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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 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 0-17382
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 04-3028397
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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 (RETIREMENT ACCOUNTS) 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.
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ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) 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 $ 12,379 $ 13,849
Cash - interest bearing 182 246
Prepaid assets 118 10
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Total Assets $ 12,679 $ 14,105
============ =============
Liabilities and Partners' Capital
Liabilities:
Reimbursable administrative expenses payable $ 111 130
Accounts payable and accrued expenses 12 56
Accrued Independent General Partners' fees and expenses 9 14
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Total Liabilities 132 200
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Partners' Capital:
Individual General Partner 8 8
Managing General Partner 241 245
Limited Partners (177,515 Units) 12,298 13,652
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Total Partners' Capital 12,547 13,905
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Total Liabilities and Partners' Capital $ 12,679 $ 14,105
============ =============
See notes to financial statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) 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 $ - $ 4 $ - $ 157
Reversal of accrued interest from portfolio investment - (304) - (304)
Interest from temporary investments 57 125 180 474
------------ ----------- ------------ ------------
Total investment income (loss) 57 (175) 180 327
------------ ----------- ------------ ------------
Expenses:
Litigation settlement - - 731 -
Investment advisory fee 66 67 200 334
Fund administration fee 45 45 134 134
Reimbursable administrative expenses 45 81 202 204
Independent General Partners' fees and expenses 20 16 120 53
Legal fees 36 39 146 91
Insurance expense 1 1 5 4
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Total expenses 213 249 1,538 820
------------ ----------- ------------ ------------
Net Investment Loss (156) (424) (1,358) (493)
------------ ----------- ------------ ------------
Realized and Unrealized Loss From Investments:
Realized loss from investments - (26) (8,751) (26)
Change in unrealized depreciation of investments - (5,541) 8,751 (7,525)
------------ ----------- ------------ ------------
Net Realized and Unrealized Loss From Investments - (5,567) - (7,551)
------------ ----------- ------------ ------------
Net Decrease in Net Assets Resulting From Operations $ (156) $ (5,991) $ (1,358) $ (8,044)
============ =========== ============ ============
See notes to financial statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30,
(dollars in thousands)
2002 2001
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Cash Flows From Operating Activities:
Interest income $ 200 $ 551
Litigation settlement (731) -
Investment advisory fee (267) (401)
Fund administration fee (178) (134)
Reimbursable administrative expenses (221) (113)
Independent General Partners' fees and expenses (125) (63)
Legal fees (190) (79)
Net redemption (purchase) of temporary investments 1,450 (285)
Proceeds from dispositions of portfolio investments - 555
Insurance expense (2) -
Cost of portfolio investments purchased - (7)
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Net Cash (Used in) Provided By Operating Activities (64) 24
Cash at Beginning of Period 246 153
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Cash at End of Period $ 182 $ 177
========== ===========
Reconciliation of net investment loss to net cash (used in) provided by
operating activities:
Net investment loss $ (1,358) $ (493)
------------ -----------
Adjustments to reconcile net investment loss to net cash (used in) provided by
operating activities:
Reversal of accrued interest from portfolio investments - 304
Amortization of commitment fee income - (2)
Decrease in investments at cost 1,470 172
Decrease in accrued interest receivable - 46
Increase in other receivable - (9)
Increase in prepaid expenses, net (108) (63)
(Decrease) increase in reimbursable administrative expenses payable (19) 91
Decrease in due to Independent General Partners (5) (10)
(Decrease) increase in accounts payable and accrued expenses (44) 14
Net realized loss from portfolio investments - (26)
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Total adjustments 1,294 517
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Net Cash (Used In) Provided By Operating Activities $ (64) $ 24
============ ===========
See notes to financial statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) 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 $ 8 $ 245 $ 13,652 $ 13,905
Net investment loss - (b) (4) (1,354) (1,358)
Net realized loss from investments (2) (25) (8,724) (8,751)
Change in unrealized depreciation of investments 2 25 8,724 8,751
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Balance as of September 30, 2002 $ 8 $ 241 $ 12,298(a) $ 12,547
======== ======= =========== =============
(a) The net asset value per $1,000 unit of limited partnership interest
("Unit") was $69 as of September 30, 2002. Cumulative cash distributions
paid to limited partners from inception to September 30, 2002 totaled
$1,476.
(b) Allocated amounts are less than $1,000.
See notes to financial statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. Organization and Purpose
ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. (the "Retirement Fund"),
a Delaware limited partnership, was formed on September 23, 1988 along with
ML-Lee Acquisition Fund II, L.P. ("Fund II", and collectively, with the
Retirement Fund referred to herein as 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 the Retirement
Fund, 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 the
Retirement Fund 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 the Retirement
Fund.
The primary objective of the Retirement Fund is to provide current income and
capital appreciation by investing in privately structured, friendly leveraged
buyouts and other leveraged transactions. The Retirement Fund 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 the Retirement Fund for an additional one year period, to allow
for the orderly liquidation of the Retirement Fund's remaining assets. The
Retirement Fund is now scheduled to dissolve no later than December 20, 2002.
Thereafter, pursuant to the Retirement Fund's amended and restated agreement of
limited partnership, as amended (the "Partnership Agreement"), the Retirement
Fund 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 the Retirement Fund'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 (RETIREMENT ACCOUNTS) 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. The Retirement Fund held the following temporary investments as of
September 30, 2002:
Maturity Original Amortized Amortized
Issuer Yield Date Cost Discount Cost
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American General Corp. 1.71% 11/05/02 $ 11,966 $ 13 $ 11,979
American General Corp. 1.75% 10/16/02 399 1 400
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Total Temporary Investments $ 12,365 $ 14 $ 12,379
=========== ========= ===========
Investment Transactions - Investment transactions are recorded on the accrual
method. Investments are recorded on the trade date, or the date the Retirement
Fund 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 Retirement Fund 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. The Retirement Fund'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 $15.7 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 99.69% to the Limited Partners, 0.28% to the Managing
General Partner and 0.03% 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, 99.69% to the Limited Partners, 0.28% to the Managing
General Partner and 0.03% to the Individual General Partner
until the sum allocated to the Limited Partners equals any
previous losses allocated together with a cumulative Priority
Return of 10% on the average daily amount in Mezzanine
Investments, and any outstanding Compensatory Payments;
o third, 69.69% to the Limited Partners, 30.281% to the Managing
General Partner and 0.029% to the Individual General Partner
until the Managing General Partner has received 20.281% of the
total profits allocated; and
o thereafter, 79.69% to the Limited Partners, 20.281% to the
Managing General Partner and 0.029% to the Individual
General Partner.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) 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. The
Retirement Fund's proportionate share of such annual fee was $534,000. 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. The Retirement Fund's proportionate share of such annual fee
is $267,000. 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. The Retirement Fund's
proportionate share of such annual fee is $178,000. 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 the Retirement Fund's Partnership Agreement, the Managing General
Partner of the Retirement Fund 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. The Retirement Fund's proportionate share of the
annual fee and meeting fee paid to each of the Independent General Partners is
$17,800 and $445, 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 (RETIREMENT ACCOUNTS) II, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited), continued
Specifically, under the Plan, (i) the Retirement Fund and Fund II 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, the Retirement Fund 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.
The Retirement Fund believes that the claims resolved by the above-described
payments were without merit, that the Retirement Fund had meritorious defenses
to such claims, and in any event that the Retirement Fund 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 the Retirement
Fund, would exceed the amount it would have to pay to obtain the releases.
Accordingly, in July 2002, the Retirement Fund contributed $731,000 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. The Retirement Fund 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 the Retirement Fund 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 the Retirement Fund. 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, the Retirement
Fund has agreed to cooperate with the other Settling Parties to address any
remaining claims relating to or arising from Big V. At this time the Retirement
Fund cannot estimate the extent of claims relating to Big V that may be
asserted, or the magnitude or merits of any such claims. The Retirement Fund
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. The Retirement Fund 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 the
Retirement Fund, 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, the Retirement Fund does not
anticipate making any distributions to its partners. The Retirement Fund
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 (RETIREMENT ACCOUNTS) II, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited), continued
As with the claims that are released under the Plan, the Retirement Fund
believes that any potential unresolved claims are without merit and that the
Retirement Fund has defenses to any liability from such claims. As discussed
above, the Retirement Fund wrote-off the remaining cost of its investment in the
Big V Entities as of June 30, 2002, realizing a loss of $7,764,000.
Additionally, due to continued business and financial difficulties at FLA.
Holdings, Inc., the Retirement Fund wrote-off its remaining investment in
the company as of June 30, 2002, realizing a loss of $987,000.
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 the Retirement Fund, 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 (Retirement Accounts) II, L.P.
(the "Retirement Fund") held $182,000 in an interest-bearing cash account and
$12,379,000 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 $57,000 and $180,000, 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 the Retirement Fund and contingent obligations, if
any, as discussed below, will be obtained from these existing cash reserves and
the related interest on such reserves. The Retirement Fund, together with ML-Lee
Acquisition Fund II, L.P. ("Fund II"), are referred to herein as the "Funds".
In December 2001, the Individual General Partners approved the final extension
of the term of the Retirement Fund for an additional one year period, to allow
for the orderly liquidation of the Retirement Fund's remaining assets. The
Retirement Fund is now scheduled to dissolve no later than December 20, 2002.
Thereafter, pursuant to the Partnership Agreement, the Retirement Fund 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, the Retirement Fund contributed $731,000 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 the Retirement
Fund have been cancelled.
With all of its portfolio investments now liquidated, it is expected that the
Retirement Fund 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 the Retirement Fund 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), the Retirement Fund cannot estimate the likely extent of
any claims being asserted, or the magnitude or merits of any such claims. The
Retirement Fund 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. In addition, the General Partners currently cannot predict
how these contingencies may affect the timing of the termination of the
Retirement Fund, 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, the Retirement Fund had a net investment loss of $156,000 and
$424,000, respectively. The favorable change in net investment loss for the 2002
period compared to the same period in 2001 resulted from a $232,000 favorable
change in investment income and a $36,000 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 $304,000 of accrued interest due on the
Big V subordinated notes, offset by a $68,000 decrease in interest from
temporary investments and an $4,000 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 for the 2002
period compared to the same period in 2001.
For the nine months ended September 30, 2002 and 2001, the Retirement Fund had a
net investment loss of $1,358,000 and $493,000, respectively. The unfavorable
change in net investment loss for the 2002 period compared to the same period in
2001 resulted from the $731,000 litigation settlement relating to the Retirement
Fund's investment in Big V, as discussed above, a $147,000 decrease in
investment income slightly offset by a $13,000 decrease in operating expenses.
The unfavorable change in investment income includes a $294,000 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 $157,000 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
$304,000 due on the Big V subordinated notes. The slight decrease in operating
expenses for the 2002 period compared to the same period in 2001 primarily
resulted from the lower Investment Advisory Fee for the 2002 period, as
discussed below, which was mostly offset by an increase in legal fees relating
to the Retirement Fund's investment in the Big V Entities.
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. The
Retirement Fund's proportionate share of such fee was $534,000. 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. The Retirement Fund's proportionate share of such annual fee
is $267,000. As a result, the Investment Advisory Fee for the three months ended
September 30, 2002 and 2001 was $66,750 for both periods, and the Investment
Advisory Fee for the nine months ended September 30, 2002 and 2001 was $200,000
and $334,000, respectively.
As compensation for its services to the Funds, the Fund Administrator receives
an annual fee of $400,000. The Retirement Fund's proportionate share of such
annual fee is $178,000. As a result, the Fund Administration Fee for the three
months ended September 30, 2002 and 2001 was $44,500 for both periods, and the
Fund Administration Fee for the nine months ended September 30, 2002 and 2001
was $133,500 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 $45,000 and
$81,000, respectively, and Reimbursable Administrative Expenses for the nine
months ended September 30, 2002 and 2001 were $202,000 and $204,000,
respectively.
Realized Gains and Losses from Portfolio Investments - The Retirement Fund 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, the
Retirement Fund had a $8,751,000 realized loss from its portfolio investments
resulting from the write-off of the remaining cost of its $7,764,000 investment
in the Big V Entities and its $987,000 investment in FLA. Holdings, Inc. Both
investments were previously carried at a value of zero, and accordingly, the
realized loss was offset by the reversal of unrealized depreciation discussed
below.
For the three and nine months ended September 30, 2001, the Retirement Fund had
a net realized loss from its portfolio investments of $26,000. In July 2001, the
Retirement Fund received net proceeds of $555,000 from the sale of its holdings
of BioLease, Inc. and BioTransplant, Inc. compared to the cost basis of such
holdings totaling $581,000, resulting in a realized loss of $26,000.
Changes in Unrealized Depreciation of Portfolio Investments - For the nine
months ended September 30, 2002, the Retirement Fund had a $8,751,000 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, the Retirement Fund had a
$7,525,000 unfavorable change in unrealized depreciation of portfolio
investments, primarily resulting from a $7,763,000 downward revaluation of the
Retirement Fund'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 $206,000 upward revaluation of the $437,000 subordinated note due
from BioLease, Inc., which was repaid in July 2001, as discussed above.
Additionally, during the period, $32,000 of unrealized depreciation was reversed
due to the sale of the Retirement Fund's investment in BioLease, Inc. and
BioTransplant, Inc.
Net Assets - As of September 30, 2002, the Retirement Fund's net assets were
$12,547,000 compared to $13,905,000 as of December 31, 2001. The reduced net
asset value reflects the net investment loss of $1,358,000 for the nine months
ended September 30, 2002. Since the Retirement Fund'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 the Retirement
Fund's net asset value.
As of September 30, 2001, the Retirement Fund's net assets were $14,009,000
compared to $22,053,000 as of December 31, 2000. The reduced net asset value
reflects the net unrealized depreciation of $7,525,000, the net realized loss of
$26,000, and the net investment loss of $493,000 for the nine months ended
September 30, 2001.
The net asset value per $1,000 unit of limited partnership interest ("Unit") of
the Retirement Fund as of September 30, 2002 and December 31, 2001, was $69 and
$77, 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 the Retirement
Fund's assets.
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, the impact of
current ongoing litigation as it relates to the Retirement Fund, 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.
Item 3. Quantitative and Qualitative Disclosure about Market Risk.
---------------------------------------------------------
As of September 30, 2002, 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.
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 the Retirement Fund'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 (RETIREMENT ACCOUNTS) 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: November 14, 2002
------------------------------------------------
Kevin K. Albert
President
ML Mezzanine II Inc.
(Principal Executive Officer)
By: /s/ Curtis W. Cariddi Dated: November 14, 2002
------------------------------------------------
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 (Retirement Accounts) 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 (Retirement Accounts) 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