UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
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)
2 World Financial Center, 14th Floor
New York, New York 10281-6114
(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 ___.
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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 March 31, 2000 (Unaudited) and December 31, 1999 (Unaudited)
Statements of Operations
For the Three Months Ended March 31, 2000 and 1999 (Unaudited)
Statements of Changes in Net Assets
For the Three Months Ended March 31, 2000 and 1999 (Unaudited)
Statements of Cash Flows
For the Three Months Ended March 31, 2000 and 1999 (Unaudited)
Statements of Changes in Partners' Capital
For the Three Months Ended March 31, 2000 (Unaudited)
Schedule of Portfolio Investments
As of March 31, 2000 (Unaudited)
Notes to Financial Statements (Unaudited)
Supplemental Schedule of Net Unrealized Appreciation and Depreciation
- Schedule 1 (Unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantative and Qualitative Disclosure About Market Risk
PART II - OTHER INFORMATION
Item 6. Exibits and Reports on Form 8-K
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
(UNAUDITED)
March 31, 2000 December 31, 1999
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Assets:
Investments - Notes 4 and 6
Portfolio Investments at fair value
Managed Companies (amortized cost $9,156
as of March 31, 2000 and as of December 31, 1999) $ 9,156 $ 9,156
Non-Managed Companies (amortized cost $1,500
as of March 31, 2000 and as of December 31, 1999) 266 266
Temporary Investments, at amortized cost (cost $11,907
as of March 31, 2000 and $11,698 as of December 31, 1999) 11,994 11,727
Cash 18 32
Accrued Interest and Other Receivables 140 92
Prepaid Expenses 3 4
----------- ----------
Total Assets $ 21,577 $ 21,277
=========== ==========
Liabilities and Partners' Capital:
Liabilities
Legal and Professional Fees Payable $ 11 $ 5
Reimbursable Administrative Expenses Payable - Note 5 147 125
Independent General Partners' Fees Payable - Note 5 2 5
Deferred Interest Income 19 24
----------- ----------
Total Liabilities 179 159
----------- ----------
Partners' Capital
Individual General Partner 11 11
Managing General Partner 215 181
Limited Partners (177,515 Units) 21,172 20,926
----------- ----------
Total Partners' Capital 21,398 21,118
----------- ----------
Total Liabilities and Partners' Capital $ 21,577 $ 21,277
=========== ==========
See the Accompanying Notes to Financial Statements (Unaudited).
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
For the Three Months Ended
--------------------------
March 31, 2000 March 31, 1999
-------------- --------------
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Investment Income
Interest $ 444 $ 311
Discount and Other Income 115 73
---------- ----------
Total Investment Income 559 384
---------- ----------
Expenses:
Investment Advisory Fee - Note 5 134 134
Fund Administration Fee - Note 5 45 45
Reimbursable Administrative Expenses - Note 5 74 77
Legal and Professional Fees 8 -
Independent General Partners' Fees and Expenses 17 20
Insurance Expense 1 1
---------- ----------
Total Expenses 279 277
---------- ----------
Net Investment Income 280 107
---------- ----------
Realized Loss on Sale of Investment - (1,170)
---------- ----------
Net Change in Unrealized Depreciation on Investments - Schedule 1
Nonpublic Securities - 4,610
---------- ----------
Net Increase in Net Assets Resulting From Operations 280 3,547
Less: Earned MGP Distributions to Managing General Partner (34) (28)
---------- ----------
Net Increase Available For Pro-Rata Distribution To All Partners $ 246 $ 3,519
========== ==========
See the Accompanying Notes to Financial Statements (Unaudited).
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
For the Three Months Ended
--------------------------
March 31, 2000 March 31, 1999
-------------- --------------
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From Operations:
Net Investment Income $ 280 $ 107
Realized Loss on Sale of Investment - (1,170)
Net Change in Unrealized Depreciation on Investments - 4,610
---------- ----------
Net Increase in Net Assets Resulting from Operations 280 3,547
Cash Distributions to Partners - (1,684)
---------- ----------
Total Increase 280 1,863
Net Assets:
Beginning of Year 21,118 21,693
---------- ----------
End of Period $ 21,398 $ 23,556
========== ==========
See the Accompanying Notes to Financial Statements (Unaudited).
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
For the Three Months Ended
--------------------------
March 31, 2000 March 31, 1999
-------------- --------------
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Increase (Decrease) in Cash
Cash Flows from Operating Activities:
Interest, Discount and Other Income $ 448 $ 1,570
Fund Administration Fee (45) (45)
Investment Advisory Fee (134) (134)
Independent General Partners' Fees and Expenses (20) (29)
Purchase of Temporary Investments, Net (209) (6,464)
Proceeds from Sale of Portfolio Company Investment - 6,812
Reimbursable Administrative Expense (52) (22)
Legal and Professional Fees (2) (2)
---------- ---------
Net Cash Provided by (Used in) Operating Activities (14) 1,686
---------- ---------
Cash Flows From Financing Activities:
Cash Distributions to Partners - (1,684)
---------- ---------
Net Cash Used in Financing Activities - (1,684)
---------- ---------
Net Increase (Decrease) in Cash (14) 2
Cash at Beginning of Year 32 11
---------- ---------
Cash at End of Period $ 18 $ 13
========== =========
Reconciliation of Net Investment Income
to Net Cash Provided by (Used in) Operating Activities
Net Investment Income $ 280 $ 107
---------- ---------
Adjustments to Reconcile Net Investment Income
to Net Cash Provided by (Used in) Operating Activities:
(Increase) Decrease in Investments at Cost (209) 1,935
Increase in Receivable for Investment Sold - (417)
(Increase) Decrease in Accrued Interest and Discount Receivable (111) 1,186
Decrease in Prepaid Expenses 1 1
Increase (Decrease) in Legal and Professional Fees Payable 6 (2)
Increase in Reimbursable Administrative Expenses Payable 22 56
Decrease in Independent General Partners' Fees Payable (3) (10)
Realized Loss on Sale of Investment - (1,170)
---------- ---------
Total Adjustments (294) 1,579
---------- ---------
Net Cash Provided by (Used in) Operating Activities $ (14) $ 1,686
========== =========
See the Accompanying Notes to Financial Statements (Unaudited).
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Individual Managing
General General Limited
Partner Partner Partners Total
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For the Three Months Ended March 31, 2000
Partners' Capital as of January 1, 2000 $ 11 $ 181 $ 20,926 $ 21,118
Allocation of Net Investment Income - 34 246 280
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Partners' Capital as of March 31, 2000 $ 11 $ 215 $ 21,172 $ 21,398
========== ======== ======== ========
See the Accompanying Notes to Financial Statements (Unaudited).
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
% of
Principal Investment Investment Fair Total
Amount/Shares Investment Date Cost(f) Value Investments
- ------------- ---------- ---------- ---------- -------- -----------
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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 42.75%
------------------------------
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 42.75%
==============================
NON-MANAGED COMPANIES
BIOLEASE, INC. - Note 6, Schedule 1
$513 Biolease, Inc., 13% Sub. Nt. due 06/06/04(b) 06/08/94 $ 442 $ 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
------------------------------
513 266 1.24%
------------------------------
FLA. ORTHOPEDICS, INC. - Schedule 1
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 $ 1,500 $ 266 1.24%
=============================
See the Accompanying Notes to Financial Statements (Unaudited).
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (continued)
MARCH 31, 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
% of
Principal Investment Investment Fair Total
Amount/Shares Investment Date Cost(f) Value Investments
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SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes Various $ 7,405 $ 7,220 33.71%
Preferred Stock, Common Stock, Warrants and Stock Rights Various 3,251 2,202 10.28%
-----------------------------
TOTAL MEZZANINE INVESTMENTS $10,656 $ 9,422 43.99%
=============================
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$10,000 Ford Motor Credit, 5.74% due 4/3/00 2/14/00 9,922 9,995
$2,000 American General Finance, 5.75% due 4/3/00 2/17/00 1,985 1,999
-----------------------------
TOTAL INVESTMENT IN COMMERCIAL PAPER $11,907 $11,994 56.01%
-----------------------------
TOTAL TEMPORARY INVESTMENTS $11,907 $11,994 56.01%
-----------------------------
TOTAL INVESTMENT PORTFOLIO $22,563 $21,416 100.00%
=============================
(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 PricewaterhouseCoopers LLP.
(f) Represents original cost and excludes accretion of discount of $22 for Mezzanine
Investments and $87 for Temporary Investments
See the Accompanying Notes to Financial Statements (Unaudited).
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
1. Organization
ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. (the "Retirement
Fund") 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.
Capital contributions from the Limited Partners and the General Partners (as
described below) totaled $178,065,000 in the public offering of the Retirement
Fund, the final closing for which was held on December 20, 1989.
Mezzanine Investments II, L.P. (the "Managing General Partner"), subject to
the supervision of the Individual General Partners (as defined below and
hereinafter with the Managing General Partner as the "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. ML Fund Administrators Inc.
(the "Fund Administrator") is an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc and is responsible for the day to day administrative services
necessary for the operations of the Retirement Fund.
2. Basis of Accounting
For financial reporting purposes, the records of the Retirement Fund are
maintained using the accrual method of accounting. 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.
The financial statements reflect all adjustments which are, in the opinion
of management, necessary for a fair presentation of the financial condition,
results of operations and cash flows for the periods presented. Such adjustments
consisted of those of a normal recurring nature, as well as an adjustment of
$120,000 to correct for a 1999 understatement of Mezzanine Investment income.
The results of operations for the three months ended March 31, 2000 are not
necessarily indicative of the results that may be achieved for the entire year.
Footnote disclosure which substantially duplicates the disclosure contained in
the Retirement Fund's Annual Report on Form 10-K for the year ended December 31,
1999, which is hereby incorporated by reference, has been omitted.
3. Investment Transactions
As previously reported, the Retirement Fund had expected to make a
distribution of Distributable Capital Proceeds relating to the August 27, 1999
sale of Fitz and Floyd, Inc. However, on November 9, 1999, a special meeting of
the General Partners of the Retirement Fund was held to review the Retirement
Fund's reserves, prior to considering 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 had been serving on the Hills Board of Directors as
a representative of the Retirement Fund). The Hills litigation was brought 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 and the Retirement Fund's potential
indemnification obligations to Thomas H. Lee, as well as the liquidity of the
Retirement Fund's remaining assets.
Following discussion of these issues, the Individual General Partners of
the Retirement Fund determined that since 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, at such time, that it would not be prudent to make
distributions to Partners. However, this reserve will be reviewed each quarter
by the General Partners of the Retirement Fund in light of the status of the
litigation, and distributions, if any, will be made in accordance with the
Retirement Fund's Partnership Agreement. On February 22, 2000, the court granted
defendants' motion for summary judgement dismissing claims against Mr. Lee.
However, Hills has the right to appeal that ruling after trial of the remaining
claims against certain other defendants, which is currently scheduled to
commence in May 2000. On March 7, 2000, the General Partners reviewed the status
of the Hills matter again, considering the court's ruling on February 22, 2000,
and the Individual General Partners again determined that it would not be
prudent to make distributions to Partners at such time. Currently, the
Retirement Fund has reserved all the net proceeds received from the sale of Fitz
and Floyd, Inc., as well as the third and fourth quarter 1999 income from
operations.
4. Non-Accrual of Investments
In accordance with the Retirement Fund's Accounting Policy, Florida
Orthopedics, Inc. has been on non-accrual status since January 1, 1995.
5. Related Party Transactions
The Investment Adviser, pursuant to an investment management agreement
among the Investment Adviser, the Thomas H. Lee Company and the Retirement Fund
dated November 10, 1989, is responsible for the identification, management and
liquidation of Mezzanine Investments and Bridge Investments for the Retirement
Fund. The Investment Adviser is entitled to receive an Investment Advisory Fee
as compensation for these services.
As compensation for its services, the Fund Administrator, an affiliate of
the Managing General Partner, is entitled to receive a Fund Administration Fee.
In addition, the Fund Administrator is entitled to reimbursement of 100% of
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.
As provided by the Partnership Agreement, the Managing General Partner of
the Retirement Fund is entitled to receive incentive distributions after Limited
Partners have received their Priority Return of 10% per annum ("MGP
Distributions"). Of the MGP Distributions, the Investment Adviser is entitled to
receive 95% and ML Mezzanine II Inc. is entitled to receive 5%. During 2000, the
Managing General Partner received no cash distributions.
6. Subsequent Event
On April 28, 2000, BioLease, Inc. ("BioLease") refinanced existing
construction and term loans and utilized a portion of the refinancing proceeds
to make a $76,000 partial paydown to the Retirement Fund of BioLease's 13%
Senior Subordinated Note.
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SCHEDULE 1
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Unrealized Total Unrealized Total Unrealized
Appreciation Appreciation Appreciation
(Depreciation) for (Depreciation) (Depreciation)
Investment Fair the Three Months as of as of
Security Cost Value Ended March 31, 2000 December 31, 1999 March 31, 2000
- -------------------------- ---------- -------- -------------------- ----------------- -----------------
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Non Public Securities:
Biolease, Inc.
Common Stock* $ 62 $ - $ - $ (62) $ (62)
Subordinated Notes* (a) 442 257 - (207) (207)
FLA. Orthopedics, Inc.
Preferred Stock* 987 - - (987) (987)
Subordinated Note - - - - -
----------- ---------- ----------
Total Unrealized Depreciation $ - $ (1,256) $ (1,256)
=========== ========== ==========
* Restricted Security
(a) Investment cost excludes accretion of discount of $22
See the Accompanying Notes to Financial Statements (Unaudited).
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity & Capital Resources
At the regular quarterly meeting of the General Partners of ML-Lee
Acquisition Fund (Retirement Accounts) II, L.P. (the "Retirement Fund") held on
December 14, 1999, Vernon R. Alden, Joseph L. Bower, Stanley H. Feldberg and
Thomas H. Lee (the "Individual General Partners") determined to extend the
initial ten year term of the Retirement Fund, which was due to terminate
December 20, 1999, for an additional two year period. Pursuant to Section 2.4 of
the Patnership Agreement, the term of the Retirement Fund will now expire on
December 20, 2001. Such extension will allow the Retirement Fund to more
effectively deal with its assets pending their liquidation. The term of the
Retirement Fund will now expire on December 20, 2001. In addition, the
Individual General Partners have the right, pursuant to the Partnership
Agreement, to extend the term of the Retirement Fund for an additional one year
period if they determine that such extension is in the best interest of the
Retirement Fund.
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 May 12, 2000, this remaining reserve balance was approximately $3,400,000 due
to follow-on investments in Petco Animal Supplies, Fitz and Floyd, Inc., Fine
Clothing, Inc., Hills and Ghirardelli Holdings and Anchor Advanced Products.
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.
As previously reported, the Retirement Fund had expected to make a
distribution of Distributable Capital Proceeds relating to the August 27, 1999
sale of Fitz and Floyd, Inc. However, on November 9, 1999, a special meeting of
the General Partners of the Retirement Fund was held to review the Retirement
Fund's reserves, prior to considering 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 had been serving on the Hills Board of Directors as
a representative of the Retirement Fund). The Hills litigation was brought 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 and the Retirement Fund's potential
indemnification obligations to Thomas H. Lee, as well as the liquidity of the
Retirement Fund's remaining assets.
Following discussion of these issues, the Individual General Partners of
the Retirement Fund determined that since 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, at such time, that it would not be prudent to make
distributions to Partners. However, this reserve will be reviewed each quarter
by the General Partners of the Retirement Fund in light of the status of the
litigation, and distributions, if any, will be made in accordance with the
Retirement Fund's Partnership Agreement. On February 22, 2000, the court granted
defendants' motion for summary judgement dismissing claims against Mr. Lee.
However, Hills has the right to appeal that ruling after trial of the remaining
claims against certain other defendants, which is currently scheduled to
commence in May 2000. On March 7, 2000, the General Partners reviewed the status
of the Hills matter again, considering the court's ruling on February 22, 2000,
and the Individual General Partners again determined that it would not be
prudent to make distributions to Partners at such time. Currently, the
Retirement Fund has reserved all the net proceeds received from the sale of Fitz
and Floyd, Inc., as well as the third and fourth quarter 1999 income from
operations.
At March 31, 2000, the Retirement Fund had outstanding a total (at cost) of
$10,656,000 invested in Mezzanine Investments representing $9,156,000 Managed
portfolio investments, $1,500,000 Non-Managed portfolio investments, and
$11,907,000 of Temporary Investments comprised of 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 after Limited
Partners have received their Priority Return of 10% per annum ("MGP
Distributions"). 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 March 31, 2000 there is no
outstanding Deferred Distribution Amount.
As recovered capital from portfolio company sales is distributed to Limited
Partners, the NAV per Unit is reduced accordingly, and the interest income
previously generated by holdings which have been sold will no longer be received
by the Retirement Fund. Because the Retirement Fund has only four portfolio
companies remaining, only two of which are income producing, the amount of
interest income received by the Retirement Fund is not significant. As a result,
it is expected that any future cash distributions paid to Partners will be
derived almost entirely from recovered capital and gains, if any, from asset
sales, which are subject to market conditions and are inherently unpredictable
as to timing. Therefore, in the absence of cash available for distribution
resulting from the future sale of portfolio holdings, the Retirement Fund will
have distributable cash from operations estimated to be less than one dollar per
Unit each quarter available for future cash distributions, to the extent such
cash is not reserved for expenses and contingencies (see discussion of Hills
matter above).
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. The Retirement Fund
undertakes no responsibility to update publicly or revise any forward-looking
statements.
Results of Operations
Net Investment Income
For the three months ended March 31, 2000, the Retirement Fund had net
investment income of $280,000 as compared to $107,000 for the three months ended
March 31, 1999. The increase in net investment during the three months ended
March 31, 2000, as compared to the same period in 1999, is primarily
attributable to an increase in interest income from both Mezzanine and Temporary
Investments and other factors, as discussed below.
Investment Income and Expenses
Total investment income from operations for the three months ended March
31, 2000 and 1999 primarily consists of interest and discount income earned on
the Retirement Fund's portfolio of Mezzanine Investments, Temporary Investments
and short-term money market instruments. For the three months ended March 31,
2000, the Retirement Fund had investment income of $559,000 as compared to
$384,000 for the same period in 1999. The increase in investment income during
the three months ended March 31, 2000, as compared to the same period in 1999,
is primarily attributable to a $120,000 adjustment to correct for a 1999
understatement of Mezzanine Investment income, plus an increase in income earned
on Temporary Investments as a result of investing the Fitz and Floyd, Inc. sale
proceeds, which have been reserved. This increase was partially offset by a
decrease in income earned on Mezzanine Investments as a result of the August
1999 sale of Fitz and Floyd, Inc.
Major expenses for the three months ended March 31, 2000 and 1999 consisted
of Investment Advisory Fees and Administrative Expenses.
The Investment Adviser and Fund Administrator both receive their
compensation on a quarterly basis. The total Investment Advisory Fee incurred by
the Retirement Fund to the Investment Adviser for each of the three months ended
March 31, 2000 and 1999 was $134,000 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 Funds on a combined basis.
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 out-of-pocket expenses incurred by the Fund Administrator on behalf of
the Retirement Fund ("Reimbursable Administrative Expenses"). Reimbursable
Administrative Expenses primarily consist of printing, audit, tax preparation,
legal fees and expenses, and custodian fees. For each of the three months ended
March 31, 2000 and 1999, the Retirement Fund incurred an Fund Administration Fee
of $45,000. For the three months ended March 31, 2000 and 1999, the Retirement
Fund incurred $74,000 and $77,000, respectively, in Reimbursable Administrative
Expenses.
Legal and professional fees for the three months ended March 31, 2000 and
1999, were $8,000, and $0, respectively. These expenses are largely 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 certain
litigation proceedings.
Net Assets
The Retirement Fund's net assets increased by $280,000 during the three
months ended March 31, 2000, due to net investment income of $280,000. During
the three months ended March 31, 1999, the Retirement Fund's net assets
increased by $1,863,000, due to net investment income of $107,000 and a reversal
of net unrealized depreciation of $4,610,000, partially offset by cash
distributions to partners of $1,684,000 and a realized loss from the sale of a
Mezzanine Investment of $1,170,000.
Unrealized Appreciation and Depreciation on Investments
The Retirement Fund recorded no unrealized appreciation or depreciation
during the three months ended March 31, 2000 as compared to a $4,610,000
reversal of net unrealized depreciation during the same period in 1999. The
Retirement Fund's cumulative net unrealized depreciation on investments as of
March 31, 2000 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 accreted 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 47.2% of the Retirement Fund's investments (at cost) are
invested in private placement securities for which there are no ascertainable
market values, while approximately 52.8% is invested in commercial paper with
maturities of less than 60 days. 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 March 31, 2000, the Retirement Fund's investment in Big V
Supermarkets Inc. represents approximately 42.8% 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 March 31,
2000. 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 Net
Unrealized Appreciation and Depreciation - Schedule 1.
<PAGE>
Net Realized Gains and Losses
The Retirement Fund recorded no realized gains or losses during the three
months ended March 31, 2000, as compared to a realized loss of $1,170,000 during
the same period in 1999.
Cash 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.
<PAGE>
Item 3. Quantitative and Qualitative Disclosure About Market Risk
As of March 31, 2000, 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 is not expected to 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 Securites.
------------------------------
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
March 31, 2000.
(b) Reports on Form 8-K:
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 15th day of May,
2000.
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: May 15, 2000 /s/ Kevin T. Seltzer
----------------------------------
Kevin T. Seltzer
ML Mezzanine II, Inc.
Vice President and Treasurer
(Principal Financial Officer of Registrant)
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the
March 31, 2000 Form 10-Q Balance Sheets and Statements of Operations and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
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