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 six months ended June 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) 449-7175
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__ .
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, 1999 and December 31, 1998
Statements of Operations - For the Three and Six
Months Ended June 30, 1999 and 1998
Statements of Changes in Net Assets -
For the Six Months Ended June 30, 1999 and 1998
Statements of Cash Flows - For the Six Months
Ended June 30, 1999 and 1998
Statement of Changes in Partners' Capital at
June 30, 1999
Schedule of Portfolio Investments - June 30, 1999
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)
(Unaudited)
<S> <C> <C>
June 30, 1999 December 31, 1998
------------- -----------------
Assets:
Investments - Notes 2,4,5
Portfolio Investments at fair value
Managed Companies (amortized cost $17,144
at June 30, 1999 and at December 31, 1998) $ 17,144 $ 17,144
Non-Managed Companies (amortized cost $17,336
at June 30, 1999 and $23,967 at December 31, 1998) 5,850 8,440
Temporary Investments, at amortized cost (cost $3,393
at June 30, 1999 and $3,401 at December 31, 1998) 3,415 3,408
Cash 36 5
Accrued Interest & Other Receivable - Note 2 340 1,395
Receivable for Investment Sold - 782
Prepaid Expenses 1 3
------------- --------------
Total Assets $ 26,786 $ 31,177
============= ==============
Liabilities and Partners' Capital:
Liabilities
Legal and Professional Fees Payable $ 17 $ 30
Reimbursable Administrative Expenses Payable - Note 8 51 22
Independent General Partners' Fees Payable - Note 9 - 18
Deferred Interest Income - Note 2 62 81
------------- --------------
Total Liabilities 130 151
------------- --------------
Partners' Capital - Note 2
Individual General Partner 12 13
Managing General Partner 198 525
Limited Partners (221,745 Units) 26,446 30,488
------------- --------------
Total Partners' Capital 26,656 31,026
------------- --------------
Total Liabilities and Partners' Capital $ 26,786 $ 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 Six Months Ended
------------------------------- -----------------------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
Investment Income - Notes 2,4,6
Interest $ 575 $ 416 $ 1,144 $ 1,153
Discount & Other Income 72 161 130 214
------------- ------------- ------------- ------------
Total Investment Income 647 577 1,274 1,367
------------- ------------- ------------- ------------
Expenses:
Investment Advisory Fee - Note 7 167 177 333 352
Fund Administration Fee - Note 8 55 55 111 111
Reimbursable Administrative Expenses - Note 8 51 103 125 186
Legal and Professional Fees - 158 - 187
Independent General Partners' Fees and Expenses - Note 9 17 22 41 55
Insurance Expense 1 1 2 2
------------- ------------- ------------- ------------
Total Expenses 291 516 612 893
------------- ------------- ------------- ------------
Net Investment Income 356 61 662 474
Net Realized Gain (Loss) on Investments - Note 4 and Schedule 1 - 6,731 (1,026) 7,028
------------- ------------- ------------- ------------
Net Change in Unrealized Appreciation (Depreciation)
on Investments - Note 5 and Schedule 2
Publicly Traded Securities - (6,542) - 2,035
Nonpublic Securities - - 4,041 -
------------- ------------- ------------- ------------
Subtotal - (6,542) 4,041 2,035
------------- ------------- ------------- ------------
Net Increase in Net Assets Resulting from Operations 356 250 3,677 9,537
------------- ------------- ------------- ------------
Less: Earned MGP Distributions to Managing General Partner (86) (945) (184) (1,065)
------------- ------------- ------------- ------------
Net Increase (Decrease) Available For Pro-Rata
Distribution to All Partners $ 270 $ (695) $ 3,493 $ 8,472
============= ============= ============= ============
</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 Six Months Ended
-----------------------------------------
June 30, 1999 June 30, 1998
------------- -------------
From Operations:
Net Investment Income $ 662 $ 474
Net Realized Gain (Loss) on Investments (1,026) 7,028
Net Change in Unrealized Depreciation
from Investments 4,041 2,035
------------- -------------
Net Increase in Net Assets Resulting from Operations 3,677 9,537
Cash Distributions to Partners (8,047) (13,789)
------------- -------------
Total Decrease (4,370) (4,252)
Net Assets:
Beginning of Year 31,026 46,833
------------- -------------
End of Period $ 26,656 $ 42,581
============= =============
</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 Six Months Ended
-----------------------------------------
June 30, 1999 June 30, 1998
------------- -------------
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows From Operating Activities:
Interest, Discount and Other Income $ 2,296 $ 1,310
Legal and Professional Fees (13) (212)
Investment Advisory Fee (333) (352)
Fund Administration Fee (111) (111)
Independent General Partners' Fees and Expenses (59) (43)
Reimbursable Administrative Expenses (96) (94)
(Purchase) Sale of Temporary Investments, Net 7 (4,323)
Proceeds from Sales of Portfolio Company Investments 6,387 17,085
------------- -------------
Net Cash Provided by Operating Activities 8,078 13,260
------------- -------------
Cash Flows from Financing Activities:
Cash Distributions to Partners (8,047) (13,503)
------------- -------------
Net Cash Used in Financing Activities (8,047) (13,503)
------------- -------------
Net Increase (Decrease) in Cash 31 (243)
Cash at Beginning of Year 5 245
------------- -------------
Cash at End of Period $ 36 $ 2
============= =============
Reconciliation of Net Investment Income
to Net Cash Provided by Operating Activities
Net Investment Income $ 662 $ 474
------------- -------------
Adjustments to Reconcile Net Investment Income
to Net Cash Provided by Operating Activities
Decrease in Investments 6,638 5,734
Decrease in Receivable for Investments Sold 782 -
(Increase) Decrease in Accrued Interest
and Discount Receivable 1,022 (57)
Decrease in Prepaid Expenses 2 3
Decrease in Legal and Professional Fees Payable (13) (25)
Increase in Reimbursable Administrative Expenses Payable 29 92
Increase (Decrease) in Independent General Partners' Fees Payable (18) 11
Net Realized Gain (Loss) on Sales of Investments (1,026) 7,028
------------- -------------
Total Adjustments 7,416 12,786
------------- -------------
Net Cash Provided by Operating Activities $ 8,078 $ 13,260
============= =============
</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 Six Months Ended June 30, 1999
Partners' Capital at January 1, 1999 $ 13 $ 525 $ 30,488 $ 31,026
Allocation of Net Investment Income - 196 466 662
Allocation of Net Realized Loss on Investments - (13) (1,013) (1,026)
Allocation of Net Change in Unrealized
Depreciation From Investments 1 9 4,031 4,041
Cash Distributions to Partners (2) (519) (7,526) (8,047)
----------- ---------- --------- ---------
Partners' Capital at June 30, 1999 $ 12 $ 198 $ 26,446 $ 26,656
=========== ========== ========= =========
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
Schedule of Portfolio Investments
June 30, 1999
(Dollars in Thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C>
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost(g) (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) (f) --------------------------------
17,144 17,144 64.92
--------------------------------
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 64.92
-------------------------------
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 1.54
-------------------------------
FITZ AND FLOYD -Note 5, 12
$2,420 Fitz and Floyd, 12% Sub. Nt. due 04/15/04 (b) 04/11/97 2,420 2,420
8,470 Shares Fitz and Floyd, Series A Preferred Stock (c) 04/11/97 12,619 3,024
51,425 Shares Fitz and Floyd, Common Stock (c) 04/11/97 - -
1,324,508 Shares Common Stock
Purchased various $ 20
Surrendered May 1996 $ 0
Realized Loss $ (20)
$10,281 Sr. Sub. Note
$2,419 Sr. Sub. Note
Purchased various $12,619
Exchanged 04/14/97
8,470 Shares Series A Preferred Stock and
51,245 Shares Common Stock $12,619
Realized Gain $ 0
Total Realized Loss $ (20) -------------------------------
15,039 5,444 20.61
-------------------------------
FLA. ORTHOPEDICS, INC. - Notes 5,6
19,366 Shares FLA. Holdings, Inc. Series B Preferred Stock (a) (c) (e) 08/02/93 1,513 -
3,822 Warrants FLA. Holdings, Inc. Common Stock Purchase Warrants (a) (c) (e) 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 $ 17,336 $ 5,850 22.15
================================
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
Schedule of Portfolio Investments
June 30, 1999
(Dollars in Thousands)
(Unaudited)
(Continued)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost(g) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes Various $ 16,133 $ 15,849 60.01
Preferred Stock, Common Stock, Warrants and Stock Rights Various 18,347 7,145 27.06
-----------------------------
TOTAL MEZZANINE INVESTMENTS $ 34,480 $ 22,994 87.07
=============================
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$2,950 Ford Motor Credit, 4.75% due 7/1/99 5/14/99 2,931 2,950
$ 465 American General Finance, 4.74% due 7/1/99 5/18/99 462 465
-----------------------------
TOTAL INVESTMENT IN COMMERCIAL PAPER $ 3,393 $ 3,415 12.93
-----------------------------
TOTAL TEMPORARY INVESTMENTS $ 3,393 $ 3,415 12.93
-----------------------------
TOTAL INVESTMENT PORTFOLIO $ 37,873 $ 26,409 100.00%
=============================
(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) Inclusive of receipt of payment-in-kind securities.
(e) Non-accrual investment status.
(f) Percentages of Common Equity have not been audited by
PricewaterhouseCoopers LLP.
(g) Represents orignal cost and excludes accretion of discount of $33
for Mezzanine Investments and $23 for Temporary Investments.
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
ML-LEE ACQUISITION FUND II, L.P.
Notes to Financial Statements
June 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 Advisers 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.
<PAGE>
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 June 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.
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, 1999, Fund II does not have
any payment-in-kind securities. As of June 30, 1998, Fund II had in its
portfolio of investments $441,900 of payment-in-kind notes which excludes $2.5
million of payment-in-kind notes received from notes placed on non-accrual
status.
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.
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, 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 June
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 Mezzanine Investments II, L.P., the Managing General
Partner of Fund II, all necessary adjustments have been made to the
aforementioned financial information for a fair presentation in accordance with
generally accepted accounting principles.
3. Allocations of Profits and Losses
Pursuant to the Partnership Agreement, all profits from Temporary
Investments generally 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;
<PAGE>
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, 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 purchase, 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 $5,605,200 was
allocated to Fund II. Fund II will recognize 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 such
receipt.
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
$1.2 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, 1999 and 1998, Fund II paid $333,000 and $352,093,
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 a Fund Administration Fee. The Fund Administration Fee is an annual
amount of $400,000 for Fund II and the Retirement Fund on a combined basis. The
Fund Administration Fee is calculated and paid quarterly, in advance, by each
Fund. For the six months ended June 30, 1999 and 1998, Fund II paid $111,000 in
Fund Administration Fees.
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. For the three and six months ended June 30,
1999 and 1998, Fund II incurred Reimbursable Administrative Expenses in the
amount of 50,566, $125,293, 102,563 and $185,660, respectively.
In addition, ML Mezzanine II Inc., an affiliate of the Fund Administrator
and Merrill Lynch & Co.,Inc., receives 5% of the benefit of any MGP
Distributions paid to the Managing General Partner (see Note 10).
9. Independent General Partners' Fees and Expenses
As compensation for their services, each Independent General Partner will
receive a combined annual fee of $40,000 (payable quarterly) from the Funds in
addition to a $1,000 fee for each meeting attended ($500 if a meeting is held on
the same day as a committee meeting of the General Partners) plus reimbursement
for any out-of-pocket expenses incurred. Fees and expenses are allocated between
the Funds in proportion to the number of units issued by each fund. Compensation
for each of the Individual General Partners is reviewed annually. For the six
months ended June 30, 1999 and 1998, Fund II incurred Independent General
Partners' Fees and Expenses of $40,927 and $54,456, respectively.
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.
The Investment Adviser, pursuant to an investment management agreement
among the Investment Adviser, the Thomas H. Lee Company and Fund II dated
November 10, 1989, is responsible for the identification, management and
liquidation of Mezzanine Investments and Bridge Investments for Fund II. The
Investment Adviser received an Investment Advisory Fee as compensation for these
services outlined in Note 7 to the Financial Statements.
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 six months ended June 30, 1999, Fund II paid the Individual
General Partner distributions totaling $1,697 and Managing General Partner
distributions totaling $519,382 (which includes $502,409 of MGP Distributions as
defined above). As of June 30, 1999, the Managing General Partner has earned a
total of $26.6 million in MGP Distributions, none of which is deferred in
payment to the Managing General Partner as a Deferred Distribution Amount.
11. 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, 1998, the tax basis of Fund II's
assets are greater than the amounts reported in the financial statements by
$15.6 million. This difference is attributable to net unrealized depreciation on
investments which has not been recognized for tax purposes.
12. Subsequent Events
On August 3, 1999, the Individual General Partner's approved the second
quarter 1999 cash distribution which represents Net Distributable Cash of
$16,988 from Temporary Investments and $286,183 from Mezzanine Investments. The
total amount distributed to Limited Partners was $217,310 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 $85,855 in MGP
Distributions. Thomas H. Lee, as an Individual General Partner, received $49
with respect to his interest in Fund II.
On August 5, 1999 Fund II executed, as a selling shareholder, a Stock
Purchase Agreement pursuant to which it intends to sell all of its shares of
Fitz and Floyd, Inc. Capital Stock (the "Sale"). Fund II will receive
approximately $11.6 million from the Sale, which includes return of capital and
proceeds on its Fitz and Floyd, Inc. Capital Stock and payment in full of its
12% Fitz and Floyd, Inc. Subordinated Notes, including prepayment premium. The
Sale, which is subject to regulatory approval and customary closing conditions,
is expected to close during the third quarter of 1999, although there can be no
assurance that the transaction will be completed.
<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, 1999
(Dollars in Thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Number of
Shares/
Principal Investment Net Realized
Security Amount Cost Proceeds Loss
----------- ---------- ------------ ------------
Soretox
Stablex Canada, Inc. Various $ 6,631 $ 6,631 $ 5,605 $ (1,026)
-------- -------- --------
Total Realized Loss for the Six Months
Ended June 30, 1999 $ 6,631 $ 5,605 $ (1,026)
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
ML-LEE ACQUISITION II, L.P.
Supplemental Schedule of Unrealized Appreciation and Depreciation
For the Six Months Ended June 30, 1999
(Dollars in Thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unrealized Unrealized
Appreciation Appreciation Total Unrealized Total 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, 1999 June 30, 1999 1998 1999
- ---------------------- ---------- ----- ------------- ------------- --------------- ---------------
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)
Subordinated Note * - - - - - -
-------- -------- ---------- ---------
Total Unrealized Depreciation
from Non Public Securities - - (11,521) (11,521)
-------- -------- ---------- ---------
Reversal of Unrealized Appreciation
(Depreciation) from Securities Sold
in 1999
Soretox
Subordinated Notes* - 4,041 (4,041) -
-------- -------- ---------- ---------
Net Unrealized Appreciation (Depreciation) $ - $ 4,041 $ (15,562) $ (11,521)
======== ======== ========== =========
* Restricted Security
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity & Capital Resources
Capital contributions from the Limited Partners and the General Partners
totaled $222,295,000 in the public offering of ML-Lee Acquisition Fund II, L.P.
("Fund II"), the final closing for which was held on December 20, 1989.
At June 30, 1999, Fund II had outstanding a total (at cost) of $34.4
million invested in Mezzanine Investments representing $17.1 million Managed and
$17.3 million Non-Managed portfolio investments. The remaining proceeds were
invested in Temporary Investments primarily comprised of commercial paper with
maturities of less than one month.
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.
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, 1999 there is no outstanding Deferred Distribution
Amount.
On August 6, 1991, the Independent General Partners approved a reserve for
follow-on investments of $24.9 million for Fund II. As of August 16, 1999 the
remaining reserve balance was $3.1 million due to follow-on investments in Petco
Animal Supplies, Fitz and Floyd, Fine Clothing, Inc., Hills Stores, Ghirardelli
Holdings and Anchor Advanced Products. Additionally, $8.3 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. 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.
<PAGE>
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.
Results of Operations
Investment Income and Expenses
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 six months ended June 30, 1999, Fund II had investment income of
$1,274,354 as compared to $1,366,543 for the same period in 1998. The decrease
in 1999 investment income as compared to 1998 is due to the sale of income
producing portfolio companies in 1998.
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 six months ended June 30,
1999 and 1998 were $166,500, $333,000, $176,603 and $352,093, 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 $1.2 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.
As compensation for its services, the Fund Administrator is entitled to
receive 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. For the six months ended June 30, 1999 and 1998, Fund
Administration Fees were $111,000. For the three months ended June 30, 1999 and
1998, the Fund Administration Fee paid to the Fund Administrator was $55,000.
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 six months ended June 30, 1999 and 1998, Fund
II incurred $50,566, $125,293, 102,563, and $185,660, respectively, in
Reimbursable Administrative Expenses.
<PAGE>
Legal and professional fees for the six months ended June 30, 1998 were
$186,549. 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 certain litigation proceedings.
For the six months ended June 30, 1999, Fund II had net investment income
of $662,343 as compared to $474,678 for the same period in 1998. The increase in
in 1999 net investment income as compared to 1998 was due to the settlement of
litigation in 1998 resulting in lower legal and professional fees in 1999. For
the three months ended June 30, 1999, Fund II had net investment income of
356,862 as compared to 61,622 for the same period in 1998.
Net Assets
Fund II's net assets decreased by $4.4 million during the six months ended
June 30, 1999, due to net investment income of $662,343 and reversal of net
unrealized depreciation of $4.0 million offset by cash distributions to partners
of $8.0 million ($6.4 million of which was return of capital from the sale of
portfolio investments) and realized losses from the sale of Mezzanine
Investments of $1.0 million. This compares to the decrease in net assets of $4.3
million for the six months ended June 30, 1998 resulting from the payment of
cash distributions to partners of $13.8 million 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 $7.0 million.
Unrealized Appreciation and Depreciation on Investments
For the six months ended June 30, 1999, Fund II recorded net unrealized
appreciation of $4.0 million all of which was related to the reversal of net
unrealized depreciation from Stablex, which was sold on March 12 ,1999. This
compares to the unrealized appreciation of $2.0 million for 1998. Fund II's
cumulative net unrealized depreciation on investments as of June 30, 1999
totaled $11.5 million.
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 91.2% 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 June 30, 1999, Fund II's
investment in Big V Supermarkets Inc. represents approximately 64.9% 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 June 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.
<PAGE>
Net Realized Gains and Losses on Investments
For the six months ended June 30, 1999, Fund II recorded net realized
losses on investments of $1.0 million as compared to net realized gains of
$7.0 for the six months ended June 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 $323,052 from
Mezzanine Investments and Net Distributable Capital Proceeds from the sale of
Stablex of $5,605,200 (all of which is return of capital). The total amount
distributed to Limited Partners was $5,814,154 or $26.22 per Unit, which was
paid on May 14, 1999. The Managing General Partner received a total of $111,278
with respect to its interest in Fund II and $98,165 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
$16,988 from Temporary Investments and $286,183 from Mezzanine Investments. The
total amount distributed to Limited Partners was $217,310 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 $85,855 in MGP
Distributions. Thomas H. Lee, as an Individual General Partner, received $49
with respect to his interest in Fund II.
Because most of Fund II's debt holdings were previously sold or redeemed,
remaining portfolio interest income expected to be received by Fund II may not
be sufficient to cover Fund II's expenses in the future. As a result, any
interest income received will be used to pay Fund II expenses and may not be
available for distribution. The majority of future cash distributions to Limited
Partners will be derived from recovered capital and gains, from asset sales, if
any, which are dependent upon future market conditions and therefore are
inherently unpredictable. Cash distributions, therefore, are likely to vary
significantly in amount and may not be made in every quarter.
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.
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 June 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
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 ended June 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 16th day of
August, 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/ Robert Remick
----------------------------------
Dated: August 16, 1999 Robert Remick
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
1999 Form 10-Q Balance Sheets and Statements of Operations and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<INVESTMENTS-AT-COST> 37,873
<INVESTMENTS-AT-VALUE> 26,409
<RECEIVABLES> 340
<ASSETS-OTHER> 37
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 26,786
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 130
<TOTAL-LIABILITIES> 130
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 222
<SHARES-COMMON-PRIOR> 222
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (11,521)
<NET-ASSETS> 26,656
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,144
<OTHER-INCOME> 130
<EXPENSES-NET> 612
<NET-INVESTMENT-INCOME> 662
<REALIZED-GAINS-CURRENT> (1,026)
<APPREC-INCREASE-CURRENT> 4,041
<NET-CHANGE-FROM-OPS> 3,677
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,660
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 6,387
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (4,370)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 333
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 612
<AVERAGE-NET-ASSETS> 28,841
<PER-SHARE-NAV-BEGIN> 137.49
<PER-SHARE-NII> 2.10
<PER-SHARE-GAIN-APPREC> 18.18
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (33.94)
<RETURNS-OF-CAPITAL> 28.80
<PER-SHARE-NAV-END> 119.26
<EXPENSE-RATIO> 0.021
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
