Back to GetFilings.com
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 September 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.
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3028398
- --------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------
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
--- ---
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 September 30, 2002
and December 31, 2001 (Unaudited)
Statements of Operations for the Three and Nine Months Ended September 30, 2002
and 2001(Unaudited)
Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001
(Unaudited)
Statement of Changes in Partners' Capital for the Nine Months Ended
September 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.
Item 4. Controls and Procedures.
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)
September 30, December 31,
2002 2001
------------------ ------------------
Assets
Temporary investments at amortized cost $ 17,571 $ 19,798
Cash - interest bearing 154 274
Prepaid assets 150 15
------------ -------------
Total Assets $ 17,875 $ 20,087
============ =============
Liabilities and Partners' Capital
Liabilities:
Reimbursable administrative expenses payable $ 91 $ 95
Accounts payable and accrued expenses 21 104
Accrued Independent General Partners' fees and expenses 12 23
------------ -------------
Total Liabilities 124 222
------------ -------------
Partners' Capital:
Individual General Partner 10 11
Managing General Partner 575 580
Limited Partners (221,745 Units) 17,166 19,274
------------ -------------
Total Partners' Capital 17,751 19,865
------------ -------------
Total Liabilities and Partners' Capital $ 17,875 $ 20,087
============ =============
See notes to financial statements.
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------ ----------- ----------- -----------
Investment Income and Expenses
Investment Income:
Interest from portfolio investments $ - $ 8 $ - $ 241
Reversal of accrued interest from portfolio investment - (569) - (569)
Interest from temporary investments 82 177 256 670
----------- ----------- ------------ -----------
Total investment income (loss) 82 (384) 256 342
----------- ----------- ------------ -----------
Expenses:
Litigation settlement - - 1,369 -
Investment advisory fee 84 83 250 416
Fund administration fee 55 55 166 166
Reimbursable administrative expenses 31 58 166 175
Independent General Partners' fees and expenses 25 20 150 66
Legal fees 61 71 262 171
Insurance expense 1 2 7 6
----------- ----------- ------------ -----------
Total expenses 257 289 2,370 1,000
----------- ----------- ------------ -----------
Net Investment Loss (175) (673) (2,114) (658)
----------- ----------- ------------ -----------
Realized and Unrealized Loss from Investments:
Realized loss from investments - (39) (16,049) (39)
Change in unrealized depreciation of investments - (10,389) 16,049 (14,173)
----------- ----------- ------------ -----------
Net Realized and Unrealized Loss from Investments - (10,428) - (14,212)
----------- ----------- ------------ -----------
Net Decrease in Net Assets Resulting From Operations $ (175) $ (11,101) $ (2,114) $ (14,870)
=========== =========== ============ ===========
See notes to financial statements.
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30,
(dollars in thousands)
2002 2001
------------ ------------
Cash Flows From Operating Activities:
Interest income $ 283 $ 782
Litigation settlement (1,369) -
Investment advisory fee (333) (499)
Fund administration fee (222) (166)
Reimbursable administrative expenses (170) (103)
Independent General Partners' fees and expenses (161) (80)
Legal fees (345) (147)
Net redemption (purchase) of temporary investments 2,200 (648)
Proceeds from dispositions of portfolio investments - 848
Insurance expense (3) -
Cost of portfolio investments purchased - (11)
----------- ---------
Net Cash Used In Operating Activities (120) (24)
Cash at Beginning of Period 274 162
----------- ---------
Cash at End of Period $ 154 $ 138
=========== =========
Reconciliation of net investment loss to net cash used in operating activities:
Net investment loss $ (2,114) $ (658)
----------- ---------
Adjustments to reconcile net investment loss to net cash used in operating
activities:
Reversal of accrued interest from portfolio investment - 569
Amortization of commitment fee income - (4)
Decrease in investments at cost 2,200 50
Decrease in accrued interest receivable 27 63
Increase in other receivable - (16)
Increase in prepaid expenses, net (135) (77)
(Decrease) increase in reimbursable administrative expenses payable (4) 72
Decrease in due to Independent General Partners (11) (13)
(Decrease) increase in accounts payable and accrued expenses (83) 29
Net realized loss from portfolio investments - (39)
----------- ---------
Total adjustments 1,994 634
----------- ---------
Net Cash Used In Operating Activities $ (120) $ (24)
=========== =========
See notes to financial statements.
ML-LEE ACQUISITION FUND II, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (Unaudited)
For the Nine Months Ended September 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) (5) (2,108) (2,114)
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 September 30, 2002 $ 10 $ 575 $ 17,166(a) $ 17,751
======= ======= =========== ===========
(a) The net asset value per $1,000 unit of limited partnership interest
("Unit") was $77 as of September 30, 2002. Cumulative cash distributions
paid to limited partners from inception to September 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
dissolve 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 - As of September 30, 2002, Fund II had no investments
other than temporary 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 September
30, 2002:
Maturity Original Amortized Amortized
Issuer Yield Date Cost Discount Cost
- -----------------------------------------------------------------------------------------------------------------------------
American General Corp. 1.71% 11/05/02 $ 16,852 $ 19 $ 16,871
American General Corp. 1.75% 10/16/02 699 1 700
----------- --------- -----------
Total Temporary Investments $ 17,551 $ 20 $ 17,571
=========== ========= ===========
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. 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 GeneralPartner.
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 incentive distributions
during the nine months ended September 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 28, 2002, the United States Bankruptcy Court for the District of
Delaware (the "Court") entered an order confirming 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 Plan, among other things, provided for the sale of substantially all of Big
V's assets to a wholly owned subsidiary of Wakefern Food Corporation
("Wakefern"). Big V had been a member of Wakefern's food purchasing cooperative.
On or about July 15, 2002, the sale to Wakefern's subsidiary was accomplished
(subject to post-closing adjustments), and Big V currently is engaged in the
process of resolving claims and distributing the proceeds of its estate.
The Plan also provided for the resolution of various potential claims
against Fund II, the Retirement Fund, Thomas H. Lee Equity Partners, L.P.
and others (collectively, the "Settling Parties").
ML-LEE ACQUISITION FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited), continued
Specifically, under the Plan, (i) Fund II and the Retirement Fund received
nothing on account of the subordinated debt and equity held in Big V; (ii) the
equity in Big V held by Fund II, the Retirement Fund and Thomas H. Lee Equity
Partners, L.P. was cancelled; (iii) certain payments were made jointly by and on
behalf of Fund II, the Retirement Fund and Thomas H. Lee Equity Partners, L.P.
and (iv) in exchange for these payments, Fund II and the other Settling Parties
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, 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 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 were
without merit, that Fund II had 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. or Thomas H. Lee Company ("THL"). Nevertheless, 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, made it likely that the
cost of defending such claims and resolving issues with respect to insurance
would be significant and for Fund II, would exceed the amount it would have to
pay 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. Fund II will be entitled to
receive its share of any available funds 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 has resolved 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 extent of claims relating to Big V that
may be asserted, or the magnitude or merits of any such claims. Fund II notes,
however, that a limited number of members of Big V's former bank syndicate
(which limited number of members have been paid in the aggregate, pursuant to
the Plan, all but approximately $1.7 million of the approximately $12 million
that had been owed to them by Big V) have initiated an action against THL
relating to Big V. Fund II believes that the claims asserted by these banks in
fact were released in connection with the Plan, and that otherwise there are
defenses to these claims.
Until such time as such potential unresolved claims are settled or Fund II, in
consultation with the other Settling Parties, determines that it has sufficient
assets remaining to satisfy its actual or potential obligations relating to such
unresolved claims, Fund II does not anticipate making any distributions to its
partners. Fund II and the other Settling Parties will continue to monitor in
good faith the appropriate amount of assets that each holds to provide for any
such unresolved claims.
ML-LEE ACQUISITION FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited), continued
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 discussed above, Fund II wrote-off the
remaining cost of its investment in the Big V Entities 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 its remaining investment in the company as
of June 30, 2002, realizing a loss of $1,513,000.
6. Interim Financial Statements
The interim financial data as of September 30, 2002 and for the nine months
ended September 30, 2002 and September 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 September 30, 2002, ML-Lee Acquisition Fund II, L.P. ("Fund II") held
$154,000 in an interest-bearing cash account and $17,571,000 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 nine months ended September 30, 2002 totaled $82,000 and $256,000,
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 and the related interest on such reserves. Fund II,
together with ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. (the
"Retirement Fund"), are referred to herein as the "Funds".
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
dissolve 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.
As more fully described in Note 5 of notes to financial statements, included in
Part I, Item 1 of this Form 10-Q, the bankruptcy court has confirmed a plan of
reorganization for 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"). 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, and to provide
funds for use by or on behalf of the Settling Parties (as described in Note 5 of
notes to financial statements) jointly to address claims not resolved by the
plan. Additionally, as part of the settlement, the subordinated debt and the
equity of Big V held by Fund II have been cancelled.
With all of its portfolio investments now liquidated, it is expected that Fund
II will complete its liquidation at such time as all potential unresolved claims
relating to Big V are settled or otherwise resolved to the satisfaction of Fund
II and the other Settling Parties to the plan. At this time (and subject to the
description contained in Note 5 of notes to financial statements), Fund II
cannot estimate the likely extent of any claims being asserted, or the magnitude
or merits of any such claims. Fund II and the other Settling Parties will
continue to monitor in good faith the appropriate amount of asssets that each
holds to provide for any such unresolved claims. In addition, the General
Partners currently cannot predict how these contingencies may affect the timing
of the termination of Fund II, or the final amount of liquidating distributions
to be paid to limited partners.
Results of Operations
Net Investment Income or Loss - For the three months ended September 30, 2002
and 2001, Fund II had a net investment loss of $175,000 and $673,000,
respectively. The favorable change in net investment loss for the 2002 period
compared to the same period in 2001 resulted from a $466,000 favorable change in
investment income and a $32,000 decrease in operating expenses. The favorable
change in investment income for the period is the result of the reversal, as of
September 30, 2001, of $569,000 of accrued interest due on the Big V
subordinated notes, offset by a $95,000 decrease in interest from temporary
investments and an $8,000 decrease in interest from portfolio investments. The
decrease in interest from temporary investments primarily resulted from a
decline in short-term interest rates for the 2002 period compared to the same
period in 2001. The decrease in interest income from portfolio investments is
the result of the sale in July 2001 of interest bearing notes due from BioLease,
Inc. The decrease in operating expenses primarily resulted from a decrease in
reimbursable administrative expenses and legal fees for the 2002 period compared
to the same period in 2001.
For the nine months ended September 30, 2002 and 2001, Fund II had a net
investment loss of $2,114,000 and $658,000, respectively. 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 discussed above, an $86,000 decrease in investment
income and a $1,000 increase in operating expenses. The unfavorable change in
investment income includes a $414,000 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 $241,000 decrease in interest from portfolio
investments, due to interest earned on notes due from BioLease, Inc. during the
2001 period, as discussed above. These amounts were offset by the reversal, as
of September 30, 2001, of accrued interest of $569,000 due on the Big V
subordinated notes. The slight 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, which was
mostly offset by the lower Investment Advisory Fee for the 2002 period, 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 September 30, 2002 and 2001
was $83,250 for both periods, and the Investment Advisory Fee for the nine
months ended September 30, 2002 and 2001 was $250,000 and $416,000,
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
September 30, 2002 and 2001 was $55,500 for both periods, and the Fund
Administration Fee for the nine months ended September 30, 2002 and 2001 was
$166,500 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 September 30, 2002 and 2001 were $31,000 and $58,000,
respectively, and Reimbursable Administrative Expenses for the nine months ended
September 30, 2002 and 2001 were $166,000 and $175,000, respectively.
Realized Gains and Losses from Portfolio Investments - Fund II had no realized
gains or losses from portfolio investments for the three months ended September
30, 2002. For the nine months ended September 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 below.
For the three and nine months ended September 30, 2001, Fund II had a net
realized loss from its portfolio investments of $39,000. In July 2001, Fund II
received net proceeds of $848,000 from the sale of its holdings of BioLease,
Inc. and BioTransplant, Inc. compared to the cost basis of such holdings
totaling $887,000, resulting in a realized loss of $39,000.
Changes in Unrealized Depreciation of Portfolio Investments - For the nine
months ended September 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 nine months ended September 30, 2001, Fund II had a $14,173,000
unfavorable change in unrealized depreciation of portfolio investments,
primarily resulting from a $14,537,000 downward revaluation of Fund II's
investments in the Big V Entities, reducing the carrying value of this
investment to $0 as of September 30, 2001. This decline was partially offset by
a $316,000 upward revaluation of the $668,000 subordinated note due from
BioLease, Inc., which was repaid in July 2001, as discussed above. Additionally,
during the period, $48,000 of unrealized depreciation was reversed due to the
sale of Fund II's investment in BioLease, Inc. and BioTransplant, Inc.
Net Assets - As of September 30, 2002, Fund II's net assets were $17,751,000
compared to $19,865,000 as of December 31, 2001. The reduced net asset value
reflects the net investment loss of $2,114,000 for the nine months ended
September 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 nine months ended
September 30, 2002 resulted in no change to Fund II's net asset value.
As of September 30, 2001, Fund II's net assets were $20,004,000 compared to
$34,874,000 as of December 31, 2000. The reduced net asset value reflects the
net unrealized depreciation of $14,173,000, the net realized loss of $39,000,
and the net investment loss of $658,000 for the nine months ended September 30,
2001.
The net asset value per $1,000 unit of limited partnership interest ("Unit") in
Fund II as of September 30, 2002 and December 31, 2001, was $77 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 September 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.
Item 4. Controls and Procedures.
-----------------------
We maintain disclosure controls and procedures and internal controls designed to
ensure that information required to be disclosed in our filings under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms. Our chief executive officer and chief financial officer have
evaluated the effectiveness of our controls and procedures within 90 days of the
filing of this quarterly report on Form 10-Q. Based on their evaluation of such
controls and procedures, our chief executive officer and chief financial officer
believe such controls and procedures to be effective.
Additionally, there have been no significant changes in internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
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:
The following report on Form 8-K was filed during the quarterly
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 November,
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: Dated: November 14, 2002
/s/ Kevin K. Albert
-------------------------------
Kevin K. Albert
President
ML Mezzanine II Inc.
(Principal Executive Officer)
By: Dated: November 14, 2002
/s/ Curtis W. Cariddi
----------------------------------------
Curtis W. Cariddi
Treasurer
ML Mezzanine II Inc.
(Principal Financial Officer)
Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Kevin K. Albert, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
ML-Lee Acquisition Fund II, L.P. (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's general partners:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Kevin K. Albert
-----------------------------
Kevin K. Albert
President, ML Mezzanine II Inc.
Chief Executive Officer
Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Curtis W. Cariddi, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
ML-Lee Acquisition Fund II, L.P. (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's general partners:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Curtis W. Cariddi
-----------------------------
Curtis W. Cariddi
Treasurer, ML Mezzanine II Inc.
Chief Financial Officer