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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
Commission File Number 0-17382
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
(Exact name of registrant as specified in its Governing Instruments)
Delaware 04-3028397
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
World Financial Center
South Tower - 14th Floor
New York, New York 10080-6114
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (212) 236-6577
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in a definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Documents Incorporated by Reference: Portions of the Prospectus of the
Registrant dated September 6, 1989, filed with the Securities and Exchange
Commission pursuant to Rule 497(b), are incorporated by reference in Parts I, II
and III hereof.
Part I
Item l. Business
Formation
ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. (the "Retirement
Fund") (formerly T.H. Lee Acquisition Fund (Retirement Accounts) II, L.P.) was
formed along with ML-Lee Acquisition Fund II, L.P. ("Fund II"); collectively
referred to as the "Funds") and the Certificates of Limited Partnership were
filed under the Delaware Revised Uniform Limited Partnership Act on September
23, 1988. The Retirement Fund's operations commenced on November 10, 1989 and
were scheduled to terminate on December 20, 1999. However, the initial ten year
term of the Retirement Fund has been extended for an additional two year period.
The Individual General Partners (as defined below) have the right to extend the
term of the Retirement Fund for an additional one year period if they determine
that such extension is in the best interest of the Retirement Fund.
Mezzanine Investments II, L.P. (the "Managing General Partner"), subject to
the supervision of the Individual General Partners (as defined below and herein
after with the Managing General Partner as the "General Partners"), is
responsible for overseeing and monitoring the Retirement Fund's investments. The
Managing General Partner is a Delaware limited partnership in which ML Mezzanine
II Inc. is the general partner and Thomas H. Lee Advisors II, L.P. (the
"Investment Adviser" to the Funds) is the limited partner. The Individual
General Partners are Vernon R. Alden, Joseph L. Bower and Stanley H. Feldberg
(the "Independent General Partners") and Thomas H. Lee. ML Fund Administrators
Inc. (the "Fund Administrator") is an indirect wholly-owned subsidiary of
Merrill Lynch & Co., Inc. and is responsible for the day-to-day administrative
services necessary for the operations of the Retirement Fund.
The Retirement Fund elected to operate as a business development company
under the Investment Company Act of 1940 as amended ("Investment Company Act").
The Retirement Fund's primary investment objective is to provide current income
and capital appreciation potential by investing in privately structured,
friendly leveraged buyouts and other leveraged transactions. The Retirement Fund
pursued this objective by investing primarily in subordinated debt and related
equity securities issued in conjunction with the "mezzanine financing" of
friendly leveraged buyout transactions, leveraged acquisitions and leveraged
recapitalizations. The Retirement Fund could also invest in "bridge investments"
if it believed that such investments would facilitate the consummation of a
mezzanine financing. The Retirement Fund considers this activity to constitute a
single industry segment of mezzanine financing investing.
The Retirement Fund invested substantially all of its net proceeds in
Mezzanine Investments consisting of high-yield subordinated debt and/or
preferred stock linked with an equity participation of middle market companies
in connection with friendly leveraged acquisitions, recapitalizations and other
leveraged financings. The Retirement Fund's Mezzanine Investments typically were
issued in private placement transactions which are generally subject to certain
restrictions on sales thereby limiting their liquidity. The Retirement Fund was
fully invested as of December 20, 1992, which was within 36 months from the date
of the final closing (after including the reserve for follow-on investments and
exclusive of amounts available for reinvestment). The reinvestment period for
various amounts of capital proceeds received during the last twelve months of
the Retirement Fund's investment period terminated at various times through
December 21, 1993.
The Funds offered an aggregate of 1 million units of limited partnership
interest ("Units") at $1,000 per Unit with the Securities and Exchange
Commission pursuant to a Registration Statement on Form N-2 (File No. 33-25816),
effective September 6, 1989. The information set forth under the heading "Risk
and Other Important Factors", "Estimated Use of Proceeds", "Mezzanine
Financing", "Investment Objectives and Policies" and "Conflicts of Interest" in
the Prospectus of the Retirement Fund dated September 6, 1989, filed with the
Securities and Exchange Commission pursuant to Rule 497(b) under the Securities
Act of 1933 (the "Prospectus"), is incorporated herein by reference.
The offering of Units commenced on September 6, 1989. On November 10 and
December 20, 1989, the Retirement Fund had its first and second closings
respectively, at which time the Managing General Partner admitted additional
Limited Partners to the Retirement Fund representing 177,515 Units of limited
partnership interest. The additional Limited Partners' total capital
contributions were $164,201,375, which excludes discounts allowed of $1,447,740
and is net of sales commissions and advisory fees of $11,865,885. The Managing
General Partner's aggregate contribution was $500,000. Thomas H. Lee, as an
Individual General Partner, contributed $50,000. For their services as selling
agent, the Retirement Fund paid sales commissions to Merrill Lynch, Pierce,
Fenner and Smith Incorporated ("MLPF&S") in the amount of $9,492,708 (exclusive
of discounts of $1,158,192). In addition, the Retirement Fund paid a financial
advisory fee to MLPF&S in the amount of $2,373,177 (exclusive of discounts of
$289,548).
Mezzanine and Bridge Investments
As of December 31, 1999, the Retirement Fund had outstanding a total (at
cost) of $10,656,000 invested in Mezzanine Investments representing $9,156,000
Managed and $1,500,000 Non-Managed portfolio investments. At December 31, 1999,
there were no Bridge Investments outstanding for the Funds. The Funds co-invest
in all Mezzanine and Bridge Investments, allocating such investments in
proportion to their capital available for investment.
The Retirement Fund's reinvestment period ended on December 21, 1993 and,
accordingly, no new investments were made after that date other than the funding
of investments which were committed to prior to that date.
REVIEW OF INVESTMENTS SOLD DURING 1999
--------------------------------------
Soretox (Stablex Canada, Inc.)
------------------------------
On March 12, 1999, the Funds entered into a Note Repurchase and Warrant
Cancellation Agreement (the "Agreement") with Stablex Canada, Inc. and Seaway
TLC Inc. to sell, retire and cancel all of the Subordinated Notes outstanding
held by the Funds (including all Deferred Interest Notes). Pursuant to the
Agreement, the Funds also relinquished all Warrants held. Total proceeds
received by the Funds for retiring the Notes and Warrants was $12,000,000, of
which $6,395,000 was allocated to the Retirement Fund. The Retirement Fund
recognized a loss of approximately $1.2 million from this transaction. The
Distributable Capital Proceeds relating to this transaction were included with
the first quarter distribution to Partners of record as of March 12, 1999.
In addition, under the Agreement, the Funds are entitled, collectively, to
receive twenty percent (20%) of the net proceeds of any payment or consideration
or distribution (whether received in cash, property, securities or any
combination thereof) arising out of transfer, disposition, recapitalization or
exchange of substantially all of the stock or other equity interest in either
Stablex Canada, Inc. or Seaway TLC Inc. if such transaction is consummated
within forty-two (42) months from the closing of the Agreement. Any
Distributable Capital Proceeds relating to future receipts by the Retirement
Fund pursuant to the Agreement will be payable to Partners of record as of the
date of the receipt of such proceeds. The Retirement Fund ascribes no value to
this contingent payment for financial reporting purposes.
Fitz & Floyd, Inc.
------------------
On August 27, 1999, the Funds completed the sale of all of its shares of
the capital stock of Fitz and Floyd, Inc. (the "Sale") pursuant to a Stock
Purchase Agreement executed by the Funds, as selling shareholders, on August 5,
1999. The Retirement Fund received net sale proceeds of $7,530,000, which
included payment in full of its 12% Fitz and Floyd, Inc. Subordinated Notes,
including prepayment premium, and partial return of capital on its Fitz and
Floyd, Inc. Capital Stock. The Retirement Fund recognized a loss of
approximately $2.3 million from this transaction. The distribution of the
Distributable Capital Proceeds relating to this transaction, if any (see below),
will be made in accordance with the terms of the Partnership Agreement.
On November 9, 1999, a special meeting of the General Partners of the Funds
was held to review the Retirement Fund's reserves prior to making any cash
distributions. At this meeting, the General Partners were briefed on the status
of certain litigation commenced by Hills Stores Company ("Hills") against its
former directors, including Thomas H. Lee, who had been serving on the Hills
Board of Directors as a representative of the Funds. The Hills litigation was
brought in connection with the July 1995 payment by Hills of approximately $32
million in golden parachute payments to certain of its officers in connection
with the change of control of Hills associated with the Dickstein proxy contest.
The General Partners discussed the potential liabilities to Thomas H. Lee in
connection with this litigation, and the Retirement Fund's potential
indemnification obligations to Thomas H. Lee, as well as the liquidity of the
Retirement Fund's remaining assets. Following discussion of the issues, the
Individual General Partners of the Retirement Fund determined that, to the
extent that the Retirement Fund may have future indemnification obligations with
respect to such litigation, suitable reserves should be maintained for such
contingency. Accordingly the Individual General Partners determined that it
would not be prudent to make distributions to Partners at such time. Thus, the
Retirement Fund has reserved all the proceeds received from the sale of Fitz &
Floyd, Inc., as well as the third quarter income from operations. This reserve
will be reviewed each quarter by the General Partners of the Retirement Fund in
light of the status of the litigation. On March 7, 2000, the General Partners
reviewed the status of the Hills matter and again determined that it would not
be prudent to make distributions to Partners at such time. On February 22, 2000,
the court granted defendents motion for summary judgement dismissing claims
against Mr. Lee. Hills has the right to appeal that ruling after trial of the
remaining claims against certain other defendents, which is currently scheduled
to commence in May 2000.
REVIEW OF INVESTMENTS IN MANAGED COMPANIES
------------------------------------------
The following is a brief description of the companies in the Retirement
Fund's Managed Company portfolio as of December 31, 1999:
Big V Supermarkets, Inc. ("Big V")
---------------------------------
Big V is a regional supermarket retailer in the Northeastern United States
doing business under the ShopRite name. Big V currently operates several
supermarkets principally in the Hudson Valley region of New York State. The
investment in Big V is valued at cost as of December 31, 1999.
Cole National Corporation ("Cole")
----------------------------------
Cole was founded in 1944 as a provider of key duplication services. Since
then, Cole has grown as a retailer and operates three separate retail
subsidiaries: Cole Vision, Things Remembered and Cole Key. The Retirement Fund
has valued its remaining investment in Cole at zero.
REVIEW OF INVESTMENTS IN NON-MANAGED COMPANIES
----------------------------------------------
The following is a brief description of the companies in the Retirement
Fund's Non-Managed Company portfolio as of December 31, 1999:
BioLease, Inc. ("Biolease")
---------------------------
BioLease provides built-to-suit wet-laboratory space in the Boston area to
a consortium of emerging growth bio-technology companies sponsored by the
venture capital funds managed by Health Care Investment Corporation. The
Retirement Fund's investment in BioLease Common Stock was written down to zero,
and the Subordinated Notes were written down to approximately 50% of par value
during the year ended December 31, 1997. As of December 31, 1999, total net
unrealized depreciation was $269,000.
FLA. Orthopedics, Inc.
---------------------
FLA. Orthopedics, Inc., headquartered in Miami, manufactures, markets and
distributes production in two major lines of business: ergonomically designed
safety products and orthopedic soft goods. The Retirement Fund has valued its
remaining investment in FLA. Orthopedics, Inc. at zero, which resulted in total
net unrealized depreciation of $987,000 as of December 31, 1999.
Competition
The Retirement Fund has completed its investment period and its
reinvestment program and, therefore, will no longer have to compete for
investments. A majority of the portfolio companies are participating in
extremely competitive businesses.
Employees
The Retirement Fund has no employees. The Investment Adviser, subject to
the supervision of the Managing General Partner and the Individual General
Partners, manages and controls the Retirement Fund's investments. The Managing
General Partner is responsible for managing the Temporary Investments of the
Retirement Fund. The Fund Administrator performs administrative services for the
Retirement Fund. The Fund Administrator is a subsidiary of Merrill Lynch & Co.
Inc., the parent of MLPF&S.
Item 2. Properties
The Retirement Fund does not own or lease any physical properties.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security-Holders
No matters were submitted to a vote of the Limited Partners of the
Retirement Fund during the fourth quarter ended December 31, 1999.
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
There is no established trading market for the Units. The Partnership
Agreement contains restrictions that are intended to prevent the development of
a public market. Accordingly, accurate information as to the market values of
Units at any given date is not available.
The approximate number of Unit holders as of January 1, 2000, the last
effective date of transfer (as described below), was 17,475. The Managing
General Partner and Thomas H. Lee as an Individual General Partner also hold
general partner interests in the Retirement Fund.
MLPF&S reports estimated values of limited partnerships and other direct
investments on client account statements and no longer reports the general
partner's estimate of limited partnership net asset value to Unit holders.
Pursuant to MLPF&S guidelines, estimated values for limited partnership
interests originally sold by MLPF&S (such as the Retirement Fund's Units) are
provided by independent valuation services. MLPF&S clients may contact their
MLPF&S Financial Consultants to obtain a general description of the methodology
used by the independent valuation services to determine their estimates of
value. The estimated values provided by the independent services and the
Retirement Fund's current net asset value as estimated by the general partner
are not market values and Unit holders may not be able to sell their Units or
realize either amount upon a sale of their Units. In addition, Unit holders may
not realize the independent estimated value or the Retirement Fund's current net
asset value upon the liquidation of the Retirement Fund's assets over its
remaining life.
The Retirement Fund distributes Distributable Cash from Investments and
Distributable Capital Proceeds in accordance with the terms of the Partnership
Agreement.
Pursuant to the Partnership Agreement, transfers of Units are recognized on
the first day of the fiscal quarter after which the Managing General Partner has
been duly notified of a transfer pursuant to the Partnership Agreement. Until a
transfer is recognized, the limited partner of record (i.e. the transferor) will
continue to receive all of the benefits and burdens of ownership of Units
(including allocations of profit and loss and distributions), and any transferee
will have no rights to distributions of sale proceeds generated at any time
prior to the recognition of the transfer and assignment.
Accordingly, Distributable Cash from Investments for a quarter and
Distributable Capital Proceeds from sales after transfer or assignment have been
entered into, but before such transfer and assignment is recognized by the
Managing General Partner, will be payable to the transferor and not the
transferee.
Cash Distributions
Generally, the Retirement Fund has made quarterly distributions including
both Distributable Cash from Investments and Distributable Capital Proceeds.
However, the Retirement Fund's ability to make future cash distributions is
restricted. See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources - the
information contained, which is incorporated herein by reference.
Item 6. Selected Financial Data
Supplemental Information Schedule
For the Years Ended December 31,
TOTAL FUND INFORMATION: 1999 1998 1997 1996 1995
----------- ----------- ------------ ----------- ------------
Net Investment Income $ 337,251 $ 1,922,189 $ 4,275,516 $ 5,516,846 $ 3,071,361
Net Realized Gain (Loss) on Sales of (3,468,662) (9,869,500) 74,228 4,755,563 9,262,616
Investments
Net Change in Unrealized Appreciation
(Depreciation) on Investments 10,881,662 17,438,728 (6,285,381) (14,768,911) (28,395,532)
Cash Distributions to Partners 8,325,079 20,876,516 14,242,934 34,722,409 29,053,844
Net Assets 21,118,625 21,693,451 33,078,550 49,257,119 88,476,031
Cost of Mezzanine Investments 10,656,462 28,049,200 57,865,408 63,818,387 88,353,161
Total Assets 21,277,376 21,798,979 33,261,494 49,627,131 89,303,296
PER UNIT OF LIMITED PARTNERSHIP INTEREST:
Investment Income $ 6.40 $ 16.66 $ 31.03 $ 35.32 $ 30.42
Expenses (4.94) (7.58) (7.99) (15.56) (18.88)
----------- ----------- ------------ ----------- -----------
Net Investment Income $ 1.46 $ 9.08 $ 23.04 $ 19.76 $ 11.54
=========== =========== ============ =========== ===========
Net Realized Gain (Loss) on Sales
of Investments $ (19.65) $ (63.45) $ .42 $ 21.99 $ 43.12
Net Change in Unrealized Appreciation
(Depreciation) on Investments 61.11 98.00 (35.30) (82.94) (159.46)
Cash Distributions 43.98 107.11 65.96 166.55 140.82
Cumulative Cash Distributions 1,476.31 1,432.33 1,325.22 1,259.26 1,092.71
Net Asset Value 117.89 118.96 185.13 262.93 470.67
See Cash Distributions Schedule for additional information.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity & Capital Resources
At the regular quarterly meeting of the General Partners of ML-Lee
Acquisition Fund (Retirement Accounts) II, L.P. (the "Retirement Fund") held on
December 14, 1999, the Individual General Partners determined to extend the
initial ten year term of the Retirement Fund, which was due to terminate
December 20, 1999, for an additional two year period, in order to better allow
the Retirement Fund to deal with its assets pending their liquidation. Pursuant
to the terms set forth under Section 2.4 of the Partnership Agreement, the term
of the Retirement Fund will now expire on December 20, 2001. The Individual
General Partners have the right to extend the term of the Retirement Fund for
and additional one year period if they determine that such extension is in the
best interest of the Retirement Fund.
On August 6, 1991, the Independent General Partners approved a reserve for
follow-on investments of approximately $20,000,000 for the Retirement Fund. As
of March 30, 2000, this remaining reserve balance was approximately $3,400,000
due to follow-on investments in Petco Animal Supplies, Fitz and Floyd, Inc.,
Fine Clothing, Inc., Hills and Ghirardelli Holdings and Anchor Advanced
Products. Additionally, approximately $7,700,000 of the reserve had been
returned to the partners. The level of the reserve was based upon an analysis of
potential Follow-On Investments in specific portfolio companies that may become
necessary to protect or enhance the Retirement Fund's existing investment.
On March 12, 1999, the Retirement Fund and Fund II (together the "Funds")
entered into a Note Repurchase and Warrant Cancellation Agreement (the
"Agreement") with Stablex Canada, Inc. and Seaway TLC Inc. to sell, retire and
cancel all of the Subordinated Notes outstanding held by the Funds (including
all Deferred Interest Notes). Pursuant to the Agreement, the Funds also
relinquished all Warrants held. Total proceeds received by the Funds for
retiring the Notes and Warrants was $12,000,000, of which $6,395,000 was
allocated to the Retirement Fund. The Retirement Fund recognized a loss of
approximately $1.2 million from this transaction. The Distributable Capital
Proceeds relating to this transaction were included with the first quarter
distribution to Partners of record as of March 12, 1999.
In addition, under the Agreement, the Funds are entitled, collectively, to
receive twenty percent (20%) of the net proceeds of any payment or consideration
or distribution (whether received in cash, property, securities or any
combination thereof) arising out of transfer, disposition, recapitalization or
exchange of substantially all of the stock or other equity interest in either
Stablex Canada, Inc. or Seaway TLC Inc. if such transaction is consummated
within forty-two (42) months from the closing of the Agreement. Any
Distributable Capital Proceeds relating to future receipts by the Retirement
Fund pursuant to the Agreement will be payable to Partners of record as of the
date of the receipt of such proceeds. The Retirement Fund ascribes no value to
this contingent for financial reporting purposes.
On August 27, 1999, the Funds completed the sale of all of its shares of
the capital stock of Fitz and Floyd, Inc. (the "Sale") pursuant to a Stock
Purchase Agreement executed by the Funds, as selling shareholders, on August 5,
1999. The Retirement Fund received net sale proceeds of $7,530,000, which
included payment in full of its 12% Fitz and Floyd, Inc. Subordinated Notes,
including prepayment premium, and partial return of capital on its Fitz and
Floyd, Inc. Capital Stock. The Retirement Fund recognized a loss of
approximately $2.3 million from this transaction. The distribution of the
Distributable Capital Proceeds relating to this transaction, if any (see below),
will be made in accordance with the terms of the Partnership Agreement.
On November 9, 1999, a special meeting of the General Partners of the Funds
was held to review the Retirement Fund's reserves prior to making any cash
distributions. At this meeting, the General Partners were briefed on the status
of certain litigation commenced by Hills Stores Company ("Hills") against its
former directors, including Thomas H. Lee, who had been serving on the Hills
Board of Directors as a representative of the Funds. The Hills litigation was
brought in connection with the July 1995 payment by Hills of approximately $32
million in golden parachute payments to certain of its officers in connection
with the change of control of Hills associated with the Dickstein proxy contest.
The General Partners discussed the potential liabilities to Thomas H. Lee in
connection with this litigation, and the Retirement Fund's potential
indemnification obligations to Thomas H. Lee, as well as the liquidity of the
Retirement Fund's remaining assets. Following discussion of the issues, the
Individual General Partners of the Retirement Fund determined that, to the
extent that the Retirement Fund may have future indemnification obligations with
respect to such litigation, suitable reserves should be maintained for such
contingency. Accordingly the Individual General Partners determined that it
would not be prudent to make distributions to Partners at such time. Thus, the
Retirement Fund has reserved all the proceeds received from the sale of Fitz &
Floyd, Inc., as well as the third quarter income from operations. This reserve
will be reviewed each quarter by the General Partners of the Retirement Fund in
light of the status of the litigation. On March 7, 2000, the General Partners
reviewed the status of the Hills matter and again determined that it would not
be prudent to make distributions to Partners at such time. On February 22, 2000,
the court granted defendents motion for summary judgement dismissing claims
against Mr. Lee. Hills has the right to appeal that ruling after trial of the
remaining claims against certain other defendents, which is currently scheduled
to commence in May 2000.
At December 31, 1999, the Retirement Fund had outstanding a total (at cost)
of $10,656,000 invested in Mezzanine Investments representing $9,156,000 Managed
and $1,500,000 Non-Managed portfolio investments. The remaining proceeds were
invested in a Temporary Investment in commercial paper with a maturity of less
than 60 days.
As provided by the Partnership Agreement, the Managing General Partner of
the Retirement Fund is entitled to receive incentive distributions after Limited
Partners have received their Priority Return of 10% per annum ("MGP
Distributions"). The Managing General Partner is required to defer a portion of
any MGP Distribution earned from the sale of portfolio investments in excess of
20% of realized capital gains, net realized capital losses and unrealized
depreciation, in accordance with the Partnership Agreement (the "Deferred
Distribution Amount"). Any Deferred Distribution Amount is distributable to the
Partners pro-rata in accordance with their capital contributions, and certain
amounts otherwise later payable to Limited Partners from distributable cash from
operations are instead payable to the Managing General Partner until the
Deferred Distribution Amount is paid in full. As of December 31, 1999 there is
no outstanding Deferred Distribution Amount.
A number of the Retirement Fund's debt investments have been repaid and one
is on non-accrual status. These situations reduce the amount of interest income
received by the Retirement Fund. As a result, it is expected that the amount of
any future cash distributions, in aggregate, paid to Partners will almost
entirely be derived from recovered capital and gains from asset sales, which are
subject to market conditions and are inherently unpredictable as to timing.
Therefore, in the absence of cash available for distributions resulting from the
future sale of portfolio holdings, the Retirement Fund will have available for
any future cash distributions, to the extent not reserved to pay expenses and
contingencies, only small amounts of net distributable cash from operations,
estimated to be less than one dollar per Unit each quarter.
Investment in High-Yield Securities
The Retirement Fund invested primarily in subordinated debt and preferred
stock securities ("High-Yield Securities"), generally linked with an equity
participation, issued in conjunction with the mezzanine financing of privately
structured, friendly leveraged acquisitions, recapitalizations and other
leveraged financings. High-Yield Securities are debt and preferred equity
securities that are unrated or are rated by Standard & Poor's Corporation as BB
or lower and by Moody's Investor Services, Inc. as Ba or lower. Risk of loss
upon default by the issuer is significantly greater with High-Yield Securities
than with investment grade securities because High-Yield Securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Also, these issuers usually have high levels of indebtedness and are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates, than investment grade issuers. Most of these securities are
subject to resale restrictions and generally there is no quoted market for such
securities.
Although the Retirement Fund cannot eliminate the risks associated with its
investments in High-Yield Securities, it has established risk management
policies. The Retirement Fund subjected each prospective investment to rigorous
analysis and made only those investments that were recommended by the Investment
Adviser and that met the Retirement Fund's investment guidelines or that had
otherwise been approved by the Managing General Partner and the Independent
General Partners. The Retirement Fund's investments were measured against
specified Retirement Fund investment and performance guidelines. To limit the
exposure of the Retirement Fund's capital in any single issuer, the Retirement
Fund limited the amount of its investment in a particular issuer. The Retirement
Fund's Investment Adviser also continually monitors portfolio companies in order
to minimize the risks associated with its investments in High-Yield Securities.
The Investment Adviser reviews each portfolio company's financial
statements quarterly. In addition, the Investment Adviser routinely reviews and
discusses financial and operating results with the company's management and
where appropriate, attends board of director meetings. In some cases,
representatives of the Investment Adviser, acting on behalf of the Funds (and
affiliated investors where applicable), serve as one or more of the directors on
the boards of portfolio companies. The Retirement Fund may, from time to time,
make follow-on investments to the extent necessary to protect or enhance its
existing investments.
Forward Looking Information
In addition to historical information contained or incorporated by
reference in this report on Form 10-K, the Retirement Fund may make or publish
forward-looking statements about management expectations, strategic objectives,
business prospects, anticipated financial performance, and other similar
matters. In order to comply with the terms of the safe harbor for such
statements provided by the Private Securities Litigation Reform Act of 1995, the
Retirement Fund notes that a variety of factors, many of which are beyond its
control, affect its operations, performance, business strategy, and results and
could cause actual results and experience to differ materially from the
expectations expressed in these statements. These factors include, but are not
limited to, the effect of changing economic and market conditions, trends in
business and finance and in investor sentiment, the level of volatility of
interest rates, the actions undertaken by both current and potential new
competitors, the impact of current, pending, and future legislation and
regulation both in the United States and throughout the world, and the other
risks and uncertainties detailed in this Form 10-K. The Retirement Fund
undertakes no responsibility to update publicly or revise any forward-looking
statements.
Results of Operations
Net Investment Income
For the year ended December 31, 1999, the Retirement Fund had net
investment income of $337,000 as compared to $1,922,000 and $4,725,000 for the
years ended 1998 and 1997, respectively. The decrease in net investment income
during 1999 as compared to 1998 and 1998 as compared to 1997 is primarily
attributable to the sales of income producing companies during 1999 and 1998 and
other factors as described below.
Investment Income and Expenses
The total investment income from operations for the years ended December
31, 1999, 1998, and 1997 consists primarily of interest and discount income
earned on the investment of proceeds from Partner's contributions in Mezzanine
Investments and short-term money market instruments. For the year ended December
31, 1999, the Retirement Fund had investment income of $1,482,000 as compared to
$3,271,000 and $5,698,000 for the years ended 1998 and 1997, respectively. The
decrease in investment income during 1999 as compared to 1998 and 1998 as
compared to 1997 is directly attributable to the sale of income producing
companies during 1999 and 1998.
Major expenses for the years ended December 31, 1999, 1998, and 1997
consisted of Investment Advisory Fees and Administrative Expenses.
The Investment Adviser and Fund Administrator both receive their
compensation on a quarterly basis. The total Investment Advisory Fees paid by
the Retirement Fund to the Investment Adviser for the years ended December 31,
1999, 1998 and 1997 were $534,000, $550,000 and $622,000 respectively, and were
calculated at an annual rate of 1.0% of assets under management (net offering
proceeds reduced by cumulative capital reductions and realized losses), with a
minimum annual amount of $1,200,000 for the Funds on a combined basis. The
decrease in Investment Advisory Fees are a direct result of sales of
investments, returns of capital distributed to Partners and realized losses on
investments.
As compensation for its services, the Fund Administrator is entitled to
receive an annual amount of $400,000 for the Funds on a combined basis, plus
100% of all reimbursable expenses (as defined below) incurred by the Retirement
Fund. Prior to November 1997, the Fund Administration Fee was calculated at an
annual amount of the greater of $500,000 or 0.45% of the excess of net offering
proceeds less 50% of capital reductions and realized losses. For the years ended
December 31, 1999, 1998 and 1997 the Retirement Fund incurred Fund
Administration Fees of $178,000, $178,000 and $458,000, respectively.
Actual out-of-pocket expenses ("Reimbursable Administrative Expenses")
primarily consist of printing, audit, tax preparation, legal fees and expenses,
and custodian fees. For the years ended December 31, 1999, 1998 and 1997 the
Retirement Fund incurred $314,000, $336,000, and $113,000, respectively, in
Reimbursable Administrative Expenses. Subsequent to November 1997, the Fund
Administrator is entitled to reimbursement for 100% of Reimbursable
Administrative Expenses while, prior to November 1997, the Fund Administrator
was entitled to reimbursement for only a portion of such expenses.
Legal and professional fees for the years ended December 31, 1999, 1998 and
1997 were $42,000, $208,000 and $136,000, respectively. These expenses are
largely attributable to legal fees incurred and advanced on behalf of
indemnified defendants as well as fees incurred directly by the Retirement Fund
in connection with certain litigation proceedings. The decrease in legal and
professional fees for the year ended December 31, 1999 as compared to the year
ended December 31, 1998, as well as the increase in legal and professional fees
for the year ended December 31, 1998 as compared to the year ended December 31,
1997, resulted from the increased legal fees incurred by the Retirement Fund in
connection with the settlement of the Seidel litigation in the first half of
1998.
Net Assets
The Retirement Fund's net assets increased by $7,750,000 during the year
ended December 31, 1999, due to net investment income of $337,000 and reversal
of net unrealized depreciation of $10,881,000, partially offset by cash
distributions to partners of $8,325,000 ($6,372,000 of which was return of
capital from the sales of Mezzanine Investments) and a net realized loss from
the sales of Mezzanine Investments of $3,468,000.
The Retirement Fund's net assets decreased by $11,385,000 during the year
ended December 31, 1998, due to the payment of cash distributions to partners of
$20,877,000 ($10,877,000 of the cash distributions paid was return of capital
from the sales of Mezzanine Investments) and a net realized loss of $9,869,000
from the sales of Mezzanine Investments, partially offset by net investment
income of $1,922,000 and net unrealized appreciation of $17,439,000.
The Retirement Fund's net assets decreased by $16,179,000 during the year
ended December 31, 1997, due to the payment of cash distributions to partners of
$14,243,000 (approximately $10,800,000 of the cash distributions paid was return
of capital from the sales of Mezzanine Investments) and net unrealized
depreciation of $6,285,000, partially offset by net investment income of
$4,275,000 and a net realized gain of $74,000 from the sales of Mezzanine
Investments.
Unrealized Appreciation and Depreciation on Investments
For the year ended December 31, 1999, the Retirement Fund recorded net
unrealized appreciation of $10,881,000 all of which was related to the reversal
of net unrealized depreciation in market value of publicly traded securities
sold in 1999. This compares to net unrealized appreciation of $17,439,000 for
1998, all of which was related to the reversal of net unrealized depreciation in
market value of publicly traded securities sold in 1998. For the year ended
December 31, 1997, the Retirement Fund recorded net unrealized depreciation of
$6,285,000 of which $3,275,000 was related to net unrealized depreciation in
market value of publicly traded securities. The Retirement Fund's cumulative net
unrealized depreciation on investments as of December 31, 1999 totaled
$1,256,000.
The Managing General Partner and the Investment Adviser review the
valuation of the Retirement Fund's portfolio investments that do not have a
readily ascertainable market value on a quarterly basis with final approval from
the Individual General Partners. Portfolio investments are valued at original
cost plus accreted value in the case of original issue discount or deferred pay
securities. Such investments will be revalued if there is an objective basis for
doing so at a different price. Investments will be written down in value if the
Managing General Partner and Investment Adviser believe adverse credit
developments of a significant nature require a write-down of such securities.
Investments will be written up in value only if there has been an arms'-length
third party transaction to justify the increased valuation.
Approximately 47.7% of the Retirement Fund's investments (at cost) are
invested in private placement securities for which there are no ascertainable
market values. Although the Managing General Partner and Investment Adviser use
their best judgment in estimating the fair value of these investments, there are
inherent limitations in any estimation technique. Therefore, the fair value
estimates presented herein are not necessarily indicative of the amount which
the Retirement Fund could realize in a current transaction. As of December 31,
1999, the Retirement Fund's investment in Big V Supermarkets Inc. represents
approximately 43.3% of the Retirement Fund's fair value.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of December
31, 1999. Although the Managing General Partner and Investment Adviser are not
aware of any factors not disclosed herein that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued since that time, and the current estimated fair value of these
investments may have changed significantly since that point in time.
For additional information please refer to Supplemental Schedule of Net
Unrealized Appreciation and Depreciation - Schedule 2.
Net Realized Gains and Losses
For the year ended December 31, 1999, the Retirement Fund recorded a net
realized loss from investments of $3,468,000 as compared to a net realized loss
of $9,869,000 for the year ended December 31, 1998 and a net realized gain of
$74,000 for the year ended December 31, 1997. For additional information related
to the current year, please refer to the Supplemental Schedule of Net Realized
Loss - Schedule 1.
Cash Distributions
On May 10, 1999, the Individual General Partners approved the first quarter
1999 cash distribution which represented net investment income of $133,000 from
Mezzanine Investments and net Distributable Capital Proceeds from the sale of
Stablex of $6,395,000 (all of which is return of capital). The total amount
distributed to Limited Partners was $6,479,000 or $36.50 per Unit, which was
paid on May 14, 1999. The Managing General Partner received a total of $18,000
with respect to its interest in the Retirement Fund and $28,000 in MGP
Distributions. Thomas H. Lee, as an Individual General Partner, received $1,825
with respect to his interest in the Retirement Fund.
On August 3, 1999, the Individual General Partners approved the second
quarter 1999 cash distribution which represented Net Distributable Cash of
$111,000 from Mezzanine Investments and $1,715 from Temporary Investments. The
total amount distributed to Limited Partners was $91,000 or $.51 per Unit, which
was paid on August 13, 1999. The Managing General Partner received a total of
$252 with respect to its interest in the Retirement Fund and $22,000 in MGP
Distributions. Thomas H. Lee, as an Individual General Partner, received $25
with respect to his interest in the Retirement Fund.
A number of the Retirement Fund's debt investments have been repaid and one
is on non-accrual status. These situations reduce the amount of interest income
received by the Retirement Fund. As a result, it is expected that the amount of
any future cash distributions, in aggregate, paid to Partners will be derived
almost entirely from recovered capital and gains from asset sales, which are
subject to market conditions and are inherently unpredictable as to timing.
Therefore, in the absence of cash available for distributions resulting from the
future sale of portfolio holdings, the Retirement Fund will have available for
any future cash distributions, to the extent not reserved to pay expenses and
contingencies (see discussion of Hills matter above), only small amounts of net
distributable cash from operations, estimated to be less than one dollar per
Unit each quarter.
Should a Limited Partner decide to sell his Units, any such sale will be
recorded on the books and records of the Retirement Fund quarterly, only upon
the satisfactory completion and acceptance of the Retirement Fund's transfer
documents. There can be no assurances that such transfer will be effected before
any specified date. Additionally, pursuant to the Partnership Agreement, until a
transfer is recognized, the Limited Partner of record (i.e. the transferor) is
entitled to receive all the benefits and burdens of ownership of Units, and any
transferee has no rights to distributions of sale proceeds generated at any time
prior to the recognition of the transfer and assignment. Accordingly,
Distributable Cash from Investments for a quarter and Distributable Capital
Proceeds from sales after transfer or assignment have been entered into, but
before such transfer and assignment is recognized, would be payable to the
transferor and not the transferee.
Cash Distributions The following table represents distributions approved by the
Individual General Partners of the Retirement Fund since inception (November 10, 1989):
Total Limited Per Unit Managing Individual
Distributed Partners Return of General Incentive General
Cash(a) Amount Per Unit Capital Partner Fee (b) Partner
------------ ---------- -------- --------- --------- --------- ----------
Fourth Quarter 1989 $ 1,049,749 $ 1,046,507 $ 6.59 $ - $ 2,947 $ - $ 295
First Quarter 1990 2,906,023 2,897,045 16.32 - 8,162 816
Second Quarter 1990 3,586,751 3,479,294 19.60 - 10,073 96,377 1,007
Third Quarter 1990 2,735,077 2,726,630 15.36 - 7,679 - 768
Fourth Quarter 1990 4,076,832 3,891,129 21.92 - 11,446 173,112 1,145
First Quarter 1991 2,297,038 2,289,944 12.90 - 6,449 - 645
Second Quarter 1991 2,920,264 2,911,246 16.40 - 8,198 - 820
Third Quarter 1991 2,327,308 2,320,120 13.07 - 6,535 - 653
Fourth Quarter 1991 2,646,044 2,637,873 14.86 - 7,428 - 743
First Quarter 1992 3,055,858 3,046,157 17.16 - 8,843 - 858
Second Quarter 1992 3,272,572 3,262,726 18.38 - 8,927 - 919
Third Quarter 1992 2,638,921 2,630,772 14.82 - 7,408 - 741
Fourth Quarter 1992 2,897,119 2,888,169 16.27 - 8,136 - 814
Snapple Distribution
on 4/13/93 12,786,849 12,747,352 71.81 71.81 35,906 - 3,591
First Quarter 1993 19,889,862 19,828,426 111.70 97.16 55,851 - 5,585
Second Quarter 1993 1,230,430 1,226,629 6.91 3.49 3,455 - 346
Third Quarter 1993 5,555,625 5,538,468 31.20 1.89 15,597 - 1,560
Fourth Quarter 1993 13,364,699 11,905,931 67.07 - 38,388 1,416,541 3,839
First Quarter 1994 14,934,550 14,117,768 79.53 72.50 41,938 770,650 4,194
Second Quarter 1994 3,184,138 2,792,311 15.73 10.00 8,941 381,992 894
Third Quarter 1994 810,197 807,693 4.55 2.79 2,276 - 228
Snapple Distribution
on 12/15/94 78,114,228 63,770,489 359.24 13.81 237,847 14,082,107 23,785
Fourth Quarter 1994 279,288 221,894 1.25 - 627 56,704 63
EquiCredit Distribution
on 2/14/95 8,303,171 6,860,956 38.65 3.82 24,411 1,415,363 2,441
First Quarter 1995 5,893,413 4,899,415 27.60 26.48 13,801 978,817 1,380
Second Quarter 1995 2,077,699 1,352,664 7.62 .38 4,820 719,733 482
Third Quarter 1995 1,890,622 1,088,166 6.13 5.61 3,069 799,080 307
Sun Pharmaceuticals
Distribution on
12/11/95 10,606,018 10,574,568 59.57 51.57 28,591 - 2,859
Fourth Quarter 1995 19,587 19,527 .11 - 55 - 5
CST Distribution on
5/3/96 13,800,125 9,773,975 55.06 42.04 27,529 3,995,868 2,753
First Quarter 1996 765,250 76,331 .43 - 217 688,680 22
Ghirardelli
Distribution on
5/3/96 10,731,976 10,698,829 60.27 46.38 30,134 - 3,013
Second Quarter 1996 9,302,264 8,889,952 50.08 26.52 25,043 384,765 2,504
Third Quarter 1996 106,839 106,509 .60 - 300 - 30
Fourth Quarter 1996 1,361,776 1,175,149 6.62 6.17 3,310 182,986 331
First Quarter 1997 268,515 55,030 .31 .01 157 213,312 16
Anchor Distribution
on 5/15/97 10,162,057 7,821,311 44.06 44.04 22,029 2,316,514 2,203
Second Quarter 1997 1,783,646 1,586,984 8.94 5.11 4,471 191,744 447
Third Quarter 1997 1,091,200 1,070,415 6.03 5.62 3,015 17,469 301
Fourth Quarter 1997 276,969 236,096 1.33 .19 514 40,308 51
First Quarter 1998 1,151,505 1,098,818 6.19 4.39 3,092 49,286 309
First Alert Distribution
on May 15, 1998 11,975,068 11,080,486 62.42 20.66 31,213 860,248 3,121
Second Quarter 1998 2,471,545 2,463,908 13.88 13.62 6,943 - 694
Third Quarter 1998 40,829 26,627 .15 - 79 14,115 8
Cinnabon Distribution on
November 16, 1998 4,536,339 4,162,727 23.45 22.22 11,725 360,714 1,173
Fourth Quarter 1998 1,684,249 1,237,280 6.97 2.34 3,489 443,131 349
First Quarter 1999 6,527,847 6,479,297 36.50 35.92 18,250 28,475 1,825
Second Quarter 1999 112,983 90,533 .51 - 252 22,173 25
------------ ------------ --------- --------- --------- ----------- ---------
Totals (c) $293,500,914 $261,910,126 $1,476.31 $ 636.54 $ 809,566 $30,700,264 $ 80,958
============ ============ ========= ========= ========= =========== =========
(a) Distributions are paid no later than 45 days after the end of each quarter.
(b) MGP Distributions to the Managing General Partner are the result of Limited Partners achieving cumulative
Priority Returns on Mezzanine Investments, in accordance with the Partnership Agreement.
(c) As more fully discussed in Item 1, Business, Review of Investments Sold During 1999, the Individual General
Partners have determined that it would not be prudent to make distributions to Partners at this time. Accordingly,
the Retirement Fund has reserved all the proceeds received from the sale of Fitz and Floyd, Inc., as well as the
third and fourth quarter income from operations.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
As of December 31, 1999, 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 8. Financial Statements and Supplemental Data
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
TABLE OF CONTENTS
Report of Independent Accountants
Statements of Assets, Liabilities and Partners' Capital
As of December 31, 1999 and December 31, 1998
Statements of Operations
For the Years Ended December 31, 1999, 1998 and 1997
Statements of Changes in Net Assets
For the Years Ended December 31, 1999, 1998 and 1997
Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
Statements of Changes in Partners' Capital
For the Years Ended December 31, 1999, 1998 and 1997
Schedule of Portfolio Investments
as of December 31, 1999
Notes to Financial Statements
Supplemental Schedule of Net Realized Loss - Schedule 1
Supplemental Schedule of Net Unrealized Appreciation and Depreciation -
Schedule 2
Report of Independent Accountants
To the General and Limited Partners of ML-Lee Acquisition Fund (Retirement
Accounts) II, L.P.
In our opinion, the accompanying statements of assets, liabilities and
partners' capital, including the schedule of portfolio investments, and the
related statements of operations, of changes in net assets, of cash flows, and
of changes in partners' capital present fairly, in all material respects, the
financial position of ML-Lee Acquisition Fund (Retirement Accounts) II, L.P.
(the "Fund") at December 31, 1999 and 1998, and the results of its operations,
the changes in its net assets, its cash flows, and the changes in its partners'
capital for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at December 31, 1999 by correspondence with the custodian, provide
a reasonable basis for the opinion expressed above.
The financial statements include securities, valued at $9.4 million at
December 31, 1999 (44.6% of net assets), whose values have been estimated by the
Managing General Partner and the Investment Adviser (with the approval of the
Independent General Partners) in the absence of readily ascertainable market
values, as further described in Note 2. Those estimated values may differ
significantly from the values that would have been used had a ready market for
the securities existed, and the differences could be material to the financial
statements.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule of net realized loss
(Schedule 1) and the schedule of net unrealized appreciation and depreciation
(Schedule 2) are presented for the purpose of additional analysis and are not a
required part of the basic financial statements. These schedules are the
responsibility of the Fund's management. Such schedules have been subjected to
the auditing procedures applied in our audits of the basic financial statements
and, in our opinion, are fairly stated in all material respects when considered
in relation to the basic financial statements taken as a whole.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 27, 2000
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
December 31, 1999 December 31, 1998
------------------ -----------------
Investments - Notes 2, 4, 5
Portfolio Investments at fair value
Managed Companies (amortized cost $9,156
at December 31, 1999 and at December 31, 1998) $ 9,156 $ 9,156
Non-Managed Companies (amortized cost $1,500
at December 31, 1999 and $18,894 at December 31, 1998) 266 6,777
Temporary Investments, at amortized cost (cost $11,698
at December 31, 1999 and $4,029 at December 31, 1998) 11,727 4,038
Cash 32 11
Accrued Interest and Other Receivables - Note 2 92 1,396
Receivable for Investment Sold - 417
Prepaid Expenses 4 3
------------------- -----------------
Total Assets $ 21,277 $ 21,798
=================== =================
Liabilities and Partners' Capital:
Liabilities
Legal and Professional Fees Payable $ 5 $ 25
Reimbursable Administrative Expenses Payable - Note 8 125 22
Independent General Partners' Fees Payable - Note 9 5 15
Deferred Interest Income - Note 2 24 43
------------------ -----------------
Total Liabilities 159 105
------------------ -----------------
Partners' Capital - Note 2
Individual General Partner 11 11
Managing General Partner 181 568
Limited Partners (177,515 Units) 20,926 21,114
------------------ -----------------
Total Partners' Capital 21,118 21,693
------------------ -----------------
Total Liabilities and Partners' Capital $ 21,277 $ 21,798
================== =================
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
For the Years Ended December 31,
-----------------------------------
1999 1998 1997
------- ------- -------
Investment Income - Notes 2, 4, 6
Interest $ 1,174 $ 2,861 $ 2,456
Discount and Other Income 308 410 3,242
------- ------- -------
Total Investment Income 1,482 3,271 5,698
------- ------- -------
Expenses:
Investment Advisory Fee - Note 7 534 550 622
Fund Administration Fee - Note 8 178 178 458
Reimbursable Administrative Expenses - Note 8 314 336 113
Legal and Professional Fees 42 208 136
Independent General Partners' Fees and Expenses - Note 9 73 73 90
Insurance Expense 4 4 4
------- ------- -------
Total Expenses 1,145 1,349 1,423
------- ------- -------
Net Investment Income 337 1,922 4,275
------- ------- -------
Net Realized Gain (Loss) on Sales of Investments - Note 4 and Schedule 1 (3,468) (9,869) 74
------- ------- -------
Net Change in Unrealized Appreciation (Depreciation)
on Investments - Note 5 and Schedule 2
Publicly Traded Securities - 17,439 (3,275)
Nonpublic Securities 10,881 - (3,010)
------- ------- -------
Subtotal 10,881 17,439 (6,285)
------- ------- -------
Net Increase (Decrease) in Net Assets
Resulting From Operations 7,750 9,492 (1,936)
Less: Earned MGP Distributions to Managing General Partner (108) (1,727) (318)
------- ------- -------
Net Increase (Decrease) Available For Pro-Rata
Distribution To All Partners $ 7,642 $ 7,765 $(2,254)
======= ======= =======
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
For the Years Ended December 31,
--------------------------------------
1999 1998 1997
-------- --------- ---------
From Operations:
Net Investment Income $ 337 $ 1,922 $ 4,275
Net Realized Gain (Loss) on Sales of Investments (3,468) (9,869) 74
Net Change in Unrealized Appreciation (Depreciation) on Investments 10,881 17,439 (6,285)
-------- --------- ---------
Net Increase (Decrease) in Net Assets Resulting from Operations 7,750 9,492 (1,936)
Cash Distributions to Partners (8,325) (20,877) (14,243)
-------- --------- ---------
Total Decrease (575) (11,385) (16,179)
Net Assets:
Beginning of Year 21,693 33,078 49,257
-------- --------- ---------
End of Year $ 21,118 $ 21,693 $ 33,078
======== ========= =========
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
For the Years Ended December 31,
-------------------------------------
1999 1998 1997
-------- -------- --------
Increase (Decrease) in Cash
Cash Flows from Operating Activities:
Interest, Discount and Other Income $ 2,747 $ 1,983 $ 5,975
Fund Administration Fee (178) (178) (458)
Investment Advisory Fee (534) (550) (622)
Independent General Partners' Fees and Expenses (83) (68) (108)
(Purchase) Sale of Temporary Investments, Net (7,669) 175 4,186
Purchase of Portfolio Company Investments - - (1,580)
Proceeds from Sales of Portfolio Company Investments 14,341 19,529 7,608
Reimbursable Administrative Expense (211) (322) (139)
Legal and Professional Fees (67) (267) (175)
------- ------- --------
Net Cash Provided By Operating Activities 8,346 20,302 14,687
------- ------- --------
Cash Flows From Financing Activities:
Cash Distributions to Partners (8,325) (20,452) (14,667)
------- ------- --------
Net Cash Used in Financing Activities (8,325) (20,452) (14,667)
------- ------- --------
Net Increase (Decrease) in Cash 21 (150) 20
Cash at Beginning of Year 11 161 141
------- ------- --------
Cash at End of Year $ 32 $ 11 $ 161
======= ======= ========
Reconciliation of Net Investment Income
to Net Cash Provided by Operating Activities
Net Investment Income $ 337 $ 1,922 $ 4,275
------- ------- --------
Adjustments to Reconcile Net Investment Income
to Net Cash Provided by Operating Activities:
Decrease in Investments at cost 9,723 29,989 10,144
(Increase) Decrease in Receivable for Investment Sold 417 (417) -
(Increase) Decrease in Accrued Interest Receivable 1,265 (1,288) 277
(Increase) Decrease in Prepaid Expenses (1) 1 -
Decrease in Legal and Professional Fees Payable (20) (55) (39)
Increase (Decrease) in Reimbursable Administrative Expenses Payable 103 13 (26)
Increase (Decrease) in Independent General Partners' Fees Payable (10) 6 (18)
Net Realized Gain (Loss) on Sales of Investments (3,468) (9,869) 74
------- ------- --------
Total Adjustments 8,009 18,380 10,412
------- ------- --------
Net Cash Provided by Operating Activities $ 8,346 $20,302 $ 14,687
======= ======= ========
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
Individual Managing
General General Limited
Partner Partner Partners Total
-------------- ------------- ------------- ----------
Partners' Capital at January 1, 1997 $ 18 $ 2,566 $ 46,673 $ 49,257
Allocation of Net Investment Income 1 184 4,090 4,275
Allocation of Net Realized Gain on Sales of Investments - - 74 74
Allocation of Net Change in Unrealized
Depreciation on Investments (2) (17) (6,266) (6,285)
Cash Distributions to Partners (3) (2,531) (11,709) (14,243)
-------------- ------------- ------------- ----------
Partners' Capital at December 31, 1997 $ 14 $ 202 $ 32,862 $ 33,078
============== ============= ============= ==========
Partners' Capital at January 1, 1998 $ 14 $ 202 $ 32,862 $ 33,078
Allocation of Net Investment Income 1 309 1,612 1,922
Allocation of Net Realized Loss on Sales of Investments (3) 1,396 (11,262) (9,869)
Allocation of Net Change in Unrealized
Depreciation on Investments 4 39 17,396 17,439
Cash Distributions to Partners (5) (1,378) (19,494) (20,877)
-------------- ------------- ------------- ----------
Partners' Capital at December 31, 1998 $ 11 $ 568 $ 21,114 $ 21,693
============== ============= ============= ==========
Partners' Capital at January 1, 1999 $ 11 $ 568 $ 21,114 $ 21,693
Allocation of Net Investment Income - 79 258 337
Allocation of Net Realized Loss on Sales of Investments (1) 20 (3,487) (3,468)
Allocation of Net Change in Unrealized
Depreciation on Investments 3 30 10,848 10,881
Cash Distributions to Partners (2) (516) (7,807) (8,325)
-------------- ------------- ------------- ----------
Partners' Capital at December 31, 1999 $ 11 $ 181 $ 20,926 $ 21,118
============== ============= ============= ==========
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
Fair % Of
Principal Investment Investment Value Total
Amount/Shares Investment Date Cost(f) (Note 2) Investments
MEZZANINE INVESTMENTS
MANAGED COMPANIES
BIG V SUPERMARKETS, INC. (a)
$6,963 Big V Supermarkets, Inc., Sr. Sub. Nt. 14.14% due 03/15/01(b) 12/27/90 $ 6,963 $ 6,963
62,667 Shares Big V Holding Corp., Inc., Common Stock(c) 12/27/90 2,193 2,193
(8.8% of fully diluted common equity) (e) ------------------------------
9,156 9,156 43.29%
------------------------------
7,032 Warrants COLE NATIONAL CORPORATION
Cole National Corporation, Common Stock Purchase Warrants (c) 9/26/90 - -
(0.0% of fully diluted common equity assuming exercise of warrants)
$744 13% Sr. Secured Bridge Note
Purchased 09/25/90........................ $744
Repaid 11/15/90........................... $744
Realized Gain............................. $0
------------------------------
- - 0.00%
------------------------------
TOTAL INVESTMENT IN MANAGED COMPANIES $ 9,156 $ 9,156 43.29%
==============================
NON-MANAGED COMPANIES
BIOLEASE, INC. - Note 5
$513 Biolease, Inc., 13% Sub. Nt. due 06/06/04(b) 06/08/94 $ 442 $ 257
63.20 Shares Biolease, Inc., Common Stock(c) 06/08/94 62 -
6,554 Warrants Biotransplant, Inc., Common Stock Purchase Warrants(c) 06/08/94 9 9
------------------------------
513 266 1.26%
------------------------------
FLA. ORTHOPEDICS, INC. - Notes 5,6
12,634 Shares FLA. Holdings, Inc. Series B Preferred Stock (a)(c)(d) 08/02/93 987 -
2,493 Warrants FLA. Holdings, Inc. Common Stock Purchase Warrants (a)(c)(d) 08/02/93 - -
$3,158 12.5% Subordinated Note
Purchased 08/02/93 $ 3,158
Surrendered 08/16/96 $ 0
Realized Loss $(3,158)
78,960 Common Stock
Purchased 08/02/93 $ 987
Exchanged 08/02/96
2,493 Series B Preferred Stock $ 987
Realized Gain $ 0
Total Realized Loss $(3,158)
-----------------------------
987 - 0.00%
-----------------------------
TOTAL INVESTMENT IN NON-MANAGED COMPANIES $ 1,500 $ 266 1.26%
=============================
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (continued)
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
Fair % Of
Principal Investment Investment Value Total
Amount/Shares Investment Date Cost(f) (Note 2) Investments
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes Various $ 7,405 $ 7,220 34.14%
Preferred Stock, Common Stock, Warrants and Stock Rights Various 3,251 2,202 10.41%
-----------------------------
TOTAL MEZZANINE INVESTMENTS $10,656 $ 9,422 44.55%
=============================
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$7,529 General Electric Capital Services, 5.90% due 1/18/00 11/16/99 $ 7,529 7,529
$3,950 Ford Motor Credit, 5.71% due 1/3/00 11/16/99 3,920 3,948
$ 250 American General Finance, 5.35% due 1/3/00 12/2/99 249 250
-----------------------------
TOTAL INVESTMENT IN COMMERCIAL PAPER $11,698 $11,727 55.45%
-----------------------------
TOTAL TEMPORARY INVESTMENTS $11,698 $11,727 55.45%
-----------------------------
TOTAL INVESTMENT PORTFOLIO $22,354 $21,149 100.00%
=============================
(a) Represents investment in affiliates as defined in the Investment Company Act of 1940.
(b) Restricted security.
(c) Restricted non-income producing equity security.
(d) Non-accrual investment status.
(e) Percentages of Common Equity have not been audited by PricewaterhouseCoopers LLP.
(f) Represents original cost and excludes accretion of discount of $22 for Mezzanine
Investments and $29 for Temporary Investments
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. Organization and Purpose
ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. (the "Retirement
Fund") (formerly T.H. Lee Acquisition Fund (Retirement Accounts) II, L.P.) was
formed along with ML-Lee Acquisition Fund II, L.P. ("Fund II"; collectively
referred to as the "Funds") and the Certificates of Limited Partnership were
filed under the Delaware Revised Uniform Limited Partnership Act on September
23, 1988. The Funds' operations commenced on November 10, 1989. Capital
contributions from the Limited Partners and the General Partners (as described
below) totaled $178,065,000 in the public offering of the Retirement Fund, the
final closing for which was held on December 20, 1989.
Mezzanine Investments II, L.P. (the "Managing General Partner"), subject to
the supervision of the Individual General Partners (as defined below and
hereinafter with the Managing General Partner as the "General Partners"), is
responsible for overseeing and monitoring the Retirement Fund's investments. The
Managing General Partner is a Delaware limited partnership in which ML Mezzanine
II Inc. is the general partner and Thomas H. Lee Advisors II, L.P., the
Investment Adviser to the Funds, is the limited partner. The Individual General
Partners are Vernon R. Alden, Joseph L. Bower and Stanley H. Feldberg (the
"Independent General Partners") and Thomas H. Lee. ML Fund Administrators Inc.
(the "Fund Administrator") is an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc and is responsible for the day to day administrative services
necessary for the operations of the Retirement Fund.
The Retirement Fund elected to operate as a business development company
under the Investment Company Act of 1940. The Retirement Fund's primary
investment objective is to provide current income and capital appreciation
potential by investing in privately-structured, friendly leveraged buyouts and
other leveraged transactions. The Retirement Fund pursues this objective by
investing primarily in subordinated debt and related equity securities issued in
conjunction with the "mezzanine financing" of friendly leveraged buyout
transactions, leveraged acquisitions and leveraged recapitalizations. The
Retirement Fund could also invest in "bridge investments" if it believed that
such investments would facilitate the consummation of a mezzanine financing. The
Retirement Fund was fully invested as of December 20, 1992, which was within 36
months from the date of the final closing (after including the reserve for
follow-on investments and exclusive of amounts available for reinvestment). The
reinvestment period for various amounts of capital proceeds received during the
last twelve months of the Retirement Fund's investment period terminated at
various times through December 21, 1993.
At the regular quarterly meeting of the General Partners of the Retirement
Fund held on December 14, 1999, the Individual General Partners determined to
extend the term of the Retirement Fund, which was due to terminate December 20,
1999, for an additional two year period, in order to better allow the Retirement
Fund to deal with its assets pending their liquidation. Pursuant to the terms
set forth under Section 2.4 of the Partnership Agreement, the term of the
Retirement Fund will now expire on December 20, 2001. The Individual General
Parnters have the right to extend the term of the Retirement Fund for an
additional one year period if they determine that such extension is in the best
interest of the Retirement Fund.
2. Significant Accounting Policies
Basis of Accounting
For financial reporting purposes, the records of the Retirement Fund are
maintained using the accrual method of accounting. For federal income tax
reporting purposes, the results of operations are adjusted to reflect statutory
requirements arising from book to tax differences. The preparation of financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts and
disclosures in the financial statements. Actual reported results could vary from
these estimates.
Valuation of Investments
Securities for which market quotations are readily available are valued by
reference to such market quotation using the last trade price (if reported) or
the last bid price for the period. For securities without a readily
ascertainable market value (including securities restricted as to resale for
which a corresponding publicly traded class exists), fair value is determined,
on a quarterly basis, in good faith by the Managing General Partner and the
Investment Adviser with final approval from the Individual General Partners of
the Retirement Fund. For privately issued securities in which the Retirement
Fund typically invests, the fair value of an investment is generally its
original cost plus accrued value in the case of original issue discount or
deferred pay securities. Such investments generally will be revalued if there is
an objective basis for doing so at a different price. Investments will be
written down in value if the Managing General Partner and Investment Adviser
believe adverse credit developments of a significant nature require a write-down
of such securities. Investments will be written up in value only if there has
been an arms'-length third party transaction to justify the increased valuation.
Although the Managing General Partner and Investment Adviser use their best
judgment in estimating the fair value of these investments, there are inherent
limitations in any estimation technique. Therefore, the fair value estimates
presented herein are not necessarily indicative of the amount which the
Retirement Fund could realize in a current transaction. Future confirming events
will also affect the estimates of fair value and the effect of such events on
the estimates of fair value could be material.
Temporary Investments with maturities of less than 60 days are stated at
amortized cost, which approximates market value.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of December
31, 1999. Although the Managing General Partner and Investment Adviser are not
aware of any factors not disclosed herein that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued since that time.
Interest Receivable on Investments
Investments generally will be placed on non-accrual status in the event of
a default (after the applicable grace period expires) or if the Investment
Adviser and the Managing General Partner determine that there is no reasonable
assurance of collecting interest.
Payment-In-Kind Securities
All payment-in-kind securities received in lieu of cash interest payments
by the Retirement Fund's portfolio companies are recorded at face value (which
approximates accrued interest), unless the Investment Adviser and the Managing
General Partner determine that there is no reasonable assurance of collecting
the full principal amounts of such securities. As of December 31, 1999 the
Retirement Fund did not have any payment-in-kind securities. As of December 31,
1998, the Retirement Fund had $504,000 of payment-in-kind securities, which
excluded approximately $2,000,000 of payment-in-kind notes received from notes
placed on non-accrual status.
Investment Transactions
The Retirement Fund recorded Mezzanine Investment transactions on the date
on which it obtained an enforceable right to demand the securities or payment
therefore. The Retirement Fund records Temporary Investment transactions on the
trade date.
Net realized gains and losses on investments are determined on the basis of
specific identification for accounting and tax purposes.
Deferred Interest Income
All fees received by the Retirement Fund upon the funding of Mezzanine or
Bridge Investments are treated as deferred interest income and amortized over
the maturity of such investments.
Partners' Capital
Partners' Capital represents the Retirement Fund's equity divided in
proportion to the Partners' Capital Contributions and does not represent the
Partners' Capital Accounts. Profits and losses, as defined in the Partnership
Agreement, when realized, are allocated in accordance with the provisions of the
Partnership Agreement summarized in Note 3.
3. Allocations of Profits and Losses
Pursuant to the Partnership Agreement, all profits from Temporary
Investments generally will be 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 will, in general, be allocated as follows:
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;
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;
third, 69.69% to the Limited Partners, 30.281% to the Managing General
Partner and .029% to the Individual General Partner until the Managing
General Partner has received 20.281% of the total profits allocated; and
thereafter, 79.69% to the Limited Partners, 20.281% to the Managing
General Partner and 0.029% to the Individual General Partner.
4. Investment Transactions
On March 12, 1999, the Funds entered into a Note Repurchase and Warrant
Cancellation Agreement (the "Agreement") with Stablex Canada, Inc. and Seaway
TLC Inc. to sell, retire and cancel all of the Subordinated Notes outstanding
held by the Funds (including all Deferred Interest Notes). Pursuant to the
Agreement, the Funds also relinquished all Warrants held. Total proceeds
received by the Funds for retiring the Notes and Warrants was $12,000,000, of
which $6,395,000 was allocated to the Retirement Fund. The Retirement Fund
recognized a loss of approximately $1.2 million from this transaction. The
Distributable Capital Proceeds relating to this transaction were included with
the first quarter distribution to Partners of record as of March 12, 1999.
In addition, under the Agreement, the Funds are entitled, collectively, to
receive twenty percent (20%) of the net proceeds of any payment or consideration
or distribution (whether received in cash, property, securities or any
combination thereof) arising out of transfer, disposition, recapitalization or
exchange of substantially all of the stock or other equity interest in either
Stablex Canada, Inc. or Seaway TLC Inc. if such transaction is consummated
within forty-two (42) months from the closing of the Agreement. Any
Distributable Capital Proceeds relating to future receipts by the Retirement
Fund pursuant to the Agreement will be payable to Partners of record as of the
date of the receipt of such proceeds. The Retirement Fund ascribes no value to
this contingent payment for financial reporting purposes.
On August 27, 1999, the Funds completed the sale of all of its shares of
the capital stock of Fitz and Floyd, Inc. (the "Sale") pursuant to a Stock
Purchase Agreement executed by the Funds, as selling shareholders, on August 5,
1999. The Retirement Fund received net sale proceeds of $7,530,000, which
included payment in full of its 12% Fitz and Floyd, Inc. Subordinated Notes,
including prepayment premium, and partial return of capital on its Fitz and
Floyd, Inc. Capital Stock. The Retirement Fund recognized a loss of
approximately $2.3 million from this transaction. The distribution of the
Distributable Capital Proceeds relating to this transaction, if any (see below),
will be made in accordance with the terms of the Partnership Agreement.
On November 9, 1999, a special meeting of the General Partners of the Funds
was held to review the Retirement Fund's reserves prior to making any cash
distributions. At this meeting, the General Partners were briefed on the status
of certain litigation commenced by Hills Stores Company ("Hills") against its
former directors, including Thomas H. Lee, who had been serving on the Hills
Board of Directors as a representative of the Funds. The Hills litigation was
brought in connection with the July 1995 payment by Hills of approximately $32
million in golden parachute payments to certain of its officers in connection
with the change of control of Hills associated with the Dickstein proxy contest.
The General Partners discussed the potential liabilities to Thomas H. Lee in
connection with this litigation, and the Retirement Fund's potential
indemnification obligations to Thomas H. Lee, as well as the liquidity of the
Retirement Fund's remaining assets. Following discussion of the issues, the
Individual General Partners of the Retirement Fund determined that, to the
extent that the Retirement Fund may have future indemnification obligations with
respect to such litigation, suitable reserves should be maintained for such
contingency. Accordingly the Individual General Partners determined that it
would not be prudent to make distributions to Partners at such time. Thus, the
Retirement Fund has reserved all the proceeds received from the sale of Fitz &
Floyd, Inc., as well as the third quarter income from operations. This reserve
will be reviewed each quarter by the General Partners of the Retirement Fund in
light of the status of the litigation. On March 7, 2000, the General Partners
reviewed the status of the Hills matter and again determined that it would not
be prudent to make distributions to Partners at such time. On February 22, 2000,
the court granted defendents motion for summary judgement dismissing claims
against Mr. Lee. Hills has the right to appeal that ruling after trial of the
remaining claims against certain other defendents, which is currently scheduled
to commence in May 2000.
Because the Retirement Fund primarily invested in high-yield private
placement securities, the risk of loss upon default by an issuer is greater than
with investment grade securities because high-yield securities are generally
unsecured and are often subordinated to other creditors of the issuer. Also,
high-yield issuers usually have higher levels of indebtedness and are more
sensitive to adverse economic conditions.
Although the Retirement Fund cannot eliminate the risks associated with its
investments in high-yield securities, it has procedures in place to continually
monitor the risks associated with its investments under a variety of market
conditions. Any potential Retirement Fund loss would generally be limited to its
investment in the portfolio company as reflected in the portfolio of
investments.
Should bankruptcy proceedings commence, either voluntarily or by action of
the court against a portfolio company, the ability of the Retirement Fund to
liquidate the position or collect proceeds from the action may be delayed or
limited.
5. Net Unrealized Appreciation and Depreciation of Investments
For information, please refer to the Supplemental Schedule of Net
Unrealized Appreciation and Depreciation - Schedule 2.
6. Non-Accrual of Investments
In accordance with the Retirement Fund's Accounting Policy, the following
security has been on non-accrual status since the date indicated:
- Florida Orthopedics January 1, 1995.
7. Investment Advisory Fee
The Investment Adviser provides the identification, management and
liquidation of portfolio investments for the Funds. As compensation for services
rendered to the Funds, the Investment Adviser receives a quarterly fee at the
annual rate of 1% of assets under management (net offering proceeds reduced by
cumulative capital reductions and realized losses), with a minimum annual fee of
$1,200,000 for the Funds on a combined basis. The Investment Advisory Fee is
calculated and paid quarterly in advance. In addition, the Investment Adviser
receives 95% of the benefit of any MGP Distributions paid to the Managing
General Partner (see Note 10).
8. Fund Administration Fees and Expenses
As compensation for its services, the Fund Administrator, an affiliate of
the Managing General Partner, is entitled to receive a Fund Administration Fee.
The Fund Administration Fee is an annual amount of $400,000 for the Funds on a
combined basis. The Fund Administration Fee is calculated and paid quarterly, in
advance, by each Fund. Prior to November 1997, the Fund Administration Fee was
calculated at an annual amount of the greater of $500,000 or 0.45% of the excess
of net offering proceeds less 50% of capital reductions and 50% of realized
losses plus a portion of reimbursable expenses incurred by the Retirement Fund.
In addition, the Fund Administrator is entitled to reimbursement of 100% of
all out-of-pocket expenses incurred by the Fund Administrator on behalf of the
Funds ("Reimbursable Administrative Expenses"). Prior to November 1997, the Fund
Administrator was entitled to reimbursement for only a portion of the
Reimbursable Administrative Expenses. Reimbursable Administrative Expenses
primarily consist of printing, audit and tax preparation, and legal fees and
expenses, and custodian fees.
In addition, ML Mezzanine II Inc., an affiliate of the Fund Administrator
and of Merrill Lynch & Co. Inc., receives 5% of the benefit of any MGP
Distributions paid to the Managing General Partner (see Note 10).
9. Independent General Partners' Fees and Expenses
As compensation for their services, each Independent General Partner will
receive a combined annual fee of $40,000 (payable quarterly) from the Funds in
addition to a $1,000 fee 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 any out-of-pocket expenses incurred. Fees and expenses are allocated between
the Funds in proportion to the number of Units issued by each fund. Compensation
for each of the Independent General Partners is reviewed annually.
10. Related Party Transactions
The Retirement Fund's investments generally are made as co-investments with
Fund II. In addition, certain of the Mezzanine Investments and Bridge
Investments which were made by the Retirement Fund involved co-investments with
entities affiliated with the Investment Adviser. Such co-investments are
generally prohibited absent exemptive relief from the Securities and Exchange
Commission (the "Commission"). As a result of these affiliations and the
Retirement Fund's expectation of engaging in such co-investments, the Funds
together with ML-Lee Acquisition Fund, L.P., sought an exemptive order from the
Commission allowing such co-investments, which was received on September 1,
1989. The Retirement Fund's co-investments in Managed Companies, and in certain
cases its co-investments in Non-Managed Companies, typically involve the entry
by the Funds and other equity security holders into stockholders' agreements.
While the provisions of such stockholders' agreements vary, such agreements may
include provisions as to corporate governance, registration rights, rights of
first offer or first refusal, rights to participate in sales of securities to
third parties, rights of majority stockholders to compel minority stockholders
to participate in sales of securities to third parties, transfer restrictions,
and preemptive rights.
Thomas H. Lee Company, a sole proprietorship owned by Thomas H. Lee, an
Individual General Partner of the Retirement Fund and an affiliate of the
Investment Adviser, typically performs certain management services for Managed
Companies and receives management fees in connection therewith, usually pursuant
to written agreements with such companies. In addition, certain of the portfolio
companies have contractual or other relationships pursuant to which they do
business with one another.
The Investment Adviser, pursuant to an investment management agreement
among the Investment Adviser, the Thomas H. Lee Company and the Retirement Fund
dated November 10, 1989, is responsible for the identification, management and
liquidation of Mezzanine Investments and Bridge Investments for the Retirement
Fund. The Investment Adviser received an Investment Advisory Fee as compensation
for these services as outlined in Note 7 of the Financial Statements.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") is an
affiliate of the Managing General Partner. MLPF&S and certain of its affiliates,
in the ordinary course of their business, perform various financial services for
various portfolio companies of the Funds, which may include investment banking
services, broker/dealer services and economic forecasting, and receive in
consideration therewith various fees, commissions and reimbursements.
Furthermore, MLPF&S and its affiliates or investment companies advised by
affiliates of MLPF&S may, from time to time, purchase or sell securities issued
by portfolio companies of the Funds in connection with its ordinary investment
operations.
As provided by the Partnership Agreement, the Managing General Partner of
the Retirement Fund is entitled to receive incentive distributions after Limited
Partners have received their Priority Return of 10% per annum ("MGP
Distributions"). The Managing General Partner is required to defer a portion of
any MGP Distribution earned from the sale of portfolio investments in excess of
20% of realized capital gains, net realized capital losses and unrealized
depreciation, in accordance with the Partnership Agreement (the "Deferred
Distribution Amount"). Any Deferred Distribution Amount is distributable to the
Partners pro-rata in accordance with their capital contributions, and certain
amounts otherwise later payable to Limited Partners from Distributable Cash from
operations are instead payable to the Managing General Partner until such
Deferred Distribution Amount is paid in full.
During 1999, the Retirement Fund paid the Individual General Partner
distributions totaling $2,199 and Managing General Partner distributions
totaling $516,000 (which includes $494,000 of MGP Distributions). As of December
31, 1999, the Managing General Partner has earned a total of $30,700,000 in MGP
Distributions, none of which is deferred in payment to the Managing General
Partner as a Deferred Distribution Amount at this time, in accordance with the
Partnership Agreement. To the extent not payable to the Managing General
Partner, any Deferred Distribution Amount is distributed to the Partners
pro-rata in accordance with their capital contributions, and certain amounts
otherwise later payable to Partners from distributable cash from operations
would instead be payable solely to the Managing General Partner until the
Deferred Distribution Amount is paid in full.
An officer of the Investment Adviser also serves as a Director/Trustee of a
managed company.
11. Income Taxes
No provision for income taxes has been made because all income and losses
are allocated to the Retirement Fund's partners for inclusion in their
respective tax returns.
Pursuant to the Statement of Financial Accounting Standards No. 109
Accounting for Income Taxes, the Retirement Fund is required to disclose any
difference in the tax basis of the Retirement Fund's assets and liabilities
versus the amounts reported in the financial statements. As of December 31,
1999, the tax basis of the Retirement Fund's assets are greater than the amounts
reported in the financial statements by approximately $1,250,000. This
difference is primarily attributable to net unrealized depreciation on
investments which has not been recognized for tax purposes.
SCHEDULE 1
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SUPPLEMENTAL SCHEDULE OF NET REALIZED LOSS
FOR THE YEAR ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
Net
Investment Par Value/ Investment Net Realized
Security Date Number of Shares Cost Proceeds Loss
- --------------------------------- ---------- ---------------- ---------- ---------- ----------
Soretox (Stablex Canada, Inc.) Various Various $ 7,565 $ 6,395 $ (1,170)
Fitz and Floyd, Inc. Various Various 9,828 7,530 (2,298)
---------- ---------- ----------
Total at December 31, 1999 $ 17,393 $ 13,925 $ (3,468)
========== ========== ==========
See the Accompanying Notes to Financial Statements.
SCHEDULE 2
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF NET UNREALIZED APPRECIATION AND DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
Total
Net Unrealized
Appreciation
(Depreciation) Unrealized Appreciation (Depreciation) for
Investment Fair at December 31, 1994
Security Cost Value 1999 1999 1998 1997 1996 1995 & Prior
- ------------------------------------------ ---------- ------ ------------ ------- ------- ------- -------- -------- -------
Non Public Securities:
Biolease, Inc.
Common Stock* $ 62 $ - $ (62) $ - $ - $ (62) $ - $ - $ -
Subordinated Notes* (a) 442 257 (207) - - (207) - - -
FLA. Orthopedics, Inc.
Preferred Stock* 987 - (987) - - - - - (987)
Subordinated Note* - - - - - - 3,158 (3,158) -
---------- ------- ------- ------- -------- -------- -------
Total Unrealized Depreciation
from Non Public Securities $ (1,256) $ - $ - $ (269) $ 3,158 $ (3,158) $ (987)
---------- ------- ------- ------- -------- -------- -------
Reversal of Unrealized Appreciation
(Depreciation) from Securities Sold in 1999
Soretox
Subordinated Notes* $ - $ 4,610 $ - $(2,782) $ - $ - $(1,828)
Fitz and Floyd, Inc.
Preferred Stock - 6,271 - 41 (4,324) (1,975) (13)
---------- ------- ------- ------- -------- -------- -------
Total Reversal of Unrealized Appreciation
(Depreciation) from Securities Sold in 1999 $ - $10,881 $ - $(2,741) $ (4,324) $ (1,975) $(1,841)
---------- ------- ------- ------- -------- -------- -------
Reversal of Unrealized Appreciation
(Depreciation) from Securities Sold prior to 1999 $ - $ - $17,439 $(3,275) $(13,603) $(23,262) $22,701
---------- ------- ------- ------- -------- -------- -------
Total Reversal of Unrealized Appreciation
(Depreciation) from Securities Sold $ - $10,881 $17,439 $(6,016) $(17,927) $(25,237) $20,860
---------- ------- ------- ------- -------- -------- -------
Net Unrealized Appreciation (Depreciation) $ (1,256) $10,881 $17,439 $(6,285) $(14,769) $(28,395) $19,873
========== ======= ======= ======= ======== ======== =======
* Restricted Security
(a) Investment cost excludes accretion of discount of $22
See Accompanying Notes to Financial Statements.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The five General Partners of the Retirement Fund are responsible for the
management and administration of the Retirement Fund and have the same positions
and responsibilities with respect to Fund II. The General Partners of Fund II
and the Retirement Fund consist of four Individual General Partners: Vernon R.
Alden, Joseph L. Bower, Stanley H. Feldberg (the "Independent General Partners")
and Thomas H. Lee; and Mezzanine Investments II, L.P., the Managing General
Partner. Pursuant to exemptive orders issued by the Securities and Exchange
Commission, each Independent General Partner is not an "interested person" of
the Retirement Fund as such term is defined in the Investment Company Act of
1940.
Individual General Partners
The Individual General Partners provide overall guidance and supervision
with respect to the operations of the Retirement Fund and perform the various
duties imposed on the directors of business development companies by the
Investment Company Act of 1940. The Individual General Partners supervise the
Managing General Partner and must, with respect to any Mezzanine Investment
transactions, either certify that it meets the Retirement Fund investment
guidelines or specifically approve it as a non-Guideline Investment or Bridge
Investment. The Retirement Fund's investment and reinvestment period expired in
December, 1993, and the only investments now permitted are follow on investments
in existing portfolio companies. In addition, if a Portfolio Company's
performance is in default of a material provision of a lending agreement or has
a ratio of operating cash flow to current cash fixed charges for its four most
recent fiscal quarters of less than or equal to 1.1 to 1, the Independent
General Partners are required to approve any changes in the terms of or sale of
such Portfolio Company.
Messrs. Alden, Bower, Feldberg and Lee have served as Individual General
Partners of the Retirement Fund and Fund II since 1989. Each Individual General
Partner shall hold office until his removal or withdrawal pursuant to the
provisions of the Retirement Fund's Partnership Agreement.
Mr. Alden, 76, Individual General Partner of the Retirement Fund, and Fund
II (used together with the Retirement Fund as the "Funds") and ML-Lee
Acquisition Fund, L.P. ("Lee I"). Director of Sonesta International Hotels
Corporation. Chairman of the Japan Society of Boston, Trustee Emeritus of the
Boston Symphony Orchestra and the Boston Museum of Science and Honorary Consul
General of the Royal Kingdom of Thailand.
Mr. Bower, 61, Individual General Partner of the Funds and Lee I. Donald
Kirk David Professor of Business Administration, Harvard Business School.
Faculty member since 1963. Director of Anika Therapeutics, Inc., Brown Shoe Co.,
New America High Income Fund, Sonesta International Hotels Corporation, and The
Lincoln Foundation. Trustee of the DeCordova & Dana Museum and Sculpture Park
and the New England Conservatory of Music.
Mr. Feldberg, 75, Individual General Partner of the Funds and Lee I.
Chairman of the Board of Storm Eye Institute at Medical University of South
Carolina. Past Director of the TJX Companies, Inc. and Waban Inc.,
Trustee-Emeritus of Brandeis University, Honorary Trustee of Beth Israel
Deaconess Medical Center.
Mr. Lee, 55, Individual General Partner of the Funds and Lee I . Chairman
of the Investment Adviser of Lee I since 1987; Chairman of the Administrative
General Partner of the Investment Adviser to the Funds since 1989; Chairman of
the Administrative General Partner of Thomas H. Lee Equity Partners L.P. since
1989. Chairman of the Administrative General Partner of Thomas H. Lee Equity
Fund III, L.P. since 1996. Founder of the Thomas H. Lee Company (the "Lee
Company") and its President since 1974. Director of Finlay Enterprises Inc.,
Metris Companies, Inc., Big Flower Holdings, Inc., Miller Import Corporation,
Safelite Glass Corporation, The Smith and Wollensky Restaurant Group, Inc., and
Vail Resorts, Inc. Trustee of Brandeis University (Vice Chairman), Museum of
Fine Arts (Boston), the Wang Center for the Performing Arts, Beth Israel
Deaconess Medical Center (overseas), Mount Sinai - NYU Medical Center and Health
System (Trustee) and the Whitney Museum of American Art. Overseer of Boston
Symphony Orchestra and New England Conservatory of Music, Member of the Dean's
Council, Harvard University: Committee on University Resources (Member,
Executive Committee), Visiting Committee to Harvard College, Boston Major Gifts
Steering Committee (Co-Chair Capital Campaign) and Financial Aid Council. Member
of the Corporation of Belmont Hill School.
The Investment Adviser
The Investment Adviser, pursuant to an investment management agreement
among the Investment Adviser, the Thomas H. Lee Company and the Retirement Fund
dated November 10, 1989, is responsible for the identification, management and
liquidation of Mezzanine Investments and Bridge Investments for the Retirement
Fund. The Investment Adviser received an Investment Advisory Fee in compensation
for these services outlined in Note 7 to the Financial Statements.
Certain officers of the Thomas H. Lee Company have been designated as
trustees and executive officers of T. H. Lee Mezzanine II, the administrative
general partner of the Investment Adviser.
Served in
Present
Name Capacity Since Title
--------- -------------- -------
Thomas H. Lee 11/10/89 Chairman, Trustee
Thomas R. Shepherd 11/10/89 Executive Vice President
David V. Harkins 11/10/89 Senior Vice President, Trustee
C. Hunter Boll 11/10/89 Vice President, Trustee
Scott A. Schoen 11/10/89 Vice President
Wendy L. Masler 11/10/89 Treasurer, Clerk
Information concerning Mr. Lee is set forth above.
Mr. Shepherd, 70, is Chairman of the Shepherd Group, LLC. Mr. Shepherd is
also currently a director of Andover.Net, Community Resource Systems, Inc.,
Rayovac Corporation and Vermont Teddy Bear Co. He is Executive Vice President of
Thomas H. Lee Advisors I.
Mr. Harkins, 58, has been a Managing Director of the Thomas H. Lee Company
since 1986 and the Chairman of National Dentex Corporation since 1983. Mr.
Harkins is a Senior Vice President and Trustee of Thomas H. Lee Advisors I. He
also is a director of National Dentex Corporation, Conseco, Inc., Cott
Corporation, Fisher Scientific International, Inc., Freedom Securities
Corporation, Metris Companies, Inc., Stanley Furniture Company and Syratech
Corporation.
Mr. Boll, 44, has served as a Managing Director of the Thomas H. Lee
Company since 1991. From 1986 to 1991 he served as a Vice President of the
Thomas H. Lee Company. Mr. Boll is a Vice President of Thomas H. Lee Advisors I.
Mr. Boll is a Director of Big V Supermarkets Inc., Cott Corporation, Freedom
Securities Corporation, Metris Companies, Inc., The Smith and Wollensky
Restaurant Group, Inc., Transwestern Publishing, L.P. and United Industries
Corporation.
Mr. Schoen, 41, has served as a Managing Director of the Thomas H. Lee
Company since 1991. From 1986 to 1990 he served as a Vice President of the
Thomas H. Lee Company. Mr. Schoen is a Vice President of Thomas H. Lee Advisors
I. Mr. Schoen is also a Director of Rayovac Corporation, ARC Holdings, LLC,
Syratech Corporation, Transwestern Publishing L.P., United Industries
Corporation and Wyndham International Inc.
Ms. Masler, 46, has been Treasurer of the Thomas H. Lee Company since 1984.
Ms. Masler is also Treasurer and Clerk of Thomas H. Lee Advisors I.
The Managing General Partner
The Managing General Partner is a limited partnership in which ML
Mezzanine II Inc. is the sole general partner and the Investment Adviser is the
limited partner. The Managing General Partner is responsible for the supervision
of the Retirement Fund's investments.
The executive officers of ML Mezzanine II Inc. are as follows:
Served in
Present
Name Capacity Since (1) Title
--------- ------------------ -------
Kevin K. Albert 7/31/89 Chairman, President and Director
James V. Caruso 1/28/93 Executive Vice President
1/27/93 Director
Rosalie Y. Goldberg 7/31/89 Vice President, Director
Diane T. Herte 11/5/99 Vice President
11/8/99 Director
Kevin T. Seltzer 11/5/99 Vice President, Treasurer
(1) Directors hold office until their successors are elected and qualified.
All executive officers serve at the pleasure of the Board of Directors.
(2) Robert Remick held the position of treasurer through November 4, 1999.
Kevin K. Albert, 47, a Managing Director of Merrill Lynch Investment
Banking Group ("ML Investment Banking") and of the Private Sales and
Divestitures Group of Business Financial Services, joined Merrill Lynch in 1981.
Mr. Albert's work in the Equity Private Placement Group is involved in
structuring and placing a diversified array of private equity financing
including common stock, preferred stock, limited partnership interests and other
equity-related securities. His work in the Private Sales and Divestitures Group
involves managing a team of investment bankers executing middle-market exclusive
sales transactions. Mr. Albert is also a director of ML Media Management Inc.
("ML Media"), an affiliate of ML Mezzanine II Inc. ("ML Mezzanine II")and a
joint venturer of Media Management Partners, the general partner of ML Media
Partners, L.P.; a director of ML Opportunity Management Inc. ("ML Opportunity")
an affiliate of ML Mezzanine II and a joint Venturer of Media Opportunity
Management Partners, the general partner of ML Opportunity, Media Partners,
L.P.; a director of ML Mezzanine Inc. ("ML Mezzanine"), an affiliate of ML
Mezzanine II and sole general partner of the managing general partner of ML-Lee
Acquisition Fund, L.P. ("Lee I'); a director of Merrill Lynch Venture Capital
Inc. ("ML Venture"), an affiliate of ML Mezzanine II and the general partner of
the Managing General Partner of ML Venture Partners II, L.P. ("Venture II") and
ML Oklahoma Venture Partners Limited Partnership ("Oklahoma"); and a director of
Merrill Lynch R&D Management Inc. ("ML R&D"), an affiliate of ML Mezzanine II
and the general partner of the General Partner of ML Technology Ventures, L.P.;
Mr. Albert also serves as an independent general partner of Venture II.
James V. Caruso, 48, a Director of ML Investment Banking, joined Merrill
Lynch in 1975. Mr. Caruso is the Director of Technology for the Global
Investment Banking Group. He is responsible for ensuring that the business
requirements of Investment Banking are supported by managing the development of
new technologies and enhancing existing systems. He is also responsible for
certain merchant banking business related activities. Mr. Caruso is also
director of ML Mezzanine, ML Media, ML Venture, ML R&D, ML Media, ML Opportunity
and MLH Property Managers Inc, an affiliate of ML-Mezzanine II and the general
partner of MLH Income Realty Partnership VI.
Rosalie Y. Goldberg, 62, a First Vice President and Senior Director of
Merrill Lynch's Private Client Group and the Director of its Special Investments
Group, joined Merrill Lynch in 1975. Ms. Goldberg has held a number of
management positions in the special investments area, including the position of
Manager for Product Development and Origination from 1983 to 1989. Ms. Goldberg
is also a Director of ML Mezzanine, ML Media and ML Opportunity.
Diane T. Herte, 39, a Vice President of ML Investment Banking since 1996
and previously an Assistant Vice President of Merrill Lynch & Co. Corporate
Credit Group since 1992, joined Merrill Lynch in 1984. Ms. Herte's
responsiblities include controllership, financial management and administrative
functions for partnerships for which subsidiaries of Merrill Lynch are the
general partner or manager. Ms. Herte is also a director of ML Mezzanine.
Kevin T. Seltzer, 33, a Vice President of ML Investment Banking, joined
Merrill Lynch in 1995. Mr. Seltzer manages certain accounting, financial
reporting and administrative functions for certain partnerships for which
subsidiaries of Merrill Lynch are the General Partner or manager. From 1993 to
1995, Mr. Seltzer was employed by Coopers & Lybrand L.L.P., where he was an
associate in their Real Estate Auditing Practice.
The Fund Administrator
ML Fund Administrators Inc., a Delaware corporation and a subsidiary of
Merrill Lynch & Co., Inc., is responsible for the provision of administrative
services necessary for the operation of the Funds. The Fund Administrator
receives Fund Administration Fees as compensation for these services as outlined
in Note 8 to the Financial Statements.
The Fund Administrator is responsible for the day-to-day administrative
affairs of the Funds and for the management of the accounts of Limited Partners.
The Fund Administrator also provides the Funds, at the Fund Administrator's
expense, with office space, facilities, equipment and personnel necessary to
carry out its obligations under the Administrative Services Agreement.
Item 11. Executive Compensation
The information with respect to compensation of the Individual General
Partners set forth under the caption "Management Arrangements - the Individual
General Partners" in the Prospectus pages 73 - 74 is incorporated herein by
reference. The Retirement Fund paid Independent General Partners, Mr. Alden, Mr.
Bower and Mr. Feldberg $66,150, collectively for their services as Independent
General Partners in 1999.
The information with respect to the allocation and distribution of the
Retirement Fund's profits and losses to the Managing General Partner set forth
under the caption "Distributions and Allocations - Allocations of Profits and
Losses" in the Prospectus pages 86 - 87 is incorporated herein by reference. The
Managing General Partner received distributions of $515,770 with respect to
1999, including incentive distributions of $493,779 that it distributed,
$469,090 to the Investment Adviser and $24,689 to ML Mezzanine II Inc.
The information with respect to the Investment Advisory Fee payable to the
Investment Adviser (and distributions from the Managing General Partner) set
forth under the caption "Management Arrangements - Description of the Advisory
Agreement" in the Prospectus pages 74 - 75 is incorporated herein by reference.
Pursuant to the Investment Advisory Agreement, the Retirement Fund paid the
Investment Adviser $534,000 with respect to 1999.
The information with respect to the Fund Administration Fees and Expenses
payable to the Fund Administrator set forth under the caption "Management
Arrangements - The Fund Administrator" in the Prospectus pages 72 - 73 is
incorporated herein by reference. Pursuant to the Administrative Services
Agreement, the Retirement Fund paid the Fund Administrator a total of $388,272
in 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of January 1, 2000, the Common Fund, which owns 21,448 Units of the
outstanding Units of limited partnership interest, or 12.08% of the Retirement
Fund, is the only entity known to the management of the Retirement Fund which
may be deemed to be a beneficial owner of more than five percent of the
outstanding units of the Retirement Fund. The Common Fund is located at 363 Reef
Road, P.O. Box 940, Fairfield, CT 06430. Mr. Lee owns 6,975 Units, or 3.93% of
the Units, of the Retirement Fund. Mr. Bower owns 11 units of the Retirement
Fund. The General Partner and certain Officers of the Investment Adviser own
8,526 Units, or 4.80% of the Units, of the Retirement Fund.
There exists no arrangement known to the Retirement Fund, the execution of
which may at a subsequent date, result in a change of control of the Retirement
Fund.
Item 13. Certain Relationships and Related Transactions
The Retirement Fund's investments generally are made as co-investments with
Fund II. In addition, certain of the Mezzanine Investments and Bridge
Investments which were made by the Retirement Fund may involve co-investments
with entities affiliated with the Investment Adviser. Such co-investments are
generally prohibited absent exemptive relief from the Securities and Exchange
Commission (the "Commission"). As a result of these affiliations and the
Retirement Fund's expectation of engaging in such co-investments, the Retirement
Fund together with Fund II and Lee I, sought an exemptive order from the
Commission allowing such co-investments, which was received on September 1,
1989. The Retirement Fund's co-investments in Managed Companies, and in certain
cases its co-investments in Non-Managed Companies, typically involve the entry
by the Funds and other equity security holders into stockholders' agreements.
While the provisions of such stockholders' agreements vary, such agreements may
include provisions as to corporate governance, registration rights, rights of
first offer or first refusal, rights to participate in sales of securities to
third parties, rights of majority stockholders to compel minority stockholders
to participate in sales of securities to third parties, transfer restrictions,
and preemptive rights.
Thomas H. Lee Company, a sole proprietorship owned by Thomas H. Lee, an
Individual General Partner of the Retirement Fund and an affiliate of the
Investment Adviser, typically performs certain management services for Managed
Companies and receives management fees in connection therewith usually pursuant
to written agreements with such companies. The Funds have one Managed Company in
their portfolios at December 31, 1999, which paid management fees to Thomas H.
Lee Company of $150,000 for the fiscal year ended December 31, 1999.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") is an
affiliate of the Managing General Partner. MLPF&S and certain of its affiliates,
in the ordinary course of their business, perform various financial services for
various portfolio companies of the Funds, which may include investment banking
services, broker/dealer services and economic forecasting, and pension plan
services and receives in consideration therewith various fees, commissions and
reimbursements. The aggregate revenue received by MLPF&S and its affiliates
during 1999 for providing such services to Managed Companies in which the Funds
have a material interest was not in excess of $100,000. Furthermore, MLPF&S and
its affiliates or investment companies advised by affiliates of MLPF&S may, from
time to time, purchase or sell securities issued by portfolio companies of the
Funds in connection with their ordinary investment operations.
During 1999, the Retirement Fund paid Managing General Partner
distributions totaling $515,770 (which included $493,779 of MGP Distributions
and $21,991 with respect to its interest in the Retirement Fund). Of this MGP
Distribution amount, 95% or $469,090 was paid to the Investment Adviser and the
remaining 5% totalling $24,689 was paid to ML Mezzanine II Inc. The Managing
General Partner has earned $30,700,264 in MGP Distributions, none of which was
deferred in payment at December 31, 1999, as a Deferred Distribution Amount in
accordance with the Partnership Agreement. To the extent not payable to the
Managing General Partner, any Deferred Distribution Amount is distributable to
the Partners pro-rata in accordance with their capital contributions, and
certain amounts otherwise later payable to Limited Partners from distributable
cash from operations will instead be payable to the Managing General Partner
until the Deferred Distribution Amount is paid in full.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits.
(1) Financial Statements.
See Item 8. "Financial Statements and Supplemenatary Data."
(2) Financial Statement Schedules.
No financial statement schedules are included because of the
absence of conditions which require their inclusion or because
the required information is included in the financial statements
or set forth herein the notes thereto.
(3) Exhibits.
3.1 Amended and Restated Certificate Incorporated by reference
of Limited Partnership, dated as to Exhibit 3.1 to
of August 25, 1989 registrant's Registration
Statement on Form N-2
number 33-25816.
3.2 Amended and Restated Agreement of Incorporated by reference
Limited Partnership, dated to Exhibit 3.2. to
November 10, 1989 Amendment No. 1, registrant's Annual Report
dated January 30, 1990. of Form 10-K for the year
ending December 31, 1989.
10.1 Investment Advisory Agreement, Incorporated by reference
dated November 10, 1989 by and to Exhibit 10.1 to
between Registrant, Thomas H. Lee registrant's Annual Report
Advisors II, L.P. and Thomas H. of Form 10-K for the year
Lee Company. ended December 31, 1991.
10.2 Custodian Agreement, dated Incorporated by reference
November 10, 1989, by and between to Exhibit 10.2 to
Registrant and State Street Bank registrant's Annual Report
and Trust Company. of Form 10-K for the year
ended December 31, 1991.
10.3 Administrative Services Agreement, Incorporated by reference
dated November 10, 1989 by and to Exhibit 10.3 to
between Registrant and ML Fund registrant's Annual Report
Administrators Inc. of Form 10-K for the year
ended December 31, 1991.
27 Financial Data Schedule for the Filed Herewith.
year ended December 31, 1999
28 Pages 21-91 of the Prospectus Incorporated by reference
dated September 6,1989, filed to Exhibit 28 to
pursuant to Rule 497(b) under the registrant's Annual Report
Securities Act of 1933. of Form 10-K for the year
ended December 31, 1991.
(b) Reports on Form 8-K.
The following Report on Form 8-K ("Report") was filed during the
last quarter of the fiscal period covered by this annual report.
(1) A Current Report on Form 8-K was filed on December 28, 1999
to disclose that the term of the Retirement Fund was extended for
an additional two year period.
(c) Exhibits.
See (a) (3) above.
(d) Financial Statement schedules.
See (a) (2) above.
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 30th day of March,
2000.
ML-LEE ACQUISITION FUND
(RETIREMENT ACCOUNTS) II, L.P.
By: Mezzanine Investments II, L.P.
Managing General Partner
By: ML Mezzanine II Inc.,
its General Partner
Dated: March 30, 2000 /s/ Kevin K. Albert
Kevin K. Albert
President, ML Mezzanine II Inc.,
General Partner of Mezzanine
Investments II, L.P., the Managing
General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on the 30th day of March, 2000.
Signature Title
/s/ Kevin K. Albert ML Mezzanine II Inc.
Kevin K. Albert President and Director
(Principal Executive Officer of Registrant)
/s/ Vernon R. Alden Individual General Partner
Vernon R. Alden ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.
/s/ Joseph L. Bower Individual General Partner
Joseph L. Bower ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.
/s/ Stanley H. Feldberg Individual General Partner
Stanley H. Feldberg ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.
/s/ Thomas H. Lee Individual General Partner
Thomas H. Lee ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.
/s/ Kevin T. Seltzer ML Mezzanine II Inc.
Kevin T. Seltzer Vice President and Treasurer
(Principal Financial Officer of Registrant)