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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended June 30, 2002
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 0-17383
ML-LEE ACQUISITION FUND II, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 04-3028398
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4 World Financial Center, 26th Floor
New York, New York 10080
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (800) 288-3694
Title of each Class Name of each exchange on which registered
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None Not applicable
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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 II, L.P.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Statements of Assets, Liabilities and Partners' Capital as of June 30, 2002 and
December 31, 2001 (Unaudited)
Statements of Operations for the Three and Six Months Ended June 30, 2002 and
2001(Unaudited)
Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001
(Unaudited)
Statement of Changes in Partners' Capital for the Six Months Ended June 30, 2002
(Unaudited)
Notes to Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities and Use of Proceeds.
Item 3. Defaults upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL (Unaudited)
(dollars in thousands)
June 30, December 31,
2002 2001
------------------ ------------------
Assets
Temporary investments at amortized cost $ 19,192 $ 19,798
Cash - interest bearing 371 274
Prepaid insurance 12 15
------------ -------------
Total Assets $ 19,575 $ 20,087
============ =============
Liabilities and Partners' Capital
Liabilities:
Litigation settlement payable $ 1,369 $ -
Reimbursable administrative expenses payable 202 113
Accounts payable and accrued expenses 71 104
Due to Independent General Partners 7 5
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Total Liabilities 1,649 222
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Partners' Capital:
Individual General Partner 10 11
Managing General Partner 576 580
Limited Partners (221,745 Units) 17,340 19,274
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Total Partners' Capital 17,926 19,865
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Total Liabilities and Partners' Capital $ 19,575 $ 20,087
============ =============
See notes to financial statements.
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------------ ---------- ----------- -----------
Investment Income and Expenses
Investment Income:
Interest from portfolio investments $ - $ 210 $ - $ 233
Interest from temporary investments 88 210 174 493
----------- ---------- ------------ -----------
Total investment income 88 420 174 726
----------- ---------- ------------ -----------
Expenses:
Litigation settlement 1,369 - 1,369 -
Investment advisory fee 83 167 166 333
Fund administration fee 55 55 111 111
Reimbursable administrative expenses 77 61 135 117
Independent General Partners' fees and expenses 76 18 125 46
Legal fees 120 54 201 100
Insurance expense 4 2 6 4
----------- ---------- ------------ -----------
Total expenses 1,784 357 2,113 711
----------- ---------- ------------ -----------
Net Investment (Loss) Income (1,696) 63 (1,939) 15
----------- ---------- ------------ -----------
Realized and Unrealized Loss from Investments:
Realized loss from investments (16,049) - (16,049) -
Change in unrealized depreciation of investments 16,049 (3,784) 16,049 (3,784)
----------- ---------- ------------ -----------
Net Realized and Unrealized Loss from Investments - (3,784) - (3,784)
----------- ---------- ------------ -----------
Net Decrease in Net Assets Resulting From Operations $ (1,696) $ (3,721) $ (1,939) $ (3,769)
========== ======== ======= =========
See notes to financial statements.
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF CASH FLOWS (Unaudited)
For the Six Months Ended June 30,
(dollars in thousands)
2002 2001
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Cash Flows From Operating Activities:
Interest income $ 172 $ 565
Investment advisory fee (166) (333)
Fund administration fee (111) (111)
Reimbursable administrative expenses (46) (103)
Independent General Partners' fees and expenses (123) (60)
Legal fees (234) (97)
Net redemption of temporary investments 608 16
Insurance expense (3) -
Cost of portfolio investments purchased - (11)
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Net Cash Provided From (Used In) Operating Activities 97 (134)
Cash at Beginning of Period 274 162
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Cash at End of Period $ 371 $ 28
=========== =======
Reconciliation of net investment (loss) income to net cash provided from (used
in) operating activities:
Net investment (loss) income $ (1,939) $ 15
-----------
Adjustments to reconcile net investment (loss) income to net cash provided from
(used in) operating activities:
Decrease (increase) in investments at cost 608 (172)
(Increase) decrease in accrued interest receivable (2) 27
Increase in other receivable - (12)
Increase in litigation settlement payable 1,369 -
Decrease in prepaid expenses, net 3 4
Increase in reimbursable administrative expenses payable 89 14
Increase (decrease) in due to Independent General Partners 2 (14)
(Decrease) increase in accounts payable and accrued expenses (33) 4
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Total adjustments 2,036 (149)
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Net Cash Provided From (Used In) Operating Activities $ 97 $ (134)
=========== =========
See notes to financial statements.
ML-LEE ACQUISITION FUND II, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (Unaudited)
For the Six Months Ended June 30, 2002
(dollars in thousands)
Individual Managing
General General Limited
Partner Partner Partners Total
- ------------------------------------------------------------------------------------------ ------------- ------------
Balance as of December 31, 2001 $ 11 $ 580 $ 19,274 $ 19,865
Net investment loss (1) (4) (1,934) (1,939)
Net realized loss from investments (4) (36) (16,009) (16,049)
Change in unrealized depreciation of investments 4 36 16,009 16,049
------- ------- ----------- -----------
Balance as of June 30, 2002 $ 10 $ 576 $ 17,340(a) $ 17,926
======= ======== ============ =========
(a) The net asset value per $1,000 unit of limited partnership interest
("Unit") was $78 as of June 30, 2002. Cumulative cash distributions paid to
limited partners from inception to June 30, 2002 totaled $1,303.
See notes to financial statements.
ML-LEE ACQUISITION FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. Organization and Purpose
ML-Lee Acquisition Fund II, L.P. ("Fund II"), a Delaware limited partnership,
was formed on September 23, 1988 along with ML-Lee Acquisition Fund (Retirement
Accounts) II, L.P. (the "Retirement Fund" and together with Fund II; the
"Funds"). The Funds commenced operations on November 10, 1989.
Mezzanine Investments II, L.P. (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
(the "Investment Adviser"), is the limited partner. The Managing General Partner
is responsible for overseeing and monitoring the investments of Fund II, subject
to the overall supervision of four individual general partners (the "Individual
General Partners"; and together with the Managing General Partner, the "General
Partners"). The Individual General Partners of Fund II include Thomas H. Lee and
three independent general partners: Vernon R. Alden, Joseph L. Bower and Stanley
H. Feldberg (the "Independent General Partners"), who are non-interested persons
as defined in the Investment Company Act of 1940. ML Fund Administrators Inc.
(the "Fund Administrator"), an indirect wholly-owned subsidiary of Merrill Lynch
& Co., Inc., is responsible for the administrative services necessary for the
operations of Fund II.
The primary objective of Fund II is to provide current income and capital
appreciation by investing in privately structured, friendly leveraged buyouts
and other leveraged transactions. Fund II has pursued this objective by
investing primarily in subordinated debt and related equity securities issued in
conjunction with the mezzanine financings of friendly leveraged buyout
transactions, leveraged acquisitions and recapitalizations.
In December 2001, the Individual General Partners approved the final extension
of the term of Fund II for an additional one year period, to allow for the
orderly liquidation of Fund II's remaining assets. Fund II is now scheduled to
terminate no later than January 5, 2003. Thereafter, pursuant to Fund II's
amended and restated agreement of limited partnership, as amended (the
"Partnership Agreement"), Fund II will have up to an additional five year period
to liquidate its remaining assets, if such additional period is required.
2. Significant Accounting Policies
Valuation of Investments - The fair value of publicly listed securities for
which market quotations are readily available, are valued using the public
market price as of the last day of the valuation period. The fair value of
publicly listed securities for which market quotations are not readily
available, including securities restricted as to resale for which a
corresponding publicly traded class exists, are valued in good faith by the
Investment Adviser after approval by the Managing General Partner and approval
of the Individual General Partners. Privately held securities generally are
valued at original cost plus accrued value in the case of original issue
discount or deferred pay securities. Such privately held investments generally
are revalued if there is an objective basis for doing so at a different price.
Investments are written down in value if the Investment Adviser and the General
Partners believe adverse credit developments of a significant nature require a
write-down of such securities. Investments are written up in value only if there
has been an arms length third party transaction to support the increased
valuation. Although the Investment Adviser and the General Partners use their
best judgment in estimating the fair value of Fund II's portfolio investments,
there are inherent limitations in any estimation technique. Therefore, the fair
value estimates presented herein are not necessarily indicative of the amount
that could be realized if a readily available market existed for such
securities, and the differences could be material.
ML-LEE ACQUISITION FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited), continued
Temporary Investments - Investments in short term money market instruments with
maturities of 90 days or less are stated at amortized cost, which approximates
market value. Fund II held the following temporary investments as of June 30,
2002:
Maturity Original Amortized Amortized
Issuer Yield Date Cost Discount Cost
- -----------------------------------------------------------------------------------------------------------------------------
American General Corp. 1.76% 7/08/02 $ 18,444 $ 48 $ 18,492
GE Capital Corp. 1.76% 7/15/02 699 1 700
----------- --------- -----------
Total Temporary Investments $ 19,143 $ 49 $ 19,192
=========== ========= ==============
Investment Transactions - Investment transactions are recorded on the accrual
method. Investments are recorded on the trade date, or the date Fund II obtains
an enforceable right to demand the securities or payment therefore. Realized
gains and losses on investments sold are computed on a specific identification
basis.
Deferred Interest Income - All fees received by Fund II upon the funding of
Mezzanine or Bridge Investments were treated as deferred interest income and
amortized over the maturity of such investments.
Income Taxes - No provision for income taxes has been made since all income and
losses are allocable to the partners for inclusion in their respective tax
returns. Fund II's net assets for financial reporting purposes differ from its
net assets for tax purposes. Net unrealized depreciation of investments of
$16.05 million as of December 31, 2001, was recorded for financial statement
purposes, but was not recognized for tax purposes. Additionally, syndication
costs relating to the offering of limited partnership interests totaling $19.6
million were charged to partners' capital on the financial statements. These
amounts have not been deducted or charged against partners' capital for tax
purposes.
Reclassification - Certain reclassifications have been made to the prior period
financial statements to conform with the current period presentation.
3. Allocations of Profits and Losses
Pursuant to the Partnership Agreement, all profits from Temporary Investments
generally are allocated 99.75% to the Limited Partners, 0.23% to the Managing
General Partner and 0.02% to the Individual General Partner. Profits from
Mezzanine Investments generally are allocated as follows:
o 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;
o second, 99.75% to the Limited Partners, 0.23% to the Managing General
Partner and 0.02% 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;
o third, 69.75% to the Limited Partners, 30.225% to the Managing General
Partner and 0.025% to the Individual General Partner until the Managing
General Partner has received 20.281% of the total profits allocated; and
o thereafter, 79.75% to the Limited Partners, 20.225% to the Managing
General Partner and 0.025% to the Individual General Partner.
ML-LEE ACQUISITION FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited), continued
4. Related Party Transactions
The Investment Adviser is responsible for the identification, management and
liquidation of the portfolio investments of the Funds. As compensation for
services rendered to the Funds, the Investment Adviser had received an
Investment Advisory Fee at an annual rate of 1% of the combined assets under
management of the Funds (net offering proceeds reduced by cumulative capital
reductions and realized losses), with a minimum fee of $1,200,000. Fund II's
proportionate share of such annual fee was $666,000. In July 2001, the
Investment Adviser voluntarily agreed to reduce the annual Investment Advisory
Fee payable by the Funds by 50%. Accordingly, the combined annual Investment
Advisory Fee payable by the Funds was reduced to $600,000, effective as of July
1, 2001. Fund II's proportionate share of such annual fee is $333,000. The
Investment Advisory Fee is paid quarterly in advance.
As compensation for its services to the Funds, the Fund Administrator receives
an annual fee of $400,000, payable quarterly in advance. Fund II's proportionate
share of such annual fee is $222,000. Additionally, the Fund Administrator is
entitled to reimbursement of 100% of the operating expenses paid by the Fund
Administrator on behalf of the Funds ("Reimbursable Administrative Expenses").
Reimbursable Administrative Expenses primarily consist of printing and mailing,
audit, tax preparation, legal fees and custody fees.
As provided by Fund II's Partnership Agreement, the Managing General Partner of
Fund II is entitled to receive an incentive distribution after Limited Partners
have received a Priority Return (as defined in the Partnership Agreement) 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%. The Managing General Partner received no cash distributions during
the six months ended June 30, 2002.
As compensation for their services to the Funds, each of the Independent General
Partners receives a combined annual fee of $40,000; $1,000 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 out-of-pocket costs incurred in
connections with such meetings. Fund II's proportionate share of the annual fee
and meeting fee paid to each of the Independent General Partners is $22,200 and
$555, respectively.
5. Portfolio Investments
On June 27, 2002, the United States Bankruptcy Court for the District of
Delaware (the "Court") indicated that it would approve confirmation of the First
Amended Joint Consolidated Liquidating Plan of Reorganization (the "Plan") for
Big V Supermarkets, Inc. ("Big V" and together with Big V Holdings Corp. "BVH",
Big V's parent company, and certain other related entities, the "Big V
Entities").. The Court entered an order confirming the Plan on June 28, 2002,
and Big V and Wakefern Food Corporation ("Wakefern," Big V's current supplier),
are now taking steps to consummate the transactions set forth in the Plan.
Specifically, the sale of substantially all the assets of Big V to Wakefern has
been accomplished (subject to post-closing adjustments), and Big V is engaged in
the process of resolving claims and distributing the proceeds of its estate.
Under the Plan, Fund II will not receive any distribution on account of the
subordinated debt and the equity it holds in the Big V Entities, and Fund II's
equity in the Big V Entities will be cancelled. Also under the Plan, certain
payments have been made jointly by and on behalf of Fund II, the Retirement Fund
and Thomas H. Lee Equity Partners, L.P. (collectively, the "Settling Parties").
In exchange for these
ML-LEE ACQUISITION FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited), continued
payments, Fund II and the other Settling Parties have received broad releases of
claims relating to or arising from their investment in Big V. Specifically, the
releases cover all claims that could be asserted by or on behalf of Big V, from
all claims that could be asserted by or on behalf of Wakefern (including claims
related to the Side Letters, as defined and discussed in previous filings), and
also from all claims that could be asserted by any creditor or party in interest
that either voted in favor of the Plan or signed a lock-up letter supporting the
Plan.
Fund II believes that the claims resolved by the above-described payments are
without merit, that Fund II has meritorious defenses to such claims, and in any
event that Fund II would likely have had insurance coverage for certain of the
claims under insurance that previously had been procured by Thomas H. Lee
Partners, L.P. f/k/a Thomas H. Lee Company ("THL"). The complexity of the
claims, the rights to insurance coverage on some but not all of the claims, and
insurance coverage disputes raised by the insurer, however, made it likely that
the cost of defending such claims and resolving issues with respect to insurance
would be significant and would, for Fund II, exceed the amount it has paid to
obtain the releases. Accordingly, in July 2002, Fund II contributed $1,369,000
to fund its portion of the above-described payments, and to provide funds for
use by or on behalf of the Settling Parties jointly to address claims not
resolved by the Plan, as described below. Some of these funds may be returned to
Fund II if not needed under the Plan or to resolve other claims.
Notwithstanding disputes with respect to insurance coverage, a significant
portion of the rest of the settlement payment described above was funded through
monies received from the insurance procured by THL. To obtain these insurance
monies, however, THL was required to indemnify the insurance company from future
claims related to the Big V Entities, to the extent that insurance would
otherwise have been available, and the Settling Parties and others were required
to indemnify THL to the same extent that THL indemnified the insurance company.
Although Fund II believes that the Plan resolves the vast majority of potential
claims related to or arising from Big V, there are some creditors who did not
vote in favor of the Plan or sign a lock-up letter supporting the Plan and may
retain claims against Fund II. In addition, creditors who did vote in favor of
the Plan and/or sign a lock-up letter supporting the Plan may attempt to assert
claims despite such vote or support. In connection with the joint payment
described above, Fund II has agreed to cooperate with the other Settling Parties
to address any remaining claims relating to or arising from Big V. At this time
Fund II cannot estimate the likelihood of any claims being asserted, or the
magnitude or merits of any such claims. Fund II and the other Settling Parties
will discuss at least yearly whether potential unresolved claims remain and how,
if at all, such claims should be addressed. Until such time as such potential
unresolved claims are settled or otherwise resolved to the satisfaction of Fund
II and the other Settling Parties, Fund II does not anticipate making any
distributions to its Limited Partners. As with the claims that are released
under the Plan, Fund II believes that any potential unresolved claims are
without merit and that Fund II has defenses to any liability from such claims.
As a result of the recent developments regarding Fund II's investment in the Big
V Entities, as discussed above, Fund II wrote-off the remaining cost of this
investment as of June 30, 2002, realizing a loss of $14,536,000.
Additionally, due to continued business and financial difficulties at FLA.
Holdings, Inc., Fund II wrote-off itsremaining investment in the company as
of June 30, 2002, realizing a loss of $1,513,000.
ML-LEE ACQUISITION FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited), continued
6. Interim Financial Statements
The interim financial data as of June 30, 2002 and for the six months ended June
30, 2002 and June 30, 2001 is unaudited. However, in the opinion of Fund II, the
interim data includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the interim
periods.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
-------------------------------------------------------------------
Liquidity and Capital Resources
As of June 30, 2002, ML-Lee Acquisition Fund II, L.P. ("Fund II") held $371,000
in an interest-bearing cash account and $19,192,000 in temporary investments
consisting of short-term discounted commercial paper securities with maturities
of less than 90 days. Interest earned from such investments for the three and
six months ended June 30, 2002 totaled $ 88,000 and $174,000, respectively.
Interest earned in future periods is subject to fluctuations in short-term
interest rates and changes in amounts available for investment in such
securities. Funds needed to cover future operating expenses of Fund II and
contingent obligations, if any, as discussed below, will be obtained from these
existing cash reserves, interest on such reserves and other investment income
and proceeds, if any, from the sale of portfolio investments. Fund II, together
with ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. (the "Retirement
Fund"), are referred to herein as the "Funds".
In connection with certain contingencies relating to Fund II's investment in Big
V Supermarkets, Inc. ("Big V") and Big V Holdings Corp. ("BVH", Big V's parent
company and defined herein with Big V and certain other related entities as the
"Big V Entities"), the General Partners of Fund II have suspended further
distributions to the partners of Fund II until the responsibilities of Fund II
with respect to such contingencies can be determined.
As more fully described in Note 5 of notes to financial statements, the
bankruptcy court entered an order confirming a plan of reorganization for Big V.
In connection therewith, in July 2002, Fund II contributed $1,369,000 to fund
its portion of certain payments due under the plan in exchange for broad
releases of certain claims. Additionally, as part of the settlement, Fund II
will not receive any distribution on account of the subordinated debt and the
equity it holds in Big V. Additionally, until such time as the potential
unresolved claims referred to in Note 5 of notes to financial statements,
included in Part I, Item1 of this Form 10-Q, are settled or otherwise resolved
to the satisfaction of Fund II and the other Settling Parties, Fund II does not
anticipate making any distributions to its Limited Partners.
In July 2001, the Investment Adviser voluntarily agreed to reduce the annual
Investment Advisory Fee payable by the Funds by 50%. As a result, the combined
annual Investment Advisory Fee payable by the Funds was reduced from $1,200,000
to $600,000, effective as of July 1, 2001. Accordingly, Fund II's proportionate
share of such annual fee was reduced from $666,000 to $333,000. The Investment
Advisory Fee is paid quarterly in advance.
As provided by the Partnership Agreement of Fund II, the Managing General
Partner of Fund II is entitled to receive an incentive distribution after
limited partners have received their Priority Return (as defined in the
Partnership Agreement) 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"). Deferred
Distribution Amounts are distributable to partners on a pro-rata basis 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 Amounts
are paid. There was no outstanding Deferred Distribution Amount payable to the
Managing General Partner as of June 30, 2002.
In December 2001, the Individual General Partners approved the final extension
of the term of Fund II for an additional one year period, to allow for the
orderly liquidation of Fund II's remaining assets. Fund II is now scheduled to
terminate no later than January 5, 2003. Thereafter, pursuant to the Partnership
Agreement, Fund II will have up to an additional five year period to liquidate
its remaining assets, if such additional period is required.
Results of Operations
Net Investment Income or Loss - For the three months ended June 30, 2002, Fund
II had a net investment loss of $1,696,000 compared to net investment income of
$63,000 for the three months ended June 30, 2001. The unfavorable change in net
investment loss for the 2002 period compared to the same period in 2001 resulted
from the $1,369,000 litigation settlement relating to Fund II's investment in
Big V, as described above, a $332,000 decrease in investment income and a
$58,000 increase in operating expenses. The decline in investment income
includes a $122,000 decrease in interest from temporary investments which
primarily resulted from a decline in short-term interest rates for the 2002
period compared to the same period in 2001. The decline in investment income
also includes a $210,000 decrease in interest from portfolio investments, due to
interest earned on notes due from BioLease, Inc. during the 2001 period,
including $189,000 of deferred interest on the subordinated note due from
BioLease, which was recorded during the second quarter of 2001 as a payment
in-kind note. The BioLease notes were sold in July 2001. The increase in
operating expenses for the 2002 period compared to the same period in 2001
primarily resulted from an increase in legal fees relating to Fund II's
investment in the Big V Entities. This increase was partially offset by the
lower Investment Advisory Fee, as discussed below.
For the six months ended June 30, 2002, Fund II had a net investment loss of
$1,939,000 compared to net investment income of $15,000 for the six months ended
June 30, 2001. The unfavorable change in net investment loss for the 2002 period
compared to the same period in 2001 resulted from the $1,369,000 litigation
settlement relating to Fund II's investment in Big V, as described above, a
$552,000 decrease in investment income and a $33,000 increase in operating
expenses. The decline in investment income includes a $319,000 decrease in
interest from temporary investments which primarily resulted from a decline in
short-term interest rates for the 2002 period compared to the same period in
2001. The decline in investment income also includes a $233,000 decrease in
interest from portfolio investments due to interest earned on notes due from
BioLease during the 2001 period as discussed above. The increase in operating
expenses for the 2002 period compared to the same period in 2001 primarily
resulted from an increase in legal fees relating to Fund II's investment in the
Big V Entities. This increase was partially offset by the lower Investment
Advisory Fee, as discussed below.
The Investment Adviser is responsible for the identification, management and
liquidation of the portfolio investments of the Funds. As compensation for
services rendered to the Funds, the Investment Adviser had received an
Investment Advisory Fee at an annual rate of 1% of the combined assets under
management of the Funds (net offering proceeds reduced by cumulative capital
reductions and realized losses), with a minimum fee of $1,200,000. Fund II's
proportionate share of such fee was $666,000. In July 2001, the Investment
Adviser voluntarily agreed to reduce the annual Investment Advisory Fee payable
by the Funds by 50%. Accordingly, the combined annual Investment Advisory Fee
payable by the Funds was reduced to $600,000, effective as of July 1, 2001. Fund
II's proportionate share of such annual fee is $333,000. As a result, the
Investment Advisory Fee for the three months ended June 30, 2002 and 2001 was
$83,000 and $167,000, respectively, and the Investment Advisory Fee for the six
months ended June 30, 2002 and 2001 was $166,000 and $333,000, respectively.
As compensation for its services to the Funds, the Fund Administrator receives
an annual fee of $400,000. Fund II's proportionate share of such annual fee is
$222,000. As a result, the Fund Administration Fee for the three months ended
June 30, 2002 and 2001 was $55,000 for both periods, and the Fund Administration
Fee for the six months ended June 30, 2002 and 2001 was $111,000 for both
periods. Additionally, the Fund Administrator is entitled to reimbursement of
100% of the operating expenses paid by the Fund Administrator on behalf of the
Funds ("Reimbursable Administrative Expenses"). Reimbursable Administrative
Expenses primarily consist of printing and mailing, audit, tax preparation,
legal and custody fees. Reimbursable Administrative Expenses for the three
months ended June 30, 2002 and 2001 were $77,000 and $61,000, respectively, and
Reimbursable Administrative Expenses for the six months ended June 30, 2002 and
2001 were $135,000 and $117,000, respectively.
Realized Gains and Losses from Portfolio Investments - For the three and six
months ended June 30, 2002, Fund II had a $16,049,000 realized loss from its
portfolio investments resulting from the write-off of the remaining cost of its
$14,536,000 investment in the Big V Entities and its $1,513,000 investment in
FLA. Holdings, Inc. Both investments were previously carried at a value of zero,
and the realized loss was accordingly offset by the reversal of unrealized
depreciation discussed in the following paragraph.
Changes in Unrealized Depreciation of Portfolio Investments - For the three and
six months ended June 30, 2002, Fund II had a $16,049,000 favorable change in
unrealized depreciation of investments resulting from the reversal of unrealized
depreciation in connection with the realized loss of its investments in the Big
V Entities and FLA. Holdings, Inc., as discussed above. For the six months ended
June 30, 2001, Fund II had a $3,784,000 unfavorable change in unrealized
depreciation of portfolio investments, primarily resulting from the downward
revaluation of its investment in the Big V Entities.
Net Assets - As of June 30, 2002, Fund II's net assets were $17,926,000 compared
to $19,865,000 as of December 31, 2001. The reduced net asset value reflects the
net investment loss of $1,939,000 for the six months ended June 30, 2002. Since
Fund II's remaining investments in the Big V Entities and FLA. Holdings, Inc.
had been fully reserved in prior periods, the write-off of the remaining cost of
these investments during the six months ended June 30, 2002 resulted in no
change to Fund II's net asset value.
As of June 30, 2001, Fund II's net assets were $31,105,000 compared to
$34,874,000 as of December 31, 2000. The reduced net asset value reflects the
net unrealized depreciation of $3,784,000, partially offset by net investment
income of $15,000 for the six months ended June 30, 2001.
The net asset value per $1,000 unit of limited partnership interest ("Unit") in
Fund II as of June 30, 2002 and December 31, 2001, was $78 and $87,
respectively. The computed net asset value does not represent the current market
value of a Unit, and limited partners may not be able to realize this value upon
a sale of their Units or ultimate liquidation of Fund II's assets.
Forward Looking Information
In addition to historical information contained or incorporated by reference in
this report on Form 10-Q, Fund II 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, Fund II 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, the impact of current ongoing litigation as it relates to
Fund II, and the other risks and uncertainties detailed in this Form 10-Q. Fund
II undertakes no responsibility to update publicly or revise any forward-looking
statements.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
As of June 30, 2002, Fund II 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 Fund II's financial position.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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The Partnership is not a party to any material pending legal proceedings.
Item 2. Changes in Securities and Use of Proceeds.
-----------------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities.
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
No matter was submitted to a vote of security holders during the period covered
by this report.
Item 5. Other Information.
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
1. Exhibits:
a) 99.1 Certification of chief executive officer pursuant to
18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
b) 99.2 Certification of chief financial officer pursuant to
18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
2. Reports on Form 8-K:
There were no reports filed on Form 8-K during the last quarter of
the fiscal period covered by this interim report. However, the
following report on Form 8-K was filed during the quarterly period
following the fiscal period covered by this interim report:
a) A report was filed on July 24, 2002 to disclose a
reorganization settlement concerning Fund II's investment in
the Big V Entities.
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 August,
2002.
ML-LEE ACQUISITION FUND II, L.P.
By: Mezzanine Investments II, L.P.
Managing General Partner
By: ML Mezzanine II Inc.
its General Partner
By: /s/ Kevin K. Albert Dated: August 14, 2002
---------------------------------------------------------
Kevin K. Albert
President
ML Mezzanine II Inc.
(Principal Executive Officer)
(Principal Financial and Accounting Officer)