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 Quarter Ended March 31, 1995
Commission File Number 0-17382
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
(Exact name of registrant as specified in its
Governing Instruments)
Delaware 13-3426817
(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) 236-7303
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 1. Financial Information
Page
Item 1. Financial Statements
Statements of Assets, Liabilities and Partners'
Capital as of March 31, 1995 and December 31, 1994 3
Statements of Operations - For the Quarters Ended
March 31, 1995 and March 31, 1995 4
Statements of Changes in Net Assets - For the Quarters
Ended March 31, 1995 and March 31, 1994 5
Statements of Cash Flows - For the Quarters Ended
March 31, 1995 and March 31, 1994 6
Statement of Changes in Partner's Capital 7
Schedule of Portfolio Investments - March 31, 1995 8
Notes to Financial Statements 15
Supplemental Schedule of Realized Gains and Losses -
(Schedule 1) 28
Supplemental Schedule of Unrealized Appreciation and
Depreciation - (Schedule 2 ) 29
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 31
Part II. Other Information 40
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<TABLE>
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
March 31,
1995 December
(Unaudited) 31, 1994
<S> <C> <C>
ASSETS:
Investments - Notes 2,4
Portfolio Investments, at fair value
Managed Companies $ 78,025 $ 95,185
(amortized cost $71,803 at March 31,
1995 and $72,484 at December 31, 1994)
Non-Managed Companies 20,015 21,592
(amortized cost $24,422 at March 31,
1995 and $24,420 at December 31, 1993)
Temporary Investments, at amortized 16,732 16,370
cost(cost $16,329 at March 31, 1995 and
$16,329 at December 31, 1994)
Cash 3 1
Accrued Interest Receivable - Note 2 1,680 1,217
Prepaid Expenses 3 4
TOTAL ASSETS $116,458 $134,369
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities
Professional Fees Payable $ 88 $ 126
Independent General Partners' Fees
Payable - Note 11 32 62
Deferred Interest Income - Note 2 565 590
Total Liabilities 685 778
Partners' Capital - Note 2
Individual General Partner 34 40
Managing General Partner 7,106 6,824
Limited Partners (177,515 Units) 108,633 126,727
Total Partners' Capital 115,773 133,591
TOTAL LIABILITIES AND PARTNERS' CAPITAL $116,458 $134,369
</TABLE>
See the Accompanying Notes to Financial Statements.
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Quarters Ended
March 31, March 31,
1995 1994
<S> <C> <C>
INVESTMENT INCOME - NOTES 2,6:
Interest $ 1,774 $ 3,654
Discount 6 391
Dividends - 46
TOTAL INCOME 1,780 4,091
EXPENSES:
Investment Advisory Fee - Note 8 272 321
Fund Administration Fee - Note 9 152 163
Amortization of Deferred Organization
Expenses - Note 2 - 12
Professional Fees 115 328
Independent General Partners' Fees 40 22
and Expenses - Note 11
Insurance Expense 1 1
TOTAL EXPENSES 580 847
NET INVESTMENT INCOME 1,200 3,244
Net Realized Gain on Investments -
Note 4 and Schedule 1 7,623 269
Net Change in Unrealized Depreciation
from Investments -
Note 5 and Schedule 2: (18,059) (3,154)
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS (9,236) 359
LESS: Incentive Fees to Managing
General Partner (6,922) (465)
NET DECREASE AVAILABLE FOR PRO-RATA
DISTRIBUTION TO ALL PARTNERS $ (16,158) $ (106)
</TABLE>
See the Accompanying Notes to Financial Statements.
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Quarters Ended
March 31, March 31,
1995 1994
FROM OPERATIONS:
<S> <C> <C>
Net Investment Income $ 1,200 $ 3,244
Net Change in Unrealized
Depreciation on Investments -
Note 5 and Schedule 2 (18,059) (3,154)
Net Realized Gain on Investments -
Note 4 and Schedule 1 7,623 269
Net Increase (Decrease) in Net
Assets Resulting From Operations (9,236) 359
Cash Distributions to Partners (8,582) (13,365)
Total Decrease (17,818) (13,006)
NET ASSETS:
Beginning of Year 133,591 278,451
End of Period $115,773 $265,445
</TABLE>
See the Accompanying Notes to Financial Statements.
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Quarters Ended
March 31, March 31,
1995 1994
<S> <C> <C>
INCREASE IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest, Discount and Dividends $ 1,267 $ 4,594
Fund Administration Fee (152) (163)
Investment Advisory Fee (272) (321)
Independent General Partners' Fees and
Expenses (70) (41)
(Purchase) Sale of Temporary Investments,
Net (339) 9,916
Proceeds from Sale of Investments 8,303 890
Reimbursable Administrative Expense (31) -
Professional Fees (122) (344)
Net Cash Provided by Operating Activities 8,584 14,531
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Distributions to Partners (8,582) (13,365)
Net Cash Applied to Financing Activities (8,582) (13,365)
Net Increase in Cash 2 1,166
Cash at Beginning of Period 1 1
Cash at End of Period $ 3 $ 1,167
RECONCILIATION OF NET INVESTMENT INCOME
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES
Net Investment Income $ 1,200 $ 3,244
Adjustments to Reconcile Net Investment
Income to Net Cash Provided by Operating
Activities:
Decrease in Investments 341 22,106
Net Realized Gains on Sales of
Investments 7,623 269
(Increase) Decrease in Accrued Interest
Receivables (513) 503
Amortization of Deferred Organization
Expenses - 12
Decrease in Prepaid Expenses 1 1
Increase in Receivable for Investment
Sold - (11,302)
Decrease in Independent General Partners'
Fees Payable (30) (16)
Decrease in Professional Fees Payable (38) (17)
(Decrease) in Option Payable - (269)
Total Adjustments 7,384 11,287
Net Cash Provided by Operating Activities $ 8,584 $ 14,531
</TABLE>
See the Accompanying Notes to Financial Statements.
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<TABLE>
<CAPTION>
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
For the Quarter Ended March 31, 1995
<S> <C> <C> <C> <C>
Partners' Capital at December 31, $ 40 $ 6,824 $126,727 $133,591
1994
Allocation of Net Investment Income
- Note 3 - 334 866 1,200
Allocation of Net Realized Gain on
Investments - Notes 3,4 2 1,496 6,125 7,623
Allocation of Net Change in
Unrealized Depreciation on
Investments - Notes 2,5 (5) (51) (18,003) (18,059)
Cash Distributions to Partners (3) (1,497) (7,082) (8,582)
Partners' Capital at March 31, 1995 $ 34 $ 7,106 $108,633 $115,773
- Notes 2,3
</TABLE>
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)
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
Fair
Principal Investmen Investmen Value % Of
Amount Investment t t (Note 2) Total
Shares Date Cost Investmen
ts
<S> <C> <C> <C> <C> <C>
MEZZANINE INVESTMENTS
MANAGED COMPANIES
ANCHOR ADVANCED PRODUCTS, INC. (b)
$3,133 Anchor Advanced Products, Inc., Sr. Sub. Nt. 04/30/90 $3,133 $3,133
11.67% due 04/30/00 (c)
$4,178 Anchor Advanced Products, Inc., Jr. Sub. Nt. 04/30/90 4,178 4,178
17.5% due 04/30/00 (c)
87,033 Shares Anchor Holdings, Inc., Common Stock (d) 04/30/90 827 827
132,290 Anchor Holdings, Inc., Common Stock Purchase 04/30/90 0 0
Warrants Warrants (d)
(14.1%of fully diluted common equity assuming 8,138 8,138 7.09
exercise of warrants)
BIG V SUPERMARKETS, INC. (b)
$6,963 Big V Supermarkets, Inc., Sr. Sub. Nt. 14.14% 12/27/90 6,963 6,963
due 03/15/01(c)
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 7.98
COLE NATIONAL CORPORATION
717 Warrants Cole National Corporation, Common Stock 09/26/90 0 0
Purchase Warrants(d)
(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 03/30/90 3,395 3,395
03/31/00(c)(h)
$3,395 Lee-CST Acquisition Corp., Jr. Sub. Nt. 18% due 03/30/90 3,395 3,395
03/31/00(c)(h)
$1,225 CST Office Products Corp., Sr. Sub. Nt. 15% due Various 104 104
03/31/00(c)(f)(h)
$1,628 CST Office Products Corp., Jr. Sub. Nt. 15% due Various 0 0
06/30/96(c)(f)(h)
87,051 Shares Lee-CST Holding Corp., Common Stock (d) 03/30/90 696 696
94,668 Lee-CST Holding Corp., Common Stock Purchase 03/30/90 0 0
Warrants Warrants (d)
(12.4%of fully diluted common equity assuming 7,590 7,590 6.61
exercise of warrants)
</TABLE>
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)
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
Fair
Principal Investmen Investmen Value % Of
Amount Investment t t (Note 2) Total
Shares Date Cost Investmen
ts
<S> <C> <C> <C> <C> <C>
FIRST ALERT, INC.(b) - Note 5
2,281,524 First Alert, Inc., Common Stock(a)(d) 07/31/92 $3,680 $23,671
Shares
(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 23,671 20.62
GHIRARDELLI HOLDINGS CORPORATION(b) - Note 16
$5,328 Ghirardelli Holdings Corporation, 13% 03/31/92 5,328 5,328
Subordinated Note due 03/31/02(c)
532,800 Ghirardelli Holdings Corporation, Common 03/31/92 1,066 1,066
Shares Stock(d)
(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 6,394 6,394 5.57
HILLS STORES COMPANY (b) - Notes 4,5,16
244,818 Hills Stores Company, Common Stock(a)(j) 04/03/90 16,153 4,958
Shares
116,994 Hills Stores Company, Common Stock Rights(d) Various 2,418 723
Rights
(2% of fully diluted common equity assuming 18,571 5,681 4.95
exercise of options)
</TABLE>
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)
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
Fair
Principal Investmen Investmen Value % Of
Amount Investment t t (Note 2) Total
Shares Date Cost Investmen
ts
<S> <C> <C> <C> <C> <C>
PETCO ANIMAL SUPPLIES, INC. (b) - Notes 5,16
126,530 Petco Animal Supplies, Common Stock(a)(d) Various $2,074 $2,657
Shares
(2.1% 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 2,074 2,657 2.32
PLAYTEX PRODUCTS, INC. - Notes 5,7
183,560 Playtex Products, Inc., Common Stock(a)(d) 03/29/90 2,830 1,468
Shares
(0.6% 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 1,468 1.28
RESTAURANTS UNLIMITED
$3,956 Restaurants Unlimited, 11% Sub. Nt. due 06/03/94 3,956 3,956
06/30/02(c)
256,083 Restaurants Unlimited, Common Stock Warrants(d) 06/03/94 0 0
Warrants
(1.6% of fully diluted common equity) 3,956 3,956 3.45
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
Fair
Principal Investmen Investmen Value % Of
Amount Investment t t (Note 2) Total
Shares Date Cost Investmen
ts
<S> <C> <C> <C> <C> <C>
STANLEY FURNITURE COMPANY, INC. (b) - Note 5
18,511 Shares Stanley Furniture Company, Inc., Common 06/30/91 $ 233 $ 132
Stock(a)(j)
(0.4% of fully diluted common equity) 233 132 0.12
SUN PHARMACEUTICALS CORP.(b) - Note 7
$9,182 Sun Pharmaceuticals Corp., 12.5% Sub. Nt. due 12/03/92 9,182 9,182
12/31/02(c)
8,218.5 Banana Boat Holding Corp., Common Stock 12/03/92 0 0
Warrants Purchase Warrants(d)(i)
(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 8.00
TOTAL INVESTMENT IN MANAGED COMPANIES $71,804 $78,025 67.99
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
Fair
Principal Investmen Investmen Value % Of
Amount Investment t t (Note 2) Total
Shares Date Cost Investmen
ts
<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 $448
63.20 Shares Biolease, Inc., Common Stock(d) 06/08/94 62 62
26,218 Biotransplant, Inc., Common Stock Purchase 06/08/94 9 9
Warrants Warrants(d)
514 519 0.45
FITZ AND FLOYD/SILVESTRI (b) - Notes 4,5,6
$6,719 FFSC, Inc., Adjustable Rate Sr. Sub. Nt. due 03/31/93 6,709 6,711
03/31/03(c)
$1,581 FFSC, Inc., Adjustable Rate Sr. Sub. Nt. due 07/30/93 1,578 1,578
03/31/03(c)
988,144 FF Holding Co., Common Stock(d) 03/31/93 10 0
Shares
336,364 FF Holding Co., Common Stock(d) 07/30/93 3 0
Shares
8,300 8,289 7.22
FLA. ORTHOPEDICS, INC - Note 6
$3,158 FLA. Acquisition Corp., 12.5% Sub, Nt. due 08/02/93 3,158 1,579
07/31/99(c)(d)
78,960 Shares FLA. Holdings, Inc. Common Stock (d) 08/02/93 987 0
47,376 FLA. Holdings, Inc. Common Stock Purchase 08/02/93 0 0
Warrants Warrants(d)
4,145 1,579 1.38
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
Fair
Principal Investmen Investmen Value % Of
Amount Investment t t (Note 2) Total
Shares Date Cost Investmen
ts
<S> <C> <C> <C> <C> <C>
NATIONAL TOBACCO COMPANY, L.P.
$3,997 National Tobacco Company, 13% Sub. Nt. due 04/14/92 $ 3,997 $ 3,997
10/15/98(c)
$131 National Tobacco Company, 15% Sub. Nt. due 06/30/93 131 131
10/15/98(c)(f)
$266 National Tobacco Company, Class A Partnership 04/14/92 267 267
Int.(d)
4,395 4,395 3.83
SORETOX
$7,061 Stablex Canada, Inc., Sub. Nt. 14% due 12/06/91 7,061 5,233
11/30/01(c)
209,829 176347 Canada, Inc., Common Stock Purchase 12/06/91 0 0
Warrants Warrants(d)
7,061 5,233 4.56
TOTAL INVESTMENT IN NON-MANAGED COMPANIES $24,415 $20,015 17.44
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes Various 62,711 59,311 51.68
Partnership Interest 04/14/92 267 267 0.23
Common Stock, Warrants and Stock Rights Various 33,241 38,462 33.52
TOTAL MEZZANINE INVESTMENTS $96,219 $98,040 85.43
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
Fair
Principal Investmen Investmen Value % Of
Amount Investment t t (Note 2) Total
Shares Date Cost Investmen
ts
<S> <C> <C> <C> <C> <C>
TEMPORARY INVESTMENTS
CERTIFICATES OF DEPOSIT AND TIME DEPOSIT
$ 395 Banque National de Paris, 3.875% due 03/29/96 - 08/18/93 $ 395 $ 395
Note 14
TOTAL INVESTMENT IN C/D'S AND TIME DEPOSITS 395 395 0.34
COMMERCIAL PAPER
$ 7,610 BMW, 5.95% due 04/3/95 03/15/95 7,586 7,608
$ 8,433 Ford Motor Credit, 5.94% due 04/03/95 03/01/95 8,387 8,430
$ 300 GECC, 5.96 due 04/18/95 03/21/95 299 299
TOTAL INVESTMENT IN COMMERCIAL PAPER 16,272 16,337 14.23
TOTAL TEMPORARY INVESTMENTS $ 16,667 $ 16,732 14.57
TOTAL INVESTMENT PORTFOLIO $112,886 $114,772 100.00%
(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 $6 for Mezzanine Investments and
$41 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.
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 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
March 31,1995, 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 March 31, 1995
and December 31, 1994, the Retirement Fund has in its portfolio
of investments $235,451 of payment-in-kind debt securities which
excludes $2,749,090 and $1,723,465, respectively, of payment-in-
kind securities received from notes placed on non-accrual status.
As of March 31, 1995 and December 31, 1994, the Retirement Fund
had in its portfolio of investments $1,239,188 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.
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 Fund 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 March 31, 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 March 31, 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
For the quarter ended March 31, 1995, the Retirement Fund
made no purchase of investment securities other than Temporary
Investments.
On September 26, 1994, Barnett Banks, Inc. signed a
definitive agreement to purchase EquiCredit common stock for $32
per share. This transaction closed on January 27, 1995 and 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 on
February 14, 1995.
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 March 31, 1995, the reserve balance was
reduced to $15,901,927 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
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.
As further discussed in Note 16, the Retirement Fund approved a
follow on investment in Ghirardelli of $1,864,800 and has
returned $4,714,921 of the reserve to partners subsequent to the
quarter ended March 31,1995.
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 quarter ended March 31, 1995, the Retirement Fund
recorded net unrealized depreciation of $18,059,157 and as of
this date, the Retirement Fund's cumulative net unrealized
appreciation on investments totaled $1,813,945.
For the quarter ended March 31, 1994, the Retirement Fund
recorded net unrealized depreciation on investments of
$3,153,672.
For additional information, please refer to the Schedule of
Unrealized Appreciation and Depreciation (Schedule 2 - pages 29-
30).
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 on January 1, 1994.
- FLA Orthopedics, Inc. on January 1, 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 Distributions paid to the Managing General
Partner (see Note 12). For the quarters ended March 31, 1995 and
1994, the Retirement Fund paid $272,229 and $321,395,
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
Distributions paid to the Managing General Partner (see 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 quarters ended March 31, 1995 and 1994, the
Retirement Fund paid $151,924 and $163,354, 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 quarter ended March 31, 1995, the
Retirement Fund paid $31,025 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. During the first quarter of 1995, the Retirement Fund
paid each Independent General Partner $$2,002 as non-recurring,
additional compensation with respect to 1994. For the quarters
ended March 31, 1995 and 1994, the Retirement Fund incurred
$40,068 and $22,407, 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 quarter ended March 31, 1995, the Retirement Fund
paid $31,025 owed to the Fund Administrator for reimbursable out-
of-pocket expenses (please refer to Note 10 for further
information).
In the first quarter of 1995, the Retirement Fund paid the
Individual General Partner distributions totaling $2,504 and paid
the Managing General Partner distributions totaling $1,497,106
(which includes $1,472,068 of incentive fees and $25,038 with
respect to their interest in Fund II). Of this incentive fee
amount, 95% or $1,398,465 was paid to the Investment Advisor and
the remaining 5% totaling $73,603 was paid to ML Mezzanine II
Inc. As of March 31, 1995, the Managing General Partner has
earned $25,045,531 in Incentive Fees of which $6,922,173 is
deferred in payment to the Managing General Partner as a Deferred
Distribution Amount in accordance with the Partnership Agreement.
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
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. 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. 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. 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 May 8, 1995, the Individual General Partners approved the
first quarter 1995 cash distribution totaling $5,893,412 which
represents $4,715,161 as a return of the reserve for follow-on
investments, net investment income of $978,818 from Mezzanine
Investments and $191,433 from Temporary Investments. The total
amount distributed to Limited Partners was $4,899,414 or $27.60
per Unit, which was paid on May 15, 1995. The Managing General
Partner received a total of $13,800, with respect to its interest
in the Retirement Fund, and $978,818 in performance incentive
fees. Thomas H. Lee, as an Individual General Partner, received
$1,380 with respect to his interest in the Retirement Fund.
On March 31, 1995, Petco announced a public offering of 3
million shares of common stock, of which approximately 2 million
would be sold by Petco and approximately 1 million would be sold
by Petco's shareholders, including the Retirement Fund. The
offering was effected on April 27, 1995 and the Retirement Fund
sold 58,561 shares for a net price of $19.7125 per share. The
Retirement Fund received proceeds of approximately $1.5 million,
realizing a gain of approximately $195,000. The Retirement Fund
may sell up to 8,784 additional shares which represents the
underwriters' overallotment option, which can be exercised until
May 27, 1995.
On May 3, 1995 Dickstein Partners, Inc. offered to buy the
outstanding common stock of Hills Stores, Co. for $25 per share.
On May 8, 1995, the Independent General Partners approved a
return of the reserve for follow-on investments to the Retirement
Fund's partners of $4,714,921 and approved a follow-on investment
in Ghirardelli Holdings Corp. of $1,864,800, which will reduce
the reserve for follow-on investments to $9,322,206. The follow-
on investment in Ghirardelli is contingent upon the Retirement
Fund receiving certain documents related to the transaction.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SUPPLEMENTAL SCHEDULE OF REALIZED GAINS AND LOSSES
FOR THE QUARTER ENDED MARCH 31, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NUMBER OF INVESTMENT NET
SECURITY SHARES COST PROCEEDS REALIZED GAIN
<S> <C> <C> <C> <C>
EquiCredit Corp.
Common Stock 259,474 $ 680 $ 8,303 $ 7,623
TOTAL $ 680 $ 8,303 $ 7,623
</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 MARCH 31, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
UNREALIZED
APPRECIATION TOTAL TOTAL
(DEPRECIATION UNREALIZED UNREALIZED
) FOR THE APPRECIATION APPRECIATION
INVESTMEN FAIR QUARTER ENDED (DEPRECIATIO (DEPRECIATIO
SECURITY T VALUE MARCH 31, N) AT N) AT MARCH
COST 1995 DECEMBER 31, 31, 1995
1994
<S> <C> <C> <C> <C>
PUBLICLY TRADED/UNDERLYING
SECURITY PUBLICLY TRADED:
EquiCredit Corp.
Common Stock* $ - $ - $ (7,591) $ 7,591 $ -
First Alert, Inc.
Common Stock 3,320 23,671 (9,697) 29,687 19,990
Hills Stores Company
Common Stock 30,247 4,958 (122) (11,073) (11,195)
Petco Animal Supplies, Inc.
Common Stock 3,885 2,657 822 (239) 583
Playtex Products, Inc.
Common Stock 5,299 1,468 161 (1,522) (1,361)
Stanley Furniture
Preferred Stock - - - - -
Common Stock 291 132 (53) (48) (101)
TOTAL UNREALIZED APPRECIATION
(DEPRECIATION) FROM PUBLICLY
TRADED SECURITIES $ (16,480) $ 24,396 $ 7,916
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SUPPLEMENTAL SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
FOR THE PERIOD ENDED MARCH 31, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Unrealized Total Total
Appreciation Unrealized Unrealized
/ Appreciation Appreciation
(Depreciatio / /
Investme Fair n) for the (Depreciatio (Depreciatio
SECURITY nt Value Quarter n) At n) At March
Cost Ended March December 31, 31, 1995
31, 1995 1994
<S> <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 Notes 3,158 1,579 (1,579) - (1,579)
Hills Department Stores, Inc.
Subordinated Note - - - - -
Common Stock Purchase Warrants - - - - -
Common Stock Rights 2,418 723 - (1,695) (1,695)
Stablex Canada Inc.
Subordinated Note* 7,061 5,233 - (1,828) (1,828)
TOTAL UNREALIZED APPRECIATION
(DEPRECIATION) FROM NON PUBLIC (1,579) (4,523) (6,102)
SECURITIES
NET UNREALIZED APPRECIATION $(18,059) $ 19,873 $ 1,814
(DEPRECIATION)
* Restricted security.
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity & Capital Resources
As of March 31, 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 March 31, 1995 were
$115,379,293, after returns of capital to partners, volume
discounts, sales commissions and organizational, offering, sales
and marketing expenses.
At March 31, 1995, the Retirement Fund had outstanding a
total of $96,217,837 invested in Mezzanine Investments
representing $71,803,450 Managed and $24,414,387 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 placed on non-accrual status,
the Retirement Fund, during the quarter ended March 31, 1995,
received no additional debt securities in lieu of cash interest
payments ("payment-in-kind" securities) as provided in certain of
its subordinated note investments. As of March 31, 1995, the
Retirement Fund has in its portfolio of investments $235,451 of
payment-in-kind securities, which excludes $2,749,090 of payment-
in-kind 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.
On January 27, 1995, the Fund completed its sale of 259,474
shares of EquiCredit common stock to Barnett Bank at $32 per
share (see Note 4 to the Financial Statements). As provided by
the Partnership Agreement, the Managing General Partner of the
Retirement Fund earned and received incentive fees of $1,415,363,
and received $24,411 with respect to its interest in the
Retirement Fund and the Limited Partners received approximately
$6.8 million or $38.65 per Unit. These amounts were distributed
on February 14, 1995. As provided by the Partnership Agreement,
the Managing General Partner of the Retirement Fund received
incentive fees from this transaction to the extent certain
returns of capital and priority returns were achieved. As of
February 14, 1995, the amount that is deferred in payment (the
"Deferred Distribution Amount") to the Managing General Partner
in accordance with the Partnership Agreement was $6,922,173. 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 May 12, 1995, the Deferred
Distribution Amount owed to the Managing General Partner is
$5,943,354.
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 May 12, 1995, the reserve balance was
reduced to $11,187,006 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 and a return of
the reserve to the Retirement Fund's partners of $4,714,921. The
return of the reserve will be distributed with the first quarter
distribution on May 15, 1995. The Retirement Fund has also
approved a follow-on investment of $1,864,800 in Ghirardelli
Holding Corp. The follow-on investment is contingent upon the
Retirement Fund receiving certain documents relating to the
transaction. The level of 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 large outstanding Deferred
Distribution Amount noted, 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 under 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 quarter ended March 31, 1995, the Retirement Fund had
investment income of $1,779,277, as compared to $4,091,726 for
the same period in 1994. This decrease of $2,312,449 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 $1,639,977 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 after distributions of return of capital to partners and
(ii) the placement of a debt security on non-accrual status
effective January 1, 1995.
Major expenses for the period consisted of the Investment
Advisory Fee, the Fund Administration Fee, professional fees and
Independent General Partners' Fees and Expenses.
Professional fees for the quarters ended March 31, 1995 and
1994 were $114,227 and $328,139, respectively. Professional fees
were primarily incurred in connection with the litigation
proceedings as described in Note 12 to the Financial Statements.
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 quarters
ended March 31, 1995 and 1994 were $272,229 and $321,395,
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. The decrease in 1995's as compared to 1994's Investment
Advisory Fees was a direct result of the sales of investments,
returns of capital to partners and realized losses on
investments.
The Fund Administration Fees paid to the Fund Administrator for
the quarters ended March 31, 1995 and 1994 were $151,924 and
$163,354, 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. 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 quarter ended March 31, 1995, reimbursable
expenses totaled $484.
For the quarters ended March 31, 1995 and 1994, the Retirement
Fund incurred $40,068 and $22,407, 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.
For the quarter ended March 31, 1995, the Retirement Fund had net
investment income of $1,199,174, as compared to $3,243,555 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 $17,818,095 during
the quarter ended March 31, 1995, due to the payment of cash
distributions to partners of $8,582,458 ($679,869 of the cash
distributions paid was return of capital from the sales of portfolio
investments) and net unrealized depreciation of $18,059,157
partially offset by net investment income of $1,199,174 and realized
gains from investments of $7,623,346. This compares to the quarter
ended March 31, 1994's net assets decreasing by $13,006,227 due to
the payment of cash distribution of $13,364,699 partially offset by
net investment income of $3,243,555 and realized gains form
investments of $268,539.
Unrealized Appreciation and Depreciation on Investments
For the quarter ended March 31, 1995, the Retirement Fund
recorded net unrealized depreciation of $18,059,157 and on this
date, the Retirement Fund's cumulative net unrealized
appreciation on investments totaled $1,813,945. This decrease
can be attributed primarily to the reversal of unrealized
appreciation from the sale of EquiCredit Corporation's Common
Stock and the decrease in valuation on First Alert, Inc.
For the quarter ended March 31, 1994, the Retirement Fund
recorded net unrealized depreciation on investments of
$3,153,672.
The Retirement Fund's valuation of the Common Stock of First
Alert, Hills, Petco, Playtex and Stanley Furniture reflect their
closing market prices at March 31, 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 March 31, 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 Item 1.
Financial Statements - Supplemental Schedule of Unrealized
Appreciation and Depreciation (Schedule 2 - pages 29-30).
Realized Gains and Losses
For the quarter ended March 31, 1995, the Retirement Fund had
net realized gains from the sale of EquiCredit of $7,623,346, as
compared to $268,539 for the same period in 1994.
For additional information, please refer to Item 1.
Financial Statements - Supplemental Schedule of Realized Gains
and Losses (Schedule 1 - page 28).
Cash Distributions
On May 8, 1995, the Individual General Partners approved the
first quarter 1995 cash distribution totaling $5,893,412 which
represents $4,715,161 as a return of the reserve for follow-on
investments, net investment income of $978,818 from Mezzanine
Investments and $191,433 from Temporary Investments. The total
amount distributed to Limited Partners was $4,899,414 or $27.60
per Unit, which was paid on May 15, 1995. The Managing General
Partner received a total of $13,800, with respect to its interest
in the Retirement Fund, and $978,818 in performance incentive
fees. Thomas H. Lee, as an Individual General Partner, received
$1,380 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, Article 6 - Financial Data Schedule for the
quarter ending March 31, 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 12th day of May, 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: May 12, 1995 /s/ Joseph W. Sullivan
Joseph W. Sullivan
Vice President and Treasurer
(Chief Financial Officer)
Dated: May 12, 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 12th day of May, 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: May 12, 1995
Joseph W. Sullivan
Vice President and Treasurer
(Chief Financial Officer)
Dated: May 12, 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 first
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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<INVESTMENTS-AT-COST> 112,884,431
<INVESTMENTS-AT-VALUE> 114,771,105
<RECEIVABLES> 1,679,833
<ASSETS-OTHER> 2,889
<OTHER-ITEMS-ASSETS> 3,425
<TOTAL-ASSETS> 116,457,252
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 684,917
<TOTAL-LIABILITIES> 684,917
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 177,515
<SHARES-COMMON-PRIOR> 177,515
<ACCUMULATED-NII-CURRENT> 3,137,026
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,813,943
<NET-ASSETS> 115,772,335
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,779,227
<OTHER-INCOME> 0
<EXPENSES-NET> 580,103
<NET-INVESTMENT-INCOME> 1,199,174
<REALIZED-GAINS-CURRENT> 7,623,346
<APPREC-INCREASE-CURRENT> (18,059,157)
<NET-CHANGE-FROM-OPS> (9,236,637)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 278,034
<DISTRIBUTIONS-OF-GAINS> 7,624,213
<DISTRIBUTIONS-OTHER> 680,211
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (17,819,095)
<ACCUMULATED-NII-PRIOR> 2,633,946
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 272,229
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 580,103
<AVERAGE-NET-ASSETS> 124,681,882
<PER-SHARE-NAV-BEGIN> 835.12
<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> 733.18
<EXPENSE-RATIO> 0.005
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
