UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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) 236-6576
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 ___.
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ML-LEE ACQUISITION FUND II, L.P.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Assets, Liabilities and Partners' Capital
As of September 30, 2000 (Unaudited) and December 31, 1999 (Unaudited)
Statements of Operations
For the Three and Nine Months Ended September 30, 2000 and 1999 (Unaudited)
Statements of Changes in Net Assets
For the Nine Months Ended September 30, 2000 and 1999 (Unaudited)
Statements of Cash Flows
For the Nine Months Ended September 30, 2000 and 1999 (Unaudited)
Statements of Changes in Partners' Capital
For the Nine Months Ended September 30, 2000 (Unaudited)
Schedule of Portfolio Investments
As of September 30, 2000 (Unaudited)
Notes to Financial Statements (Unaudited)
Supplemental Schedule of Realized Loss
- Schedule 1 (Unaudited)
Supplemental Schedule of Unrealized Depreciation
- Schedule 2 (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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ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF ASSETS, LIABILTIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
(UNAUDITED)
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Assets:
Investments - Notes 3, 4 and 7
Portfolio Investments at fair value
Managed Companies (amortized cost $14,537
as of September 30, 2000 and $17,144 as of December 31, 1999) $ 14,537 $ 17,144
Non-Managed Companies (amortized cost $2,197
as of September 30, 2000 and $2,297 as of December 31, 1999) 348 406
Temporary Investments, at amortized cost (cost $19,189
as of September 30, 2000 and $15,255 as of December 31, 1999) 19,196 15,280
Cash 266 36
Accrued Interest 202 163
Prepaid Expenses - 6
--------- ---------
Total Assets $ 34,549 $ 33,035
========= =========
Liabilities and Partners' Capital:
Liabilities
Reimbursable Administrative Expenses Payable - Note 6 $ 110 $ 105
Independent General Partners' Fees Payable - Note 6 2 6
Legal and Professional Fees Payable 13 5
Deferred Interest Income 18 44
--------- ---------
Total Liabilities 143 160
--------- ---------
Partners' Capital
Individual General Partner 13 13
Managing General Partner 612 322
Limited Partners (221,745 Units) 33,781 32,540
--------- ---------
Total Partners' Capital 34,406 32,875
--------- ---------
Total Liabilities and Partners' Capital $ 34,549 $ 33,035
========= =========
See the Accompanying Notes to Financial Statements (Unaudited).
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ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- ----------------------
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Investment Income:
Interest $ 405 $ 562 $ 1,670 $ 1,706
Discount and Other Income 312 93 715 223
-------- -------- --------- ---------
Total Investment Income 717 655 2,385 1,929
-------- -------- --------- ---------
Expenses:
Investment Advisory Fee - Note 6 167 167 500 500
Fund Administration Fee - Note 6 55 56 166 167
Reimbursable Administrative Expenses - Note 6 47 48 150 173
Independent General Partners' Fees and Expenses 20 23 60 64
Legal and Professional Fees 1 37 12 37
Insurance Expense 2 1 6 3
-------- -------- --------- ---------
Total Expenses 292 332 894 944
-------- -------- --------- ---------
Net Investment Income 425 323 1,491 985
Realized Loss on Sales of Investments - Note 3 and Schedule 1 - (3,507) (7) (4,533)
Net Change in Unrealized Depreciation on
Investments - Schedule 2
Nonpublic Securities - 9,596 47 13,637
-------- -------- --------- ---------
Net Increase in Net Assets Resulting from Operations 425 6,412 1,531 10,089
Less: Earned MGP Distributions to Managing General Partner (92) (109) (297) (293)
-------- -------- --------- ---------
Net Increase Available for Pro-Rata Distribution to All Partners $ 333 $ 6,303 $ 1,234 $ 9,796
======== ======== ========= =========
See the Accompanying Notes to Financial Statements (Unaudited).
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ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
For the Nine Months Ended September 30,
---------------------------------------
2000 1999
--------- ---------
<S> <C> <C>
From Operations:
Net Investment Income $ 1,491 $ 985
Realized Loss on Sales of Investments (7) (4,533)
Net Change in Unrealized Depreciation on Investments 47 13,637
--------- ---------
Net Increase in Net Assets Resulting from Operations 1,531 10,089
Cash Distributions to Partners - (8,351)
--------- ---------
Total Increase 1,531 1,738
Net Assets:
Beginning of Year 32,875 31,026
--------- ---------
End of Period $ 34,406 $ 32,764
========= =========
See the Accompanying Notes to Financial Statements (Unaudited).
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ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
For the Nine Months Ended September 30,
--------------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Increase in Cash
Cash Flows From Operating Activities:
Interest, Discount and Other Income $ 2,338 $ 2,946
Investment Advisory Fee (500) (500)
Fund Administration Fee (166) (167)
Reimbursable Administrative Expenses (145) (149)
Independent General Partners' Fees and Expenses (64) (77)
Legal and Professional Fees (22) (65)
Purchase of Temporary Investments, Net (3,934) (11,502)
Proceeds from Sales, Maturities and Paydowns
of Portfolio Company Investments 2,723 17,919
--------- ---------
Net Cash Provided by Operating Activities 230 8,405
--------- ---------
Cash Flows from Financing Activities:
Cash Distributions to Partners - (8,351)
--------- ---------
Net Cash Used in Financing Activities - (8,351)
--------- ---------
Net Increase in Cash 230 54
Cash at Beginning of Year 36 5
--------- ---------
Cash at End of Period $ 266 $ 59
========= =========
Reconciliation of Net Investment Income
to Net Cash Provided by Operating Activities
Net Investment Income $ 1,491 $ 985
--------- ---------
Adjustments to Reconcile Net Investment Income
to Net Cash Provided by Operating Activities:
(Increase) Decrease in Investments at Cost (1,222) 10,168
Decrease in Receivable for Investments Sold - 782
(Increase) Decrease in Accrued Interest and Discount Receivable (47) 1,017
Decrease in Prepaid Expenses 6 3
Increase in Reimbursable Administrative Expenses Payable 5 24
Decrease in Independent General Partners' Fees Payable (4) (13)
Increase (Decrease) in Legal and Professional Fees Payable 8 (28)
Realized Loss on Sales of Investments (7) (4,533)
--------- ---------
Total Adjustments (1,261) 7,420
--------- ---------
Net Cash Provided by Operating Activities $ 230 $ 8,405
========= =========
See the Accompanying Notes to Financial Statements (Unaudited).
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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 Nine Months Ended September 30, 2000
Partners' Capital as of January 1, 2000 $ 13 $ 322 $ 32,540 $ 32,875
Allocation of Net Investment Income - 290 1,201 1,491
Allocation of Realized Loss on Sale of Investment - - (7) (7)
Allocation of Net Change in Unrealized Depreciation
on Investments - - 47 47
------------ ---------- ----------- ---------
Partners' Capital as of September 30, 2000 $ 13 $ 612 $ 33,781 $ 34,406
============ ========== =========== =========
See the Accompanying Notes to Financial Statements (Unaudited).
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ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 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) - Note 3
$10,430 Big V Supermarkets, Inc., Sr. Sub. Nt. 14.14% due 03/15/01(b)(g) 12/27/90 $ 10,430 $ 10,430
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) --------------------------------
14,537 14,537 42.66%
--------------------------------
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 $ 14,537 $ 14,537 42.66%
===============================
NON-MANAGED COMPANIES
BIOLEASE, INC. - Notes 3 and 7 and Schedule 2
$668 BioLease, Inc., 13% Sub. Nt. due 06/06/04 (b) 06/08/94 $ 576 $ 334
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
9,362 Options BioTransplant, Inc., Common Stock Purchase Options(c) 02/02/96 - -
-------------------------------
684 348 1.02%
-------------------------------
FLA. ORTHOPEDICS, INC. - Schedule 2
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) 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 $ 2,197 $ 348 1.02%
===============================
See the Accompanying Notes to Financial Statements (Unaudited).
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ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (continued)
SEPTEMBER 30, 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 $ 11,006 $ 10,764 31.58%
Preferred Stock, Common Stock, Warrants and Stock Rights Various 5,728 4,121 12.10%
------------------------------
TOTAL MEZZANINE INVESTMENTS $ 16,734 $ 14,885 43.68%
==============================
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$10,000 State Street Clipper Receivable, 6.50% due 11/13/00 9/29/00 $ 9,919 $ 9,923
$ 9,275 State Street Clipper Receivable, 6.60% due 10/2/00 9/29/00 9,270 9,273
------------------------------
TOTAL INVESTMENT IN COMMERCIAL PAPER $ 19,189 $ 19,196 56.32%
------------------------------
TOTAL TEMPORARY INVESTMENTS $ 19,189 $ 19,196 56.32%
------------------------------
TOTAL INVESTMENT PORTFOLIO $ 35,923 $ 34,081 100.00%
==============================
(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 are not audited by PricewaterhouseCoopers
LLP.
(f) Represents original cost and excludes accretion of discount of $28 for
Mezzanine Investments and $7 for Temporary Investments.
(g) $3,911,000 is scheduled to mature on December 15, 2000, with the
remaining $6,519,000 scheduled to mature on March 15, 2001.
See the Accompanying Notes to Financial Statements (Unaudited).
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ML-LEE ACQUISITION FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 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 and nine months ended September 30, 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
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. Fund II realized a loss from this transaction of $7,000,
after the payment of $18,000 in transaction costs and the write-off of $11,000
of unamortized note discount.
On June 15, 2000, $2,607,000 (20%) of Fund II's $13,037,000 senior
subordinated Note from Big V Supermarkets, Inc. ("Big V") matured. Fund II
recorded no gain or loss from this transaction. An additional $3,911,000 (30%)
is scheduled to mature on December 15, 2000, with the remaining $6,519,000 (50%)
scheduled to mature on March 15, 2001.
In September 2000, the court approved a settlement in respect 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 settlement provided a complete
release of Mr. Lee in his role as a director of Hills. As a result, the reserves
which had been maintained by Fund II for future indemnification obligations are
no longer required for such purpose.
However, before consenting to the disposition of all or part of Fund II
reserves, at the most recent quarterly meeting, the General Partners reviewed
certain contractual covenants, commitments and contingencies Fund II's has with
respect to its investment in Big V Supermarkets, Inc. ("Big V"). Such covenants,
commitments and contingencies may have the effect of delaying and/or precluding
future distributions, and accordingly, the General Partners have determined that
further distributions should not be made until Fund II's responsibilities under
such covenants, commitments and contingencies have been more thoroughly
investigated and resolved. The General Partners will continue to review such
reserves each quarter in light of this matter, and distributions, if any, will
be made in accordance with Fund II's Partnership Agreement.
Subsequently, Fund II and the Retirement Fund agreed to guarantee, in
aggregate, $1,000,000 of short-term financing requirements of Big V.
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.
5. 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. In accordance with this policy, as of
September 30, 2000 and December 31, 1999, Fund II's portfolio of investments
excluded approximately $160,000 and $131,000, respectively, of such
payment-in-kind notes received from BioLease, Inc.
6. 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.
7. Subsequent Events
On November 9, 2000, Fund II exercised its rights under the BioTransplant,
Inc. common stock purchase warrants and purchased 10,014 shares of
BioTransplant, Inc. common stock for $30,042, exclusive of any transaction
costs.
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SCHEDULE 1
ML-LEE ACQUISITION FUND II, L.P.
SUPPLEMENTAL SCHEDULE OF REALIZED LOSS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Principal Amount/ Investment Net Realized
Security Number of Shares Cost Proceeds Loss
-------- ---------------- ---------- -------- --------
<S> <C> <C> <C> <C>
Biolease, Inc. (Note) $ 116 $ 105 $ 98 $ (7)
===== ===== ==== ====
See the Accompanying Notes to Financial Statements (Unaudited).
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SCHEDULE 2
ML-LEE ACQUISITION FUND II, L.P.
SUPPLEMENTAL SCHEDULE OF UNREALIZED DEPRECIATION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Reversal of Reversal of
Unrealized Unrealized
Depreciation Depreciation
for for Total Unrealized Total Unrealized
the Three Months the Nine Months Depreciation Depreciation
Investment Fair Ended Ended as of as of
Security Cost Value September 30, 2000 September 30, 2000 December 31, 1999 September 30, 2000
-------------------------- ---------- -------- ------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Non Public Securities:
Biolease, Inc.
Common Stock* $ 94 $ - $ - $ - $ (94) $ (94)
Subordinated Notes* (a) 576 334 - - (270) (270)
FLA. Orthopedics, Inc.
Preferred Stock* 1,513 - - - (1,513) (1,513)
Subordinated Note* - - - - - -
----------- ---------- ---------- ----------
Unrealized Depreciation from Non Public Securities - - (1,877) (1,877)
----------- ---------- ---------- ----------
Reversal of Unrealized Depreciation on Securities Sold in 2000:
BioLease, Inc.
Subordinate Note* - 47 (47) -
----------- ---------- ---------- ----------
Total Unrealized Depreciation $ - $ 47 $ (1,924) $ (1,877)
=========== ========== ========== ==========
* Restricted Security
(a) Investment cost is after April 28, 2000 partial note paydown and excludes accretion of remaining discount of $28.
See the Accompanying Notes to Financial Statements (Unaudited).
</TABLE>
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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 August 11,
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.
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. Fund II realized a loss from this transaction of $7,000,
after the payment of $18,000 in transaction costs and the write-off of $11,000
of unamortized note discount.
On June 15, 2000, $2,607,000 (20%) of Fund II's $13,037,000 senior
subordinated Note from Big V Supermarkets, Inc. ("Big V") matured. Fund II
recorded no gain or loss from this transaction. An additional $3,911,000 (30%)
is scheduled to mature on December 15, 2000, with the remaining $6,519,000 (50%)
scheduled to mature on March 15, 2001.
On November 9, 2000, Fund II exercised its rights under the BioTransplant,
Inc. common stock purchase warrants and purchased 10,014 shares of
BioTransplant, Inc. common stock for $30,042, exclusive of any transaction
costs.
In September 2000, the court approved a settlement in respect 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 settlement provided a complete
release of Mr. Lee in his role as a director of Hills. As a result, the reserves
which had been maintained by Fund II for future indemnification obligations are
no longer required for such purpose.
However, before consenting to the disposition of all or part of Fund II's
reserves, at the most recent quarterly meeting, the General Partners reviewed
certain contractual covenants, commitments and contingencies Fund II has with
respect to its investment in Big V Supermarkets, Inc. ("Big V"). Such covenants,
commitments and contingencies may have the effect of delaying and/or precluding
future distributions, and accordingly, the General Partners have determined that
further distributions should not be made until Fund II's responsibilties under
such covenants, commitments and contingencies have been more thoroughly
investigated and resolved. The General Partners will continue to review such
reserves each quarter in light of this matter, and distributions, if any, will
be made in accordance with Fund II's Partnership Agreement.
Subsequently, Fund II and the Retirement Fund agreed to guarantee, in
aggregate, $1,000,000 of short-term financing requirements of Big V.
As of September 30, 2000, Fund II had outstanding a total (at cost) of
$16,734,000 invested in Mezzanine Investments representing $14,537,000 Managed
and $2,197,000 Non-Managed portfolio investments, and Temporary Investments of
$19,189,000 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 September 30, 2000 there is no outstanding Deferred Distribution
Amount.
As recovered capital from portfolio company sales is distributed to Limited
Partners, the Limited Partners' net asset value ("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 (to the extent such cash is not reserved for
expenses and contingencies - see discussion above) available to pay
distributions to Partners will be derived almost entirely from recovered capital
and gains from asset sales, which are subject to market conditions and are
inherently unpredictable as to timing. Therefore, in the absence of cash
available for distribution resulting from the future sale of portfolio holdings,
the only cash available for distribution by Fund II will derive from operations;
this cash is estimated to be less than one dollar per Unit each quarter.
Investment in High-Yield Securities
Fund II invested primarily in subordinated debt and preferred stock
securities ("High-Yield Securities"), generally linked with an equity
participation, issued in conjunction with the mezzanine financing of privately
structured, friendly leveraged acquisitions, recapitalizations and other
leveraged financings. High-Yield Securities are debt and preferred equity
securities that are unrated or are rated by Standard & Poor's Corporation as BB
or lower and by Moody's Investor Services, Inc. as Ba or lower. Risk of loss
upon default by the issuer is significantly greater with High-Yield Securities
than with investment grade securities because High-Yield Securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Also, these issuers usually have high levels of indebtedness and are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates, than investment grade issuers. Most of these securities are
subject to resale restrictions and generally there is no quoted market for such
securities.
Although Fund II cannot eliminate the risks associated with its investments
in High-Yield Securities, it has established risk management policies. Fund II
subjected each prospective investment to rigorous analysis and made only those
investments that were recommended by the Investment 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 and nine months ended September 30, 2000 and 1999, Fund II
had net investment income of $425,000, $1,491,000, $323,000 and $985,000,
respectively. The increase in net investment income during the three and nine
months ended September 30, 2000, as compared to the same periods in 1999, is
primarily attributable to an increase in interest and discount income from
Temporary Investments and other factors, as discussed below.
Investment Income and Expenses
Total investment income from operations for the three and nine months ended
September 30, 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 and nine months ended
September 30, 2000 and 1999, Fund II had investment income of $717,000,
$2,385,000, $655,000 and $1,929,000 respectively. The increase in investment
income during the three and nine months ended September 30, 2000, as compared to
the same periods in 1999, is primarily attributable to an increase in income
earned on Temporary Investments as a result of investing the Fitz and Floyd,
Inc. sale proceeds, the Biolease, Inc. partial paydown proceeds, the Big V
Supermarkets, Inc. partial maturity proceeds, and income from operations from
the third quarter 1999 and forward, all of 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., the
April 2000 partial paydown of the Biolease, Inc. subordinated note and the June
2000 partial maturity of the Big V Supermarkets, Inc. senior subordinated note.
In addition, the increase in investment income during the nine months ended
September 30, 2000, as compared to the same period in 1999, is attributable to a
$205,000 adjustment in the first quarter of 2000 to correct for a 1999
understatement of Mezzanine Investment income.
Major expenses for the three and nine months ended September 30, 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 the three and nine months ended September
30, 2000 and 1999 were $167,000, $500,000, $167,000 and $500,000, respectively,
and was calculated at an annual rate of 1.0% of assets under management (net
offering proceeds reduced by cumulative capital reductions and realized losses),
with a minimum annual amount of $1,200,000 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 the three and nine
months ended September 30, 2000 and 1999, Fund II incurred a Fund Administration
Fee of $55,000, $166,000, $56,000 and $167,000, respectively. For the three and
nine months ended September 30, 2000 and 1999, Fund II incurred $47,000,
$150,000, $48,000 and $173,000, respectively, in Reimbursable Administrative
Expenses.
For the three and nine months ended September 30, 2000 and 1999, the Fund
incurred legal and professional fees of $1,000, $12,000, $37,000 and $37,000,
respectively. Such expenses are primarily attributable to legal fees incurred on
behalf of indemnified defendants in connection with the Hills litigation.
Net Assets
Fund II's net assets increased by $1,531,000 during the nine months ended
September 30, 2000, due to net investment income of $1,491,000 and a reversal of
net unrealized depreciation of $47,000, partially offset by a net realized loss
of $7,000 from the partial paydown of a Mezzanine Investment. During the nine
months ended September 30, 1999, Fund II's net assets increased by $1,738,000,
due to net investment income of $985,000 and a reversal of net unrealized
depreciation of $13,637,000, partially offset by realized losses from the sales
of two Mezzanine Investments of $4,533,000 and distributions to partners of
$8,351,000.
Unrealized Appreciation and Depreciation on Investments
Fund II recorded a reversal of net unrealized depreciation of $47,000
during the nine months ended September 30, 2000 as compared to a $13,637,000
reversal of net unrealized depreciation during the same period in 1999. Fund
II's cumulative net unrealized depreciation on investments as of September 30,
2000 totaled $1,877,000.
The Managing General Partner and the Investment Adviser review, on a
quarterly basis, the valuation of Fund II's portfolio investments that do not
have a readily ascertainable market value; such investment valuations are
subject to 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. Although the Managing General Partner and Investment
Adviser use their best judgement in estimating the fair value of these
investments, there are inherent limitations in any estimation technique.
As a result of total net realized and unrealized appreciation and
depreciation recorded by Fund II through September 30, 2000, Limited Partners'
NAV was $152.33 per Unit. Fund II's net assets include private placement
securities (approximately 43.3% of net assets) for which there are no
ascertainable market values and commercial paper (approximately 55.8% of net
assets) which is stated at amortized cost. Fund II's private placement
securities are primarily comprised of its investments in Big V Supermarkets,
Inc., which are valued at cost. The September 30, 2000 NAV figure does not
reflect any change that may have occurred in the value of Fund II's holdings
since September 30, 2000, does not reflect residual costs related to the Hills
litigation other than those incurred through September 30, 2000, nor does it
represent the Units' current market value. Furthermore, Limited Partners may not
be able to realize this value upon a sale of their Units.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of September
30, 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
Unrealized Depreciation - Schedule 2.
Realized Losses
Fund II recorded a realized loss of $7,000 during the nine months ended
September 30, 2000, as compared to realized losses of $4,533,000 during the same
period in 1999.
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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
As of September 30, 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
September 30, 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 14th day of
November, 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: November 14, 2000 /s/ Kevin T. Seltzer
----------------------------------
Kevin T. Seltzer
ML Mezzanine II, Inc.
Vice President and Treasurer
(Principal Financial Officer of Registrant)
