UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
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)
2 World Financial Center - 14th Floor
New York, New York 10281-6114
(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>
ML-LEE ACQUISITION FUND II, L.P.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Assets, Liabilities and Partners' Capital
As of March 31, 2000 (Unaudited) and December 31, 1999 (Unaudited)
Statements of Operations
For the Three Months Ended March 31, 2000 and 1999 (Unaudited)
Statements of Changes in Net Assets
For the Three Months Ended March 31, 2000 and 1999 (Unaudited)
Statements of Cash Flows
For the Three Months Ended March 31, 2000 and 1999 (Unaudited)
Statements of Changes in Partners' Capital
For the Three Months Ended March 31, 2000 (Unaudited)
Schedule of Portfolio Investments
As of March 31, 2000 (Unaudited)
Notes to Financial Statements (Unaudited)
Supplemental Schedule of Net Unrealized Appreciation and Depreciation
- Schedule 1 (Unaudited)
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 Form 8-K
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF ASSETS, LIABILTIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
(UNAUDITED)
March 31, 2000 December 31, 1999
---------------- -------------------
<S> <C> <C>
Assets:
Investments - Notes 4 and 6
Portfolio Investments at fair value
Managed Companies (amortized cost $17,144
as of March 31, 2000 and as of December 31, 1999) $ 17,144 $ 17,144
Non-Managed Companies (amortized cost $2,297
as of March 31, 2000 and as of December 31, 1999) 406 406
Temporary Investments, at amortized cost (cost $15,726
as of March 31, 2000 and $15,255 as of December 31, 1999) 15,842 15,280
Cash 3 36
Accrued Interest & Other Receivable 256 163
Prepaid Expenses 4 6
---------------- ------------------
Total Assets $ 33,655 $ 33,035
================ ==================
Liabilities and Partners' Capital:
Liabilities
Legal and Professional Fees Payable $ 14 $ 5
Reimbursable Administrative Expenses Payable - Note 5 118 105
Independent General Partners' Fees Payable - Note 5 3 6
Deferred Interest Income 35 44
---------------- ------------------
Total Liabilities 170 160
---------------- ------------------
Partners' Capital
Individual General Partner 13 13
Managing General Partner 431 322
Limited Partners (221,745 Units) 33,041 32,540
---------------- ------------------
Total Partners' Capital 33,485 32,875
---------------- ------------------
Total Liabilities and Partners' Capital $ 33,655 $ 33,035
================ ==================
See the Accompanying Notes to Financial Statements (Unaudited).
</TABLE>
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
For the Three Months Ended
------------------------------------
March 31, 2000 March 31, 1999
------------------ -------------------
<S> <C> <C>
Investment Income
Interest $ 780 $ 569
Discount and Other Income 146 58
------------------ -------------------
Total Investment Income 926 627
------------------ -------------------
Expenses:
Investment Advisory Fee - Note 5 166 166
Fund Administration Fee - Note 5 56 56
Reimbursable Administrative Expenses - Note 5 60 75
Legal and Professional Fees 11 -
Independent General Partners' Fees and Expenses 21 24
Insurance Expense 2 1
------------------ -------------------
Total Expenses 316 322
------------------ -------------------
Net Investment Income 610 305
------------------ -------------------
Realized Loss on Sale of Investment - (1,026)
------------------ -------------------
Net Change in Unrealized Depreciation on Investments - Schedule 1
Nonpublic Securities - 4,041
------------------ -------------------
Net Increase in Net Assets Resulting from Operations 610 3,320
Less: Earned MGP Distributions to Managing General Partner (107) (98)
------------------ -------------------
Net Increase Available For Pro-Rata Distribution to All Partners $ 503 $ 3,222
================== ===================
See the Accompanying Notes to Financial Statements (Unaudited).
</TABLE>
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
For the Three Months Ended
----------------------------------
March 31, 2000 March 31, 1999
---------------- ----------------
<S> <C> <C>
From Operations:
Net Investment Income $ 610 $ 305
Realized Loss on Sale of Investment - (1,026)
Net Change in Unrealized Depreciation on Investments - 4,041
---------------- ----------------
Net Increase in Net Assets Resulting from Operations 610 3,320
Cash Distributions to Partners - (2,120)
---------------- ----------------
Total Increase 610 1,200
Net Assets:
Beginning of Year 32,875 31,026
---------------- ----------------
End of Period $ 33,485 $ 32,226
================ ================
See the Accompanying Notes to Financial Statements (Unaudited).
</TABLE>
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
For the Three Months Ended
-------------------------------
March 31, 2000 March 31, 1999
---------------- -----------------
<S> <C> <C>
Increase (Decrease) in Cash
Cash Flows From Operating Activities:
Interest, Discount and Other Income $ 733 $ 1,663
Legal and Professional Fees (2) (2)
Investment Advisory Fee (166) (167)
Fund Administration Fee (56) (56)
Independent General Partners' Fees and Expenses (24) (35)
Reimbursable Administrative Expenses (47) (22)
Purchase of Temporary Investments, Net (471) (5,646)
Proceeds from Sale of Portfolio Company Investment - 6,387
---------------- -----------------
Net Cash Provided by (Used in) Operating Activities (33) 2,122
---------------- -----------------
Cash Flows from Financing Activities:
Cash Distributions to Partners - (2,120)
---------------- -----------------
Net Cash Used in Financing Activities - (2,120)
---------------- -----------------
Net Increase (Decrease) in Cash (33) 2
Cash at Beginning of Year 36 5
---------------- -----------------
Cash at End of Period $ 3 $ 7
================ =================
Reconciliation of Net Investment Income
to Net Cash Provided by (Used in) Operating Activities
Net Investment Income $ 610 $ 305
---------------- -----------------
Adjustments to Reconcile Net Investment Income
to Net Cash Provided by (Used in) Operating Activities
(Increase) Decrease in Investments at Cost (471) 2,548
Increase in Receivable for Investments Sold - (782)
(Increase) Decrease in Accrued Interest and Discount Receivable (193) 1,036
Decrease in Prepaid Expenses 2 1
Increase (Decrease) in Legal and Professional Fees Payable 9 (2)
Increase in Reimbursable Administrative Expenses Payable 13 53
Decrease in Independent General Partners' Fees Payable (3) (11)
Realized Loss on Sale of Investment - (1,026)
----------------- ----------------
Total Adjustments (643) 1,817
----------------- ----------------
Net Cash Provided by (Used in) Operating Activities $ (33) $ 2,122
================= ================
See the Accompanying Notes to Financial Statements (Unaudited).
</TABLE>
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Individual Managing
General General Limited
Partner Partner Partners Total
------------ ---------- ----------- ---------
<S> <C> <C> <C> <C>
For the Three Months Ended March 31, 2000
Partners' Capital as of January 1, 2000 $ 13 $ 322 $ 32,540 $ 32,875
Allocation of Net Investment Income - 109 501 610
------------ ---------- ----------- ---------
Partners' Capital as of March 31, 2000 $ 13 $ 431 $ 33,041 $ 33,485
============ ========== =========== =========
See the Accompanying Notes to Financial Statements (Unaudited).
</TABLE>
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
% of
Principal Investment Investment Fair Total
Amount/Shares Investment Date Cost(f) Value Investments
------------- ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
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 51.34%
--------------------------------
COLE NATIONAL CORPORATION
13,161 Warrants Cole National Corporation, Common Stock Purchase Warrants (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 51.34%
===============================
NON-MANAGED COMPANIES
BIOLEASE, INC.- Note 6, Schedule 1
$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 1.22%
-------------------------------
FLA. ORTHOPEDICS, INC. - Schedule 1
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 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 1.22%
===============================
See the Accompanying Notes to Financial Statements (Unaudited).
</TABLE>
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (continued)
MARCH 31, 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
% of
Principal Investment Investment Fair Total
Amount/Shares Investment Date Cost(f) Value Investments
- ------------- ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes Various $ 13,713 $ 13,429 40.22%
Preferred Stock, Common Stock, Warrants and Stock Rights Various 5,728 4,121 12.34%
------------------------------
TOTAL MEZZANINE INVESTMENTS $ 19,441 $ 17,550 52.56%
==============================
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$10,000 General Electric Capital Services, 5.75% due 4/3/00 2/14/00 $ 9,922 $ 9,995
$ 5,450 Prudential Funding, 5.74% due 4/3/00 2/14/00 5,407 5,447
$ 400 American General Finance, 5.75% due 4/3/00 2/17/00 397 400
-----------------------------
TOTAL INVESTMENT IN COMMERCIAL PAPER $ 15,726 $ 15,842 47.44%
-----------------------------
TOTAL TEMPORARY INVESTMENTS $ 15,726 $ 15,842 47.44%
-----------------------------
TOTAL INVESTMENT PORTFOLIO $ 35,167 $ 33,392 100.00%
=============================
(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 original cost and excludes accretion of discount of $33 for
Mezzanine Investments and $116 for Temporary Investments.
See the Accompanying Notes to Financial Statements (Unaudited).
</TABLE>
<PAGE>
ML-LEE ACQUISITION FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
1. Organization
ML-Lee Acquisition Fund II, L.P. ("Fund II") 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.
Capital contributions from the Limited Partners and the General Partners (as
defined below) totaled $222,295,000 in the public offering of Fund II, the final
closing for which was held on January 5, 1990.
Mezzanine Investments II, L.P. (the "Managing General Partner"), subject to
the supervision of the Individual General Partners (as defined below and
hereinafter with the Managing General Partner as the "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. ML Fund Administrators Inc. (the "Fund
Administrator") is an indirect wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. and is responsible for the day to day administrative services necessary for
the operations of Fund II.
2. Basis of Accounting
For financial reporting purposes, the records of Fund II are maintained
using the accrual method of accounting. 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.
The financial statements reflect all adjustments which are, in the opinion
of management, necessary for a fair presentation of the financial condition,
results of operations and cash flows for the periods presented. Such adjustments
consisted of those of a normal recurring nature, as well as an adjustment of
$205,000 to correct for a 1999 understatement of Mezzanine Investment income.
The results of operations for the three months ended March 31, 2000 are not
necessarily indicative of the results that may be achieved for the entire year.
Footnote disclosure which substantially duplicates the disclosure contained in
Fund II's Annual Report on Form 10-K for the year ended December 31, 1999, which
is hereby incorporated by reference, has been omitted.
3. Investment Transactions
As previously reported, Fund II had expected to make a distribution of
Distributable Capital Proceeds relating to the August 27, 1999 sale of Fitz and
Floyd, Inc. However, on November 9, 1999, a special meeting of the General
Partners of Fund II was held to review Fund II's reserves, prior to considering
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 had been
serving on the Hills Board of Directors as a representative of Fund II). The
Hills litigation was brought 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 of Hills associated with the
Dickstein proxy contest. The General Partners discussed the potential
liabilities to Thomas H. Lee in connection with this litigation and Fund II's
potential indemnification obligations to Thomas H. Lee, as well as the liquidity
of Fund II's remaining assets.
Following discussion of these issues, the Individual General Partners of
Fund II determined that since 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, at such time, that it would not be prudent to make distributions to
Partners. However, this reserve will be reviewed each quarter by the General
Partners of Fund II in light of the status of the litigation, and distributions
if any, will be made in accordance with Fund II's Partnership Agreement. On
February 22, 2000, the court granted defendants' motion for summary judgement
dismissing claims against Mr. Lee. However, Hills has the right to appeal that
ruling after trial of the remaining claims against certain other defendants,
which is currently scheduled to commence in May 2000. On March 7, 2000, the
General Partners reviewed the status of the Hills matter again, considering the
court's ruling on February 22, 2000, and the Individual General Partners again
determined that it would not be prudent to make distributions to Partners at
such time. Currently, Fund II has reserved all the net proceeds received from
the sale of Fitz and Floyd, Inc., as well as the third and fourth quarter 1999
income from operations.
4. Non-Accrual of Investments
In accordance with Fund II's Accounting Policy, Florida Orthopedics, Inc.
has been on non-accrual status since January 1, 1995.
<PAGE>
5. Related Party Transactions
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 is entitled to receive an Investment Advisory Fee as
compensation for these services.
As compensation for its services, the Fund Administrator, an affiliate of
the Managing General Partner, is entitled to receive a Fund Administration Fee.
In addition, the Fund Administrator is entitled to reimbursement of 100% of
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.
As provided by the Partnership Agreement, the Managing General Partner of
Fund II is entitled to receive an incentive distribution after Limited Partners
have received their Priority Return of 10% per annum ("MGP Distributions"). Of
the MGP Distributions, the Investment Adviser is entitled to receive 95% and ML
Mezzanine II Inc. is entitled to receive 5%. During 2000, the Managing General
Partner received no cash distributions.
6. Subsequent Event
On April 28, 2000, BioLease, Inc. ("BioLease") refinanced existing
construction and term loans and utilized a portion of the refinancing proceeds
to make a $116,000 partial paydown to Fund II of BioLease's 13% Senior
Subordinated Note.
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<CAPTION>
SCHEDULE 1
ML-LEE ACQUISITION FUND II, L.P.
SUPPLEMENTAL SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Unrealized Total Unrealized Total Unrealized
Appreciation Appreciation Appreciation
(Depreciation) for (Depreciation) (Depreciation)
Investment Fair the Three Months as of as of
Security Cost Value Ended March 31, 2000 December 31, 1999 March 31, 2000
- -------- ----------- ------- -------------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Non Public Securities
Biolease, Inc.
Common Stock* $ 94 $ - $ - $ (94) $ (94)
Subordinated Notes* (a) 676 392 - (317) (317)
FLA. Orthopedics, Inc.
Preferred Stock* 1,513 - - (1,513) (1,513)
Subordinated Note* - - - - -
--------- --------- ----------
Total Unrealized Depreciation $ - $ (1,924) $ (1,924)
========= ========= ==========
* Restricted Security
(a) Investment cost excludes accretion of discount of $33
See the Accompanying Notes to Financial Statements (Unaudited).
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity & Capital Resources
At the regular quarterly meeting of the General Partners of ML-Lee
Acquisition Fund II, L.P. ("Fund II"), held on December 14, 1999, Vernon R.
Alden, Joseph L. Bower, Stanley H. Feldberg and Thomas H. Lee (the "Individual
General Partners") determined to extend the initial ten year term of Fund II,
which was due to terminate January 5, 2000, for an additional two year period,
pursuant to Section 2.4 of the Partnership Agreement. Such extension will allow
Fund II to more effectively deal with its assets pending their liquidation. The
term of Fund II will now expire on January 5, 2002. In addition, the Individual
General Partners have the right, pursuant to the Partnership Agreement, to
extend the term of Fund II for an additional one year period if they determine
that such extension is in the best interest of Fund II.
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 May 12,
2000, this remaining reserve balance was approximately $3,100,000 due to
follow-on investments in Petco Animal Supplies, Fitz and Floyd, Inc., 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.
As previously reported, Fund II had expected to make a distribution of
Distributable Capital Proceeds relating to the August 27, 1999 sale of Fitz and
Floyd, Inc. However, on November 9, 1999, a special meeting of the General
Partners of Fund II was held to review Fund II's reserves, prior to considering
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 had been
serving on the Hills Board of Directors as a representative of Fund II). The
Hills litigation was brought 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 of Hills associated with the
Dickstein proxy contest. The General Partners discussed the potential
liabilities to Thomas H. Lee in connection with this litigation and Fund II's
potential indemnification obligations to Thomas H. Lee, as well as the liquidity
of Fund II's remaining assets.
Following discussion of these issues, the Individual General Partners of
Fund II determined that since 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, at such time, that it would not be prudent to make distributions to
Partners. However, this reserve will be reviewed each quarter by the General
Partners of Fund II in light of the status of the litigation, and distributions
if any, will be made in accordance with Fund II's Partnership Agreement. On
February 22, 2000, the court granted defendants' motion for summary judgement
dismissing claims against Mr. Lee. However, Hills has the right to appeal that
ruling after trial of the remaining claims against certain other defendants,
which is currently scheduled to commence in May 2000. On March 7, 2000, the
General Partners reviewed the status of the Hills matter again, considering the
court's ruling on February 22, 2000, and the Individual General Partners again
determined that it would not be prudent to make distributions to Partners at
such time. Currently, Fund II has reserved all the net proceeds received from
the sale of Fitz and Floyd, Inc., as well as the third and fourth quarter 1999
income from operations.
As of March 31, 2000, 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, and Temporary Investments of
$15,726,000 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 after Limited Partners
have received their Priority Return of 10% per annum ("MGP Distributions"). 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 March 31, 2000 there is no outstanding Deferred Distribution
Amount.
As recovered capital from portfolio company sales is distributed to Limited
Partners, the NAV per Unit is reduced accordingly, and the interest income
previously generated by holdings which have been sold will no longer be received
by Fund II. Because Fund II has only four portfolio companies remaining, only
two of which are income producing, the amount of interest income received by
Fund II is not significant. As a result, it is expected that any future cash
distributions paid to Partners will be derived almost entirely from recovered
capital and gains, if any, from asset sales, which are subject to market
conditions and are inherently unpredictable as to timing. Therefore, in the
absence of cash available for distribution resulting from the future sale of
portfolio holdings, Fund II will have distributable cash from operations
estimated to be less than one dollar per Unit each quarter available for future
cash distributions, to the extent such cash is not reserved for expenses and
contingencies (see discussion of Hills matter above).
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 Advisor 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. Fund II undertakes no responsibility to update publicly or
revise any forward-looking statements.
Results of Operations
Net Investment Income
For the three months ended March 31, 2000, Fund II had net investment
income of $610,000 as compared to $305,000 for the three months ended March 31,
1999. The increase in net investment during the three months ended March 31,
2000, as compared to the same period in 1999, is primarily attributable to an
increase in interest income from both Mezzanine and Temporary Investments and
other factors, as discussed below.
Investment Income and Expenses
Total investment income from operations for the three months ended March
31, 2000 and 1999 consists primarily of interest and discount income earned on
Fund II's portfolio of Mezzanine and Temporary Investments and short-term money
market instruments. For the three months ended March 31, 2000, Fund II had
investment income of $926,000 as compared to $627,000 for the three months ended
1999. The increase in investment income during the three months ended March 31,
2000, as compared to the same period in 1999, is primarily attributable to a
$205,000 adjustment to correct for a 1999 understatement of Mezzanine Investment
income, plus an increase in income earned on Temporary Investments as a result
of investing the Fitz and Floyd, Inc. sale proceeds, which have been reserved.
This increase was partially offset by a decrease in income earned on Mezzanine
Investments as a result of the August 1999 sale of Fitz and Floyd, Inc.
Major expenses for the three months ended March 31, 2000 and 1999 consisted
of Investment Advisory Fees and Administrative Expenses.
The Investment Adviser and Fund Administrator both receive their
compensation on a quarterly basis. The total Investment Advisory Fee incurred by
Fund II to the Investment Adviser for each of the three months ended March 31,
2000 and 1999 was $166,000 and was calculated at an annual rate of 1.0% of
assets under management (net offering proceeds reduced by cumulative capital
reductions and realized losses), with a minimum annual amount of $1,200,000 for
the Funds on a combined basis.
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
reimbursement of 100% of out-of-pocket expenses incurred by the Fund
Administrator on behalf of Fund II ("Reimbursable Administrative Expenses").
Reimbursable Administrative Expenses primarily consist of printing, audit, tax
preparation, legal fees and expenses, and custodian fees. For each of the three
months ended March 31, 2000 and 1999, Fund II incurred a Fund Administration Fee
of $56,000. For the three months ended March 31, 2000 and 1999, Fund II incurred
$60,000 and $75,000, respectively, in Reimbursable Administrative Expenses.
Legal and professional fees for the three months ended March 31, 2000 and
1999 were $11,000 and $0, 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 certain litigation
proceedings.
Net Assets
Fund II's net assets increased by $610,000 during the three months ended
March 31, 2000, due to net investment income of $610,000. During the three
months ended March 31, 1999, Fund II's net assets increased by $1,200,000, due
to net investment income $305,000 and reversal of net unrealized depreciation of
$4,041,000, partially offset by cash distributions to partners of $2,120,000 and
a realized loss from the sale of a Mezzanine Investment of $1,026,000.
Unrealized Appreciation and Depreciation on Investments
Fund II recorded no unrealized appreciation or depreciation during the
three months ended March 31, 2000 as compared to a $4,041,000 reversal of net
unrealized depreciation during the same period in 1999. Fund II's cumulative net
unrealized depreciation on investments as of March 31, 2000 totaled $1,924,000.
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 accreted 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 55.3% of Fund II's investments (at cost) are invested in
private placement securities for which there are no ascertainable market values,
while approximately 44.7% is invested in commercial paper with maturities less
than 60 days. 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 March 31, 2000, Fund II's
investment in Big V Supermarkets Inc. represents approximately 51.3% 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 March 31,
2000. 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
Net Unrealized Appreciation and Depreciation - Schedule 1.
Net Realized Gains and Losses
Fund II recorded no realized gains or lossed during the three months ended
March 31, 2000, as compared to a realized loss of $1,026,000 during the same
period in 1999.
<PAGE>
Cash 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.
<PAGE>
Item 3. Quantitative and Qualitative Disclosure About Market Risk
As of March 31, 2000, 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 is not expected to 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
March 31, 2000.
(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
May, 2000.
ML-LEE ACQUISITION FUND II, L.P.
By: Mezzanine Investments II, L.P.
Managing General Partner
By: ML Mezzanine II Inc.,
its General Partner
Dated: May 15, 2000 /s/ Kevin T. Seltzer
----------------------------------
Kevin T. Seltzer
ML Mezzanine II, Inc.
Vice President and Treasurer
(Principal Financial Officer of Registrant)
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the
March 31, 2000 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
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