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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, 1998
Commission File Number 0-17382
ML-LEE ACQUISITION FUND(RETIREMENT ACCOUNTS) II, L.P.
(Exact name of registrant as specified in its Governing Instruments)
Delaware 04-3028397
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
World Financial Center
South Tower - 23rd Floor
New York, New York 10080-6123
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (212) 236-7339
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]
Aggregate market value of voting securities held by non-affiliates: Not
Applicable.
Documents Incorporated by Reference: Portions of the Prospectus of the
Registrant dated September 6, 1989, filed with the Securities and Exchange
Commission pursuant to Rule 497(b), are incorporated by reference in Parts I, II
and III hereof.
Part I
Item l. Business
Formation
ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. (the "Retirement
Fund") (formerly T.H. Lee Acquisition Fund (Retirement Accounts) II, L.P.) was
formed along with ML-Lee Acquisition Fund II, L.P. ("Fund II"); collectively
referred to as the "Funds") and the Certificates of Limited Partnership were
filed under the Delaware Revised Uniform Limited Partnership Act on September
23, 1988. The Funds' operations commenced on November 10, 1989.
Mezzanine Investments II, L.P. (the "Managing General Partner"), subject to
the supervision of the Individual General Partners, is responsible for
overseeing and monitoring the Retirement Fund's investments. The Managing
General Partner is a Delaware limited partnership in which ML Mezzanine II Inc.
is the general partner and Thomas H. Lee Advisors II, L.P. (the "Investment
Adviser" to the Funds) is the limited partner. The Individual General Partners
are Vernon R. Alden, Joseph L. Bower and Stanley H. Feldberg (the "Independent
General Partners") and Thomas H. Lee. ML Fund Administrators Inc. (the "Fund
Administrator") is an indirect wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. and is responsible for the day-to-day administrative services necessary for
the operations of the Retirement Fund.
The Retirement Fund elected to operate as a business development company
under the Investment Company Act of 1940 as amended ("Investment Company Act").
The Retirement Fund's primary investment objective is to provide current income
and capital appreciation potential by investing in privately structured,
friendly leveraged buyouts and other leveraged transactions. The Retirement Fund
pursued this objective by investing primarily in subordinated debt and related
equity securities issued in conjunction with the "mezzanine financing" of
friendly leveraged buyout transactions, leveraged acquisitions and leveraged
recapitalizations. The Retirement Fund may also invest in "bridge investments"
if it is believed that such investments would facilitate the consummation of a
mezzanine financing. The Retirement Fund considers this activity to constitute a
single industry segment of mezzanine financing investing.
The Retirement Fund invested substantially all of its net proceeds in
Mezzanine Investments consisting of high-yield subordinated debt and/or
preferred stock linked with an equity participation of middle market companies
in connection with friendly leveraged acquisitions, recapitalizations and other
leveraged financings. The Retirement Fund's Mezzanine Investments typically were
issued in private placement transactions which are generally subject to certain
restrictions on sales thereby limiting their liquidity. The Retirement Fund was
fully invested as of December 20, 1992, which was within 36 months from the date
of the final closing (after including the reserve for follow-on investments and
exclusive of amounts available for reinvestment). The reinvestment period for
various amounts of capital proceeds received during the last twelve months of
the Retirement Fund's investment period terminated at various times through
December 18, 1993.
The Funds together 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" and "Investment Objectives and Policies" on pages 21
through 46 and "Conflicts of Interest" on pages 79 through 82 in the Prospectus
of the Retirement Fund dated September 6, 1989, filed with the Securities and
Exchange Commission pursuant to Rule 497(b) under the Securities Act of 1933
(the "Prospectus"), is incorporated herein by reference.
The offering of Units commenced on September 6, 1989. On November 10 and
December 20, 1989, the Retirement Fund had its first and second closings
respectively, at which time the Managing General Partner admitted additional
Limited Partners to the Retirement Fund representing 177,515 Units of limited
partnership interest. The additional Limited Partners' total capital
contributions were $164,201,375, which excludes discounts allowed of $1,447,740
and is net of sales commissions and advisory fees of $11,865,885. The Managing
General Partner's aggregate contribution was $500,000. Thomas H. Lee, as an
Individual General Partner, contributed $50,000. For their services as selling
agent, the Retirement Fund paid sales commissions to Merrill Lynch, Pierce,
Fenner and Smith Incorporated ("MLPF&S") in the amount of $9,492,708 (exclusive
of discounts of $1,158,192). In addition, the Retirement Fund paid a financial
advisory fee to MLPF&S in the amount of $2,373,177 (exclusive of discounts of
$289,548).
Mezzanine and Bridge Investments
At December 31, 1998, the Retirement Fund had outstanding a total (at cost)
of $28 million invested in Mezzanine Investments representing $9.1 million
Managed and $18.9 million Non-Managed portfolio investments. At December 31,
1998, there were no Bridge Investments outstanding for the Funds. The Funds
co-invest in all Mezzanine and Bridge Investments, allocating such investments
in proportion to their capital available for investment.
The Retirement Fund's reinvestment period ended on December 18, 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 IN 1998
Stanley Furniture Company
On January 6, 1998 the Retirement Fund sold its remaining holdings of
common stock in Stanley. The common stock was sold pursuant to a Form S-3
Registration Statement, which was filed by Stanley on December 22, 1997 and
declared effective by the Securities and Exchange Commission on December 23,
1997. In connection with the sale, the Retirement Fund sold its remaining 2,773
shares of common stock and received net proceeds of $74,844 or $27 per share.
The Retirement Fund recognized a gain of approximately $40,000 from this sale.
Anchor Advanced Products
On March 19, 1998 the Retirement Fund and affiliates of the Thomas H. Lee
Company sold their remaining holdings in Anchor Advanced Products. Pursuant to
this transaction the Retirement Fund sold 219,323 shares of Anchor Common Stock
for approximately $877,292 ($4.00 per share) and recognized a gain of $132,013.
First Alert
On April 2, 1998, Sunbeam Corporation acquired all of the outstanding
shares of First Alert for $175 million or $5.25 per share and assumed all of
First Alert's debt. Pursuant to this transaction the Retirement Fund tendered
all of its shares of First Alert and received proceeds of $11.98 million and
recognized a gain of approximately $8.3 million. Net Distributable Proceeds of
$62.42 per unit were distributed to Limited Partners of record as of the date of
the closing of this transaction, April 2, 1998.
Playtex Products Inc.
On May 27, 1998, Playtex Products Inc., ("Playtex"), completed a public
offering in the international markets of approximately 4 million shares of
Common Stock at a net price of $13.215 per share (the "Playtex Offering"). Of
the 4 million shares offered, approximately 3.8 million shares were offered by
affiliates of the Thomas H. Lee Company, including the Retirement Fund. As part
of the Playtex Offering, the Retirement Fund sold its remaining investment in
Playtex, consisting of approximately 183,560 shares of Common Stock. The
Retirement Fund received proceeds of $2.4 million and recognized a loss on the
sale of approximately $404,000. Net Distributable Proceeds were distributed to
Limited Partners of record as of May 27, 1998.
Cinnabon International, Inc.
On October 16, 1998, Cinnabon International, Inc. ("Cinnabon") completed a
Plan of Merger with AFC Enterprises, Inc. ("AFC") whereby AFC acquired Cinnabon
by Merger ("Merger"). Pursuant to the Merger, the Retirement Fund received
proceeds of $4.5 million (which includes $360,714 of deferred interest) for its
entire interest in Cinnabon. Net Distributable Proceeds from the Merger of
$23.45 per Unit were distributed on November 16, 1998, to Limited Partners of
record as of October 16, 1998, the closing date of this transaction. The
Retirement Fund recognized a gain of $217,800 from the Merger.
Hills Stores Company
On November 13, 1998, Ames Department Stores, Inc. ("Ames") and Hills
jointly announced the signing of a definitive agreement in which Ames would
acquire Hills. On November 18, 1998 Ames commenced a tender offer for all the
outstanding shares of Common Stock and Series A Convertible Preferred Stock of
Hills, at a price of $1.50 per share. Pursuant to the offer, the deferred
contingent right is not transferrable. On December 16, 1998, the Retirement Fund
tendered all 278,245 of its shares and received proceeds of $417,368 on December
31, 1998 the date of completion of the tender offer. The Retirement Fund
recognized a loss of approximately $18.2 million.
REVIEW OF INVESTMENTS IN MANAGED COMPANIES
------------------------------------------
The following is a brief description of the companies in the Retirement
Fund's Managed Company portfolio during the year ended December 31, 1998:
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 at December 31, 1998.
REVIEW OF INVESTMENTS IN NON-MANAGED COMPANIES
----------------------------------------------
The following is a brief description of the companies in the Retirement
Fund's Non-Managed Company portfolio during the year ended December 31, 1998:
BioLease, Inc. ("BioLease")
--------------------------
BioLease provides built-to-suit wet-laboratory space in the Boston area to
a consortium of emerging growth bio-technology companies sponsored by the
venture capital funds managed by Health Care Investment Corporation. The
Retirement Fund's investment in BioLease Common Stock was written down to zero,
and the Subordinated Notes were written down to approximately 50% of par value
during the year ending December 31, 1998. These writedowns resulted in total net
unrealized depreciation of $269,000 through December 31, 1998.
Fitz and Floyd Corporation
--------------------------
Fitz & Floyd is the maker of fine china dinnerware and ceramic giftware
whose products are retailed through leading specialty and department stores and
catalogs throughout the U.S. and Canada.
On April 11, 1997 the Bankruptcy Court confirmed a plan of Reorganization
for Fitz & Floyd. As a result, on April 14, 1997, a follow-on investment of $1.6
million was made in Fitz and Floyd and the Retirement Fund received a $1.6
million 12% subordinated note. Additionally, the Retirement Fund exchanged the
$8.2 million adjustable notes, which the Retirement Fund previously held, for
Series A Preferred Stock and Class A Common Stock in Fitz and Floyd. No gain or
loss was recorded on the transaction.
FLA. Orthopedics, Inc.
---------------------
The Retirement Fund has valued its remaining investment in FLA.
Orthopedics, Inc. at zero, which resulted in cumulative unrealized depreciation
of $987,000 through December 31, 1998.
Soretox
-------
Soretox, through its wholly-owned subsidiary Stablex Canada Inc., is an
inorganic hazardous waste management company operating in Eastern Canada and the
Northeastern United States. On December 31, 1998, the Fund received
approximately $1.2 million from Stablex Canada Inc., $134,200 of which
represented fourth quarter 1998 interest and $1,065,800 represented prior period
unpaid interest. The Retirement Fund is currently not accruing interest on this
investment and wrote down the investment in the Stablex Jr. Subordinated Note to
zero during the year ended December 31, 1997. The Retirement Fund's valuation
reflects total unrealized depreciation of approximately $4.6 million through
December 31, 1998.
Competition
The Retirement Fund has completed its investment period and its
reinvestment program and, therefore, will no longer have to compete for
investments. A majority of the portfolio companies are participating in
extremely competitive businesses.
Employees
The Retirement Fund has no employees. The Investment Adviser, subject to
the supervision of the Managing General Partner and the Individual General
Partners, manages and controls the Retirement Fund's investments. The Managing
General Partner is responsible for managing the Temporary Investments of the
Retirement Fund. The Fund Administrator performs administrative services for the
Retirement Fund. The Fund Administrator is a subsidiary of Merrill Lynch & Co.
Inc., the parent of MLPF&S.
Item 2. Properties
The Retirement Fund does not own or lease any physical properties.
Item 3. Legal Proceedings
On April 10, 1998, the parties to the Retirement Fund and ML-Lee
Acquisition Fund II, L.P. ("Fund II" and together with the Retirement Fund, "the
Funds") Securities Litigation No. 92-60(JJF) Seidel, et al v. Thomas H. Lee, et
al, No. 94-422 (JJF) and Seidel, et al v. Thomas H. Lee, et al, No. 95-724
(JJF), three class actions brought on behalf of limited partners of the Funds,
filed with United States District Court for the District of Delaware, a
Stipulation of Settlement preliminarily settling these actions.
The settlement, which was approved by the Court at a hearing on July 16,
1998, dismissed with prejudice all claims against the Funds, the Funds'
Investment Adviser and certain of its affiliates, the Funds' Managing General
Partner and certain of its affiliates, the Funds' counsel and the Funds'
Independent General Partners. Defendants, other than the Funds, have agreed to
provide cash of $16 million and certain other considerations to members of the
class to settle the claims asserted in these actions. In addition, Thomas H.
Lee, a General Partner of the Funds, and certain affiliates have purchased
approximately $1.5 million of the Funds' limited partnership units pursuant to a
liquidity option offered to eligible class members. The settlement became
effective on August 24, 1998. Defendants continue to deny all liability in this
action.
Item 4. Submission of Matters to a Vote of Security-Holders
No matters were submitted to a vote of the Limited Partners of the
Retirement Fund during the fourth quarter ended December 31, 1998.
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, 1999, the last
effective date of transfer (as described below), was 17,562. The Managing
General Partner and Thomas H. Lee as an Individual General Partner also hold
general partner interests.
MLPF&S reports estimated values of limited partnerships and other direct
investments on client account statements and no longer reports the general
partner's estimate of limited partnership net asset value to Unit holders.
Pursuant to MLPF&S guidelines, estimated values for limited partnership
interests originally sold by MLPF&S (such as the Retirement Fund's Units) are
provided by independent valuation services. MLPF&S clients may contact their
MLPF&S Financial Consultants to obtain a general description of the methodology
used by the independent valuation services to determine their estimates of
value. The estimated values provided by the independent services and the
Retirement Fund's current net asset value as estimated by the general partner
are not market values and Unit holders may not be able to sell their Units or
realize either amount upon a sale of their Units. In addition, Unit holders may
not realize the independent estimated value or the Retirement Fund's current net
asset value upon the liquidation of the Retirement Fund's assets over its
remaining life.
The Retirement Fund distributes Distributable Cash from Investments and
Distributable Capital Proceeds in accordance with the terms of the Partnership
Agreement.
Pursuant to the Partnership Agreement, transfers of Units are recognized on
the first day of the fiscal quarter after which the Managing General Partner has
been duly notified of a transfer pursuant to the Partnership Agreement. Until a
transfer is recognized, the limited partner of record (i.e. the transferor) will
continue to receive all of the benefits and burdens of ownership of Units
(including allocations of profit and loss and distributions), and any transferee
will have no rights to distributions of sale proceeds generated at any time
prior to the recognition of the transfer and assignment.
Accordingly, Distributable Cash from Investments for a quarter and
Distributable Capital Proceeds from sales after transfer or assignment have been
entered into, but before such transfer and assignment is recognized by the
Managing General Partner, will be payable to the transferor and not the
transferee.
Cash Distributions
The Retirement Fund has made quarterly distributions including both
Distributable Cash from Investments and Distributable Capital Proceeds. The
Retirement Fund's ability to make future cash distributions is restricted. See
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources - the information contained,
which is incorporated herein by reference.
Item 6. Selected Financial Data
Supplemental Information Schedule
For the Years Ended December 31,
TOTAL FUND INFORMATION: 1998 1997 1996 1995 1994
----------- ----------- ------------ ------------ -------------
Net Investment Income $ 1,922,189 $ 4,275,516 $ 5,516,846 $ 3,071,361 $ 5,571,207
Net Realized (Loss) Gain on Investments (9,869,500) 74,228 4,755,563 9,262,616 74,326,557
Net Change in (Depreciation)
Appreciation on Investments 17,438,728 (6,285,381) (14,768,911) (28,395,532) (114,349,601)
Cash Distributions to Partners (a) 20,876,516 14,242,934 34,722,409 29,053,844 110,407,812
Net Assets 21,693,451 33,078,550 49,257,119 88,476,031 133,591,430
Cost of Mezzanine Investments 28,049,200 57,865,408 63,818,387 88,353,161 96,897,659
Total Assets 21,798,979 33,261,494 49,627,131 89,303,296 134,369,173
PER UNIT OF LIMITED PARTNERSHIP INTEREST:
Investment Income $ 16.66 $ 31.03 $ 35.32 $ 30.42 $ 47.26
Expenses (7.58) (7.99) (15.56) (18.88) (21.99)
----------- ----------- ----------- ------------ ------------
Net Investment Income $ 9.08 $ 23.04 $ 19.76 $ 11.54 $ 25.27
----------- ----------- ----------- ------------ ------------
Net Realized Gains (Losses) on Sales
of Investments (63.45) .42 21.99 43.12 302.22
Net Change in Unrealized (Depreciation)
Appreciation on Investments 98.00 (35.30) (82.94) (159.46) (642.18)
Cash Distributions (a) 107.11 65.96 166.55 140.82 526.12
Cumulative Cash Distributions 1,432.33 1,325.22 1,259.26 (b) 1,092.71 (b) 951.89
Net Asset Value $ 118.96 $ 185.13 $ 262.93 $ 470.67 $ 713.90
(a) Includes $10,876,638 or $61.27 per limited partnership Unit return of
capital from the sale of portfolio investments during 1998.
See Cash Distributions Schedule for additional information, including return of capital.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity & Capital Resources
Capital contributions from the Limited Partners and the General Partners
totaled $178,065,000 in the public offering of ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P. (the "Retirement Fund"), the final closing for
which was held on December 20, 1989.
At December 31, 1998, the Retirement Fund had outstanding a total (at cost)
of $28.1 million invested in Mezzanine Investments representing $9.1 million
Managed and $19.0 million Non-Managed portfolio investments. The remaining
proceeds were invested in a Temporary Investment in commercial paper with a
maturity of less than one month.
The Retirement Fund invested substantially all of its net proceeds in
Mezzanine Investments consisting of high-yield subordinated debt and/or
preferred stock linked with an equity participation of middle market companies
in connection with friendly leveraged acquisitions, recapitalizations and other
leveraged financings. The Retirement Fund's Mezzanine Investments typically were
issued in private placement transactions which are generally subject to certain
restrictions on sales thereby limiting their liquidity. The Retirement Fund was
fully invested as of December 20, 1992, which was within 36 months from the date
of the final closing (after including the reserve for follow-on investments and
exclusive of amounts available for reinvestment). The reinvestment period for
various amounts of capital proceeds received during the last twelve months of
the Retirement Fund's investment period terminated at various times through
December 18, 1993.
As provided by the Partnership Agreement, the Managing General Partner of
the Retirement Fund is entitled to receive incentive distributions ("MGP
Distributions"), after Limited Partners have received their Priority Return of
10% per annum. The Managing General Partner is required to defer a portion of
any MGP Distribution earned from the sale of portfolio investments in excess of
20% of realized capital gains, net realized capital losses and unrealized
depreciation, in accordance with the Partnership Agreement (the "Deferred
Distribution Amount"). Any Deferred Distribution Amount is distributable to the
Partners pro-rata in accordance with their capital contributions, and certain
amounts otherwise later payable to Limited Partners from Distributable Cash from
operations are instead payable to the Managing General Partner until the
Deferred Distribution Amount is paid in full. As of December 31, 1998 there is
no outstanding Deferred Distribution Amount.
On August 6, 1991, the Independent General Partners approved a reserve for
follow-on investments of $20.0 million for the Retirement Fund. As of March 23,
1999, the reserve balance was reduced to $3.4 million due to follow-on
investments in Petco Animal Supplies, FFSC, Inc., Fine Clothing, Inc., Hills and
Ghirardelli. Additionally, $7.7 million of the reserve had been returned to the
partners. The level of the reserve was based upon an analysis of potential
Follow-On Investments in specific portfolio companies that may become necessary
to protect or enhance the Retirement Fund's existing investment.
The Managing General Partner has established a reserve for future
Retirement Fund expenses of $500,000 from proceeds received from the sale of
Anchor Advanced Products on April 2, 1997.
All net proceeds from the sale of Mezzanine Investments received by the
Retirement Fund in the future will be distributed to its partners unless applied
to or set aside for expenses or follow-on investments.
The proportion of distributions provided by net investment income has
decreased significantly from prior years due primarily to increased sales and
redemptions of Mezzanine Investments and a resulting decrease in investment
income as those holdings cease to generate interest income. It is expected that
the majority of future cash distributions to Limited Partners will almost
entirely be derived from recovered capital and gains from asset sales, which are
subject to market conditions and are inherently unpredictable as to timing.
Assuming there are no asset sales in a particular quarter, Limited Partners are
expected to receive only small amounts of net distributable cash from Temporary
and Mezzanine Investments, which are estimated to be less than one dollar per
Limited Partnership Unit each quarter for the next few years. Distributions
therefore are expected to vary significantly in amount and may not be made in
every quarter.
Investment in High-Yield Securities
The Retirement Fund invested primarily in subordinated debt and preferred
stock securities ("High-Yield Securities"), generally linked with an equity
participation, issued in conjunction with the mezzanine financing of privately
structured, friendly leveraged acquisitions, recapitalizations and other
leveraged financings. High-Yield Securities are debt and preferred equity
securities that are unrated or are rated by Standard & Poor's Corporation as BB
or lower and by Moody's Investor Services, Inc. as Ba or lower. Risk of loss
upon default by the issuer is significantly greater with High-Yield Securities
than with investment grade securities because High-Yield Securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Also, these issuers usually have high levels of indebtedness and are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates, than investment grade issuers. Most of these securities are
subject to resale restrictions and generally there is no quoted market for such
securities.
Although the Retirement Fund cannot eliminate the risks associated with its
investments in High-Yield Securities, it has established risk management
policies. The Retirement Fund subjected each prospective investment to rigorous
analysis and made only those investments that were recommended by the Investment
Adviser and that met the Retirement Fund's investment guidelines or that had
otherwise been approved by the Managing General Partner and the Independent
General Partners. The Retirement Fund's investments were measured against
specified Retirement Fund investment and performance guidelines. To limit the
exposure of the Retirement Fund's capital in any single issuer, the Retirement
Fund limited the amount of its investment in a particular issuer. The Retirement
Fund's Investment Adviser also continually monitors portfolio companies in order
to minimize the risks associated with its investments in High-Yield Securities.
The Investment Adviser reviews each portfolio company's financial
statements quarterly. In addition, the Investment Adviser routinely reviews and
discusses financial and operating results with the company's management and
where appropriate, attends board of director meetings. In some cases,
representatives of the Investment Adviser, acting on behalf of the Funds (and
affiliated investors where applicable), serve as one or more of the directors on
the boards of portfolio companies. The Retirement Fund may, from time to time,
make follow-on investments to the extent necessary to protect or enhance its
existing investments.
Results of Operations
Investment Income and Expenses
The investment income from operations for the period consists primarily of
interest and discount income earned on the investment of proceeds from partners'
contributions in Mezzanine Investments and short-term money market instruments.
For the year ended December 31, 1998, the Retirement Fund had investment
income of $3.3 million as compared to $5.7 million for the same period in 1997
and $8.3 million for the same period in 1996. The decrease in investment income
from 1997 to 1998 is due primarily to the sale of income producing portfolio
companies in 1998.
Major expenses for the period consisted of Investment Advisory Fees and
Fund Administration Fees and Reimbursable Administrative Expenses.
The Investment Adviser and Fund Administrator both receive their
compensation on a quarterly basis. The total Investment Advisory Fees paid to
the Investment Adviser by the Retirement Fund for the years ended December 31,
1998, 1997 and 1996 was $549,968, $621,386 and $807,939, 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 Fund II and the Retirement Fund on a
combined basis. These decreases in Investment Advisory Fees are a direct result
of the sales of investments, returns of capital to Partners and realized losses
on investments.
Beginning in November of 1997, the Fund Administration Fee changed to an
annual amount of $400,000 for the Retirement Fund and Fund II on a combined
basis, plus 100% of all reimbursable expenses (as defined below) incurred by the
Fund. Actual out-of-pocket expenses ("reimbursable expenses") primarily consist
of printing, audit, tax preparation and custodian fees. For the years ended
December 31, 1998, 1997 and 1996, the Retirement Fund incurred $335,556,
$113,219 and $110,370, respectively, in reimbursable expenses.
The Fund Administration Fees paid to the Fund Administrator for the years
ended December 31, 1998, 1997 and 1996 were $178,000, $458,168 and $544,478,
respectively. For the years ended December 31, 1996, Fund Administrative Fees
were calculated at an annual rate of 0.45% of the excess of net offering
proceeds, less 50% of capital reductions and realized losses. These decreases in
Fund Administration Fees were a direct result of sales of investments, returns
of capital distributed to partners and realized losses on investments.
Pursuant to the administrative services agreement between the Retirement
Fund and the Fund Administrator, for the period ending November 10, 1997, a
portion of the actual out-of-pocket expenses incurred in connection with the
administration of the Retirement Fund was reimbursable to the Fund
Administrator.
Legal and Professional Fees were primarily incurred in connection with the
litigation proceedings as described in Note 11 to the Financial Statements.
Professional fees for the years ended December 31, 1998, 1997 and 1996 were
$207,918, $135,998 and $1.1 million, respectively. These expenses are
attributable to legal fees incurred and advanced on behalf of indemnified
defendants as well as fees incurred directly by the Retirement Fund in
connection with the aforementioned litigation proceedings.
For the year ended December 31, 1998, the Retirement Fund had net
investment income of $1.9 million, as compared to $4.3 million for the same
period in 1997 and $5.5 million for the same period in 1996. The decrease in net
investment income from 1997 to 1998 is the result of the sale of income
producing portfolio companies in 1998. The decrease in 1997 as compared to 1996
is the result of additional payment-in-kind interest income recorded upon the
sale of CST in 1996.
Net Assets
The Retirement Fund's net assets decreased by $11.4 million during the year
ended December 31, 1998, due to the payment of cash distributions to partners of
$20.9 million ($10.9 million of the cash distributions paid was return of
capital from the sales of portfolio investments), net unrealized appreciation of
$17.4 million and realized losses of $9.9 million from the sale of Mezzanine
Investments, partially offset by net investment income of $1.9 million.
Unrealized Appreciation and Depreciation on Investments
For the year ended December 31, 1998, the Retirement Fund recorded a
reversal of net unrealized depreciation of $17.4 million. This compares to a net
unrealized depreciation of $6.3 million for the same period in 1997 of which
$3.3 million was related to net unrealized depreciation in market value of
publicly traded securities. The Retirement Fund's cumulative net unrealized
depreciation as of December 31, 1998 totaled $12.1 million.
The Managing General Partner and the Investment Adviser review the
valuation of the Retirement Fund's portfolio investments that do not have a
readily ascertainable market value on a quarterly basis with final approval from
the Individual General Partners. Portfolio investments are valued at original
cost plus accrued 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 87.4% of the Retirement Fund's investments (at cost) are
invested in private placement securities for which there are no ascertainable
market values. Although the Managing General Partner and Investment Adviser use
their best judgment in estimating the fair value of these investments, there are
inherent limitations in any estimation technique. Therefore, the fair value
estimates presented herein are not necessarily indicative of the amount which
the Retirement Fund could realize in a current transaction.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of December
31, 1998. 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
Unrealized Appreciation and Depreciation - Schedule 2.
Realized Gains and Losses
For the year ended December 31, 1998, the Retirement Fund had net realized
losses from investments of $9.9 million as compared to net realized gains of
$74,228 and $4.8 million for the same periods in 1997 and 1996, respectively.
For additional information, please refer to Supplemental Schedule of Realized
Gains and Losses - Schedule 1.
Cash Distributions
On February 4, 1999, the Individual General Partners approved the fourth
quarter 1998 cash distribution which represents net investment income of
$1,266,881 from Mezzanine Investments and Net Distributable Capital proceeds
from the sale of Hills of $417,368 (which is all a return of capital). The total
amount distributed to Limited Partners was $1,237,280 or $6.97 per Unit, which
was paid on February 16, 1999. The Managing General Partner received a total of
$3,489 with respect to its interest in the Retirement Fund and $443,131 in MGP
Distributions. Thomas H. Lee, as an Individual General Partner, received $349
with respect to his interest in the Retirement Fund.
Because most of the Retirement Fund's debt holdings were previously sold or
redeemed, remaining portfolio interest income expected to be received by the
Retirement Fund may not be sufficient to cover the Retirement Fund's expenses in
the future. As a result, any interest income received will be used to pay the
Retirement Fund's expenses and may not be available for distribution. The
majority of future cash distributions to Limited Partners will be derived from
recovered capital and gains, and from asset sales, if any, which are dependent
upon future market conditions and therefore are inherently unpredictable. Cash
distributions, therefore, are likely to vary significantly in amount and may not
be made in every quarter.
Should a Limited Partner decide to sell his Units, any such sale will be
recorded on the books and records of the Retirement Fund quarterly, only upon
the satisfactory completion and acceptance of the Retirement Fund's transfer
documents. There can be no assurances that such transfer will be effected before
any specified date. Additionally, pursuant to the Partnership Agreement, until a
transfer is recognized, the Limited Partner of record (i.e. the transferor) is
entitled to receive all the benefits and burdens of ownership of Units, and any
transferee has no rights to distributions of sale proceeds generated at any time
prior to the recognition of the transfer and assignment. Accordingly,
Distributable Cash from Investments for a quarter and Distributable Capital
Proceeds from sales after transfer or assignment have been entered into, but
before such transfer and assignment is recognized, would be payable to the
transferor and not the transferee.
Year 2000 Compliance Initiative
The year 2000 ("Y2K") problem is the result of a widespread programming
technique that causes computer systems to identify a date based on the last two
numbers of a year, with the assumption that the first two numbers of the year
are "19". As a result, the year 2000 would be stored as "00", causing computers
to incorrectly interpret the year as 1900. Left uncorrected, the Y2K problem may
cause information technology systems (e.g., computer databases) and
non-information technology systems (e.g., elevators) to produce incorrect data
or cease operating completely.
Overall, the Retirement Fund believes that it has identified and evaluated
its internal Y2K problem and that it is devoting sufficient resources to
renovating technology systems that are not already Y2K compliant. The Retirement
Fund has been working with third-party software vendors to ensure that computer
programs utilized by the Retirement Fund are Y2K compliant. In addition, the
Retirement Fund has contacted third parties to ascertain whether these entities
are addressing the Y2K issue within their own operation.
Mezzanine Investment II L.P., through ML Mezzanine II Inc. is responsible
for providing administrative and accounting services necessary to support the
Retirement Fund's operations, including maintenance of the books and records,
maintenance of the partner database, issuance of financial reports and tax
information to partners and processing distribution payments to partners. In
1995, Merrill Lynch established the Year 2000 Compliance Initiative, which is an
enterprisewide effort (of which ML Mezzanine II Inc. is a part) to address the
risks associated with the Y2K problem, both internal and external. The
integration testing phase, which will occur throughout 1999, validates that a
system can successfully interface with both internal and external systems.
Merrill Lynch continues to survey and communicate with third parties whose Year
2000 readiness is important to the company. Based on the nature of the response
and the importance of the product or service involved, Merrill Lynch determines
if additional testing is needed.
Merrill Lynch will participate in further industrywide testing currently
scheduled for March and April 1999, which will involve an expanded number of
firms, transactions, and conditions.
Although the Retirement Fund has not finally determined the cost associated
with its Year 2000 readiness efforts, the Retirement Fund does not anticipate
the cost of the Y2K problem to be material to its business, financial condition
or results of operations in any given year. However, there can be no guarantee
that the systems of other companies on which the Retirement Fund systems rely
will be timely converted, or that a failure to convert by another company or a
conversion that is incompatible with the Retirement Fund systems would not have
a material adverse effect on the Retirement Fund's business, financial condition
or results of operations.
Item 7A. Quantitative and Qualitative Disclosure About Market
Risk
As of December 31, 1998, the Retirement Fund maintains a portion of its
cash equivalents in financial instruments with original maturities of three
months or less. These financial instruments are subject to interest rate risk,
and will decline in value if interest rates increase. A significant increase or
decrease in interest rates would not have a material effect on the Retirement
Fund's financial position.
Cash Distributions
The following table represents distributions approved by the Individual
General Partners of ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. since
inception (November 10, 1989):
Total Limited Per Unit Managing Individual
Distributed Partners Return of General Incentive General
Cash(a) Amount Per Unit Capital Partner Fee (b) Partner
------------ ---------- -------- --------- --------- --------- ----------
Fourth Quarter 1989 $ 1,049,749 $ 1,046,507 $ 6.59 $ - $ 2,947 $ - $ 295
First Quarter 1990 2,906,023 2,897,045 16.32 - 8,162 816
Second Quarter 1990 3,586,751 3,479,294 19.60 - 10,073 96,377 1,007
Third Quarter 1990 2,735,077 2,726,630 15.36 - 7,679 - 768
Fourth Quarter 1990 4,076,832 3,891,129 21.92 - 11,446 173,112 1,145
First Quarter 1991 2,297,038 2,289,944 12.90 - 6,449 - 645
Second Quarter 1991 2,919,747 2,910,729 16.90 - 8,198 - 820
Third Quarter 1991 2,327,308 2,320,120 13.07 - 6,535 - 653
Fourth Quarter 1991 2,646,044 2,637,873 14.86 - 7,428 - 743
First Quarter 1992 3,055,858 3,046,157 17.16 - 8,843 - 858
Second Quarter 1992 3,272,572 3,262,726 18.38 - 8,927 - 919
Third Quarter 1992 2,638,921 2,630,772 14.82 - 7,408 - 741
Fourth Quarter 1992 2,897,119 2,888,169 16.27 - 8,136 - 814
Snapple Distribution
on 4/13/93 12,786,849 12,747,352 71.81 71.81 35,906 - 3,591
First Quarter 1993 19,889,862 19,828,426 111.70 97.16 55,851 - 5,585
Second Quarter 1993 1,230,430 1,226,629 6.91 3.49 3,455 - 346
Third Quarter 1993 5,555,625 5,538,468 31.20 1.89 15,597 - 1,560
Fourth Quarter 1993 13,364,699 11,905,931 67.07 - 38,388 1,416,541 3,839
First Quarter 1994 14,934,550 14,117,768 79.53 72.50 41,938 770,650 4,194
Second Quarter 1994 3,184,138 2,792,311 15.73 10.00 8,941 381,992 894
Third Quarter 1994 810,197 807,693 4.55 2.79 2,276 - 228
Snapple Distribution
on 12/15/94 78,114,228 63,770,489 359.24 13.81 237,847 14,082,107 23,785
Fourth Quarter 1994 279,288 221,894 1.25 - 627 56,704 63
EquiCredit Distribution
on 2/14/95 8,303,171 6,860,956 38.65 3.82 24,411 1,415,363 2,441
First Quarter 1995 5,893,413 4,899,415 27.60 26.48 13,801 978,817 1,380
Second Quarter 1995 2,077,699 1,352,664 7.62 .38 4,820 719,733 482
Third Quarter 1995 1,890,622 1,088,166 6.13 5.61 3,069 799,080 307
Sun Pharmaceuticals
Distribution on
12/11/95 10,609,652 10,574,568 59.57 51.57 28,591 - 2,859
Fourth Quarter 1995 19,587 19,527 .11 - 55 - 5
CST Distribution on
5/3/96 13,800,125 9,773,975 55.06 42.04 27,529 3,995,868 2,753
First Quarter 1996 765,250 76,331 .43 - 217 688,680 22
Ghirardelli
Distribution on
5/3/96 10,731,976 10,698,829 60.27 46.38 30,134 - 3,013
Second Quarter 1996 9,302,264 8,889,952 50.08 26.52 25,043 384,765 2,504
Third Quarter 1996 106,839 106,509 .60 - 300 - 30
Fourth Quarter 1996 1,361,776 1,175,149 6.62 6.17 3,310 182,986 331
First Quarter 1997 268,515 55,030 .31 .01 157 213,312 16
Anchor Distribution
on 5/15/97 10,162,056 7,821,311 44.06 44.04 22,029 2,316,514 2,203
Second Quarter 1997 1,783,647 1,586,984 8.94 5.11 4,471 191,744 447
Third Quarter 1997 1,091,201 1,070,415 6.03 5.62 3,015 17,469 301
Fourth Quarter 1997 221,938 181,065 1.02 .19 514 40,308 51
First Quarter 1998 1,151,505 1,098,818 6.19 4.39 3,092 49,286 309
First Alert Distribution
on May 15, 1998 11,975,068 11,080,486 62.42 20.66 31,213 860,248 3,121
Second Quarter 1998 2,471,546 2,463,908 13.88 13.62 6,943 - 694
Third Quarter 1998 40,829 26,627 0.15 - 79 14,115 8
Cinnabon Distribution on
November 16, 1998 4,536,339 4,162,727 23.45 22.22 11,725 360,714 1,173
Fourth Quarter 1998 1,684,249 1,237,280 6.97 2.34 3,489 443,131 349
------------ ------------ --------- --------- --------- ----------- ---------
Totals $286,808,173 $255,284,748 $1,439.30 $ 600.62 $ 791,064 $30,649,616 $ 79,108
============ ============ ========= ========= ========= =========== =========
(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.
Item 8. Financial Statements and Supplementary Data
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
TABLE OF CONTENTS
Report of Independent Accountants
Statements of Assets, Liabilities and Partners' Capital
As of December 31, 1998 and December 31, 1997
Statements of Operations
For the Years Ended December 31, 1998, 1997 and 1996
Statements of Changes in Net Assets
For the Years Ended December 31, 1998, 1997 and 1996
Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
Statements of Changes in Partners' Capital
For the Years Ended December 31, 1998, 1997 and 1996
Schedule of Portfolio Investments - December 31, 1998
Notes to Financial Statements
Supplementary Schedule of Realized Gains and Losses - Schedule 1
Supplementary Schedule of Unrealized Appreciation and Depreciation - Schedule 2
Report of Independent Accountants
To the General and Limited Partners of ML-Lee Acquisition Fund (Retirement
Accounts) II, L.P.
In our opinion, the accompanying statements of assets, liabilities and
partners' capital, including the schedule of portfolio investments, and the
related statements of operations, of changes in net assets, of cash flows, and
of changes in partners' capital present fairly, in all material respects, the
financial position of ML-Lee Acquisition Fund (Retirement Accounts) II, L.P.
(the "Fund") at December 31, 1998 and 1997, 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, 1998, in
conformity with generally accepted accounting principles. 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 generally
accepted auditing standards 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, 1998 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
The financial statements include securities, valued at $15.9 million at
December 31, 1998 (73.4% 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.
As discussed in Note 1, the Fund is scheduled to dissolve on December 20,
1999. The Individual General Partners have the right to extend the term of the
Fund.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule of realized gains and
losses (Schedule 1) and the schedule of 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 23, 1999
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
Assets:
Investments - Notes 2,4,5
Portfolio Investments at fair value
Managed Companies (amortized cost $9,156
at December 31, 1998 and $38,972 at December 31, 1997) $ 9,156 $ 21,533
Non-Managed Companies (amortized cost $18,894
at December 31, 1998 and at December 31, 1997) 6,777 6,777
Temporary Investments, at amortized cost (cost $4,029
at December 31, 1998 and $4,204 at December 31, 1997) 4,038 4,222
Cash 11 161
Receivable for Investment Sold 417 -
Accrued Interest and Other Receivables - Note 2 1,396 141
Due from Affiliate -- 424
Prepaid Expenses 3 4
----------------- -----------------
Total Assets $ 21,798 $ 33,262
================= =================
Liabilities and Partners' Capital:
Liabilities
Legal and Professional Fees Payable $ 25 $ 80
Reimbursable Administrative Expenses Payable - Note 8 22 9
Independent General Partners' Fees Payable - Note 9 15 10
Deferred Interest Income - Note 2 43 85
----------------- -----------------
Total Liabilities 105 184
----------------- -----------------
Partners' Capital - Note 2
Individual General Partner 11 14
Managing General Partner 568 202
Limited Partners (177,515 Units) 21,114 32,862
----------------- -----------------
Total Partners' Capital 21,693 33,078
----------------- -----------------
Total Liabilities and Partners' Capital $ 21,798 $ 33,262
================= =================
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
Investment Income - Notes 2,4,6:
Interest $ 2,861 $ 2,456 $ 7,557
Discount, Dividends & Other Income 410 3,242 730
------------ ------------ ------------
Total Income 3,271 5,698 8,287
------------ ------------ ------------
Expenses:
Investment Advisory Fee - Note 7 550 622 808
Fund Administration Fee - Note 8 178 458 544
Reimbursable Administrative Expenses-Note 8 336 113 110
Legal and Professional Fees 208 136 1,125
Independent General Partners' Fees and Expenses - Note 9 73 90 179
Insurance Expense 4 4 4
------------ ------------ ------------
Total Expenses 1,349 1,423 2,770
------------ ------------ ------------
Net Investment Income 1,922 4,275 5,517
------------ ------------ ------------
Net Realized Gain (Loss) on Investments - Note 4 and Schedule 1 (9,869) 74 4,756
------------ ------------ ------------
Net Change in Unrealized Appreciation (Depreciation)
from Investments - Note 5 and Schedule 2:
Publicly Traded Securities 17,439 (3,275) (13,603)
Nonpublic Securities -- (3,010) (1,166)
------------ ------------ ------------
Subtotal 17,439 (6,285) (14,769)
------------ ------------ ------------
Net Increase (Decrease) in Net Assets
Resulting From Operations 9,492 (1,936) (4,496)
Less: Earned MGP Distributions to Managing General Partner (1,727) (318) (2,566)
------------ ------------ ------------
Net Increase (Decrease) Available For Pro-Rata
Distribution To All Partners $ 7,765 $ (2,254) $ (7,062)
============ ============ ============
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
From Operations:
Net Investment Income $ 1,922 $ 4,275 $ 5,517
Net Realized Gain (Loss) on Investments (9,869) 74 4,756
Net Change in Unrealized Appreciation (Depreciation) from Investments 17,439 (6,285) (14,769)
------------ ------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations 9,492 (1,936) (4,496)
Cash Distributions to Partners (20,877) (14,243) (34,723)
------------ ------------ ------------
Total Decrease (11,385) (16,179) (39,219)
Net Assets:
Beginning of Year 33,078 49,257 88,476
------------ ------------ ------------
End of Year $ 21,693 $ 33,078 $ 49,257
============ ============ ============
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from Operating Activities:
Interest, Dividends, Discount and Other Income $ 1,983 $ 5,975 $ 8,856
Fund Administration Fee (178) (458) (544)
Investment Advisory Fee (550) (622) (808)
Independent General Partners' Fees and Expenses (68) (108) (196)
(Purchase) Sale of Temporary Investments, Net 175 4,186 (188)
Purchase of Portfolio Company Investments -- (1,580) --
Proceeds from Sales of Portfolio Company Investments 19,529 7,608 29,185
Reimbursable Administrative Expense (322) (139) (121)
Legal and Professional Fees (267) (175) (1,321)
------------ ------------ ------------
Net Cash Provided By Operating Activities 20,302 14,687 34,863
------------ ------------ ------------
Cash Flows From Financing Activities:
Cash Distributions to Partners (20,452) (14,667) (34,723)
------------ ------------ ------------
Net Cash Applied to Financing Activities (20,452) (14,667) (34,723)
------------ ------------ ------------
Net Increase (Decrease) in Cash (150) 20 140
Cash at Beginning of Year 161 141 1
------------ ------------ ------------
Cash at End of Year $ 11 $ 161 $ 141
------------ ------------ ------------
Reconciliation of Net Investment Income
to Net Cash Provided by Operating Activities
Net Investment Income $ 1,922 $ 4,275 $ 5,517
------------ ------------ ------------
Adjustments to Reconcile Net Investment Income
to Net Cash Provided by Operating Activities
Decrease in Investments 29,989 10,144 24,342
Increase in Receivable for Investment Sold (417) -- --
(Increase) Decrease in Accrued Interest Receivables (1,288) 277 468
Decrease in Prepaid Expenses 1 -- --
Decrease in Legal and Professional Fees Payable (55) (39) (192)
Increase (Decrease) in Reimbursable Administrative Expenses Payable 13 (26) (11)
Increase (Decrease) in Independent General Partners' Fees Payable 6 (18) (17)
Net Realized Gains (Loss) on Sales of Investments (9,869) 74 4,756
------------ ------------ ------------
Total Adjustments 18,380 10,412 29,346
------------ ------------ ------------
Net Cash Provided by Operating Activities $ 20,302 $ 14,687 $ 34,863
============ ============ ============
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
For the Years Ended December 31, 1998, 1997, and 1996 Individual Managing
General General Limited
Partner Partners Partners Total
------------- ------------- ------------- -------------
Partners' Capital at January 1, 1996 $ 28 $ 4,897 $ 83,551 $ 88,476
Allocation of Net Investment Income 2 2,007 3,508 5,517
Allocation of Net Realized Gain on Investments 1 852 3,903 4,756
Allocation of Net Change in Unrealized
Depreciation From Investments (4) (41) (14,724) (14,769)
Cash Distributions to Partners (9) (5,149) (29,565) (34,723)
------------- ------------- ------------- -------------
Partners' Capital at December 31, 1996 $ 18 $ 2,566 $ 46,673 $ 49,257
============= ============= ============= =============
Partners' Capital at January 1, 1997 $ 18 $ 2,566 $ 46,673 $ 49,257
Allocation of Net Investment Income 1 184 4,090 4,275
Allocation of Net Realized Gain on Investments -- -- 74 74
Allocation of Net Change in Unrealized
Depreciation From Investments (2) (17) (6,266) (6,285)
Cash Distributions to Partners (3) (2,531) (11,709) (14,243)
------------- ------------- ------------- -------------
Partners' Capital at December 31, 1997 $ 14 $ 202 $ 32,862 $ 33,078
============= ============= ============= =============
Partners' Capital at January 1, 1998 $ 14 $ 202 $ 32,862 $ 33,078
Allocation of Net Investment Income 1 309 1,612 1,922
Allocation of Net Realized Gain (Loss) on Investments (3) 1,396 (11,262) (9,869)
Allocation of Net Change in Unrealized
Depreciation From Investments 4 39 17,396 17,439
Cash Distributions to Partners (5) (1,378) (19,494) (20,877)
------------- ------------- ------------- -------------
Partners' Capital at December 31, 1998 $ 11 $ 568 $ 21,114 $ 21,693
============= ============= ============= =============
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
Fair % Of
Principal Investment Investment Value Total
Amount/Shares Investment Date Cost(g) (Note 2) Investments
MEZZANINE INVESTMENTS
MANAGED COMPANIES
BIG V SUPERMARKETS, INC. (a)
$6,963 Big V Supermarkets, Inc., Sr. Sub. Nt. 14.14% due 03/15/01(b) 12/27/90 $ 6,963 $ 6,963
62,667 Shares Big V Holding Corp., Inc., Common Stock(c) 12/27/90 2,193 2,193
(8.8% of fully diluted common equity) (f) ------------------------------
9,156 9,156 45.85
7,032 Warrants COLE NATIONAL CORPORATION
Cole national Corporation, Common Stock Purchase Warrants (c) 9/26/90 - -
(0.0% of fully diluted common equity assuming exercise of warrants)
$744 13% Sr. Secured Bridge Note
Purchased 09/25/90........................ $744
Repaid 11/15/90........................... $744
Realized Gain............................. $0
-----------------------------
- - 0.00
-----------------------------
TOTAL INVESTMENT IN MANAGED COMPANIES 9,156 9,156 45.85
-----------------------------
NON-MANAGED COMPANIES
BIOLEASE, INC. - Note 5
$513 Biolease, Inc., 13% Sub. Nt. due 06/06/04(b) 06/08/94 443 257
63.20 Shares Biolease, Inc., Common Stock(c) 06/08/94 62 -
6,554 Warrants Biotransplant, Inc., Common Stock Purchase Warrants(c) 06/08/94 9 9
-----------------------------
514 266 1.33
-----------------------------
FITZ AND FLOYD - Note 5
$1,580 Fitz and Floyd, 12% Sub. Nt. due 4/15/04(b) 04/11/97 1,580 1,580
5,530 Shares Fitz and Floyd, Series A Preferred Stock(c) 04/11/97 8,248 1,976
1,661,663 Shares Common Stock
Purchased Various $ 13
Surrendered May 1996 $ 0
Realized loss $ (13)
$6,719 Sr. Sub. Note
$1,581 Sr. Sub. Note
Purchased Various $8,248
Exchanged 4/11/97
6,530 Series A Preferred Stock and
33,575 Shares common Stock $8,248
Realized Gain $ 0
Total Realized Loss $ (13) -----------------------------
9,828 3,556 17.81
-----------------------------
FLA. ORTHOPEDICS, INC. - Notes 5,6
12,634 Shares FLA. Holdings, Inc. Series B Preferred Stock (c)(e) 08/02/93 987 -
2,493 Warrants FLA. Holdings, Inc. Common Stock Purchase Warrants(c) 08/02/93 - -
$3,158 12.5% Subordinated Note
Purchased 08/02/93 $ 3,158
Surrendered 08/16/96 $ 0
Realized Loss $(3,158)
78,960 Common Stock
Purchased 08/02/93 $ 987
Exchanged 08/02/96
2,493 Series B Preferred Stock $ 987
Realized Gain $ 0
Total Realized Loss $(3,158) -----------------------------
987 - 0.00
-----------------------------
SORETOX - Notes 5,6,13
$3,997 Stablex Canada, Inc., Sr. Sub. Nt. 10% due 06/30/07(b)(d)(e) 06/29/95 3,997 2,955
$3,568 Stablex Canada, Inc., Jr. Sub. Nt. 11% due 06/30/09(b)(d)(e) 06/29/95 3,568 -
2,286 Warrants Seaway TLC, Inc. Common Stock Purchase Warrants(c) 06/29/95 - -
-----------------------------
7,565 2,955 14.80
-----------------------------
TOTAL INVESTMENT IN NON-MANAGED COMPANIES 18,894 6,777 33.94
-----------------------------
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
Fair % Of
Principal Investment Investment Value Total
Amount/Shares Investment Date Cost(g) (Note 2) Investments
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes Various $16,551 $ 11,755 58.86
Preferred Stock, Common Stock, Warrants and Stock Rights Various 11,499 4,178 20.92
-----------------------------
TOTAL MEZZANINE INVESTMENTS 28,050 15,933 79.78
-----------------------------
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$ 4,040 Ford Motor Credit 5.53% due 1/04/99 12/18/98 4,029 4,038
-----------------------------
TOTAL INVESTMENT IN COMMERCIAL PAPER 4,029 4,038 20.22
-----------------------------
TOTAL TEMPORARY INVESTMENTS 4,029 4,038 20.22
-----------------------------
TOTAL INVESTMENT PORTFOLIO $32,079 $ 19,971 100.00%
=============================
(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) Inclusive of receipt of payment-in-kind securities.
(e) Non-accrual investment status.
(f) Percentages of Common Equity have not been audited by PricewaterhouseCoopers LLP.
(g) Represents original cost and excludes accretion of discount of $22 for Mezzanine
Investments and $9 for Temporary Investments
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. Organization and Purpose
ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. (the "Retirement
Fund") (formerly T.H. Lee Acquisition Fund (Retirement Accounts) II, L.P.) was
formed along with ML-Lee Acquisition Fund II, L.P. ("Fund II"; collectively
referred to as the "Funds") and the Certificates of Limited Partnership were
filed under the Delaware Revised Uniform Limited Partnership Act on September
23, 1988. The Funds' operations commenced on November 10, 1989.
Mezzanine Investments II, L.P. (the "Managing General Partner"), subject to
the supervision of the Individual General Partners, is responsible for
overseeing and monitoring the Retirement Fund's investments. The Managing
General Partner is a Delaware limited partnership in which ML Mezzanine II Inc.
is the general partner and Thomas H. Lee Advisors II, L.P., the Investment
Adviser to the Funds, is the limited partner. The Individual General Partners
are Vernon R. Alden, Joseph L. Bower and Stanley H. Feldberg (the "Independent
General Partners") and Thomas H. Lee.
The Retirement Fund elected to operate as a business development company
under the Investment Company Act of 1940. The Retirement Fund's primary
investment objective is to provide current income and capital appreciation
potential by investing in privately-structured, friendly leveraged buyouts and
other leveraged transactions. The Retirement Fund pursues this objective by
investing primarily in subordinated debt and related equity securities issued in
conjunction with the "mezzanine financing" of friendly leveraged buyout
transactions, leveraged acquisitions and leveraged recapitalizations. The
Retirement Fund may also invest in "bridge investments" if it is believed that
such investments would facilitate the consummation of a mezzanine financing.
As described in the Prospectus, the Retirement Fund will terminate no later
than December 20, 1999, subject to the right of the Individual General Partners
to extend the term for up to one additional two-year period and one additional
one-year period if it is in the best interest of the Retirement Fund. The
Retirement Fund will then have five additional years to liquidate its remaining
investments.
2. Significant Accounting Policies
Basis of Accounting
For financial reporting purposes, the records of the Retirement Fund are
maintained using the accrual method of accounting. For federal income tax
reporting purposes, the results of operations are adjusted to reflect statutory
requirements arising from book to tax differences. The preparation of financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts and
disclosures in the financial statements. Actual reported results could vary from
these estimates.
Valuation of Investments
Securities for which market quotations are readily available are valued by
reference to such market quotation using the last trade price (if reported) or
the last bid price for the period. For securities without a readily
ascertainable market value (including securities restricted as to resale for
which a corresponding publicly traded class exists), fair value is determined,
on a quarterly basis, in good faith by the Managing General Partner and the
Investment Adviser with final approval from the Individual General Partners of
the Retirement Fund. For privately issued securities in which the Retirement
Fund typically invests, the fair value of an investment is generally its
original cost plus accrued value in the case of original issue discount or
deferred pay securities. Such investments generally will be revalued if there is
an objective basis for doing so at a different price. Investments will be
written down in value if the Managing General Partner and Investment Adviser
believe adverse credit developments of a significant nature require a write-down
of such securities. Investments will be written up in value only if there has
been an arms'-length third party transaction to justify the increased valuation.
Although the Managing General Partner and Investment Adviser use their best
judgment in estimating the fair value of these investments, there are inherent
limitations in any estimation technique. Therefore, the fair value estimates
presented herein are not necessarily indicative of the amount which the
Retirement Fund could realize in a current transaction. Future confirming events
will also affect the estimates of fair value and the effect of such events on
the estimates of fair value could be material.
Temporary Investments with maturities of less than 60 days are stated at
amortized cost, which approximates market value.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of December
31, 1998. 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 because investments of companies whose equity is
publicly traded are valued at the last price at December 31, 1998, the current
estimated fair value of these investments may have changed significantly since
that point in time.
Interest Receivable on Investments
Investments generally will be placed on non-accrual status in the event of
a default (after the applicable grace period expires) or if the Investment
Adviser and the Managing General Partner determine that there is no reasonable
assurance of collecting interest.
Payment-In-Kind Securities
All payment-in-kind securities received in lieu of cash interest payments
by the Retirement Fund's portfolio companies are recorded at face value (which
approximates accrued interest), unless the Investment Adviser and the Managing
General Partner determine that there is no reasonable assurance of collecting
the full principal amounts of such securities. As of December 31, 1998 the
Retirement Fund has in its portfolio of investments $504,150 of payment-in-kind
notes which excludes $2.0 million of payment-in-kind notes received from notes
placed on non-accrual status.
Investment Transactions
The Retirement Fund records investment transactions on the date on which it
obtains an enforceable right to demand the securities or payment therefore. The
Retirement Fund records Temporary Investment transactions on the trade date.
Realized gains and losses on investments are determined on the basis of
specific identification for accounting and tax purposes.
Sales and Marketing Expenses, Offering Expenses and Sales Commissions
Sales commissions and selling discounts were allocated to the specific
Partners' accounts in which they were applied. Sales and marketing expenses and
offering expenses were allocated between the Funds in proportion to the number
of Units issued by each Fund and to the Partners in proportion to their capital
contributions.
Deferred Interest Income
All fees received by the Retirement Fund upon the funding of Mezzanine or
Bridge Investments are treated as deferred interest income and amortized over
the maturity of such investments.
Partners' Capital
Partners' Capital represents the Retirement Fund's equity divided in
proportion to the Partners' Capital Contributions and does not represent the
Partners' Capital Accounts. Profits and losses, as defined in the Partnership
Agreement, when realized, are allocated in accordance with the provisions of the
Partnership Agreement summarized in Note 3.
3. Allocations of Profits and Losses
Pursuant to the Partnership Agreement, all profits from Temporary
Investments generally will be allocated 99.69% to the Limited Partners, 0.28% to
the Managing General Partner and 0.03% to the Individual General Partner.
Profits from Mezzanine Investments will, in general, be allocated as follows:
first, if the capital accounts of any partners have negative balances,
to such partners in proportion to the negative balances in their capital
accounts until the balances of all such capital accounts equal zero,
second, 99.69% to the Limited Partners, 0.28% to the Managing General
Partner and 0.03% to the Individual General Partner until the sum
allocated to the Limited Partners equals any previous losses allocated
together with a cumulative Priority Return of 10% on the average daily
amount in Mezzanine Investments, and any outstanding Compensatory
Payments,
third, 69.69% to the Limited Partners, 30.281% to the Managing General
Partner and .029% to the Individual General Partner until the Managing
General Partner has received 20.281% of the total profits allocated,
thereafter, 79.69% to the Limited Partners, 20.281% to the Managing
General Partner and 0.029% to the Individual General Partner.
4. Investment Transactions
On January 6, 1998 the Retirement Fund sold its remaining holdings of
common stock in Stanley. The common stock was sold pursuant to a Form S-3
Registration Statement, which was filed by Stanley on December 22, 1997 and
declared effective by the Securities and Exchange Commission on December 23,
1997. In connection with the sale, the Retirement Fund sold its remaining 2,773
shares of common stock and received net proceeds of $74,844 or $27 per share.
The Retirement Fund recognized a gain of approximately $40,000 from this sale.
On March 19, 1998 the Retirement Fund and affiliates of the Thomas H. Lee
Company sold their remaining holdings in Anchor Advanced Products. Pursuant to
this transaction the Retirement Fund sold 219,323 shares of Anchor Common Stock
for approximately $877,292 ($4.00 per share) and recognized a gain of $132,013.
On April 2, 1998, Sunbeam Corporation acquired all of the outstanding
shares of First Alert for $175 million or $5.25 per share and assumed all of
First Alert's debt. Pursuant to this transaction the Retirement Fund tendered
all of its shares of First Alert and received proceeds of $11.98 million and
recognized a gain of approximately $8.3 million. Net Distributable Proceeds of
$62.42 per unit were distributed to Limited Partners of record as of the date of
the closing of this transaction, April 2, 1998.
On May 27, 1998, Playtex Products Inc., ("Playtex"), completed a public
offering in the international markets of approximately 4 million shares of
Common Stock at a net price of $13.215 per share (the "Playtex Offering"). Of
the 4 million shares offered, approximately 3.3 million shares were offered by
affiliates of the Thomas H. Lee Company, including the Retirement Fund. As part
of the Playtex Offering, the Retirement Fund sold its remaining investment in
Playtex, consisting of approximately 183,560 shares of Common Stock. The
Retirement Fund received proceeds of $2.4 million and recognized a loss on the
sale of approximately $404,000. Net Distributable Proceeds were distributed to
Limited Partners of record as of May 27, 1998.
On October 16, 1998, Cinnabon International, Inc. ("Cinnabon") completed a
Plan of Merger with AFC Enterprises, Inc. ("AFC") whereby AFC acquired Cinnabon
by Merger ("Merger"). Pursuant to the Merger, the Retirement Fund received
proceeds of $4.5 million (which includes $360,714 of deferred interest) for its
entire interest in Cinnabon. Net Distributable Proceeds from the Merger of
$23.45 per Unit were distributed on November 16, 1998, to Limited Partners of
record as of October 16, 1998, the closing date of this transaction. The
Retirement Fund recognized a gain of $217,800 from the Merger.
On November 13, 1998, Ames Department Stores, Inc. ("Ames") and Hills
jointly announced the signing of a definitive agreement in which Ames would
acquire Hills. On November 18, 1998 Ames commenced a tender offer for all the
outstanding shares of Common Stock and Series A Convertible Preferred Stock of
Hills, at a price of $1.50 per share. Pursuant to the offer, the deferred
contingent right is not transferrable. On December 16, 1998, the Retirement Fund
tendered all 278,245 of its shares and received proceeds of $417,368 on December
31, 1998 the date of completion of the tender offer. The Retirement Fund
recognized a loss of approximately $18.2 million.
On December 31, 1998, the Fund received approximately $1.2 million from
Stablex Canada Inc., $134,200 of which represented fourth quarter 1998 interest
and $1,065,800 represented prior period unpaid interest. The Retirement Fund is
currently not accruing interest on this investment and wrote down the investment
in the Stablex Jr. Subordinated Note to zero during the year ended December 31,
1997. The Retirement Fund's valuation reflects total unrealized depreciation of
approximately $4.6 million through December 31, 1998.
Because the Retirement Fund primarily invested in high-yield private
placement securities, the risk of loss upon default by an issuer is greater than
with investment grade securities because high-yield securities are generally
unsecured and are often subordinated to other creditors of the issuer. Also,
high-yield issuers usually have higher levels of indebtedness and are more
sensitive to adverse economic conditions.
Although the Retirement Fund cannot eliminate the risks associated with its
investments in high-yield securities, it has procedures in place to continually
monitor the risks associated with its investments under a variety of market
conditions. Any potential Retirement Fund loss would generally be limited to its
investment in the portfolio company as reflected in the portfolio of
investments.
Should bankruptcy proceedings commence, either voluntarily or by action of
the court against a portfolio company, the ability of the Retirement Fund to
liquidate the position or collect proceeds from the action may be delayed or
limited.
5. Unrealized Appreciation and Depreciation of Investments
For information, please refer to the Supplemental Schedule of Unrealized
Appreciation and Depreciation - Schedule 2.
6. Non-Accrual of Investments
In accordance with the Retirement Fund's Accounting Policy, the following
securities have been on non-accrual status since the date indicated:
- Florida Orthopedics January 1, 1995.
- Stablex Canada, Inc. June 29, 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
$1.2 million 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). For the years
ended December 31, 1998, 1997 and 1996, the Retirement Fund paid $549,968,
$621,386, and $807,939, respectively, in Investment Advisory Fees to Thomas H.
Lee Advisors II, L.P.
8. Fund Administration Fees and Expenses
As compensation for its services, ML Fund Administrators Inc. (the "Fund
Administrator"; an affiliate of the Managing General Partner), is entitled to
receive from the Funds an Administration Fee and reimbursement for certain
expenses incurred by the Fund Administrator on behalf of the Funds. Actual
out-of-pocket expenses ("reimbursable expenses") primarily consist of printing,
audit, tax preparation and custodian fees. For the years ended December 31,
1998, 1997 and 1996, the Retirement Fund incurred $335,556, $113,219, and
$110,370, respectively, in reimbursable expenses.
Beginning in November of 1997, the Fund Administration Fee changed to an
annual amount of $400,000 for the Retirement Fund and Fund II on a combined
basis, plus 100% of all reimbursable expenses incurred by the Funds. The Fund
Administration Fee is calculated and paid quarterly, in advance, by each Fund.
For the years ended December 31, 1998, 1997 and 1996, the Retirement Fund paid
$178,000, $458,168, and $544,478, respectively, in Fund Administration Fees.
For the period ending November 1997, the Fund Administration Fee was
calculated at an annual amount of the greater of $500,000 or 0.45% of the excess
of net offering proceeds less 50% of capital reductions and realized losses.
In addition, ML Mezzanine II Inc., an affiliate of the Fund Administrator
and of Merrill Lynch & Co. Inc., receives 5% of the benefit of any MGP
Distributions paid to the Managing General Partner (see Note 10).
9. Independent General Partners' Fees and Expenses
As compensation for their services, each Independent General Partner will
receive a combined annual fee of $40,000 (payable quarterly) from the Funds in
addition to a $1,000 fee for each meeting attended ($500 if a meeting is held on
the same day as a committee meeting of the General Partners) plus reimbursement
for any out-of-pocket expenses incurred. Fees and expenses are allocated between
the Funds in proportion to the number of Units issued by each fund. Compensation
for each of the Independent General Partners is reviewed annually. For the years
ended December 31, 1998, 1997 and 1996, the Retirement Fund incurred $73,433,
$89,810, and $179,150, respectively, in Independent General Partners' Fees and
Expenses.
10. Related Party Transactions
The Retirement Fund's investments generally are made as co-investments with
Fund II. In addition, certain of the Mezzanine Investments and Bridge
Investments which were made by the Retirement Fund involve co-investments with
entities affiliated with the Investment Adviser. Such co-investments are
generally prohibited absent exemptive relief from the Securities and Exchange
Commission (the "Commission"). As a result of these affiliations and the
Retirement Fund's expectation of engaging in such co-investments, the Funds
together with ML-Lee Acquisition Fund, L.P., sought an exemptive order from the
Commission allowing such co-investments, which was received on September 1,
1989. The Retirement Fund's co-investments in Managed Companies, and in certain
cases its co-investments in Non-Managed Companies, typically involve the entry
by the Funds and other equity security holders into stockholders' agreements.
While the provisions of such stockholders' agreements vary, such agreements may
include provisions as to corporate governance, registration rights, rights of
first offer or first refusal, rights to participate in sales of securities to
third parties, rights of majority stockholders to compel minority stockholders
to participate in sales of securities to third parties, transfer restrictions,
and preemptive rights.
Thomas H. Lee Company, a sole proprietorship owned by Thomas H. Lee, an
Individual General Partner of the Retirement Fund and an affiliate of the
Investment Adviser, typically performs certain management services for Managed
Companies and receives management fees in connection therewith, usually pursuant
to written agreements with such companies. In addition, certain of the portfolio
companies have contractual or other relationships pursuant to which they do
business with one another.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") is an
affiliate of the Managing General Partner. MLPF&S and certain of its affiliates,
in the ordinary course of their business, perform various financial services for
various portfolio companies of the Funds, which may include investment banking
services, broker/dealer services and economic forecasting, and receive in
consideration therewith various fees, commissions and reimbursements.
Furthermore, MLPF&S and its affiliates or investment companies advised by
affiliates of MLPF&S may, from time to time, purchase or sell securities issued
by portfolio companies of the Funds in connection with its ordinary investment
operations.
As provided by the Partnership Agreement, the Managing General Partner of
the Retirement Fund is entitled to receive incentive distributions "MGP
Distributions", after Limited Partners have received their Priority Return of
10% per annum. 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 any
Deferred Distribution Amount is paid in full.
During 1998, the Retirement Fund paid the Individual General Partner
distributions totaling $5,357 and Managing General Partner distributions
totaling $1,378,238 (which includes $1,324,671 of MGP Distributions). As of
December 31, 1998, the Managing General Partner has earned a total of $30.6
million in MGP Distributions, none of which is deferred in payment to the
Managing General Partner as a Deferred Distribution amount (the "Deferred
Distribution",) at this time, in accordance with the Partnership Agreement. To
the extent not payable to the Managing General Partner, any Deferred
Distribution 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.
As a result of the settlement of three class action lawsuits (see Note 11 -
Litigation), Thomas H. Lee purchased 6,975 units of the Retirement Fund from
certain limited partners.
An officer of the Investment Advisor also serves as a Director/Trustee of a
managed company.
11. Litigation
On April 10, 1998, the parties to the Retirement Fund and ML-Lee
Acquisition Fund II, L.P. ("Fund II" and together with the Retirement Fund, "the
Funds") Securities Litigation No. 92-60(JJF) Seidel, et al v. Thomas H. Lee, et
al, No. 94-422 (JJF) and Seidel, et al v. Thomas H. Lee, et al, No. 95-724
(JJF), three class actions brought on behalf of limited partners of the Funds,
filed with United States District Court for the District of Delaware, a
Stipulation of Settlement preliminarily settling these actions.
The settlement, which was approved by the Court at a hearing on July 16,
1998, dismissed with prejudice all claims against the Funds, the Funds'
Investment Adviser and certain of its affiliates, the Funds' Managing General
Partner and certain of its affiliates, the Funds' counsel and the Funds'
Independent General Partners. Defendants, other than the Funds, have agreed to
provide cash of $16 million and certain other considerations to members of the
class to settle the claims asserted in these actions. In addition, Thomas H.
Lee, a General Partner of the Funds, and certain affiliates have purchased from
certain limited partners approximately $1.5 million of the Funds' limited
partnership units pursuant to a liquidity option offered to eligible class
members. The settlement became effective on August 24, 1998. Defendants continue
to deny all liability in this action.
The Funds have reimbursed legal expenses incurred by certain defendants and
have included such expenses in Legal and Professional Fees in the Financial
Statements.
12. Income Taxes (Statement of Financial Accounting Standards No. 109)
No provision for income taxes has been made because all income and losses
are allocated to the Retirement Fund's partners for inclusion in their
respective tax returns.
Pursuant to the Statement of Financial Accounting Standards No. 109
Accounting for Income Taxes, the Retirement Fund is required to disclose any
difference in the tax basis of the Retirement Fund's assets and liabilities
versus the amounts reported in the financial statements. As of December 31,
1998, the tax basis of the Retirement Fund's assets are greater than the amounts
reported in the financial statements by $12.2 million. This difference is
primarily attributable to net unrealized depreciation and appreciation on
investments which has not been recognized for tax purposes.
13. Subsequent Events
On February 4, 1999, the Individual General Partners approved the fourth
quarter 1998 cash distribution which represents net investment income of
$1,266,881 from Mezzanine Investments and Net Distributable Capital proceeds
from the sale of Hills of $417,368 (which is all a return of capital). The total
amount distributed to Limited Partners was $1,237,280 or $6.97 per Unit, which
was paid on February 6, 1999. The Managing General Partner received a total of
$3,489 with respect to its interest in the Retirement Fund and $443,131 in MGP
Distributions. Thomas H. Lee, as an Individual General Partner, received $349
with respect to his interest in the Retirement Fund.
On March 12, 1999, the Retirement Fund and Fund II (together the "Funds")
entered into a Note Repurchase and Warrant Cancellation Agreement (the
"Agreement") with Stablex Canada Inc. and Seaway TLC Inc. to purchase, retire
and cancel all of the Subordinated Notes outstanding and held by the Funds
(including all Deferred Interest Notes). Pursuant to the Agreement, the Funds
also relinquished all Warrants held. Total proceeds received by the Funds for
retiring the Notes and Warrants was $12,000,000; of which $6,394,000 was
allocated to the Retirement Fund. The Retirement Fund will recognize a loss of
approximately $1.2 million from this transaction. The distribution of any
Capital Proceeds relating to this transaction will be made in connection with
the first quarter cash distribution to Limited Partners of record as of March
12, 1999.
In addition, under the Agreement, the Funds are entitled, collectively, to
receive twenty percent (20%) of the net proceeds of any payment or consideration
or distribution (whether received in cash, property, securities or any
combination thereof) arising out of transfer, disposition, recapitalization or
exchange of substantially all of the stock or other equity interest in either
Stablex Canada Inc. or Seaway TLC Inc. if such transaction is consummated within
forty-two (42) months from the closing of the Agreement. Any Distributable
Capital Proceeds relating to future receipts by the Retirement Fund pursuant to
the Agreement will be payable to Limited Partners of record as of the date of
such receipt.
SCHEDULE 1
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SUPPLEMENTARY SCHEDULE OF REALIZED GAINS AND LOSSES
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
Principal Amount/ Investment Net Realized
Security Number of Shares Cost Proceeds Gain (Loss)
--------------- ------------- ------------- -------------
Anchor Advanced Products, Inc. Common Stock 219,323 $ 745 $ 877 $ 132
Stanley Furniture Company Inc. Common Stock 2,773 35 75 40
First Alert, Inc. Common Stock 2,281,524 3,680 11,978 8,298
Playtex Products, Inc. Common Stock 183,560 2,830 2,426 (404)
Cinnabon International, Inc. Note $ 3,956 3,956 4,174 218
Hills Stores Company Common Stock 278,245 18,571 418 (18,153)
--------------- ------------- ------------- -------------
Total Net Realized Gains
at December 31, 1998 $ 29,817 $ 19,948 $ (9,869)
============= ============= =============
SCHEDULE 2
SUPPLEMENTARY SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
ML-LEE ACQUISITION (RETIREMENT ACCOUNTS) II, L.P.
FOR THE PERIOD ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
Total
Unrealized
Appreciation/ Unrealized Appreciation (Depreciation) for
(Depreciation)
Investment Fair at December 31, 1993
Security Cost Value 1998 1998 1997 1996 1995 1994 & Prior
- - -------------------------------------- -------- ------ ------------ ------ ------ -------- ------- ------ --------
Non Public Securities:
Fitz and Floyd
Preferred Stock 8,248 1,976 (6,271) -- 41 (4,324) (1,975) (13) --
Biolease
Common Stock* 62 -- (62) -- (62) -- -- -- --
Subordinated Notes*(a) 443 257 (207) -- (207) -- -- -- --
FLA. Orthopedics, Inc.
Preferred Stock* 987 -- (987) -- -- -- -- (987) --
Subordinated Note -- -- -- -- -- 3,158 (3,158) -- --
Soretox
Subordinated Notes* 7,565 2,955 (4,610) -- (2,782) -- -- (1,828) --
----- ----- ------- ------ ------ ------ ------ ------ -------
Total Unrealized Depreciation
from Non Public Securities (12,137) -- (3,010) (1,166) (5,133) (2,828) --
------- ------ ------ ------ ------ ------ -------
Reversal of Unrealized Appreciation
(Depreciation) from Securities Sold
in 1998
First Alert, Inc.
Common Stock -- (1,170) (2,851) (11,977) (13,689) 29,687 --
Playtex Products, Inc.
Common Stock -- 948 414 91 69 (1,347) (175)
Stanley
Common Stock -- (41) (38) 164 (37) (63) 15
Hills Stores Company
Common Stock -- 17,702 (800) (1,079) (3,055) 101 (12,869)
-------- ------ ------ ------- ------- ------ -------
Reversal of Unrealized Appreciation
(Depreciation) from Securities Sold in 1998 -- 17,439 (3,275) (12,801) (16,712) 28,378 (13,029)
-------- ------ ------ ------- ------- ------ -------
Reversal of Unrealized Appreciation
(Depreciation) from Investments Sold prior to 1998 -- -- -- (802) (6,550) (139,900) 147,252
-------- ------ ------ ------- ------- ------ -------
Total Unrealized Appreciation
(Depreciation) from Investments Sold -- 17,439 (3,275) (13,603) (23,262) (111,522) 134,223
------- ------ ------ ------ ------- ------- -------
Net Unrealized Appreciation (Depreciation) $(12,137) $ 17,439 $(6,285) $ (14,769) $(28,395) $(114,350) $134,223
======= ====== ====== ====== ======= ======== =======
* Restricted Security.
(a) Investment cost excludes accretion of discount of $22.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The five General Partners of the Retirement Fund are responsible for the
management and administration of the Retirement Fund and have the same positions
and responsibilities with respect to Fund II. The General Partners of Fund II
and the Fund II consist of four Individual General Partners: Vernon R. Alden,
Joseph L. Bower, Stanley H. Feldberg (the "Independent General Partners"),
Thomas H. Lee and Mezzanine Investments II, L.P., the Managing General Partner.
Pursuant to exemptive orders issued by the Securities and Exchange Commission,
each Independent General Partner is not an "interested person" of the Retirement
Fund as such term is defined in the Investment Company Act of 1940.
Individual General Partners
The Individual General Partners provide overall guidance and supervision
with respect to the operations of the Retirement Fund and perform the various
duties imposed on the directors of business development companies by the
Investment Company Act of 1940. The Individual General Partners supervise the
Managing General Partner and must, with respect to any Mezzanine Investment
transactions, either certify that it meets the Retirement Fund investment
guidelines or specifically approve it as a non-Guideline Investment or Bridge
Investment. The Retirement Fund's investment and reinvestment period expired in
December, 1993, and the only investments now permitted are Follow On Investments
in existing portfolio companies. In addition, if a Portfolio Company's
performance is in default of a material provision of a lending agreement or has
a ratio of operating cash flow to current cash fixed charges for its four most
recent fiscal quarters of less than or equal to 1.1 to 1, the Independent
General Partners are required to approve any changes in the terms of or sale of
such Portfolio Company.
Messrs. Alden, Bower, Feldberg and Lee have served as Individual General
Partners of the Retirement Fund and Fund II since 1989. Each Individual General
Partner shall hold office until his removal or withdrawal pursuant to the
provisions of the Retirement Fund's Partnership Agreement.
Mr. Alden, age 76, Individual General Partner of the Retirement Fund,
ML-Lee Acquisition Fund, L.P. ("Lee I") and Fund II; and together with the Fund
II, the "New Funds"; and together with Lee I, the "Funds"). 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, age 60, Individual General Partner of the Funds. Donald Kirk
David Professor of Business Administration. Harvard University Graduate School
of Business Administration. Faculty member since 1963. Director of Anika
Research, Inc., Brown Group, Inc., New America High Income Fund, Sonesta
International Hotels Corporation and The Lincoln Foundation. Trustee of the
DeCordova & Dana Museum and Park and the New England Conservatory of Music.
Mr. Feldberg, age 74, Individual General Partner of the Funds. Past
Director of the TJX Companies, Inc. and Waban Inc., Trustee-Emeritus of Brandeis
University, Honorary Trustee of Beth Israel Deaconess Medical Center.
Mr. Lee, age 54, Individual General Partner of the Funds. Chairman of the
Investment Adviser of the Funds since 1987; Chairman of the Administrative
General Partner of the Investment Adviser to the new 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.,
First Security Services Corporation, Livent, Inc., Miller Import Corporation,
Safelite Glass Corporation, Sondik Supply Corporation and Vail Resorts, Inc.
Trustee of Brandeis University (Vice Chairman), Museum of Fine Arts (Boston),
the Wang Center for the Performing Arts, Boston's Beth Israel Hospital
(Treasurer), NYU Medical Center and the Whitney Museum of American Art. Overseer
of Boston Symphony Orchestra and New England Conservatory of Music, Member of
the Dean's Council, Faculty of Arts and Sciences and an Executive Committee
Member of the Committee on University and an Executive Committee Member of the
Committee on University Resources at Harvard University; Member of the
Corporation of Belmont Hill School.
The Investment Adviser
The Investment Adviser, pursuant to an investment management agreement
among the Investment Adviser, the Thomas H. Lee Company and the Retirement Fund
dated November 10, 1989, is responsible for the identification, management and
liquidation of Mezzanine Investments and Bridge Investments for the Retirement
Fund. The Investment Adviser received an Investment Advisory Fee in compensation
for these services outlined in Note 7 to the Financial Statements.
Certain officers of the Lee Company have been designated as trustees and
executive officers of T. H. Lee Mezzanine II, the administrative general partner
of the Investment Adviser.
Title
Thomas H. Lee Chairman, Trustee
Thomas R. Shepherd Executive Vice President
David V. Harkins Senior Vice President, Trustee
C. Hunter Boll Vice President
Scott A. Schoen Vice President
Wendy L. Masler Treasurer, Clerk
Information concerning Mr. Lee is set forth above.
Mr. Shepherd, age 69, is a Managing Director of the Thomas H. Lee Company
since 1986. Mr. Shepherd is currently a director of General Nutrition Companies,
Inc. and Rayovac Corporation. He is Executive Vice President of Thomas H. Lee
Advisors I and T.H. Lee Mezzanine II.
Mr. Harkins, age 57, has been a Managing Director of the Lee Company since
1986 and the Chairman of National Dentex Corporation since 1983. Mr. Harkins is
a Senior Vice President and Trustee of Advisors I. He also is a director of
National Dentex Corporation, Cott Corporation, First Security Services Inc.,
Fisher Scientific International, Inc., Freedom Securities Corporation, Metris
Companies, Inc. (pending), Stanley Furniture Company and Syratech Corporation.
Mr. Boll, age 43, has served as a Managing Director of the Lee Company
since 1991. From 1986 to 1991 he served as a Vice President of the Lee Company.
Mr. Boll is a Director of Big V Supermarkets Inc., Cott Corporation, Freedom
Securities Corporation, Metris Companies, Inc. (pending), New York Restaurant
Group, Transwestern Publishing, L.P. and United Industries Corporation.
Mr. Schoen, age 40, has served as a Managing Director of the Lee Company
since 1991. From 1986 to 1990 he served as a Vice President of the Lee Company.
Mr. Schoen is a Vice President of Advisors I. Mr. Schoen is also a Director of
Rayovac Corporation, ARC Holdings, LLC, Syratech Corporation, Transwestern
Publishing L.P. and United Industries Corporation.
Ms. Masler, age 45, has been Treasurer of the Lee Company since 1984. Ms.
Masler is also Treasurer and Clerk of Advisors I.
The Managing General Partner
The Managing General Partner is a limited partnership in which ML
Mezzanine II Inc. is the sole general partner and the Investment Adviser is the
limited partner. The Managing General Partner is responsible for the supervision
of the Retirement Fund's investments.
The executive officers of ML Mezzanine II Inc. are as follows:
Title
Kevin K. Albert Chairman and President
James V. Caruso Executive Vice President, Director
Rosalie Y. Goldberg Vice President, Director
Robert J. Remick Vice President, Treasurer
Sharon McKenzie Vice President, Assistant Treasurer
Kevin K. Albert, 46, a Managing Director of Merrill Lynch Investment
Banking Group ("ML Investment Banking"), joined Merrill Lynch in 1981. Mr.
Albert works in the Equity Private Placement Group and 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. Mr. Albert is also a director of ML Media Management
Inc. ("ML Media"), an affiliate of ML Mezzanine II Inc. 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.; a director of Merrill Lynch Venture Capital Inc. ("ML Venture"), an
affiliate of ML Mezzanine II Inc. 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 Inc. 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, 47, a Director of ML Investment Banking, joined Merrill
Lynch in 1975. Mr. Caruso manages the Investment Banking Group Corporate
Accounting, Master Lease and off Balance Sheet accounting functions as well as
the Controller's area of the Partnership Analysis and Finance Group. Mr. Caruso
is also a director of ML Opportunity, ML Venture, ML R&D, ML Mezzanine, ML
Mezzanine II and MLH Property Managers Inc., an affiliate of MLOM and the
general partner of MLH Income Realty Partnership VI.
Rosalie Y. Goldberg, 61 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 is also a Director of ML
Mezzanine, ML Mezzanine II, and ML Media.
Robert J. Remick, age 28, serves as Assistant Vice President in ML
Investment Banking of ML & Co. and joined the firm in 1994. He serves as Vice
President and Treasurer of and ML Mezzanine II. Mr. Remick manages certain
accounting, financial reporting and administrative functions in the Merrill
Lynch Partnership Analysis and Finance Department and serves as Vice President
and Treasurer of ML Mezzanine II.
Sharon McKenzie, age 40, joined ML Investment Banking in 1996 and serves as
Vice President, Assistant Treasurer and controller to the Funds. Ms. McKenzie is
responsible for financial reporting and fund accounting in the Merrill Lynch
Partnership Analysis and Finance Department and serves as Vice President and
Assistant Treasurer of ML Mezzanine II.
The Fund Administrator
ML Fund Administrators Inc., a Delaware corporation and a subsidiary of
Merrill Lynch & Co., Inc., is responsible for the provision of administrative
services necessary for the operation of the Funds. The Fund Administrator
receives Fund Administration Fees as compensation for these services as outlined
in Note 8 to the Financial Statements.
The Fund Administrator is responsible for the day-to-day administrative
affairs of the Funds and for the management of the accounts of Limited Partners.
The Fund Administrator also provides the Funds, at the Fund Administrator's
expense, with office space, facilities, equipment and personnel necessary to
carry out its obligations under the Administrative Services Agreement.
Item 11. Executive Compensation
The information with respect to compensation of the Individual General
Partners set forth under the caption "Management Arrangements - the Individual
General Partners" in the Prospectus pages 73 - 74 is incorporated herein by
reference. The Retirement Fund paid Independent General Partners, Mr. Alden, Mr.
Bower and Mr. Feldberg $67,600, collectively for their services as Independent
General Partners in 1998.
The information with respect to the allocation and distribution of the
Retirement Fund's profits and losses to the Managing General Partner set forth
under the caption "Distributions and Allocations - Allocations of Profits and
Losses" in the Prospectus pages 86 - 87 is incorporated herein by reference. The
Managing General Partner received distributions of $1,784,035 with respect to
1998, including incentive distributions of $1,727,494 that it distributed,
$1,641,119 to the Investment Adviser and $86,374 to ML Mezzanine II Inc.
The information with respect to the Investment Advisory Fee payable to the
Investment Adviser (and distributions from the Managing General Partner) set
forth under the caption "Management Arrangements - Description of the Advisory
Agreement" in the Prospectus pages 74 - 75 is incorporated herein by reference.
Pursuant to the Investment Advisory Agreement, the Retirement Fund paid the
Investment Adviser $549,968 with respect to 1998.
The information with respect to the Fund Administration Fees and Expenses
payable to the Fund Administrator set forth under the caption "Management
Arrangements - The Fund Administrator" in the Prospectus pages 72 - 73 is
incorporated herein by reference. Pursuant to the Administrative Services
Agreement, the Retirement Fund paid the Fund Administrator a total of $500,210
in 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of January 1, 1999, the Common Fund, which owns 21,448 Units of the
outstanding Units of limited partnership interest, or 12.08% of the Retirement
Fund, is the only entity known to the management of the Retirement Fund which
may be deemed to be a beneficial owner of more than five percent of the
outstanding units of the Retirement Fund. The Common Fund is located at 363 Reef
Road, P.O. Box 940, Fairfield, CT 06430. Mr. Bower owns 11 units of the
Retirement Fund. The General Partner and certain Officers of the Investment
Adviser own 8,526 Units of the Retirement Fund. See Item 3 Legal Proceedings for
more information.
There exists no arrangement known to the Retirement Fund, the execution of
which may at a subsequent date, result in a change of control of the Retirement
Fund.
Item 13. Certain Relationships and Related Transactions
The Retirement Fund's investments generally are made as co-investments with
Fund II. In addition, certain of the Mezzanine Investments and Bridge
Investments which were made by the Retirement Fund may involve co-investments
with entities affiliated with the Investment Adviser. Such co-investments are
generally prohibited absent exemptive relief from the Securities and Exchange
Commission (the "Commission"). As a result of these affiliations and the
Retirement Fund's expectation of engaging in such co-investments, the Retirement
Fund together with Fund II and Fund I, sought an exemptive order from the
Commission allowing such co-investments, which was received on September 1,
1989. The Retirement Fund's co-investments in Managed Companies, and in certain
cases its co-investments in Non-Managed Companies, typically involve the entry
by the Funds and other equity security holders into stockholders' agreements.
While the provisions of such stockholders' agreements vary, such agreements may
include provisions as to corporate governance, registration rights, rights of
first offer or first refusal, rights to participate in sales of securities to
third parties, rights of majority stockholders to compel minority stockholders
to participate in sales of securities to third parties, transfer restrictions,
and preemptive rights.
Thomas H. Lee Company, a sole proprietorship owned by Thomas H. Lee, an
Individual General Partner of the Retirement Fund and an affiliate of the
Investment Adviser, typically performs certain management services for Managed
Companies and receives management fees in connection therewith usually pursuant
to written agreements with such companies. The Funds have one Managed Company in
their portfolios at December 31, 1998, which paid management fees to Thomas H.
Lee Company of $150,000 for the fiscal year ended December 31, 1998.
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 1998 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 1998, the Retirement Fund paid Managing General Partner
distributions totaling $1,378,237 (which included $1,324,671 of MGP
Distributions and $53,566 with respect to its interest in the Retirement Fund).
Of this MGP Distribution amount, 95% or $1,258,437 was paid to the Investment
Adviser and the remaining 5% totalling $66,234 was paid to ML Mezzanine II Inc.
The Managing General Partner has earned $30.7 million in MGP Distributions, none
of which was deferred in payment at December 31, 1998, as a Deferred
Distribution Amount in accordance with the Partnership Agreement. To the extent
not payable to the Managing General Partner, any Deferred Distribution Amount is
distributable to the Partners pro-rata in accordance with their capital
contributions, and certain amounts otherwise later payable to Limited Partners
from distributable cash from operations will instead be payable to the Managing
General Partner until the Deferred Distribution Amount is paid in full.
Stanley Furniture Company
On January 6, 1998 the Retirement Fund sold its remaining holdings of
common stock in Stanley. The common stock was sold pursuant to a Form S-3
Registration Statement, which was filed by Stanley on December 22, 1997 and
declared effective by the Securities and Exchange Commission on December 23,
1997. In connection with the sale, the Retirement Fund sold its remaining 2,773
shares of common stock and received net proceeds of $74,844 or $27 per share.
The Retirement Fund recognized a gain of approximately $40,000 from this sale.
First Alert
On April 2, 1998, Sunbeam Corporation acquired all of the outstanding
shares of First Alert for $175 million or $5.25 per share and assumed all of
First Alert's debt. Pursuant to this transaction the Retirement Fund tendered
all of its shares of First Alert and received proceeds of $11.8 million and
recognized a gain of approximately $8.3 million. Net Distributable Proceeds of
$62.42 per unit were distributed to Limited Partners of record as of the date of
the closing of this transaction, April 2, 1998.
David Harkins, Scott A. Schoen, and Anthony J. DiNovi, officers of the
Investment Advisor to the Funds, served as directors of First Alert.
Anchor Advanced Products
On March 19, 1998 the Retirement Fund and affiliates of the Thomas H. Lee
Company sold their remaining holdings in Anchor Advanced Products. Pursuant to
this transaction the Retirement Fund sold 219,323 shares of Anchor Common Stock
for approximately $877,292 ($4.00 per share) and recognized a gain of $132,013.
Playtex Products Inc.
On May 27, 1998, Playtex Products Inc., ("Playtex"), completed a public
offering in the international markets of approximately 4 million shares of
Common Stock at a net price of $13.215 per share (the "Playtex Offering"). Of
the 4 million shares offered, approximately 3.3 million shares were offered by
affiliates of the Thomas H. Lee Company, including the Retirement Fund. As part
of the Playtex Offering, the Retirement Fund sold its remaining investment in
Playtex, consisting of approximately 183,560 shares of Common Stock. The
Retirement Fund received proceeds of $2.4 million and recognized a loss on the
sale of approximately $404,000. Net Distributable Proceeds were distributed to
Limited Partners of record as of May 27, 1998.
Thomas H. Lee, who is an Individual General Partner of the Funds and an
officer of the Investment Advisor, served as a director of Playtex.
Cinnabon International, Inc.
On October 16, 1998, Cinnabon International, Inc. ("Cinnabon") completed a
Plan of Merger with AFC Enterprises, Inc. ("AFC") whereby AFC acquired Cinnabon
by Merger ("Merger"). Pursuant to the Merger, the Retirement Fund received
proceeds of $4.5 million (which includes $360,714 of deferred interest) for its
entire interest in Cinnabon. Net Distributable Proceeds from the Merger of
$23.45 per Unit were distributed on November 16, 1998, to Limited Partners of
record as of October 16, 1998, the closing date of this transaction. The
Retirement Fund recognized a gain of $217,800 from the Merger.
Hills Stores Company
On November 13, 1998, Ames Department Stores, Inc. ("Ames") and Hills
jointly announced the signing of a definitive agreement in which Ames would
acquire Hills. On November 18, 1998 Ames commenced a tender offer for all the
outstanding shares of Common Stock and Series A Convertible Preferred Stock of
Hills, at a price of $1.50 per share. Pursuant to the offer, the deferred
contingent right is not transferrable. On December 16, 1998, the Retirement Fund
tendered all 278,245 of its shares and received proceeds of $417,368 on December
31, 1998 the date of completion of the tender offer. The Retirement Fund
recognized a loss of approximately $18.2 million.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits
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, 1998
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) Forms 8-K
None.
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 31th day of March,
1999.
ML-LEE ACQUISITION FUND
(RETIREMENT ACCOUNTS) II, L.P.
By: Mezzanine Investments II, L.P.
Managing General Partner
By: ML Mezzanine II Inc.,
its General Partner
/s/ Kevin K. Albert
Dated: March 31, 1999 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 31th day of March, 1999.
Signature Title
/s/ Kevin K. Albert ML Mezzanine II Inc.
Kevin K. Albert President and Director
(Principal Executive Officer of Registrant)
/s/ Vernon R. Alden Individual General Partner
Vernon R. Alden ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.
/s/ Joseph L. Bower Individual General Partner
Joseph L. Bower ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.
/s/ Stanley H. Feldberg Individual General Partner
Stanley H. Feldberg ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.
/s/ Thomas H. Lee Individual General Partner
Thomas H. Lee ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.
/s/ Robert J. Remick ML Mezzanine II Inc.
Robert J. Remick Vice President and Treasurer
(Principal Financial Officer of Registrant)
/s/ Sharon McKenzie ML Mezzanine II Inc.
Sharon McKenzie Vice President and Assistant Treasurer
(Principal Accounting Officer of Registrant)