UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Period Ended September 30, 1998
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 - 14th Floor
New York, New York 10080-6123
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:(212) 236-6562
Securities registered pursuant to Section 12(b) of the Act: None
Name of each exchange onwhich 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.
<PAGE>
PART I - FINANCIAL INFORMATION
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements
Statements of Assets, Liabilities and Partners'
Capital as of September 30, 1998 and December 31, 1997
Statements of Operations - For the Three and Nine Months
Ended September 30, 1998 and 1997
Statements of Changes in Net Assets - For the Six
Months Ended September 30, 1998 and 1997
Statements of Cash Flows - For the Nine Months
Ended September 30, 1998 and 1997
Statement of Changes in Partners' Capital at
September 30, 1998
Schedule of Portfolio Investments - September 30, 1998
Notes to Financial Statements
Supplemental Schedule of Realized Gains and Losses - Schedule 1
Supplemental Schedule of Unrealized Appreciation
and Depreciation - Schedule 2
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II. Other Information
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
<S> <C> <C>
(Unaudited)
September 30, 1998 December 31, 1997
------------------ -----------------
Assets:
Investments - Notes 2,4,5
Portfolio Investments at fair value
Managed Companies (amortized cost $31,683
at September 30, 1998 and $38,972 at December 31, 1997) $ 13,738 $ 21,533
Non-Managed Companies (amortized cost $18,894
at September 30, 1998 and at December 31, 1997) 6,777 6,777
Temporary Investments, at amortized cost (cost $3,861
at September 30, 1998 and $4,204 at December 31, 1997) 3,863 4,222
Cash 161 161
Accrued Interest and Other Receivables - Note 2 188 565
Prepaid Expenses - 4
-------- --------
Total Assets $ 24,727 $ 33,262
======== ========
Liabilities and Partners' Capital:
Liabilities
Legal and Professional Fees Payable $ 50 $ 80
Reimbursable Administrative Expenses Payable - Note 8 91 9
Independent General Partners' Fees Payable - Note 9 21 10
Deferred Interest Income - Note 2 67 85
-------- --------
Total Liabilities 229 184
-------- --------
Partners' Capital - Note 2
Individual General Partner 12 14
Managing General Partner 629 202
Limited Partners (177,515 Units) 23,857 32,862
-------- --------
Total Partners' Capital 24,498 33,078
-------- --------
Total Liabilities and Partners' Capital $ 24,727 $ 33,262
======== ========
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
For the Three Months Ended For the Nine Months Ended
------------- ------------- ------------- -------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
Investment Income - Notes 2,4,6:
Interest $ 318 $ 470 $ 958 $ 2,027
Discount, Dividends & Other Income 71 79 286 3,176
------------- ------------- ------------- -------------
Total Income 389 549 1,244 5,203
------------- ------------- ------------- -------------
Expenses:
Investment Advisory Fee - Note 7 130 142 424 472
Fund Administration Fee - Note 8 44 123 134 378
Reimbursable Administrative Expenses-Note 8 96 40 313 104
Legal and Professional Fees 55 -- 203 88
Independent General Partners' Fees and Expenses - Note 9 17 18 63 83
Insurance Expense 1 2 3 4
------------- ------------- ------------- -------------
Total Expenses 343 325 1,140 1,129
------------- ------------- ------------- -------------
Net Investment Income 46 224 104 4,074
Net Realized Gain on Investments - Note 4 and Schedule 1 -- -- 8,066 40
Net Change in Unrealized Depreciation
from Investments Note 5 and Schedule 2:
Publicly Traded Securities (974) 829 (506) (935)
Nonpublic Securities -- (269) -- (3,010)
------------- ------------- ------------- -------------
Subtotal (974) 560 (506) (3,945)
Net Increase (Decrease) in Net Assets
Resulting From Operations (928) 784 7,664 169
------------- ------------- ------------- -------------
Less: Earned MGP Distributions to Managing General Partner -- (17) (1,349) (2,739)
------------- ------------- ------------- -------------
Net Increase (Decrease) Available For Pro-Rata
Distribution To All Partners $ (928) $ 767 $ 6,315 $ (2,570)
============= ============= ============= =============
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
For the Nine Months Ended
------------- -------------
September 30, September 30,
1998 1997
------------- -------------
From Operations:
Net Investment Income $ 104 $ 4,074
Net Realized Gain on Investments 8,066 40
Net Change in Unrealized Depreciation from Investments (506) (3,945)
------------- -------------
Net Increase in Net Assets Resulting from Operations 7,664 169
Cash Distributions to Partners (16,244) (13,576)
------------- -------------
Total Decrease (8,580) (13,407)
Net Assets:
Beginning of Year 33,078 49,257
------------- -------------
End of Period $ 24,498 $ 35,850
============= =============
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
For the Nine Months Ended
------------- -------------
September 30, September 30,
1998 1997
------------- -------------
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from Operating Activities:
Interest, Dividends, Discount and Other Income $ 1,249 $ 4,849
Fund Administration Fee (134) (378)
Investment Advisory Fee (424) (472)
Independent General Partners' Fees and Expenses (51) (92)
(Purchase) Sale of Temporary Investments, Net 343 3,317
Purchase of Portfolio Company Investments -- (1,580)
Proceeds from Sales of Portfolio Company Investments 15,356 7,983
Reimbursable Administrative Expense (231) (99)
Legal and Professional Fees (233) (92)
------------- -------------
Net Cash Provided By Operating Activities 15,875 13,436
------------- -------------
Cash Flows From Financing Activities:
Cash Distributions to Partners (15,875) (13,576)
------------- -------------
Net Cash Applied to Financing Activities (15,875) (13,576)
------------- -------------
Net Decrease in Cash -- (140)
Cash at Beginning of Period 161 141
------------- -------------
Cash at End of Period $ 161 $ 1
============= =============
Reconciliation of Net Investment Income
to Net Cash Provided by Operating Activities
Net Investment Income $ 104 $ 4,074
------------- -------------
Adjustments to Reconcile Net Investment Income
to Net Cash Provided by Operating Activities
Decrease in Investments 7,633 9,685
(Increase) Decrease in Accrued Interest Receivables 4 (354)
Decrease in Prepaid Expenses 3 4
Decrease in Legal and Professional Fees Payable (30) (9)
Increase in Reimbursable Administrative Expenses Payable 83 5
Increase (Decrease) in Independent General Partners' Fees Payable 12 (9)
Net Realized Gains on Sales of Investments 8,066 40
------------- -------------
Total Adjustments 15,771 9,362
------------- -------------
Net Cash Provided by Operating Activities $ 15,875 $ 13,436
============= =============
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Individual Managing
General General Limited
Partner Partner Partners Total
------- --------- -------- --------
For the Nine Months Ended September 30, 1998
Partners' Capital at January 1, 1998 $ 14 $ 202 $ 32,862 $ 33,078
Allocation of Net Investment Income - 11 93 104
Allocation of Net Realized Gain on Investments 2 1,409 6,655 8,066
Allocation of Net Change in Unrealized
Depreciation From Investments - (1) (505) (506)
Cash Distributions to Partners (4) (992) (15,248) (16,244)
------ ----- -------- --------
Partners' Capital at September 30, 1998 $ 12 $ 629 $ 23,857 $ 24,498
====== ===== ======== ========
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
September 30, 1998
(DOLLARS IN THOUSANDS)
UNAUDITED
Fair % Of
Principal Investment Investment Value Total
Amount/Shares Investment Date Cost(e) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
MEZZANINE INVESTMENTS
MANAGED COMPANIES
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
(8.8% of fully diluted common equity) ------------------------------
9,156 9,156 37.56
------------------------------
CINNABON INTERNATIONAL, INC. - Notes 6, 13
(formerly Restaurants Unlimited)
$3,956 Cinnabon, 13% Sub. Nt. due 06/30/02(c)(g) 06/03/94 3,956 3,956
256,083 Warrants Cinnabon, Common Stock Warrants(d) 06/03/94 - -
(1.4% of fully diluted common equity) ------------------------------
3,956 3,956 16.23
------------------------------
COLE NATIONAL CORPORATION
717 Warrants Cole National Corporation, Common Stock Purchase Warrants(d) 09/26/90 - -
(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 ------------------------------
- - 0.00
------------------------------
HILLS STORES COMPANY - Note 5
244,818 Shares Hills Stores Company, Common Stock(a)(d) 04/03/90 16,153 551
33,427 Shares Hills Stores Company, Common Stock(a)(d) 08/21/95 2,418 75
(2.5% of fully diluted common equity) ------------------------------
18,571 626 2.57
------------------------------
TOTAL INVESTMENT IN MANAGED COMPANIES 31,683 13,738 56.36
===============================
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
September 30, 1998
(DOLLARS IN THOUSANDS)
UNAUDITED
Fair % Of
Principal Investment Investment Value Total
Amount/Shares Investment Date Cost(e) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
NON-MANAGED COMPANIES
BIOLEASE, INC. - Note 5
$513 Biolease, Inc., 13% Sub. Nt. due 06/06/04(c) 06/08/94 $ 443 $ 257
63.20 Shares Biolease, Inc., Common Stock(d) 06/08/94 62 -
6,554 Warrants Biotransplant, Inc., Common Stock Purchase Warrants(d) 06/08/94 9 9
-----------------------------
514 266 1.09
-----------------------------
FITZ AND FLOYD - Notes 4,5
$1,580 Fitz and Floyd, 12% Sub. Nt. due 4/15/04(c) 04/11/97 1,580 1,580
5,530 Shares Fitz and Floyd, Series A Preferred Stock(d) 04/11/97 8,248 1,976
33,575 Shares Fitz and Floyd, Common Stock (d) 04/15/97 -- --
1,661,663 Shares Common Stock
Purchased Various $ 13
Surrendered May 1996 $ 0
Realized loss $ (13)
$6,719 Sr. Sub. Note
$1,581 Sr. Sub. Note
Purchased Various $8,248
Exchanged 4/11/97
6,530 Series A Preferred Stock and
33,575 Shares Common Stock $8,248
Realized Gain $ 0
Total Realized Loss $ (13) -----------------------------
9,828 3,556 14.59
-----------------------------
FLA. ORTHOPEDICS, INC - Notes 5,6
12,634 Shares FLA. Holdings, Inc. Series B Preferred Stock (d)(g) 08/02/93 987 -
2,493 Warrants FLA. Holdings, Inc. Common Stock Purchase Warrants(d) 08/02/93 - -
$3,158 12.5% Subordinated Note
Purchased 08/02/93 $ 3,158
Surrendered 08/16/96 $ 0
Realized Loss $(3,158)
78,960 Common Stock
Purchased 08/02/93 $ 987
Exchanged 08/02/96
2,493 Series B Preferred Stock $ 987
Realized Gain $ 0
Total Realized Loss $(3,158) -----------------------------
987 - 0.00
-----------------------------
SORETOX - Notes 5,6
$3,997 Stablex Canada, Inc., Sr. Sub. Nt. 10% due 06/30/07(c)(f)(g) 06/29/95 3,997 2,955
$3,568 Stablex Canada, Inc., Jr. Sub. Nt. 11% due 06/30/09(c)(f)(g) 06/29/95 3,568 -
2,286 Warrants Seaway TLC, Inc. Common Stock Purchase Warrants(d) 06/29/95 - -
-----------------------------
7,565 2,955 12.12
-----------------------------
TOTAL INVESTMENT IN NON-MANAGED COMPANIES $18,894 $ 6,777 27.80
=============================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
September 30, 1998
(DOLLARS IN THOUSANDS)
UNAUDITED
Fair % Of
Principal Investment Investment Value Total
Amount/Shares Investment Date Cost(e) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes Various $20,507 $ 15,711 64.45
Preferred Stock, Common Stock and Warrants Various 30,070 4,804 19.71
-----------------------------
TOTAL MEZZANINE INVESTMENTS $50,577 $ 20,515 84.16
=============================
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$3,865 Ford Motor Credit Corp., 5.35% due 10/5/98 9/28/98 3,861 3,863
-----------------------------
TOTAL INVESTMENT IN COMMERCIAL PAPER 3,861 3,863 15.84
-----------------------------
TOTAL TEMPORARY INVESTMENTS $ 3,861 $ 3,863 15.84
-----------------------------
TOTAL INVESTMENT PORTFOLIO $54,438 $ 24,378 100.00%
=============================
(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 $2 for Temporary Investments.
(f) Inclusive of receipt of payment-in-kind securities.
(g) Non-accrual investment status.
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
(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 the Retirement Fund's investments. The Managing
General Partner is a Delaware limited partnership in which ML Mezzanine II Inc.
is the general partner and Thomas H. Lee Advisors II, L.P., the Investment
Adviser to the Funds, is the limited partner. The Individual General Partners
are Vernon R. Alden, Joseph L. Bower and Stanley H. Feldberg (the "Independent
General Partners") and Thomas H. Lee.
The Retirement Fund 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.
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. The preparation of financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts and
disclosures in the financial statements. Actual reported results could vary from
these estimates.
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. Future confirming events will also
affect the estimates of fair value and the effect of such events on the
estimates of fair value could be material.
<PAGE>
Temporary Investments with maturities of less than 60 days are stated at
amortized cost, which approximates market.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of September
30, 1998. 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 because investments of companies whose equity is
publicly traded are valued at the last price at September 30, 1998, 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 September 30, 1998 and
December 31, 1997, the Retirement Fund had in its portfolio of investments
$504,150 of payment-in-kind debt securities. As of September 30, 1998 and
December 31, 1997, the Retirement Fund has in its portfolio of investments
$14,640 of payment-in-kind equity securities.
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 the 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 as defined in the Partnership
Agreement, 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 report as of September 30, 1998
and for the period then ended has been prepared by management without an audit
by independent cetified public accountants. The results for the period ended
September 30, 1998 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.
<PAGE>
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
Partner and 0.03% to the Individual General Partner.
4. Investment Transactions
On January 6, 1998 the Retirement Fund sold its remaining holdings of
common stock in Stanley. The common stock was sold pursuant to Form S-3
Registration Statement, which was filed by Stanley on December 22, 1997 and
declared effective by the Securities and Exchange Commissionn on December 23,
1997. In connection with the sale, the Retirement Fund sold its remaining 2,773
shares of common stock and received net proceeds of $74,844 or $27 per share.
On March 2, 1998, Sunbeam Corporation and First Alert executed a definitive
merger agreement whereby Sunbeam agreed to acquire all of the outstanding shares
of First Alert for $175 million or $5.25 per share and assume all of First
Alert's debt. Pursuant to this transaction the Retirement Fund tendered all of
their shares of First Alert and received proceeds of $11.9 million. Net
Distributable Proceeds of $62.42 per unit were distributed to Limited Partners
of record as of the date of the closing of this transaction, April 2, 1998.
On March 19, 1998 the Retirement Fund and affiliates of the Thomas H. Lee
Company sold their remaining holdings in Anchor Advanced Products. Pursuant to
this transaction the Retirement Fund sold 219,323 shares of Anchor Common Stock
for approximately $877,292 ($4.00 per share) and recognized a gain of $132,013.
On May 27, 1998, Playtex Products Inc., ("Playtex"), completed a public
offering in the international markets of approximately 4 million shares of
Common Stock at a net price of $13.215 per share (the "Playtex Offering"). Of
the 4 million shares offered, approximately 3.8 million shares were offered by
affiliates of the Thomas H. Lee Company, including the Retirement Fund. As part
of the Playtex Offering, the Retirement Fund sold its remaining investment in
Playtex, consisting of approximately 183,560 shares of Common Stock. The
Retirement Fund received proceeds of $2.4 million and recognized a loss on the
sale of approximately $404,000. Net Distributable Proceeds were distributed to
Limited Partners of record as of May 27, 1998.
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.
<PAGE>
5. Unrealized Appreciation and Depreciation of Investments
For information, please refer to the Supplemental Schedule of Unrealized
Appreciation and Depreciation - Schedule 2.
6. Non-Accrual of Investments
In accordance with the Retirement Fund's accounting policy, the
following securities have been on non-accrual status since the date indicated:
- Cinnabon International on January 1, 1998.
(Cinnabon was sold on October 16, 1998. See Note 13 for futher information)
- FLA Orthopedics, Inc. on January 1, 1995.
- Stablex Canada, Inc. on June 29, 1995.
7. 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 and realized losses), 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 10). For the nine
months ended September 30, 1998 and 1997, the Retirement Fund paid $423,636 and
$472,308, respectively, in Investment Advisory Fees to Thomas H. Lee Advisors
II, L.P.
8. Fund Administration Fees and Expenses
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 Administration Fee and reimbursement for certain
expenses incurred by the Fund Administrator on behalf of the Funds. The Fund
Administration Fee is paid quarterly, in advance, by each Fund. For the nine
months ended September 30, 1998 and 1997, the Retirement Fund incurred $133,500
and $378,288, respectively, in Fund Administration Fees.
Beginning in November of 1997, the Fund Administration Fee changed to an
annual amount of $400,000 for the Retirement Fund and Fund II on a combined
basis, plus 100% of all reimbursable expenses incurred by the Fund
Administrator. Reimbursable expenses primarily consist of printing, audit, tax
preparation and custodian fees.
For the nine months ended September 30, 1998 and 1997, the Retirement Fund
incurred $313,338 and $104,347, respectively, in reimbursable expenses.
For the period ended November 1997, the Fund Administration Fee was
calculated at an annual amount of the greater of $500,000 or 0.45% of the excess
of net offering proceeds less 50% of capital reductions and realized losses plus
a portion of reimbursable expenses incurred by the Retirement Fund.
In addition, ML Mezzanine II Inc., an affiliate of the Fund Administrator
and of Merrill Lynch & Co. Inc., receives 5% of the benefit of any MGP
Distributions paid to the Managing General Partner (see Note 10).
<PAGE>
9. Independent General Partners' Fees and Expenses
As compensation for their services, each Independent General Partner
receives 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. Compensation
for each of the Independent General Partners is reviewed annually. For the nine
months ended September 30, 1998 and 1997, the Retirement Fund incurred $63,380
and $83,263, respectively, in Independent General Partners' Fees and Expenses.
10. 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.
As provided by the Partnership Agreement, the Managing General Partner of
the Retirement Fund is entitled to receive an incentive distribution ("MGP
Distributions") after Limited Partners have received their Priority Return of
10% per annum. The Managing General Partner is required to defer a portion of
any MGP Distribution earned from the sale of portfolio investments in excess of
20% of realized capital gains, net realized capital losses and unrealized
depreciation, in accordance with the Partnership Agreement (the "Deferred
Distribution Amount"). This Deferred Distribution Amount is distributable to the
Partners pro-rata in accordance with their capital contributions, and certain
amounts otherwise later payable to Limited Partners from distributable cash from
operations are instead payable to the Managing General Partner until any
Deferred Distribution Amount is paid.
For the nine months ending September 30, 1998, the Retirement Fund paid
Individual General Partner distributions totaling $4,132 and Managing General
Partner distributions totaling $964,976 (which includes $923,649 of MGP
Incentive Fees). As of September 30, 1998, the Managing General Partner has
earned a total of $30.3 million in MGP Incentive Fees of which $473,527 was
deferred in payment to the Managing General Partner as a Deferred Distribution
Amount. 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
Partners from distributable cash from operations would instead be payable solely
to the Managing General Partner until the Deferred Distribution amount is paid.
<PAGE>
11. Litigation
On April 10, 1998, the parties to the Retirement Fund and ML-Lee
Acquisition Fund II, L.P. ("Fund II" and together with the Retirement Fund, "the
Funds") Securities Litigation No. 92-60(JJF) Seidel, et al v. Thomas H. Lee, et
al, No. 94-422 (JJF) and Seidel, et al v. Thomas H. Lee, et al, No. 95-724
(JJF), three class actions brought on behalf of limited partners of the Funds,
filed with United States District Court for the District of Delaware, a
Stipulation of Settlement preliminarily settling these actions.
The settlement, which was approved by the Court at a hearing on July 16,
1998, provides for dismissal with prejudice of all claims against the Funds, the
Funds' Investment Adviser and certain of its affiliates, the Funds' Managing
General Partner and certain of its affiliates, the Funds' counsel and the Funds'
Independent General Partners. Defendants, other than the Funds, have agreed to
provide cash of $16 million and certain other considerations to members of the
class to settle the claims asserted in these actions. In addition, certain
affiliates of Thomas H. Lee, a General Partner of the Funds, have agreed to
provide up to $14 million for purchases of the Funds' limited partnership units
pursuant to a liquidity option to be offered to eligible class members. The
settelment became effective on August 24, 1998. Defendants continue to deny all
liability in this action.
The Funds have advanced legal expenses incurred by certain defendents and
have included such expenses in Legal and Professional Fees in the Financial
Statements.
12. Income Taxes (Statement of Financial Accounting Standards No. 109)
No provision for income taxes has been made because all income and losses
are allocated to the Retirement Fund's partners for inclusion in their
respective tax returns.
Pursuant to the Statement of Financial Accounting Standards No. 109
Accounting for Income Taxes, the Retirement Fund is required to disclose any
difference in the tax basis of the Retirement Fund's assets and liabilities
versus the amounts reported in the financial statements. As of December 31,
1997, the tax basis of the Retirement Fund's assets are greater than the amounts
reported in the financial statements by $25.7 million. This difference is
attributable to unrealized depreciation on investments which has not been
recognized for tax purposes.
13. Subsequent Events
On October 27, 1998, the Individual General Partners approved the third
quarter 1998 cash distribution consisting of Net Distributable Cash from
Temporary Investments of $27,241 and Distributable Capital Proceeds from
Mezzanine Investments of $14,115. The distribution is as follows: a cash
distribution to Limited Partners in the amount of $.15 per Unit, a cash
distribution of $79 to the Managing General Partner in proportion to its Capital
Contribution and $14,115 as an MGP distribution. Thomas H. Lee as an Individual
General Partner, will receive $8 with respect to his interest in the Retirement
Fund. This cash distribution will be paid on November 16, 1998, in accordance
with the Partnership Agreement.
On October 16, 1998, Cinnabon International, Inc. ("Cinnabon") completed a
Plan of Merger with AFC Enterprises, Inc. ("AFC") whereby AFC acquired Cinnabon
by Merger ("Merger"). Pursuant to the Merger, the Retirement Fund received
proceeds of $4.5 million. In connection with the Cinnabon sale, the Individual
General Partners approved a distribution consisting of Net Distributable Capital
Proceeds of $4,536,339 which includes Return of Capital of $3,955,659. The
distribution is as follows: a cash distribution to Limited Partners of record as
of the effective date of such sale in the amount of $23.45 per Unit, a cash
distribution of $11,725 to the Managing General Partner in proportion to its
Capital Contribution, a cash distribution of $360,714 to the Managing General
Partner as a MGP Distribution and a cash distribution of $1,173 to Thomas H. Lee
as an Individual General Partner, all such distributions to be payable on or
before Novemeber 16, 1998, in accordance with the Partnership Agreement.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SUPPLEMENTAL SCHEDULE OF REALIZED GAINS AND LOSSES
FOR THE nine months ENDED September 30, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Par Value or Investment Net Realized
SECURITY Number of Share Cost Proceeds Gain/(Loss)
- ------------------------------------------ ------------ ------------ ------------ ------------
For the Three Months Ended March 31, 1998
Anchor Advanced Products, Inc.
Common Stock 219,323 $ 745 $ 877 $ 132
Stanley Furniture Company Inc.
Common Stock 2,773 35 75 40
----------- ------------ ------------
Total For the Three Months Ended March 31, 1998 780 952 172
----------- ------------ ------------
For the Three Months Ended June 30, 1998
First Alert, Inc.
Common Stock 2,281,524 3,680 11,978 8,298
Playtex Products, Inc.
Common Stock 183,560 2,830 2,426 (404)
----------- ------------ ------------
Total for the Three Months Ended June 30, 1998 6,510 14,404 7,894
----------- ------------ ------------
Total for the Nine Months Ended September 30, 1998 7,290 15,356 8,066
=========== ============ ============
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
FOR THE PERIOD ENDED September 30, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Unrealized Unrealized
Appreciation/ Appreciation/ Total Total
(Depreciation) (Depreciation) Unrealized Unrealized
for the Three for the Nine Appreciation/ Appreciation/
Months Ended Months ended (Depreciation) (Depreciation)
Investment Fair September 30, September 30, at December 31, at September 30,
SECURITY Cost Value 1998 1998 1997 1998
- --------------------------------- ----------- ------ --------------- -------------- -------------- -------------
Publicly Traded:
Hills Stores Company
Common Stock * $ 18,571 $ 626 $ (974) $ (243) $ (17,702) $ (17,945)
---------- ---------- ---------- ----------
Total Unrealized Depreciation
From Publicly Traded Securities (974) (243) (17,702) (17,945)
---------- ---------- ---------- ----------
Fitz and Floyd
Preferred Stock * 8,248 1,976 -- -- (6,271) (6,271)
Biolease
Common Stock* 62 -- -- -- (62) (62)
Subordinated Notes* 443 257 -- -- (207) (207)
FLA. Orthopedics, Inc.
Preferred Stock* 987 -- -- -- (987) (987)
Soretox
Subordinated Notes* 7,565 2,955 -- -- (4,610) (4,610)
---------- ---------- ---------- ----------
Total Unrealized Depreciation
From Non Public Securities -- -- (12,137) (12,137)
---------- ---------- ---------- ----------
Reversal of Unrealized Appreciation
(Depreciation) from Securities Sold:
First Alert, Inc.
Common Stock -- -- -- (1,170) 1,170 --
Playtex Products, Inc.
Common Stock -- -- -- 948 (948) --
Stanley Furniture
Common Stock -- -- -- (41) 41 --
---------- ---------- ---------- ----------
Total Unrealized Appreciation
(Depreciation) from Investments Sold -- (263) 263 --
---------- ---------- ---------- ----------
Net Unrealized Depreciation $ (974) $ (506) $ (29,576) $ (30,082)
========== ========== ========== ==========
* Restricted Security
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity & Capital Resources
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.
The Retirement Fund invested substantially all of its net proceeds in
Mezzanine Investments, which consisted 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 twelve months 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 is entitled to receive an incentive distribution ("MGP
Distribution") after Limited Partners have received their Priority Return of 10%
per annum. The Managing General Partner is required to defer a portion of any
incentive distribution earned from the sale of portfolio investments in excess
of 20% of realized capital gains, net realized capital losses and unrealized
depreciation, in accordance with the Partnership Agreement (the "Deferred
Distribution Amount"). This Deferred Distribution Amount is distributable to the
Partners pro-rata in accordance with their capital contributions, and certain
amounts otherwise later payable to Limited Partners from Distributable Cash from
operations are instead payable to the Managing General Partner until the
Deferred Distribution Amount is paid in full. As of September 30, 1998, there
was $473,527 outstanding as a Deferred Distribution Amount.
On August 6, 1991, the Independent General Partners approved a reserve for
follow-on investments of $20.0 million for the Retirement Fund. As of November
13, 1998, the reserve for follow-on-investments balance was reduced to $3.4
million due to follow-on investments in both Managed and Non-Managed portfolio
companies Additionally, $7.7 million of the reserve has been returned to the
partners. The level of the reserve was based upon an analysis of potential
Follow-On Investments in specific portfolio companies that may become necessary
to protect or enhance the Retirement Fund's existing investment.
The Managing General Partner has established a reserve for Retirement Fund
expenses of $500,000 from the proceeds received from the sale of Anchor Advanced
Products on April 2, 1997.
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 and the resulting decrease in investment
income as those holdings cease to generate interest income. Pursuant to the
terms of the Partnership Agreement, 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 future cash distributions to Limited Partners 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. Distributions therefore are expected to vary significantly in amount
and may not be made in every quarter.
On October 16, 1998, Cinnabon International, Inc. ("Cinnabon") completed a
Plan of Merger with AFC Enterprises, Inc. ("AFC") whereby AFC acquired Cinnabon
by Merger ("Merger"). Pursuant to the Merger, the Retirement Fund received
proceeds of $4.5 million.
<PAGE>
Investment in High-Yield Securities
The Retirement Fund invests primarily in subordinated debt and preferred
stock securities ("High-Yield Securities"), generally linked with an equity
participation, issued in conjunction with the mezzanine financing of privately
structured, friendly leveraged acquisitions, recapitalizations and other
leveraged financings. High-Yield Securities are debt and preferred equity
securities that are unrated or are rated by Standard & Poor's Corporation as BB
or lower and by Moody's Investor Services, Inc. as Ba or lower. Risk of loss
upon default by the issuer is significantly greater with High-Yield Securities
than with investment grade securities because High-Yield Securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Also, these issuers usually have high levels of indebtedness and are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates, than investment grade issuers. Most of these securities are
subject to resale restrictions and generally there is no quoted market for such
securities.
Although the Retirement Fund cannot eliminate the risks associated with
its investments in High-Yield Securities, it has established 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 met 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 Securities held by the Retirement Fund registered their
equity securities in public offerings. Although the equity securities of the
same class presently held by the Retirement Fund 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 one year 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 two 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 nine months ended September 30, 1998, the Retirement Fund had
investment income of $1,244,356, as compared to $5,203,422 for the same period
in 1997. The decrease in 1998 investment income as compared to 1997 is due to
the sale of income producing portfolio companies. Additionally, as of January 1,
1998, the Retirement Fund began receiving payment-in-kind securities in lieu of
interest which reduced the amount of interest income recognized by the
Retirement Fund for the nine months ending September 30, 1998.
Major expenses for the period consisted of Investment Advisory Fees, Fund
Administration Fees and Reimbursable Administrative Expenses.
The Investment Adviser and Fund Administrator both receive their
compensation on a quarterly basis. The Investment Advisory Fee paid to the
Investment Adviser for the nine months ended September 30, 1998 and 1997 was
$423,636 and $472,308, respectively, and was calculated at an annual rate of
1.0% of assets under management (net offering proceeds reduced by cumulative
capital reductions and realized losses), with a minimum annual amount of
$1,200,000 for the Retirement Fund and Fund II on a combined basis. For the
three months ended September 30, 1998 and 1997 Investment Advisory Fees paid to
the Investment Advisor were $129,566 and $142,365, respectively.
<PAGE>
Beginning in November of 1997, the Fund Administration Fee changed to an
annual amount of $400,000 for the Retirement Fund and Fund II on a combined
basis, plus 100% of all reimbursable expenses (as defined below) incurred by the
Retirement Fund. For the nine months ended September 30, 1998 and 1997, Fund
Administration Fees were $133,500 and $378,288, respectively. For the three
months ended September 30, 1998 and 1997 Fund Administration Fees were $44,500
and $122,710 respectively. Actual out-of-pocket expenses ("reimbursable
expenses") primarily consist of printing, audit, tax preparation and custodian
fees. For the nine months ended September 30, 1998 and 1997, the Retirement Fund
incurred $313,338 and $104,347, respectively, in reimbursable expenses. For the
three months ended September 30, 1998 and 1997 reimbursable expenses totaled
$96,494 and $40,250, respectively.
The Fund Administration Fees paid to the Fund Administrator for the period
ending November 10, 1997 were calculated at an annual rate of 0.45% of the
excess of net offering proceeds, less 50% of capital reductions and 50% of
realized losses. The decrease in Fund Administration Fees were a direct result
of sales of investments, returns of capital distributed to partners and realized
losses on investments.
Pursuant to the administrative services agreement between the Retirement
Fund and the Fund Administrator, for the period ending November 10, 1997, a
portion of the actual out-of-pocket expenses incurred in connection with the
administration of the Retirement Fund was reimbursable to the Fund
Administrator.
Legal and Professional Fees were primarily incurred in connection with the
litigation proceedings as described in Note 11 to the Financial Statements.
Legal and Professional fees for the nine months ended September 30, 1998 and
1997 were $202,896 and $87,933, respectively. These expenses are attributable to
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.
For the nine months ended September 30, 1998, the Retirement Fund had net
investment income of $104,427 as compared to $4,073,649 for the same period in
1997. The decrease in 1998 net investment income as compared to 1997 is due to
the decrease in interest income partically offset by lower Investment Advisory
Fees paid to the Investment Advisor. For the three months ended September 30,
1998, the Retirement Fund had net investment income of $46,950 as compared to
$223,617 for the same period in 1997.
Net Assets
The Retirement Fund's net assets decreased by $8.6 million during the nine
months ended September 30, 1998, due to the payment of cash distributions to
partners of $16,244,399 partially offset by realized gains of $8,066,170, net
investment income of $104,427 and net unrealized depreciation of $506,057. This
compares to the decrease in net assets of $13,407,963 for the nine months ended
September 30, 1997 resulting from the payment of cash distributions to partners
of $13,575,994 and net unrealized depreciation of $3,945,427, partially offset
by net investment income of $4,073,649 and realized gains from investments of
$39,809.
<PAGE>
Unrealized Appreciation and Depreciation on Investments
The Retirement Fund's valuation of the Common Stock of Hills Stores Company
reflects the closing market price at September 30, 1998.
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 Advisor believe adverse credit
developments of a significant nature require a write-down of such securities.
Investments will be written up in value only if there has been an arms'-length
third party transaction to justify the increased valuation.
Approximately 97% the Retirement Fund's mezzanine investments 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.
Certain 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.
Accordingly, the values referred to in the financial statements for the
remaining Hills securities does not necessarily represent the prices at which
these securities could currently be sold.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of September
30, 1998. 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.
Realized Gains and Losses
For the nine months ended September 30, 1998, the Retirement Fund had net
realized gains from the sale of Mezzanine Investments of $8,066,170 as compared
to $39,809 for the same period in 1997.
For the three months ended September 30, 1998 and 1997, the Retirement Fund
had no realized gains from the sale of investments. For additional information,
please refer to the Supplemental Schedule of Realized Gains and Losses -
Schedule 1.
<PAGE>
Cash Distributions
On October 27, 1998, the Individual General Partners approved the third
quarter 1998 cash distribution consisting of Net Distributable Cash from
Temporary Investments of $27,241 and Distributable Capital Proceeds from
Mezzanine Investments of $14,115. The distribution is as follows: a cash
distribution to Limited Partners in the amount of $.15 per Unit, a cash
distribution of $79 to the Managing General Partner in proportion to its Capital
Contribution and $14,115 as an MGP distribution. Thomas H. Lee as an Individual
General Partner, will receive $8 with respect to his interest in the Retirement
Fund. This cash distribution will be paid on November 16, 1998, in accordance
with the Partnership Agreement.
In addition, in connection with the Cinnabon sale on October 16, 1998, the
Individual General Partners approved a distribution consisting of Net
Distributable Capital Proceeds of $4,536,339 which includes Return of Capital of
$3,955,659. The distribution is as follows: a cash distribution to Limited
Partners of record as of the effective date of such sale in the amount of $23.45
per Unit, a cash distribution of $11,725 to the Managing General Partner in
proportion to its Capital Contribution, a cash distribution of $360,714 to the
Managing General Partner as a MGP Distribution and a cash distribution of $1,173
to Thomas H. Lee as an Individual General Partner, all such distributions to be
payable on or before Novemeber 16, 1998, in accordance with the Partnership
Agreement.
Should a Limited Partner decide to sell his Units, any such sale will be
recorded on the books and records of the Retirement Fund quarterly, only upon
the satisfactory completion and acceptance of the Retirement Fund's transfer
documents. There can be no assurances that such transfer will be effected before
any specified date. Additionally, pursuant to the Partnership Agreement, until a
transfer is recognized, the Limited Partner of record (i.e. the transferor) is
entitled to receive all the benefits and burdens of ownership of Units, and any
transferee has no rights to distributions of sale proceeds generated at any time
prior to the recognition of the transfer and assignment. Accordingly,
Distributable Cash from Investments for a quarter and Distributable Capital
Proceeds from sales after transfer or assignment have been entered into, but
before such transfer and assignment is recognized, would be payable to the
transferor and not the transferee.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
On April 10, 1998, the parties to the Retirement Fund and ML-Lee
Acquisition Fund II, L.P. ("Fund II" and together with the Retirement Fund, "the
Funds") Securities Litigation No. 92-60(JJF) Seidel, et al v. Thomas H. Lee, et
al, No. 94-422 (JJF) and Seidel, et al v. Thomas H. Lee, et al, No. 95-724
(JJF), three class actions brought on behalf of limited partners of the Funds,
filed with United States District Court for the District of Delaware, a
Stipulation of Settlement preliminarily settling these actions.
The settlement, which was approved by the Court at a hearing on July 16,
1998, provides for dismissal with prejudice of all claims against the Funds, the
Funds' Investment Adviser and certain of its affiliates, the Funds' Managing
General Partner and certain of its affiliates, the Funds' counsel and the Funds'
Independent General Partners. Defendants, other than the Funds, have agreed to
provide cash of $16 million and certain other considerations to members of the
class to settle the claims asserted in these actions. In addition, certain
affiliates of Thomas H. Lee, a General Partner of the Funds, have agreed to
provide up to $14 million for purchases of the Funds' limited partnership units
pursuant to a liquidity option to be offered to eligible class members. The
settelment became effective on August 24, 1998. Defendants continue to deny all
liability in this action.
Items 2 - 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
September 30, 1998.
(b) Reports on form 8-K: 8-K Filed September 23, 1998
Regarding Cinnabon Merger
8-K Filed September 29, 1998
Regarding Cinnabon Merger
<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
12th day of November, 1998.
ML-LEE ACQUISITION FUND (RETIREMENT
ACCOUNTS) II, L.P.
By: Mezzanine Investments II, L.P.,
Managing General Partner
By: ML Mezzanine II Inc.,
its General Partner
Dated: November 12, 1998 /s/ Robert Remick
Robert Remick
Vice President and Treasurer
(Chief Financial Officer)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 12th day of
November, 1998.
ML-LEE ACQUISITION FUND (RETIREMENT
ACCOUNTS) II, L.P.
By: Mezzanine Investments II, L.P.,
Managing General Partner
By: ML Mezzanine II Inc.,
its General Partner
Dated: November 12, 1998 ____________________________
Robert Remick
Vice President and Treasurer
Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the
September 30, 1998 Form 10-Q Statements of Assets, Liabilities and Partners'
Capital and Statements of Operations and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 54,436,675
<INVESTMENTS-AT-VALUE> 24,377,260
<RECEIVABLES> 188,572
<ASSETS-OTHER> 162,014
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 24,727,847
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 229,150
<TOTAL-LIABILITIES> 229,150
<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> (30,082,781)
<NET-ASSETS> 24,498,695
<DIVIDEND-INCOME> 9,889
<INTEREST-INCOME> 1,216,157
<OTHER-INCOME> 18,309
<EXPENSES-NET> 1,139,929
<NET-INVESTMENT-INCOME> 104,427
<REALIZED-GAINS-CURRENT> 8,066,170
<APPREC-INCREASE-CURRENT> (506,057)
<NET-CHANGE-FROM-OPS> 7,664,540
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 874,665
<DISTRIBUTIONS-OF-GAINS> 8,504,503
<DISTRIBUTIONS-OTHER> 6,920,181
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (8,579,859)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 423,636
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,139,929
<AVERAGE-NET-ASSETS> 28,788,620
<PER-SHARE-NAV-BEGIN> 185.13
<PER-SHARE-NII> .52
<PER-SHARE-GAIN-APPREC> (2.84)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 85.90
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<PER-SHARE-NAV-END> 134.40
<EXPENSE-RATIO> 0.040
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
