10-Q 1 mlleeraq202.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 2002 Or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number 0-17382 ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P. ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 04-3028397 ------------------------------------------------------------------------------- (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 (RETIREMENT ACCOUNTS) II, L.P. INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Statements of Assets, Liabilities and Partners' Capital as of June 30, 2002 and December 31, 2001 (Unaudited) Statements of Operations for the Three and Six Months Ended June 30, 2002 and 2001 (Unaudited) Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 (Unaudited) Statement of Changes in Partners' Capital for the Six Months Ended June 30, 2002 (Unaudited) Notes to Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Item 3. Quantitative and Qualitative Disclosures about Market Risk. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Item 2. Changes in Securities and Use of Proceeds. Item 3. Defaults upon Senior Securities. Item 4. Submission of Matters to a Vote of Security Holders. Item 5. Other Information. Item 6. Exhibits and Reports on Form 8-K. PART I - FINANCIAL INFORMATION Item 1. Financial Statements. ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P. STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL (Unaudited) (dollars in thousands) June 30, December 31, 2002 2001 ------------------ ------------------ Assets Temporary investments at amortized cost $ 13,495 $ 13,849 Cash - interest bearing 186 246 Prepaid insurance 8 10 ------------ ------------- Total Assets $ 13,689 $ 14,105 ============ ============= Liabilities and Partners' Capital Liabilities: Litigation settlement payable $ 731 $ - Reimbursable administrative expenses payable 211 140 Accounts payable and accrued expenses 39 56 Due to Independent General Partners 5 4 ------------ ------------- Total Liabilities 986 200 ------------ ------------- Partners' Capital: Individual General Partner 8 8 Managing General Partner 241 245 Limited Partners (177,515 Units) 12,454 13,652 ------------ ------------- Total Partners' Capital 12,703 13,905 ------------ ------------- Total Liabilities and Partners' Capital $ 13,689 $ 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 Six Months Ended June 30, June 30, 2002 2001 2002 2001 ------------ ----------- ----------- ----------- Investment Income and Expenses Investment Income: Interest from portfolio investments $ - $ 138 $ - $ 153 Interest from temporary investments 62 149 123 349 ------------ ----------- ------------ ----------- Total investment income 62 287 123 502 ------------ ----------- ------------ ----------- Expenses: Litigation settlement 731 - 731 - Investment advisory fee 67 133 134 267 Fund administration fee 44 44 89 89 Reimbursable administrative expenses 80 58 157 123 Independent General Partners' fees and expenses 61 15 100 37 Legal fees 66 29 110 52 Insurance expense 2 2 4 3 ------------ ----------- ------------ ----------- Total expenses 1,051 281 1,325 571 ------------ ----------- ------------ ----------- Net Investment (Loss) Income (989) 6 (1,202) (69) Realized and Unrealized Loss From Investments: Realized loss from investments (8,751) - (8,751) - Change in unrealized depreciation of investments 8,751 (1,984) 8,751 (1,984) ------------ ----------- ------------ ----------- Net Realized and Unrealized Loss From Investments - (1,984) - (1,984) ------------ ----------- ------------ ----------- Net Decrease in Net Assets Resulting From Operations $ (989) $ (1,978) $ (1,202) $ (2,053) ========== ========== ============ ============

See notes to financial statements. ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P. STATEMENTS OF CASH FLOWS (Unaudited) For the Six Months Ended June 30, (dollars in thousands) 2002 2001 ------------ ------------ Cash Flows From Operating Activities: Interest income $ 122 $ 400 Investment advisory fee (134) (267) Fund administration fee (89) (89) Reimbursable administrative expenses (86) (113) Independent General Partners' fees and expenses (99) (49) Legal fees (127) (52) Net redemption of temporary investments 355 76 Insurance expense (2) - Cost of portfolio investments purchased - (7) ------------ ------------ Net Cash Used in Operating Activities (60) (101) Cash at Beginning of Period 246 153 ------------ ------------ Cash at End of Period $ 186 $ 52 ============ ============ Reconciliation of net investment loss to net cash used in operating activities: Net investment loss $ (1,202) $ (69) ------------ ------------ Adjustments to reconcile net investment loss to net cash used in operating activities: Decrease (increase) in investments at cost 355 (47) (Increase) decrease in accrued interest receivable (1) 21 Increase in other receivable - (7) Decrease in prepaid expenses, net 2 3 Increase in litigation settlement payable 731 - Increase in reimbursable administrative expenses payable 71 10 Increase (decrease) in due to Independent General Partners 1 (12) Decrease in accounts payable and accrued expenses (17) - ------------ ------------ Total adjustments 1,142 (32) ------------ ------------ Net Cash Used In Operating Activities $ (60) $ (101) ============ ============

See notes to financial statements. ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P. STATEMENT OF CHANGES IN PARTNERS' CAPITAL (Unaudited) For the Six Months Ended June 30, 2002 (dollars in thousands) Individual Managing General General Limited Partner Partner Partners Total ----------------------------------------------------------------------------------------- ------------- ------------- Balance as of December 31, 2001 $ 8 $ 245 $ 13,652 $ 13,905 Net investment loss - (b) (4) (1,198) (1,202) Net realized loss from investments (2) (25) (8,724) (8,751) Change in unrealized depreciation of investments 2 25 8,724 8,751 -------- ------- ----------- ------------- Balance as of June 30, 2002 $ 8 $ 241 $ 12,454(a) $ 12,703 ======== ======= =========== =============

(a) The net asset value per $1,000 unit of limited partnership interest ("Unit") was $70 as of June 30, 2002. Cumulative cash distributions paid to limited partners from inception to June 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 day to day 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 terminate 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 - 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 ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P. NOTES TO FINANCIAL STATEMENTS (Unaudited), continued 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. 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 June 30, 2002. Maturity Original Amortized Amortized Issuer Yield Date Cost Discount Cost ----------------------------------------------------------------------------------------------------------------------------- American General Corp. 1.76% 7/08/02 $ 12,961 $ 34 $ 12,995 GE Capital Corp. 1.76% 7/15/02 499 1 500 ----------- --------- ----------- Total Temporary Investments $ 13,460 $ 35 $ 13,495 =========== ========= =============

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. Net unrealized depreciation of investments of $8.8 million as of December 31, 2001, was recorded for financial statement purposes, but was not recognized for tax purposes. Additionally, syndication costs relating to the offering of limited partnership interests totaling $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 cash distributions during the six months ended June 30, 2002, As compensation for their services to the Funds, each of the Independent General Partners receives a combined annual fee of $40,000; $1,000 for each meeting attended ($500 if a meeting is held on the same day as a committee meeting of the General Partners) plus reimbursement for out-of-pocket costs incurred in connections with such meetings. 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 27, 2002, the United States Bankruptcy Court for the District of Delaware (the "Court") indicated that it would approve confirmation of the First Amended Joint Consolidated Liquidating Plan of Reorganization (the "Plan") for Big V Supermarkets, Inc. ("Big V" and together with Big V Holdings Corp. "BVH", Big V's parent company, and certain other related entities, the "Big V Entities"). The Court entered an order confirming the Plan on June 28, 2002, and Big V and Wakefern Food Corporation ("Wakefern", Big V's current supplier), are now taking steps to consummate the transactions set forth in the Plan. Specifically, the sale of substantially all the assets of Big V to Wakefern has been accomplished (subject to post-closing adjustments), and Big V is engaged in the process of resolving claims and distributing the proceeds of its estate. Under the Plan, the Retirement Fund will not receive any distribution on account of the subordinated debt and the equity it holds in the Big V Entities, and the Retirement Fund's equity in the Big V Entities will be cancelled. Also under the Plan, certain payments have been made jointly by and on behalf of the Retirement Fund, Fund II and Thomas H. Lee Equity Partners, L.P. (collectively, the "Settling Parties"). In ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P. NOTES TO FINANCIAL STATEMENTS (Unaudited), continued exchange for these payments, the Retirement Fund and the other Settling Parties have received broad releases of claims relating to or arising from their investment in Big V. Specifically, the releases cover all claims that could be asserted by or on behalf of Big V, from all claims that could be asserted by or on behalf of Wakefern (including claims related to the Side Letters, as defined and discussed in previous filings), and also from all claims that could be asserted by any creditor or party in interest that either voted in favor of the Plan or signed a lock-up letter supporting the Plan. The Retirement Fund believes that the claims resolved by the above-described payments are without merit, that the Retirement Fund has 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. f/k/a Thomas H. Lee Company ("THL"). The complexity of the claims, the rights to insurance coverage on some but not all of the claims, and insurance coverage disputes raised by the insurer, however, made it likely that the cost of defending such claims and resolving issues with respect to insurance would be significant and would, for the Retirement Fund, exceed the amount it has paid 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. Some of these funds may be returned to the Retirement Fund if not needed under the Plan or to resolve other claims. Notwithstanding disputes with respect to insurance coverage, a significant portion of the rest of the settlement payment described above was funded through monies received from the insurance procured by THL. To obtain these insurance monies, however, THL was required to indemnify the insurance company from future claims related to the Big V Entities, to the extent that insurance would otherwise have been available, and the Settling Parties and others were required to indemnify THL to the same extent that THL indemnified the insurance company. Although the Retirement Fund believes that the Plan resolves the vast majority of potential claims related to or arising from Big V, there are some creditors who did not vote in favor of the Plan or sign a lock-up letter supporting the Plan and may retain claims against 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 likelihood of any claims being asserted, or the magnitude or merits of any such claims. The Retirement Fund and other Settling Parties will discuss at least yearly whether potential unresolved claims remain and how, if at all, such claims should be addressed. Until such time as such potential unresolved claims are settled or otherwise resolved to the satisfaction of the Retirement Fund and the other Settling Parties, the Retirement Fund does not anticipate making any distributions to its Limited Partners. 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 a result of the recent developments regarding the Retirement Fund's investment in the Big V Entities, as discussed above, the Retirement Fund wrote-off the remaining cost of this investment as of June 30, 2002, realizing a loss of $7,764,000. Additionally, due to continued business 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. ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P. NOTES TO FINANCIAL STATEMENTS (Unaudited), continued 6. Interim Financial Statements The interim financial data as of June 30, 2002 and for the six months ended June 30, 2002 and June 30, 2001 is unaudited. However, in the opinion of 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 June 30, 2002, ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. (the "Retirement Fund") held $186,000 in an interest-bearing cash account and $13,495,000 in temporary investments consisting of short-term discounted commercial paper securities with maturities of less than 90 days. Interest earned from such investments for the three and six months ended June 30, 2002 totaled $62,000 and $123,000, 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, future interest on such reserves and other investment income and proceeds, if any, from the sale of portfolio investments. The Retirement Fund, together with ML-Lee Acquisition Fund II, L.P. ("Fund II"), is referred to herein as the "Funds". In connection with certain contingencies relating to the Retirement Fund's investment in Big V Supermarkets, Inc. ("Big V") and Big V Holdings Corp. ("BVH", Big V's parent company and defined herein with Big V and certain other related entities as the "Big V Entities"), the General Partners of the Retirement Fund have suspended further distributions to the partners of the Retirement Fund until the responsibilities of the Retirement Fund with respect to such contingencies can be determined. As more fully described in Note 5 of Notes to Financial Statements, the bankruptcy court entered an order confirming a plan of reorganization for Big V. In connection therewith, in July 2002, the Retirement Fund contributed $731,000 to fund its portion of certain payments due under the plan in exchange for releases of certain claims. Additionally, as part of the settlement, the Retirement Fund will not receive any distribution on account of the subordinated debt and the equity it holds in Big V. Additionally, until such time as the potential unresolved claims referred to in Note 5 of notes to financial statements, included in Part I, Item 1 of this Form 10-Q, are settled or otherwise resolved to the satisfaction of the Retirement Fund and the other Settling Parties, the Retirement Fund does not anticipate making any distributions to its Limited Partners. In July 2001, the Investment Adviser voluntarily agreed to reduce the annual Investment Advisory Fee payable by the Funds by 50%. Accordingly, the combined annual Investment Advisory Fee payable by the Funds was reduced from $1,200,000 to $600,000, effective as of July 1, 2001. Accordingly, the Retirement Fund's proportionate share of such annual fee was reduced from $534,000 to $267,000. The Investment Advisory Fee is paid quarterly in advance. As provided by the limited Partnership Agreement of the Retirement Fund, the Managing General Partner of the Retirement Fund is entitled to receive an incentive distribution after limited partners have received their Priority Return (as defined in the Partnership Agreement) of 10% per annum ("MGP Distributions"). The Managing General Partner is required to defer a portion of any MGP Distribution earned from the sale of portfolio investments in excess of 20% of realized capital gains, net realized capital losses and unrealized depreciation, in accordance with the Partnership Agreement (the "Deferred Distribution Amount"). Deferred Distribution Amounts are distributable to partners on a pro-rata basis in accordance with their capital contributions, and certain amounts otherwise later payable to limited partners from distributable cash from operations are instead payable to the Managing General Partner until the Deferred Distribution Amounts are paid. There was no outstanding Deferred Distribution Amount payable to the Managing General Partner as of June 30, 2002. In December 2001, the Individual General Partners approved the final extension of the term of 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 terminate 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, if such additional period is required. Results of Operations Net Investment Income or Loss - For the three months ended June 30, 2002, the Retirement Fund had a net investment loss of $989,000 compared to net investment income of $6,000 for the three months ended June 30, 2001. The unfavorable change in net investment loss for the 2002 period compared to the same period in 2001 resulted from the $731,000 litigation settlement relating to the Retirement Fund's investment in Big V, as described above, a $225,000 decrease in investment income and a $39,000 increase in operating expenses. The decline in investment income includes an $87,000 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 $138,000 decrease in interest from portfolio investments, due to interest earned on notes due from BioLease, Inc. during the 2001 period, including $124,000 of deferred interest on the subordinated note due from BioLease, which was recorded during the second quarter of 2001 as a payment in-kind note. The BioLease notes were sold in July 2001. The increase in operating expenses for the 2002 period compared to the same period in 2001 primarily resulted from an increase in legal fees relating to the Retirement Fund's investment in the Big V Entities. This increase was partially offset by the lower Investment Advisory Fee, as discussed below. For the six months ended June 30, 2002 and 2001, the Retirement Fund had a net investment loss of $1,202,000 and $69,000, 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 described above, a $379,000 decrease in investment income, and a $23,000 increase in operating expenses. The decline in investment income includes a $226,000 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 $153,000 decrease in interest from portfolio investments due to interest earned on notes due from BioLease during the 2001 period as discussed above. The increase in operating expenses for the 2002 period compared to the same period in 2001 primarily resulted from an increase in legal fees relating to the Retirement Fund's investment in the Big V Entities. This increase was partially offset by the lower Investment Advisory Fee, as discussed below. The Investment Adviser is responsible for the identification, management and liquidation of the portfolio investments of the Funds. As compensation for services rendered to the Funds, the Investment Adviser had received an Investment Advisory Fee at an annual rate of 1% of the combined assets under management of the Funds (net offering proceeds reduced by cumulative capital reductions and realized losses), with a minimum fee of $1,200,000. 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 June 30, 2002 and 2001 was $67,000 and $133,000, respectively, and the Investment Advisory Fee for the six months ended June 30, 2002 and 2001 was $134,000 and $267,000, 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 June 30, 2002 and 2001 was $44,500 for both periods, and the Fund Administration Fee for the six months ended June 30, 2002 and 2001 was $89,000 for both periods. Additionally, the Fund Administrator is entitled to reimbursement of 100% of the operating expenses paid by the Fund Administrator on behalf of the Funds ("Reimbursable AdministrativeExpenses"). Reimbursable Administrative Expenses primarily consist of printing and mailing, audit, tax preparation, legal and custody fees. Reimbursable Administrative Expenses primarily consist of printing and mailing, audit, tax preparation, legal and custody fees. Reimbursable Administrative Expenses for the three months ended June 30, 2002 and 2001 were $80,000 and $58,000, respectively, and Reimbursable Administrative Expenses for the six months ended June 30, 2002 and 2001 were $157,000 and $123,000, respectively. Realized Gains and Losses from Portfolio Investments - For the three and six months ended June 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 Big V and its $987,000 investment in FLA. Holdings, Inc. Both investments were previously carried at a value of zero, and the realized loss was accordingly offset by the reversal of unrealized depreciation discussed in the following paragraph. Changes in Unrealized Depreciation of Portfolio Investments - For the three and six months ended June 30, 2002, 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 Big V and FLA. Holdings, Inc., as discussed above. For the six months ended June 30, 2001, the Retirement Fund had a $1,984,000 unfavorable change in unrealized depreciation of portfolio investments, primarily resulting from the downward revaluation of its investment in the Big V Entities. Net Assets - As of June 30, 2002, the Retirement Fund's net assets were $12,703,000 compared to $13,905,000 as of December 31, 2001. The reduced net asset value reflects the net investment loss of $1,202,000 for the six months ended June 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 six months ended June 30, 2002 resulted in no change to the Retirement Fund's net asset value. As of June 30, 2001, the Retirement Fund's net assets were $20,000,000 compared to $22,053,000 as of December 31, 2000. The reduced net asset value reflects the net unrealized depreciation of $1,984,000 and the $69,000 net investment loss for the six months ended June 30, 2001. The net asset value per $1,000 unit of limited partnership interest ("Unit") in the Retirement Fund as of June 30, 2002 and December 31, 2001, was $70 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 June 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. 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: There were no reports filed on Form 8-K during the last quarter of the fiscal period covered by this interim report. However, the following report on Form 8-K was filed during the quarterly period following the fiscal period covered by this interim report: a) A report was filed on July 24, 2002 to disclose a reorganization settlement concerning 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 August, 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: August 14, 2002 --------------------------------------------------------- President ML Mezzanine II Inc. (Principal Executive Officer) (Principal Financial and Accounting Officer)

ML LEE ACQUISITION FUND RETIREMENT ACCOUNTS II L P 10-Q