UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Period Ended September 30, 1995
Commission File Number 0-17382
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
(Exact name of registrant as specified in its Charter)
Delaware 04-3028397
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
World Financial Center
South Tower - 23rd Floor
New York, New York 10080-6123
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:(212) 236-7339 Securities
registered pursuant to Section 12(b) of the Act: None Name of each exchange on
which registered: Not Applicable Securities registered pursuant to Section 12(g)
of the Act:
Units of Limited Partnership Interest
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___.
Aggregate market value of voting securities held by non-affiliates:
Not Applicable.
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PART I - FINANCIAL INFORMATION
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
TABLE OF CONTENTS
Part I. Financial Information
Page
Item 1. Financial Statements
Statements of Assets, Liabilities and Partners'
Capital as of September 30, 1995 and
December 31, 1994 3
Statements of Operations - For the Three and Nine
Months Ended September 30, 1995 and
September 30, 1994 4
Statements of Changes in Net Assets - For the Nine
Months Ended September 30, 1995 and
September 30, 1994 5
Statements of Cash Flows - For the Nine Months
Ended September 30, 1995 and September 30, 1994 6
Statement of Changes in Partners' Capital at
September 30, 1995 7
Schedule of Portfolio Investments - September 30, 1995 8
Notes to Financial Statements 15
Supplemental Schedule of Realized Gains and Losses -
(Schedule 1) 27
Supplemental Schedule of Unrealized Appreciation
and Depreciation - (Schedule 2) 28
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 30
Part II. Other Information 37
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
September 30,
1995 December
(Unaudited) 31, 1994
<S> <C> <C>
ASSETS:
Investments - Notes 2,4,5
Portfolio Investments, at fair value
Managed Companies
(amortized cost $72,617 at September 30,
1995 and $72,484 at December 31, 1994) $ 88,746 $ 95,185
Non-Managed Companies
(amortized cost $24,930 at September 30,
1995 and $24,420 at December 31, 1994) 20,523 21,592
Temporary Investments, at amortized
cost(cost $9,793 at September 30, 1995
and $16,329 at December 31, 1994) 9,835 16,370
Cash 1 1
Accrued Interest and Dividend Receivable - Note 2 999 1,217
Prepaid Expenses 1 4
TOTAL ASSETS $120,105 $134,369
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities
Legal and Professional Fees Payable $ 503 $ 126
Independent General Partners' Fees
Payable - Note 11 20 62
Deferred Interest Income - Note 2 515 590
Total Liabilities 1,038 778
Partners' Capital - Note 2
Individual General Partner 36 40
Managing General Partner 5,780 6,824
Limited Partners (177,515 Units) 113,251 126,727
Total Partners' Capital 119,067 133,591
TOTAL LIABILITIES AND PARTNERS' CAPITAL $120,105 $134,369
</TABLE>
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Three Months Ended For the Nine Months Ended
September 30, September 30, September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
INVESTMENT INCOME - NOTES 2,6:
Interest $ 1,436 $2,259 $ 4,557 $7,387
Discount 6 198 17 859
Dividends 35 - 53 46
TOTAL INCOME 1,477 2,457 4,627 8,292
EXPENSES:
Investment Advisory Fee - Note 8 257 274 802 918
Fund Administration Fee - Note 9 149 152 452 479
Amortization of Deferred Organization
Expenses - Note 2 - 12 - 35
Professional Fees 536 609 854 1,418
Reimbursable Administrative Expenses -
Note 10 22 26 72 156
Independent General Partners' Fees
and Expenses - Note 11 33 37 98 74
Insurance Expense 1 1 4 4
TOTAL EXPENSES 998 1,111 2,282 3,084
NET INVESTMENT INCOME 479 1,346 2,345 5,208
Net Realized Gain on Investments -
Note 4 and Schedule 1 - - 7,836 269
Net Change in Unrealized Depreciation
from Investments - Note 5 and
Schedule 2:
Publicly Traded Securities (1,452) (22,264) (6,572) (31,155)
Non Public Securities - (1,127) (1,579) (4,225)
(1,452) (23,391) (8,151) (35,380)
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS (973) (22,045) 2,030 (29,903)
LESS: Incentive Fees to Managing
General Partner - Note 12 (799) - (5,583) (847)
NET DECREASE AVAILABLE FOR PRO-RATA
DISTRIBUTION TO ALL PARTNERS $(1,772) $(22,045) $(3,553) $(30,750)
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See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Nine Months Ended
September 30, September 30,
1995 1994
FROM OPERATIONS:
<S> <C> <C>
Net Investment Income $ 2,345 $ 5,208
Net Realized Gain on Investments 7,836 269
Net Change in Unrealized Depreciation on Investments (8,151) (35,380)
Net Increase (Decrease) in Net Assets Resulting
From Operations 2,030 (29,903)
Cash Distributions to Partners (16,554) (31,304)
Total Decrease (14,524) (61,207)
NET ASSETS:
Beginning of Year 133,591 278,451
End of Period $119,067 $217,244
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See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Nine Months Ended
September 30, September 30,
1995 1994
<S> <C> <C>
INCREASE IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest, Dividends and Discount Income $ 4,259 $ 8,311
Fund Administration Fee (452) (479)
Investment Advisory Fee (802) (1,019)
Independent General Partners' Fees and Expenses (141) (109)
Receivable from Managing General Partner - (179)
Sale of Temporary Investments, Net 6,536 20,485
Purchase of Portfolio Company Investment (1,865) (6,091)
Proceeds from Sale of Portfolio Company Investments 9,568 12,192
Closing Fee Received - 39
Reimbursable Administrative Expense (125) (91)
Legal and Professional Fees (424) (918)
Net Cash Provided by Operating Activities 16,554 32,141
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Distributions to Partners (16,554) (31,304)
Net Cash Applied to Financing Activities (16,554) (31,304)
Net Increase in Cash - 837
Cash at Beginning of Period 1 1
Cash at End of Period $ 1 $ 838
RECONCILIATION OF NET INVESTMENT INCOME
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Investment Income $ 2,345 $ 5,208
Adjustments to Reconcile Net Investment
Income to Net Cash Provided by Operating Activities:
Decrease in Investments 6,403 26,579
Net Realized Gains on Sales of Investments 7,836 269
(Increase) Decrease in Accrued Interest Receivables (368) 19
Amortization of Deferred Organization Expenses - 35
Increase in Receivable from Managing General Partner - (179)
Decrease in Prepaid Expenses 3 11
Decrease in Independent General Partners' Fees Payable (42) (33)
Increase in Professional Fees Payable 377 462
Increase in Closing Fees Payable - 39
Decrease in Option Payable - (269)
Total Adjustments 14,209 26,933
Net Cash Provided by Operating Activities $ 16,554 $ 32,141
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See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Individual Managing
General General Limited
Partner Partner Partners Total
<S> <C> <C> <C> <C>
For the Nine Months Ended September 30, 1995 -
Notes 2,3,4,5
Partners' Capital at January 1, 1995 $ 40 $ 6,824 $126,727 $133,591
Allocation of Net Investment Income 1 790 1,554 2,345
Allocation of Net Realized Gain on Investments 2 1,403 6,431 7,836
Allocation of Net Change in Unrealized
Depreciation on Investments (2) (23) (8,126) (8,151)
Cash Distributions to Partners (5) (3,214) (13,335) (16,554)
Partners' Capital at September 30, 1995 $ 36 $ 5,780 $113,251 $119,067
</TABLE>
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares Investment Date Cost (Note 2) Investments
<S> <C> <C> <C> <C> <C>
MEZZANINE INVESTMENTS
MANAGED COMPANIES
ANCHOR ADVANCED PRODUCTS, INC. (b)
$3,133 Anchor Advanced Products, Inc., Sr. Sub. Nt. 11.67% due 04/30/00 (c) 04/30/90 $3,133 $3,133
$4,178 Anchor Advanced Products, Inc., Jr. Sub. Nt. 17.5% due 04/30/00 (c) 04/30/90 4,178 4,178
87,033 Shares Anchor Holdings, Inc., Common Stock (d) 04/30/90 827 827
132,290 Warrants Anchor Holdings, Inc., Common Stock Purchase Warrants(d) 04/30/90 0 0
(14.1% of fully diluted common equity assuming exercise of warrants) 8,138 8,138 6.83
BIG V SUPERMARKETS, INC. (b)
$6,963 Big V Supermarkets, Inc., Sr. Sub. Nt. 14.14% due 03/15/01(c) 12/27/90 6,963 6,963
62,667 Shares Big V Holding Corp., Inc., Common Stock(d) 12/27/90 2,193 2,193
(8.9% of fully diluted common equity) 9,156 9,156 7.69
COLE NATIONAL CORPORATION
717 Warrants Cole National Corporation, Common Stock Purchase Warrants(d) 09/26/90 0 0
(0.0% of fully diluted common equity assuming exercise of warrants)
$744 13% Sr. Secured Bridge Note
Purchased 09/25/90 $744
Repaid 11/15/90 $744
Realized Gain $ 0 0 0 0.00
CST OFFICE PRODUCTS, INC. (b) - Note 6
$3,395 Lee-CST Acquisition Corp., Sr. Sub. Nt. 12% due 0/31/00(c)(h) 03/30/90 3,395 3,395
$3,395 Lee-CST Acquisition Corp., Jr. Sub. Nt. 18% due 03/31/00(c)(h) 03/30/90 3,395 3,395
$1,225 CST Office Products Corp., Sr. Sub. Nt. 15% due 03/31/00(c)(f)(h) Various 104 104
$1,628 CST Office Products Corp., Jr. Sub. Nt. 15% due 06/30/96(c)(f)(h) Various 0 0
87,051 Shares Lee-CST Holding Corp., Common Stock (d) 03/30/90 696 696
94,668 Warrants Lee-CST Holding Corp., Common Stock Purchase Warrants(d) 03/30/90 0 0
(12.4% of fully diluted common equity assuming exercise of warrants) 7,590 7,590 6.37
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 1995
Principal Fair % Of
Amount Investment Investment Value Total
Shares Investment Date Cost (Note 2) Investments
<S> <C> <C> <C> <C> <C>
FIRST ALERT, INC.(b) - Note 5
2,281,524 Shares First Alert, Inc., Common Stock(a)(d) 07/31/92 $3,680 $35,934
(8.9% of fully diluted common equity)
$11,302 12.5% Subordinated Note
Purchased 07/31/92 $11,302
Repaid 03/28/94 $11,302
Realized Gain $ 0
3,680 35,934 30.17
GHIRARDELLI HOLDINGS CORPORATION(b) - Note 4
$5,328 Ghirardelli Holdings Corporation, 13% Subordinated Note due 03/31/02(c) 03/31/92 5,328 5,328
532,800 Shares Ghirardelli Holdings Corporation, Common Stock(d) 03/31/92 1,066 1,066
84,039 Shares Ghirardelli Holdings Corporation, Common Stock(d) 05/12/95 266 266
15,984 Shares Ghirardelli Holdings Corporation, Series A Preferred Stock(d) 05/12/95 1,598 1,598
(9.4% of fully diluted common equity)
$7,992 Sr. Bridge Note
Purchased 03/31/92 $7,992
Repaid 06/11/92 $7,992
Realized Gain $ 0
8,258 8,258 6.93
HILLS STORES COMPANY (b) - Notes 4,5
244,818 Shares Hills Stores Company, Common Stock(a)(j) 04/03/90 16,153 2,785
33,427 Shares Hills Stores Company, Common Stock(d) 08/21/95 2,418 380
(2% of fully diluted common equity) 18,571 3,165 2.66
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares Investment Date Cost (Note 2) Investments
<S> <C> <C> <C> <C> <C>
PETCO ANIMAL SUPPLIES, INC. (b) - Notes 4,5
62,379 Shares Petco Animal Supplies, Common Stock(a)(d) Various $1,023 $ 1,622
(.70% of fully diluted common equity)
$28 14% Sr. Sub. Bridge Notes
Purchased various $ 28
Repaid 04/19/91 $ 28
Realized Gain $ 0
$900 12.5% Sr. Sub. Notes
Purchased various $ 900
Repaid 03/28/94 $ 900
Realized Gain $ 0
Total Realized Gain $ 0
64,151 Shares Common Stock
Purchased Various $1,052
Sold 04/26/95 $1,265
Total Realized Gain $ 213
1,023 1,622 1.36
PLAYTEX PRODUCTS, INC. - Notes 5,7,16
183,560 Shares Playtex Products, Inc., Common Stock(a)(d) 03/29/90 2,830 1,583
(0.36% of fully diluted common equity)
$3,916 15% Subordinated Note
Purchased 03/29/90 $3,916
Sold 09/28/90 $3,925
Realized Gain $ 9
45,323 Shares Common Stock
Purchased 03/29/90 $ 151
Sold 12/20/91 $ 175
Realized Gain $ 24
$3,916 15% Subordinated Note
Purchased 03/29/90 $3,916
Sold 02/01/93 $3,912
Realized Loss $ (4)
Total Net Realized Gain $ 29
2,830 1,583 1.33
See the Accompanying Notes to Financial Statements.
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<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares Investment Date Cost (Note 2) Investments
<S> <C> <C> <C> <C> <C>
RESTAURANTS UNLIMITED - Note 4
$3,956 Restaurants Unlimited, 11% Sub. Nt. due 06/30/02(c) 06/03/94 $3,956 $ 3,956
256,083 Warrants Restaurants Unlimited, Common Stock Warrants(d) 06/03/94 0 0
(1.6% of fully diluted common equity) 3,956 3,956 3.32
STANLEY FURNITURE COMPANY, INC. (b) - Note 5
18,511 Shares Stanley Furniture Company, Inc., Common Stock(a)(j) 06/30/91 233 162
(0.4% of fully diluted common equity) 233 162 0.14
SUN PHARMACEUTICALS CORP.(b) - Note 7,16
$9,182 Sun Pharmaceuticals Corp., 12.5% Sub. Nt. due 12/31/02(c) 12/03/92 9,182 9,182
8,218.5 Warrants Banana Boat Holding Corp., Common Stock Purchase Warrants(d)(i) 12/03/92 0 0
(6.5% of fully diluted common equity assuming exercise
of warrants)
$12,199 Sr. Bridge Note
Purchased 12/03/92 $12,199
Repaid 12/18/92 $12,199
Realized Gain $ 0
9,182 9,182 7.71
TOTAL INVESTMENT IN MANAGED COMPANIES $72,617 $88,746 74.51
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares Investment Date Cost (Note 2) Investments
<S> <C> <C> <C> <C> <C>
NON-MANAGED COMPANIES
BIOLEASE, INC.
$513 Biolease, Inc., 13% Sub. Nt. due 06/06/04(c) 06/08/94 $ 443 $ 452
63.20 Shares Biolease, Inc., Common Stock(d) 06/08/94 62 62
26,218 Warrants Biotransplant, Inc., Common Stock Purchase Warrants(d) 06/08/94 9 9
514 523 0.44
FITZ AND FLOYD/SILVESTRI (b) - Notes 4,5,6
$6,719 FFSC, Inc., Adjustable Rate Sr. Sub. Nt. due 03/31/03(c) 03/31/93 6,709 6,711
$1,581 FFSC, Inc., Adjustable Rate Sr. Sub. Nt. due 03/31/03(c) 07/30/93 1,578 1,578
988,144 Shares FF Holding Co., Common Stock(d) 03/31/93 10 0
336,364 Shares FF Holding Co., Common Stock(d) 07/30/93 3 0
337,155 Shares FF Holding Co., Common Stock(d) 12/22/94 0 0 6.95
8,300 8,289
FLA. ORTHOPEDICS, INC - Notes 5,6,14
$3,158 FLA. Acquisition Corp., 12.5% Sub, Nt. due 07/31/99(c)(h) 08/02/93 3,158 1,579
78,960 Shares FLA. Holdings, Inc. Common Stock (d) 08/02/93 987 0
47,376 Warrants FLA. Holdings, Inc. Common Stock Purchase Warrants(d) 08/02/93 0 0
4,145 1,579 1.33
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares Investment Date Cost (Note 2) Investments
<S> <C> <C> <C> <C> <C>
NATIONAL TOBACCO COMPANY, L.P.
$3,997 National Tobacco Company, 13% Sub. Nt. due 10/15/98(c) 04/14/92 $ 3,997 $ 3,997
$131 National Tobacco Company, 15% Sub. Nt. due 10/15/98(c)(f) 06/30/93 131 131
$266 National Tobacco Company, Class A Partnership Int.(d) 04/14/92 267 267
4,395 4,395 3.69
SORETOX - Notes 4,5,6
$3,997 Stablex Canada, Inc., Sr. Sub. Nt. 10% due 06/30/07(c)(h) 06/29/95 3,997 2,955
3,568 Warrants Stablex Canada, Inc., Jr. Sub. Nt. 11% due 06/30/09(c)(h) 06/29/95 3,568 2,782
2,286 Warrants Seaway TLC, Inc. Common Stock Purchase Warrants 06/29/95 0 0
7,565 5,737 4.81
TOTAL INVESTMENT IN NON-MANAGED COMPANIES $24,919 $20,523 17.22
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes Various 63,215 59,819 50.22
Partnership Interest 04/14/92 267 267 0.22
Preferred Stock, Common Stock, Warrants and Stock Rights Various 34,054 49,183 41.29
TOTAL MEZZANINE INVESTMENTS $97,536 $109,269 91.73
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares Investment Date Cost (Note 2) Investments
<S> <C> <C> <C> <C> <C>
TEMPORARY INVESTMENTS
CERTIFICATES OF DEPOSIT AND TIME DEPOSIT
$ 395 State Street Bank, 3.5% due 07/03/95 09/29/95 $ 395 $ 395
$ 116 Banque National de Paris, 3.875% due 03/26/96 - Note 14 08/18/93 116 116
TOTAL INVESTMENT IN CERTIFICATES OF DEPOSITS 511 511 0.43
COMMERCIAL PAPER
$2,073 Ford Motor Credit, 5.72% due 10/20/95 09/22/95 2,064 2,067
$7,258 AVCO Financial, 5.73% due 10/02/95 08/28/95 7,218 7,257
TOTAL INVESTMENT IN COMMERCIAL PAPER 9,282 9,324 7.84
TOTAL TEMPORARY INVESTMENTS $ 9,793 $ 9,835 8.27
TOTAL INVESTMENT PORTFOLIO $107,329 $119,104 100.00%
(a) Publicly traded class of securities.
(b) Represents investment in affiliates as defined in the Investment Company Act of 1940.
(c) Restricted security.
(d) Restricted non-income producing equity security.
(e) Represents original cost and excludes accretion of discount of $11,202 for Mezzanine Investments and $29,763 for
Temporary Investments.
(f) Inclusive of receipt of payment-in-kind securities.
(g) Represents an amount of less than one thousand dollars.
(h) Non-accrual investment status.
(i) Call option written against this security.
(j) Non-income producing equity security.
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(UNAUDITED)
1. Organization and Purpose
ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. (the "Retirement
Fund") (formerly T.H. Lee Acquisition Fund (Retirement Accounts) II, L.P.) was
formed along with ML-Lee Acquisition Fund II, L.P. ("Fund II"; 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 the Retirement Fund'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.
The Retirement Fund has elected to operate as a business development company
under the Investment Company Act of 1940. The Retirement Fund'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. The Retirement Fund 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. The
Retirement Fund may also invest in "bridge investments" if it is believed that
such investments would facilitate the consummation of a mezzanine financing.
As stated in the Prospectus, the Retirement Fund will terminate no later
than December 20, 1999, 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 the Retirement Fund. The
Retirement Fund 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 the Retirement Fund 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.
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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
the Retirement Fund. For privately issued securities in which the Retirement
Fund typically invests, the fair value of an investment is its original cost
plus accrued value in the case of original issue discount or deferred pay
securities. Such investments will be revalued if there is an objective basis for
doing so at a different price. Investments will be written down in value if the
Managing General Partner and Investment Adviser believe adverse credit
developments of a significant nature require a write-down of such securities.
Investments will be written up in value only if there has been an arms'-length
third party transaction to justify the increased valuation. Although the
Managing General Partner and Investment Adviser use their best judgment in
estimating the fair value of these investments, there are inherent limitations
in any estimation technique. Therefore, the fair value estimates presented
herein are not necessarily indicative of the amount which the Retirement Fund
could realize in a current transaction.
Temporary Investments with maturities of less than 60 days are stated at
amortized cost, which approximates market.
The information presented herein is based on pertinent information available
to the Managing General Partner and Investment Adviser as of September 30, 1995.
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 especially in light of the fact that the portfolio investments of
companies whose equity is publicly traded are valued at the trading price at
September 29, 1995, the current estimated fair value of these investments may
have changed significantly since that point in time.
Interest Receivable on Investments
Investments generally will be placed on non-accrual status in the event of a
default (after the applicable grace period expires) or if the Investment Adviser
and the Managing General Partner determine that there is no reasonable assurance
of collecting interest.
<PAGE>
Payment-In-Kind Securities
All payment-in-kind securities received in lieu of cash interest payments by
the Retirement Fund's portfolio companies are recorded at face value (which
approximates accrued interest), unless the Investment Adviser and the Managing
General Partner determine that there is no reasonable assurance of collecting
the full principal amounts of such securities. As of September 30, 1995 and
December 31, 1994, the Retirement Fund has in its portfolio of investments
$739,601 and $235,451, respectively, of payment-in-kind debt securities which
excludes $3,888,120 and $1,723,465, respectively, of payment-in-kind securities
received from notes placed on non-accrual status. As of September 30, 1995 and
December 31, 1994, the Retirement Fund had in its portfolio of investments
$1,224,548 of payment-in-kind equity securities.
Deferred Organization Expenses
Organization costs of $233,859 for the Retirement Fund were fully amortized
on a straight-line basis as of November 10, 1994.
Investment Transactions
The Retirement Fund records investment transactions on the date on which it
obtains an enforceable right to demand the securities or payment therefor. The
Retirement Fund 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 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 the Retirement Fund 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 the Retirement Fund's equity divided in
proportion to the Partners' Capital Contributions and does not represent the
Partners' Capital Accounts. Profits and losses, when realized, are allocated in
accordance with the provisions of the Partnership Agreement summarized in Note
3.
<PAGE>
Interim Financial Statements
The financial information included in this interim report as of September
30, 1995 and for the period then ended has been prepared by management without
an audit by independent certified public accountants. The results for the period
ended September 30, 1995 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 the Retirement Fund, 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 are allocated 99.69% to the Limited Partners, 0.28% to the
Managing General Partner and 0.03% 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, 99.69% to the Limited Partners, 0.28% to the Managing General
Partner and 0.03% to the Individual General Partner until the sum allocated
to the Limited Partners equals any previous losses allocated together with a
cumulative Priority Return of 10% on the average daily amount in Mezzanine
Investments, and any outstanding Compensatory Payments,
third, 69.69% to the Limited Partners, 30.281% to the Managing General
Partner and .029% to the Individual General Partner until the Managing
General Partner has received 20.281% of the total profits allocated,
thereafter, 79.69% to the Limited Partners, 20.281% to the Managing General
Partner and 0.029% to the Individual General Partner.
Losses will be allocated in reverse order of profits
previously allocated and thereafter 99.69% to the Limited
Partners, 0.28% to the Managing General Partners and 0.03% to the Individual
General Partner.
4. Investment Transactions
On January 27, 1995, the Retirement Fund sold 259,474 shares of EquiCredit
Common Stock, realizing a gain of $7,623,346 on an original investment of
$679,822. The proceeds from the sale were distributed to the Retirement Fund's
partners in a special distribution on February 14, 1995.
<PAGE>
On April 27, 1995, Petco Animal Supplies, Inc. ("Petco") completed a public
offering of approximately 3.6 million shares of Common Stock (the "Petco
Offering") at a net price of $19.71 per share. Of the shares sold, approximately
2.4 million shares were offered by Petco and approximately 1.2 million were
offered by certain existing shareholders, including the Retirement Fund. As part
of the Petco Offering, the Retirement Fund sold 64,151 shares (including shares
sold as a result of the exercise of the underwriters' overallotment option on
May 26, 1995) representing 51% of its Petco holdings. The Retirement Fund
received proceeds of $1,264,577 and realized a gain of $212,949 on the sale of
the equity.
On May 12, 1995, the Retirement Fund made a follow-on investment in
Ghirardelli Holdings Corp. for a total of $1,864,800. The Retirement Fund
received 15,984 shares of Series A Preferred Stock for $1,598,400 and 84,039
additional shares of Common Stock for $266,400.
Effective June 29, 1995, Soretox structured a management led buyout of the
company. As a result, the Stablex Canada, Inc. $7,060,925, 14% Subordinated Note
and the 209,829 shares of 176347 Canada, Inc. Common Stock Purchase Warrants
held by the Retirement Fund were exchanged for a Stablex Canada Inc. $3,996,750
principal amount 10% Subordinated Note, a $3,064,175 principal amount (plus
capitalized interest of $504,150 from the note exchanged) 11% Junior
Subordinated Note and 2,286 shares of Seaway TLC, Inc. Common Stock Purchase
Warrants. No gain or loss was recorded on the transaction.
On August 21, 1995, the Retirement Fund entered into a stock purchase and
exchange agreement with Hills Stores Company and exchanged the 116,994 Common
Stock Rights held by the Retirement Fund for 33,427 shares of Hills Stores
Common Stock. No gain or loss was recognized on the transaction. The common
shares will be registered with the Securities and Exchange Commission in the
fourth quarter.
On August 6, 1991, the Independent General Partners approved a reserve for
follow-on investments of $20,014,971 for the Retirement Fund. As of September
30, 1995, the reserve balance was reduced to $9,322,206 due to follow-on
investments of $153 in Petco Animal Supplies, Inc., $1,581,030 in Fitz and
Floyd, Inc., $128,270 in Fine Clothing, Inc. and $2,403,591 for a Certificate of
Deposit related to the reorganization of Hills Stores. The Retirement Fund made
a follow on investment in Ghirardelli Holdings Corp. of $1,864,800 and has
returned $4,714,921 of the reserve to partners during the quarter ended June
30,1995. The Independent General Partners have also approved an additional
distribution of $1,000,000 of the reserve to partners to be made on November 14,
1995. See Note 16 for further information. 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 its existing
investment.
Because the Retirement Fund 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.
<PAGE>
Although the Retirement Fund 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 Retirement Fund 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 the Retirement Fund to
liquidate the position or collect proceeds from the action may be delayed or
limited.
5. Unrealized Appreciation and Depreciation of Investments
For the nine months ended September 30, 1995, the Retirement Fund recorded
net unrealized depreciation of $8,150,451 (of which $6,571,251 is net unrealized
depreciation from publicly traded securities and $1,579,200 is net unrealized
depreciation from non-public securities) compared to a net unrealized
depreciation of $35,379,887 for the same period in 1994. As of this date, the
Retirement Fund's cumulative net unrealized appreciation on investments totaled
$11,722,649.
For additional information, please refer to the Schedule of Unrealized
Appreciation and Depreciation (Schedule 2 - pages 28 - 29).
6. Non-Accrual of Investments
In accordance with the Retirement Fund's Accounting Policy, the following
notes has been on non-accrual status since the date indicated:
- CST Office Products, Inc. on October 1, 1992.
- Fitz and Floyd/Sylvestri Corporation
on January 1, 1994.
- FLA Orthopedics, Inc. on January 1, 1995.
- Stablex Canada, Inc. on June 29, 1995.
7. Covered Call and Put Options
Concurrently with the Retirement Fund's investment in Sun Pharmaceuticals
Corp. ("Sun"), Playtex Products, Inc. ("Playtex") entered into a distribution
agreement with Sun pursuant to which Playtex agreed to act as the principal
distributor for Sun's products in the ordinary course of business. As additional
consideration for entering into this agreement, Playtex obtained an option to
purchase at a formula price (under certain conditions) the Banana Boat Holding
Corp. Common Stock held by other investors in the transaction, including the
common stock purchasable upon exercise of the Funds' warrants. Playtex exercised
this option in the fourth quarter in 1995. See Note 16 for further information.
<PAGE>
8. 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), with a minimum annual fee of $1.2 million for
the Retirement Fund and Fund II 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 Incentive Fees paid to the Managing
General Partner (as defined in Note 12). For the nine months ended September 30,
1995 and 1994, the Retirement Fund paid $802,112 and $918,012, respectively, in
Investment Advisory Fees to Thomas H. Lee Advisors II, L.P.
9. Fund Administration Fee
As compensation for its services, ML Fund Administrators Inc. (the "Fund
Administrator"; an affiliate of the Managing General Partner) is entitled to
receive from the Funds an annual amount of the greater of $500,000 or 0.45% of
the excess of net offering proceeds less 50% of capital reductions. In addition,
ML Mezzanine II Inc., an affiliate of the Fund Administrator and of Merrill
Lynch & Co., receives 5% of the benefit of any MGP Incentive Fees paid to the
Managing General Partner (as defined in Note 12). The Fund Administration Fee is
calculated and paid quarterly, in advance, by each fund in proportion with the
net offering proceeds. For the nine months ended September 30, 1995 and 1994,
the Retirement Fund paid $452,493 and $478,939, respectively, in Fund
Administration Fees.
10. Administrative Expenses
Pursuant to the administrative services agreement between the Retirement
Fund and the Fund Administrator, effective November 10, 1993, a portion of the
actual out-of-pocket expenses incurred in connection with the administration of
the Retirement Fund is being reimbursed to the Fund Administrator. Actual
out-of-pocket expenses ("reimbursable expenses") primarily consist of printing,
audits, tax preparation and custodian fees. For the nine months ended September
30, 1995 and 1994, the Retirement Fund incurred $72,127 and $155,568,
respectively, in reimbursable expenses.
11. 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 and
compensation for each of the Independent General Partners is reviewed annually
by the Independent General Partners. For the nine months ended September 30,
1995 and 1994, the Retirement Fund incurred $98,375 and $74,346, respectively,
in Independent General Partners' Fees and Expenses.
<PAGE>
12. Related Party Transactions
The Retirement Fund's investments generally are made as co-investments with
Fund II. In addition, certain of the Mezzanine Investments and Bridge
Investments which were made by the Retirement Fund 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 the
Retirement Fund'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. The Retirement Fund's co-investments in Managed Companies, and in certain
cases its co-investments in Non-Managed Companies, typically involve the entry
by the Funds and other equity security holders into stockholders' agreements.
While the provisions of such stockholders' agreements vary, such agreements may
include provisions as to corporate governance, registration rights, rights of
first offer or first refusal, rights to participate in sales of securities to
third parties, rights of majority stockholders to compel minority stockholders
to participate in sales of securities to third parties, transfer restrictions,
and preemptive rights.
Thomas H. Lee Company, a sole proprietorship owned by Thomas H. Lee, an
Individual General Partner of the Retirement Fund and an affiliate of the
Investment Adviser, typically performs certain management services for Managed
Companies and receives management fees in connection therewith, usually pursuant
to written agreements with such companies. In addition, certain of the portfolio
companies have contractual or other relationships pursuant to which they do
business with one another.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") is an
affiliate of the Managing General Partner. MLPF&S and certain of its affiliates,
in the ordinary course of their business, perform various financial services for
various portfolio companies of the Funds, which may include investment banking
services, broker/dealer services and economic forecasting, and receive in
consideration therewith various fees, commissions and reimbursements.
Furthermore, MLPF&S and its affiliates or investment companies advised by
affiliates of MLPF&S may, from time to time, purchase or sell securities issued
by portfolio companies of the Funds in connection with its ordinary investment
operations.
For the nine months ended September 30, 1995, the Retirement Fund paid
$125,246 to the Fund Administrator for reimbursable out-of-pocket expenses
(please refer to Note 10 for further information).
<PAGE>
In 1995, the Retirement Fund paid the Individual General Partner
distributions totaling $4,306 and paid the Managing General Partner
distributions totaling $3,214,610 (which includes $3,170,619 of incentive fees
("MGP Incentive Fees") and $43,991 with respect to their interest in the
Retirement Fund). Of the MGP Incentive Fees paid, 95% or $3,012,088 was paid to
the Investment Advisor and the remaining 5% totaling $158,531 was paid to ML
Mezzanine II Inc. As of September 30, 1995, the Managing General Partner has
earned $23,682,148 in MGP Incentive Fees of which $5,582,863 is deferred in
payment to the Managing General Partner as a Deferred Distribution amount (the
"Deferred Distribution") in accordance with the Partnership Agreement. To the
extent not payable to the Managing General Partner, this Deferred Distribution
is distributed to the Partners pro-rata in accordance with their capital
contributions, and certain amounts otherwise later payable to Partners from
distributable cash from operations would instead be payable solely to the
Managing General Partner until the Deferred Distribution amount is paid in full.
13. Litigation
On February 3, 1992 and February 5, 1992, respectively, one Limited Partner
from Fund II and one Limited Partner from the Retirement Fund each commenced
class actions in the US District Court for the District of Delaware, purportedly
on behalf of all persons who purchased limited partnership interests in the
Funds between November 10, 1989 and January 5, 1990, against the Funds, the
Managing General Partner, the Individual General Partners, the Investment
Adviser to the Funds and certain named affiliates of such persons. These
actions, alleging that the defendants in the action made material
misrepresentations or omitted material information in the offering materials for
the Funds concerning the investment purposes of the Funds, were consolidated by
the court on March 31, 1992, and a consolidated complaint was filed by the
plaintiffs on May 14, 1992. In April 1993, plaintiffs filed an amended
complaint, adding claims that certain transactions by the Funds were prohibited
by the federal securities laws applicable to the Funds and their affiliates
under the Investment Company Act of 1940, as amended. The amended complaint also
named the Funds' counsel as a defendant. Defendants moved to dismiss the amended
complaint, and, by Opinion and Order dated March 31, 1994, the court granted in
part and denied in part the motions to dismiss.
<PAGE>
Additionally, by its March 31, 1994 Opinion and Order, the Court certified
the case as a class action, and ordered plaintiffs to replead by filing a new
complaint reflecting the Court's rulings. On April 15, 1994, plaintiffs served
and filed a new complaint, which defendants moved to strike for not conforming
to the Court's ruling. On August 3, 1994, the Court granted defendants' motion
to strike the new complaint. Plaintiffs thereafter filed a revised second
amended complaint dated September 26, 1994. Factual discovery in this litigation
has concluded. Expert discovery is currently set to conclude in early 1996. The
defendants in this action believe that the remaining claims are without merit,
although whether or not the plaintiffs prevail, the Funds may be obligated to
indemnify and advance litigation expenses to certain of the defendants under the
terms and conditions of various indemnity provisions in the Funds' Partnership
Agreements and separate indemnification agreements, and the amount of such
indemnification and expenses could be material. The Retirement Fund has advanced
amounts to the indemnified parties based upon amounts which are deemed
reimbursable in accordance with the indemnification provisions and has included
these amounts in professional fees. The outcome of this case is not determinable
at this time.
On August 9, 1994, the same two Limited Partners from Fund II and the
Retirement Fund commenced another putative class action in the US District Court
for the District of Delaware, purportedly on behalf of all persons who owned
limited partnership interests in the Funds on November 4, 1993, against the
Funds, the Managing General Partners, the Individual General Partners, the
Investment Adviser to the Funds and certain named affiliates of such persons.
Plaintiffs allege that the defendants violated certain provisions of the
Investment Company Act of 1940 and the common law in connection with the sale by
certain of the defendants of shares of common stock of Snapple Beverage Corp. in
a November 1993 secondary offering and seek actual and punitive damages and an
accounting in connection therewith. The defendants have filed papers in
opposition to the motion for partial summary judgment on January 10, 1995. On
August 4, 1995, plaintiffs filed an amended complaint alleging additional
violations of the Investment Company Act of 1940 and common law arising out of
the secondary offering. The plaintiffs moved for summary judgment on certain of
these claims. On October 13, 1995, the defendants in this litigation each filed
briefs in opposition to plaintiffs' motions. Because the defendants in this
action believe that the claims are without merit, each defendant also filed a
separate motion to dismiss, although whether or not the plaintiffs prevail, the
Funds may be obligated to indemnify and advance litigation expenses to certain
of the defendants under the terms and conditions of various indemnity provisions
in the Funds' Partnership Agreements and separate indemnification agreements.
The outcome of this case is not determinable at this time.
<PAGE>
On November 2, 3 and 4, 1994, stockholders of Snapple Beverage Corp.
commenced approximately twenty putative class actions in the Delaware Chancery
Court, purportedly on behalf of all public stockholders of Snapple, against
Snapple, the Funds, Thomas H. Lee Equity Partners, L.P., and some or all of
Snapple's directors. Since then, the plaintiffs have filed a Consolidated
Amended Complaint against Snapple, the Funds, Thomas H. Lee Equity Partners,
L.P., some or all of Snapple's directors and Quaker Oats. The complaint alleges
that the sale of Snapple to Quaker Oats is at an unfair price and in violation
of the defendants' fiduciary duties to public stockholders. The plaintiffs
sought an injunction against the merger transaction, an accounting for any
damages suffered by the public stockholders, and attorneys' fees and related
expenses. The Court on November 15, 1994 denied plaintiffs application to take
expedited discovery and request to schedule a preliminary injunction hearing.
The defendants in these actions believe that the claims are without merit,
although whether or not the plaintiffs prevail, the Funds may be obligated to
indemnify and advance litigation expenses to certain of the defendants under the
terms and conditions of various indemnity provisions in the Funds' Partnership
Agreements and separate indemnification agreements. The outcome of this case is
not determinable at this time.
14. Commitments
On August 2, 1993, the Retirement Fund established a letter of credit from
Banque Nationale de Paris in favor of FLA. Orthopedics, a Non-Managed portfolio
company. The Retirement Fund posted as collateral a $394,800 Banque Nationale de
Paris certificate of deposit which pays an annual interest rate of 3.875%. If
the commitment is drawn upon, the Retirement Fund will receive additional
subordinated notes and equity of FLA. Orthopedics. The letter of credit will
expire on May 1, 1996.
15. Income Taxes (Statement of Financial Accounting
Standards No. 109)
No provision for income taxes has been made since all income and losses are
allocated to the Retirement Fund's partners for inclusion in their respective
tax returns.
Pursuant to the Statement of Financial Accounting Standards No. 109 -
Accounting for Income Taxes, the Retirement Fund is required to disclose any
difference in the tax basis of the Retirement Fund's assets and liabilities
versus the amounts reported in the financial statements. Generally, the tax
bases of the Retirement Fund's assets approximate the amortized cost amounts
reported in the financial statements. This amount is computed annually and as of
December 31, 1994, the tax basis of the Retirement Fund's assets are less than
the amounts reported in the financial statements by $19,910,687. This difference
is primarily attributable to unrealized appreciation on investments which has
not been recognized for tax purposes.
<PAGE>
16. Subsequent Events
On October 17, 1995 Playtex Products, Inc. and Banana Boat Holding Corp.
entered an Agreement and Plan of Merger (the "Agreement") pursuant to which
Playtex agreed to acquire all of the outstanding equity of Banana Boat not
already owned by Playtex. In accordance with the Agreement, the 12.5% Senior
Subordinated Note held by the Retirement Fund, plus all accrued interest, was
paid in full by Playtex upon consummation of the merger. Additionally, the
Retirement Fund received net proceeds of $173.55 per share for the 8,218.5
Common Stock Purchase Warrants that were exercised pursuant to the Agreement. As
a result, the Retirement Fund received total proceeds of $10,707,155 which
resulted in a gain of $1,426,321 on October 31, 1995. These proceeds will be
distributed to the partners in December 1995 in a special distribution.
On November 3, 1995, the Individual General Partners approved the third
quarter 1995 cash distribution totaling $1,890,622 which represents net
investment income of $799,079 from Mezzanine Investments, $998,946 as a return
of the reserve for follow on investments and $92,597 from Temporary Investments.
The total amount distributed to Limited Partners was $1,088,167 or $6.13 per
Unit, which was paid on November 14, 1995. The Managing General Partner received
a total of $3,069, with respect to its interest in the Retirement Fund, and
$799,079 in performance incentive fees. Thomas H. Lee, as an Individual General
Partner, received $307 with respect to his interest in the Retirement Fund.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SUPPLEMENTAL SCHEDULE OF REALIZED GAINS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NUMBER OF INVESTMENT NET REALIZED
SECURITY SHARES COST PROCEEDS GAIN
<S> <C> <C> <C> <C>
EquiCredit Corp.
Common Stock 259,474 $ 680 $8,303 $7,623
Petco Animal Supplies
Common Stock 64,151(a) 1,052 1,265 213
TOTAL $1,732 $9,568 $7,836
(a) Includes the exercise of the underwriters overallotment option which was
exercised on May 12, 1995.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SUPPLEMENTAL SCHEDULE OF UNREALIZED APPRECIATION (DEPRECIATION)
FOR THE PERIOD ENDED SEPTEMBER 30, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
UNREALIZED UNREALIZED
APPRECIATION APPRECIATION
(DEPRECIATION) (DEPRECIATION) TOTAL TOTAL
FOR THE THREE FOR THE NINE UNREALIZED UNREALIZED
SECURITY MONTHS ENDED MONTHS ENDED APPRECIATION APPRECIATION
INVESTMENT FAIR SEPTEMBER 30, SEPTEMBER 30, (DEPRECIATION) AT (DEPRECIATION) AT
COST VALUE 1995 1995 DECEMBER 31, 1994 SEPTEMBER 30, 1995
<S> <C> <C> <C> <C> <C> <C>
PUBLICLY TRADED/UNDERLYING
SECURITY PUBLICLY TRADED:
EquiCredit Corp.
Common Stock* $ - $ - $ - $(7,591) $ 7,591 $ -
First Alert, Inc.
Common Stock* 3,680 35,934 1,997 2,567 29,687 32,254
Hills Stores Company
Common Stock 18,571 3,165 (3,434) (2,638) (12,768) (15,406)
Petco Animal Supplies, Inc.
Common Stock 1,023 1,622 171 838 (239) 599
Playtex Products, Inc.
Common Stock 2,830 1,583 (207) 275 (1,522) (1,247)
Stanley Furniture
Common Stock 233 162 21 (23) (48) (71)
TOTAL UNREALIZED APPRECIATION
(DEPRECIATION) FROM PUBLICLY
TRADED SECURITIES $(1,452) $(6,572) $22,701 $16,129
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SUPPLEMENTAL SCHEDULE OF UNREALIZED APPRECIATION (DEPRECIATION)
FOR THE PERIODS ENDED SEPTEMBER 30, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
UNREALIZED UNREALIZED
APPRECIATION APPRECIATION TOTAL TOTAL
(DEPRECIATION) (DEPRECIATION) UNREALIZED UNREALIZED
FOR THE THREE FOR THE NINE APPRECIATION APPRECIATION
MONTHS ENDED MONTHS ENDED (DEPRECIATION) (DEPRECIATION)
INVESTMENT FAIR SEPTEMBER 30, SEPTEMBER 30, AT DECEMBER 31, AT SEPTEMBER 30,
SECURITY COST VALUE 1995 1995 1994 1995
<S> <C> <C> <C> <C> <C> <C>
NON PUBLIC SECURITIES:
Fitz and Floyd/Sylvestri
Common Stock $ 13 $ - $ - $ - $ (13) $ (13)
FLA. Orthopedics, Inc.
Common Stock* 987 - - - (987) (987)
Subordinated Note 3,158 1,579 - (1,579) - (1,579)
Stablex Canada Inc.
Subordinated Notes* 7,565 5,737 - - (1,828) (1,828)
TOTAL UNREALIZED (APPRECIATION) DEPRECIATION
FROM NON PUBLIC SECURITIES - (1,579) (2,828) (4,407)
NET UNREALIZED APPRECIATION (DEPRECIATION) $(1,452) $(8,151) $19,873 $11,722
* Restricted security.
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity & Capital Resources
As of September 30, 1995, capital contributions from the Limited Partners
and the General Partners totaled $178,065,000 in the public offering of ML-Lee
Acquisition Fund (Retirement Accounts) II, L.P. (the "Retirement Fund"), the
final closing for which was held on December 20, 1989. Net proceeds which were
available for investment to the Retirement Fund as of September 30, 1995 were
$110,971,792, after returns of capital to partners, volume discounts, sales
commissions and organizational, offering, sales and marketing expenses.
At September 30, 1995, the Retirement Fund had outstanding a total of
$97,535,160 invested in Mezzanine Investments representing $72,616,623 Managed
and $24,918,537 Non-Managed portfolio investments. The remaining proceeds were
invested in Temporary Investments primarily comprised of commercial paper and
bankers' acceptances with maturities of less than two months.
Excluding Subordinated Notes place on non-accrual status, the Retirement
Fund during the nine months ended September 30, 1995, received $504,150 in
additional debt securities in lieu of cash interest payments ("payment-in-kind"
securities) as provided in certain of its subordinated note investments. As of
September 30, 1995, the Retirement Fund has in its portfolio of investments
$739,601 of payment-in-kind debt securities and $1,224,548 of payment-in-kind
equity securities, which excludes $3,888,120 of payment-in-kind debt securities
received from notes placed on non-accrual status.
The Retirement Fund 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. The Retirement Fund's Mezzanine Investments typically were
issued in private placement transactions which are generally subject to certain
restrictions on sales thereby limiting their liquidity. The Retirement Fund 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 quarter of the
Retirement Fund's investment period terminated at various times through December
18, 1993.
<PAGE>
As provided by the Partnership Agreement, the Managing General Partner of
the Retirement Fund receives incentive fees from transactions to the extent
certain returns of capital and priority returns are achieved. As of September
30, 1995, the amount that is deferred in payment (the "Deferred Distribution
Amount") to the Managing General Partner in accordance with the Partnership
Agreement was $5,582,863. To the extent not payable to the Managing General
Partner, this Deferred Distribution Amount is distributed 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 would instead be payable to the Managing General Partner until the
Deferred Distribution Amount is paid in full. As of November 14, 1995, the
Deferred Distribution Amount owed to the Managing General Partner is $4,783,784.
On August 6, 1991, the Independent General Partners approved a reserve for
follow-on investments of $20,014,971 for the Retirement Fund. As of November 14,
1995, the reserve balance has been reduced to $8,322,206 due to follow-on
investments of $153 in Petco Animal Supplies, $1,581,030 in Fitz and Floyd,
Inc., $128,270 in Fine Clothing, Inc., $2,403,591 for a Certificate of Deposit
related to the reorganization of Hills. The Retirement Fund also made a
follow-on investment in Ghirardelli Holdings Corp. of $1,864,800 and returned
$4,714,921 of the reserve to partners during the nine months ended September 30,
1995. The Independent General Partners have approved an additional return of the
reserve of $1,000,000 to be distributed to the partners on November 14, 1995.
The level of the reserve was based upon an analysis of potential follow-on
investments in specific portfolio companies, which may become necessary to
protect or enhance the Retirement Fund's existing investment.
All net proceeds from the sale of Mezzanine Investments
received by the Retirement Fund in the future will be distributed to its
partners unless applied to or set aside for expenses or follow-on investments.
The proportion of distributions provided by net investment income has
dropped significantly from prior years, due primarily to increased sales and
redemptions of Mezzanine Investments, a resulting decrease in investment income
as those holdings cease to generate interest income. Given the outstanding
Deferred Distribution Amount noted above, it is expected that all net investment
income from Mezzanine Investments will be distributed to the Managing General
Partner until the Managing General Partner receives an amount equal to any
outstanding Deferred Distribution Amount. Given these circumstances, it is
expected that the majority of any future cash distributions to Limited Partners
for the next few years will almost entirely be derived from gains and recovered
capital from asset sales, 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 from Temporary Investments, which are estimated to be
less than one dollar per Limited Partnership Unit each quarter for the next few
years. Distributions therefore are expected to vary significantly in amount and
may not be made in every quarter.
<PAGE>
Investment in High-Yield Securities
The Retirement Fund invests 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 the Retirement Fund cannot eliminate the risks
associated with its investments in High-Yield Securities, it has established and
implemented risk management policies. The Retirement Fund subjected each
prospective investment to rigorous analysis, and made only those investments
that were recommended by the Investment Adviser and that meet the Retirement
Fund's investment guidelines or that had otherwise been approved by the Managing
General Partner and the Independent General Partners. The Retirement Fund's
investments were measured against specified Retirement Fund investment and
performance guidelines. To limit the exposure of the Retirement Fund's capital
in any single issuer, the Retirement Fund limited the amount of its investment
in a particular issuer. The Retirement Fund's Investment Adviser also
continually monitors portfolio companies in order to minimize the risks
associated with its investments in High-Yield Securities.
Certain issuers of High-Yield Securities held by the Retirement Fund (First
Alert, Hills, Petco, Playtex and Stanley Furniture) have registered their equity
securities in public offerings. Although the equity securities of the same class
presently held by the Retirement Fund (other than Stanley Furniture) were not
registered in these offerings, the Retirement Fund has the ability under Rule
144 of the Securities Act of 1933 to sell publicly traded equity securities held
by it for at least two years on the open market, subject to the volume
restrictions set forth in that rule. The Rule 144 volume restrictions generally
are not applicable to equity securities of non-affiliated companies held by the
Retirement Fund for at least three years. In certain cases, the Retirement Fund
has agreed not to make any sales of equity securities for a specified hold-back
period following a public offering.
The Investment Adviser reviews each portfolio company's financial statements
quarterly. In addition, the Investment Adviser routinely reviews and discusses
financial and operating results with the company's management and where
appropriate, attends board of director meetings. In some cases, representatives
of the Investment Adviser, acting on behalf of the Funds (and affiliated
investors where applicable), serve as one or more of the directors on the boards
of portfolio companies. The Retirement Fund may from time to time make follow-on
investments to the extent necessary to protect or enhance its existing
investments.
<PAGE>
Results of Operations
Investment Income and Expenses
The investment income from operations for the quarter consists primarily of
interest and discount income earned on the investment of proceeds from partners'
contributions in Mezzanine Investments and short-term money market instruments.
For the nine months ended September 30, 1995, the Retirement Fund had
investment income of $4,626,991, as compared to $8,292,454 for the same period
in 1994. The decrease of $3,665,463 in 1995 investment income from 1994 is due
primarily to the recognition of previously unrecorded interest, dividend and
discount income related to Petco Animal Supplies of $1,596,330 that was recorded
in the first quarter of 1994. Also contributing to this decrease is (i) the
amount of temporary investments held by the Retirement Fund in 1995 after
distributions of return of capital to partners and (ii) the placement of two
debt securities on non-accrual status during 1995.
For the three months ended September 30, 1995, the Retirement Fund had
investment income of $1,476,782, compared to $2,456,758 for the same period in
1994.
Major expenses for the period ended September 30, 1995 consisted of the
Investment Advisory Fee, legal and professional fees, the Fund Administration
Fee and Independent General Partners' Fees and Expenses.
The Investment Adviser and Fund Administrator both receive their
compensation on a quarterly basis. The total Investment Advisory Fees paid to
the Investment Adviser for the nine months ended September 30, 1995 and 1994
were $802,112 and $918,012, respectively, and are calculated at an annual rate
of 1.0% of assets under management (net offering proceeds reduced by cumulative
capital reductions), with a minimum annual amount of $1,200,000 for the
Retirement Fund and Fund II on a combined basis. For the three months ended
September 30, 1995 and 1994, the Retirement Fund paid $257,195 and $273,697,
respectively, in Investment Advisory Fees. The decrease in 1995's as compared to
1994's Investment Advisory Fee was a direct result of returns of capital to
partners and realized losses on investments.
Legal and professional fees for the nine months ended September 30, 1995 and
1994 were $853,745 and $1,418,232, respectively. These fees were primarily
incurred in connection with the litigation proceedings as described in Note 13
to the Financial Statements. For the three months ended September 30, 1995 and
1994, the Retirement Fund incurred $536,470 and $609,503, respectively, in legal
and professional fees. The decrease is attributable to a decrease in legal fees
incurred and advanced on behalf of indemnified defendants as well as fees
incurred directly by the Retirement Fund in connection with the aforementioned
litigation proceedings.
<PAGE>
The Fund Administration Fees paid to the Fund Administrator for the nine
months ended September 30, 1995 and 1994 were $452,493 and $478,939,
respectively, and are calculated at an annual rate of 0.45% of the excess of net
offering proceeds less 50% of capital reductions. For the three months ended
September 30, 1995 and 1994, the Retirement Fund paid $148,542 and $152,255,
respectively, in Fund Administration Fees. The decrease in 1995's as compared to
1994's Fund Administration Fees was a direct result of sales of investments,
returns of capital to partners and realized losses on investments.
Pursuant to the administrative services agreement between the Retirement
Fund and the Fund Administrator, effective November 10, 1993, a portion of the
actual out-of-pocket expenses incurred in connection with the administration of
the Retirement Fund is reimbursable to the Fund Administrator. Actual
out-of-pocket expenses ("reimbursable expenses") primarily consist of printing,
audits, tax preparation and custodian fees. For the nine months ended September
30, 1995 and 1994 reimbursable expenses totaled $72,127 and $155,568,
respectively. The decrease from 1994 to 1995 is due to an increase in the
accrual for reimbursable expenses in 1994.
For the nine months ended September 30, 1995 and 1994, the Retirement Fund
incurred $98,375 and $74,346, respectively, in Independent General Partners'
Fees and Expenses. The increase in Independent General Partners' Fees and
Expenses was primarily attributable to the increase in legal fees incurred and
advanced on behalf of indemnified Independent General Partners in connection
with the aforementioned litigation proceedings. (See Note 13 to the Financial
Statements).
For the nine months ended September 30, 1995, the Retirement Fund had net
investment income of $2,344,587, as compared to $5,208,298 for the same period
in 1994. For the three months ended September 30, 1995, the Retirement Fund had
net investment income of $478,557, as compared to $1,345,757 for the same period
in 1994. This decrease in 1995 as compared to 1994 is primarily attributable to
higher interest, discount and dividend income recorded from Mezzanine
Investments in 1994 due to Petco Animal Supplies' March 17, 1994 initial public
offering.
Net Assets
The Retirement Fund's net assets decreased by $14,523,140 during the nine
months ended September 30, 1995, due to the payment of cash distributions to
partners of $16,553,571 ($5,463,044 of the cash distributions paid was return of
capital from the sale of portfolio investments and the return of a portion of
the reserve to Limited Partners) and net unrealized depreciation of $8,150,451,
partially offset by realized gain from the sales of EquiCredit and Petco of
$7,836,295 and net investment income of $2,344,587. The 1995 decrease in net
assets for the nine months is smaller than the decrease in the comparable 1994
period. This compares to the nine months ended September 30, 1994's net assets
decreasing by $61,207,043 due to the payment of cash distribution to partners of
$31,303,993 ($15,026,908 of the cash distributions paid was return of capital
from the sales of portfolio investments) and net unrealized depreciation of
$35,379,887, partially offset by net investment income of $5,208,298 and
realized gains of $268,539.
<PAGE>
The Retirement Fund's net assets decreased by $1,104,834 during the three
months ended September 30, 1995, due to net investment income of $478,557
partially offset by unrealized depreciation of $1,451,422 and the payment of
cash distributions to partners of $2,077,699 ($67,027 of the cash distributions
paid was return of capital from the sale of Petco Animal Supplies. This compares
to the three months ended September 30, 1994's net assets decreasing by
$25,050,239 due to the payment of cash distributions to partners of $3,004,744
($1,780,649 of the cash distributions paid was return of capital from the sales
of portfolio investments) and net unrealized depreciation of $23,391,252,
partially offset by net investment income of $1,345,757.
Unrealized Appreciation and Depreciation on Investments
For the nine months ended September 30, 1995, the Retirement Fund recorded
net unrealized depreciation of $8,150,451 (of which $6,571,251 is net unrealized
depreciation from publicly traded securities and $1,579,200 is net unrealized
depreciation from non-public securities) compared to a net unrealized
depreciation of $35,379,887 for the same period in 1994. On September 30, 1995,
the Retirement Fund's cumulative net unrealized appreciation on investments
totaled $11,722,649. This decrease in unrealized depreciation can be attributed
primarily to the increase in valuation of First Alert at September 30, 1995,
partially offset by unrealized depreciation recorded on the investment in Hills
Stores Company and the reversal of unrealized appreciation due to the sale of
EquiCredit during the first quarter of 1995.
For the three months ended September 30, 1995, the Retirement Fund recorded
net unrealized depreciation on investments of $1,451,422 (all of which is from
publicly traded securities), compared to a net unrealized depreciation of
$23,391,252 for the same period in 1994.
The Retirement Fund's valuation of the Common Stock of First Alert, Hills,
Petco, Playtex and Stanley Furniture reflect their closing market prices at
September 29, 1995.
The Managing General Partner and the Investment Adviser
review the valuation of the Retirement Fund'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.
A number of the Retirement Fund's assets (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 the
Retirement Fund could realize in a current transaction.
<PAGE>
The First Alert, Petco and Playtex securities held by the Retirement Fund
are restricted securities under the SEC's Rule 144 and can only be sold under
that rule, in a registered public offering, or pursuant to an exemption from the
registration requirement. In addition, resale in some cases is restricted by
lockup or other agreements. The Retirement Fund may be considered an affiliate
of First Alert and of Stanley Furniture under the SEC's Rule 144, and therefore
any resale of securities of those companies under Rule 144 is limited by the
volume limitations in that rule. Accordingly, the values referred to in the
financial statements for the remaining First Alert, Hills, Petco, Playtex and
Stanley Furniture securities held by the Retirement Fund do not necessarily
represent the prices at which these securities could currently be sold.
The information presented herein is based on pertinent information available
to the Managing General Partner and Investment Adviser as of September 30, 1995.
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 the Supplemental Schedule of
Unrealized Appreciation and Depreciation (Schedule 2 - pages 28 - 29).
Realized Gains and Losses
For the nine months ended September 30, 1995, the Retirement Fund had net
realized gains from the sales of EquiCredit and Petco Animal Supplies of
$7,836,295, as compared to $268,539 for the same period in 1994.
For additional information, please refer to the Supplemental Schedule of
Realized Gains and Losses (Schedule 1 - page 27).
Cash Distributions
On November 3, 1995, the Individual General Partners approved the third
quarter 1995 cash distribution totaling $1,890,622 which represents net
investment income of $799,079 from Mezzanine Investments, $998,946 as a return
of the reserve for follow on investments and $92,597 from Temporary Investments.
The total amount distributed to Limited Partners was $1,088,167 or $6.13 per
Unit, which was paid on November 14, 1995. The Managing General Partner received
a total of $3,069, with respect to its interest in the Retirement Fund, and
$799,079 in performance incentive fees. Thomas H. Lee, as an Individual General
Partner, received $307 with respect to his interest in the Retirement Fund.
<PAGE>
Part II - Other Information
Items 1 - 4 are herewith omitted as the response to all items is either
none or not applicable.
Item 5. Other Information
On October 17, 1995 Playtex Products, Inc. and Banana Boat Holding Corp.
entered an Agreement and Plan of Merger (the "Agreement") pursuant to which
Playtex agreed to acquire all of the outstanding equity of Banana Boat not
already owned by Playtex. In accordance with the Agreement, the 12.5% Senior
Subordinated Note held by the Retirement Fund, plus all accrued interest, was
paid in full by Playtex upon consummation the merger. Additionally, the
Retirement Fund received net proceeds of $173.55 per share for the 8,218.5
Common Stock Purchase Warrants that were exercised pursuant to the Agreement. As
a result, the Retirement Fund received total proceeds of $10,707,155 which
resulted in a gain of $1,426,321 on October 31, 1995. These proceeds will be
distributed to the partners in December 1995 in a special distribution.
On November 1, 1995, the Retirement Fund entered into a Partnership Interest
Redemption Agreement (the "Agreement") with National Tobacco Company, LP.
Pursuant to the Agreement, National Tobacco will redeem the Class A Partnership
Interests and repay all Subordinated Notes, plus unpaid and accrued interest,
held by the Retirement Fund. As consideration, National Tobacco shall pay a 2.5%
prepayment penalty on the principal amount of the 13% subordinated note and pay
a contingent interest amount to be determined in accordance with the Agreement.
The prepayment penalty and contingent interest amounts will be calculated as of
the closing date which is anticipated to occur by December 20, 1995. This
agreement my be terminated by either party if the closing does not occur on or
before December 20, 1995.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule for the quarter ending September
30, 1995.
(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 this
14th day of November, 1995.
ML-LEE ACQUISITION FUND (RETIREMENT
ACCOUNTS) II, L.P.
By: Mezzanine Investments II, L.P.,
Managing General Partner
By: ML Mezzanine II Inc.,
its General Partner
Dated: November 14, 1995 /s/ James V. Caruso
James V. Caruso
Executive Vice President and Director
Dated: November 14, 1995 /s/ Audrey Bommer
Audrey Bommer
Vice President and Treasurer
(Chief Financial Officer)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on this
14th day of November, 1995.
ML-LEE ACQUISITION FUND (RETIREMENT
ACCOUNTS) II, L.P.
By: Mezzanine Investments II, L.P.,
Managing General Partner
By: ML Mezzanine II Inc.,
its General Partner
Dated: November 14, 1995 James V. Caruso
Executive Vice President and Director
Dated: November 14, 1995 Audrey Bommer
Vice President and Treasurer
Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the third
quarter of 1995 Form 10-Q Balance Sheets and Statements of Operations and is
qualified in its entirety by reference to such documents.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 97,535,161
<INVESTMENTS-AT-VALUE> 109,269,104
<RECEIVABLES> 999,530
<ASSETS-OTHER> 508
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 120,104,064
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 6
<OTHER-ITEMS-LIABILITIES> 1,036,773
<TOTAL-LIABILITIES> 1,036,773
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 177,515
<SHARES-COMMON-PRIOR> 177,515
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,722,649
<NET-ASSETS> 119,068,290
<DIVIDEND-INCOME> 53,213
<INTEREST-INCOME> 4,556,892
<OTHER-INCOME> 16,887
<EXPENSES-NET> 2,282,405
<NET-INVESTMENT-INCOME> 2,344,587
<REALIZED-GAINS-CURRENT> 7,836,295
<APPREC-INCREASE-CURRENT> (8,150,451)
<NET-CHANGE-FROM-OPS> 2,030,431
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,269,218
<DISTRIBUTIONS-OF-GAINS> 8,822,373
<DISTRIBUTIONS-OTHER> 5,463,044
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (14,523,140)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 802,112
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,282,405
<AVERAGE-NET-ASSETS> 126,329,860
<PER-SHARE-NAV-BEGIN> 713.90
<PER-SHARE-NII> 8.76
<PER-SHARE-GAIN-APPREC> (9.54)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (75.12)
<RETURNS-OF-CAPITAL> 30.16
<PER-SHARE-NAV-END> 637.99
<EXPENSE-RATIO> 0.005
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
