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, 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) 236-6576
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 September 30, 2000 (Unaudited) and December 31, 1999 (Unaudited)
Statements of Operations
For the Three and Nine Months Ended September 30, 2000 and 1999 (Unaudited)
Statements of Changes in Net Assets
For the Nine Months Ended September 30, 2000 and 1999 (Unaudited)
Statements of Cash Flows
For the Nine Months Ended September 30, 2000 and 1999 (Unaudited)
Statements of Changes in Partners' Capital
For the Nine Months Ended September 30, 2000 (Unaudited)
Schedule of Portfolio Investments
As of September 30, 2000 (Unaudited)
Notes to Financial Statements (Unaudited)
Supplemental Schedule of Realized Loss
- Schedule 1 (Unaudited)
Supplemental Schedule of Unrealized Depreciation
- Schedule 2 (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)
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Assets:
Investments - Notes 3, 4 and 7
Portfolio Investments at fair value
Managed Companies (amortized cost $7,763
as of September 30, 2000 and $9,156 as of December 31, 1999) $ 7,763 $ 9,156
Non-Managed Companies (amortized cost $1,435
as of September 30, 2000 and $1,500 as of December 31, 1999) 228 266
Temporary Investments, at amortized cost (cost $13,667
as of September 30, 2000 and $11,698 as of December 31, 1999) 13,671 11,727
Cash 204 32
Accrued Interest 110 92
Prepaid Expenses - 4
----------- ----------
Total Assets $ 21,976 $ 21,277
=========== ==========
Liabilities and Partners' Capital:
Liabilities
Reimbursable Administrative Expenses Payable - Note 6 $ 141 $ 125
Independent General Partners' Fees Payable - Note 6 1 5
Legal and Professional Fees Payable 12 5
Deferred Interest Income 7 24
----------- ----------
Total Liabilities 161 159
----------- ----------
Partners' Capital
Individual General Partner 11 11
Managing General Partner 267 181
Limited Partners (177,515 Units) 21,537 20,926
----------- ----------
Total Partners' Capital 21,815 21,118
----------- ----------
Total Liabilities and Partners' Capital $ 21,976 $ 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 For the Nine Months
Ended September 30, Ended September 30,
-------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Investment Income:
Interest $ 220 $ 333 $ 926 $ 955
Discount and Other Income 222 55 529 218
---------- ---------- --------- ---------
Total Investment Income 442 388 1,455 1,173
---------- ---------- --------- ---------
Expenses:
Investment Advisory Fee - Note 6 134 134 401 401
Fund Administration Fee - Note 6 45 45 134 134
Reimbursable Administrative Expenses - Note 6 64 46 190 186
Independent General Partners' Fees and Expenses 16 19 47 52
Legal and Professional Fees - 29 8 29
Insurance Expense 1 1 4 3
---------- ---------- --------- ---------
Total Expenses 260 274 784 805
---------- ---------- --------- ---------
Net Investment Income 182 114 671 368
Realized Loss on Sales of Investments - Note 3 and Schedule 1 - (2,298) (5) (3,468)
Net Change in Unrealized Depreciation on
Investments - Schedule 2
Nonpublic Securities - 6,271 31 10,881
---------- ---------- --------- ---------
Net Increase in Net Assets Resulting from Operations 182 4,087 697 7,781
Less: Earned MGP Distributions to Managing General Partner (27) (32) (91) (82)
---------- ---------- --------- ---------
Net Increase Available For Pro-Rata Distribution to All Partners $ 155 $ 4,055 $ 606 $ 7,699
========== ========== ========= =========
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 Nine Months Ended September 30,
---------------------------------------
2000 1999
---------- ----------
<S> <C> <C>
From Operations:
Net Investment Income $ 671 $ 368
Realized Loss on Sales of Investments (5) (3,468)
Net Change in Unrealized Depreciation on Investments 31 10,881
---------- ----------
Net Increase in Net Assets Resulting from Operations 697 7,781
Cash Distributions to Partners - (8,325)
---------- ----------
Total Increase (Decrease) 697 (544)
Net Assets:
Beginning of Year 21,118 21,693
---------- ----------
End of Period $ 21,815 $ 21,149
========== ==========
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 Nine Months Ended September 30,
---------------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Increase in Cash
Cash Flows from Operating Activities:
Interest, Discount and Other Income $ 1,445 $ 2,358
Investment Advisory Fee (401) (401)
Fund Administration Fee (134) (134)
Reimbursable Administrative Expense (174) (161)
Independent General Partners' Fees and Expenses (51) (62)
Legal and Professional Fees (13) (52)
Purchase of Temporary Investments, Net (1,969) (7,529)
Proceeds from Sales, Maturities and Paydowns of
Portfolio Company Investments 1,469 14,341
---------- ---------
Net Cash Provided by Operating Activities 172 8,360
---------- ---------
Cash Flows From Financing Activities:
Cash Distributions to Partners - (8,325)
---------- ---------
Net Cash Used in Financing Activities - (8,325)
---------- ---------
Net Increase in Cash 172 35
Cash at Beginning of Year 32 11
---------- ---------
Cash at End of Period $ 204 $ 46
========== =========
Reconciliation of Net Investment Income
to Net Cash Provided by Operating Activities
Net Investment Income $ 671 $ 368
---------- ---------
Adjustments to Reconcile Net Investment Income
to Net Cash Provided by Operating Activities:
(Increase) Decrease in Investments at Cost (507) 9,862
Decrease in Receivable for Investment Sold - 417
(Increase) Decrease in Accrued Interest and Discount Receivable (10) 1,186
Decrease in Prepaid Expenses 4 3
Increase in Reimbursable Administrative Expenses Payable 16 25
Decrease in Independent General Partners' Fees Payable (4) (10)
Increase (Decrease) in Legal and Professional Fees Payable 7 (23)
Realized Loss on Sales of Investments (5) (3,468)
---------- ---------
Total Adjustments (499) 7,992
---------- ---------
Net Cash Provided by Operating Activities $ 172 $ 8,360
========== =========
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
---------- -------- -------- --------
<S> <C> <C> <C> <C>
For the Nine Months Ended September 30, 2000
Partners' Capital as of January 1, 2000 $ 11 $ 181 $ 20,926 $ 21,118
Allocation of Net Investment Income - 86 585 671
Allocation of Realized Loss on Sale of Investment - - (5) (5)
Allocation of Net Change in Unrealized Depreciation
on Investments - - 31 31
---------- -------- -------- --------
Partners' Capital as of September 30, 2000 $ 11 $ 267 $ 21,537 $ 21,815
========== ======== ======== ========
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
SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
% of
Principal Investment Investment Fair Total
Amount/Shares Investment Date Cost(f) Value Investments
------------- ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
MEZZANINE INVESTMENTS
MANAGED COMPANIES
BIG V SUPERMARKETS, INC. (a) - Note 3
$5,570 Big V Supermarkets, Inc., Sr. Sub. Nt. 14.14% due 03/15/01(b)(g) 12/27/90 $ 5,570 $ 5,570
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) -------------------------------
7,763 7,763 35.84%
-------------------------------
COLE NATIONAL CORPORATION
7,032 Warrants 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 $ 7,763 $ 7,763 35.84%
===============================
NON-MANAGED COMPANIES
BIOLEASE, INC. - Notes 3 and 7 and Schedule 2
$437 BioLease, Inc., 13% sub. Nt. due 06/06/04(b) 06/08/94 $ 377 $ 219
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
6,128 Options BioTransplant, Inc., Common Stock Purchase Options(c) 02/02/96 - -
-------------------------------
448 228 1.05%
-------------------------------
FLA. ORTHOPEDICS, INC. - Schedule 2
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) 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 $ 1,435 $ 228 1.05%
==============================
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)
SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
% of
Principal Investment Investment Fair Total
Amount/Shares Investment Date Cost(f) Value Investments
------------- ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes Various $ 5,947 $ 5,789 26.72%
Preferred Stock, Common Stock, Warrants and Stock Rights Various 3,251 2,202 10.17%
------------------------------
TOTAL MEZZANINE INVESTMENTS $ 9,198 $ 7,991 36.89%
==============================
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$10,000 Ford Motor Credit, 6.48% due 11/13/00 9/29/00 9,919 9,923
$ 3,750 State Street Clipper Receivable, 6.60% due 10/2/00 9/29/00 3,748 3,748
------------------------------
TOTAL INVESTMENT IN COMMERCIAL PAPER $13,667 $13,671 63.11%
------------------------------
TOTAL TEMPORARY INVESTMENTS $13,667 $13,671 63.11%
------------------------------
TOTAL INVESTMENT PORTFOLIO $22,865 $21,662 100.00%
==============================
(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 are not audited by PricewaterhouseCoopers LLP.
(f) Represents original cost and excludes accretion of discount of $18 for
Mezzanine Investments and $4 for Temporary Investments.
(g) $2,089,000 is scheduled to mature on December 15, 2000, with the remaining
$3,481,000 scheduled to mature on March 15, 2001.
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
SEPTEMBER 30, 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 and nine months ended September 30, 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
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. The Retirement Fund realized a loss from this
transaction of $5,000, after the payment of $12,000 in transaction costs and the
write-off of $7,000 of unamortized note discount.
On June 15, 2000, $1,393,000 (20%) of the Retirement Fund's $6,963,000
senior subordinated Note from Big V Supermarkets, Inc. ("Big V") matured. The
Retirement Fund recorded no gain or loss from this transaction. An additional
$2,089,000 (30%) is scheduled to mature on December 15, 2000, with the remaining
$3,481,000 (50%) scheduled to mature on March 15, 2001.
In September 2000, the court approved a settlement in respect 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 settlement provided a
complete release of Mr. Lee in his role as a director of Hills. As a result, the
reserves which had been maintained by the Retirement Fund for future
indemnification obligations are no longer required for such purpose.
However, before consenting to the disposition of all or part of Retirement
Fund's reserves, at the most recent quarterly meeting, the General Partners
reviewed certain contractual covenants, commitments and contingencies the
Retirement Fund has with respect to its investment in Big V Supermarkets, Inc.
("Big V"). Such covenants, commitments and contingencies may have the effect of
delaying and/or precluding future distributions, and accordingly, the General
Partners have determined that further distributions should not be made until the
Retirement Fund's responsibilities under such covenants, commitments and
contingencies have been more thoroughly investigated and resolved. The General
Partners will continue to review such reserves each quarter in light of this
matter, and distributions, if any, will be made in accordance with the
Retirement Fund's Partnership Agreement.
Subsequently, the Retirement Fund and Fund II agreed to guarantee, in
aggregate, $1,000,000 of short-term financing requirements of Big V.
<PAGE>
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. 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. In accordance with this policy,
as of September 30, 2000 and December 31, 1999, the Retirement Fund's portfolio
of investments excluded approximately $105,000 and $86,000, respectively, of
such payment-in-kind notes received from BioLease, Inc.
6. 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.
7. Subsequent Events
On November 9, 2000, the Retirement Fund exercised its rights under the
BioTransplant, Inc. common stock purchase warrants and purchased 6,554 shares of
BioTransplant, Inc. common stock for $19,662, exclusive of any transaction
costs.
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SCHEDULE 1
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SUPPLEMENTAL SCHEDULE OF REALIZED LOSS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Principal Amount/ Investment Net Realized
Security Number of Shares Cost Proceeds Loss
-------- ---------------- ---------- -------- --------
<S> <C> <C> <C> <C>
Biolease, Inc. (Note) $ 76 $ 69 $ 64 $ (5)
==== ==== ==== ====
See the Accompanying Notes to Financial Statements (Unaudited).
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SCHEDULE 2
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SUPPLEMENTAL SCHEDULE OF UNREALIZED DEPRECIATION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Reversal of Reversal of
Unrealized Unrealized
Depreciation Depreciation
for for Total Unrealized Total Unrealized
the Three Months the Nine Months Depreciation Depreciation
Investment Fair Ended Ended as of as of
Security Cost Value September 30, 2000 September 30, 2000 December 31, 1999 September 30, 2000
-------------------------- ---------- -------- ------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Non Public Securities:
Biolease, Inc.
Common Stock* $ 62 $ - $ - $ - $ (62) $ (62)
Subordinated Notes* (a) 377 219 - - (176) (176)
FLA. Orthopedics, Inc.
Preferred Stock* 987 - - - (987) (987)
Subordinated Note* - - - - - -
----------- ---------- ---------- ----------
Unrealized Depreciation from Non Public Securities - - (1,225) (1,225)
----------- ---------- ---------- ----------
Reversal of Unrealized Depreciation on Securities Sold in 2000:
BioLease, Inc.
Subordinate Note* - 31 (31) -
----------- ---------- ---------- ----------
Total Unrealized Depreciation $ - $ 31 $ (1,256) $ (1,225)
=========== ========== ========== ==========
* Restricted Security
(a) Investment cost is after April 28, 2000 partial note
paydown and excludes accretion of remaining discount of $18.
See the Accompanying Notes to Financial Statements (Unaudited).
</TABLE>
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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 August 11, 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.
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. The Retirement Fund realized a loss from this
transaction of $5,000, after the payment of $12,000 in transaction costs and the
write-off of $7,000 of unamortized note discount.
On June 15, 2000, $1,393,000 (20%) of the Retirement Fund's $6,963,000
senior subordinated Note from Big V Supermarkets, Inc. ("Big V") matured. The
Retirement Fund recorded no gain or loss from this transaction. An additional
$2,089,000 (30%) is scheduled to mature on December 15, 2000, with the remaining
$3,481,000 (50%) scheduled to mature on March 15, 2001.
On November 9, 2000, the Retirement Fund exercised its rights under the
BioTransplant, Inc. common stock warrants and purchased 6,554 shares of
BioTransplant, Inc. common stock for $19,662, exclusive of any transaction
costs.
In September 2000, the court approved a settlement in respect 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 settlement provided a
complete release of Mr. Lee in his role as a director of Hills. As a result, the
reserves which had been maintained by the Retirement Fund for future
indemnification obligations are no longer required for such purpose.
However, before consenting to the disposition of all or part of Retirement
Fund's reserves, at the most recent quarterly meeting, the General Partners
reviewed certain contractual covenants, commitments and contingencies the
Retirement Fund has with respect to its investment in Big V Supermarkets, Inc.
("Big V"). Such covenants, commitments and contingencies may have the effect of
delaying and/or precluding future distributions, and accordingly, the General
Partners have determined that further distributions should not be made until the
Retirement Fund's responsibilities under such covenants, commitments and
contingencies have been more thoroughly investigated and resolved. The General
Partners will continue to review such reserves each quarter in light of this
matter, and distributions, if any, will be made in accordance with the
Retirement Fund's Partnership Agreement.
Subsequently, the Retirement Fund and Fund II agreed to guarantee, in
aggregate, $1,000,000 of short-term financing requirements of Big V.
At September 30, 2000, the Retirement Fund had outstanding a total (at
cost) of $9,198,000 invested in Mezzanine Investments representing $7,763,000
Managed portfolio investments, $1,435,000 Non-Managed portfolio investments, and
$13,667,000 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 September 30, 2000 there is
no outstanding Deferred Distribution Amount.
As recovered capital from portfolio company sales is distributed to Limited
Partners, the Limited Partners net asset value ("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 (to
the extent such cash is not reserved for expenses and contingencies - see
discussion above) available to pay distributions to 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 distribution resulting from the
future sale of portfolio holdings, the only cash available for distribution by
the Retirement Fund will derive from operations; this cash is estimated to be
less than one dollar per Unit each quarter.
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 and nine months ended September 30, 2000 and 1999, the
Retirement Fund had net investment income of $182,000, $671,000, $114,000 and
$368,000, respectively. The increase in net investment income during the three
and nine months ended September 30, 2000, as compared to the same income periods
in 1999, is primarily attributable to an increase in interest and discount
income from Temporary Investments and other factors, as discussed below.
<PAGE>
Investment Income and Expenses
Total investment income from operations for the three and nine months ended
September 30, 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 and nine
months ended September 30, 2000 and 1999, the Retirement Fund had investment
income of $442,000, $1,455,000, $388,000 and $1,173,000, respectively. The
increase in investment income during the three and nine months ended September
30, 2000, as compared to the same periods in 1999, is primarily attributable to
an increase in income earned on Temporary Investments as a result of investing
the Fitz and Floyd, Inc. sale proceeds, the Biolease, Inc. partial paydown
proceeds, the Big V Supermarkets, Inc. partial maturity proceeds, and income
from operations from the third quarter 1999 and forward, all of 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., the April 2000 partial paydown of the Biolease, Inc. senior subordinated
note and the June 2000 partial maturity of the Big V Supermarkets, Inc. senior
subordinated note. In addition, the increase in investment income during the
nine months ended September 30, 2000, as compared to the same period in 1999, is
attributable to a $120,000 adjustment in the first quarter of 2000 to correct
for a 1999 understatement of Mezzanine Investment income.
Major expenses for the three and nine months ended September 30, 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 the three and nine months
ended September 30, 2000 and 1999 was $134,000, $401,000, $134,000 and $401,000,
respectively, and was calculated at an annual rate of 1.0% of assets under
management (net offering proceeds reduced by cumulative capital reductions and
realized losses), with a minimum annual amount of $1,200,000 for the 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 the three and nine months ended
September 30, 2000 and 1999, the Retirement Fund incurred an Fund Administration
Fee of $45,000, $134,000, $45,000 and $134,000, respectively. For the three and
nine months ended September 30, 2000 and 1999, the Retirement Fund incurred
$64,000, $190,000, $46,000 and $186,000, respectively, in Reimbursable
Administrative Expenses.
For the three and nine months ended September 30, 2000 and 1999, the Fund
incurred legal and professional fees of $0, $8,000, $29,000 and $29,000,
respectively. Such expenses are primarily attributable to legal fees incurred on
behalf of indemnified defendants in connection with the Hills Litigation.
Net Assets
The Retirement Fund's net assets increased by $697,000 during the nine
months ended September 30, 2000, due to net investment income of $671,000 and a
reversal of net unrealized depreciation of $31,000 partially offset by a net
realized loss of $5,000 from the partial paydown of a Mezzanine Investment.
During the nine months ended September 30, 1999, the Retirement Fund's net
assets decreased by $544,000, due to cash distributions to partners of
$8,325,000 and realized losses from the sales of two Mezzanine Investments of
$3,468,000, partially offset by net investment income of $368,000 and a reversal
of net unrealized depreciation of $10,881,000.
Unrealized Appreciation and Depreciation on Investments
The Retirement Fund recorded a reversal of net unrealized depreciation of
$31,000 during the nine months ended September 30, 2000 as compared to a
$10,881,000 reversal of net unrealized depreciation during the same period in
1999. The Retirement Fund's cumulative net unrealized depreciation on
investments as of September 30, 2000 totaled $1,225,000.
The Managing General Partner and the Investment Adviser review, on a
quarterly basis, the valuation of the Retirement Fund's portfolio investments
that do not have a readily ascertainable market value; such investment
valuations are subject to 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. Although the Managing General Partner and
Investment Adviser use their best judgement in estimating the fair value of
these investments, there are inherent limitations in any estimation technique.
As a result of total net realized and unrealized appreciation and
depreciation recorded by the Retirement Fund through September 30, 2000, Limited
Partners' NAV was $121.33 per Unit. The Retirement Fund's net assets include
private placement securities (approximately 36.6% of net assets) for which there
are no ascertainable market values and commercial paper (approximately 62.7% of
net assets) which is stated at amortized cost. The Retirement Fund's private
placement securities are primarily comprised of its investments in Big V
Supermarkets, Inc., which are valued at cost. The September 30, 2000 NAV figure
does not reflect any change that may have occurred in the value of the
Retirement Fund's holdings since September 30, 2000, does not reflect residual
costs related to the Hills litigation other than those incurred through
September 30, 2000, nor does it represent the Units' current market value.
Furthermore, Limited Partners may not be able to realize this value upon a sale
of their Units.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of September
30, 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
Unrealized Depreciation - Schedule 2.
Net Realized Gains and Losses
The Retirement Fund recorded a realized loss of $5,000 during the nine
months ended September 30, 2000, as compared to realized losses of $3,468,000
during the same period in 1999.
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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
As of September 30, 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
September 30, 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 14th day of
November, 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: November 14, 2000 /s/ Kevin T. Seltzer
----------------------------------
Kevin T. Seltzer
ML Mezzanine II, Inc.
Vice President and Treasurer
(Principal Financial Officer of Registrant)
