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 June 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 June 30, 1995 and December 31, 1994 3
Statements of Operations - For the Three and Six
Months Ended June 30, 1995 and June 30, 1994 4
Statements of Changes in Net Assets - For the Six
Months Ended June 30, 1995 and June 30, 1994 5
Statements of Cash Flows - For the Six Months
Ended June 30, 1995 and June 30, 1994 6
Statement of Changes in Partner's Capital at
June 30, 1995 7
Schedule of Portfolio Investments - June 30, 1995 8
Notes to Financial Statements 15
Supplemental Schedule of Realized Gains and Losses -
(Schedule 1) 29
Supplemental Schedule of Unrealized Appreciation
and Depreciation - (Schedule 2) 30
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 32
Part II. Other Information 42
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
June 30,
1995 December
(Unaudited) 31, 1994
<S> <C> <C>
ASSETS:
Investments - Notes 2,4,5,7,16
Portfolio Investments, at fair value
Managed Companies
(amortized cost $72,617 at June 30,
1995 and $72,484 at December 31, 1994) $ 90,198 $ 95,185
Non-Managed Companies
(amortized cost $24,926 at June 30,
1995 and $24,420 at December 31, 1994) 20,521 21,592
Temporary Investments, at amortized
cost(cost $11,499 at June 30, 1995
and $16,329 at December 31, 1994) 11,529 16,370
Cash - 1
Accrued Interest and Dividend Receivable
- Note 2 549 1,217
Prepaid Expenses 2 4
TOTAL ASSETS $122,799 $134,369
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities
Legal and Professional Fees Payable $ 123 $ 126
Independent General Partners' Fees
Payable - Note 11 18 62
Deferred Interest Income - Note 2 540 590
Total Liabilities 681 778
Partners' Capital - Note 2
Individual General Partner 37 40
Managing General Partner 6,506 6,824
Limited Partners (177,515 Units) 115,575 126,727
Total Partners' Capital 122,118 133,591
TOTAL LIABILITIES AND PARTNERS' CAPITAL $122,799 $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 Six Months Ended
June 30, June 30, June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
INVESTMENT INCOME - NOTES 2,6:
Interest $ 1,347 $1,474 $ 3,122 $5,128
Discount 6 270 11 661
Dividends 18 - 18 46
TOTAL INCOME 1,371 1,744 3,151 5,835
EXPENSES:
Investment Advisory Fee - Note 8 273 323 545 644
Fund Administration Fee - Note 9 152 164 304 327
Amortization of Deferred Organization
Expenses - Note 2 - 11 - 23
Legal and Professional Fees 204 481 318 809
Reimbursable Administrative Expenses -
Note 10 49 130 50 130
Independent General Partners' Fees
and Expenses - Note 11 26 15 66 37
Insurance Expense 1 2 2 3
TOTAL EXPENSES 705 1,126 1,285 1,973
NET INVESTMENT INCOME 666 618 1,866 3,862
Net Realized Gain on Investments -
Note 4 and Schedule 1 213 - 7,836 269
Net Change in Unrealized Appreciation
(Depreciation) from Investments -
Note 5 and Schedule 2:
Publicly Traded Securities 11,360 (7,806) (5,120) (9,766)
Non Public Securities - (1,029) (1,579) (2,223)
Subtotal 11,360 (8,835) (6,699) (11,989)
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 12,239 (8,217) 3,003 (7,858)
LESS: Incentive Fees to Managing
General Partner (428) (382) (6,214) (847)
NET INCREASE (DECREASE) AVAILABLE FOR
PRO-RATA DISTRIBUTION TO ALL PARTNERS $11,811 $(8,599) $(3,211) $(8,705)
</TABLE>
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 Six Months Ended
June 30, June 30,
1995 1994
FROM OPERATIONS:
<S> <C> <C>
Net Investment Income $ 1,866 $ 3,862
Net Realized Gain on Investments 7,836 269
Net Change in Unrealized
Depreciation on Investments (6,699) (11,989)
Net Increase (Decrease) in Net
Assets Resulting From Operations 3,003 (7,858)
Cash Distributions to Partners (14,476) (28,299)
Total Decrease (11,473) (36,157)
NET ASSETS:
Beginning of Year 133,591 278,451
End of Period $122,118 $242,294
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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 Six Months Ended
June 30, June 30,
1995 1994
<S> <C> <C>
INCREASE IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest, Discount and Dividends $ 3,272 $ 6,620
Fund Administration Fee (304) (327)
Investment Advisory Fee (545) (644)
Independent General Partners' Fees and Expenses (110) (71)
Sale of Temporary Investments, Net 4,829 18,159
Proceeds from Sale of Portfolio Company Investments 9,568 12,192
Purchase of Portfolio Company Investment (1,865) (5,719)
Reimbursable Administrative Expense (86) (91)
Closing Fee Received - 40
Legal and Professional Fees (284) (661)
Net Cash Provided by Operating Activities 14,475 29,498
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Distributions to Partners (14,476) (28,299)
Net Cash Applied to Financing Activities (14,476) (28,299)
Net Increase (Decrease) in Cash (1) 1,199
Cash at Beginning of Period 1 1
Cash at End of Period $ - $ 1,200
RECONCILIATION OF NET INVESTMENT INCOME
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Investment Income $ 1,866 $ 3,862
Adjustments to Reconcile Net Investment
Income to Net Cash Provided by Operating Activities:
Decrease in Investments 4,696 24,632
Net Realized Gains on Sales of Investments 7,836 269
Decrease in Accrued Interest Receivables 122 785
Amortization of Deferred Organization Expenses - 23
Decrease in Prepaid Expenses 2 2
Decrease in Independent General Partners' Fees Payable (44) (31)
Increase in Closing Fees Payable - 40
Increase(Decrease)in Professional Fees Payable (3) 185
Decrease in Option Payable - (269)
Total Adjustments 12,609 25,636
Net Cash Provided by Operating Activities $14,475 $ 29,498
</TABLE>
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 Six Months Ended June 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 1 542 1,323 1,866
Allocation of Net Realized Gain on
Investments 2 1,649 6,185 7,836
Allocation of Net Change in
Unrealized Depreciation on Investments (2) (19) (6,678) (6,699)
Cash Distributions to Partners (4) (2,490) (11,982) (14,476)
Partners' Capital at June 30, 1995 $ 37 $6,506 $115,575 $122,118
</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)
JUNE 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 6.66
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 7.49
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 6.21
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)
JUNE 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>
FIRST ALERT, INC.(b) - Note 5
2,281,524 Shares First Alert, Inc., Common Stock(a)(d) 07/31/92 $3,680 $33,938
(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 33,938 27.76
GHIRARDELLI HOLDINGS CORPORATION(b) - Note 14
$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 6.76
HILLS STORES COMPANY (b) - Notes 5,16
244,818 Shares Hills Stores Company, Common Stock(a)(j) 04/03/90 16,153 5,875
116,994 Rights Hills Stores Company, Common Stock Rights(d) Various 2,418 723
(2% of fully diluted common equity assuming exercise of options) 18,571 6,598 5.40
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)
JUNE 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 $ 1,451
(.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 1,023 1,451 1.19
64,151 Shares Common Stock
Purchased Various $1,052
Sold 04/26/95 $1,265
Total Realized Gain $ 213
64,151 Shares Common Stock
Purchased Various $1,052
Sold 04/26/95 $1,265
Total Realized Gain $ 213
PLAYTEX PRODUCTS, INC. - Notes 5,7
183,560 Shares Playtex Products, Inc., Common Stock(a)(d) 03/29/90 2,830 1,790
(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 1,790 1.46
See the Accompanying Notes to Financial Statements.
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 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 3.24
STANLEY FURNITURE COMPANY, INC. (b) - Note 5
18,511 Shares Stanley Furniture Company, Inc., Common Stock(a)(j) 06/30/91 233 141
(0.4% of fully diluted common equity) 233 141 0.12
SUN PHARMACEUTICALS CORP.(b) - Note 7
$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 7.51
TOTAL INVESTMENT IN MANAGED COMPANIES $72,617 $90,198 73.80
See the Accompanying Notes to Financial Statements.
</TABLE>
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 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 $ 450
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
514 521 0.43
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 6.77
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 1.29
See the Accompanying Notes to Financial Statements.
</TABLE>
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<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 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 3.60
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 4.68
TOTAL INVESTMENT IN NON-MANAGED COMPANIES $24,91 $20,521 16.77
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes Various 63,215 59,817 48.93
Partnership Interest 04/14/92 267 267 0.22
Preferred Stock, Common Stock, Warrants and Stock Rights Various 34,054 50,635 41.42
TOTAL MEZZANINE INVESTMENTS $97,536 $110,719 90.57
See the Accompanying Notes to Financial Statements.
</TABLE>
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 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 - Note 14
$ 395 Banque National de Paris, 3.875% due 03/26/96 08/18/93 $ 395 $ 395
$ 506 State Street Bank, 3.5% due 07/03/95 06/30/95 506 506
TOTAL INVESTMENT IN C/D'S AND TIME DEPOSITS 901 901 0.74
COMMERCIAL PAPER
$2,052 Ford Motor Credit, 5.94% due 07/03/95 06/01/95 2,041 2,051
$1,260 Mid-South Capital Corp. 5.95% due 07/07/95 06/07/95 1,254 1,259
$7,357 GECC, 5.95% due 08/02/95 06/19/95 7,303 7,318
TOTAL INVESTMENT IN COMMERCIAL PAPER 10,598 10,628 8.69
TOTAL TEMPORARY INVESTMENTS $ 11,499 $ 11,529 9.43
TOTAL INVESTMENT PORTFOLIO $109,035 $122,248 100.00%
(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 $7,669 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
JUNE 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 Advisers II, L.P., the Investment Adviser to
the Funds, is the limited partner. The Individual General
Partners are Vernon R. Alden, Joseph L. Bower and Stanley H.
Feldberg (the "Independent General Partners") and Thomas H.
Lee.
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.
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 June 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 June 30,1995, 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.
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 June 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 $3,110,711
and $1,723,465, respectively, of payment-in-kind securities
received from notes placed on non-accrual status. As of
June 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.
Interim Financial Statements
The financial information included in this interim report
as of June 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 June 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.
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 given up) 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 6, 1991, the Independent General Partners
approved a reserve for follow-on investments of $20,014,971
for the Retirement Fund. As of June 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 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.
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 six months ended June 30, 1995, the Retirement
Fund recorded net unrealized depreciation of $6,699,029 (of
which $5,119,829 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 $11,989,635 for the same period
in 1994. As of this date, the Retirement Fund's cumulative
net unrealized appreciation on investments totaled
$13,174,071.
For additional information, please refer to the Schedule
of Unrealized Appreciation and Depreciation (Schedule 2 -
pages 30 - 31).
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 Family Products
Corporation ("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.
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 six months ended
June 30, 1995 and 1994, the Retirement Fund paid $544,916
and $644,315, 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 six months ended June 30, 1995 and 1994,
the Retirement Fund paid $303,951 and $326,684,
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 primarily
consist of printing, audits, tax preparation and custodian
fees. For the six months ended June 30, 1995 and 1994, the
Retirement Fund incurred $49,964 and $130,332, 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 six months ended June 30, 1995 and 1994, the Retirement
Fund incurred $65,717 and $37,200, respectively, in
Independent General Partners' Fees and Expenses.
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 six months ended June 30, 1995, the Retirement
Fund paid $86,029 to the Fund Administrator for reimbursable
out-of-pocket expenses (please refer to Note 10 for further
information).
In 1995, the Retirement Fund paid the Individual General
Partner distributions totaling $3,884 and paid the Managing
General Partner distributions totaling $2,489,725 (which
includes $2,450,886 of incentive fees ("MGP Incentive
Fees") and $38,839 with respect to their interest in the
Retirement Fund). Of the MGP Incentive Fees paid, 95% or
$2,328,342 was paid to the Investment Advisor and the
remaining 5% totaling $122,544 was paid to ML Mezzanine II
Inc. As of June 30, 1995, the Managing General Partner has
earned $23,682,149 in MGP Incentive Fees of which $6,214,293
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 June 30, 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 June 30, 1994, the court granted in
part and denied in part the motions to dismiss.
Additionally, by its June 30, 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. 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. On December 12, 1994, defendants moved to
dismiss plaintiffs' claims; plaintiffs filed their
opposition papers on or about January 10, 1995. This motion
remains pending. 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. The defendants in this
action 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.
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 bases 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 bases
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.
16. Subsequent Events
On August 3, 1995, the Individual General Partners
approved the second quarter 1995 cash distribution totaling
$2,077,699 which represents $67,663 as return of capital
from the sale of Petco, net investment income and realized
gains of $1,828,905 from Mezzanine Investments and $181,131
from Temporary Investments. The total amount distributed to
Limited Partners was $1,352,664 or $7.62 per Unit, which was
paid on August 14, 1995. The Managing General Partner
received a total of $4,820, with respect to its interest in
the Retirement Fund, and $719,733 in performance incentive
fees. Thomas H. Lee, as an Individual General Partner,
received $482 with respect to his interest in the Retirement
Fund.
On July 20,1995 Dickstein Partners, Inc. withdrew their
offer to purchase the outstanding common stock of Hills
Stores, Co. for $27 per share.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SUPPLEMENTAL SCHEDULE OF REALIZED GAINS AND LOSSES
FOR THE SIX MONTHS ENDED JUNE 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 underwriters overallotment option exercised on May 26, 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 JUNE 30, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
UNREALIZED UNREALIZED
APPRECIATION APPRECIATION TOTAL TOTAL
(DEPRECIATION) (DEPRECIATION) UNREALIZED UNREALIZED
FAIR FOR THE THREE FOR THE SIX APPRECIATION APPRECIATION
SECURITY INVESTMENT VALUE MONTHS ENDED MONTHS ENDED (DEPRECIATION) AT (DEPRECIATION) AT
COST JUNE 30, 1995 JUNE 30, 1995 DECEMBER 31, 1994 JUNE 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 30,258 10,267 570 29,687 30,257
Hills Stores Company
Common Stock 16,153 5,876 918 796 (11,073) (10,277)
Petco Animal Supplies, Inc.
Common Stock 1,023 1,451 (155) 667 (239) 428
Playtex Products, Inc.
Common Stock 2,830 1,790 321 482 (1,522) (1,040)
Stanley Furniture
Preferred Stock - - - - - -
Common Stock 233 141 9 (44) (48) (92)
TOTAL UNREALIZED APPRECIATION
(DEPRECIATION) FROM PUBLICLY
TRADED SECURITIES $11,360 $(5,120) $24,396 $ 19,276
</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 JUNE 30, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
UNREALIZED UNREALIZED
APPRECIATION APPRECIATION TOTAL TOTAL
(DEPRECIATION) (DEPRECIATION) UNREALIZED UNREALIZED
FOR THE THREE FOR THE SIX APPRECIATION APPRECIATION
MONTHS ENDED MONTHS ENDED (DEPRECIATION) (DEPRECIATION)
INVESTMENT FAIR JUNE 30, JUNE 30, AT DECEMBER 31, AT JUNE 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)
Hills Department Stores, Inc.
Common Stock Rights 2,418 723 - - (1,695) (1,695)
Stablex Canada Inc.
Subordinated Notes* 7,565 5,737 - - (1,828) (1,828)
TOTAL UNREALIZED DEPRECIATION
FROM NON PUBLIC SECURITIES - (1,579) (4,523) (6,102)
NET UNREALIZED APPRECIATION (DEPRECIATION) $11,360 $(6,699) $19,873 $13,174
* Restricted security.
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity & Capital Resources
As of June 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 June 30, 1995 were $111,038,819, after
returns of capital to partners, volume discounts, sales
commissions and organizational, offering, sales and
marketing expenses.
At June 30, 1995, the Retirement Fund had outstanding a
total of $97,535,161 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 three months ended June 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 June 30, 1995, the Retirement Fund has in its
portfolio of investments $739,601 of payment-in-kind
securities, which excludes $3,110,711 of payment-in-kind
securities received from notes placed on non-accrual status
and $1,224,548 of payment-in-kind equity securities.
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.
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 June 30,
1995, the amount that is deferred in payment (the "Deferred
Distribution Amount") to the Managing General Partner in
accordance with the Partnership Agreement is $6,214,293. 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 August 14, 1995,
the Deferred Distribution Amount owed to the Managing
General Partner is $5,582,863.
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 August 14, 1995, the reserve
balance has been reduced to $9,322,206 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 has returned $4,714,921 of the reserve to
partners during the six months ended June 30, 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 year to two 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.
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
Hills and 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.
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 six months ended June 30, 1995, the Retirement
Fund had investment income of $3,150,209, as compared to
$5,835,696 for the same period in 1994. The decrease of
$2,685,487 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 the first and second quarters of 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 June 30, 1995, the Retirement
Fund had investment income of $1,370,932, compared to
$1,743,970 for the same period in 1994.
Major expenses for the period ended June 30, 1995
consisted of the Investment Advisory Fee, the Fund
Administration Fee, legal and professional fees 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 six months ended June 30, 1995 and 1994 were $544,916
and $644,315, respectively, and were 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
June 30, 1995 and 1994, the Retirement Fund paid $272,687
and $322,920, respectively, in Investment Advisory Fees.
The decrease in 1995's as compared to 1994's Investment
Advisory Fee was a direct result of sales of investments,
returns of capital to partners and realized losses on
investments.
Legal and professional fees for the six months ended June
30, 1995 and 1994 were $317,275 and $808,729, respectively.
These fees were primarily incurred in connection with the
litigation proceedings as described in Note 12 to the
Financial Statements. For the three months ended June 30,
1995 and 1994, the Retirement Fund incurred $203,048 and
$480,590, 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.
The Fund Administration Fees paid to the Fund
Administrator for the six months ended June 30, 1995 and
1994 were $303,951 and $326,684, respectively, and were
calculated at an annual rate of 0.45% of the excess of net
offering proceeds less 50% of capital reductions, plus a
percentage of out-of-pocket expenses. For the three months
ended June 30, 1995 and 1994, the Retirement Fund paid
$152,027 and $163,330, 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 primarily
consist of printing, audits, tax preparation and custodian
fees. For the six months ended June 30, 1995 and 1994
reimbursable expenses totaled $49,964 and $130,332,
respectively. The decrease from 1994 to 1995 reflects the
amounts paid in 1994 for expense incurred by the Fund
Administrator in prior years.
For the six months ended June 30, 1995 and 1994, the
Retirement Fund incurred $65,717 and $37,200, 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 12 to the Financial
Statements).
For the six months ended June 30, 1995, the Retirement
Fund had net investment income of $1,866,030, as compared to
$3,862,541 for the same period in 1994. For the three
months ended June 30, 1995, the Retirement Fund had net
investment income of $666,856, as compared to $618,986 for
the same period in 1994. This decrease in 1995 as compared
to 1994 is primarily attributable to higher investment
income recorded on Mezzanine Investments in 1994 due to
Petco Animal Supplies' March 17, 1994 initial public
offering and recognition of thirty-eight and one half months
of interest, discount and dividend income.
Net Assets
The Retirement Fund's net assets decreased by $11,472,576
during the six months ended June 30, 1995, due to the
payment of cash distributions to partners of $14,475,872
($5,395,462 of the cash distributions paid was return of
capital from the sale of EquiCredit and the return of a
portion of the reserve to Limited Partners) and net
unrealized depreciation of $6,699,029, partially offset by
realized gain from the sales of EquiCredit and Petco of
$7,836,295 and net investment income of $1,866,030. The
1995 decrease in net assets over the six months is smaller
than the decrease in the comparable 1994 period. This
compares to the six months ended June 30, 1994's net assets
decreasing by $36,156,804 due to the payment of cash
distribution to partners of $28,299,249 ($13,246,259 of the
cash distributions paid was return of capital from the sales
of portfolio investments) and net unrealized depreciation of
$11,988,635, partially offset by net investment income of
$3,862,541 and realized gains of $268,539.
The Retirement Fund's net assets increased by $6,346,520
during the three months ended June 30, 1995, due to net
investment income of $666,856 and realized gains of $212,949
and net unrealized appreciation of $11,360,128, partially
offset by the payment of cash distributions to partners of
$5,893,413 ($4,715,087 of the cash distributions paid was
from the return of a portion of the reserve to Limited
Partners). This compares to the three months ended June 30,
1994's net assets decreasing by $23,150,527 due to the
payment of cash distributions to partners of $14,934,550
($12,909,714 of the cash distributions paid was return of
capital from the sales of portfolio investments) and net
unrealized depreciation of $8,834,963, partially offset by
net investment income of $618,986.
Unrealized Appreciation and Depreciation on Investments
For the six months ended June 30, 1995, the Retirement
Fund recorded net unrealized depreciation of $6,699,029 (of
which $5,119,829 is net unrealized depreciation from
publicly traded securities and $1,529,200 is net unrealized
depreciation from non-public securities) compared to a net
unrealized depreciation of $11,988,635 for the same period
in 1994. On June 30, 1995, the Retirement Fund's cumulative
net unrealized appreciation on investments totaled
$13,174,071. This decrease in unrealized depreciation can
be attributed primarily to the increase in valuation of
First Alert at June 30, 1995, partially offset by the
reversal of unrealized appreciation due to the sale of
EquiCredit during the first quarter of 1995.
For the three months ended June 30, 1995, the Retirement
Fund recorded net unrealized appreciation on investments of
$11,360,128 (all of which is from publicly traded
securities), compared to a net unrealized depreciation of
$8,834,963 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 June 30, 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 substantial 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.
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, Hills 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 June 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 30 - 31).
Realized Gains and Losses
For the six months ended June 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 the three months ended June 30, 1995, the Retirement
Fund had net realized gains from investments of $212,949 as
compared to no gain for the same period in 1994.
For additional information, please refer to the
Supplemental Schedule of Realized Gains and Losses (Schedule
1 - page 29).
Cash Distributions
On August 3, 1995, the Individual General Partners
approved the second quarter 1995 cash distribution totaling
$2,077,699 which represents $67,663 as return of capital
from the sale of Petco, net investment income and realized
gains of $1,828,905 from Mezzanine Investments and $181,131
from Temporary Investments. The total amount distributed to
Limited Partners was $1,352,664 or $7.62 per Unit, which was
paid on August 14, 1995. The Managing General Partner
received a total of $4,820, with respect to its interest in
the Retirement Fund, and $719,733 in performance incentive
fees. Thomas H. Lee, as an Individual General Partner,
received $482 with respect to his interest in the Retirement
Fund.
<PAGE>
Part II - Other Information
Items 1 - 5 are herewith omitted as the response to all
items is either none or not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule for the
quarter ending June 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
August, 1995.
ML-LEE ACQUISITION FUND (RETIREMENT
ACCOUNTS) II, L.P.
By: Mezzanine Investments, L.P.,
Managing General Partner
By: ML Mezzanine II Inc.,
its General Partner
Dated: August 14, 1995 /s/ James V. Caruso
James V. Caruso
Executive Vice President and Director
Dated: August 14, 1995 /s/ Audrey Bommer
Audrey Bommer
Vice President and Assistant Treasurer
(Chief Accounting 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
August, 1995.
ML-LEE ACQUISITION FUND (RETIREMENT
ACCOUNTS) II, L.P.
By: Mezzanine Investments, L.P.,
Managing General Partner
By: ML Mezzanine II Inc.,
its General Partner
Dated: August 14, 1995 James V. Caruso
Executive Vice President and Director
Dated: August 14, 1995 Audrey Bommer
Vice President and Assistant Treasurer
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from the second 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 97,535,161
<INVESTMENTS-AT-VALUE> 110,718,951
<RECEIVABLES> 550,012
<ASSETS-OTHER> 1,705
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 122,799,747
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 680,892
<TOTAL-LIABILITIES> 680,892
<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> 13,174,071
<NET-ASSETS> 122,118,854
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,150,209
<OTHER-INCOME> 0
<EXPENSES-NET> 1,284,180
<NET-INVESTMENT-INCOME> 1,866,030
<REALIZED-GAINS-CURRENT> 7,836,295
<APPREC-INCREASE-CURRENT> (6,699,029)
<NET-CHANGE-FROM-OPS> 3,003,296
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,456,758
<DISTRIBUTIONS-OF-GAINS> 7,624,896
<DISTRIBUTIONS-OTHER> 5,396,018
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (11,472,576)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 544,916
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,284,180
<AVERAGE-NET-ASSETS> 127,855,142
<PER-SHARE-NAV-BEGIN> 611.69
<PER-SHARE-NII> 4.87
<PER-SHARE-GAIN-APPREC> (66.92)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 35.45
<RETURNS-OF-CAPITAL> 4.45
<PER-SHARE-NAV-END> 651.08
<EXPENSE-RATIO> 0.005
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
