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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 0-17383
ML-LEE ACQUISITION FUND II, L.P.
(Exact name of registrant as specified in its Governing Instruments)
Delaware 04-3028398
(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 II, L.P. ("Fund II") (formerly T.H. Lee Acquisition
Fund II, L.P.) was formed along with ML-Lee Acquisition Fund (Retirement
Accounts) II, L.P. the ("Retirement Fund" 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. Fund
II's operations commenced on November 10, 1989 and were scheduled to terminate
on January 5, 2000. However, the initial ten year term of Fund II has been
extended for an additional two year period. The Individual General Partners (as
defined below) have the right to extend the term of Fund II for an additional
one year period if they determine that such extension is in the best interest of
Fund II.
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 Fund II'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 Fund II.
Fund II elected to operate as a business development company under the
Investment Company Act of 1940, as amended ("Investment Company Act"). Fund II'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. Fund II 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 recapitalizations. Fund II could also
invest in "bridge investments" if it believed that such investments would
facilitate the consummation of a mezzanine financing. Fund II considers this
activity to constitute a single industry segment of mezzanine financing
investing.
Fund II 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. Fund II's Mezzanine Investments typically were issued in private
placement transactions which are generally subject to certain restrictions on
sales thereby limiting their liquidity. Fund II 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 Fund II'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 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 and January 5, 1990, Fund II had its first, second and third
closings, respectively, at which time the Managing General Partner admitted
additional Limited Partners to Fund II representing 221,745 Units of limited
partnership interest. The additional Limited Partners' total capital
contributions were $205,114,126, which excludes discounts allowed of $3,119,607
and is net of sales commissions and advisory fees of $13,511,267. 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, Fund II paid sales commissions to Merrill Lynch, Pierce, Fenner and Smith
Incorporated ("MLPF&S") in the amount of $10,800,450 (exclusive of discounts of
$2,504,250). In addition, Fund II paid a financial advisory fee to MLPF&S in the
amount of $2,710,817 (exclusive of discounts of $615,357).
Mezzanine and Bridge Investments
As of December 31, 1999, Fund II had outstanding a total (at cost) of
$19,441,000 invested in Mezzanine Investments representing $17,144,000 Managed
and $2,297,000 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.
Fund II'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 $5,605,000 was allocated to Fund II. Fund II recognized a loss of
approximately $1 million from this transaction. The Distributable Capital
Proceeds relating to this transaction was made in connection with the first
quarter cash 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 Fund II pursuant to the
Agreement will be payable to Partners of record as of the date of the receipt of
such proceeds. Fund II ascribes no value to this contingent payment for
financial reporting purposes.
Fitz and 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. Fund II received net sales proceeds of $11,532,000, 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. Fund II recognized a loss of approximately $3.5 million from this
transaction. The distribution of 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 Fund II'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 Fund II's potential indemnification
obligations to Thomas H. Lee, as well as the liquidity of Fund II's remaining
assets. Following discussion of the issues, the Individual General Partners of
Fund II determined that, to the extent that Fund II 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, Fund II 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 Fund II 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 Fund II'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. Fund II 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 Fund II'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. Fund II'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 $412,000.
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. Fund II has valued its remaining
investment in FLA. Orthopedics, Inc. at zero, which resulted in total net
unrealized depreciation of $1,513,000 as of December 31, 1999.
Competition
Fund II 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
Fund II has no employees. The Investment Adviser, subject to the
supervision of the Managing General Partner and the Individual General Partners,
manages and controls Fund II's investments. The Managing General Partner is
responsible for managing the Temporary Investments of Fund II. The Fund
Administrator performs administrative services for Fund II. The Fund
Administrator is a subsidiary of Merrill Lynch & Co, Inc., the parent of MLPF&S.
Item 2. Properties
Fund II 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 Fund II
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 10,070. The Managing
General Partner and Thomas H. Lee as an Individual General Partner also hold
general partnership interests in Fund II.
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 Fund II'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 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 Fund II's current net asset value upon the liquidation of the
Fund's assets over its remaining life.
Fund II 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, Fund II has made quarterly distributions including both
Distributable Cash from Investments and Distributable Capital Proceeds. However,
Fund II'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 in 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 $ 1,096,665 $ 2,822,809 $ 8,426,190 $ 11,023,166 $ 4,146,846
Net Realized Gain (Loss) on Sales of
Investments (4,532,421) (26,634,967) 92,648 5,894,176 8,372,906
Net Change in Unrealized Appreciation
(Depreciation) on Investments 13,635,980 33,816,479 (6,129,993) (15,723,691) (30,559,313)
Cash Distributions to Partners 8,350,808 25,810,638 26,672,357 49,261,781 29,490,761
Net Assets 32,875,097 31,025,683 46,832,011 71,115,538 119,183,669
Cost of Mezzanine Investments 19,440,708 41,110,511 91,989,046 103,597,216 135,797,397
Total Assets 33,034,443 31,176,545 47,105,834 71,678,160 120,346,488
PER UNIT OF LIMITED PARTNERSHIP INTEREST:
Investment Income $ 7.58 $ 17.84 $ 36.43 $ 50.33 $ 32.05
Expenses (4.13) (6.81) (7.79) (15.11) (19.71)
----------- ----------- ----------- ------------ -----------
Net Investment Income $ 3.45 $ 11.03 $ 28.64 $ 35.22 $ 12.34
=========== =========== =========== ============ ===========
Net Realized Gain (Loss) on Sales of
Investments $ (20.61) $ (124.73) $ .42 $ 14.47 $ 34.23
Net Change in Unrealized Appreciation
(Depreciation) on Investments 61.34 152.12 (27.58) (70.73) (137.47)
Cash Distributions 34.92 109.19 106.00 192.87 112.31
Cumulative Cash Distributions 1,302.98 1,267.87 1,158.68 1,052.68 859.81
Net Asset Value 146.74 137.49 209.93 314.44 528.63
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 II, L.P. ("Fund II"), held on December 14, 1999, the Individual
General Partners determined to extend the initial ten year term of Fund II,
which was due to terminate January 5, 2000, for an additional two year period,
in order to better allow Fund II 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 Fund II will now expire on January 5, 2002.
The Individual General Partners have the right to extend the term of Fund II for
an additional one year period if they determine that such extension is in the
best interest of Fund II.
On August 6, 1991, the Independent General Partners approved a reserve for
follow-on investments of approximately $24,900,000 for Fund II. As of March 30,
2000, this remaining reserve balance was approximately $3,100,000 due to
follow-on investments in Petco Animal Supplies, Fitz and Floyd, Inc., Fine
Clothing, Inc., Hills Stores, Ghirardelli Holdings and Anchor Advanced Products.
Additionally, approximately $8,300,000 of the reserve has 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 Fund II's existing investment.
On March 12, 1999, Fund II and the Retirement Fund (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 $5,605,000 was
allocated to Fund II. Fund II recognized a loss of approximately $1 million from
this transaction. The Distributable Capital Proceeds relating to this
transaction was made in connection with the first quarter cash 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 Fund II pursuant
to the Agreement will be payable to Partners of record as of the date of the
receipt of such proceeds. Fund II 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. Fund II received net sales proceeds of $11,532,000, 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. Fund II recognized a loss of approximately $3.5 million from this
transaction. The distribution of 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 Fund II'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 Fund II's potential indemnification
obligations to Thomas H. Lee, as well as the liquidity of Fund II's remaining
assets. Following discussion of the issues, the Individual General Partners of
Fund II determined that, to the extent that Fund II 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, Fund II 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 Fund II 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, Fund II had outstanding a total (at cost) of
$19,441,000 invested in Mezzanine Investments representing $17,144,000 Managed
and $2,297,000 Non-Managed portfolio investments. The remaining proceeds were
invested in Temporary Investments primarily comprised of commercial paper with
maturities of less than 60 days.
As provided by the Partnership Agreement, the Managing General Partner of
Fund II is entitled to receive an incentive distribution 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. As of December 31, 1999 there is no outstanding Deferred Distribution
Amount.
A number of Fund II's debt investments have been repaid and one is on
non-accrual status. These situations reduce the amount of interest income
received by Fund II. 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 distribution resulting from the sale of
portfolio holdings, Fund II 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
Fund II 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 Fund II cannot eliminate the risks associated with its investments
in High-Yield Securities, it has established risk management policies. Fund II
subjected each prospective investment to rigorous analysis and made only those
investments that were recommended by the Investment Advisor and that met Fund
II's investment guidelines or that had otherwise been approved by the Managing
General Partner and the Independent General Partners. Fund II's investments were
measured against specified Fund II investment and performance guidelines. To
limit the exposure of Fund II's capital in any single issuer, Fund II limited
the amount of its investment in a particular issuer. Fund II'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. Fund II 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, Fund II may make or publish
forward-looking statements about management expectations, strategic objectives,
business prospects, anticipated financial performance, and other similar
matters. In order to comply with the terms of the safe harbor for such
statements provided by the Private Securities Litigation Reform Act of 1995,
Fund II notes that a variety of factors, many of which are beyond its control,
affect its operations, performance, business strategy, and results and could
cause actual results and experience to differ materially from the expectations
expressed in these statements. These factors include, but are not limited to,
the effect of changing economic and market conditions, trends in business and
finance and in investor sentiment, the level of volatility of interest rates,
the actions undertaken by both current and potential new competitors, the impact
of current, pending, and future legislation and regulation both in the United
States and throughout the world, and the other risks and uncertainties detailed
in this Form 10-K. Fund II 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, Fund II had net investment income of
$1,097,000 as compared to $2,823,000 and $8,426,000 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, Fund II had investment income of $2,409,000 as compared to $4,336,000
and $10,157,000 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 sales 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
Fund II to the Investment Adviser for the years ended December 31, 1999, 1998
and 1997 were $666,000, $654,000 and $759,000, 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 Fund II. 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. For the years ended December 31, 1999, 1998 and
1997 Fund II incurred Fund Administration Fees of $222,000, $222,000 and
$570,000, 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 Fund II
incurred $276,000, $295,000, and $140,000, respectively, in Reimbursable
Administrative Expenses. Subsequent to November 1997, the Fund Adminstrator 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 $52,000, $247,000 and $152,000, respectively. These expenses are
largely attributable to legal fees incurred and advanced on behalf of
indemnified defendants as well as fees incurred directly by Fund II in
connection with certain litigation proceedings. The decrease in legal and
professional fees for the year ended December 31, 1999 as compared to 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 primarily from the increased legal fees incurred by Fund II in
connection with the settlement of the Seidel litigation in the first half of
1998.
Net Assets
Fund II's net assets increased by $1,849,000 during the year ended December
31, 1999, due to net investment income of $1,097,000 and reversal of net
unrealized depreciation of $13,636,000, partially offset by cash distributions
to partners of $8,351,000 ($6,387,000 of which was return of capital from the
sales of Mezzanine Investments) and net realized loss from the sales of
Mezzanine Investments of $4,533,000.
Fund II's net assets decreased by $15,807,000 during the year ended
December 31,1998, due to the payment of cash distributions to partners of
$25,811,000 ($15,389,000 of the cash distributions paid was return of capital
from the sales of Mezzanine Investments) and a net realized loss of $26,635,000
from the sales of Mezzanine Investments, partially offset by net investment
income of $2,823,000 and net unrealized appreciation of $33,816,000.
Fund II's net assets decreased by $24,282,000 during the year ended
December 31, 1997, due to the payment of cash distributions to partners of
$26,671,000 (approximately $18,400,000 of the cash distributions paid was return
of capital from the sales of Mezzanine Investments) and net unrealized
depreciation of $6,130,000, partially offset by the net investment income of
$8,426,000 and a net realized gain of $93,000 from the sales of Mezzanine
Investments.
Unrealized Appreciation and Depreciation on Investments
For the year ended December 31, 1999, Fund II recorded net unrealized
appreciation of $13,636,000 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 $33,816,000, 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,
Fund II recorded net unrealized depreciation of $6,130,000 of which $3,342,000
was related to net unrealized depreciation in market value of publicly traded
securities. Fund II's cumulative net unrealized depreciation on investments as
of December 31, 1999 totaled $1,924,000.
The Managing General Partner and the Investment Adviser review the
valuation of Fund II'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 56.0% of Fund II'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 Fund II
could realize in a current transaction. As of December 31, 1999, Fund II's
investment in Big V Supermarkets Inc. represents approximately 52.2% of Fund
II'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, Fund II recorded a net realized loss
from investments of $4,533,000 as compared to a net realized loss of $26,635,000
for the year ended December 31, 1998 and a net realized gain of $93,000 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 $323,000 from
Mezzanine Investments and net Distributable Capital Proceeds from the sale of
Stablex of $5,605,000 (all of which is return of capital). The total amount
distributed to Limited Partners was $5,814,000 or $26.22 per Unit, which was
paid on May 14, 1999. The Managing General Partner received a total of $13,000
with respect to its interest in Fund II and $98,000 in MGP Distributions. Thomas
H. Lee, as an Individual General Partner, received $1,311 with respect to his
interest in Fund II.
On August 3, 1999, the Individual General Partner's approved the second
quarter 1999 cash distribution which represented Net Distributable Cash of
$17,000 from Temporary Investments and $286,000 from Mezzanine Investments. The
total amount distributed to Limited Partners was $217,000 or $.98 per Unit,
which was paid on August 13, 1999. The Managing General Partner received a total
of $491 with respect to its interest in Fund II and $86,000 in MGP
Distributions. Thomas H. Lee, as an Individual General Partner, received $49
with respect to his interest in Fund II.
A number of Fund II's debt investments have been repaid and one is on
non-accrual status. These situations reduce the amount of interest income
received by Fund II. As a result, it is expected that the amount of any future
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, Fund II will have available for 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 Fund II quarterly, only upon the
satisfactory completion and acceptance of Fund II'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 Fund II,
since inception (November 10, 1989):
Total Limited Per Unit Managing Individual
Distributed Partners Per Return of General Incentive General
Cash(a) Amount Unit Capital Partner Fee(b) Partner
------------ ------------ -------- ---------- ----------- ---------- ----------
Fourth Quarter 1989 $ 1,224,768 $ 1,221,692 $ 6.27 $ - $ 2,796 $ - $ 280
First Quarter 1990 3,776,596 3,767,253 17.00 - 8,494 - 849
Second Quarter 1990 4,943,920 4,751,996 21.43 - 11,120 179,692 1,112
Third Quarter 1990 3,487,811 3,479,179 15.69 - 7,847 - 785
Fourth Quarter 1990 6,045,031 5,705,499 25.73 - 13,598 324,574 1,360
First Quarter 1991 2,889,835 2,882,685 13.00 - 6,500 - 650
Second Quarter 1991 4,216,058 4,205,629 19.56 - 9,481 - 948
Third Quarter 1991 2,936,520 2,929,252 13.21 - 6,607 - 661
Fourth Quarter 1991 3,438,901 3,430,395 15.47 - 7,733 - 773
First Quarter 1992 3,599,446 3,590,052 16.19 - 8,584 - 810
Second Quarter 1992 3,829,652 3,820,667 17.23 - 8,124 - 861
Third Quarter 1992 2,905,394 2,898,207 13.07 - 6,534 - 653
Fourth Quarter 1992 3,027,660 3,020,167 13.62 - 6,812 - 681
First Quarter 1993 21,642,642 21,589,093 97.36 85.75 48,681 - 4,868
Second Quarter 1993 1,442,695 1,439,125 6.49 - 3,245 - 325
Third Quarter 1993 5,074,991 5,062,438 22.83 2.45 11,412 - 1,141
Fourth Quarter 1993 11,803,865 11,774,660 53.10 1.33 26,550 - 2,655
First Quarter 1994 16,087,488 16,047,686 72.37 59.42 36,184 - 3,618
Second Quarter 1994 4,214,710 4,204,285 18.96 12.24 9,477 - 948
Third Quarter 1994 1,298,201 1,294,991 5.84 3.42 2,918 - 292
Snapple Distribution
on 12/15/94 68,497,700 58,336,675 263.08 9.70 164,845 9,979,695 16,485
Fourth Quarter 1994 375,092 241,702 1.09 - 543 132,793 54
EquiCredit Distribution
on 2/14/95 7,276,582 6,359,647 28.68 2.68 16,826 898,426 1,683
First Quarter 1995 6,731,899 5,505,928 24.83 23.77 12,418 1,212,311 1,242
Second Quarter 1995 3,477,482 2,084,403 9.40 .57 6,215 1,386,242 622
Third Quarter 1995 2,019,088 1,124,247 5.07 4.50 2,536 892,051 254
Sun Pharmaceuticals
Distribution on 12/11/95 9,610,616 9,587,798 43.24 37.42 20,744 - 2,074
Fourth Quarter 1995 333,445 166,765 .75 - 752 165,853 75
CST Distribution
on 5/03/96 25,825,311 21,023,644 94.81 63.04 47,165 4,749,785 4,717
First Quarter 1996 1,766,006 1,263,947 5.70 - 2,849 498,925 285
Ghirardelli Distribution
on 5/03/96 9,409,746 9,386,466 42.33 32.57 21,164 - 2,116
Second Quarter 1996 11,494,950 10,745,763 48.46 20.09 24,229 722,535 2,423
Third Quarter 1996 432,323 181,831 .82 - 410 250,041 41
Fourth Quarter 1996 1,833,044 1,226,250 5.53 5.04 2,764 603,754 276
First Quarter 1997 696,267 79,828 .36 .01 180 616,241 18
Anchor Distribution
on 5/15/97 19,963,239 18,158,698 81.89 66.06 40,946 1,759,500 4,095
Second Quarter 1997 3,203,136 2,818,379 12.71 7.43 6,353 377,769 635
Third Quarter 1997 1,304,854 1,221,815 5.51 4.49 2,757 80,006 276
Fourth Quarter 1997 525,375 412,445 1.86 .20 836 112,010 84
First Quarter 1998 2,169,871 2,044,489 9.22 6.47 4,610 120,311 461
First Alert Distribution
on May 15, 1998 10,807,982 10,781,242 48.62 14.94 24,309 - 2,431
Second Quarter 1998 4,808,219 4,607,861 20.78 20.43 10,391 188,928 1,039
Third Quarter 1998 242,195 46,566 .21 - 106 195,512 11
Cinnabon Distribution on
November 16, 1998 6,928,824 6,361,864 28.69 27.19 14,345 551,180 1,435
Fourth Quarter 1998 2,120,360 1,711,871 7.72 3.52 3,859 404,244 386
First Quarter 1999 5,926,743 5,814,154 26.22 25.21 13,113 98,165 1,311
Second Quarter 1999 303,705 217,310 .98 - 491 85,855 49
------------- ------------ --------- -------- --------- ----------- --------
Totals (c) $ 315,970,238 $288,626,539 $1,302.98 $ 539.94 $ 688,453 $26,586,398 $ 68,848
============= ============ ========= ======== ========= =========== ========
(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, Fund II 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, Fund II maintains a portion of its cash
equivalents in financial instruments with original maturities of three months or
less. These financial instruments are subject to interest rate risk, and will
decline in value if interest rates increase. A significant increase or decrease
in interest rates is not expected to have a material effect on Fund II's
financial position.
Item 8. Financial Statements and Supplemental Data
ML-LEE ACQUISITION FUND 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 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 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 $17.6 million at
December 31, 1999 (53.4% 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 II, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
December 31, December 31,
1999 1998
------------ ------------
Assets:
Investments - Notes 2, 4, 5
Portfolio Investments at fair value
Managed Companies (amortized cost $17,144
at December 31, 1999 and at December 31, 1998) $ 17,144 $ 17,144
Non-Managed Companies (amortized cost $2,297
at December 31, 1999 and $23,967 at December 31, 1998) 406 8,440
Temporary Investments, at amortized cost (cost $15,255
at December 31, 1999 and $3,401 at December 31, 1998) 15,280 3,408
Cash 36 5
Accrued Interest & Other Receivable - Note 2 163 1,395
Receivable for Investment Sold - 782
Prepaid Expenses 6 3
---------- ----------
Total Assets $ 33,035 $ 31,177
========== ==========
Liabilities and Partners' Capital:
Liabilities
Legal and Professional Fees Payable $ 5 $ 30
Reimbursable Administrative Expenses Payable - Note 8 105 22
Independent General Partners' Fees Payable - Note 9 6 18
Deferred Interest Income - Note 2 44 81
---------- ----------
Total Liabilities 160 151
---------- ----------
Partners' Capital - Note 2
Individual General Partner 13 13
Managing General Partner 322 525
Limited Partners (221,745 Units) 32,540 30,488
---------- ----------
Total Partners' Capital 32,875 31,026
---------- ----------
Total Liabilities and Partners' Capital $ 33,035 $ 31,177
========== ==========
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND 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 $ 2,062 $ 3,933 $ 4,354
Discount and Other Income 347 403 5,803
------------ ------------ ------------
Total Investment Income 2,409 4,336 10,157
------------ ------------ ------------
Expenses:
Investment Advisory Fee - Note 7 666 654 759
Fund Administration Fee - Note 8 222 222 570
Reimbursable Administrative Expenses - Note 8 276 295 140
Legal and Professional Fees 52 247 152
Independent General Partners' Fees and Expenses - Note 9 91 91 106
Insurance Expense 5 4 4
------------ ------------ ------------
Total Expenses 1,312 1,513 1,731
------------ ------------ ------------
Net Investment Income 1,097 2,823 8,426
------------ ------------ ------------
Net Realized Gain (Loss) on Sales of Investments - Note 4 and Schedule 1 (4,533) (26,635) 93
------------ ------------ ------------
Net Change in Unrealized Appreciation (Depreciation)
on Investments - Note 5 and Schedule 2
Publicly Traded Securities - 33,816 (3,342)
Nonpublic Securities 13,636 - (2,788)
------------ ------------ ------------
Subtotal 13,636 33,816 (6,130)
------------ ------------ ------------
Net Increase in Net Assets Resulting from Operations 10,200 10,004 2,389
Less: Earned MGP Distributions to Managing General Partner (380) (1,460) (2,078)
------------ ------------ ------------
Net Increase Available For Pro-Rata Distribution
to All Partners $ 9,820 $ 8,544 $ 311
============ ============ ============
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND 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 $ 1,097 $ 2,823 $ 8,426
Net Realized Gain (Loss) on Sales of Investments (4,533) (26,635) 93
Net Change in Unrealized Appreciation (Depreciation) on Investments 13,636 33,816 (6,130)
------------- ------------- -------------
Net Increase in Net Assets Resulting from Operations 10,200 10,004 2,389
Cash Distributions to Partners (8,351) (25,811) (26,671)
------------- ------------- -------------
Total Increase (Decrease) 1,849 (15,807) (24,282)
Net Assets:
Beginning of Year 31,026 46,833 71,115
------------- ------------- -------------
End of Year $ 32,875 $ 31,026 $ 46,833
============= ============= =============
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND 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 $ 3,586 $ 3,135 $ 10,677
Legal and Professional Fees (77) (317) (207)
Investment Advisory Fee (666) (654) (759)
Fund Administration Fee (222) (222) (570)
Independent General Partners' Fees and Expenses (103) (84) (128)
Reimbursable Administrative Expenses (193) (284) (174)
(Purchase) Sale of Temporary Investments, Net (11,854) 210 6,588
Purchase of Portfolio Company Investments - - (2,420)
Proceeds from Sales of Portfolio Company Investments 17,919 23,462 14,117
Insurance Expense (8) (4) (4)
------------- ------------- -------------
Net Cash Provided by Operating Activities 8,382 25,242 27,120
------------- ------------- -------------
Cash Flows from Financing Activities:
Cash Distributions to Partners (8,351) (25,482) (27,000)
------------- ------------- -------------
Net Cash Used in Financing Activities (8,351) (25,482) (27,000)
------------- ------------- -------------
Net Increase (Decrease) in Cash 31 (240) 120
Cash at Beginning of Year 5 245 125
------------- ------------- -------------
Cash at End of Year $ 36 $ 5 $ 245
============= ============= =============
Reconciliation of Net Investment Income
to Net Cash Provided by Operating Activities
Net Investment Income $ 1,097 $ 2,823 $ 8,426
------------- ------------- -------------
Adjustments to Reconcile Net Investment Income
to Net Cash Provided by Operating Activities
Decrease in Investments at Cost 9,816 51,089 18,195
(Increase) Decrease in Receivable for Investments Sold 782 (782) -
(Increase) Decrease in Accrued Interest,
Dividend and Discount Receivable 1,177 (1,201) 520
(Increase) Decrease in Prepaid Expenses (3) 1 -
Decrease in Legal and Professional Fees Payable (25) (70) (59)
Increase (Decrease) in Reimbursable Administrative Expenses Payable 83 11 (34)
Increase (Decrease) in Independent General Partners' Fees Payable (12) 6 (21)
Net Realized Gain (Loss) on Sales of Investments (4,533) (26,635) 93
------------- ------------- -------------
Total Adjustments 7,285 22,419 18,694
------------- ------------- -------------
Net Cash Provided by Operating Activities $ 8,382 $ 25,242 $ 27,120
============= ============= =============
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND 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 $ 19 $ 1,368 $ 69,728 $ 71,115
Allocation of Net Investment Income 2 2,073 6,351 8,426
Allocation of Net Realized Gain on Sales of Investments - - 93 93
Allocation of Net Change in Unrealized
Depreciation on Investments (1) (14) (6,115) (6,130)
Cash Distributions to Partners (5) (3,161) (23,505) (26,671)
------------- ------------- ------------- ------------
Partners' Capital at December 31, 1997 $ 15 $ 266 $ 46,552 $ 46,833
------------- ------------- ------------- ------------
Partners' Capital at January 1, 1998 $ 15 $ 266 $ 46,552 $ 46,833
Allocation of Net Investment Income 1 376 2,446 2,823
Allocation of Net Realized Loss on Sales of Investments (6) 1,030 (27,659) (26,635)
Allocation of Net Change in Unrealized
Depreciation on Investments 8 76 33,732 33,816
Cash Distributions to Partners (5) (1,223) (24,583) (25,811)
------------- ------------- ------------- ------------
Partners' Capital at December 31, 1998 $ 13 $ 525 $ 30,488 $ 31,026
------------- ------------- ------------- ------------
Partners' Capital at January 1, 1999 $ 13 $ 525 $ 30,488 $ 31,026
Allocation of Net Investment Income - 332 765 1,097
Allocation of Net Realized Loss on Sales of Investments (1) 40 (4,572) (4,533)
Allocation of Net Change in Unrealized
Depreciation on Investments 3 31 13,602 13,636
Cash Distributions to Partners (2) (606) (7,743) (8,351)
------------- ------------- ------------- ------------
Partners' Capital at December 31, 1999 $ 13 $ 322 $ 32,540 $ 32,875
============= ============= ============= ============
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND 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)
$13,037 Big V Supermarkets, Inc., Sr. Sub. Nt. 14.14% due 03/15/01(b) 12/27/90 $ 13,037 $ 13,037
117,333 Shares Big V Holding Corp., Common Stock (c) 12/27/90 4,107 4,107
(16.6% of fully diluted common equity) (e) ---------------------------------
17,144 17,144 52.22%
---------------------------------
COLE NATIONAL CORPORATION
13,161 Warrants Cole National Corporation, Common Stock Purchase Warrants (c) 9/26/90 - -
(0.0% of fully diluted common equity
assuming exercise of warrants)
$1,393 13% Sr. Secured Bridge Note
Purchased 9/25/90 $1,393
Repaid 11/15/90 $1,393 -------------------------------
Realized Gain $ 0 - - 0.00%
-------------------------------
TOTAL INVESTMENT IN MANAGED COMPANIES $ 17,144 $ 17,144 52.22%
===============================
NON-MANAGED COMPANIES
BIOLEASE, INC.- Note 5
$784 BioLease, Inc., 13% Sub. Nt. due 06/06/04 (b) 06/08/94 $ 676 $ 392
96.56 Shares BioLease, Inc., Common Stock (c) 06/08/94 94 -
10,014 Warrants Biotransplant, Inc., Common Stock Purchase Warrants(c) 06/08/94 14 14
-------------------------------
784 406 1.24%
-------------------------------
FLA. ORTHOPEDICS, INC. - Notes 5,6
19,366 Shares FLA. Holdings, Inc. Series B Preferred Stock (a) (c) (d) 08/02/93 1,513 -
3,822 Warrants FLA. Holdings, Inc. Common Stock Purchase Warrants (a) (c) (d) 08/02/93 - -
$4,842 12.5% Subordinated Note
Purchased 08/02/93 $ 4,842
Surrendered 08/16/96 $ 0
Realized Loss $(4,842)
121,040 Common Stock
Purchased 08/02/93 $ 1,513
Exchanged 08/02/96
19,366 Series B Preferred Stock $ 1,513
Realized Gain $ 0
Total Realized Loss $(4,842)
-------------------------------
1,513 - 0.00%
-------------------------------
TOTAL INVESTMENT IN NON-MANAGED COMPANIES $ 2,297 $ 406 1.24%
===============================
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND 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 $ 13,713 $ 13,429 40.91%
Preferred Stock, Common Stock, Warrants and Stock Rights Various 5,728 4,121 12.55%
-----------------------------
TOTAL MEZZANINE INVESTMENTS $ 19,441 $ 17,550 53.46%
=============================
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$10,000 Prudential Funding, 5.92% due 1/14/00 11/16/99 $ 10,000 $ 10,000
$ 3,300 Ford Motor Credit, 5.71% due 1/3/00 11/16/99 3,275 3,298
$ 1,532 General Electric Capital Services, 5.90% due 1/18/00 11/16/99 1,532 1,532
$ 450 American General Finance, 5.35% due 1/3/00 12/2/99 448 450
-----------------------------
TOTAL INVESTMENT IN COMMERCIAL PAPER $ 15,255 $ 15,280 46.54%
-----------------------------
TOTAL TEMPORARY INVESTMENTS $ 15,255 $ 15,280 46.54%
-----------------------------
TOTAL INVESTMENT PORTFOLIO $ 34,696 $ 32,830 100.00%
=============================
(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 $33 for
Mezzanine Investments and $25 for Temporary Investments.
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. Organization and Purpose
ML-Lee Acquisition Fund II, L.P. ("Fund II") (formerly T.H. Lee Acquisition
Fund II, L.P.) was formed along with ML-Lee Acquisition Fund (Retirement
Accounts) II, L.P. (the "Retirement Fund"; 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 defined below) totaled
$222,295,000 in the public offering of Fund II, the final closing for which was
held on January 5, 1990.
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 of Fund II'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 Fund II.
Fund II elected to operate as a business development company under the
Investment Company Act of 1940. Fund II'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. Fund II 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. Fund II could also invest in
"bridge investments" if it believed that such investments would facilitate the
consummation of a mezzanine financing. Fund II 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 Fund II's investment
period terminated at various times through December 21, 1993.
At the regular quarterly meeting of the General Partners of Fund II held on
December 14, 1999, the Individual General Partners determined to extend the
initial ten year term of Fund II, which was due to terminate January 5, 2000,
for an additional two year period, in order to better allow Fund II 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 Fund II will now expire on
January 5, 2002. The Individual General Partners have the right to extend the
term of Fund II for an additional one year period if they determine that such
extension is in the best interest of Fund II.
2. Significant Accounting Policies
Basis of Accounting
For financial reporting purposes, the records of Fund II 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
Fund II. For privately issued securities in which Fund II 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 Fund II 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 Fund II'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, Fund II does not
have any payment-in-kind securities. As of December 31, 1998, Fund II had
$442,000 of payment-in-kind notes, which excluded approximately $1,800,000 of
payment-in-kind notes received from notes placed on non-accrual status.
Investment Transactions
Fund II recorded Mezzanine Investment transactions on the date on which it
obtained an enforceable right to demand the securities or payment therefore.
Fund II 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 Fund II 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 Fund II'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 99.75% to the Limited Partners, 0.23% to
the Managing General Partner and 0.02% 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, 99.75% to the Limited Partners, 0.23% to the Managing General
Partner and 0.02% to the Individual General Partner until the sum allocated
to the Limited Partners equals any previous losses allocated together with a
cumulative Priority Return of 10% on the average daily amount in Mezzanine
Investments, and any outstanding Compensatory Payments;
third, 69.75% to the Limited Partners, 30.225% to the Managing General
Partner and 0.025% to the Individual General Partner until the Managing
General Partner has received 20.281% of the total profits allocated; and
thereafter, 79.75% to the Limited Partners, 20.225% to the Managing General
Partner and 0.025% 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 $5,605,000 was allocated to Fund II. Fund II recognized a loss of
approximately $1 million from this transaction. The Distributable Capital
Proceeds relating to this transaction was made in connection with the first
quarter cash 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 Fund II pursuant
to the Agreement will be payable to Partners of record as of the date of the
receipt of such proceeds. Fund II 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. Fund II received net sales proceeds of $11,532,000, 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. Fund II recognized a loss of approximately $3.5 million from this
transaction. The distribution of 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 Fund II'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 Fund II's potential indemnification
obligations to Thomas H. Lee, as well as the liquidity of Fund II's remaining
assets. Following discussion of the issues, the Individual General Partners of
Fund II determined that, to the extent that Fund II 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, Fund II 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 Fund II 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 Fund II primarily invests 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 Fund II 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 Fund II 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 Fund II 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 Fund II's Accounting Policy, the following security has
been on non-accrual status since the date indicated:
- Florida Orthopedics, Inc., 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 Fund II and the Retirement Fund 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 Fund II.
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, legal fees and
expenses, and custodian fees.
In addition, ML Mezzanine II Inc., an affiliate of the Fund Administrator
and 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 Individual General Partners is reviewed annually.
10. Related Party Transactions
Fund II's investments generally were made as co-investments with the
Retirement Fund. In addition, certain of the Mezzanine Investments and Bridge
Investments which were made by Fund II 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 Fund II'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. Fund II'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 Fund II dated
November 10, 1989, is responsible for the identification, management and
liquidation of Mezzanine Investments and Bridge Investments for Fund II. The
Investment Adviser received an Investment Advisory Fee as compensation for these
services as outlined in Note 7 to 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
Fund II is entitled to receive an incentive distribution 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").
This 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 any Deferred Distribution Amount
is paid in full.
During 1999, Fund II paid the Individual General Partner distributions
totaling $1,746 and Managing General Partner distributions totaling $606,000
(which includes $588,000 of MGP Distributions as defined above). As of December
31, 1999, the Managing General Partner has earned a total of $26,586,000 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 Fund II's partners for inclusion in their respective tax
returns.
Pursuant to the Statement of Financial Accounting Standards No. 109
Accounting for Income Taxes, Fund II is required to disclose any difference in
the tax basis of Fund II's assets and liabilities versus the amounts reported in
the financial statements. As of December 31, 1999, the tax basis of Fund II's
assets are greater than the amounts reported in the financial statements by
approximately $1,900,000. 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 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 $ 6,631 $ 5,605 $ (1,026)
Fitz and Floyd, Inc. Various Various 15,039 11,532 (3,507)
---------- -------- --------
Total at December 31, 1999 $ 21,670 $ 17,137 $ (4,533)
========== ======== ========
See Accompanying Notes to Financial Statements.
SCHEDULE 2
ML-LEE ACQUISITION FUND II, L.P.
SUPPLEMENTAL SCHEDULE OF NET UNREALIZED APPRECIATION AND DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
Total
Net Unrealized
Appreciation/ Unrealized Appreciation (Depreciation) for
(Depreciation)
Investment Fair at December 31, 1994 &
Security Cost Value 1999 1999 1998 1997 1996 1995 Prior
- -------- ---------- ----- ------------- ------- ------- ------- -------- -------- -------
Non Public Securities
Biolease, Inc.
Common Stock* $ 94 $ - $ (94) $ - $ - $ (94) $ - $ - $ -
Subordinated Notes*(a) 676 392 (317) - - (317) - - -
FLA. Orthopedics, Inc.
Preferred Stock* 1,513 - (1,513) - - - - - (1,513)
Subordinated Note * - - - - - - 4,842 (4,842) -
-------- ------- ------- ------- -------- -------- -------
Total Unrealized Depreciation
from Non Public Securities $ (1,924) $ - $ - $ (411) $ 4,842 $ (4,842) $(1,513)
-------- ------- ------- ------- -------- -------- -------
Reversal of Unrealized Appreciation
(Depreciation) from Securities Sold in 1999
Soretox
Subordinated Notes* $ - $ 4,041 $ - $(2,439) $ - $ - $(1,602)
Fitz and Floyd, Inc.
Preferred Stock * - 9,595 - 63 (6,614) (3,025) (19)
-------- ------- ------- ------- -------- -------- -------
Total Reversal of Unrealized Appreciation
(Depreciation) from Securities Sold in 1999 $ - $13,636 $ - $(2,376) $ (6,614) $ (3,025) $(1,621)
-------- ------- ------- ------- -------- -------- -------
Reversal of Unrealized Appreciation (Depreciation)
from Securities Sold Prior to 1999 $ - $ - $33,816 $(3,342) $(13,952) $(22,693) $ 6,171
-------- ------- ------- ------- -------- -------- -------
Total Unrealized Appreciation (Depreciation)
from Securities Sold $ - $13,636 $33,816 $(5,718) $(20,566) $(25,718) $ 4,550
-------- ------- ------- ------- -------- -------- -------
Net Unrealized Appreciation (Depreciation) $ (1,924) $13,636 $33,816 $(6,129) $(15,724) $(30,560) $ 3,037
======== ======= ======= ======= ======== ======== =======
* Restricted Security
(a) Investment cost excludes accretion of discount of $33
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 Fund II are responsible for the management and
administration of Fund II and have the same positions and responsibilities with
respect to the Retirement Fund. 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 Fund II 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 Fund II 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 Fund II investment guidelines or specifically approve it as a
non-Guideline Investment or Bridge Investment. Fund II'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 Fund II and the Retirement Fund since 1989. Each Individual General
Partner shall hold office until his removal or withdrawal pursuant to the
provisions of Fund II's Partnership Agreement.
Mr. Alden, 76, Individual General Partner of Fund II and the Retirement
Fund (used together with Fund II 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 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 Fund II dated
November 10, 1989, is responsible for the identification, management and
liquidation of Mezzanine Investments and Bridge Investments for Fund II. 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 Fund II'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 J. Remick held the postion 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
responsibilities 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
association 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. Fund II paid Independent General Partners, Mr. Alden, Mr. Bower and
Mr. Feldberg $83,863 collectively for their services as Independent General
Partners in 1999.
The information with respect to the allocation and distribution of Fund
II'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 $605,727 during 1999, including MGP
Distributions of $588,264 that it distributed, $558,851 to the Investment
Adviser and $29,413 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, Fund II paid the Investment
Adviser $666,000 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, Fund II paid the Fund Administrator a total of $416,406 in 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Fund II is aware of the following persons who are beneficial owners of more
than five percent of its Units of limited partnership interest, based upon
Schedules 13D and 13G filed with the Securities and Exchange Commission and a
review of Fund II's records.
Amount of Percent of Units of the
Name and Address Benificial Fund Beneficially Owned
of Beneficial Owner Ownership at January 1, 2000
- ------------------- ---------- ------------------------
Yale University 20,954 9.4%
Investment Office
230 Prospect Street
New Haven, CT 06511
Farallon Capital Partners, L.P. 21,341(1) 10.0%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Tinicum Partners, L.P. 21,341(1) 10.0%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Thomas F. Steyer 21,341(1) 10.0%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Fleur E. Fairman 21,341(1) 10.0%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
David I. Cohen 21,341(1) 10.0%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Joseph F. Downes 21,341(1) 10.0%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Jason M. Fish 21,341(1) 10.0%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
William F. Mellin 21,341(1) 10.0%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Meridee A. Moore 21,341(1) 10.0%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Eric M. Ruttenberg 21,341(1) 10.0%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
(1) By reason of Rule 13d-5 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), Farallon Capital Partners, L.P., a California
limited partnership ("FCP"), and Tinicum Partners, L.P., a New York limited
partnership ("Tinicum"), each may be deemed to own 21,341 Units of limited
partnership interest beneficially owned at January 1, 2000 as a result of
the direct ownership by FCP of 16,722 such Units and as a result of the
direct ownership by Tinicum of 4,619 such Units. FCP and Tinicum, however,
consider their beneficial interest to be limited to their direct ownership.
In addition, by reason of Rule 13d-3 under the Exchange Act, each of the
general partners of FCP and Tinicum, Thomas F. Steyer, Fleur E. Fairman,
David I. Cohen,, Joseph F. Downes, Jason M. Fish, William F. Mellin,
Meridee A. Moore and Eric M. Ruttenberg, may be deemed to own beneficially
the Units of limited partnership interest by FCP and Tinicum.
Ownership of Fund II's Units by the General Partners and Officers of the
Investment Adviser and Mezzanine II are as follows:
Name of Amount of Percent of Units
Beneficial Owner Beneficial Ownership of Class
- ---------------------------------------------------------------------
Vernon R. Alden 50 Units *
Joseph L. Bower None 0.00%
Stanley H. Feldberg 25 Units *
Thomas H. Lee 11,011 Units 4.97%
General Partners and
Officers as a Group 13,458 Units 6.07%
* Less than one percent.
For more information regarding Beneficial Ownership, see Item 3 Legal
Proceedings.
There exists no arrangement known to Fund II, the execution of which may at
a subsequent date, result in a change of control of Fund II.
Item 13. Certain Relationships and Related Transactions
Fund II's investments generally are made as co-investments with the
Retirement Fund. In addition, certain of the Mezzanine Investments and Bridge
Investments which were made by Fund II 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 Fund II's expectation
of engaging in such co-investments, Fund II together with the Retirement Fund
and Lee I, sought an exemptive order from the Commission allowing such
co-investments, which was received on September 1, 1989. Fund II'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 Fund II 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, Fund II paid Managing General Partner distributions totaling
$605,727 (which included $588,264 of MGP Distributions and $17,463 with respect
to its interest in Fund II). Of this MGP Distribution amount, 95% or $558,851
was paid to the Investment Adviser and the remaining 5% totalling $29,413 was
paid to ML Mezzanine II Inc. The Managing General Partner has earned a total of
$26,586,398 in MGP Distributions none of which was deferred in payment to the
Managing General Partner at December 31, 1999, as a Deferred Distribution Amount
in accordance with the Partnership Agreement. 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 Statments and Supplemental 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 ("Reports") 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 Fund II 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 II, L.P.
By: Mezzanine Investments II, L.P.
Managing General Partner
By: ML Mezzanine II Inc.,
its General Partner
/s/ Kevin K. Albert
Dated: March 30, 2000 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 II, L.P.
/s/ Joseph L. Bower Individual General Partner
Joseph L. Bower ML-Lee Acquisition Fund II, L.P.
/s/ Stanley H. Feldberg Individual General Partner
Stanley H. Feldberg ML-Lee Acquisition Fund II, L.P.
/s/ Thomas H. Lee Individual General Partner
Thomas H. Lee ML-Lee Acquisition Fund II, L.P.
/s/ Kevin T. Seltzer ML Mezzanine II Inc.
Kevin T. Seltzer Vice President and Treasurer
(Principal Financial Officer of Registrant)