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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 0-17383
ML-LEE ACQUISITION FUND II, L.P.
(Exact name of registrant as specified in its Governing Instruments)
Delaware 04-3028398
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
World Financial Center
South Tower - 14th Floor
New York, New York 10080-6114
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (212) 236-6562
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 II, L.P. ("Fund II") (formerly T.H. Lee
Acquisition Fund II, L.P.) was formed along with ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P. the ("Retirement Fund" collectively referred to
as the "Funds") and the Certificates of Limited Partnership were filed under the
Delaware Revised Uniform Limited Partnership Act on September 23, 1988. The
Funds' operations commenced on November 10, 1989.
Mezzanine Investments II, L.P. (the "Managing General Partner"), subject to
the supervision of the Individual General Partners, is responsible for
overseeing and monitoring Fund II's investments. The Managing General Partner is
a Delaware limited partnership in which ML Mezzanine II Inc. is the general
partner and Thomas H. Lee Advisors II, L.P. (the "Investment Adviser" to the
Funds) is the limited partner. The Individual General Partners are Vernon R.
Alden, Joseph L. Bower and Stanley H. Feldberg (the "Independent General
Partners") and Thomas H. Lee. ML Fund Administrators Inc. (the "Fund
Administrator") is an indirect wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. and is responsible for the day-to-day administrative services necessary for
the operations of Fund II.
Fund II elected to operate as a business development company under the
Investment Company Act of 1940, as amended ("Investment Company Act"). Fund II's
primary investment objective is to provide current income and capital
appreciation potential by investing in privately structured, friendly leveraged
buyouts and other leveraged transactions. Fund II pursued this objective by
investing primarily in subordinated debt and related equity securities issued in
conjunction with the "mezzanine financing" of friendly leveraged buyout
transactions, leveraged acquisitions and recapitalizations. Fund II may also
invest in "bridge investments" if it is believed that such investments would
facilitate the consummation of a mezzanine financing. Fund II considers this
activity to constitute a single industry segment of mezzanine financing
investing.
Fund II invested substantially all of its net proceeds in Mezzanine
Investments consisting of high-yield subordinated debt and/or preferred stock
linked with an equity participation, of middle market companies in connection
with friendly leveraged acquisitions, recapitalizations and other leveraged
financings. Fund II's Mezzanine Investments typically were issued in private
placement transactions which are generally subject to certain restrictions on
sales thereby limiting their liquidity. Fund II was fully invested as of
December 20, 1992, which was within 36 months from the date of the final closing
(after including the reserve for follow-on investments and exclusive of amounts
available for reinvestment). The reinvestment period for various amounts of
capital proceeds received during the last twelve months of Fund II's investment
period terminated at various times through December 18, 1993.
The Funds offered an aggregate of 1 million units of limited partnership
interest ("Units") at $1,000 per Unit with the Securities and Exchange
Commission pursuant to a Registration Statement on Form N-2 (File No. 33-25816),
effective September 6, 1989. The information under the heading "Risk and Other
Important Factors", "Estimated Use of Proceeds", "Mezzanine Financing",
"Investment Objectives and Policies" and "Conflicts of Interest" in the
Prospectus dated September 6, 1989, filed with the Securities and Exchange
Commission pursuant to Rule 497(b) under the Securities Act of 1933 (the
"Prospectus"), is incorporated herein by reference.
The offering of Units commenced on September 6, 1989. On November 10 and
December 20, 1989 and January 5, 1990, Fund II had its first, second and third
closings, respectively, at which time the Managing General Partner admitted
additional Limited Partners to Fund II representing 221,745 Units of limited
partnership interest. The additional Limited Partners' total capital
contributions were $205,114,126, which excludes discounts allowed of $3,119,607
and is net of sales commissions and advisory fees of $13,511,267. The Managing
General Partner's aggregate contribution was $500,000. Thomas H. Lee, as an
Individual General Partner, contributed $50,000. For their services as selling
agent, Fund II paid sales commissions to Merrill Lynch, Pierce, Fenner and Smith
Incorporated ("MLPF&S") in the amount of $10,800,450 (exclusive of discounts of
$2,504,250). In addition, Fund II paid a financial advisory fee to MLPF&S in the
amount of $2,710,817 (exclusive of discounts of $615,357).
Mezzanine and Bridge Investments
At December 31, 1998, Fund II had outstanding a total (at cost) of $41.1
million invested in Mezzanine Investments representing $17.1 million Managed and
$24.0 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.
Fund II's reinvestment period ended on December 21, 1993 and, accordingly,
no new investments were made after that date other than the funding of
investments which were committed to prior to that date.
REVIEW OF INVESTMENTS SOLD DURING 1998
--------------------------------------
Stanley Furniture Company
On January 6, 1998, Fund II sold its holdings of Common Stock in Stanley
Furniture Company ("Stanley") for $27 per share. In connection with the sale,
Fund II sold its remaining 3,461 shares of Stanley Common Stock and received net
proceeds of $93,447. These proceeds were distributed on May 15, 1998. Fund II
recognized a gain of $49,867 from this sale.
Anchor Advanced Products
On March 19, 1998 Fund II and affiliates of the Thomas H. Lee Company sold
their remaining holdings in Anchor. Pursuant to this transaction, Fund II sold
410,677 shares of Anchor Common Stock for approximately $1.6 million and
recognized a gain of $247,192. Net distributable proceeds were distributed
during the second quarter to Limited Partners of record as of March 19, 1998.
First Alert
On April 2, 1998, Sunbeam Corporation ("Sunbeam") acquired all of the
outstanding shares of First Alert Common Stock for $175 million ($5.25 per
share) by means of a tender offer (the 'Tender Offer'), and assume all of the
debt of First Alert. Pursuant to the Tender Offer, Fund II tendered all of its
shares of First Alert Common Stock. and received proceeds of approximately $10.8
million and recognized a gain of $7.5 million. Net distributable proceeds of
$48.62 per Unit were distributed on May 15, 1998 to Limited Partners of record
as of April 2, 1998.
Playtex Products Inc.
On May 27, 1998, Playtex Products Inc. 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 Fund II. As part of the Playtex Offering, Fund
II sold its remaining investment in Playtex, consisting of 343,726 shares of
Common Stock. Proceeds to Fund II from the sale totaled $4.5 million or $20.43
per Unit and were included in the distribution made on August 14, 1998. Fund II
recognized a loss of $756,348 from the Playtex Offering.
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, Fund II received proceeds of $6.9
million (which includes $551,180 of deferred interest)for its entire interest in
Cinnabon. Net Distributable Proceeds from the Merger of $28.69 per Unit were
distributed on November 16, 1998, to Limited Partners of record as of October
16, 1998, the closing date of this transaction. Fund II recognized a gain of
$332,200 from the Merger.
Hills Stores Company
On November 13, 1998, Ames Department Stores, Inc. ("Ames") and Hills
Stores Company ("Hills") jointly announced the signing of a definitive agreement
in which Ames would acquire Hills. Pursuant to the terms of the transaction,
Ames, through a wholly-owned subsidiary, on November 18, 1998 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. Ames will also share
with Hills' stockholders 25% of a potential recovery in the form of deferred
contingent cash rights with regard to litigation initiated by Hills against
certain of Hills' former directors. Pursuant to the offer, the deferred
contingent cash right is not transferrable. On December 16, 1998, Fund II
tendered all 521,048 of the Funds shares and received proceeds of $781,572 and
recognized a loss of approximately $34 million. These proceeds were distributed
on February 16, 1999.
REVIEW OF INVESTMENTS IN MANAGED COMPANIES
------------------------------------------
The following is a brief description of the companies in Fund II's Managed
Company portfolio at December 31, 1998:
Big V Supermarkets, Inc.
-------------------------
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 Fund II's
Non-Managed Company portfolio during the year ended December 31, 1998:
BioLease, Inc.
---------------
BioLease provides built-to-suit wet-laboratory space in the Boston area to
a consortium of emerging growth bio-technology companies sponsored by the
venture capital funds managed by Health Care Investment Corporation. Fund II's
investment in BioLease Common Stock was written down to zero, and the
Subordinated Notes were written down to approximately 50% of par value during
the year ended December 31, 1997. As of December 31, 1998 total net unrealized
depreciation was $412,000.
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. The fair value of this investment at
December 31, 1998 was $5.4 million which relects total unrealized depreciation
of $9.6 million.
FLA. Orthopedics, Inc.
---------------------
As of December 31, 1998, Fund II has valued its remaining investment in
FLA. Orthopedics, Inc. at zero, which resulted in cumulative unrealized
depreciation of $1.5 million.
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 $1.1 million from Stablex Canada Inc. of which $124,000
represented fourth quarter 1998 interest and $934,000 represented prior period
unpaid interest. Fund II is currently not accruing interest on this investment
and wrote down its investment in the Stablex Jr. Subordinated Note to zero
during the year ended December 31, 1997. Fund II's valuation reflects total
unrealized depreciation of approximately $4.0 million through December 31, 1998.
Competition
Fund II has completed its investment period and its reinvestment program
and, therefore, will no longer have to compete for investments. A majority of
the portfolio companies are participating in extremely competitive businesses.
Employees
Fund II has no employees. The Investment Adviser, subject to the
supervision of the Managing General Partner and the Individual General Partners,
manages and controls Fund II's investments. The Managing General Partner is
responsible for managing the Temporary Investments of Fund II. The Fund
Administrator performs administrative services for Fund II. The Fund
Administrator is a subsidiary of Merrill Lynch & Co, Inc., the parent of MLPF&S.
Item 2. Properties
Fund II does not own or lease any physical properties.
Item 3. Legal Proceedings
On April 10, 1998, Fund II and the Retirement Fund and (together with Fund
II, "the Funds") the parties to Fund II and the Retirement Fund 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
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, provided 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 $2.9
million of the Funds' limited partnership units from certain limited partners
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 Fund II
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 10,095. The Managing
General Partner and Thomas H. Lee as an Individual General Partner also hold
general partnership interests in Fund II.
MLPF&S reports estimated values of limited partnerships and other direct
investments on client account statements and no longer reports the general
partner's estimate of limited partnership net asset value to Unit holders.
Pursuant to MLPF&S guidelines, estimated values for limited partnership
interests originally sold by MLPF&S (such as Fund II's Units) are provided by
independent valuation services. MLPF&S clients may contact their MLPF&S
Financial Consultants to obtain a general description of the methodology used by
the independent valuation services to determine their estimates of value. The
estimated values provided by the independent services and the Fund's current net
asset value as estimated by the general partner are not market values and Unit
holders may not be able to sell their Units or realize either amount upon a sale
of their Units. In addition, Unit holders may not realize the independent
estimated value or Fund II's current net asset value upon the liquidation of the
Fund's assets over its remaining life.
Fund II distributes Distributable Cash from Investments and Distributable
Capital Proceeds in accordance with the terms of the Partnership Agreement.
Pursuant to the Partnership Agreement, transfers of Units are recognized on
the first day of the fiscal quarter after which the Managing General Partner has
been duly notified of a transfer pursuant to the Partnership Agreement. Until a
transfer is recognized, the limited partner of record (i.e. the transferor) will
continue to receive all of the benefits and burdens of ownership of Units
(including allocations of profit and loss and distributions), and any transferee
will have no rights to distributions of sale proceeds generated at any time
prior to the recognition of the transfer and assignment.
Accordingly, Distributable Cash from Investments for a quarter and
Distributable Capital Proceeds from sales after transfer or assignment have been
entered into, but before such transfer and assignment is recognized by the
Managing General Partner, will be payable to the transferor and not the
transferee.
Cash Distributions
Fund II has made quarterly distributions including both Distributable Cash
from Investments and Distributable Capital Proceeds. See Item 7 Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - the information in which is incorporated
herein by reference.
Item 6. Selected Financial Data
Supplemental Information Schedule
Selected Financial Data
For the Years Ended December 31,
TOTAL FUND INFORMATION: 1998 1997 1996 1995 1994
------------- ------------- -------------- ---------------- ---------------
Net Investment Income $ 2,822,809 $ 8,426,190 $ 11,023,166 $ 4,146,846 $ 7,816,305
Net Realized Gain (Loss) on Sales of
Investments (26,634,967) 92,648 5,894,176 8,372,906 63,853,148
Net Change in (Depreciation) Appreciation
on Investments 33,816,479 (6,129,993) (15,723,691) (30,559,313) (100,354,280)
Cash Distributions to Partners (a) 25,810,649 26,672,357 49,261,781 29,490,761 101,901,964
Net Assets 31,025,683 46,832,011 71,115,538 119,183,669 166,713,991
Cost of Mezzanine Investments 41,110,511 91,989,046 103,597,216 135,797,397 144,603,700
Total Assets 31,176,545 47,105,834 71,678,160 120,346,488 167,805,653
PER UNIT OF LIMITED PARTNERSHIP INTEREST:
Investment Income $ 17.84 $ 36.43 $ 50.33 $ 32.05 $ 49.88
Expenses (6.81) (7.79) (15.11) (19.71) (19.70)
----------- ----------- ----------- ----------- ------------
Net Investment Income $ 11.03 $ 28.64 $ 35.22 $ 12.34 $ 30.18
=========== =========== =========== =========== ============
Net Realized Gain (Loss) on Sales of
Investments $ (124.73) $ .42 $ 14.47 $ 34.23 $ 225.61
Net Change in (Depreciation) Appreciation
on Investments 152.12 (27.58) (70.73) (137.47) (451.45)
Cash Distributions 109.19 (a) 106.00 192.87 112.31 413.35
Cumulative Cash Distributions 1,267.87 1,158.68 1,052.68 859.81 747.50
Net Asset Value 137.49 209.93 314.44 528.63 730.09
(a) Includes $15,388,897 million or $69.40 per Limited Partnership Unit return
of Capital from the sale of Portfolio Investments during 1998.
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 $222,295,000 in the public offering of ML-Lee Acquisition Fund II, L.P.
("Fund II"), the final closing for which was held on December 20, 1989.
At December 31, 1998, Fund II had outstanding a total (at cost) of $41.1
million invested in Mezzanine Investments representing $17.1 million Managed and
$24.0 million Non-Managed portfolio investments. The remaining proceeds were
invested in Temporary Investments primarily comprised of commercial paper with
maturities of less than one month.
Fund II invested substantially all of its net proceeds in Mezzanine
Investments, consisting of high-yield subordinated debt and/or preferred stock
linked with an equity participation, of middle market companies in connection
with friendly leveraged acquisitions, recapitalizations and other leveraged
financings. Fund II's Mezzanine Investments typically were issued in private
placement transactions which are generally subject to certain restrictions on
sales thereby limiting their liquidity. Fund II was fully invested as of
December 20, 1992, which was within 36 months from the date of the final closing
(after including the reserve for follow-on investments and exclusive of amounts
available for reinvestment). The reinvestment period for various amounts of
capital proceeds received during the last twelve months of Fund II's investment
period terminated at various times through December 18, 1993.
As provided by the Partnership Agreement, the Managing General Partner of
Fund II is entitled to receive an incentive distribution ("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. 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 $24.9 million for Fund II. As of March 23, 1999, the
remaining reserve balance was $3.1 million due to follow-on investments in Petco
Animal Supplies, Fitz and Floyd, Fine Clothing, Inc., Hills Stores, Ghirardelli
Holdings and Anchor Advanced Products. Additionally, $8.29 million of the
reserve has been returned to the partners. The level of the reserve was based
upon an analysis of potential follow-on investments in specific portfolio
companies that may become necessary to protect or enhance Fund II's existing
investment.
All net proceeds from the sale of Mezzanine Investments received by Fund II
in the future will be distributed to its partners unless applied to or set aside
for expenses.
The proportion of distributions provided by net investment income has
decreased from prior years due primarily to increased sales and redemptions of
Mezzanine Investments and the 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, if any, 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, which are estimated to be
less than one dollar per Limited Partnership Unit each quarter. Distributions
therefore are expected to vary significantly in amount and may not be made in
every quarter.
Investment in High-Yield Securities
Fund II invested primarily in subordinated debt and preferred stock
securities ("High-Yield Securities"), generally linked with an equity
participation, issued in conjunction with the mezzanine financing of privately
structured, friendly leveraged acquisitions, recapitalizations and other
leveraged financings. High-Yield Securities are debt and preferred equity
securities that are unrated or are rated by Standard & Poor's Corporation as BB
or lower and by Moody's Investor Services, Inc. as Ba or lower. Risk of loss
upon default by the issuer is significantly greater with High-Yield Securities
than with investment grade securities because High-Yield Securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Also, these issuers usually have high levels of indebtedness and are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates, than investment grade issuers. Most of these securities are
subject to resale restrictions and generally there is no quoted market for such
securities.
Although Fund II cannot eliminate the risks associated with its investments
in High-Yield Securities, it has established risk management policies. Fund II
subjected each prospective investment to rigorous analysis and made only those
investments that were recommended by the Investment Advisor and that met Fund
II's investment guidelines or that had otherwise been approved by the Managing
General Partner and the Independent General Partners. Fund II's investments were
measured against specified Fund II investment and performance guidelines. To
limit the exposure of Fund II's capital in any single issuer, Fund II limited
the amount of its investment in a particular issuer. Fund II's Investment
Adviser also continually monitors portfolio companies in order to minimize the
risks associated with its investments in High-Yield Securities.
The Investment Adviser reviews each portfolio company's financial
statements quarterly. In addition, the Investment Adviser routinely reviews and
discusses financial and operating results with the company's management and
where appropriate, attends board of director meetings. In some cases,
representatives of the Investment Adviser, acting on behalf of the Funds (and
affiliated investors where applicable), serve as one or more of the directors on
the boards of portfolio companies. Fund II may, from time to time, make
follow-on investments to the extent necessary to protect or enhance its existing
investments.
Results of Operations
Investment Income and Expenses
The investment income from operations for the year consists primarily of
interest and discount income earned on the investment of Mezzanine Investments
and short-term money market instruments.
For the year ended December 31, 1998, Fund II had investment income of $4.3
million, as compared to $10.2 million and $14.4 million for the comparable years
ended 1997 and 1996, respectively. The decrease in 1998 investment income as
compared to 1997 and 1996 was due to the sale of income producing portfolio
companies in 1998.
Major expenses for the period consisted of Investment Advisory Fees and
Fund Administration Fees.
The Investment Adviser and Fund Administrator both receive their
compensation on a quarterly basis. The total Investment Advisory Fees paid by
Fund II to the Investment Adviser for the years ended December 31, 1998, 1997
and 1996 were $653,956, $759,160, and $988,882, 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 $1.2 million for Fund II and the Retirement Fund on a
combined basis. The decrease in Investment Advisory Fees are a direct result of
sales of investments, returns of capital distributed to partners and realized
losses on investments.
Beginning in November of 1997, the Fund Administration Fee changed to an
annual amount of $400,000 for Fund II and the Retirement Fund on a combined
basis, plus 100% of all reimbursable expenses (as defined below) incurred by
Fund II. 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, Fund II incurred $294,846, $140,157 and
$139,158, respectively, in reimbursable expenses.
The Fund Administration Fees paid to the Fund Administrator for the years
ended December 31, 1997 and 1996 were calculated at an annual rate of 0.45% of
the excess of net offering proceeds, less 50% of capital reductions and 50% of
realized losses. The decrease in Fund Administration Fees were a direct result
of sales of investments, returns of capital distributed to partners and realized
losses on investments. For the years ended December 31, 1998, 1997 and 1996,
Fund Administration Fees were $222,000, $569,224, and $675,250, respectively.
Pursuant to the administrative services agreement between Fund II 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
Fund II was reimbursable to the Fund Administrator.
Legal and Professional Fees were 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 $247,270
$152,000, and $1.3 million, respectively. These expenses are attributable to
legal fees incurred and advanced on behalf of indemnified defendants as well as
fees incurred directly by Fund II in connection with the aforementioned
litigation proceedings.
For the year ended December 31, 1998, Fund II had net investment income of
$2.8 million as compared to $8.4 million for the same period in 1997 and $11
million for the same period in 1996. The decrease in 1998 net investment income
as compared to 1997 and 1996 was due to the sale of income producing portfolio
companies in 1998.
Net Assets
Fund II's net assets decreased by $15.8 million during the year ended
December 31, 1998, due to the payment of cash distributions to partners of $25.8
million ($15.4 million of the cash distributions paid was return of capital from
the sales of portfolio investments) and net unrealized appreciation of $33.8
million, partially offset by net investment income of $2.8 million and realized
losses of $26.6 from the sales of Mezzanine Investments.
Unrealized Appreciation and Depreciation on Investments
For the year ended December 31, 1998, Fund II recorded net unrealized
appreciation of $33.8 million all of which was related to the reversal of net
unrealized depreciation in market value of publicly traded securities sold in
1998. This compares to the reversal of net unrealized depreciation of $6.1
million for 1997 of which $3.3 million was related to net depreciation in market
value of publicly traded securities. Fund II's cumulative net unrealized
depreciation on investments as of December 31, 1998 totaled $15.6 million.
For the year ended December 31, 1998, Fund II recorded net unrealized
depreciation of $15.7 million of which $12.5 million was related to net
unrealized depreciation in market value of publicly traded securities.
The Managing General Partner and the Investment Adviser review the
valuation of Fund II's portfolio investments that do not have a readily
ascertainable market value on a quarterly basis with final approval from the
Individual General Partners. Portfolio investments are valued at original cost
plus 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 92.4% of Fund II's investments (at cost) are invested in
private placement securities for which there are no ascertainable market values.
Although the Managing General Partner and Investment Adviser use their best
judgment in estimating the fair value of these investments, there are inherent
limitations in any estimation technique. Therefore, the fair value estimates
presented herein are not necessarily indicative of the amount which Fund II
could realize in a current transaction. As of December 31, 1998, Fund II's
investment in Big V Supermarkets Inc. represents approximately 60% of Fund II's
fair value.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of December
31, 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, Fund II recorded realized losses from
investments of $26.6 million as compared to $92,648 and $5.9 million for the
years ended December 31, 1997 and 1996, respectively. For additional
information, please refer to the 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
$1,325,586 from Mezzanine Investments, net investment income of $11,942 from
Temporary Investments and Net Distributable Capital proceeds from the sale of
Hills of $781,572 (which is all return of capital). The total amount distributed
to Limited Partners was $1,711,478 or $7.72 per Unit, which was paid on February
16, 1999. The Managing General Partner received a total of $3,859 with respect
to its interest in Fund II and $404,244 in MGP Distributions. Thomas H. Lee, as
an Individual General Partner, received $386 with respect to his interest in
Fund II.
Because most of Fund II's debt holdings were previously sold or redeemed,
remaining portfolio interest income expected to be received by Fund II may not
be sufficient to cover Fund II's expenses in the future. As a result, any
interest income received will be used to pay Fund II 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, 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 Fund II quarterly, only upon the
satisfactory completion and acceptance of Fund II's transfer documents. There
can be no assurances that such transfer will be effected before any specified
date. Additionally, pursuant to the Partnership Agreement, until a transfer is
recognized, the Limited Partner of record (i.e. the transferor) is entitled to
receive all the benefits and burdens of ownership of Units, and any transferee
has no rights to distributions of sale proceeds generated at any time prior to
the recognition of the transfer and assignment. Accordingly, Distributable Cash
from Investments for a quarter and Distributable Capital Proceeds from sales
after transfer or assignment have been entered into, but before such transfer
and assignment is recognized, would be payable to the transferor and not the
transferee.
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, Fund II 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. Fund II has been working
with third-party software vendors to ensure that computer programs utilized by
Fund II are Y2K compliant. In addition, Fund II 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 Fund
II'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 Fund II has not finally determined the cost associated with its
Year 2000 readiness efforts, Fund II 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 Fund II's systems rely will be timely
converted, or that a failure to convert by another company or a conversion that
is incompatible with Fund II's systems would not have a material adverse effect
on Fund II's business, financial condition or results of operations.
Item 7A. Quantitative and Qualitative Disclosure About Market
Risk
As of December 31, 1998, Fund II maintains a portion of its cash
equivalents in financial instruments with original maturities of three months or
less. These financial instruments are subject to interest rate risk, and will
decline in value if interest rates increase. A significant increase or decrease
in interest rates would not have a material effect on Fund II's financial
position.
Cash Distributions
The following table represents distributions approved by the Individual
General Partners of ML-Lee Acquisition Fund II, L.P. since inception (November
10, 1989):
Total Limited Per Unit Managing Individual
Distributed Partners Per Return of General Incentive General
Cash(a) Amount Unit Capital Partner Fee(b) Partner
------------ ------------ -------- ---------- ----------- ---------- ----------
Fourth Quarter 1989 $1,224,768 $1,221,692 $ 6.27 $ - $ 2,796 $ - $ 280
First Quarter 1990 3,776,596 3,767,253 17.00 - 8,494 - 849
Second Quarter 1990 4,943,920 4,751,996 21.43 - 11,120 179,692 1,112
Third Quarter 1990 3,487,811 3,479,179 15.69 - 7,847 - 785
Fourth Quarter 1990 6,045,031 5,705,499 25.73 - 13,598 324,574 1,360
First Quarter 1991 2,889,835 2,882,685 13.00 - 6,500 - 650
Second Quarter 1991 4,216,058 4,205,629 19.56 - 9,481 - 948
Third Quarter 1991 2,936,520 2,929,252 13.21 - 6,607 - 661
Fourth Quarter 1991 3,438,901 3,430,395 15.47 - 7,733 - 773
First Quarter 1992 3,599,446 3,590,052 16.19 - 8,584 - 810
Second Quarter 1992 3,829,652 3,820,667 17.23 - 8,124 - 861
Third Quarter 1992 2,905,394 2,898,207 13.07 - 6,534 - 653
Fourth Quarter 1992 3,027,660 3,020,167 13.62 - 6,812 - 681
First Quarter 1993 21,642,642 21,589,093 97.36 85.75 48,681 - 4,868
Second Quarter 1993 1,442,695 1,439,125 6.49 - 3,245 - 325
Third Quarter 1993 5,074,991 5,062,438 22.83 2.45 11,412 - 1,141
Fourth Quarter 1993 11,803,865 11,774,660 53.10 1.33 26,550 - 2,655
First Quarter 1994 16,087,488 16,047,686 72.37 59.42 36,184 - 3,618
Second Quarter 1994 4,214,710 4,204,285 18.96 12.24 9,477 - 948
Third Quarter 1994 1,298,201 1,294,991 5.84 3.42 2,918 - 292
Snapple Distribution
on 12/15/94 68,497,700 58,336,675 263.08 9.70 164,845 9,979,695 16,485
Fourth Quarter 1994 375,092 241,702 1.09 - 543 132,793 54
EquiCredit Distribution
on 2/14/95 7,276,582 6,359,647 28.68 2.68 16,826 898,426 1,683
First Quarter 1995 6,731,899 5,505,928 24.83 23.77 12,418 1,212,311 1,242
Second Quarter 1995 3,477,482 2,084,403 9.40 .57 6,215 1,386,242 622
Third Quarter 1995 2,019,088 1,124,247 5.07 4.50 2,536 892,051 254
Sun Pharmaceuticals
Distribution on 12/11/95 9,610,616 9,587,798 43.24 37.42 20,744 - 2,074
Fourth Quarter 1995 333,445 166,765 .75 - 752 165,853 75
CST Distribution
on 5/03/96 25,825,311 21,023,644 94.81 63.04 47,165 4,749,785 4,717
First Quarter 1996 1,766,006 1,263,947 5.70 - 2,849 498,925 285
Ghirardelli Distribution
on 5/03/96 9,409,746 9,386,466 42.33 32.57 21,164 - 2,116
Second Quarter 1996 11,494,950 10,745,763 48.46 20.09 24,229 722,535 2,423
Third Quarter 1996 432,323 181,831 .82 - 410 250,041 41
Fourth Quarter 1996 1,833,044 1,226,250 5.53 5.04 2,764 603,754 276
First Quarter 1997 696,267 79,828 .36 .01 180 616,241 18
Anchor Distribution
on 5/15/97 19,963,238 18,158,698 81.89 66.06 40,946 1,759,500 4,095
Second Quarter 1997 3,203,136 2,818,379 12.71 7.43 6,353 377,769 635
Third Quarter 1997 1,304,854 1,221,815 5.51 4.49 2,757 80,006 276
Fourth Quarter 1997 483,244 370,314 1.67 .20 836 112,010 84
First Quarter 1998 2,169,871 2,044,489 9.22 6.47 4,610 120,311 461
First Alert Distribution
on May 15, 1998 10,807,982 10,781,242 48.62 14.94 24,309 - 2,431
Second Quarter 1998 4,808,219 4,607,861 20.78 20.43 10,391 188,928 1,039
Third Quarter 1998 242,195 46,566 0.21 - 106 195,512 11
Cinnabon Distribution on
November 16, 1998 6,928,824 6,361,864 28.69 27.19 14,345 551,180 1,435
Fourth Quarter 1998 2,120,360 1,711,871 7.72 3.52 3,859 404,244 386
------------- ------------ --------- -------- --------- ----------- --------
Totals $ 309,697,658 $282,552,944 $1,275.59 $ 514.73 $ 674,849 $26,402,378 $ 67,488
============= ============ ========= ======== ========= =========== ========
(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 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 II, L.P.
In our opinion, the accompanying statements of assets, liabilities and
partners' capital, including the schedule of portfolio investments, and the
related statements of operations, of changes in net assets, of cash flows, and
of changes in partners' capital present fairly, in all material respects, the
financial position of ML-Lee Acquisition Fund II, L.P. (the "Fund") at December
31, 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 $25.6 million at
December 31, 1998 (82.5% 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 January 5,
2000. 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 II, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
Year Ended Year Ended
December 31, December 31,
1998 1997
------------- -------------
Assets:
Investments - Notes 2,4,5
Portfolio Investments at fair value
Managed Companies (amortized cost $17,144
at December 31, 1998 and $68,023 at December 31, 1997) $ 17,144 $ 34,206
Non-Managed Companies (amortized cost $23,967
at December 31, 1998 and at December 31, 1997) 8,440 8,440
Temporary Investments, at amortized cost (cost $3,401
at December 31, 1998 and $3,612 at December 31, 1997) 3,408 3,627
Cash 5 245
Accrued Interest & Other Receivable - Note 2 1,395 257
Receivable for Investment Sold 782 --
Due from Affiliate -- 328
Prepaid Expenses 3 4
------------- -------------
Total Assets $ 31,177 $ 47,107
============= =============
Liabilities and Partners' Capital:
Liabilities
Legal and Professional Fees Payable $ 30 $ 100
Reimbursable Administrative Expenses Payable Note 8 22 11
Independent General Partners' Fees Payable - Note 9 18 12
Deferred Interest Income - Note 2 81 151
------------- -------------
Total Liabilities 151 274
------------- -------------
Partners' Capital - Note 2
Individual General Partner 13 15
Managing General Partner 525 266
Limited Partners (221,745 Units) 30,488 46,552
------------- -------------
Total Partners' Capital 31,026 46,833
------------- -------------
Total Liabilities and Partners' Capital $ 31,177 $ 47,107
============= =============
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND 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 $ 3,933 $ 4,354 $ 13,462
Discount, Dividend & Other Income 403 5,803 920
------------- ------------- -------------
Total Income 4,336 10,157 14,382
------------- ------------- -------------
Expenses:
Investment Advisory Fee - Note 7 654 759 989
Fund Administration Fee - Note 8 222 570 675
Reimbursable Administrative Expenses - Note 8 295 140 139
Legal and Professional Fees 247 152 1,345
Independent General Partners' Fees and Expenses - Note 9 91 106 207
Insurance Expense 4 4 4
------------- ------------- -------------
Total Expenses 1,513 1,731 3,359
------------- ------------- -------------
Net Investment Income 2,823 8,426 11,023
------------- ------------- -------------
Net Realized Gain (Loss) on Investments - Note 4 and Schedule 1 (26,635) 93 5,895
------------- ------------- -------------
Net Change in Unrealized Appreciation (Depreciation)
on Investments: Note 5 and Schedule 2
Publicly Traded Securities 33,816 (3,342) (13,952)
Nonpublic Securities -- (2,788) (1,772)
------------- ------------- -------------
Subtotal 33,816 (6,130) (15,724)
------------- ------------- -------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 10,004 2,389 1,194
------------- ------------- -------------
Less: Earned MGP Distributions to Managing General Partner (1,460) (2,078) (5,366)
------------- ------------- -------------
Net Increase (Decrease) Available For Pro-Rata
Distribution to All Partners $ 8,544 $ 311 $ (4,172)
============= ============= =============
See the Accompanying Notes to Financial Statements
ML-LEE ACQUISITION FUND 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 $ 2,823 $ 8,426 $ 11,023
Net Realized Gain (Loss) on Investments (26,635) 93 5,895
Net Change in Unrealized Appreciation
(Depreciation) from Investments 33,816 (6,130) (15,724)
------------- ------------- -------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 10,004 2,389 1,194
Cash Distributions to Partners (25,811) (26,671) (49,262)
------------- ------------- -------------
Total Decrease (15,807) (24,282) (48,068)
Net Assets:
Beginning of Year 46,833 71,115 119,183
------------- ------------- -------------
End of Year $ 31,026 $ 46,833 $ 71,115
============= ============= =============
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
------------- ------------- -------------
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows From Operating Activities:
Interest, Dividends, Discount and Other Income $ 3,135 $ 10,677 $ 15,268
Legal and Professional Fees (317) (207) (1,549)
Investment Advisory Fee (654) (759) (989)
Fund Administration Fee (222) (570) (675)
Independent General Partners' Fees and Expenses (84) (128) (240)
Reimbursable Administrative Expenses (284) (174) (151)
(Purchase) Sale of Temporary Investments, Net 210 6,588 (175)
Purchase of Portfolio Companies -- (2,420) -
Proceeds from Sales of Portfolio Company Investments 23,462 14,117 37,901
Insurance Expense (4) (4) (4)
------------- ------------- -------------
Net Cash Provided by Operating Activities 25,242 27,120 49,386
------------- ------------- -------------
Cash Flows from Financing Activities:
Cash Distributions to Partners (25,482) (27,000) 49,262
------------- ------------- -------------
Net Cash Applied to Financing Activities (25,482) (27,000) 49,262
------------- ------------- -------------
Net Increase (Decrease) in Cash (240) 120 124
Cash at Beginning of Year 245 125 1
------------- ------------- -------------
Cash at End of Period $ 5 $ 245 $ 125
============= ============= =============
Reconciliation of Net Investment Income
to Net Cash Provided by Operating Activities
Net Investment Income $ 2,823 $ 8,426 $ 11,023
------------- ------------- -------------
Adjustments to Reconcile Net Investment Income
to Net Cash Provided by Operating Activities
Decrease in Investments 51,089 18,195 32,015
(Increase) in Receivable for Investments Sold (782) -- --
(Increase) Decrease in Accrued Interest,
Dividend and Discount Receivable (1,201) 520 702
Decrease in Prepaid Expenses 1 -- --
Decrease in Legal and Professional Fees Payable (70) (59) (204)
Increase (Decrease) in Reimbursable Administrative Expenses Payable 11 (34) (12)
Increase (Decrease) in Independent General Partners' Fees Payable 6 (21) (33)
Net Realized Gain (Loss) on Sales of Investments (26,635) 93 5,895
------------- ------------- -------------
Total Adjustments 22,419 18,694 38,363
------------- ------------- -------------
Net Cash Provided by Operating Activities $ 25,242 $ 27,120 $ 49,386
============= ============= =============
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
Individual Managing
General General Limited
Partner Partner Partners Total
------------- ------------- ------------- -------------
Partners' Capital at January 1, 1996 $ 29 $ 1,932 $ 117,222 $ 119,183
Allocation of Net Investment Income 2 3,211 7,810 11,023
Allocation of Net Realized Gain on Investments 1 2,684 3,210 5,895
Allocation of Net Change in Unrealized
Depreciation From Investments (3) (35) (15,686) (15,724)
Cash Distributions to Partners (10) (6,424) (42,828) (49,262)
------------- ------------- ------------- -------------
Partners' Capital at December 31, 1996 $ 19 $ 1,368 $ 69,728 $ 71,115
------------- ------------- ------------- -------------
Partners' Capital at January 1, 1997 $ 19 $ 1,368 $ 69,728 $ 71,115
Allocation of Net Investment Income 2 2,073 6,351 8,426
Allocation of Net Realized Gain (Loss) on Investments -- -- 93 93
Allocation of Net Change in Unrealized
Depreciation From Investments (1) (14) (6,115) (6,130)
Cash Distributions to Partners (5) (3,161) (23,505) (26,671)
------------- ------------- ------------- -------------
Partners' Capital at December 31, 1997 $ 15 $ 266 $ 46,552 $ 46,833
------------- ------------- ------------- -------------
Partners' Capital at January 1, 1998 $ 15 $ 266 $ 46,552 $ 46,833
Allocation of Net Investment Income 1 376 2,446 2,823
Allocation of Net Realized Gain (Loss) on Investments (6) 1,030 (27,659) (26,635)
Allocation of Net Change in Unrealized
Depreciation From Investments 8 76 33,732 33,816
Cash Distributions to Partners (5) (1,223) (24,583) (25,811)
------------- ------------- ------------- -------------
Partners' Capital at December 31, 1998 $ 13 $ 525 $ 30,488 $ 31,026
============= ============= ============= =============
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost(g) (Note 2) Investments
MEZZANINE INVESTMENTS
MANAGED COMPANIES
BIG V SUPERMARKETS, INC. (a)
$13,037 Big V Supermarkets, Inc., Sr. Sub. Nt. 14.14% due 03/15/01(b) 12/27/90 $ 13,037 $ 13,037
117,333 Shares Big V Holding Corp., Common Stock(c) 12/27/90 4,107 4,107
(16.6% of fully diluted common equity) (f) --------------------------------
17,144 17,144 59.13
--------------------------------
COLE NATIONAL CORPORATION
13,161 Warrants Cole National Corporation, Common Stock Purchase Warants (c) 9/26/90 - -
(0.0% of fully diluted common equity
assuming exercise of warrants)
$1,393 13% Sr. Secured Bridge Note
Purchased 9/25/90 $1,393
Repaid 11/15/90 $1,393 -------------------------------
Realized Gain $ 0 - - 0.00
-------------------------------
TOTAL INVESTMENT IN MANAGED COMPANIES $17,144 17,144 59.13
-------------------------------
NON-MANAGED COMPANIES
BIOLEASE, INC.- Note 5
$784 BioLease, Inc., 13% Sub. Nt. due 06/06/04 (b) 06/08/94 676 392
96.56 Shares BioLease, Inc., Common Stock (c) 06/08/94 94 -
10,014 Warrants Biotransplant, Inc., Common Stock Purchase Warrants(c) 06/08/94 14 14
-------------------------------
784 406 1.40
-------------------------------
FITZ AND FLOYD -Note 5
$2,420 Fitz and Floyd, 12% Sub. Nt. due 04/15/04 (b) 04/11/97 2,420 2,420
8,470 Shares Fitz and Floyd, Series A Preferred Stock (c) 04/11/97 12,619 3,024
1,324,508 Shares Common Stock
Purchased various $ 20
Surrendered May 1996 $ -
Realized Loss $ (20)
$10,281 Sr. Sub. Note
$2,419 Sr. Sub. Note
Purchased various $12,619
Exchanged 04/14/97
8,470 Sh Series A Preferred Stock and
51,245 Shares Common Stock $12,619
Realized Gain $ 0
Total Realized Loss $ (20) -------------------------------
15,039 5,444 18.78
-------------------------------
FLA. ORTHOPEDICS, INC. - Notes 5,6
19,366 Shares FLA. Holdings, Inc. Series B Preferred Stock (a) (c) (e) 08/02/93 1,513 -
3,822 Warrants FLA. Holdings, Inc. Common Stock Purchase Warrants (a) (c) (e) 08/02/93 - -
$4,842 12.5% Subordinated Note
Purchased 08/02/93 $ 4,842
Surrendered 08/16/96 $ 0
Realized Loss $(4,842)
121,040 Common Stock
Purchased 08/02/93 $ 1,513
Exchanged 08/02/96
19,366 Series B Preferred Stock $ 1,513
Realized Gain $ 0
Total Realized Loss $(4,842)
-------------------------------
1,513 - 0.00
-------------------------------
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost(g) (Note 2) Investments
SORETOX - Notes 5,6,13
$3,503 Stablex Canada, Inc., Sub. Nt. 10% due 06/30/07(b)(d)(e) 06/29/95 $ 3,503 $ 2,590
$3,128 Stablex Canada, Inc., Jr. Sub. Nt. 11% due 06/30/09(b)(d)(e) 06/29/95 3,128 0
2,004 Warrants Seaway TLC, Inc. Common Stock Purchase Warrants(c) 12/06/91 0 0
-----------------------------
6,631 2,590 8.93
-----------------------------
TOTAL INVESTMENT IN NON-MANAGED COMPANIES $ 23,967 $ 8,440 29.11
=============================
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes Various 22,764 18,439 63.60
Preferred Stock, Common Stock, Warrants and Stock Rights Various 18,347 7,145 24.64
-----------------------------
TOTAL MEZZANINE INVESTMENTS $ 41,111 $25,584 88.24
=============================
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$3,410 Ford Motor Credit, 5.53% due 1/4/99 12/18/98 3,401 3,408
-----------------------------
TOTAL INVESTMENT IN COMMERCIAL PAPER 3,401 3,408 11.76
-----------------------------
TOTAL TEMPORARY INVESTMENTS $ 3,401 $ 3,408 11.76
-----------------------------
TOTAL INVESTMENT PORTFOLIO $ 44,512 $ 28,992 100.00%
=============================
(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 orignal cost and excludes accretion of discount of $33 for
Mezzanine Investments and $7 for Temporary Investments.
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Organization and Purpose
ML-Lee Acquisition Fund II, L.P. ("Fund II") (formerly T.H. Lee Acquisition
Fund II, L.P.) was formed along with ML-Lee Acquisition Fund (Retirement
Accounts) II, L.P. (the "Retirement Fund"; collectively referred to as the
"Funds") and the Certificates of Limited Partnership were filed under the
Delaware Revised Uniform Limited Partnership Act on September 23, 1988. The
Funds' operations commenced on November 10, 1989.
Mezzanine Investments II, L.P. (the "Managing General Partner"), subject to
the supervision of the Individual General Partners, is responsible for
overseeing and monitoring of Fund II's investments. The Managing General Partner
is a Delaware limited partnership in which ML Mezzanine II Inc. is the general
partner and Thomas H. Lee Advisors II, L.P., the Investment Adviser to the
Funds, is the limited partner. The Individual General Partners are Vernon R.
Alden, Joseph L. Bower and Stanley H. Feldberg (the "Independent General
Partners") and Thomas H. Lee.
Fund II elected to operate as a business development company under the
Investment Company Act of 1940. Fund II's primary investment objective is to
provide current income and capital appreciation potential by investing in
privately-structured, friendly leveraged buyouts and other leveraged
transactions. Fund II pursues this objective by investing primarily in
subordinated debt and related equity securities issued in conjunction with the
"mezzanine financing" of friendly leveraged buyout transactions, leveraged
acquisitions and leveraged recapitalizations. Fund II 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, Fund II will terminate no later than
January 5, 2000, 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 Fund II. Fund II 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 Fund II are maintained
using the accrual method of accounting. For federal income tax reporting
purposes, the results of operations are adjusted to reflect statutory
requirements arising from book to tax differences. The preparation of financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts and
disclosures in the financial statements. Actual reported results could vary from
these estimates.
Valuation of Investments
Securities for which market quotations are readily available are valued by
reference to such market quotation using the last trade price (if reported) or
the last bid price for the period. For securities without a readily
ascertainable market value (including securities restricted as to resale for
which a corresponding publicly traded class exists), fair value is determined,
on a quarterly basis, in good faith by the Managing General Partner and the
Investment Adviser with final approval from the Individual General Partners of
Fund II. For privately issued securities in which Fund II typically invests, the
fair value of an investment is generally its original cost plus accrued value in
the case of original issue discount or deferred pay securities. Such investments
generally will be revalued if there is an objective basis for doing so at a
different price. Investments will be written down in value if the Managing
General Partner and Investment Adviser believe adverse credit developments of a
significant nature require a write-down of such securities. Investments will be
written up in value only if there has been an arms'-length third party
transaction to justify the increased valuation. Although the Managing General
Partner and Investment Adviser use their best judgment in estimating the fair
value of these investments, there are inherent limitations in any estimation
technique. Therefore, the fair value estimates presented herein are not
necessarily indicative of the amount which Fund II could realize in a current
transaction. Future confirming events will also affect the estimates of fair
value and the effect of such events on the estimates of fair value could be
material.
Temporary Investments with maturities of less than 60 days are stated at
amortized cost, which approximates market value.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of December
31, 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 the portfolio 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 Fund II's portfolio companies are recorded at face value (which approximates
accrued interest), unless the Investment Adviser and the Managing General
Partner determine that there is no reasonable assurance of collecting the full
principal amounts of such securities. As of December 31, 1998 and December 31,
1997, Fund II had in its portfolio of investments $441,900 of payment-in-kind
notes which excludes $1.8 million of payment-in-kind notes received from notes
placed on non-accrual status.
Investment Transactions
Fund II records investment transactions on the date on which it obtains an
enforceable right to demand the securities or payment therefore. Fund II 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 Fund II upon the funding of Mezzanine or Bridge
Investments are treated as deferred interest income and amortized over the
maturity of such investments.
Partners' Capital
Partners' Capital represents Fund II's equity divided in proportion to the
Partners' Capital Contributions and does not represent the Partners' Capital
Accounts. Profits and losses, as defined in the Partnership Agreement, when
realized, are allocated in accordance with the provisions of the Partnership
Agreement summarized in Note 3.
3. Allocations of Profits and Losses
Pursuant to the Partnership Agreement, all profits from Temporary
Investments generally will be allocated 99.75% to the Limited Partners, 0.23% to
the Managing General Partner and 0.02% to the Individual General Partner.
Profits from Mezzanine Investments will, in general, be allocated as follows:
first, if the capital accounts of any partners have negative balances, to
such partners in proportion to the negative balances in their capital
accounts until the balances of all such capital accounts equal zero,
second, 99.75% to the Limited Partners, 0.23% to the Managing General
Partner and 0.02% to the Individual General Partner until the sum allocated
to the Limited Partners equals any previous losses allocated together with a
cumulative Priority Return of 10% on the average daily amount in Mezzanine
Investments, and any outstanding Compensatory Payments,
third, 69.75% to the Limited Partners, 30.225% to the Managing General
Partner and 0.025% to the Individual General Partner until the Managing
General Partner has received 20.281% of the total profits allocated,
thereafter, 79.75% to the Limited Partners, 20.225% to the Managing General
Partner and 0.025% to the Individual General Partner.
4. Investment Transactions
On January 6, 1998, Fund II sold its remaining holdings of common stock in
Stanley Furniture Company, Inc. The common stock was sold pursuant to a Form S-3
Registration Statement, which was declared effective by the Securities and
Exchange Commission on December 23, 1997. In connection with the sale, Fund II
sold its remaining 3,461 shares of common stock and received net proceeds of
$93,447 or $27 per share. Fund II recognized a gain of $49,867 from this sale.
On March 19, 1998, Fund II and affiliates of the Thomas H. Lee Company sold
their remaining holdings in Anchor Advanced Products. Pursuant to this
transaction, Fund II sold 410,677 shares of Anchor Common Stock for
approximately $1.6 Million ($4.00 per share) and recognized a gain of $247,192.
On April 2, 1998, Sunbeam Corporation ("Sunbeam") acquired all of the
outstanding shares of First Alert Common Stock for $175 million ($5.25 per
share) by means of a tender offer (the 'Tender Offer'), and assume all of the
debt of First Alert. Pursuant to the Tender Offer, Fund II tendered all of its
shares of First Alert Common Stock. and received proceeds of approximately $10.8
million and recognized a gain of $7.5 million. Net distributable proceeds of
$48.62 per Unit were distributed on May 15, 1998 to Limited Partners of record
as of 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 Fund II. As part of the
Playtex Offering, Fund II sold its remaining investment in Playtex, consisting
of approximately 343,726 shares of Common Stock. Fund II received proceeds of
$4.5 million and recognized a loss on the sale of approximately $756,000. 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, Fund II received proceeds of $6.9
million (which includes 551,180 of deferred interest) for its entire interest in
Cinnabon. Net Distributable Proceeds from the Merger of $28.69 per Unit were
distributed on November 16, 1998, to Limited Partners of record as of October
16, 1998, the closing date of this transaction. Fund II recognized a gain of
$332,200 from the Merger.
On November 13, 1998, Ames Department Stores, Inc. ("Ames") and Hills
Stores Company ("Hills") jointly announced the signing of a definitive agreement
in which Ames would acquire Hills. Pursuant to the terms of the transaction,
Ames, through a wholly-owned subsidiary, on November 18, 1998 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. Ames will also share
with Hills' stockholders 25% of a potential recovery in the form of deferred
contingent cash rights with regard to litigation initiated by Hills against
certain of Hills' former directors. Pursuant to the offer, the deferred
contingent cash right is not transferrable. On December 16, 1998, Fund II
tendered all 521,048 of the Funds shares and received proceeds of $781,572 and
recognized a loss of approximately $34 million. These proceeds were distributed
on February 16, 1999.
On December 31, 1998, the Fund received approximately $1.1 million from
Stablex Canada Inc., of which $124,000 represented fourth quarter 1998 interest
and $934,000 represented prior period's unpaid interest. Fund II is currently
not accruing interest on this investment.
Because Fund II primarily invests in high-yield private placement
securities, the risk of loss upon default by an issuer is greater than with
investment grade securities because high-yield securities are generally
unsecured and are often subordinated to other creditors of the issuer. Also,
high-yield issuers usually have higher levels of indebtedness and are more
sensitive to adverse economic conditions.
Although Fund II cannot eliminate the risks associated with its investments
in high-yield securities, it has procedures in place to continually monitor the
risks associated with its investments under a variety of market conditions. Any
potential Fund II loss would generally be limited to its investment in the
portfolio company as reflected in the portfolio of investments.
Should bankruptcy proceedings commence, either voluntarily or by action of
the court against a portfolio company, the ability of Fund II to liquidate the
position or collect proceeds from the action may be delayed or limited.
5. 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 Fund II's Accounting Policy, the following securities
have been on non-accrual status since the date indicated:
- Florida Orthopedics, Inc., 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, Fund II paid $653,956, $759,160, and
$988,882, 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
out-of-pocket expenses incurred by the Fund Administrator on behalf of the Funds
("reimbursable expenses"). The Fund Administration Fee is calculated and paid
quarterly, in advance, by each Fund. For the years ended December 31, 1998, 1997
and 1996, Fund II paid $222,000, $569,224, and $675,250, respectively, in Fund
Administration Fees.
Beginning in November of 1997, the Fund Administration Fee changed to an
annual amount of $400,000 for Fund II and the Retirement Fund on a combined
basis, plus 100% of all reimbursable expenses incurred by the Funds.
Reimbursable expenses primarily consist of printing, audit, tax preparation and
custodian fees. For the years ended December 31, 1998, 1997 and 1996, Fund II
incurred $294,846, $140,157, and $139,158, respectively, in reimbursable
expenses.
Prior to November 1997, the Fund Administration Fee was calculated at an
annual amount of the greater of $500,000 or 0.45% of the excess of net offering
proceeds less 50% of capital reductions and 50% of realized losses plus a
portion of reimbursable expenses incurred by Fund II.
In addition, ML Mezzanine II Inc., an affiliate of the Fund Administrator
and Merrill Lynch & Co.,Inc., receives 5% of the benefit of any MGP
Distributions paid to the Managing General Partner (see Note 10).
9. Independent General Partners' Fees and Expenses
As compensation for their services, each Independent General Partner will
receive a combined annual fee of $40,000 (payable quarterly) from the Funds in
addition to a $1,000 fee for each meeting attended ($500 if a meeting is held on
the same day as a committee meeting of the General Partners) plus reimbursement
for any out-of-pocket expenses incurred. Fees and expenses are allocated between
the Funds in proportion to the number of units issued by each fund. Compensation
for each of the Individual General Partners is reviewed annually. For the years
ended December 31, 1998, 1997 and 1996, Independent General Partners' Fees and
Expenses were $90,929, $106,069, and $207,269, respectively.
10. Related Party Transactions
Fund II's investments generally were made as co-investments with the
Retirement Fund. In addition, certain of the Mezzanine Investments and Bridge
Investments which were made by Fund II involve co-investments with entities
affiliated with the Investment Adviser. Such co-investments are generally
prohibited absent exemptive relief from the Securities and Exchange Commission
(the "Commission"). As a result of these affiliations and Fund II's expectation
of engaging in such co-investments, the Funds together with ML-Lee Acquisition
Fund, L.P., sought an exemptive order from the Commission allowing such
co-investments, which was received on September 1, 1989. Fund II's
co-investments in Managed Companies, and in certain cases its co-investments in
Non-Managed Companies, typically involve the entry by the Funds and other equity
security holders into stockholders' agreements. While the provisions of such
stockholders' agreements vary, such agreements may include provisions as to
corporate governance, registration rights, rights of first offer or first
refusal, rights to participate in sales of securities to third parties, rights
of majority stockholders to compel minority stockholders to participate in sales
of securities to third parties, transfer restrictions, and preemptive rights.
The Investment Adviser, pursuant to an investment management agreement
among the Investment Adviser, the Thomas H. Lee Company and Fund II dated
November 10, 1989, is responsible for the identification, management and
liquidation of Mezzanine Investments and Bridge Investments for Fund II. The
Investment Adviser received an Investment Advisory Fee as compensation for these
services outlined in Note 7 to the Financial Statements.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") is an
affiliate of the Managing General Partner. MLPF&S and certain of its affiliates,
in the ordinary course of their business, perform various financial services for
various portfolio companies of the Funds, which may include investment banking
services, broker/dealer services and economic forecasting, and receive in
consideration therewith various fees, commissions and reimbursements.
Furthermore, MLPF&S and its affiliates or investment companies advised by
affiliates of MLPF&S may, from time to time, purchase or sell securities issued
by portfolio companies of the Funds in connection with its ordinary investment
operations.
As provided by the Partnership Agreement, the Managing General Partner of
Fund II is entitled to receive an incentive distribution ("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").
This Deferred Distribution Amount is distributable to the Partners pro-rata in
accordance with their capital contributions, and certain amounts otherwise later
payable to Limited Partners from distributable cash from operations are instead
payable to the Managing General Partner until any Deferred Distribution Amount
is paid.
During 1998, Fund II paid the Individual General Partner distributions
totaling $5,461 and Managing General Partner distributions totaling $1,222,538
(which includes $1,167,940 of MGP Distributions as defined above). As of
December 31, 1998, the Managing General Partner has earned a total of $26.4
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 11,011 units of Fund II 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, Fund II and the Retirement Fund and (together with Fund
II, "the Funds") the parties to Fund II and the Retirement Fund 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 $2.9
million of the Funds' limited partnership units from certain limited partners
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
has 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 Fund II's partners for inclusion in their respective tax
returns.
Pursuant to the Statement of Financial Accounting Standards No. 109
Accounting for Income Taxes, Fund II is required to disclose any difference in
the tax basis of Fund II's assets and liabilities versus the amounts reported in
the financial statements. As of December 31, 1998, the tax basis of Fund II's
assets are greater than the amounts reported in the financial statements by
$15.6 million. This difference is attributable to net unrealized depreciation 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
$1,326,846 from Mezzanine Investments, net investment income of $11,942 from
Temporary Investments and Net Distributable Capital proceeds from the sale of
Hills of $781,572 (which is all return of capital). The total amount distributed
to Limited Partners was $1,711,871 or $7.72 per Unit, which was paid on February
16, 1999. The Managing General Partner received a total of $3,859 with respect
to its interest in Fund II and $404,244 in MGP Distributions. Thomas H. Lee, as
an Individual General Partner, received $386 with respect to his interest in
Fund II.
On March 12, 1999, Fund II and the Retirement Fund (together the "Funds")
entered into a Note Repurchase and Warrant Cancellation Agreement (the
"Agreement") with Stablex Canada Inc. and Seaway TLC Inc. to 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 $5,605,200 was
allocated to Fund II. Fund II will recognize a loss of approximately $1 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 Fund II 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 II, L.P.
SUPPLEMENTARY SCHEDULE OF REALIZED GAINS AND LOSSES
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
Number of Shares/ Investment Net Realized
Security Principal Amount Cost Proceeds Gain (Loss)
---------------- ------------ ------------ -------------
Stanley Furniture Company Inc. Common Stock 3,461 $ 44 $ 94 $ 50
Anchor Advanced Products, Inc. Common Stock 410,677 1,396 1,643 247
First Alert, Inc. Common Stock 2,058,474 3,320 10,807 7,487
Playtex Products, Inc. Common Stock 343,726 5,298 4,542 (756)
Cinnabon International, Inc. Notes $ 6,044 6,044 6,376 332
Hills Store Company Common Stock 521,048 34,776 781 (33,995)
------------- ------------- ------------- -------------
Total at December 31, 1998 $ 50,878 $ 24,243 $ (26,635)
============= ============= =============
SCHEDULE 2
SUPPLEMENTARY SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
ML-LEE ACQUISITION 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 * 12,619 3,024 (9,596) -- 63 (6,614) (3,025) (20) --
Biolease
Common Stock* 94 -- (94) -- (94) -- -- -- --
Subordinated Notes* (a) 676 392 (318) -- (318) -- -- -- --
FLA. Orthopedics, Inc.
Preferred Stock* 1,513 -- (1,513) -- -- -- -- (1,513) --
Subordinated Note -- -- -- -- -- 4,842 (4,842) -- --
Soretox
Subordinated Notes* 6,631 2,590 (4,041) -- (2,439) -- -- (1,602) --
--------- -------- ------- --------- --------- --------- ---------
Total Unrealized Depreciation
from Non Public Securities (15,562) -- (2,788) (1,772) (7,867) (3,135) --
Reversal of Unrealized Appreciation
(Depreciation) from Securities Sold
in 1998
First Alert, Inc.
Common Stock -- (1,054) (2,573) (10,807) (12,351) 26,785 --
Playtex Products, Inc.
Common Stock -- 1,776 773 172 129 (2,522) (328)
Stanley
Common Stock -- (54) (44) 204 (46) (78) 18
Hills Stores Company
Common Stock -- 33,148 (1,498) (2,019) (5,722) 189 (24,098)
--------- -------- ------- --------- --------- --------- ---------
Total Reversal of Unrealized Appreciation
(Depreciation) from Securities Sold in 1998 -- 33,816 (3,342) (12,450) (17,990) 24,374 (24,408)
--------- -------- ------- --------- --------- --------- ---------
Reversal of Unrealized Appreciation
(Depreciation) from Securities Sold
Prior to 1998 -- -- -- (1,502) (4,703) (121,593) 127,798
--------- -------- ------- --------- --------- --------- ---------
Total Unrealized Appreciation
(Depreciation) from Securities Sold -- 33,816 (3,342) (13,952) (22,693) (97,219) 103,390
--------- -------- ------- --------- --------- --------- ---------
Net Unrealized Appreciation (Depreciation) $ (15,562) $ 33,816 $(6,130) $ (15,724) $ (30,560) $(100,354) $ 103,390
========= ======== ======= ========= ========= ========= =========
* Restricted Security
(a) Investment cost excludes accretion of discount of $33.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The five General Partners of Fund II are responsible for the management and
administration of Fund II and have the same positions and responsibilities with
respect to the Retirement Fund. The General Partners of Fund II and the
Retirement Fund consist of four Individual General Partners: Vernon R. Alden,
Joseph L. Bower, Stanley H. Feldberg (the "Independent General Partners"),
Thomas H. Lee and Mezzanine Investments II, L.P., the Managing General Partner.
Pursuant to exemptive orders issued by the Securities and Exchange Commission,
each Independent General Partner is not an "interested person" of Fund II as
such term is defined in the Investment Company Act of 1940.
Individual General Partners
The Individual General Partners provide overall guidance and supervision
with respect to the operations of Fund II and perform the various duties imposed
on the directors of business development companies by the Investment Company Act
of 1940. The Individual General Partners supervise the Managing General Partner
and must, with respect to any Mezzanine Investment transactions, either certify
that it meets Fund II investment guidelines or specifically approve it as a
non-Guideline Investment or Bridge Investment. Fund II's investment and
reinvestment period expired in December, 1993, and the only investments now
permitted are Follow On Investments in existing portfolio companies. In
addition, if a Portfolio Company's performance is in default of a material
provision of a lending agreement or has a ratio of operating cash flow to
current cash fixed charges for its four most recent fiscal quarters of less than
or equal to 1.1 to 1, the Independent General Partners are required to approve
any changes in the terms of or sale of such Portfolio Company.
Messrs. Alden, Bower, Feldberg and Lee have served as Individual General
Partners of Fund II and the Retirement Fund since 1989. Each Individual General
Partner shall hold office until his removal or withdrawal pursuant to the
provisions of Fund II's Partnership Agreement.
Mr. Alden, age 76, Individual General Partner of Fund II, ML-Lee
Acquisition Fund, L.P. ("Lee I") and the Retirement Fund; and together with the
Fund II, the "New Funds"; and together with Lee I, the "Funds"). Director of
Digital Equipment Corporation, Intermet Corporation and 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. Director of
Waban Inc. Trustee of Brandeis University.
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 Fund II dated
November 10, 1989, is responsible for the identification, management and
liquidation of Mezzanine Investments and Bridge Investments for Fund II. The
Investment Adviser received an Investment Advisory Fee in compensation for these
services outlined in Note 7 to the Financial Statements.
Certain officers of the 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, Trustee
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. Fund II paid Independent General Partners, Mr. Alden, Mr. Bower and
Mr. Feldberg $84,262 collectively for their services as Independent General
Partners in 1998.
The information with respect to the allocation and distribution of Fund
II's profits and losses to the Managing General Partner set forth under the
caption "Distributions and Allocations - Allocations of Profits and Losses" in
the Prospectus pages 86 - 87 is incorporated herein by reference. The Managing
General Partner received distributions of $1,222,538 during 1998, including MGP
Distributions of $1,167,940 that it distributed, $1,109,543 to the Investment
Adviser and $58,397 to ML Mezzanine II Inc.
The information with respect to the Investment Advisory Fee payable to the
Investment Adviser (and distributions from the Managing General Partner) set
forth under the caption "Management Arrangements - Description of the Advisory
Agreement" in the Prospectus pages 74 - 75 is incorporated herein by reference.
Pursuant to the Investment Advisory Agreement, Fund II paid the Investment
Adviser $653,956 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, Fund II paid the Fund Administrator a total of $516,846 in 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Fund II is aware of the following persons who are beneficial owners of more
than five percent of its Units of limited partnership interest, based upon
Schedules 13D and 13G filed with the Securities and Exchange Commission and a
review of Fund II's records.
Amount of Percent of Units of the
Name and Address Benificial Fund Beneficially Owned
of Beneficial Owner Ownership at January 1, 1999
- - ------------------- ---------- ------------------------
Yale University 20,954 9.4%
Investment Office
230 Prospect Street
New Haven, CT 06511
Farallon Capital Partners, L.P. 21,341(1) 10.0%
Farallon Capital Managment, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Tinicum Partners, L.P. 21,341(1) 10.0%
Farallon Capital Managment, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Thomas F. Steyer 21,341(1) 10.0%
Farallon Capital Managment, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Fleur E. Fairman 21,341(1) 10.0%
Farallon Capital Managment, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
David I. Cohen 21,341(1) 10.0%
Farallon Capital Managment, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Joseph F. Downes 21,341(1) 10.0%
Farallon Capital Managment, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Jason M. Fish 21,341(1) 10.0%
Farallon Capital Managment, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
William F. Mellin 21,341(1) 10.0%
Farallon Capital Managment, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Meridee A. Moore 21,341(1) 10.0%
Farallon Capital Managment, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Eric M. Ruttenberg 21,341(1) 10.0%
Farallon Capital Managment, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
(1) By reason of Rule 13d-5 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), Farallon Capital Partners, L.P., a California
limited partnership ("FCP"), and Tinicum Partners, L.P., a New York limited
partnership ("Tinicum"), each may be deemed to own 21,341 Units of limited
partnership interest beneficially owned at January 1, 1999 as a result of
the direct ownership by FCP of 16,722 such Units and as a result of the
direct ownerhip by Tinicum of 4,619 such Units. FCP and Tinicum, however,
consider their beneficial interest to be limited to their direct ownership.
In addition, by reason of Rule 13d-3 under the Exchange Act, each of the
general partners of FCP and RTinicum, Thomas F. ASteyer, Fleur E. Fairman,
David I. Cohen,, Joseph F. Downes, Jason M. Fish, William F. Mellin,
Meridee A. Moore and Eric M. Ruttenberg, may be deemed to own beneficailly
the Units of limited partnship interst by FCP and Tinicum.
Ownership of Fund II's Units by the General Partners and Officers of the
Investment Adviser and Mezzanine II are as follows:
Name of Amount of Percent of Units
Beneficial Owner Beneficial Ownership of Class
- - ---------------------------------------------------------------------
Vernon R. Alden 50 Units *
Jospeh L. Bower None *
Stanley H. Feldberg 25 Units *
Thomas H. Lee 11,011 Units 4.97%
General Partners and
Officers as a Group 12,584 Units 5.7%
* Less than one percent.
For more information regarding Beneficial Ownership, see Item 3 Legal
Proceedings.
There exists no arrangement known to Fund II, the execution of which may at
a subsequent date, result in a change of control of Fund II.
Item 13. Certain Relationships and Related Transactions
Fund II's investments generally are made as co-investments with the
Retirement Fund's. In addition, certain of the Mezzanine Investments and Bridge
Investments which were made by Fund II may involve co-investments with entities
affiliated with the Investment Adviser. Such co-investments are generally
prohibited absent exemptive relief from the Securities and Exchange Commission
(the "Commission"). As a result of these affiliations and Fund II's expectation
of engaging in such co-investments, Fund II together with the Retirement Fund
and Fund I, sought an exemptive order from the Commission allowing such
co-investments, which was received on September 1, 1989. Fund II's
co-investments in Managed Companies, and in certain cases its co-investments in
Non-Managed Companies, typically involve the entry by the Funds and other equity
security holders into stockholders' agreements. While the provisions of such
stockholders' agreements vary, such agreements may include provisions as to
corporate governance, registration rights, rights of first offer or first
refusal, rights to participate in sales of securities to third parties, rights
of majority stockholders to compel minority stockholders to participate in sales
of securities to third parties, transfer restrictions, and preemptive rights.
Thomas H. Lee Company, a sole proprietorship owned by Thomas H. Lee, an
Individual General Partner of Fund II and an affiliate of the Investment
Adviser, typically performs certain management services for Managed Companies
and receives management fees in connection therewith usually pursuant to written
agreements with such companies. The Funds have one Managed Company in their
portfolios at December 31, 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, Fund II paid Managing General Partner distributions totaling
$1,222,538 (which included $1,167,940 of MGP Distributions and $54,598 with
respect to its interest in Fund II). Of this MGP Distribution amount, 95% or
$1,109,543 was paid to the Investment Adviser and the remaining 5% totalling
$588,397 was paid to ML Mezzanine II Inc. The Managing General Partner has
earned a total of $26.4 million in MGP Distributions none of which was deferred
in payment to the Managing General Partner at December 31, 1998, as a Deferred
Distribution Amount in accordance with the Partnership Agreement. Any Deferred
Distribution Amount is distributable to the Partners pro-rata in accordance with
their capital contributions, and certain amounts otherwise later payable to
Limited Partners from distributable cash from operations will instead be payable
to the Managing General Partner until the Deferred Distribution Amount is paid
in full.
Stanley Furniture Company
On January 6, 1998, Fund II sold its holdings of Common Stock in Stanley
Furniture Company ("Stanley") for $27 per share. In connection with the sale,
Fund II sold its remaining 3,461 shares of Stanley Common Stock and received net
proceeds of $93,447. These proceeds were distributed on May 15, 1998.
Anchor Advanced Products
On March 19, 1998 Fund II and affiliates of the Thomas H. Lee Company sold
their remaining holdings in Anchor. Pursuant to this transaction, Fund II sold
410,677 shares of Anchor Common Stock for approximately $1.6 million and
recognized a gain of $247,192. Net distributable proceeds were distributed
during the second quarter to Limited Partners of record as of March 19, 1998.
First Alert
On April 2, 1998, Sunbeam Corporation ("Sunbeam") acquired all of the
outstanding shares of First Alert Common Stock for $175 million ($5.25 per
share) by means of a tender offer (the 'Tender Offer'), and assume all of the
debt of First Alert. Pursuant to the Tender Offer, Fund II tendered all of its
shares of First Alert Common Stock. and received proceeds of approximately $10.8
million and recognized a gain of $7.5 million. Net distributable proceeds of
$48.62 per Unit were distributed on May 15, 1998 to Limited Partners of record
as of April 2, 1998.
David V. Harkins, Scott A. Schoen and Anthony J. DiNovi, officers of the
Investment Adviser to the Funds, served as directors of First Alert.
Playtex Products Inc.
On May 27, 1998, Playtex Products Inc. 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 Fund II. As part of the Playtex Offering, Fund
II sold its remaining investment in Playtex, consisting of 343,726 shares of
Common Stock. Proceeds to Fund II from the sale totaled $4.5 million or $20.43
per Unit and were included in the distribution made on August 14, 1998. Fund II
recognized a loss of $756,348 from the Playtex Offering.
Thomas H. Lee, who is an Individual General Partner of the Funds and an
officer of the Investment Adviser, 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, Fund II received proceeds of $6.9
million (which includes $551,180 of deferred interest) for its entire interest
in Cinnabon. Net Distributable Proceeds from the Merger of $28.69 per Unit were
distributed on November 16, 1998, to Limited Partners of record as of October
16, 1998, the closing date of this transaction. Fund II recognized a gain of
$332,200 from the Merger.
Hills Stores Company
On November 13, 1998, Ames Department Stores, Inc. ("Ames") and Hills
Stores Company ("Hills") jointly announced the signing of a definitive agreement
in which Ames would acquire Hills. Pursuant to the terms of the transaction,
Ames, through a wholly-owned subsidiary, on November 18, 1998 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. Ames will also share
with Hills' stockholders 25% of a potential recovery in the form of deferred
contingent cash rights with regard to litigation initiated by Hills against
certain of Hills' former directors. Pursuant to the offer, the deferred
contingent cash right is not transferrable. On December 16, 1998, Fund II
tendered all 521,048 of the Funds shares and received proceeds of $781,572 and
recognized a loss of approximately $34 million. These proceeds were distributed
on February 16, 1999.
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, 1996
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 31st 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 31st 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)