UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
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 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 10080-6114
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (212) 236-6577
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___.
<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, 1999 and December 31, 1998
Statements of Operations - For the Three and Nine Months
Ended September 30, 1999 and 1998
Statements of Changes in Net Assets - For the Nine Months
Ended September 30, 1999 and 1998
Statements of Cash Flows - For the Nine Months
Ended September 30, 1999 and 1998
Statement of Changes in Partners' Capital - For the Nine Months
Ended September 30, 1999
Schedule of Portfolio Investments as of September 30, 1999
Notes to Financial Statements
Supplemental Schedule of Realized Gains and Losses - Schedule 1
Supplemental Schedule of Unrealized Appreciation
(Depreciation) - Schedule 2
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
Statements of Assets, Liabilities and Partners' Capital
(Dollars in Thousands)
(Unaudited)
<S> <C> <C>
September 30, December 31,
1999 1998
-------------- -------------
Assets:
Investments - Notes 2,4,5
Portfolio Investments at fair value
Managed Companies (amortized cost $9,156
at September 30, 1999 and at December 31, 1998) $ 9,156 $ 9,156
Non-Managed Companies (amortized cost $1,522
at September 30, 1999 and $18,894 at December 31, 1998) 265 6,777
Temporary Investments, at amortized cost (cost $11,559
at September 30, 1999 and $4,029 at December 31, 1998) 11,624 4,038
Cash 46 11
Accrued Interest and Other Receivables - Note 2 140 1,396
Receivable for Investment Sold - 417
Prepaid Expenses - 3
-------------- -------------
Total Assets $ 21,231 $ 21,798
============== =============
Liabilities and Partners' Capital:
Liabilities
Legal and Professional Fees Payable $ 2 $ 25
Reimbursable Administrative Expenses Payable - Note 8 47 22
Independent General Partners' Fees Payable - Note 9 5 15
Deferred Interest Income - Note 2 28 43
-------------- -------------
Total Liabilities 82 105
-------------- -------------
Partners' Capital - Note 2
Individual General Partner 10 11
Managing General Partner 150 568
Limited Partners (177,515 Units) 20,989 21,114
-------------- -------------
Total Partners' Capital 21,149 21,693
-------------- -------------
Total Liabilities and Partners' Capital $ 21,231 $ 21,798
============== =============
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<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,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Investment Income - Notes 2,4,6
Interest $ 333 $ 318 $ 955 $ 958
Discount and Other Income 55 71 218 286
------------ ------------ ------------ ------------
Total Investment Income 388 389 1,173 1,244
------------ ------------ ------------ ------------
Expenses:
Investment Advisory Fee - Note 7 134 130 401 424
Fund Administration Fee - Note 8 45 44 134 134
Reimbursable Administrative Expenses - Note 8 46 96 186 313
Legal and Professional Fees 29 55 29 203
Independent General Partners' Fees and Expenses - Note 9
19 17 52 63
Insurance Expense 1 1 3 3
------------ ------------ ------------ ------------
Total Expenses 274 343 805 1,140
------------ ------------ ------------ ------------
Net Investment Income 114 46 368 104
Net Realized Gain (Loss) on Investments - Note 4 and Schedule 1
(2,298) - (3,468) 8,066
Net Change in Unrealized Appreciation (Depreciation)
on Investments - Note 5 and Schedule 2
Publicly Traded Securities - (974) - (506)
Nonpublic Securities 6,271 - 10,881 -
------------ ------------ ------------ ------------
Subtotal 6,271 (974) 10,881 (506)
------------ ------------ ------------ ------------
Net Increase (Decrease) in Net Assets
Resulting From Operations 4,087 (928) 7,781 7,664
Less: Earned MGP Distributions to Managing General Partner
(32) - (82) (1,349)
------------ ------------ ------------ ------------
Net Increase (Decrease) Available For Pro-Rata
Distribution To All Partners $ 4,055 $ (928) $ 7,699 $ 6,315
============ ============ ============ ============
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<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, 1999 September 30, 1998
------------------ ------------------
From Operations:
Net Investment Income $ 368 $ 104
Net Realized Gain (Loss) on Investments (3,468) 8,066
Net Change in Unrealized Appreciation (Depreciation)
from Investments 10,881 (506)
------------------ ------------------
Net Increase in Net Assets Resulting from Operations 7,781 7,664
Cash Distributions to Partners (8,325) (16,244)
------------------ ------------------
Total Decrease (544) (8,580)
Net Assets:
Beginning of Year 21,693 33,078
------------------ ------------------
End of Period $ 21,149 $ 24,498
================== ==================
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<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, 1999 September 30, 1998
------------------ ------------------
Increase in Cash
Cash Flows from Operating Activities:
Interest, Discount and Other Income $ 2,358 $ 1,249
Fund Administration Fee (134) (134)
Investment Advisory Fee (401) (424)
Independent General Partners' Fees and Expenses (62) (51)
(Purchase) Sale of Temporary Investments, Net (7,529) 343
Proceeds from Sales of Portfolio Company Investments 14,341 15,356
Reimbursable Administrative Expense (161) (231)
Legal and Professional Fees (52) (233)
----------------- -----------------
Net Cash Provided By Operating Activities 8,360 15,875
----------------- -----------------
Cash Flows From Financing Activities:
Cash Distributions to Partners (8,325) (15,875)
----------------- -----------------
Net Cash Used in Financing Activities (8,325) (15,875)
----------------- -----------------
Net Increase in Cash 35 -
Cash at Beginning of Period 11 161
----------------- -----------------
Cash at End of Period $ 46 $ 161
================= =================
Reconciliation of Net Investment Income
to Net Cash Provided by Operating Activities
Net Investment Income $ 368 $ 104
----------------- -----------------
Adjustments to Reconcile Net Investment Income
to Net Cash Provided by Operating Activities
Decrease in Investments 9,862 7,633
Decrease in Receivable for Investment Sold 417 -
Decrease in Accrued Interest Receivables 1,186 4
Decrease in Prepaid Expenses 3 3
Decrease in Legal and Professional Fees Payable (23) (30)
Increase in Reimbursable Administrative Expenses Payable 25 83
Increase (Decrease) in Independent General Partners' Fees Payable (10) 12
Net Realized Gains (Loss) on Sales of Investments (3,468) 8,066
----------------- -----------------
Total Adjustments 7,992 15,771
----------------- -----------------
Net Cash Provided by Operating Activities $ 8,360 $ 15,875
================= =================
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
Statements 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, 1999
Partners' Capital at January 1, 1999 $ 11 $ 568 $ 21,114 $ 21,693
Allocation of Net Investment Income - 90 278 368
Allocation of Net Realized Loss on Investments (1) (16) (3,451) (3,468)
Allocation of Net Change in Unrealized
Depreciation From Investments 2 24 10,855 10,881
Cash Distributions to Partners (2) (516) (7,807) (8,325)
---------- ---------- ---------- ----------
Partners' Capital at September 30, 1999 $ 10 $ 150 $ 20,989 $ 21,149
========== ========== ========== ==========
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
Schedule of Portfolio Investments
September 30, 1999
(Dollars in Thousands)
(Unaudited)
Fair % Of
Principal Investment Investment Value Total
Amount/Shares Investment Date Cost(f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
MEZZANINE INVESTMENTS
MANAGED COMPANIES
BIG V SUPERMARKETS, INC. (a)
$6,963 Big V Supermarkets, Inc., Sr. Sub. Nt. 14.14% due 03/15/01(b) 12/27/90 $ 6,963 $ 6,963
62,667 Shares Big V Holding Corp., Inc., Common Stock(c) 12/27/90 2,193 2,193
(8.8% of fully diluted common equity) (e) ------------------------------
9,156 9,156 43.50%
------------------------------
7,032 Warrants COLE NATIONAL CORPORATION
Cole national Corporation, Common Stock Purchase Warrants (c) 9/26/90 - -
(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%
-----------------------------
TOTAL INVESTMENT IN MANAGED COMPANIES $ 9,156 $ 9,156 43.50%
=============================
NON-MANAGED COMPANIES
BIOLEASE, INC. - Note 5
$513 Biolease, Inc., 13% Sub. Nt. due 06/06/04(b) 06/08/94 $ 443 $ 257
63.20 Shares Biolease, Inc., Common Stock(c) 06/08/94 62 -
6,554 Warrants Biotransplant, Inc., Common Stock Purchase Warrants(c) 06/08/94 9 9
-----------------------------
514 266 1.26%
-----------------------------
FLA. ORTHOPEDICS, INC. - Notes 5,6
12,634 Shares FLA. Holdings, Inc. Series B Preferred Stock (a)(c)(d) 08/02/93 987 -
2,493 Warrants FLA. Holdings, Inc. Common Stock Purchase Warrants(a)(c)(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%
-----------------------------
TOTAL INVESTMENT IN NON-MANAGED COMPANIES $ 1,501 $ 266 1.26%
=============================
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
Schedule of Portfolio Investments
September 30, 1999
(Dollars in Thousands)
(Unaudited)
(Continued)
Fair % Of
Principal Investment Investment Value Total
Amount/Shares Investment Date Cost(f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes Various $ 7,406 $ 7,220 34.31%
Preferred Stock, Common Stock, Warrants and Stock Rights Various 3,251 2,202 10.46%
-----------------------------
TOTAL MEZZANINE INVESTMENTS $ 10,657 $ 9,422 44.77%
=============================
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$ 7,625 State Street Corp, 5.23% due 10/1/99 8/27/99 7,625 7,664
$ 3,960 Ford Motor Credit, 5.21% due 10/1/99 8/17/99 3,934 3,960
-----------------------------
TOTAL INVESTMENT IN COMMERCIAL PAPER $ 11,559 $ 11,624 55.23%
-----------------------------
TOTAL TEMPORARY INVESTMENTS $ 11,559 $ 11,624 55.23%
-----------------------------
TOTAL INVESTMENT PORTFOLIO $ 22,216 $ 21,046 100.00%
=============================
</TABLE>
(a) Represents investment in affiliates as defined in the Investment Company
Act of 1940.
(b) Restricted security.
(c) Restricted non-income producing equity security.
(d) Non-accrual investment status.
(e) Percentages of Common Equity have not been audited by Pricewaterhouse
Coopers LLP.
(f) Represents original cost and excludes accretion of discount of $22 for
Mezzanine Investments and $65 for Temporary Investments.
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
Notes to Financial Statements
September 30, 1999
(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.
As described 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. 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 generally its
original cost plus accrued value in the case of original issue discount or
deferred pay securities. Such investments generally 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.
Temporary Investments with maturities of less than 60 days are stated at
amortized cost, which approximates market value.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of September
30, 1999. 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.
<PAGE>
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, 1999 the
Retirement Fund did not have any payment-in-kind securities. As of September 30,
1998, the Retirement Fund had $519,000 of payment-in-kind securities which
excluded approximately $2,800,000 of payment-in-kind notes received from notes
placed on non-accrual status.
Investment Transactions
The Retirement Fund records investment transactions on the date on which it
obtains an enforceable right to demand the securities or payment therefore. 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.
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 interim report as of September
30, 1999 and for the period then ended has been prepared by management without
an audit by independent certified public accountants. The results for the period
ended September 30, 1999 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 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 will be 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; and
thereafter, 79.69% to the Limited Partners, 20.281% to the Managing
General Partner and 0.029% to the Individual General Partner.
4. Investment Transactions
On March 12, 1999, the Funds entered into a Note Repurchase and Warrant
Cancellation Agreement (the "Agreement") with Stablex Canada Inc. and Seaway TLC
Inc. to sell, retire and cancel all of the Subordinated Notes outstanding and
held by the Funds (including all Deferred Interest Notes). Pursuant to the
Agreement, the Funds also relinquished all Warrants held. Total proceeds
received by the Funds for retiring the Notes and Warrants was $12,000,000; of
which $6,395,000 was allocated to the Retirement Fund. The Retirement Fund
recognized a loss of approximately $1.2 million from this transaction. The
Distributable Capital Proceeds relating to this transaction were included with
the first quarter distribution to Limited Partners of record as of March 12,
1999.
In addition, under the Agreement, the Funds are entitled, collectively, to
receive twenty percent (20%) of the net proceeds of any payment or consideration
or distribution (whether received in cash, property, securities or any
combination thereof) arising out of transfer, disposition, recapitalization or
exchange of substantially all of the stock or other equity interest in either
Stablex Canada Inc. or Seaway TLC Inc. if such transaction is consummated within
forty-two (42) months from the closing of the Agreement. Any Distributable
Capital Proceeds relating to future receipts by the Retirement Fund pursuant to
the Agreement will be payable to Limited Partners of record as of the date of
the receipt of such proceeds.
On August 27, 1999, the Funds completed the sale of all of its shares of
Fitz and Floyd, Inc. Capital Stock (the "Sale") pursuant to a Stock Purchase
Agreement executed by the Funds, as selling shareholders, on August 5, 1999. The
Retirement Fund received net sale proceeds of $7,560,000, which includes payment
in full of its 12% Fitz and Floyd, Inc. Subordinated Notes, including prepayment
premium, and partial return of capital on its Fitz and Floyd, Inc. Capital
Stock. The Retirement Fund recognized a loss of approximately $2.3 million from
this transaction. The distribution of the Distributable Capital Proceeds
relating to this transaction will be made in accordance with the terms of the
Partnership Agreement (see Note 12).
Because the Retirement Fund primarily invested 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 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
security has been on non-accrual status since the date indicated:
- Florida Orthopedics January 1, 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
$1,200,000 for the Funds 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).
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 a Fund Administration Fee. The Fund Administration Fee is an annual
amount of $400,000 for the Funds on a combined basis. The Fund Administration
Fee is calculated and paid quarterly, in advance, by each Fund.
In addition, the Fund Administrator is entitled to reimbursement of 100% of
all out-of-pocket expenses incurred by the Fund Administrator on behalf of the
Funds ("Reimbursable Administrative Expenses"). Reimbursable Administrative
Expenses primarily consist of printing, audit and tax preparation, and legal
fees and expenses, and custodian fees.
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).
9. 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. Compensation
for each of the Independent General Partners is reviewed annually.
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 incentive distributions ("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"). Any Deferred Distribution Amount is distributable to the
Partners pro-rata in accordance with their capital contributions, and certain
amounts otherwise later payable to Limited Partners from Distributable Cash from
operations are instead payable to the Managing General Partner until such
Deferred Distribution Amount is paid in full.
During the nine months ended September 30, 1999, the Retirement Fund paid
the Individual General Partner distributions totaling $2,199 and Managing
General Partner distributions totaling $516,000 (which includes $494,000 of MGP
Distributions). As of September 30, 1999, the Managing General Partner has
earned a total of $30,752,000 million in MGP Distribution, none of which is
deferred in payment to the Managing General Partner as a Deferred Distribution
Amount.
11. Income Taxes
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,
1998, the tax basis of the Retirement Fund's assets are greater than the amounts
reported in the financial statements by approximately $12,200,000. This
difference is primarily attributable to net unrealized depreciation on
investments which has not been recognized for tax purposes.
12. Subsequent Events
On November 9, 1999, a special meeting of the General Partners of the Funds
was held to review the Retirement Fund's reserves prior to making any cash
distributions. At this meeting, the General Partners were briefed on the status
of certain litigation commenced by Hills Stores Company ("Hills") against its
former directors, including Thomas H. Lee (who was serving as a representative
of the Funds), in connection with the July 1995 payment by Hills of
approximately $32 million in golden parachute payments to certain of its
officers in connection with the change of control of Hills associated with the
Dickstein proxy contest. The General Partners discussed the potential
liabilities to Thomas H. Lee in connection with this litigation, the Retirement
Fund's potential indemnification obligations to Thomas H. Lee and the liquidity
of the Retirement Fund's remaining assets. Following discussion of the issues,
the Individual General Partners of the Retirement Fund determined that, to the
extent that the Retirement Fund may have future indemnification obligations with
respect to such litigation, suitable reserves should be maintained for such
contingency. Accordingly the Individual General Partners determined that it
would not be prudent to make distributions to Partners at this time and
therefore, the Retirement Fund has reserved all the proceeds received from the
sale of Fitz & Floyd, Inc. This reserve will be reviewed each quarter by the
General Partners of the Retirement Fund.
<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, 1999
(Dollars in Thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C>
Par Value or Investment Net Realized
Security Security Number of Shares Cost Proceeds Loss
- -------- ------- ---------------- ---------- ---------- ----------
Soretox
Stablex Canada Inc. Various Various $ 7,565 $ 6,395 $ (1,170)
Fitz and Floyd, Inc. Various Various 9,828 7,530 (2,298)
---------- ---------- ----------
Total Realized Loss for Nine Months
ended September 30, 1999 $ 17,393 $ 13,925 $ (3,468)
========== ========== ==========
</TABLE>
See Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
Schedule of Unrealized Appreciation (Depreciation)
For The Nine Months Ended September 30, 1999
(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 1999 1999 1998 1999
- -------- ---------- ------ ------------- ------------- -------------- ----------------
Non Public Securities:
Biolease, Inc.
Common Stock* $ 62 $ - $ - $ - $ (62) $ (62)
Subordinated Notes*(a) 443 257 - - (207) (207)
FLA. Orthopedics, Inc.
Preferred Stock* 987 - - - (987) (987)
------------- ------------- -------------- ----------------
Total Unrealized Depreciation
From Non Public Securities - - (1,256) (1,256)
------------- ------------- -------------- ----------------
Reversal of Unrealized Appreciation
(Depreciation) from Securities Sold
in 1999
Soretox
Subordinated Notes* - 4,610 (4,610) -
Fitz and Floyd, Inc.
Preferred Stock* 6,271 6,271 (6,271) -
------------- ------------- -------------- ----------------
Total Reversal of Unrealized Appreciation
(Depreciation) from Securities Sold in 1999 6,271 10,881 (10,881) -
------------- ------------- -------------- ----------------
Net Unrealized Appreciation (Depreciation)
$ 6,271 $ 10,881 $ (12,137) $ (1,256)
============= ============= =============== ================
</TABLE>
* Restricted Security
(a) Investment cost excludes accretion of discount of $22.
See Accompanying Notes to Financial Statements (Unaudited).
<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 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 twelve months of
the Retirement Fund's investment period terminated at various times through
December 18, 1993.
On August 6, 1991, the Independent General Partners approved a reserve for
follow-on investments of approximately $20,000,000 for the Retirement Fund. As
of November 15, 1999 this remaining reserve balance was approximately $3,400,000
due to follow-on investments in Petco Animal Supplies, FFSC, Inc., Fine
Clothing, Inc., Hills and Ghirardelli. Additionally, approximately $7,700,000 of
the reserve had 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.
On March 12, 1999, the Retirement Fund and Fund II (together the "Funds")
entered into a Note Repurchase and Warrant Cancellation Agreement (the
"Agreement") with Stablex Canada Inc. and Seaway TLC Inc. to sell, retire and
cancel all of the Subordinated Notes outstanding and held by the Funds
(including all Deferred Interest Notes). Pursuant to the Agreement, the Funds
also relinquished all Warrants held. Total proceeds received by the Funds for
retiring the Notes and Warrants was $12,000,000; of which $6,395,000 was
allocated to the Retirement Fund. The Retirement Fund recognized a loss of
approximately $1.2 million from this transaction. The Distributable Capital
Proceeds relating to this transaction were included with the first quarter
distribution to Limited Partners of record as of March 12, 1999.
In addition, under the Agreement, the Funds are entitled, collectively, to
receive twenty percent (20%) of the net proceeds of any payment or consideration
or distribution (whether received in cash, property, securities or any
combination thereof) arising out of transfer, disposition, recapitalization or
exchange of substantially all of the stock or other equity interest in either
Stablex Canada Inc. or Seaway TLC Inc. if such transaction is consummated within
forty-two (42) months from the closing of the Agreement. Any Distributable
Capital Proceeds relating to future receipts by the Retirement Fund pursuant to
the Agreement will be payable to Limited Partners of record as of the date of
the receipt of such proceeds.
On August 27, 1999, the Funds completed the sale of all of its shares of
Fitz and Floyd, Inc. Capital Stock (the "Sale") pursuant to a Stock Purchase
Agreement executed by the Funds, as selling shareholders, on August 5, 1999. The
Retirement Fund received net sale proceeds of $7,560,000, which includes payment
in full of its 12% Fitz and Floyd, Inc. Subordinated Notes, including prepayment
premium, and partial return of capital on its Fitz and Floyd, Inc. Capital
Stock. The Retirement Fund recognized a loss of approximately $2.3 million from
this transaction. The distribution of the Distributable Capital Proceeds
relating to this transaction will be made in accordance with the terms of the
Partnership Agreement.
On November 9, 1999, a special meeting of the General Partners of the Funds
was held to review the Retirement Fund's reserves prior to making any cash
distributions. At this meeting, the General Partners were briefed on the status
of certain litigation commenced by Hills Stores Company ("Hills") against its
former directors, including Thomas H. Lee (who was serving as a representative
of the Funds), in connection with the July 1995 payment by Hills of
approximately $32 million in golden parachute payments to certain of its
officers in connection with the change of control of Hills associated with the
Dickstein proxy contest. The General Partners discussed the potential
liabilities to Thomas H. Lee in connection with this litigation, the Retirement
Fund's potential indemnification obligations to Thomas H. Lee and the liquidity
of the Retirement Fund's remaining assets. Following discussion of the issues,
the Individual General Partners of the Retirement Fund determined that, to the
extent that the Retirement Fund may have future indemnification obligations with
respect to such litigation, suitable reserves should be maintained for such
contingency. Accordingly the Individual General Partners determined that it
would not be prudent to make distributions to Partners at this time and
therefore, the Retirement Fund has reserved all the proceeds received from the
sale of Fitz & Floyd, Inc. This reserve will be reviewed each quarter by the
General Partners of the Retirement Fund.
At September 30, 1999, the Retirement Fund had outstanding a total (at
cost) of $10,657,000 invested in Mezzanine Investments representing $9,156,000
Managed and $1,501,000 Non-Managed portfolio investments. The remaining proceeds
were invested in a Temporary Investment in commercial paper with a maturity of
less than 60 days.
As provided by the Partnership Agreement, the Managing General Partner of
the Retirement Fund is entitled to receive incentive distributions ("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"). Any Deferred Distribution Amount is distributable to the
Partners pro-rata in accordance with their capital contributions, and certain
amounts otherwise later payable to Limited Partners from Distributable Cash from
operations are instead payable to the Managing General Partner until the
Deferred Distribution Amount is paid in full. As of September 30, 1999 there is
no outstanding Deferred Distribution Amount.
The proportion of distributions provided by net investment income has
decreased significantly from prior years due primarily to increased sales and
redemptions of Mezzanine Investments and a resulting decrease in investment
income as those holdings cease to generate interest income. As a result, it is
expected that the amount of any future cash distributions, in aggregate, paid to
Limited Partners will almost entirely be derived from recovered capital and
gains from asset sales, which are subject to market conditions and are
inherently unpredictable as to timing. Therefore, in the absence of cash
available for distributions resulting from the future sale of portfolio
holdings, the Retirement Fund will have available only small amounts of Net
Distributable Cash from Operations, estimated to be less than one dollar per
Unit each quarter, for any future distributions.
Investment in High-Yield Securities
The Retirement Fund invested primarily in subordinated debt and preferred
stock securities ("High-Yield Securities"), generally linked with an equity
participation, issued in conjunction with the mezzanine financing of privately
structured, friendly leveraged acquisitions, recapitalizations and other
leveraged financings. High-Yield Securities are debt and preferred equity
securities that are unrated or are rated by Standard & Poor's Corporation as BB
or lower and by Moody's Investor Services, Inc. as Ba or lower. Risk of loss
upon default by the issuer is significantly greater with High-Yield Securities
than with investment grade securities because High-Yield Securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Also, these issuers usually have high levels of indebtedness and are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates, than investment grade issuers. Most of these securities are
subject to resale restrictions and generally there is no quoted market for such
securities.
Although 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.
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.
Forward Looking Information
In addition to historical information contained or incorporated by
reference in this report on Form 10-Q, the Retirement Fund may make or publish
forward-looking statements about management expectations, strategic objectives,
business prospects, anticipated financial performance, and other similar
matters. In order to comply with the terms of the safe harbor for such
statements provided by the Private Securities Litigation Reform Act of 1995, the
Retirement Fund notes that a variety of factors, many of which are beyond its
control, affect its operations, performance, business strategy, and results and
could cause actual results and experience to differ materially from the
expectations expressed in these statements. These factors include, but are not
limited to, the effect of changing economic and market conditions, trends in
business and finance and in investor sentiment, the level of volatility of
interest rates, the actions undertaken by both current and potential new
competitors, the impact of current, pending, and future legislation and
regulation both in the United States and throughout the world, and the other
risks and uncertainties detailed in this Form 10-Q, and as more fully detailed
in Form 10-K incorporated by reference herein. The Retirement Fund undertakes no
responsibility to update publicly or revise any forward-looking statements.
<PAGE>
Results of Operations
Investment Income and Expenses
For the three and nine months ended September 30, 1999, the Retirement Fund
had net investment income of $114,000 and $368,000 as compared to $46,000 and
$104,000 for the same periods in 1998. The increase in net investment income in
1999 as compared to 1998 is the result of the settlement of litigation in 1998
resulting in lower legal and professional fees in 1999. The increase in net
investment income during the three and nine months ended September 30, 1999 as
compared to the same periods in 1998 is due to a decrease in legal and
professional fees and Reimbursable Administrative Expenses partially offset by a
decrease in investment income during 1999 as future described below.
The investment income from operations for the period 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, 1999, the Retirement Fund had investment
income of 1,173,000 as compared to $1,244,000 for the same period in 1998. The
decrease in investment income from 1998 to 1999 is directly attributable to the
sale of income producing portfolio companies in 1998 and 1999. For the three
months ended September 30, 1999, the Retirement Fund had investment income of
$388,000 as compared to $389,000 for the same period in 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 total Investment Advisory Fees paid to
the Investment Adviser by the Retirement Fund for the three and nine months
ended September 30, 1999 and 1998 was $134,000, $401,000, $130,000, and
$424,000, respectively, and were calculated at an annual rate of 1.0% of assets
under management (net offering proceeds reduced by cumulative capital reductions
and realized losses), with a minimum annual amount of $1,200,000 for the Funds
on a combined basis. These decreases in Investment Advisory Fees are a direct
result of the sales of investments, returns of capital distributed to Partners
and realized losses on investments.
As compensation for its services, the Fund Administrator is entitled to
receive an annual amount of $400,000 for the Funds on a combined basis, plus
100% of all reimbursable expenses (as defined below) incurred by the Fund. For
the three and nine months ended September 30, 1999 and 1998, The Retirement Fund
incurred Fund Administration Fees of $45,500, $134,000, $44,000 and $134,000,
respectively.
Actual out-of-pocket expenses ("Reimbursable Administrative Expenses")
primarily consist of printing, audit, tax preparation, legal fees and expenses,
and custodian fees. For the three and nine months ended September 30, 1999 and
1998, the Retirement Fund incurred Reimbursable Administrative Expenses in the
amount of $46,000, $186,000, $96,000 and $313,000 respectively. The decrease in
Reimbursable Administrative Expenses for the three and nine months ended
September 30, 1999 as compared to the same periods in 1998 is due to a overall
reduction in auditing, custodian, printing and legal administration fees during
1999 resulting from fewer investments held by the Retirement Fund during 1999.
Legal and professional fees for the three and nine months ended September
30, 1999 1998 and were $29,000, $55,000, $29,000 and $203,000, respectively.
These expenses were 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 certain litigation proceedings. The decrease in
legal and professional fees for the nine months ended September 30, 1999 as
compared to the same period in 1998 resulted from the increased costs incurred
by the Retirement Fund in connection with the settlement of the Seidel
litigation in the first half of 1998.
Net Assets
The Retirement Fund's net assets increased by $7,781,000 during the nine
months ended September 30, 1999, due to net investment income of $368,000 and
reversal of unrealized depreciation of $10,881,000 partially offset by cash
distributions to partners of $8,325,000 ($6,812,000 of which was return of
capital from the sale of portfolio investments) and realized losses of
$3,468,000. This compares to the decrease of net assets by $8,580,000 during the
nine months ended September 30, 1998, due to the payment of cash distributions
to partners of $16,244,000, unrealized depreciation of $243,000, and reversal of
unrealized appreciation of $263,000 partially offset by realized gains of
$8,066,000 and net investment income of $104,000.
Unrealized Appreciation and Depreciation on Investments
For the nine months ended September 30, 1999, the Retirement Fund recorded
a reversal of net unrealized depreciation of $10,881,000. This compares to an
increase in net unrealized depreciation of $243,000 and a reversal of unrealized
appreciation of $263,000 for the same period in 1998. The Retirement Fund's
cumulative net unrealized depreciation as of September 30, 1999 totaled
$1,256,000.
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.
Approximately 48.0% of the Retirement Fund's investments (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. As of September 30,
1999 Retirement Fund's investment in Big V Supermarkets Inc. represents
approximately 43.5% of the Retirement Fund's fair value.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of September
30, 1999. Although the Managing General Partner and Investment Adviser are not
aware of any factors not disclosed herein that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued since that time, and the current estimated fair value of these
investments may have changed significantly since that point in time.
For additional information, please refer to Supplemental Schedule of
Unrealized Appreciation and Depreciation - Schedule 2.
Realized Gains and Losses on Investments
For the nine months ended September 30, 1999, the Retirement Fund recorded
net realized losses from investments of $3,468,000 as compared to net realized
gains of $8,066,000 for the same period in 1998. For additional information,
please refer to Supplemental Schedule of Realized Gains and Losses - Schedule 1.
Cash Distributions
On May 10, 1999, the Individual General Partners approved the first quarter
1999 cash distribution which represents net investment income of $133,000 from
Mezzanine Investments and Net Distributable Capital Proceeds from the sale of
Stablex of $6,395,000 (all of which is return of capital). The total amount
distributed to Limited Partners was $6,479,000 or $36.50 per Unit, which was
paid on May 14, 1999. The Managing General Partner received a total of $18,000
with respect to its interest in the Retirement Fund and $28,000 in MGP
Distributions. Thomas H. Lee, as an Individual General Partner, received $1,825
with respect to his interest in the Retirement Fund.
On August 3, 1999, the Individual General Partners approved the second
quarter 1999 cash distribution which represents Net Distributable Cash of
$111,000 from Mezzanine Investments and $1,715 from Temporary Investments. The
total amount distributed to Limited Partners was $91,000 or $.51 per Unit, which
was paid on August 13, 1999. The Managing General Partner received a total of
$252 with respect to its interest in the Retirement Fund and $22,000 in MGP
Distributions. Thomas H. Lee, as an Individual General Partner, received $25
with respect to his interest in the Retirement Fund.
A number of the Retirement Fund's debt investments have been repaid and one
is on non-accrual status. These situations reduce the amount of interest income
received by the Retirement Fund. As a result, it is expected that the amount of
any future cash distributions, in aggregate, paid to Limited Partners will be
derived almost entirely from recovered capital and gains from asset sales, which
are subject to market conditions and are inherently unpredictable as to timing.
Therefore, in the absence of cash available for distributions resulting from the
future sale of portfolio holdings, the Retirement Fund will have available only
small amounts of Net Distributable Cash from Operations, estimated to be less
than one dollar per Unit each quarter, for any future distributions.
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.
Year 2000 Compliance Initiative
The year 2000 ("Y2K") problem is the result of a widespread programming
technique that causes computer systems to identify a date based on the last two
numbers of a year, with the assumption that the first two numbers of the year
are "19". As a result, the year 2000 would be stored as "00", causing computers
to incorrectly interpret the year as 1900. Left uncorrected, the Y2K problem may
cause information technology systems (e.g., computer databases) and
non-information technology systems (e.g., elevators) to produce incorrect data
or cease operating completely.
Overall, the Retirement Fund believes that it has identified and evaluated
its internal Y2K problem and that it is devoting sufficient resources to
renovating technology systems that are not already Y2K compliant. The Retirement
Fund has been working with third-party software vendors to ensure that computer
programs utilized by the Retirement Fund are Y2K compliant. In addition, the
Retirement Fund has contacted third parties to ascertain whether these entities
are addressing the Y2K issue within their own operation.
ML Fund Administrators, Inc. an indirect wholly owned subsidiary of Merrill
Lynch and Co., Inc. ("Merrill Lynch") is responsible for providing
administrative and accounting services necessary to support the Retirement
Fund's operations, including maintenance of the books and records, maintenance
of the partner database, issuance of financial reports and tax information to
partners and processing distribution payments to partners. In 1995, Merrill
Lynch established the Year 2000 Compliance Initiative, which is an
enterprisewide effort (of which ML Fund Administrators Inc. is a part) to
address the risks associated with the Y2K problem, both internal and external.
The integration testing phase, which will occur throughout 1999, validates that
a system can successfully interface with both internal and external systems.
Merrill Lynch continues to survey and communicate with third parties whose Year
2000 readiness is important to the company. Based on the nature of the response
and the importance of the product or service involved, Merrill Lynch determines
if additional testing is needed.
Merrill Lynch participated in further industrywide testing during March and
April 1999, sponsored by the Securities Industry Association. These tests
involved an expanded number of firms, transactions, and conditions compared with
those previously conducted. Merrill Lynch has participated in and continues to
participate in numerous industy tests througout the world.
Although the Retirement Fund has not finally determined the cost associated
with its Year 2000 readiness efforts, the Retirement Fund does not anticipate
the cost of the Y2K problem to be material to its business, financial condition
or results of operations in any given year. However, there can be no guarantee
that the systems of other companies on which the Retirement Fund systems rely
will be timely converted, or that a failure to convert by another company or a
conversion that is incompatible with the Retirement Fund systems would not have
a material adverse effect on the Retirement Fund's business, financial condition
or results of operations.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
As of September 30, 1999, the Retirement Fund maintains a portion of its
cash equivalents in financial instruments with original maturities of three
months or less. These financial instruments are subject to interest rate risk,
and will decline in value if interest rates increase. A significant increase or
decrease in interest rates would not have a material effect on the Retirement
Fund's financial position.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings.
-----------------
None
Item 2. Changes in Securities and Use of Proceeds.
-----------------------------------------
None
Item 3. Defaults Upon Senior Securities.
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None
Item 5. Other Information.
-----------------
None
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits:
Exhibit 27 - Financial Data Schedule for the quarter ended
September 30, 1999.
(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
15th day of November, 1999.
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 15, 1999 /s/ Kevin T. Seltzer
----------------------------
Kevin T. Seltzer
ML Mezzanine II, Inc.
Vice President and Treasurer
(Principal Financial Officer of Registrant)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the
September 30, 1999 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>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<INVESTMENTS-AT-COST> 22,216
<INVESTMENTS-AT-VALUE> 21,046
<RECEIVABLES> 140
<ASSETS-OTHER> 46
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 21,231
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 82
<TOTAL-LIABILITIES> 82
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 178
<SHARES-COMMON-PRIOR> 178
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,256)
<NET-ASSETS> (21,149)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 955
<OTHER-INCOME> 218
<EXPENSES-NET> 805
<NET-INVESTMENT-INCOME> 368
<REALIZED-GAINS-CURRENT> (3,468)
<APPREC-INCREASE-CURRENT> 10,881
<NET-CHANGE-FROM-OPS> 7,781
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,513
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 6,812
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (544)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 401
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 805
<AVERAGE-NET-ASSETS> 21,421
<PER-SHARE-NAV-BEGIN> 118.96
<PER-SHARE-NII> 1.57
<PER-SHARE-GAIN-APPREC> 61.15
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 43.98
<RETURNS-OF-CAPITAL> 38.38
<PER-SHARE-NAV-END> 118.25
<EXPENSE-RATIO> 0.038
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
