securities. Such investments
generally 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 value.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of September
30, 1999. 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.
<PAGE>
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 September 30, 1999, Fund II does not
have any payment-in-kind securities. As of September 30, 1998, Fund II had
$442,000 of payment-in-kind notes which excluded approximately $2,500,000 of
payment-in-kind notes received from notes placed on non-accrual status.
Investment Transactions
Fund II records investment transactions on the date on which it obtains an
enforceable right to demand the securities or payment therefore. 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.
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 September 30, 1999
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
September 30, 1999 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 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 will be 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; and
thereafter, 79.75% to the Limited Partners, 20.225% to the Managing General
Partner and 0.025% to the Individual General Partner.
4. Investment Transactions
On March 12, 1999, the Funds entered into a Note Repurchase and Warrant
Cancellation Agreement (the "Agreement") with Stablex Canada Inc. and Seaway TLC
Inc. to sell, retire and cancel all of the Subordinated Notes outstanding and
held by the Funds (including all Deferred Interest Notes). Pursuant to the
Agreement, the Funds also relinquished all Warrants held. Total proceeds
received by the Funds for retiring the Notes and Warrants was $12,000,000; of
which $5,605,000 was allocated to Fund II. Fund II has recognized a loss of
approximately $1 million from this transaction. The distribution of any Capital
Proceeds relating to this transaction was made in connection with the first
quarter cash distribution, to Limited Partners of record as of March 12, 1999.
In addition, under the Agreement, the Funds are entitled, collectively, to
receive twenty percent (20%) of the net proceeds of any payment or consideration
or distribution (whether received in cash, property, securities or any
combination thereof) arising out of transfer, disposition, recapitalization or
exchange of substantially all of the stock or other equity interest in either
Stablex Canada Inc. or Seaway TLC Inc. if such transaction is consummated within
forty-two (42) months from the closing of the Agreement. Any Distributable
Capital Proceeds relating to future receipts by Fund II pursuant to the
Agreement will be payable to Limited Partners of record as of the date of the
receipt of such proceeds.
On August 27, 1999, the Funds completed the sale of all of its shares of
Fitz and Floyd, Inc. Capital Stock (the "Sale") pursuant to a Stock Purchase
Agreement executed by the Funds, as selling shareholders, on August 5, 1999.
Fund II received net sales proceeds of $11,579,000, which includes payment in
full of its 12% Fitz and Floyd, Inc. Subordinated Notes, including prepayment
premium, and partial return of capital on its Fitz and Floyd, Inc. Capital
Stock. Fund II recognized a loss of approximately $3.5 million from this
transaction. The distribution of Distributable Capital Proceeds relating to this
transaction will be made in accordance with the terms of the Partnership
Agreement (See Note 12).
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 Supplemental Schedule of Unrealized
Appreciation and Depreciation - Schedule 2.
6. Non-Accrual of Investments
In accordance with Fund II's Accounting Policy, the following security has
been on non-accrual status since the date indicated:
- Florida Orthopedics, Inc., January 1, 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
$1,200,000 for the Funds 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).
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 a Fund Administration Fee. The Fund Administration Fee is an annual
amount of $400,000 for the Funds on a combined basis. The Fund Administration
Fee is calculated and paid quarterly, in advance, by each Fund.
In addition, the Fund Administrator is entitled to reimbursement of 100% of
all out-of-pocket expenses incurred by the Fund Administrator on behalf of the
Funds ("Reimbursable Administrative Expenses"). Reimbursable Administrative
Expenses primarily consist of printing, audit and tax preparation, legal fees
and expenses, and custodian fees.
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.
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 the Retirement Fund and an affiliate of the
Investment Adviser, 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 such Deferred Distribution Amount
is paid in full.
During the nine months ended September 30, 1999, Fund II paid the
Individual General Partner distributions totaling $2,000 and Managing General
Partner distributions totaling $606,000 (which includes $588,000 of MGP
Distributions as defined above). As of September 30, 1999, the Managing General
Partner has earned a total of $26,690,000 in MGP Distributions, none of which is
deferred in payment to the Managing General Partner as a Deferred Distribution
Amount.
11. Income Taxes
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, 1998, the tax basis of Fund II's
assets are greater than the amounts reported in the financial statements by
approximately $15,600,000. This difference is attributable to net unrealized
depreciation on investments which has not been recognized for tax purposes.
12. Subsequent Events
On November 9, 1999, a special meeting of the General Partners of the Funds
was held to review Fund II's reserves prior to making any cash distributions. At
this meeting, the General Partners were briefed on the status of certain
litigation commenced by Hills Stores Company ("Hills") against its former
directors, including Thomas H. Lee (who was serving as a representative of the
Funds), in connection with the July 1995 payment by Hills of approximately $32
million in golden parachute payments to certain of its officers in connection
with the change of control associated with the Dickstein proxy contest. The
General Partners discussed the potential liabilities to Thomas H. Lee in
connection with this litigation, Fund II's potential indemnification obligations
to Thomas H. Lee and the liquidity of Fund II's remaining assets. Following
discussion of the issues, the Individual General Partners of Fund II determined
that, to the extent that Fund II may have future indemnification obligations
with respect to such litigation, suitable reserves should be maintained for such
contingency. Accordingly, the Individual General Partners determined that it
would not be prudent to make distributions to Partners at this time and
therefore, Fund II has reserved all the proceeds received from the sale of Fitz
& Floyd, Inc. This reserve will be reviewed each quarter by the General Partners
of Fund II.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
ML-LEE ACQUISITION FUND II, L.P.
Supplemental Scedule of Realized Gains and Losses
For the Nine Months Ended September 30, 1999
(Dollars in Thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C>
Par Value or Investment Net Realized
Security Security Number of Shares Cost Proceeds Loss
- -------- -------- ---------------- ---------- -------- --------
Soretox
Stablex Canada, Inc. Various Various $ 6,631 $ 5,605 $ (1,026)
Fitz and Floyd, Inc. Various Various 15,039 11,532 (3,507)
---------- -------- --------
Total Realized Loss for the Nine Months ended September 30, 1999 $ 21,670 $ 17,137 $ (4,533)
========== ======== ========
</TABLE>
See Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
ML-LEE ACQUISITION FUND II, L.P.
Supplemental Scedule of Unrealized Appreciation (Depreciation)
For the Nine Months Ended September 30, 1999
(Dollars in Thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Unrealized Unrealized
Appreciation Appreciation
(Depreciation) (Depreciation) Total Unrealized Total Unrealized
for the Three for the Nine Appreciation Appreciation
Months Ended Months Ended (Depreciation) (Depreciation)
Investment Fair September 30, September 30, at December 31, at September 30,
Security Cost Value 1999 1999 1998 1999
- -------- ---------- ------- ------------- ------------- ----------------- --------------
Non Public Securities:
Biolease, Inc.
Common Stock* $ 94 $ - $ - $ - $ (94) $ (94)
Subordinated Notes*(a) 676 392 - - (318) (318)
FLA. Orthopedics, Inc.
Preferred Stock* 1,513 - - - (1,513) (1,513)
------------- ------------- ----------------- --------------
Total Unrealized Depreciation
from Non Public Securities - - (1,925) (1,925)
------------- ------------- ----------------- --------------
Reversal of Unrealized Appreciation
(Depreciation) from Securities Sold
in 1999
Soretox
Subordinated Notes* - 4,041 (4,041) -
Fitz and Floyd, Inc.
Preferred Stock * 9,596 9,596 (9,596) -
-------------- ------------- ----------------- -------------
Total Reversal of Unrealized
Appreciation(Depreciation)from
Securities Sold in 1999 9,596 13,637 (13,637) -
-------------- ------------- ----------------- -------------
Net Unrealized Appreciation (Depreciation) $ 9,596 $ 13,637 $ (15,562) $ (1,925)
============== ============= ================= =============
</TABLE>
* Restricted Security
(a) Investment cost excludes accretion of discount of $33.
See Accompanying Notes to Financial Statements (Unaudited).
<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, consisting of high-yield subordinated debt and/or preferred stock
linked with an equity participation, of middle market companies in connection
with friendly leveraged acquisitions, recapitalizations and other leveraged
financings. Fund II's Mezzanine Investments typically were issued in private
placement transactions which are generally subject to certain restrictions on
sales thereby limiting their liquidity. Fund II was fully invested as of
December 20, 1992, which was within 36 months from the date of the final closing
(after including the reserve for follow-on investments and exclusive of amounts
available for reinvestment). The reinvestment period for various amounts of
capital proceeds received during the last twelve months of Fund II's investment
period terminated at various times through December 18, 1993.
On August 6, 1991, the Independent General Partners approved a reserve for
follow-on investments of approximately $24,900,000 for Fund II. As of November
15, 1999 this remaining reserve balance was approximately $3,100,000 due to
follow-on investments in Petco Animal Supplies, Fitz and Floyd, Fine Clothing,
Inc., Hills Stores, Ghirardelli Holdings and Anchor Advanced Products.
Additionally, approximately $8,300,000 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.
On March 12, 1999, Fund II and the Retirement Fund (together the "Funds")
entered into a Note Repurchase and Warrant Cancellation Agreement (the
"Agreement") with Stablex Canada Inc. and Seaway TLC Inc. to sell, retire and
cancel all of the Subordinated Notes outstanding and held by the Funds
(including all Deferred Interest Notes). Pursuant to the Agreement, the Funds
also relinquished all Warrants held. Total proceeds received by the Funds for
retiring the Notes and Warrants was $12,000,000; of which $5,605,000 was
allocated to Fund II. Fund II has recognized a loss of approximately $1 million
from this transaction. The distribution of any Capital Proceeds relating to this
transaction was made in connection with the first quarter cash distribution, to
Limited Partners of record as of March 12, 1999.
In addition, under the Agreement, the Funds are entitled, collectively, to
receive twenty percent (20%) of the net proceeds of any payment or consideration
or distribution (whether received in cash, property, securities or any
combination thereof) arising out of transfer, disposition, recapitalization or
exchange of substantially all of the stock or other equity interest in either
Stablex Canada Inc. or Seaway TLC Inc. if such transaction is consummated within
forty-two (42) months from the closing of the Agreement. Any Distributable
Capital Proceeds relating to future receipts by Fund II pursuant to the
Agreement will be payable to Limited Partners of record as of the date of the
receipt of such proceeds.
On August 27, 1999, the Funds completed the sale of all of its shares of
Fitz and Floyd, Inc. Capital Stock (the "Sale") pursuant to a Stock Purchase
Agreement executed by the Funds, as selling shareholders, on August 5, 1999.
Fund II received net sales proceeds of $11,579,000, which includes payment in
full of its 12% Fitz and Floyd, Inc. Subordinated Notes, including prepayment
premium, and partial return of capital on its Fitz and Floyd, Inc. Capital
Stock. Fund II recognized a loss of approximately $3.5 million from this
transaction. The distribution of Distributable Capital Proceeds relating to this
transaction will be made in accordance with the terms of the Partnership
Agreement.
On November 9, 1999, a special meeting of the General Partners of the Funds
was held to review Fund II's reserves prior to making any cash distributions. At
this meeting, the General Partners were briefed on the status of certain
litigation commenced by Hills Stores Company ("Hills") against its former
directors, including Thomas H. Lee (who was serving as a representative of the
Funds), in connection with the July 1995 payment by Hills of approximately $32
million in golden parachute payments to certain of its officers in connection
with the change of control associated with the Dickstein proxy contest. The
General Partners discussed the potential liabilities to Thomas H. Lee in
connection with this litigation, Fund II's potential indemnification obligations
to Thomas H. Lee and the liquidity of Fund II's remaining assets. Following
discussion of the issues, the Individual General Partners of Fund II determined
that, to the extent that Fund II may have future indemnification obligations
with respect to such litigation, suitable reserves should be maintained for such
contingency. Accordingly, the Individual General Partners determined that it
would not be prudent to make distributions to Partners at this time and
therefore, Fund II has reserved all the proceeds received from the sale of Fitz
& Floyd, Inc. This reserve will be reviewed each quarter by the General Partners
of Fund II.
At September 30, 1999, Fund II had outstanding a total (at cost) of
$19,441,000 invested in Mezzanine Investments representing $17,144,000 Managed
and $2,297,000 Non-Managed portfolio investments. The remaining proceeds were
invested in Temporary Investments primarily comprised of commercial paper with
maturities of less than 60 days.
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 September 30, 1999 there is no outstanding Deferred Distribution
Amount.
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. As a result, it is expected that the
amount of any future cash distributions, in aggregate, paid to Limited Partners
will almost entirely be derived from recovered capital and gains, from asset
sales, which are subject to market conditions and are inherently unpredictable
as to timing. Therefore, in the absence of cash available for distributions
resulting from the future sale of portfolio holdings, Fund II will have
available only small amounts of Net Distributable Cash from Operations,
estimated to be less than one dollar per Unit each quarter, for any future
distributions.
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.
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.
Forward Looking Information
In addition to historical information contained or incorporated by
reference in this report on Form 10-Q, Fund II may make or publish
forward-looking statements about management expectations, strategic objectives,
business prospects, anticipated financial performance, and other similar
matters. In order to comply with the terms of the safe harbor for such
statements provided by the Private Securities Litigation Reform Act of 1995,
Fund II notes that a variety of factors, many of which are beyond its control,
affect its operations, performance, business strategy, and results and could
cause actual results and experience to differ materially from the expectations
expressed in these statements. These factors include, but are not limited to,
the effect of changing economic and market conditions, trends in business and
finance and in investor sentiment, the level of volatility of interest rates,
the actions undertaken by both current and potential new competitors, the impact
of current, pending, and future legislation and regulation both in the United
States and throughout the world, and the other risks and uncertainties detailed
in this Form 10-Q, and as more fully detailed in Form 10-K incorporated by
reference herein. Fund II undertakes no responsibility to update publicly or
revise any forward-looking statements.
Results of Operations
Investment Income and Expenses
For the nine months ended September 30, 1999, Fund II had net investment
income of $985,000 as compared to $736,000 for the same period in 1998. For the
three months ended September 30, 1999, Fund II had net investment income of
$323,000 as compared to $262,000 for the same period in 1998. The increase in
net investment income for 1999 as compared to 1998 is due to a decrease in legal
and professional fees and Reimbursable Administrative Expenses partially offset
by a decrease in investment income during 1999 as further described below.
The investment income from operations for the year consists primarily of
interest and discount income earned on the investment of Proceeds from Partners'
Contributions in Mezzanine Investments and short-term money market instruments.
For the nine months ended September 30, 1999, Fund II had investment income of
$1,929,000 as compared to $2,016,000 for the same period in 1998. The decrease
in investment income for the nine months ended September 30, 1999 as compared to
the same period in 1998 is directly attributable to the sale of income producing
portfolio companies during 1998 and 1999. For the three months ended September
30, 1999, Fund II had investment income of $655,000 as compared to $649,000 for
the same period in 1998. The increase in investment income during the three
months ended September 30, 1999 as compared to the same period in 1998 is due to
the increase of discount income in 1999 which was earned from the Fitz and
Floyd, Inc. sale proceeds.
Major expenses for the period consisted of Investment Advisory Fees, Fund
Administration Fees, and Reimbursable Administrative Expenses
The Investment Adviser and Fund Administrator both receive their
compensation on a quarterly basis. The total Investment Advisory Fees paid by
Fund II to the Investment Adviser for the three and nine months ended September
30, 1999 and 1998 were $167,000, $500,000, $156,000 and $508,000, respectively,
and were 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 $1,200,000 for the Funds 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.
As compensation for its services, the Fund Administrator is entitled to
receive an annual amount of $400,000 for the Funds on a combined basis, plus
100% of all reimbursable expenses (as defined below) incurred by Fund II. For
the three and nine months ended September 30, 1999, and 1998, Fund II incurred
Fund Administration Fees of $56,000, $167,000 $55,000 and $167,000,
respectively.
Actual out-of-pocket expenses ("Reimbursable Administrative Expenses")
primarily consist of printing, audit, tax preparation, legal fees and expenses,
and custodian fees. For the three and nine months ended September 30, 1999 and
1998, Fund II incurred $48,000, $173,000, $87,000, and $273,000, respectively,
in Reimbursable Administrative Expenses. The decrease in reimbursable
administrative expenses for the three and nine months ended September 30, 1999
as compared to the same periods in 1998 is due to an overall reduction in
auditing, custodian, printing and legal administrative fees during 1999
resulting from fewer investments held by Fund II during 1999.
Legal and professional fees for the three and nine months ended September
30, 1999 and 1998 were $37,000, $68,000, $37,000 and $255,000, respectively.
These expenses are largely 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 certain litigation proceedings. The decrease in legal and
professional fees for the nine months ended September 30, 1999 as compared to
the same period in 1998 resulted from the increased costs incurred by Fund II in
connection with the settlement of the Seidel litigation in the first half of
1998.
Net Assets
Fund II's net assets increased by $1,738,000 during the nine months ended
September 30, 1999, due to net investment income of $985,000 and reversal of net
unrealized depreciation of $13,637,000 offset by cash distributions to partners
of $8,351,000 ($6,387,000 of which was return of capital from the sale of
portfolio investments) and realized losses from the sale of Mezzanine
Investments of $4,533,000. This compares to the decrease in net assets of
$10,621,000 for the nine months ended September 30, 1998 resulting from the
payment of cash distributions to partners of $18,597,000 partially offset by net
unrealized depreciation of $456,000, a reversal of unrealized appreciation of
$1,108,000, a reversal of unrealized depreciation of $1,776,000, net investment
income of $736,000 and realized gains from the sale of portfolio investments of
$7,028,000.
Unrealized Appreciation and Depreciation on Investments
For the nine months ended September 30, 1999, Fund II recorded reversal of
net unrealized depreciation of $13,637,000. This compares to the unrealized
depreciation of $456,000, a reversal of unrealized appreciation of $1,108,000, a
reversal of unrealized depreciation of $1,776,000, for 1998. Fund II's
cumulative net unrealized depreciation on investments as of September 30, 1999
totaled $1,925,000.
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 56.6% 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. As of September 30, 1999, Fund II's
investment in Big V Supermarkets Inc. represents approximately 52.7% of Fund
II's fair value.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of September
30, 1999. 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.
Net Realized Gains and Losses on Investments
For the nine months ended September 30, 1999, Fund II recorded net realized
losses on investments of $4,533,000 million as compared to net realized gains of
$7,028,000 for the nine months ended September 30, 1998. For additional
information, please refer to the Supplemental Schedule of Realized Gains and
Losses - Schedule 1.
Cash Distributions
On May 10, 1999, the Individual General Partners approved the first quarter
1999 cash distribution which represents net investment income of $323,000 from
Mezzanine Investments and Net Distributable Capital Proceeds from the sale of
Stablex of $5,605,000 (all of which is return of capital). The total amount
distributed to Limited Partners was $5,814,000 or $26.22 per Unit, which was
paid on May 14, 1999. The Managing General Partner received a total of $13,000
with respect to its interest in Fund II and $98,000 in MGP Distributions. Thomas
H. Lee, as an Individual General Partner, received $1,311 with respect to his
interest in Fund II.
On August 3, 1999, the Individual General Partner's approved the second
quarter 1999 cash distribution which represents Net Distributable Cash of
$17,000 from Temporary Investments and $286,000 from Mezzanine Investments. The
total amount distributed to Limited Partners was $217,000 or $.98 per Unit,
which was paid on August 13, 1999. The Managing General Partner received a total
of $491 with respect to its interest in Fund II and $86,000 in MGP
Distributions. Thomas H. Lee, as an Individual General Partner, received $49
with respect to his interest in Fund II.
A number of Fund II's debt investments have been repaid and one is on
non-accrual status. These situations reduce the amount of interest income
received by Fund II. As a result, It is expected that the amount of any future
distributions, in aggregate, paid to Limited Partners will be derived almost
entirely from recovered capital and gains from asset sales, which are subject to
market conditions and are inherently unpredictable as to timing. Therefore, in
the absence of cash available for distributions resulting from the future sale
of portfolio holdings, Fund II will have available only small amounts of Net
Distributable Cash from Operations, estimated to be less than one dollar per
Unit each quarter, for any future distributions.
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 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.
Year 2000 Compliance Initiative
The year 2000 ("Y2K") problem is the result of a widespread programming
technique that causes computer systems to identify a date based on the last two
numbers of a year, with the assumption that the first two numbers of the year
are "19". As a result, the year 2000 would be stored as "00", causing computers
to incorrectly interpret the year as 1900. Left uncorrected, the Y2K problem may
cause information technology systems (e.g., computer databases) and
non-information technology systems (e.g., elevators) to produce incorrect data
or cease operating completely.
Overall, Fund II believes that it has identified and evaluated its internal
Y2K problem and that it is devoting sufficient resources to renovating
technology systems that are not already Y2K compliant. Fund II has been working
with third-party software vendors to ensure that computer programs utilized by
Fund II are Y2K compliant. In addition, Fund II has contacted third parties to
ascertain whether these entities are addressing the Y2K issue within their own
operation.
ML Fund Administrators, Inc. an indirect wholly owned subsidiary of Merrill
Lynch and Co., Inc. ("Merrill Lynch"), is responsible for providing
administrative and accounting services necessary to support Fund II's
operations, including maintenance of the books and records, maintenance of the
partner database, issuance of financial reports and tax information to partners
and processing distribution payments to partners. In 1995, Merrill Lynch
established the Year 2000 Compliance Initiative, which is an enterprisewide
effort (of which ML Fund Administrators Inc., is a part) to address the risks
associated with the Y2K problem, both internal and external. The integration
testing phase, which will occur throughout 1999, validates that a system can
successfully interface with both internal and external systems. Merrill Lynch
continues to survey and communicate with third parties whose Year 2000 readiness
is important to the company. Based on the nature of the response and the
importance of the product or service involved, Merrill Lynch determines if
additional testing is needed.
Merrill Lynch participated in further industrywide testing during March and
April 1999, sponsored by the Securities Industry Association. These tests
involved an expanded number of firms, transactions, and conditions compared with
those previously conducted. Merrill Lynch has participated in and continues to
participate in numerous industry tests throughout the world.
Although Fund II has not finally determined the cost associated with its
Year 2000 readiness efforts, Fund II does not anticipate the cost of the Y2K
problem to be material to its business, financial condition or results of
operations in any given year. However, there can be no guarantee that the
systems of other companies on which Fund II's systems rely will be timely
converted, or that a failure to convert by another company or a conversion that
is incompatible with Fund II's systems would not have a material adverse effect
on Fund II's business, financial condition or results of operations.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
As of September 30, 1999, Fund II maintains a portion of its cash
equivalents in financial instruments with original maturities of three months or
less. These financial instruments are subject to interest rate risk, and will
decline in value if interest rates increase. A significant increase or decrease
in interest rates would not have a material effect on Fund II's financial
position.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings.
-----------------
None
Item 2. Changes in Securities and Use of Proceeds.
-----------------------------------------
None
Item 3. Defaults Upon Senior Securites.
------------------------------
None
Item 4. Submission of Matters to a Vote of Security holders.
---------------------------------------------------
None
Item 5. Other Information.
-----------------
None
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits:
Exhibit 27 - Financial Data Schedule for the quarter ended
September 30, 1999.
(b) Reports on form 8-K:
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 15th day of
November, 1999.
ML-LEE ACQUISITION FUND
II, L.P.
By: Mezzanine Investments II, L.P.
Managing General Partner
By: ML Mezzanine II Inc.,
its General Partner
/s/ Kevin T. Seltzer
----------------------------------
Dated: November 15, 1999 Kevin T. Seltzer
ML Mezzanine II, Inc.
Vice President and Treasurer
(Principal Financial Officer of Registrant)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the
September 30, 1999 Form 10-Q Statements of Assets, Liabilities and Partners'
Capital Statements of Operations and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
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[AVG-DEBT-OUTSTANDING] 0
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</TABLE>
