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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, 1995
Commission File Number 0-17382
ML-LEE ACQUISITION FUND(RETIREMENT ACCOUNTS) II, L.P.
(Exact name of registrant as specified in its Governing Instruments)
Delaware 04-3028397
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
World Financial Center
South Tower - 23rd Floor
New York, New York 10080-6123
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (212) 236-7339
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in a definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of voting securities held by non-affiliates: Not
Applicable.
Documents Incorporated by Reference: Portions of the Prospectus of the
Registrant dated September 6, 1989, filed with the Securities and Exchange
Commission pursuant to Rule 497(b), are incorporated by reference in Parts I, II
and III hereof.
Part I
Item l. Business
Formation
ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. (the "Retirement
Fund") (formerly T.H. Lee Acquisition Fund (Retirement Accounts) II, L.P.) was
formed along with ML-Lee Acquisition Fund II, L.P. ("Fund II"; collectively
referred to as the "Funds") and the Certificates of Limited Partnership were
filed under the Delaware Revised Uniform Limited Partnership Act on September
23, 1988. The Funds' operations commenced on November 10, 1989.
Mezzanine Investments II, L.P. (the "Managing General Partner"), subject to
the supervision of the Individual General Partners, is responsible for
overseeing and monitoring the Retirement Fund's investments. The Managing
General Partner is a Delaware limited partnership in which ML Mezzanine II Inc.
is the general partner and Thomas H. Lee Advisors II, L.P. (the "Investment
Adviser" to the Funds) is the limited partner. The Individual General Partners
are Vernon R. Alden, Joseph L. Bower and Stanley H. Feldberg (the "Independent
General Partners") and Thomas H. Lee. ML Fund Administrators Inc. (the "Fund
Administrator") is an indirect wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. and is responsible for the day-to-day administrative services necessary for
the operations of the Retirement Fund.
The Retirement Fund has elected to operate as a business development
company under the Investment Company Act of 1940 ("Investment Company Act"). The
Retirement Fund's primary investment objective is to provide current income and
capital appreciation potential by investing in privately structured, friendly
leveraged buyouts and other leveraged transactions. The Retirement Fund pursues
this objective by investing primarily in subordinated debt and related equity
securities issued in conjunction with the "mezzanine financing" of friendly
leveraged buyout transactions, leveraged acquisitions and leveraged
recapitalizations. The Retirement Fund may also invest in "bridge investments"
if it is believed that such investments would facilitate the consummation of a
mezzanine financing. The Retirement Fund considers this activity to constitute a
single industry segment of mezzanine financing investing.
The Funds offered together an aggregate 1 million units of limited
partnership interest ("Units") at $1,000 per Unit with the Securities and
Exchange Commission pursuant to a Registration Statement on Form N-2 (File No.
33-25816), effective September 6, 1989. The information set forth under the
heading "Risk and Other Important Factors", "Estimated Use of Proceeds",
"Mezzanine Financing" and "Investment Objectives and Policies" on pages 21
through 46 and "Conflicts of Interest" on pages 79 through 82 in the Prospectus
of the Retirement Fund dated September 6, 1989, filed with the Securities and
Exchange Commission pursuant to Rule 497(b) under the Securities Act of 1933
(the "Prospectus"), is incorporated herein by reference.
The offering of Units commenced on September 6, 1989. On November 10 and
December 20, 1989, the Retirement Fund had its first and second closings
respectively, at which time the Managing General Partner admitted additional
Limited Partners to the Retirement Fund representing 177,515 Units of limited
partnership interest. The additional Limited Partners' total capital
contributions were $164,201,375, which excludes discounts allowed of $1,447,740
and is net of sales commissions and advisory fees of $11,865,885. The Managing
General Partner's aggregate contribution was $500,000. Thomas H. Lee, as an
Individual General Partner, contributed $50,000. For their services as selling
agent, the Retirement Fund paid sales commissions to Merrill Lynch, Pierce,
Fenner and Smith Incorporated ("MLPF&S") in the amount of $9,492,708 (exclusive
of discounts of $1,158,192). In addition, the Retirement Fund paid a financial
advisory fee to MLPF&S in the amount of $2,373,177 (exclusive of discounts of
$289,548).
Mezzanine and Bridge Investments
At December 31, 1995, the Retirement Fund had outstanding a total of
$88,353,161 invested in Mezzanine Investments representing $63,434,623 Managed
and $24,918,538 Non-Managed portfolio investments. At December 31, 1995, there
were no Bridge Investments outstanding for the Funds. The Funds co-invest in all
Mezzanine and Bridge Investments, allocating such investments in proportion to
their capital available for investment.
The Retirement Fund's reinvestment period ended on December 18, 1993 and
accordingly, no new investments can be made after that date, other than the
funding of investments which were committed to prior to that date.
REVIEW OF INVESTMENTS IN MANAGED COMPANIES
The following is a brief description of the companies in the Retirement
Fund's Managed Company portfolio during the year ended December 31, 1995:
Publicly Held Managed Portfolio Companies
EquiCredit Corporation ("EquiCredit")
On September 26, 1994, Barnett Banks, Inc. signed a definitive agreement
to acquire all of the outstanding EquiCredit common stock for $32 per share.
This transaction closed on January 27, 1995. The Retirement Fund sold its entire
investment of 259,474 shares realizing a gain of $7.6 million on an original
investment of $679,822.
First Alert, Inc. ("First Alert")
First Alert is a designer and manufacturer of residential smoke
detectors, fire extinguishers, portable rechargeable lights and other security
and safety products. The Retirement Fund owns 2,281,524 shares of First Alert
common stock. The closing market price at December 29, 1995 reflects unrealized
depreciation of $13.7 million for the year ended December 31, 1995, bringing the
aggregate net unrealized appreciation to $16.0 million through December 31,
1995.
Hills Stores Company, ("Hills")
Hills is an operator of discount department stores in the Northeast and
Midwest and offers a broad selection of merchandise at everyday low prices,
targeted primarily at the female shopper. The Retirement Fund recorded net
unrealized depreciation of approximately $3.0 million on this investment for the
year ended December 31, 1995. The closing market price of this investment
reflects an aggregate net unrealized depreciation of approximately $15.8 million
through December 31, 1995.
On August 21, 1995, the Retirement Fund entered into a stock purchase
and exchange agreement with Hills and exchanged the 116,994 Common Stock Rights
held by the Retirement Fund for 33,427 shares of Hills Common Stock. No gain or
loss was recognized on the transaction.
Petco Animal Supplies, Inc. ("Petco")
Petco is a leading retailer of premium pet food and supplies, operating
more stores than any other specialty pet food and supply retailer in the United
States.
On April 27, 1995, Petco completed a public offering of approximately $3.6
million shares of Common Stock (the "Petco Offering") at a net price of $19.71
per share. As part of the Petco Offering the Retirement Fund sold 64,151 common
shares (including shares sold as a result of the exercise of the underwriters'
overallotment option) representing 51% of its Petco holdings. The Retirement
Fund received proceeds of $1.3 million and realized a gain of $212,949 on the
sale of the equity. The closing market price of Petco common stock on December
29, 1995 reflects unrealized appreciation of $1.0 million for the year ended
December 31, 1995, bringing the aggregate net unrealized appreciation to
approximately $802,000 through December 31, 1995.
Playtex Products, Inc. ("Playtex")
Playtex manufactures and sells feminine hygiene and nursery products,
household rubber gloves, toothbrushes and Jhirmack and LaCoupe haircare
products. The Retirement Fund's year-end valuation of this investment reflects
$68,835 of unrealized appreciation recorded in 1995 and $1.5 million of
cumulative net unrealized depreciation through 1995.
Stanley Furniture Company, Inc. ("Stanley Furniture")
Stanley Furniture designs, manufactures and markets furniture and fabric
products. Based upon the closing bid price at December 29, 1995, the Retirement
Fund recorded $37,022 of unrealized depreciation on its equity in Stanley
Furniture for the year ended December 31, 1995. The Retirement Fund's year-end
valuation of this investment reflects an aggregate of $84,842 in net unrealized
depreciation.
Non-Publicly Held Managed Portfolio Companies
Anchor Advanced Products, Inc. ("Anchor")
Anchor is a large manufacturer of toothbrushes and cosmetic packaging
products. Anchor holds a major share of the U.S. market for contract
manufacturing of toothbrushes, supplying many of the brand marketers. In
addition, Anchor has a strong position in key areas of the cosmetic packaging
market, including nail polish brushes, mascara packages and applicators and
lipstick packaging products. The investment is valued at cost at December 31,
1995.
Big V Supermarkets, Inc. ("Big V")
Big V is a regional supermarket retailer in the Northeastern United
States doing business under the ShopRite name. Big V currently operates several
supermarkets principally in the Hudson Valley region of New York State. The
investment in Big V is valued at cost at December 31, 1995.
Cole National Corp. ("Cole")
Cole was founded in 1944 as a provider of key duplication services.
Since then, Cole has grown as a retailer and operates three separate retail
subsidiaries: Cole Vision, Things Remembered and Cole Key. The investment in
Cole is valued at cost at December 31, 1995.
CST Office Products Corp. ("CST")
CST is a provider of stock computer forms to the resale market. CST
operates several manufacturing plants throughout the U.S., which produce
business forms and related office products. The Retirement Fund is currently not
accruing interest on this investment. The investment in CST is valued at cost at
December 31, 1995. On March 22, 1996 the Retirement Fund sold its entire
investment in CST and will realize a gain of $2.3 million and $3.9 of additional
Interest Income for Payment in kind notes previously classified as non-accrual .
Please see Note 14 to the Financial Statements for further information.
Ghirardelli Holdings Corporation ("Ghirardelli")
Ghirardelli is a marketer of premium chocolate products. Ghirardelli's
products are sold through a variety of distribution channels including three
company-owned retail shops, two of which are located in Ghirardelli Square, a
prominent San Francisco landmark. The Retirement Fund made a follow-on
investment in Ghirardelli for $1.9 million on May 12, 1995 and received 15,984
shares of Preferred Stock and 84,039 shares of Common Stock. The investment in
Ghirardelli is valued at cost at December 31, 1995.
In February, 1996 the Retirement Fund executed a Stock Purchase
Agreement, pursuant to which the Retirement Fund agreed to sell its entire
investment in Ghirardelli. See Note 14 to the Financial Statements for further
information.
Restaurants Unlimited Corporation ("RU Corp.")
RU Corp., through its Cinnabon division, operates and franchises a national
chain of specialty cinnamon roll bakeries in more than 250 locations, operating
under the Cinnabon World famous Cinnamon Rolls brand name. In addition, through
its Restaurants Unlimited, Inc. division, RU Corp. owns and operates 23 unique
full-service restaurants located primarily on the West Coast of the United
States. These restaurants operate under various trade names, including Cutters,
Kincaid's, Horatio's and Palomino. The investment in RU Corp. is valued at cost
at December 31, 1995.
Sun Pharmaceuticals Corp.
On October 17, 1995 Playtex Products, Inc. and Banana Boat Holding Corp.
entered an Agreement and Plan of Merger (the "Agreement") pursuant to which
Playtex agreed to acquire all of the outstanding equity of Banana Boat that it
did not already own. In accordance with the Agreement, the 12.5% Subordinated
Note held by the Retirement Fund, plus all accrued interest, was paid in full by
Playtex upon consummation of the merger. Additionally, the Retirement Fund
received net proceeds of $173.55 per share for each of the 8,218.5 Common Stock
Purchase Warrants that were exercised pursuant to the Agreement. As a result, on
October 31, 1995, the Retirement Fund received total proceeds of $10.6 million
which resulted in a gain of $1.4 million.
REVIEW OF INVESTMENTS IN NON-MANAGED COMPANIES
The following is a brief description of the companies in the Retirement
Fund's Non-Managed Company portfolio during the year ended December 31, 1995:
BioLease, Inc. ("BioLease")
BioLease provides built-to-suit wet-laboratory space in the Boston area
to a consortium of emerging growth bio-technology companies sponsored by the
venture capital funds managed by Health Care Investment Corporation. The
investment in BioLease is valued at amortized cost at December 31, 1995.
Fitz Floyd/Silvestri Corporation
FFSC, Inc. consists of two businesses, Fitz Floyd and Silvestri
Corporation. Fitz and Floyd is one of the industry leaders in fine china
dinnerware and ceramic giftware whose products are retailed through leading
specialty and department stores and catalogs throughout the U.S. and Canada, and
through nine company-operated stores. Silvestri designs, imports and markets a
broad line of Christmas decorations, home accessories and seasonal gifts which
are sold through stores and catalogs. As of December 31, 1995, the Retirement
Fund has valued its total investment in FFSC at $6.3 million, which resulted in
total unrealized depreciation of $2.0 million.
FLA. Orthopedics, Inc.
FLA. Orthopedics, Inc., headquarted in Miami, manufactures, markets and
distributes production in two major limes of business: ergonomically designed
safety products and orthopedic soft goods.
The Retirement Fund has pledged a $394,800 certificate of deposit to secure
its obligation to purchase additional securities of FLA. Orthopedics, Inc.
securities in 1996, in the event that certain performance tests are not met. As
of December 31, 1995, the Retirement Fund has valued its investment in FLA.
Orthopedics, Inc. at zero, which resulted in total unrealized depreciation of
$4.1 million.
National Tobacco Company
National Tobacco Company is a producer of loose-leaf chewing tobacco in
the United States, whose product is primarily sold under the Beech-Nut brand
name. The investment in National Tobacco Company is valued at cost at December
31, 1995.
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. The Retirement Fund is currently not accruing
interest on this investment. The Retirement Fund's year end valuation reflects
approximately 1.8 million of unrealized depreciation.
Effective June 29, 1995, Soretox structured a management led buyout of
the company. As a result, the Stablex Canada, Inc. $7,060,925, 14% Subordinated
Note and the 209,829 shares of 176347 Canada, Inc. Common Stock Purchase
Warrants held by the Retirement Fund were exchanged for a Stablex Canada, Inc.
$3,996,750 principal amount 10% Subordinated Note, a $3,568,325 principal amount
11% Junior Subordinated Note and 2,286 shares of Seaway TLC, Inc. Common Stock
Purchase Warrants. No gain or loss was recorded on the transaction.
Competition
The Retirement Fund has completed its investment period and its
reinvestment program and therefore, will no longer have to compete for
investments. A majority of the portfolio companies are participating in
extremely competitive businesses. Also, to the extent that there is more
competition in the market to sell the Retirement Fund's assets, the market will
become more constrained.
Employees
The Retirement Fund has no employees. The Investment Adviser, subject to
the supervision of the Managing General Partner and the Individual General
Partners, manages and controls the Retirement Fund's investments. The Managing
General Partner is responsible for managing the Temporary Investments of the
Retirement Fund. The Fund Administrator performs administrative services for the
Retirement Fund. The Fund Administrator is a subsidiary of Merrill Lynch & Co.
Inc., the parent of MLPF&S.
Item 2. Properties
The Retirement Fund does not own or lease any physical properties.
Item 3. Legal Proceedings
On February 3, 1992 and February 5, 1992, respectively, one Limited
Partner from Fund II and one Limited Partner from the Retirement Fund each
commenced class actions in the US District Court for the District of Delaware,
purportedly on behalf of all persons who purchased limited partnership interests
in the Funds between November 10, 1989 and January 5, 1990, against the Funds,
the Managing General Partner, the Individual General Partners, the Investment
Adviser to the Funds and certain named affiliates of such persons. These
actions, alleging that the defendants in the action made material
misrepresentations or omitted material information in the offering materials for
the Funds concerning the investment purposes of the Funds, were consolidated by
the court on March 31, 1992, and a consolidated complaint was filed by the
plaintiffs on May 14, 1992. In April 1993, plaintiffs filed an amended
complaint, adding claims that certain transactions by the Funds were prohibited
by the federal securities laws applicable to the Funds and their affiliates
under the Investment Company Act of 1940, as amended. The amended complaint also
named the Funds' counsel as a defendant. Defendants moved to dismiss the amended
complaint, and, by Opinion and Order dated March 31, 1994, the court granted in
part and denied in part the motions to dismiss.
Additionally, by its March 31, 1994 Opinion and Order, the Court certified
the case as a class action, and ordered plaintiffs to replead by filing a new
complaint reflecting the Court's rulings. On April 15, 1994, plaintiffs served
and filed a new complaint, which defendants moved to strike for not conforming
to the Court's ruling. On August 3, 1994, the Court granted defendants' motion
to strike the new complaint. Plaintiffs thereafter filed a revised second
amended complaint dated September 26, 1994. Factual discovery in this litigation
has concluded. Expert discovery is currently set to conclude in early 1996. The
defendants in this action believe that the remaining claims are without merit,
although whether or not the plaintiffs prevail, the Funds may be obligated to
indemnify and advance litigation expenses to certain of the defendants under the
terms and conditions of various indemnity provisions in the Funds' Partnership
Agreements and separate indemnification agreements, and the amount of such
indemnification and expenses could be material. The Retirement Fund has advanced
amounts to the indemnified parties based upon amounts which are deemed
reimbursable in accordance with the indemnification provisions and has included
these amounts in professional fees. The outcome of this case is not determinable
at this time.
On August 9, 1994, the same two Limited Partners noted in the preceding
paragraphs commenced another putative class action in the US District Court for
the District of Delaware, purportedly on behalf of all persons who owned limited
partnership interests in the Funds on November 4, 1993, against the Funds, the
Managing General Partners, the Individual General Partners, the Investment
Adviser to the Funds and certain named affiliates of such persons. Plaintiffs
allege that the defendants violated certain provisions of the Investment Company
Act of 1940 and the common law in connection with the sale by certain of the
defendants of shares of common stock of Snapple Beverage Corp. in a November
1993 secondary offering and seek actual and punitive damages and an accounting
in connection therewith. The defendants have filed papers in opposition to the
motion for partial summary judgment on January 10, 1995. On August 4, 1995,
plaintiffs filed an amended complaint alleging additional violations of the
Investment Company Act of 1940 and common law arising out of the secondary
offering. The plaintiffs moved for summary judgment on certain of these claims.
On October 13, 1995, the defendants in this litigation each filed briefs in
opposition to plaintiffs' motions. Because the defendants in this action believe
that the claims are without merit, each defendant also filed a separate motion
to dismiss, although whether or not the plaintiffs prevail, the Funds may be
obligated to indemnify and advance litigation expenses to certain of the
defendants under the terms and conditions of various indemnity provisions in the
Funds' Partnership Agreements and separate indemnification agreements. The
outcome of this case is not determinable at this time.
On November 2, 3 and 4, 1994, stockholders of Snapple Beverage Corp.
commenced approximately twenty putative class actions in the Delaware Chancery
Court, purportedly on behalf of all public stockholders of Snapple, against
Snapple, the Funds, Thomas H. Lee Equity Partners, L.P., and some or all of
Snapple's directors. Since then, the plaintiffs have filed a Consolidated
Amended Complaint against Snapple, the Funds, Thomas H. Lee Equity Partners,
L.P., some or all of Snapple's directors and Quaker Oats. The complaint alleges
that the sale of Snapple to Quaker Oats was at an unfair price and in violation
of the defendants' fiduciary duties to public stockholders. The plaintiffs
sought an injunction against the merger transaction, an accounting for any
damages suffered by the public stockholders, and attorneys' fees and related
expenses. The Court on November 15, 1994 denied plaintiffs application to take
expedited discovery and request to schedule a preliminary injunction hearing.
The defendants in these actions believe that the claims are without merit,
although whether or not the plaintiffs prevail, the Funds may be obligated to
indemnify and advance litigation expenses to certain of the defendants under the
terms and conditions of various indemnity provisions in the Funds' Partnership
Agreements and separate indemnification agreements. The outcome of this case is
not determinable at this time.
On November 27, 1995, one Limited Partner from Fund II and one Limited
partner from the Retirement Fund filed a putative class action in the United
States District Court for the District of Delaware, purportedly on behalf on
behalf of all persons or entities who owned units in the Funds between April 5,
1991 and November 27, 1995, against the Funds, the Managing General Partner, the
Individual General Partners, the Investment Adviser to the Funds, and certain
named affiliates of such persons. The complaint contends that the Funds
improperly advanced legal fees and litigation costs to the defendants in
connection with three previously filed lawsuits. The plaintiffs are seeking an
accounting, rescissory or actual damages, punitive damages, plaintiffs'
litigation costs and attorneys fees, pre-judgment and post-judgment interest,
and an injunction barring the defendants from further indemnifying themselves.
The defendants in this action believe that the claims are without merit and have
moved to dismiss the case. Although the defendants believe the advancement of
legal fees and litigation costs was properly made pursuant to indemnification
agreements signed by the defendants, the outcome of this case is not
determinable at this time.
Item 4. Submission of Matters to a Vote of Security-Holders
No matters were submitted to a vote of the Limited Partners of the
Retirement Fund during the fourth quarter of the year ended December 31, 1995.
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 holders of Units as of March 15, 1996 is
20,542. The Managing General Partner and Thomas H. Lee as an Individual General
Partner also hold general partner interests.
Effective November 9, 1992, MLPF&S introduced a new limited partnership
secondary service through Merrill Lynch's Limited Partnership Secondary
Transaction Department ("LPSTD"). This service assists Merrill Lynch clients
wishing to buy or sell limited partnership interests, but does not represent an
established trading market for the Units.
Beginning with December 1994 client account statements, MLPF&S
implemented new guidelines for valuing and reporting limited partnership
investments on client account statements. As a result, the Managing General
Partner's estimate is no longer reported on these statements, although the
Managing General Partner may continue to provide its estimate of net asset value
in reports to Unit holders. Pursuant to such MLPF&S guidelines, estimated values
for limited partnership interests originally sold by MLPF&S (such as Units in
the Retirement Fund) are provided to MLPF&S by independent valuation services.
Commencing this year, such estimated values will be updated two times per year.
The estimated values will be based on financial and other information available
to the independent services on the prior August 15th for reporting on December
year-end client account statements, and on information available to the services
on March 31st for reporting on June month-end MLPF&S client account statements.
The Managing General Partner's estimate of net asset value as set forth in the
Fund's year-end financial statements reflects the value of the Fund's underlying
assets remaining at fiscal year end, whereas the value provided by the
independent services reflects the estimated value of the Units themselves based
on information that was available on the prior August 15th. MLPF&S clients may
contact their Merrill Lynch Financial Consultants or telephone the number
provided to them on their account statements to obtain a general description of
the methodology used by the independent valuation services to determine their
estimated values, provided the independent services are not market values and
Unit holders may not be able to sell their Units or realize the amounts shown on
their MLPF&S statements upon a sale. In addition, Unit holders may not realize
the amount shown on their account statements upon the liquidation of the
Retirement Fund over its remaining life.
The Retirement Fund distributes Distributable Cash from Investments and
Distributable Capital Proceeds in accordance with the terms of the Partnership
Agreement.
Pursuant to the Partnership Agreement, transfers of Units are recognized
on the first day of the fiscal quarter after which the Managing General Partner
has been duly notified of a transfer pursuant to the Partnership Agreement.
Until a transfer is recognized, the limited partner of record (i.e. the
transferor) will continue to receive all 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 sale proceeds from sales after transfer or assignment have been
entered into, but before such transferred and assignment is recognized by the
Managing General Partner, will be payable to the transferor and not the
transferee.
Cash Distributions
The Retirement Fund has made quarterly distributions including both
Distributable Cash from Investments and Distributable Capital Proceeds. The
Retirement Fund's ability to make future cash distributions is restricted in
part by the factors as set forth in Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations Liquidity and Capital Resources
- - the information contained in which is incorporated herein by reference.
Item 6. Selected Financial Data
Supplemental Information Schedule
For the Years Ended
December 31, December 31, December 31, December 31, December 31,
Total Fund Information: 1995 1994 1993 1992 1991
-------------- -------------- ------------- --------------- --------------
Net Investment Income $ 3,071,361 $ 5,571,207 $ 4,904,017 $ 10,308,795 $ 9,170,849
Net Realized Gain on Investments 9,262,616 74,326,557 15,978,135 943,644 656,153
Net Change in (Depreciation)
Appreciation on Investments (28,395,532) (114,349,601) 94,671,310 48,214,869 181,949
Cash Distributions to Partners 29,053,844 (b) 110,407,812 42,359,885 11,613,395 11,621,246
Net Assets 88,476,030 133,591,430 278,451,079 205,257,502 157,403,589
Cost of Mezzanine Investments 88,353,161 96,897,659 105,516,167 111,813,880 76,220,219
Total Assets 89,303,296 134,369,173 279,629,574 206,423,808 158,268,507
Per Unit of Limited Partnership Interest:
Investment Income $ 30.42 $ 47.26 $ 51.37 $ 78.40 $ 65.75
Expenses (18.88) (21.99) (25.62) (20.51) (14.25)
---------- ------------ ------------ ------------ -----------
Net Investment Income $ 11.54 $ 25.27 $ 25.75 $ 57.89 $ 51.50
---------- ------------ ------------ ------------ -----------
Net Realized Gains on Sales of Investments 43.12 302.22 81.82 5.30 3.68
Net Change in Unrealized (Depreciation)
Appreciation on Investments (159.47) (642.18) 531.67 270.77 1.02
Cash Distributions (c) 138.43 (b) 526.12 237.89 65.22 64.79
Cumulative Cash Distributions (a) 1,090.32 951.89 425.77 187.88 122.66
Net Asset Value $ 470.67 $ 713.90 $ 1,554.72 $ 1,153.37 $ 884.63
(a) For periods prior to the 3rd quarter 1991, the amount shown is for the
first closing participants only. The subsequent closing amounts as to such
periods will vary.
(b) Includes $15.6 million or $87.86 per limited partnership Unit return of
capital from the sale of EquiCredit, Petco and Sun Pharmaceuticals and
returns of the reserve for the follow-on investments.
(c) See Cash Distributions Schedule on pages 15-16 for additional information,
including return of capital for years prior to 1995.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity & Capital Resources
As of December 31, 1995, capital contributions from the Limited Partners
and the General Partners totaled $178,065,000 in the public offering of ML-Lee
Acquisition Fund (Retirement Accounts) II, L.P. (the "Retirement Fund"), the
final closing for which was held on December 20, 1989. Net proceeds available
for investment by the Retirement Fund as of December 31, 1995 were $116,434,836,
after adjusting for returns of capital distributed to partners, volume
discounts, sales commissions and organizational, offering, sales and marketing
expenses.
At December 31, 1995, the Retirement Fund had outstanding a total of
$88,353,161 invested in Mezzanine Investments representing $63,434,624 Managed
and $24,918,537 Non-Managed portfolio investments. The remaining proceeds were
invested in Temporary Investments primarily comprised of commercial paper with
maturities of less than two months.
The Retirement Fund invested substantially all of its net proceeds in
Mezzanine Investments consisting of high-yield subordinated debt and/or
preferred stock linked with an equity participation, of middle market companies
in connection with friendly leveraged acquisitions, recapitalizations and other
leveraged financings. The Retirement Fund's Mezzanine Investments typically were
issued in private placement transactions which are generally subject to certain
restrictions on sales thereby limiting their liquidity. The Retirement Fund was
fully invested as of December 20, 1992, which was within 36 months from the date
of the final closing (after including the reserve for follow-on investments and
exclusive of amounts available for reinvestment). The reinvestment period for
various amounts of capital proceeds received during the last twelve months of
the Retirement Fund's investment period terminated at various times through
December 18, 1993.
Upon the consummation of the sale of Snapple Common Stock, the
Retirement Fund received gross proceeds of approximately $78 million on December
8, 1994. As provided by the Partnership Agreement, the Managing General Partner
of the Retirement Fund received incentive fees from this transaction to the
extent certain returns of capital and priority returns were achieved. The
Managing General Partner was entitled to an incentive MGP distribution of
approximately $21 million, approximately $6.7 million of which was deferred in
payment (the "Deferred Distribution Amount") to the Managing General Partner in
accordance with the Partnership Agreement. This Deferred Distribution Amount is
distributed 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 instead are payable to the Managing
General Partner until the Deferred Distribution Amount is paid in full. The
Limited Partners received approximately $63.8 million or $359.24 per Unit from
the Snapple proceeds. As of February 14, 1996, the Deferred Distribution Amount
owed to the Managing General Partner was $5,211,680.
On August 6, 1991, the Independent General Partners approved a reserve
for follow-on investments of $20.0 million for the Retirement Fund. As of
December 31, 1995, the reserve balance was reduced to $8.2 million due to
follow-on investments of $153 in Petco Animal Supplies, $1.6 million in Fitz and
Floyd/Silvestri, Corporation, $128,270 in Fine Clothing, Inc., $2.5 million in
Hills and $1.9 million in Ghirardelli. Additionally, $5.7 million of the reserve
has been returned to the partners during 1995. The level of the reserve was
based upon an analysis of potential Follow-On Investments in specific portfolio
companies that may become necessary to protect or enhance the Retirement Fund's
existing investment. As of March 6, 1996, the Independent General Partners have
approved retention of the reserve at its current level.
All net proceeds from the sale of Mezzanine Investments received by the
Retirement Fund in the future will be distributed to its partners unless applied
to or set aside for expenses or follow-on investments.
The proportion of distributions provided by net investment income has
dropped significantly from prior years and due primarily to increased sales and
redemptions of Mezzanine Investments, a resulting decrease in investment income
as those holdings cease to generate interest income. Pursuant to the terms of
the Partnership Agreement, all net investment income from Mezzanine Investments
will be distributed to the Managing General Partner until the Managing General
Partner receives an amount equal to any outstanding Deferred Distribution
Amount. Given these circumstances, it is expected that the majority of future
cash distributions to Limited Partners for the next few years will almost
entirely be derived from gains and recovered capital from asset sales, which are
subject to market conditions and are inherently unpredictable as to timing.
Assuming there are no asset sales in a particular quarter, Limited Partners are
expected to receive only small amounts of net distributable cash from Temporary
Investments, which are estimated to be less than one dollar per Limited
Partnership Unit each quarter for the next few years. Distributions therefore
are expected to vary significantly in amount and may not be made in every
quarter.
Investment in High-Yield Securities
The Retirement Fund invests primarily in subordinated debt and preferred
stock securities ("High-Yield Securities"), generally linked with an equity
participation, issued in conjunction with the mezzanine financing of privately
structured, friendly leveraged acquisitions, recapitalizations and other
leveraged financings. High-Yield Securities are debt and preferred equity
securities that are unrated or are rated by Standard & Poor's Corporation as BB
or lower and by Moody's Investor Services, Inc. as Ba or lower. Risk of loss
upon default by the issuer is significantly greater with High-Yield Securities
than with investment grade securities because High-Yield Securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Also, these issuers usually have high levels of indebtedness and are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates, than investment grade issuers. Most of these securities are
subject to resale restrictions and generally there is no quoted market for such
securities.
Although the Retirement Fund cannot eliminate the risks associated with its
investments in High-Yield Securities, it has established risk management
policies. The Retirement Fund subjected each prospective investment to rigorous
analysis and made only those investments that were recommended by the Investment
Adviser and that met the Retirement Fund's investment guidelines or that had
otherwise been approved by the Managing General Partner and the Independent
General Partners. The Retirement Fund's investments were measured against
specified Retirement Fund investment and performance guidelines. To limit the
exposure of the Retirement Fund's capital in any single issuer, the Retirement
Fund limited the amount of its investment in a particular issuer. The Retirement
Fund's Investment Adviser also continually monitors portfolio companies in order
to minimize the risks associated with its investments in High-Yield Securities.
Certain issuers of Securities held by the Retirement Fund (First Alert,
Hills, Petco, Playtex and Stanley Furniture) have registered their equity
securities in public offerings. Although the equity securities of the same class
presently held by the Retirement Fund (other than Hills and Stanley Furniture)
were not registered in these offerings, the Retirement Fund has the ability
under Rule 144 under the Securities Act of 1933 to sell publicly traded equity
securities held by it for at least two years on the open market, subject to the
volume restrictions set forth in that rule. The Rule 144 volume restrictions
generally are not applicable to equity securities of non-affiliated companies
held by the Retirement Fund for at least three years. In certain cases, the
Retirement Fund has agreed not to make any sales of equity securities for a
specified hold-back period following a public offering.
The Investment Adviser reviews each portfolio company's financial
statements quarterly. In addition, the Investment Adviser routinely reviews and
discusses financial and operating results with the company's management and
where appropriate, attends board of director meetings. In some cases,
representatives of the Investment Adviser, acting on behalf of the Funds (and
affiliated investors where applicable), serve as one or more of the directors on
the boards of portfolio companies. The Retirement Fund may, from time to time,
make follow-on investments to the extent necessary to protect or enhance its
existing investments.
Results of Operations
Investment Income and Expenses
The investment income from operations for the period consists primarily
of interest and discount income earned on the investment of proceeds from
partners' contributions in Mezzanine Investments and short-term money market
instruments.
For the year ended December 31, 1995, the Retirement Fund had investment
income of $6,433,071, as compared to $9,485,887 for the same period in 1994 and
$9,784,746 for the same period in 1993. This decrease in 1995 investment income
from 1994 is due primarily to the decline in short-term interest income stemming
from the decrease in short term interest rates and in the amount of Temporary
Investments held by the Retirement Fund after distributions of return of capital
to partners. Also contributing to this decrease is the sale of Mezzanine
Investments during 1995. The decrease in 1994 investment income from 1993 is due
primarily to the sales and redemption of Mezzanine Investments.
Major expenses for the period consisted of Legal and Professional Fees,
Investment Advisory Fees, Fund Administration Fees and Administrative Expenses.
Legal and Professional Fees were primarily incurred in connection with
the litigation proceedings as described in Note 11 to the Financial Statements.
Professional fees for the years ended December 31, 1995, 1994 and 1993 were
$1,389,303, $1,659,263, and $2,419,228, respectively. These expenses are
attributable to legal fees incurred and advanced on behalf of indemnified
defendants as well as fees incurred directly by the Retirement Fund in
connection with the aforementioned litigation proceedings.
The Investment Adviser and Fund Administrator both receive their
compensation on a quarterly basis. The total Investment Advisory Fees paid to
the Investment Adviser for the years ended December 31, 1995, 1994 and 1993 were
$1,063,604, $1,202,216, and $1,411,755, respectively, and were calculated at an
annual rate of 1.0% of assets under management (net offering proceeds reduced by
cumulative capital reductions), with a minimum annual amount of $1,200,000 for
the Retirement Fund and Fund II on a combined basis. These decreases in
Investment Advisory Fees are a direct result of the sales of investments,
returns of capital to Partners and realized losses on investments.
The Fund Administration Fees paid to the Fund Administrator for the
years ended December 31, 1995, 1994 and 1993 were $602,002, $633,558, and
$715,816, respectively, and were calculated at an annual rate of 0.45% of the
excess of net offering proceeds, less 50% of capital reductions. These decreases
in Fund Administration Fees are a direct result of sales of investments, returns
of capital distributed to partners and realized losses on investments.
Pursuant to the administrative services agreement between the Retirement
Fund and the Fund Administrator, effective November 10, 1993, a portion of the
actual out-of-pocket expenses incurred in connection with the administration of
the Retirement Fund is reimbursable to the Fund Administrator. Actual
out-of-pocket expenses ("reimbursable expenses") primarily consist of printing,
audits, tax preparation and custodian fees.
For the year ended December 31, 1995, the Retirement Fund had net
investment income of $3,071,361, as compared to $5,571,207 for the same period
in 1994 and $4,904,017 for the same period in 1993. This decrease in 1995 as
compared to 1994 is primarily attributable to a decrease in interest income from
Mezzanine Investments and Temporary Investments partially offset by lower
Investment Advisory Fees, Fund Administration Fees, and Expenses and Legal and
Professional Fees. The increase in 1994 net investment income as compared to
1993 can be attributed to the lower Investment Advisory Fees, Fund
Administration Fees and Legal and Professional Fees in 1994, offset by Petco
Animal Supplies' March 17, 1994 initial public offering and the recognition of
thirty-eight and one half months of interest, discount and dividend income
recorded in the first quarter of 1994.
Net Assets
The Retirement Fund's net assets decreased by $45,115,400 during the
year ended December 31, 1995, due to the payment of cash distributions to
partners of $29,053,844 ($15,645,654 of the cash distributions paid was return
of capital from the sales of portfolio investments) and net unrealized
depreciation of $28,395,532, partially offset by net investment income of
$3,071,361 and realized gains of $9,262,616 from the sale of Mezzanine
Investments.
The Retirement Fund's net assets decreased by $144,859,649 during the year
ended December 31, 1994, due to the payment of cash distributions to partners of
$110,407,812 ($17,985,052 of cash distributions paid was return of capital from
the sales of portfolio investments) and net unrealized depreciation of
$114,349,601, partially offset by net investment income of $5,571,207 and
realized gains of $74,326,557. The 1994 decrease in net assets over the year is
considerably larger than the increase recorded in the comparable 1993 period.
This is primarily attributed to the appreciation recorded in 1993 compared with
the depreciation recorded in 1994 and the increase in the cash distributions
paid during 1994 from the sale of the Snapple common stock.
Unrealized Appreciation and Depreciation on Investments
For the year ended December 31, 1995, the Retirement Fund recorded net
unrealized depreciation of $28.4 million of which $23.3 million was related to
net depreciation in market value of publicly traded securities. This decrease
can be attributed primarily to the decrease in value of the Retirement Fund's
investment in First Alert, Inc. and Hills Stores Company at December 31, 1995,
as well as the reversal of appreciation on the investment in EquiCredit upon the
sale of EquiCredit Securities. This compares to a net unrealized depreciation of
$114.3 million for the same period in 1994 of which $111.1 million was related
to net depreciation in market value of publicly traded securities. The
Retirement Fund's cumulative net unrealized depreciation on investments as of
December 31, 1995 totaled $8.5 million.
For the year ended December 31, 1993, the Retirement Fund recorded net
unrealized appreciation of $94,671,310 of which $83,500,000 was related to net
appreciation in market value of publicly traded securities. The increase can be
attributed primarily to the increase in valuation on Snapple Beverage Corp.
The Retirement Fund's valuation of the common stock of First Alert,
Hills, Petco, Playtex and Stanley Furniture reflect their closing market prices
at December 31, 1995.
The Managing General Partner and the Investment Adviser review the
valuation of the Retirement Fund's portfolio investments that do not have a
readily ascertainable market value on a quarterly basis with final approval from
the Individual General Partners. Portfolio investments are valued at original
cost plus accrued value in the case of original issue discount or deferred pay
securities. Such investments will be revalued if there is an objective basis for
doing so at a different price. Investments will be written down in value if the
Managing General Partner and Investment Advisor 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.
A substantial number of the Retirement Fund's assets (at cost) are
invested in private placement securities for which there are no ascertainable
market values. Although the Managing General Partner and Investment Adviser use
their best judgment in estimating the fair value of these investments, there are
inherent limitations in any estimation technique. Therefore, the fair value
estimates presented herein are not necessarily indicative of the amount which
the Retirement Fund could realize in a current transaction.
The First Alert, Petco, Hills, Playtex and Stanley Furniture securities
held by the Retirement Fund are restricted securities under the SEC's Rule 144
and can only be sold under that rule, in a registered public offering, or
pursuant to an exemption from the registration requirement. In addition, resale
in some cases is restricted by lockup or other agreements. The Retirement Fund
may be considered an affiliate of First Alert and Stanley Furniture under the
SEC's Rule 144, and therefore any resale of securities of those companies, under
Rule 144, is limited by the volume limitations in that rule. Accordingly, the
values referred to in the financial statements for the remaining First Alert,
Hills, Petco, Playtex and Stanley Furniture securities held by the Retirement
Fund do not necessarily represent the prices at which these securities could
currently be sold.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of December
31, 1995. 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 - page 41).
Realized Gains and Losses
For the year ended December 31, 1995, the Retirement Fund had net
realized gains from investments of $9.3 million as compared to $74.3 million and
$16 million for the same periods in 1994 and 1993, respectively.
For additional information, please refer to Supplemental Schedule of
Realized Gains and Losses (Schedule 1 - page 40).
Cash Distributions
On February 8, 1996, the Individual General Partners approved the fourth
quarter 1995 cash distribution totalling $19,587 which represents net investment
income of $159,555 from Temporary Investments offset by a net investment loss
from Mezzanine Investments of $139,968. The total amount distributed to Limited
Partners was $19,527 or $.11 per Unit, which was paid on February 14, 1996. The
Managing General Partner received a total of $55, with respect to its interest
in the Retirement Fund. Thomas H. Lee, as an Individual General Partner,
received $5 with respect to his interest in the Retirement Fund.
Cash Distributions
The following table represents distributions approved by the Individual
General Partners of ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. since
inception (November 10 , 1989):
Total Managing Individual
Distributed Limited Partners General Incentive General
Cash (a) Amount Per Unit (b) Partner Fee (c) Partner
----------- ---------- -------- --------- --------- ---------
Fourth Quarter 1989 $ 1,049,749 $ 1,046,507 $ 6.59 $ 2,947 $ - $ 295
First Quarter 1990 2,906,023 2,897,045 16.32 8,162 816
Second Quarter 1990 3,586,751 3,479,294 19.60 10,073 96,377 1,007
Third Quarter 1990 2,735,077 2,726,630 15.36 7,679 - 768
Fourth Quarter 1990 4,076,832 3,891,129 21.92 11,446 173,112 1,145
First Quarter 1991 2,297,038 2,289,944 12.90 6,449 - 645
Second Quarter 1991 2,919,747 2,910,729 16.90 8,198 - 820
Third Quarter 1991 2,327,308 2,320,120 13.07 6,535 - 653
Fourth Quarter 1991 2,646,044 2,637,873 14.86 7,428 - 743
First Quarter 1992 3,055,858 3,046,157 17.16 8,843 - 858
Second Quarter 1992 3,272,572 3,262,726 18.38 8,927 - 919
Third Quarter 1992 2,638,921 2,630,772 14.82 7,408 - 741
Fourth Quarter 1992 2,897,119 2,888,169 16.27 8,136 - 814
Distribution
on 4/13/93 for
Return of Capital
from the sale of
Snapple Notes 12,786,849 12,747,352 71.81 35,906 - 3,591
First Quarter 1993 19,889,862 19,828,426 111.70 (d) 55,851 - 5,585
Second Quarter 1993 1,230,430 1,226,629 6.91 3,455 - 346
Third Quarter 1993 5,555,625 5,538,468 31.20 (e) 15,597 - 1,560
Fourth Quarter 1993 13,364,699 11,905,931 67.07 (f) 38,388 1,416,541 3,839
First Quarter 1994 14,934,550 14,117,768 79.53 (g) 41,938 770,650 4,194
Second Quarter 1994 3,184,138 2,792,311 15.73 (h) 8,941 381,992 894
Third Quarter 1994 810,197 807,693 4.55 (i) 2,276 - 228
Distribution
on 12/15/94 for
proceeds from the
sale of Snapple
Common Stock 78,114,228 63,770,489 359.24 (j) 237,847 14,082,107 23,785
Fourth Quarter 1994 279,288 221,894 1.25 627 56,704 63
Distribution
on 2/14/95 for
proceeds from the
sale of EquiCredit
Common Stock 8,303,170 6,860,956 38.65 (k) 24,411 1,415,362 2,441
First Quarter 1995 5,893,413 4,899,415 27.60 13,801 978,817 1,380
Second Quarter 1995 2,077,699 1,352,664 7.62 (l) 4,820 719,733 482
Third Quarter 1995 1,890,622 1,088,166 6.13 3,069 799,080 307
Distribution
on 12/11/95 of
proceeds from the
sale of Sun
Pharmaceuticals 10,609,653 10,150,307 57.18 (m) 28,591 427,896 2,859
Forth Quarter 1995 19,587 19,527 .11 55 - 5
------------ ------------ --------- --------- ----------- ---------
Totals $215,353,049 $193,355,091 $1,090.43 $ 617,804 $21,318,371 (n) $ 61,783
============ ============ ========= ========= =========== =========
(a) Distributions are paid no later than 45 days after the end of each
quarter.
(b) For periods prior to the Third Quarter 1991, the amount shown is for the
1st closing participants only. The second closing amounts as to such
periods will vary.
(c) Incentive distribution to the Managing General Partner for exceeding the
cumulative Priority Return of 10% on Mezzanine Investments to Limited
Partners.
(d) Includes $97.16 per Unit return of capital from the sale of EquiCredit
and Playtex securities.
(e) Includes $3.49 per Unit return of capital from the sale of EquiCredit
securities.
(f) Includes $1.89 per Unit return of capital from the sale of EquiCredit
and Snapple securities.
(g) Includes $72.50 per Unit return of capital from the redemption of BRK
Electronics and Petco Notes.
(h) Includes $10.00 per Unit return of uninvested proceeds.
(i) Includes $2.79 per Unit return of uninvested proceeds.
(j) Includes $13.81 per Unit return of capital from the sale of Snapple
Common Stock.
(k) Includes $3.82 per Unit return of capital from the sale of EquiCredit
Common Stock.
(l) Includes $0.38 per Unit return of capital from the sale of Petco Common
Stock.
(m) Includes $51.57 per Unit return of capital from the sale of Sun
Pharmaceuticals.
(n) As of February 14, 1996, there is a Deferred Distribution Amount
outstanding of $5,211,680 that is payable to the Managing General
Partner. This amounts equates to $29.36 per Limited Partner Unit and
will be paid out of Net Mezzanine Income, after the priority return has
been reached, before this source of income can be distributed to the
Limited Partners.
Item 8. Financial Statements and Supplementary Data
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
TABLE OF CONTENTS
Reports of Independent Accountants
Statements of Assets, Liabilities and Partners' Capital
As of December 31, 1995 and December 31, 1994
Statements of Operations
For the Years Ended December 31, 1995,
December 31, 1994 and December 31, 1993
Statements of Changes in Net Assets
For the Years Ended December 31, 1995,
December 31, 1994 and December 31, 1993
Statements of Cash Flows
For the Years Ended December 31, 1995,
December 31, 1994 and December 31, 1993
Statements of Changes in Partners' Capital
For the Years Ended December 31,1995,
December 31, 1994 and December 31, 1993
Schedule of Portfolio Investments - December 31, 1995
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
March 15, 1996, except as to Note 14 which is as of March 22, 1996.
To the General and Limited Partners of ML-Lee Acquisition Fund (Retirement
Accounts) II, L.P.
In our opinion, the accompanying statements of assets, liabilities and partners'
capital, including the schedule of portfolio investments, and the related
statements of operations, of changes in net assets, of cash flows, and of
changes in partners' capital present fairly, in all material respects, the
financial position of ML-Lee Acquisition Fund (Retirement Accounts) II, L.P.
(the "Fund") at December 31, 1995 and 1994, 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, 1995, 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 audits 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, 1995 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations were not received, provide a reasonable
basis for the opinion expressed above.
The financial statements include securities, valued at $79,513,706 at December
31, 1995 (89.9% 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. We have reviewed the procedures used by the
Managing General Partner and the Investment Adviser in arriving at their
estimate of value and have inspected underlying documentation, and, in the
circumstances, we believe the procedures are reasonable and the documentation
appropriate. However, those estimated values may differ significantly from the
values that would have been used had a ready market for the securities existed,
and the differences could be material to the financial statements.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of 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.
PRICE WATERHOUSE LLP
New York, New York
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
December 31, 1995 December 31, 1994
----------------- -----------------
ASSETS:
Investments - Notes 2,4,5
Portfolio Investments at fair value
Managed Companies (amortized cost $63,435
at December 31, 1995 and $72,484 at
December 31, 1994) $ 62,874 $ 95,185
Non-Managed Companies (amortized cost $24,931
at December 31, 1995 and $24,420 at
December 31, 1994) 16,970 21,592
Temporary Investments, at amortized cost
(cost $8,202 at December 31, 1995 and $16,329
at December 31, 1994) 8,218 16,370
Cash 1 1
Accrued Interest Receivable - Note 2 1,237 1,217
Prepaid Expenses 4 4
----------- -----------
TOTAL ASSETS $ 89,304 $ 134,369
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities
Professional Fees Payable $ 311 $ 56
Reimbursable Administrative Expenses Payable 46 70
Independent General Partners' Fees Payable
- Note 9 45 62
Deferred Interest Income - Note 2 426 590
----------- -----------
Total Liabilities 828 778
----------- -----------
Partners' Capital - Note 2
Individual General Partner 28 40
Managing General Partner 4,897 6,824
Limited Partners (177,515 Units) 83,551 126,727
----------- -----------
Total Partners' Capital 88,476 133,591
----------- -----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 89,304 $ 134,369
=========== ===========
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
For the Years Ended
-------------------------------------------
December 31, December 31, December 31,
1995 1994 1993
-------------- ------------- --------------
INVESTMENT INCOME - Notes 2,4,6:
Interest $ 5,530 $ 8,277 $ 8,323
Discount 816 1,163 1,257
Dividends 87 46 205
--------- --------- ---------
TOTAL INCOME 6,433 9,486 9,785
--------- --------- ---------
EXPENSES:
Investment Advisory Fee - Note 7 1,064 1,202 1,412
Fund Administration Fee - Note 8 602 634 716
Reimbursable Administrative Expenses-Note 8 101 220 -
Legal and Professional Fees 1,389 1,659 2,419
Independent General Partners' Fees and 201 155 282
Expenses - Note 9
Amortization of Deferred Organization - 40 47
Expenses - Note 2
Insurance Expense 5 5 5
--------- --------- ---------
TOTAL EXPENSES 3,362 3,915 4,881
--------- --------- ---------
NET INVESTMENT INCOME 3,071 5,571 4,904
Net Realized Gain on Investments - Note 4 9,263 74,327 15,978
and Schedule 1
Net Change in Unrealized (Depreciation)
Appreciation from Investments Note 5
and Schedule 2:
Publicly Traded Securities (23,262) (111,096) 83,500
Nonpublic Securities (5,133) (3,254) 11,171
--------- --------- ---------
SUBTOTAL (28,395) (114,350) 94,671
NET (DECREASE) INCREASE IN NET ASSETS
--------- --------- ---------
RESULTING FROM OPERATIONS (16,061) (34,452) 115,553
Less: Incentive Fees to Managing General (2,592) (21,518) (1,723)
Partner --------- --------- ---------
NET (DECREASE) INCREASE AVAILABLE FOR
PRO-RATA DISTRIBUTION TO ALL PARTNERS $ (18,653) $ (55,970) $ 113,830
========= ========== =========
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
For the Years Ended
--------------------------------------------
December 31, December 31, December 31,
1995 1994 1993
-------------- ------------- --------------
FROM OPERATIONS:
Net Investment Income $ 3,071 $ 5,571 $ 4,904
Net Realized Gain From Investments 9,263 74,327 15,978
Net Change in Unrealized (Depreciation)
Appreciation From Investments (28,395) (114,350) 94,671
--------- --------- ---------
Net (Decrease) Increase in Net Assets
Resulting from Operations (16,061) (34,452) 115,553
Cash Distributions to Partners (29,054) (110,408) (42,360)
--------- --------- ---------
Total (Decrease) Increase $ (45,115) $(144,860) $ 73,193
NET ASSETS:
Beginning of Year 133,591 278,451 205,258
--------- --------- ---------
End of Year $ 88,476 $ 133,591 $ 278,451
========= ========= =========
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
For the Years Ended
--------------------------------------------
December 31, December 31, December 31,
1995 1994 1993
------------- -------------- ---------------
Increase (Decrease) in Cash and Cash Equivalents
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest, Dividends and Discount Income $ 5,763 $ 10,001 $ 9,789
Fund Administration Fee (602) (634) (716)
Investment Advisory Fee (1,064) (1,202) (1,412)
Independent General Partners' Fees and (218) (147) (240)
Expenses
Sale of Temporary Investments, Net 8,127 20,797 14,687
Purchase of Portfolio Company Investments (1,865) (6,887) (13,177)
Proceeds from Sales of Portfolio Company 20,176 90,308 35,650
Investments
Closing Fees Received - 40 128
Reimbursable Administrative Expense (125) (150) -
Legal and Professional Fees (1,134) (1,713) (2,336)
Insurance Expense (4) (5) (5)
Prepaid Expense - - (7)
--------- --------- ---------
Net Cash Provided by Operating 29,054 110,408 42,361
Activities --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Distributions to Partners (29,054) (110,408) (42,360)
--------- --------- ---------
Net Cash Applied to Financing (29,054) (110,408) (42,360)
Activities --------- --------- ---------
Net Increase (Decrease) in Cash - - 1
Cash at Beginning of Year 1 1 -
--------- --------- ---------
Cash at End of Year $ 1 $ 1 $ 1
========= ========= =========
RECONCILIATION OF NET INVESTMENT INCOME
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Investment Income $ 3,071 $ 5,571 $ 4,904
--------- --------- ---------
Adjustments to Reconcile Net Investment
Income to Net Cash Provided by Operating
Activities:
Decrease in Investments 17,176 30,152 21,182
Net Realized Gains on Sales of Investments 9,263 74,327 15,978
(Increase) Decrease in Accrued Interest (670) 515 4
Receivables
Amortization of Deferred Organization Expenses - 40 47
Decrease in Prepaid Expenses - 8 (7)
Increase in Independent General Partners' Fees (17) 16 42
Payable
Increase in Professional Fees Payable 255 (62) 83
(Decrease)Increase in Reimbursable
Administrative Expenses Payable (24) 70 -
Increase in Deferred Closing Fee - 40 128
(Decrease) in Option Payable - (269) -
--------- --------- ---------
Total Adjustments 25,983 104,837 37,457
--------- --------- ---------
Net Cash Provided by Operating Activities $ 29,054 $ 110,408 $ 42,361
========= ========= =========
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
Individual Managing
General General Limited
Partner Partner Partners Total
------------ ----------- ------------ ------------
For the year Ended December 31, 1993
Partners' Capital at January 1, 1993 $ 61 $ 456 $ 204,741 $ 205,258
Allocation of Net Investment Income 2 332 4,570 4,904
Allocation of Net Realized Gain on 5 1,448 14,525 15,978
Investments
Allocation of Net Change in Unrealized
Appreciation From Investments 26 266 94,379 94,671
Cash Distributions to Partners (12) (119) (42,229) (42,360)
--------- --------- --------- ---------
Partners' Capital at December 31, 1993 $ 82 $ 2,383 $ 275,986 $ 278,451
========= ========= ========= =========
For the year Ended December 31, 1994
Partners' Capital at January 1, 1994 $ 82 $ 2,383 $ 275,986 $ 278,451
Allocation of Net Investment Income 2 1,086 4,483 5,571
Allocation of Net Realized Gain on 21 20,657 53,649 74,327
Investments
Allocation of Net Change in Unrealized
Depreciation From Investments (32) (321) (113,997) (114,350)
Cash Distributions to Partners (33) (16,981) (93,394) (110,408)
--------- --------- --------- ---------
Partners' Capital at December 31, 1994 $ 40 $ 6,824 $ 126,727 $ 133,591
========= ========= ========= =========
For the year Ended December 31, 1995
Partners' Capital at January 1, 1995 $ 40 $ 6,824 $ 126,727 $ 133,591
Allocation of Net Investment Income - 1 1,021 2,049 3,071
Note 3
Allocation of Net Realized Gain on
Investments - Notes 3,4 3 1,605 7,655 9,263
Allocation of Net Change in Unrealized
Depreciation From Investments-Notes 2,5 (8) (80) (28,307) (28,395)
Cash Distributions to Partners (8) (4,473) (24,573) (29,054)
--------- --------- --------- ---------
Partners' Capital at December 31, 1995 $ 28 $ 4,897 $ 83,551 $ 88,476
- - Notes 2,3 ========= ========= ========= =========
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/Shares Investment Investment Value Total
Investment Date Cost(e) (Note 2) Investments
MEZZANINE INVESTMENTS
MANAGED COMPANIES
ANCHOR ADVANCED PRODUCTS, INC. (b)
$3,133 Anchor Advanced Products, Inc., Sr. Sub. Nt. 11.67% due 04/30/00 (c) 04/30/90 $3,133 $3,133
$4,178 Anchor Advanced Products, Inc., Jr. Sub. Nt. 17.5% due 04/30/00 (c) 04/30/90 4,178 4,178
87,033 Shares Anchor Holdings, Inc., Common Stock (d) 04/30/90 827 827
132,290 Warrants Anchor Holdings, Inc., Common Stock Purchase Warrants(d) 04/30/90 0 0
(13.9% of fully diluted common equity assuming exercise
of warrants) (i) 8,138 8,138 9.24
BIG V SUPERMARKETS, INC. (b)
$6,963 Big V Supermarkets, Inc., Sr. Sub. Nt. 14.14% due 03/15/01(c) 12/27/90 6,963 6,963
62,667 Shares Big V Holding Corp., Inc., Common Stock(d) 12/27/90 2,193 2,193
(8.8% of fully diluted common equity) (i) 9,156 9,156 10.40
COLE NATIONAL CORPORATION
717 Warrants Cole National Corporation, Common Stock Purchase Warrants(d) 09/26/90 0 0
(0.0% of fully diluted common equity assuming exercise of
warrants)(i)
$744 13% Sr. Secured Bridge Note
Purchased 09/25/90 $744
Repaid 11/15/90 $744
Realized Gain $ 0
0 0 0.00
CST OFFICE PRODUCTS, INC. (b) - Notes 6,14
$3,395 Lee-CST Acquisition Corp., Sr. Sub. Nt. 12% due 03/31/00(c)(g) 03/30/90 3,395 3,395
$3,395 Lee-CST Acquisition Corp., Jr. Sub. Nt. 18% due 03/31/00(c)(g) 03/30/90 3,395 3,395
$1,691 CST Office Products Corp., Sr. Sub. Nt. 15% due 03/31/00(c)(f)(g) Various 104 104
$2,301 CST Office Products Corp., Jr. Sub. Nt. 15% due 06/30/96(c)(f)(g) Various 0 0
87,051 Shares Lee-CST Holding Corp., Common Stock (d) 03/30/90 696 696
94,668 Warrants Lee-CST Holding Corp., Common Stock Purchase Warrants(d) 03/30/90 0 0
(11.9% of fully diluted common equity assuming exercise of
warrants) (i) 7,590 7,590 8.62
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/Shares Investment Investment Value Total
Investment Date Cost(e) (Note 2) Investments
Investments
FIRST ALERT, INC.(b) - Note 5
2,281,524 Shares First Alert, Inc., Common Stock(a)(d) 07/31/92 $3,680 $19,678
(8.9% of fully diluted common equity) (i)
$11,302 12.5% Subordinated Note
Purchased 07/31/92 $11,302
Repaid 03/28/94 $11,302
Realized Gain $ 0
3,680 19,678 22.35
GHIRARDELLI HOLDINGS CORPORATION(b) - Notes 4,14
$5,328 Ghirardelli Holdings Corporation, 13% Subordinated Note due 03/31/02(c) 03/31/92 5,328 5,328
532,800 Shares Ghirardelli Holdings Corporation, Common Stock(d) 03/31/92 1,066 1,066
84,039 Shares Ghirardelli Holdings Corporation, Common Stock(d) 05/12/95 266 266
15,984 Shares Ghirardelli Holdings Corporation, Series A Preferred Stock(d) 05/12/95 1,598 1,598
(10.6% of fully diluted common equity) (i)
$7,992 Sr. Bridge Note
Purchased 03/31/92 $7,992
Repaid 06/11/92 $7,992
Realized Gain $ 0
8,258 8,258 9.38
HILLS STORES COMPANY - Notes 4,5
244,818 Shares Hills Stores Company, Common Stock(a)(d) 04/03/90 16,153 2,418
33,427 Shares Hills Stores Company, Common Stock(a)(h) 08/21/95 2,418 330
(2.5% of fully diluted common equity) (i) 18,571 2,748 3.12
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/Shares Investment Investment Value Total
Investment Date Cost(e) (Note 2) Investments
Investments
PETCO ANIMAL SUPPLIES, INC. (b) - Notes 4,5
62,379 Shares Petco Animal Supplies, Common Stock(a)(d)(f) Various $1,023 $ 1,825
(.7% of fully diluted common equity)(i)
$28 14% Sr. Sub. Bridge Notes
Purchased various $ 28
Repaid 04/19/91 $ 28
Realized Gain $ 0
$900 12.5% Sr. Sub. Notes
Purchased various $ 900
Repaid 03/28/94 $ 900
Realized Gain $ 0
Total Realized Gain $ 0
64,151 Shares Common Stock
Purchased Various $1,052
Sold 04/26/95 $1,265
Total Realized Gain $ 213
1,023 1,825 2.07
PLAYTEX PRODUCTS, INC.(b) - Notes 4,5
183,560 Shares Playtex Products, Inc., Common Stock(a)(d) 03/29/90 2,830 1,377
(0.3% of fully diluted common
equity)(i)
$3,916 15% Subordinated Note
Purchased 03/29/90 $3,916
Sold 09/28/90 $3,925
Realized Gain $ 9
45,323 Shares Common Stock
Purchased 03/29/90 $ 151
Sold 12/20/91 $ 175
Realized Gain $ 24
$3,916 15% Subordinated Note
Purchased 03/29/90 $3,916
Sold 02/01/93 $3,912
Realized Loss $ (4)
Total Net Realized Gain $ 29
2,830 1,377 1.56
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/Shares Investment Investment Value Total
Investment Date Cost(e) (Note 2) Investments
Investments
RESTAURANTS UNLIMITED
$3,956 Restaurants Unlimited, 11% Sub. Nt. due 06/30/02(c) 06/03/94 $3,956 $ 3,956
256,083 Warrants Restaurants Unlimited, Common Stock Warrants(d) 06/03/94 0 0
(1.4% of fully diluted common equity) (i) 3,956 3,956 4.49
STANLEY FURNITURE COMPANY, INC. (b) - Note 5
18,511 Shares Stanley Furniture Company, Inc., Common Stock(a)(d) 06/30/91 233 148
(0.4% of fully diluted common equity)(i) 233 148 0.17
TOTAL INVESTMENT IN MANAGED COMPANIES $63,435 $62,874 71.40
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/Shares Investment Investment Value Total
Investment Date Cost(e) (Note 2) Investments
Investments
NON-MANAGED COMPANIES
BIOLEASE, INC.
$513 Biolease, Inc., 13% Sub. Nt. due 06/06/04(c) 06/08/94 $ 443 $ 454
63.20 Shares Biolease, Inc., Common Stock(d) 06/08/94 62 62
26,218 Warrants Biotransplant, Inc., Common Stock Purchase Warrants(d) 06/08/94 9 9
514 525 0.60
FITZ AND FLOYD/SILVESTRI (b) - Notes 5,6
$6,719 FFSC, Inc., Adjustable Rate Sr. Sub. Nt. due 03/31/03(c)(g) 03/31/93 6,709 5,111
$1,581 FFSC, Inc., Adjustable Rate Sr. Sub. Nt. due 03/31/03(c)(g) 07/30/93 1,578 1,203
988,144 Shares FF Holding Co., Common Stock(d) 03/31/93 10 0
336,364 Shares FF Holding Co., Common Stock(d) 07/30/93 3 0
337,155 Shares FF Holding Co., Common Stock(d) 12/22/94 0 0 7.17
8,300 6,314
FLA. ORTHOPEDICS, INC - Notes 5,6,12
$3,158 FLA. Acquisition Corp., 12.5% Sub, Nt. due 07/31/99(c)(g) 08/02/93 3,158 0
78,960 Shares FLA. Holdings, Inc. Common Stock (d) 08/02/93 987 0
47,376 Warrants FLA. Holdings, Inc. Common Stock Purchase Warrants(d) 08/02/93 0 0
4,145 0 0.00
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/Shares Investment Investment Value Total
Investment Date Cost(e) (Note 2) Investments
Investments
NATIONAL TOBACCO COMPANY, L.P.
$3,997 National Tobacco Company, 13% Sub. Nt. due 10/15/98(c) 04/14/92 $ 3,997 $ 3,997
$131 National Tobacco Company, 16% Sub. Nt. due 10/15/98(c)(f) 06/30/93 131 131
$266 National Tobacco Company, Class A Partnership Int.(d) 04/14/92 266 266
4,394 4,394 4.99
SORETOX - Notes 4,5,6
$3,997 Stablex Canada, Inc., Sr. Sub. Nt. 10% due 06/30/07(c)(f)(g) 06/29/95 3,997 2,955
3,568 Stablex Canada, Inc., Jr. Sub. Nt. 11% due 06/30/09(c)(f)(g) 06/29/95 3,568 2,782
2,286 Warrants Seaway TLC, Inc. Common Stock Purchase Warrants 06/29/95 0 0
7,565 5,737 6.51
TOTAL INVESTMENT IN NON-MANAGED COMPANIES $24,918 $16,970 19.27
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes Various 54,033 47,085 53.47
Partnership Interest 04/14/92 266 266 0.30
Preferred Stock, Common Stock, Warrants and Stock Rights Various 34,054 32,493 36.90
TOTAL MEZZANINE INVESTMENTS $88,353 $ 79,844 90.67
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS)
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/Shares Investment Investment Value Total
Investment Date Cost(e) (Note 2) Investments
TEMPORARY INVESTMENTS
CERTIFICATES OF DEPOSIT AND TIME DEPOSIT
$ 395 Banque National de Paris, 3.875% due 03/29/96 - Note 12 08/18/93 395 395
TOTAL INVESTMENT IN CERTIFICATES OF DEPOSITS 395 395 0.45
COMMERCIAL PAPER
$ 724 Ford Motor Credit, 5.92% due 01/02/96 12/27/95 724 725
$7,083 Ford Motor Credit, 5.81% due 01/03/96 12/19/95 7,083 7,098
TOTAL INVESTMENT IN COMMERCIAL PAPER 7,807 7,823 8.88
TOTAL TEMPORARY INVESTMENTS $ 8,202 $ 8,218 9.33
TOTAL INVESTMENT PORTFOLIO $ 96,555 $ 88,062 100.00%
(a) Publicly traded class of securities.
(b) Represents investment in affiliates as defined in the Investment Company
Act of 1940.
(c) Restricted security.
(d) Restricted non-income producing equity security.
(e) Represents original cost and excludes accretion of discount of $12,978 for
Mezzanine Investments and $15,492 for Temporary Investments.
(f) Inclusive of receipt of payment-in-kind securities.
(g) Non-accrual investment status.
(h) Non-income producing equity security.
(i) Percentages of common equity have not been audited by Price Waterhouse LLP.
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. Organization and Purpose
ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. (the "Retirement
Fund") (formerly T.H. Lee Acquisition Fund (Retirement Accounts) II, L.P.) was
formed along with ML-Lee Acquisition Fund II, L.P. ("Fund II"; collectively
referred to as the "Funds") and the Certificates of Limited Partnership were
filed under the Delaware Revised Uniform Limited Partnership Act on September
23, 1988. The Funds' operations commenced on November 10, 1989.
Mezzanine Investments II, L.P. (the "Managing General Partner"), subject to
the supervision of the Individual General Partners, is responsible for
overseeing and monitoring the Retirement Fund's investments. The Managing
General Partner is a Delaware limited partnership in which ML Mezzanine II Inc.
is the general partner and Thomas H. Lee Advisors II, L.P., the Investment
Adviser to the Funds, is the limited partner. The Individual General Partners
are Vernon R. Alden, Joseph L. Bower and Stanley H. Feldberg (the "Independent
General Partners") and Thomas H. Lee.
The Retirement Fund has elected to operate as a business development
company under the Investment Company Act of 1940. The Retirement Fund's primary
investment objective is to provide current income and capital appreciation
potential by investing in privately-structured, friendly leveraged buyouts and
other leveraged transactions. The Retirement Fund pursues this objective by
investing primarily in subordinated debt and related equity securities issued in
conjunction with the "mezzanine financing" of friendly leveraged buyout
transactions, leveraged acquisitions and leveraged recapitalizations. The
Retirement Fund may also invest in "bridge investments" if it is believed that
such investments would facilitate the consummation of a mezzanine financing.
As stated in the Prospectus, the Retirement Fund will terminate no later
than December 20, 1999, subject to the right of the Individual General Partners
to extend the term for up to one additional two-year period and one additional
one-year period if it is in the best interest of the Retirement Fund. The
Retirement Fund will then have five additional years to liquidate its remaining
investments.
2. Significant Accounting Policies
Basis of Accounting
For financial reporting purposes, the records of the Retirement
Fund are maintained using the accrual method of accounting. For federal income
tax reporting purposes, the results of operations are adjusted to reflect
statutory requirements arising from book to tax differences. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
and disclosures in the financial statements. Actual reported results could vary
from these estimates.
Valuation of Investments
Securities for which market quotations are readily available are valued
by reference to such market quotation using the last trade price (if reported)
or the last bid price for the period. For securities without a readily
ascertainable market value (including securities restricted as to resale for
which a corresponding publicly traded class exists), fair value is determined,
on a quarterly basis, in good faith by the Managing General Partner and the
Investment Adviser with final approval from the Individual General Partners of
the Retirement Fund. For privately issued securities in which the Retirement
Fund typically invests, the fair value of an investment is its 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. Although the
Managing General Partner and Investment Adviser use their best judgment in
estimating the fair value of these investments, there are inherent limitations
in any estimation technique. Therefore, the fair value estimates presented
herein are not necessarily indicative of the amount which the Retirement Fund
could realize in a current transaction. Future confirming events will also
affect the estimates of fair value and the effect of such events on the
estimates of fair value could be material.
Temporary Investments with maturities of less than 60 days are stated at
amortized cost, which approximates market.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of December
31, 1995. Although the Managing General Partner and Investment Adviser are not
aware of any factors not disclosed herein that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued since that time, and because investments of companies whose equity is
publicly traded are valued at the last price at December 31, 1995, the current
estimated fair value of these investments may have changed significantly since
that point in time.
Interest Receivable on Investments
Investments generally will be placed on non-accrual status in the event
of a default (after the applicable grace period expires) or if the Investment
Adviser and the Managing General Partner determine that there is no reasonable
assurance of collecting interest.
Payment-In-Kind Securities
All payment-in-kind securities received in lieu of cash interest
payments by the Retirement Fund's portfolio companies are recorded at face value
(which approximates accrued interest), unless the Investment Adviser and the
Managing General Partner determine that there is no reasonable assurance of
collecting the full principal amounts of such securities. As of December 31,
1995 and December 31, 1994, the Retirement Fund has in its portfolio of
investments $739,601 and $235,451, respectively, of payment-in-kind notes which
excludes $4,298,447 and $1,723,465, respectively, of payment-in-kind notes
received from notes placed on non-accrual status. As of December 31, 1995 and
December 31, 1994, the Retirement Fund has in its portfolio of investments
$1,224,548 and $1,239,188 respectively of payment-in-kind equity.
Deferred Organization Expenses
Organization costs of $233,859 for the Retirement Fund were fully
amortized on November 10, 1994.
Investment Transactions
The Retirement Fund records investment transactions on the date on which
it obtains an enforceable right to demand the securities or payment therefor.
The Retirement Fund records Temporary Investment transactions on the trade date.
Realized gains and losses on investments are determined on the basis of
specific identification for accounting and tax purposes.
Sales and Marketing Expenses, Offering Expenses and Sales Commissions
Sales commissions and selling discounts were allocated to the specific
Partners' accounts in which they were applied. Sales and marketing expenses and
offering expenses were allocated between the Funds in proportion to the number
of Units issued by each Fund and to the Partners in proportion to their capital
contributions.
Deferred Interest Income
All fees received by the Retirement Fund upon the funding of Mezzanine
or Bridge Investments are treated as deferred interest income and amortized over
the maturity of such investments.
Partners' Capital
Partners' Capital represents the Retirement Fund's equity divided in
proportion to the Partners' Capital Contributions and does not represent the
Partners' Capital Accounts. Profits and losses, when realized, are allocated in
accordance with the provisions of the Partnership Agreement summarized in Note
3.
3. Allocations of Profits and Losses
Pursuant to the Partnership Agreement, all profits from Temporary
Investments generally will be allocated 99.69% to the Limited Partners, 0.28% to
the Managing General Partner and 0.03% to the Individual General Partner.
Profits from Mezzanine Investments will, in general, be allocated as follows:
first, if the capital accounts of any partners have negative balances,
to such partners in proportion to the negative balances in their capital
accounts until the balances of all such capital accounts equal zero,
second, 99.69% to the Limited Partners, 0.28% to the Managing General
Partner and 0.03% to the Individual General Partner until the sum
allocated to the Limited Partners equals any previous losses allocated
together with a cumulative Priority Return of 10% on the average daily
amount in Mezzanine Investments, and any outstanding Compensatory
Payments,
third, 69.69% to the Limited Partners, 30.281% to the Managing General
Partner and .029% to the Individual General Partner until the Managing
General Partner has received 20.281% of the total profits allocated,
thereafter, 79.69% to the Limited Partners, 20.281% to the Managing
General Partner and 0.029% to the Individual General Partner.
Losses will be allocated in reverse order of profits previously
allocated and thereafter 99.69% to the Limited Partners, 0.28% to the Managing
General Partner and 0.03% to the Individual General Partner.
4. Investment Transactions
On January 27, 1995, the Retirement Fund sold 259,474 shares of
EquiCredit Common Stock, realizing a gain of $7,623,346 on an original
investment of $679,822.
On April 27, 1995, Petco Animal Supplies, Inc. ("Petco") completed a
public offering of approximately 3.6 million shares of Common Stock (the "Petco
Offering") at a net price of $19.71 per share. Of the shares sold, approximately
2.4 million shares were offered by Petco and approximately 1.2 million were
offered by certain existing shareholders, including the Retirement Fund. As part
of the Petco Offering, the Retirement Fund sold 64,151 shares (including shares
sold as a result of the exercise of the underwriters' overallotment option)
representing 51% of its Petco holdings. The Retirement Fund received proceeds of
$1,264,577 and realized a gain of $212,949 on the sale of the equity.
On May 12, 1995, the Retirement Fund made a follow-on investment in
Ghirardelli Holdings Corp. for a total of $1,864,800. The Retirement Fund
received 15,984 shares of Series A Preferred Stock for $1,598,400 and 84,039
additional shares of Common Stock for $266,400.
Effective June 29, 1995, Soretox structured a management led buyout of the
company. As a result, the Stablex Canada, Inc. $7,060,925, 14% Subordinated Note
and the 209,829 shares of 176347 Canada, Inc. Common Stock Purchase Warrants
held by the Retirement Fund were exchanged for a Stablex Canada Inc. $3,996,750
principal amount 10% Subordinated Note, a $3,568,325 principal amount 11% Junior
Subordinated Note and 2,286 shares of Seaway TLC, Inc. Common Stock Purchase
Warrants. No gain or loss was recorded on the transaction.
On August 21, 1995, the Retirement Fund entered into a stock purchase and
exchange agreement with Hills Stores Company and exchanged the 116,994 Common
Stock Rights held by the Retirement Fund for 33,427 shares of Hills Stores
Common Stock. No gain or loss was recognized on the transaction. The common
shares were registered with the Securities and Exchange Commission in the fourth
quarter of 1995.
On October 17, 1995 Playtex Products, Inc. and Banana Boat Holding Corp.
entered an Agreement and Plan of Merger (the "Agreement") pursuant to which
Playtex agreed to acquire all of the outstanding equity of Banana Boat that it
did not already own. In accordance with the Agreement, the 12.5% Subordinated
Note held by the Retirement Fund, plus all accrued interest, was paid in full by
Playtex upon consummation of the merger. Additionally, the Retirement Fund
received net proceeds of $173.55 per share for each of the 8,218.5 Common Stock
Purchase Warrants that were exercised pursuant to the Agreement. As a result, on
October 31, 1995, the Retirement Fund received total proceeds of $10.7 million
which resulted in a gain of $1.4 million.
On August 6, 1991, the Independent General Partners approved a reserve
for follow-on investments of $20.0 million for the Retirement Fund. As of
December 31, 1995, the reserve balance was reduced to $8.2 million due to
follow-on investments of $153 in Petco Animal Supplies, $1.6 million in Fitz and
Floyd, Inc., $128,270 in Fine Clothing, Inc., $2.5 million in Hills Stores and
$1.9 million in Ghirardelli Holdings. Additionally, $5.7 million of the reserve
has been returned to the partners during 1995. The level of the reserve was
based upon an analysis of potential follow-on investments in specific portfolio
companies that may become necessary to protect or enhance the Retirement Fund's
existing investment. As of March 6, 1996, the Independent General Partners have
approved retention of the reserve at its current level.
Because the Retirement Fund 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 the Retirement Fund cannot eliminate the risks associated with
its investments in high-yield securities, it has procedures in place to
continually monitor the risks associated with its investments under a variety of
market conditions. Any potential Retirement Fund loss would generally be limited
to its investment in the portfolio company as reflected in the portfolio of
investments.
Should bankruptcy proceedings commence, either voluntarily or by action
of the court against a portfolio company, the ability of the Retirement Fund to
liquidate the position or collect proceeds from the action may be delayed or
limited.
5. Unrealized Appreciation and Depreciation of Investments
For the year ended December 31, 1995, the Retirement Fund recorded net
unrealized depreciation of $28.4 million of which $23.3 million was related to
net depreciation in market value of publicly traded securities. The unrealized
depreciation can be attributed primarily to the decrease in value of First Alert
and Hills Stores Company at December 31, 1995, as well as the reversal of
unrealized appreciation of EquiCredit from the sale of the EquiCredit securities
held by the Retirement Fund. This compares to a net unrealized depreciation of
$114.3 million of which $111.1 million was related to net depreciation in market
value of publicly traded securities for the same period in 1994. The Retirement
Fund's cumulative net unrealized depreciation on investments as of December 31,
1995 totaled $8.5 million.
For the year ended December 31, 1993, the Retirement Fund recorded net
unrealized appreciation of $94,671,310 of which $83,500,000 was related to net
appreciation in market value of publicly traded securities. The increase can be
attributed primarily to the increase in valuation on Snapple Beverage Corp.
The Retirement Fund's valuation of the Common Stock of First Alert,
Hills, Petco, Playtex and Stanley Furniture reflects their closing market prices
at December 31, 1995.
For additional information, please refer to the Supplemental Schedule of
Unrealized Appreciation and Depreciation (Schedule 2 - page 41).
6. Non-Accrual of Investments
In accordance with the Retirement Fund's Accounting Policy, the
following securities have been on non-accrual status since the date indicated:
- CST Office Products, Inc. on October 1, 1992 (See Note 14).
- Fitz and Floyd/Silvestri Corporation, on January 1, 1994.
- FLA Orthopedics, Inc. on January 1, 1995.
- Stablex Canada, Inc. on 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), with a minimum annual fee of $1.2 million for
the Retirement Fund and Fund II 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, 1995, 1994 and
1993, the Retirement Fund paid $1,063,604, $1,202,216, and $1,411,755,
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 annual amount of the greater of $500,000 or 0.45% of
the excess of net offering proceeds less 50% of capital reductions. In addition,
ML Mezzanine II Inc., an affiliate of the Fund Administrator and of Merrill
Lynch & Co. Inc., receives 5% of the benefit of any MGP Distributions paid to
the Managing General Partner (see Note 10). The Fund Administration Fee is
calculated and paid quarterly, in advance, by each fund in proportion with the
net offering proceeds. For the years ended December 31, 1995, 1994 and 1993, the
Retirement Fund paid $602,002, $633,558, and $715,816, respectively, in Fund
Administration Fees.
Pursuant to the administrative services agreement between the Retirement
Fund and the Fund Administrator, effective November 10, 1993, a portion of the
actual out-of-pocket expenses incurred in connection with the administration of
the Retirement Fund is being reimbursed to the Fund Administrator. Actual
out-of-pocket expenses ("reimbursable expenses") primarily consist of printing,
audits, tax preparation and custodian fees. For the years ended December 31,
1995 and 1994, the Retirement Fund incurred $100,721 and $220,205, respectively,
in reimbursable expenses.
9. Independent General Partners' Fees and Expenses
As compensation for their services, each Independent General Partner
will receive a combined annual fee of $40,000 (payable quarterly) from the Funds
in addition to a $1,000 fee for each meeting attended ($500 if a meeting is held
on the same day as a committee meeting of the General Partners) plus
reimbursement for any out-of-pocket expenses incurred. Fees and expenses are
allocated between the Funds in proportion to the number of Units issued by each
fund. Compensation for each of the Independent General Partners is reviewed
annually. For the years ended December 31, 1995, 1994 and 1993, the Retirement
Fund incurred $201,406, $153,909, and $281,709, respectively, in Independent
General Partners' Fees and Expenses.
10. Related Party Transactions
The Retirement Fund's investments generally are made as co-investments
with Fund II. In addition, certain of the Mezzanine Investments and Bridge
Investments which were made by the Retirement Fund involve co-investments with
entities affiliated with the Investment Adviser. Such co-investments are
generally prohibited absent exemptive relief from the Securities and Exchange
Commission (the "Commission"). As a result of these affiliations and the
Retirement Fund's expectation of engaging in such co-investments, the Funds
together with ML-Lee Acquisition Fund, L.P., sought an exemptive order from the
Commission allowing such co-investments, which was received on September 1,
1989. The Retirement Fund's co-investments in Managed Companies, and in certain
cases its co-investments in Non-Managed Companies, typically involve the entry
by the Funds and other equity security holders into stockholders' agreements.
While the provisions of such stockholders' agreements vary, such agreements may
include provisions as to corporate governance, registration rights, rights of
first offer or first refusal, rights to participate in sales of securities to
third parties, rights of majority stockholders to compel minority stockholders
to participate in sales of securities to third parties, transfer restrictions,
and preemptive rights.
Thomas H. Lee Company, a sole proprietorship owned by Thomas H. Lee, an
Individual General Partner of the Retirement Fund and an affiliate of the
Investment Adviser, typically performs certain management services for Managed
Companies and receives management fees in connection therewith, usually pursuant
to written agreements with such companies. In addition, certain of the portfolio
companies have contractual or other relationships pursuant to which they do
business with one another.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") is an
affiliate of the Managing General Partner. MLPF&S and certain of its affiliates,
in the ordinary course of their business, perform various financial services for
various portfolio companies of the Funds, which may include investment banking
services, broker/dealer services and economic forecasting, and receive in
consideration therewith various fees, commissions and reimbursements.
Furthermore, MLPF&S and its affiliates or investment companies advised by
affiliates of MLPF&S may, from time to time, purchase or sell securities issued
by portfolio companies of the Funds in connection with its ordinary investment
operations.
For the year ended December 31, 1995, the Retirement Fund paid $125,246
to the Fund Administrator for reimbursable out-of-pocket expenses (please refer
to Note 8 for further information).
During 1995, the Retirement Fund paid Managing General Partner
distributions totalling $4,472,911 (which includes $4,397,592 of incentive fees
and $75,319 with respect to its interest in the Retirement Fund). Of this
incentive fee amount, 95% or $4,177,712 was paid to the Investment Adviser and
the remaining 5% totalling $219,880 was paid to ML Mezzanine Inc. As of December
31, 1995, the Managing General Partner has earned $24,110,084 in Incentive Fees
of which $5,211,680 was deferred in payment to the Managing General Partner as a
Deferred Distribution Amount in accordance with the Partnership Agreement. This
Deferred Distribution Amount was distributed 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 would
instead be payable to the Managing General Partner until the Deferred
Distribution Amount is paid in full.
11. Litigation
On February 3, 1992 and February 5, 1992, respectively, one Limited
Partner from Fund II and one Limited Partner from the Retirement Fund each
commenced class actions in the US District Court for the District of Delaware,
purportedly on behalf of all persons who purchased limited partnership interests
in the Funds between November 10, 1989 and January 5, 1990, against the Funds,
the Managing General Partner, the Individual General Partners, the Investment
Adviser to the Funds and certain named affiliates of such persons. These
actions, alleging that the defendants in the action made material
misrepresentations or omitted material information in the offering materials for
the Funds concerning the investment purposes of the Funds, were consolidated by
the court on March 31, 1992, and a consolidated complaint was filed by the
plaintiffs on May 14, 1992. In April 1993, plaintiffs filed an amended
complaint, adding claims that certain transactions by the Funds were prohibited
by the federal securities laws applicable to the Funds and their affiliates
under the Investment Company Act of 1940, as amended. The amended complaint also
named the Funds' counsel as a defendant. Defendants moved to dismiss the amended
complaint, and, by Opinion and Order dated March 31, 1994, the court granted in
part and denied in part the motions to dismiss.
Additionally, by its March 31, 1994 Opinion and Order, the Court certified
the case as a class action, and ordered plaintiffs to replead by filing a new
complaint reflecting the Court's rulings. On April 15, 1994, plaintiffs served
and filed a new complaint, which defendants moved to strike for not conforming
to the Court's ruling. On August 3, 1994, the Court granted defendants' motion
to strike the new complaint. Plaintiffs thereafter filed a revised second
amended complaint dated September 26, 1994. Factual discovery in this litigation
has concluded. Expert discovery is currently set to conclude in early 1996. The
defendants in this action believe that the remaining claims are without merit,
although whether or not the plaintiffs prevail, the Funds may be obligated to
indemnify and advance litigation expenses to certain of the defendants under the
terms and conditions of various indemnity provisions in the Funds' Partnership
Agreements and separate indemnification agreements, and the amount of such
indemnification and expenses could be material. The Retirement Fund has advanced
amounts to the indemnified parties based upon amounts which are deemed
reimbursable in accordance with the indemnification provisions and has included
these amounts in professional fees. The outcome of this case is not determinable
at this time.
On August 9, 1994, the same two Limited Partners as noted in the preceding
paragraphs commenced another putative class action in the US District Court for
the District of Delaware, purportedly on behalf of all persons who owned limited
partnership interests in the Funds on November 4, 1993, against the Funds, the
Managing General Partners, the Individual General Partners, the Investment
Adviser to the Funds and certain named affiliates of such persons. Plaintiffs
allege that the defendants violated certain provisions of the Investment Company
Act of 1940 and the common law in connection with the sale by certain of the
defendants of shares of common stock of Snapple Beverage Corp. in a November
1993 secondary offering and seek actual and punitive damages and an accounting
in connection therewith. The defendants have filed papers in opposition to the
motion for partial summary judgment on January 10, 1995. On August 4, 1995,
plaintiffs filed an amended complaint alleging additional violations of the
Investment Company Act of 1940 and common law arising out of the secondary
offering. The plaintiffs moved for summary judgment on certain of these claims.
On October 13, 1995, the defendants in this litigation each filed briefs in
opposition to plaintiffs' motions. Because the defendants in this action believe
that the claims are without merit, each defendant also filed a separate motion
to dismiss, although whether or not the plaintiffs prevail, the Funds may be
obligated to indemnify and advance litigation expenses to certain of the
defendants under the terms and conditions of various indemnity provisions in the
Funds' Partnership Agreements and separate indemnification agreements. The
outcome of this case is not determinable at this time.
On November 2, 3 and 4, 1994, stockholders of Snapple Beverage Corp.
commenced approximately twenty putative class actions in the Delaware Chancery
Court, purportedly on behalf of all public stockholders of Snapple, against
Snapple, the Funds, Thomas H. Lee Equity Partners, L.P., and some or all of
Snapple's directors. Since then, the plaintiffs have filed a Consolidated
Amended Complaint against Snapple, the Funds, Thomas H. Lee Equity Partners,
L.P., some or all of Snapple's directors and Quaker Oats. The complaint alleges
that the sale of Snapple to Quaker Oats was at an unfair price and in violation
of the defendants' fiduciary duties to public stockholders. The plaintiffs
sought an injunction against the merger transaction, an accounting for any
damages suffered by the public stockholders, and attorneys' fees and related
expenses. The Court on November 15, 1994 denied plaintiffs application to take
expedited discovery and request to schedule a preliminary injunction hearing.
The defendants in these actions believe that the claims are without merit,
although whether or not the plaintiffs prevail, the Funds may be obligated to
indemnify and advance litigation expenses to certain of the defendants under the
terms and conditions of various indemnity provisions in the Funds' Partnership
Agreements and separate indemnification agreements. The outcome of this case is
not determinable at this time.
On November 27, 1995, one Limited Partner from Fund II and one Limited
Partner from the Retirement Fund filed a putative class action in the United
States District Court for the District of Delaware, purportedly on behalf of all
persons or entities who owned Units in the Funds between April 5, 1991 and
November 27, 1995, against the Funds, the Managing General Partner, the
Individual General Partners, the Investment Adviser to the Funds, and certain
named affiliates of such persons. The complaint contends that the Funds
improperly advanced legal fees and litigation costs to the defendants in
connection with three previously filed lawsuits. The plaintiffs are seeking an
accounting, rescissory or actual damages, punitive damages, plaintiffs'
litigation costs and attorneys fees, pre-judgment and post-judgment interest,
and an injunction barring the defendants from further indemnifying themselves.
The defendants in this action believe that the claims are without merit and have
moved to dismiss the case. Although the defendants believe the advancement of
legal fees and litigation costs was properly made pursuant to indemnification
agreements signed by the defendants, the outcome of this case is not
determinable at this time.
12. Commitments
On August 18, 1993, the Retirement Fund established a letter of credit
from Banque Nationale de Paris in favor of FLA. Orthopedics, a Non-Managed
portfolio company. The Retirement Fund posted as collateral a $394,800 Banque
Nationale de Paris certificate of deposit which pays an annual interest rate of
3.875%. If the commitment is drawn upon, the Retirement Fund will receive
additional subordinated notes and equity of FLA. Orthopedics. The letter of
credit will expire on May 1, 1996.
13. Income Taxes (Statement of Financial Accounting Standards
No. 109)
No provision for income taxes has been made because all income and
losses are allocated to the Retirement Fund's partners for inclusion in their
respective tax returns.
Pursuant to the Statement of Financial Accounting Standards No. 109
Accounting for Income Taxes, the Retirement Fund is required to disclose any
difference in the tax basis of the Retirement Fund's assets and liabilities
versus the amounts reported in the financial statements. Generally, the tax
basis of the Retirement Fund's assets approximate the amortized cost amounts
reported in the financial statements. This amount is computed annually and as of
December 31, 1995, the tax basis of the Retirement Fund's assets are less than
the amounts reported in the financial statements by $9,598,909. This difference
is primarily attributable to unrealized depreciation and appreciation on
investments which has not been recognized for tax purposes.
14. Subsequent Events
On February 8, 1996, the Individual General Partners approved the fourth
quarter 1995 cash distribution totalling $19,587 which represents net investment
income of $159,555 from Temporary Investments offset by a net investment loss
from Mezzanine Investments of $139,968. The total amount distributed to Limited
Partners was $19,527 or $.11 per Unit, which was paid on February 14, 1996. The
Managing General Partner received a total of $55, with respect to its interest
in the Retirement Fund. Thomas H. Lee, as an Individual General Partner,
received $5 with respect to his interest in the Retirement Fund.
On February 14, 1996, Ghirardelli Holdings Corporation ("Ghirardelli"),
Ghirardelli Chocolate Company, and all of the equityholders of Ghirardelli,
including the Funds and certain Lee Affiliates, executed a Stock Purchase
Agreement pursuant to which (i) the equityholders agreed to sell all of their
shares and options to Ghirardelli and (ii) HMTF/CH Acquisition Company (the
"Buyer") agreed to purchase new shares of Ghirardelli. The closing is scheduled
for the later to occur of (x) the 10th day after the first closing of the
Buyer's parent's equity fund, and (y)the date upon which the last of any
approvals and consents necessary to the transaction are obtained. The price per
share for the stock of Ghirardelli is $5.88854; provided that if the closing
occurs after March 31, 1996, the purchase price shall bear interest at an annual
rate of 9% for the period April 1, 1996 through the closing. If the transaction
occurs, the Retirement Fund will sell 616,839 shares for proceeds of
approximately $3.6 million. In addition, the Buyer will (i) repay all of
Ghirardelli's Subordinated Notes held by the Funds, including all interest and
all prepayment penalties thereon and (ii) pay the redemption price, including
the redemption premium, on all outstanding Series A Preferred Stock of
Ghirardelli held by the Retirement Fund. As part of the transaction, each
stockholder is required to allocate approximately 3.5% of the proceeds received
on account from the sale of the equity of Ghirardelli to an escrow account to be
held for a period of one year from the closing. As such, the Retirement Fund
will escrow $130,839 of the proceeds.
On March 22, 1996 by means of merger of Lee-CST Holding Corp. with an
unaffilated third party, the Retirement Fund sold its entire investment in CST
Office Products ("CST") for total proceeds of $14.2 million. The Retirement Fund
received $11.3 million for the $3,395,000 principal amount 12% senior
subordinated note, the $3,395,000 principal amount 18% junior subordinated note,
appoximately $4 milliion in principal amount of 15% payment in kind subordinated
notes issued with respect thereto, plus all outstanding accrued interest on
these notes. Additionally, the Retirement Fund received $1.4 million, or $16 per
share, for its common stock and $1.5 million, or $15.99 per share, for its
common stock purchase warrants. The Retirement Fund realized a gain of $2.3
million, and additional interest income of $3.9 million for the payment in kind
subordinated notes that were previously classified as non-accrual.
SCHEDULE 1
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SUPPLEMENTARY SCHEDULE OF REALIZED GAINS AND LOSSES
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
PAR VALUE/ INVESTMENT NET REALIZED
SECURITY NUMBER SHARES COST PROCEEDS GAIN (LOSS)
- ---------------------------------------------------- ----------------- -------------- --------------- -------------
EquiCredit Corp.
Common Stock 259,474 $ 680 $ 8,303 $ 7,623
Petco Animal Supplies, Inc.
Common Stock 64,151 1,052 1,265 213
Sun Pharmaceuticals Corp.
Subordinated Note $ 9,182 9,182 9,182 -
Common Stock Purchase Warrants (Banana Boat
Holding, Corp.) 8,219 - 1,427 1,427
---------- --------- --------
Total Net Realized Gains at December 31, 1995 $ 10,914 $ 20,177 $ 9,263
========== ========= =========
SCHEDULE 2
SUPPLEMENTARY SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
ML-LEE ACQUISITION (RETIREMENT ACCOUNTS) II, L.P.
FOR THE PERIOD ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
Total Unrealized
Appreciation/ Unrealized Appreciation/ (Depreciation) For
Investment Fair (Depreciation)
SECURITY Cost Value December 31, 1990
1995 1995 1994 1993 1992 1991 & PRIOR
- ------------------------------- --------- -------- ------------- --------- --------- ---------- ---------- -------- -----------
PUBLICLY TRADED/UNDERLYING
SECURITY PUBLICLY TRADED:
First Alert, Inc.
Common Stock* $ 3,680 $19,678 $ 15,998 $(13,689) $ 29,687 $ - $ - $ - $ -
Hills Stores Company
Common Stock 18,571 2,748 (15,823) (3,055) 101 (12,869) - - -
Petco Animal Supplies, Inc.
Common Stock* 1,023 1,825 802 1,041 (239) - - - -
Playtex Products, Inc.
Common Stock* 2,830 1,377 (1,453) 69 (1,347) (583) - 408 -
Stanley Furniture
Common Stock* 233 148 (85) (37) (63) 15 - - -
TOTAL UNREALIZED (DEPRECIATION) -------- -------- -------- ------- ------ --------- ---------
APPRECIATION FROM PUBLICLY (561) (15,671) 28,139 (13,437) - 408 -
TRADED SECURITIES -------- -------- -------- ------- ------ --------- ---------
NON PUBLIC SECURITIES:
Fitz and Floyd/Sylvestri
Common Stock* 13 - (13) - (13) - - - -
Adjusted Rate Senior 8,287 6,314 (1,975) (1,975) - - - - -
Sub.Notes*
FLA. Orthopedics, Inc.
Common Stock* 987 - (987) - (987) - - - -
Subordinated Note 3,158 - (3,158) (3,158) - - - - -
Stablex Canada Inc.
Subordinated Note* 7,565 5,737 (1,828) - (1,828) - - - -
TOTAL UNREALIZED (DEPRECIATION) ------- ------ ------ ------- ------ -------- ---------
APPRECIATION FROM NON PUBLIC SECURITIES (7,961) (5,133) (2,828) - - - -
------- ------ ------ ------- ------ --------- ---------
UNREALIZED (DEPRECIATION)/ APPRECIATION
FOR INVESTMENTS SOLD
Sold in 1995 EquiCredit Corp.
Common Stock - (7,591) 3,016 4,575 - - -
Sold Prior to 1995
Various - - (142,677) 103,533 48,215 (226) (8,845)
Total Unrealized (Depreciation)/ -------- -------- -------- -------- ------- ------- --------
Appreciation for Investments sold: - (7,591) (139,661) 108,108 48,215 (226) (8,845)
-------- -------- -------- -------- ------- ------- --------
NET UNREALIZED (DEPRECIATION)
APPRECIATION $ (8,522) $(28,395) $(114,350) $ 94,671 $48,215 $ 182 $ (8,845)
======== ======== ========= ======== ======= ======= ========
* Restricted Security.
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 Retirement Fund
The five General Partners of the Retirement Fund are responsible for the
management and administration of the Retirement Fund and have the same positions
and responsibilities with respect to Fund II. The General Partners of the
Retirement Fund and Fund II consist of four Individual General Partners: Vernon
R. Alden, Joseph L. Bower, Stanley H. Feldberg (the "Independent General
Partners"), Thomas H. Lee and Mezzanine Investments II, L.P., the Managing
General Partner. Pursuant to exemptive orders issued by the Securities and
Exchange Commission, each Independent General Partner is not an "interested
person" of the Retirement Fund as such term is defined in the Investment Company
Act.
Individual General Partners
The Individual General Partners provide overall guidance and supervision
with respect to the operations of the Retirement Fund and perform the various
duties imposed on the directors of business development companies by the
Investment Company Act of 1940. The Individual General Partners supervise the
Managing General Partner and must, with respect to any Mezzanine Investment
transactions, either certify that it meets the Retirement Fund investment
guidelines or specifically approve it as a non-Guideline Investment or Bridge
Investment. In addition, if a Portfolio Company is in default of performance 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 material changes in the terms of investment in such Portfolio
Company.
Messrs. Alden, Bower, Feldberg and Lee have served as Individual General
Partners of the Retirement Fund and Fund II since 1989. Each Individual General
Partner shall hold office until his removal or withdrawal pursuant to the
provisions of the Retirement Fund's Partnership Agreement.
Mr. Alden, age 73, is a director of Augat Inc., Colgate - Palmolive
Company, Digital Equipment Corporation, Intermet Corporation, and Sonesta
International Hotels Corporation. Mr. Alden also serves as Chairman of the Japan
Society of Boston, Trustee Emeritus of the Boston Symphony Orchestra and the
Boston Museum of Science and Honorary Counsel General of the Royal Kingdom of
Thailand. Mr. Alden also serves as an Individual General Partner of ML-Lee
Acquisition Fund, L.P. ("Fund I") since its inception in 1987.
Mr. Bower, age 57, is the Donald Kirk David Professor of Business
Administration, Chairman of the Doctoral Programs and Director of Research at
the Harvard University Graduate School of Business Administration. He has served
as a faculty member of the University since 1963. Mr. Bower is also a director
of Anika Research, Inc., Brown Group, Inc., New America High Income Fund,
Sonesta International Hotels Corporation and The Lincoln Foundation. Mr. Bower
serves as trustee of the DeCordova & Dana Museum and Park and the New England
Conservatory of Music. Mr. Bower also serves as an Individual General Partner of
Fund I since its inception in 1987.
Mr. Feldberg, age 71, is director of The TJX Companies, Inc., and Waban
Inc. He also serves as a Trustee of Brandeis University. Mr. Feldberg also
serves as an Individual General Partner of Fund I since its inception in 1987.
Mr. Lee, age 52, founded the Thomas H. Lee Company in 1974 and since that
time has served as its Chief Executive Officer. Mr. Lee also is Chairman and a
Trustee of Thomas H. Lee Advisors I and Thomas H. Lee Advisors II, L.P., the
respective investment advisers to Fund I and the Funds, and is Individual
General Partner of THL Equity Advisors Limited Partnership, the investment
adviser to Thomas H. Lee Equity Partners, L.P. which participates in equity or
equity-related investments of certain companies acquired by the respective
funds. In addition, Mr. Lee serves as an Individual General Partner of Fund I
since its inception in 1987.
From 1966 through 1974, Mr. Lee was with First National Bank of Boston
where he directed the bank's high technology lending group from 1968 to 1974 and
became a Vice President in 1973. Prior to 1966, Mr. Lee was a Securities Analyst
in the institutional research department of L.F. Rothschild in New York. Mr. Lee
serves as a director of Autotote Corporation, J. Baker, Inc., Finlay Fine
Jewelry Corporation, General Nutrition Companies, Inc., Health o meter Products,
Inc., Playtex Products Inc. and Snapple Beverage Corp. Mr. Lee was Chairman of
Hills Department Stores, Inc. and Hills Stores Company from 1990 to 1993. In
February 1991, Hills Department Stores, Inc. and Hills Stores Company filed for
protection under Chapter 11 of the Federal Bankruptcy Code.
Mr. Lee is a trustee of Brandeis University (Vice Chairman), Museum of
Arts (Boston), the Wang Center for the Performing Arts and Boston's Beth Israel
Hospital (Vice Chairman). Mr. Lee is also an overseer of Boston Symphony
Orchestra and New England Conservatory of Music, a member of the Dean's Council
and an Executive Committee Member of the Committee on University Resources at
Harvard University and a member of the Corporation of Belmont Hill School.
The Investment Adviser
The Investment Adviser, pursuant to an investment management agreement
among the Investment Adviser, the Thomas H. Lee Company and the Retirement Fund
dated November 10, 1989, is responsible for the identification, management and
liquidation of Mezzanine Investments and Bridge Investments for the Retirement
Fund. The Investment Adviser received an Investment Advisory Fee in compensation
for these services outlined in Note 7 to the Financial Statements.
Certain officers of the Lee Company have been designated as trustees and
executive officers of T. H. Lee Mezzanine II, the administrative general partner
of the Investment Adviser.
Title
Thomas H. Lee Chairman, Trustee
John W. Childs President, Trustee
Thomas R. Shepherd Executive Vice President
David V. Harkins Senior Vice President, Trustee
C. Hunter Boll Vice President
Scott A. Schoen Vice President
Wendy L. Masler Treasurer, Clerk
Information concerning Mr. Lee is set forth above.
John W. Childs, age 54, is the founder of J.W. Childs Associated, L.P.,
Mr. Childs was a Senior Managing Director of the Thomas H. Lee Company ("Lee
Company"), from 1987 to 1995. For the 17 years prior to joining the company, Mr.
Childs was with the Prudential Insurance Company of America where he was most
recently Senior Managing Director in charge of the Capital Markets Group. In
that position he was responsible for Prudential's approximately $77 billion
fixed income portfolio, including all of the Capital Markets Group's investments
in leveraged acquisitions. Mr. Child's past positions at Prudential include,
from 1982 to 1984, Senior Vice President of PruCaptial, Inc., a Prudential
subsidiary; from 1981 to 1982, Vice President, responsible for private
placements of the Capital Markets Group; and from 1980 to 1981, Vice President
in Corporate Finance of the Capital Markets Group. Mr. Childs serves as
President and Trustee of Thomas H. Lee Advisors I ("Advisors I"), the investment
advisor to Fund I. Mr. Childs is a director of General Nutrition Companies,
Inc., Health o meter, Inc., and Snapple Beverage Corp. Mr. Childs also serves as
Chairman of the Jane Coffin Childs Fund for medical research.
Mr. Shepherd, age 66, has been engaged as a consultant to the Thomas H. Lee
Company since 1986 and is currently a Managing Director. Mr. Shepherd is
currently a director of General Nutrition Companies, Inc., Health o meter, Inc.
and Playtex Products, Inc. He is Executive Vice President of Thomas H. Lee
Advisors I and T.H. Lee Mezzanine II. Previously, Mr. Shepherd was Chairman of
Amerace Corporation from 1986 to 1988 and President of GTE (Sylvania) Lighting
Products Group from 1983 to 1986. Mr. Shepherd served as President of North
American Philips Commercial Electronics Corporation from 1981 to 1983 and from
1979 to 1981, he served as Senior Vice President and general manager of GTE
Entertainment Products Group.
Mr. Harkins, age 56, has been a Managing Director of the Lee Company since
1986 and the Chairman of National Dentex Corporation since 1983. He served as
President of Massachusetts Capital Corporation and Masscap Investment Company,
Inc. from 1976 to 1983, and as President of First American Investment Company,
Inc. from 1982 to 1983. Mr. Harkins is a Senior Vice President and Trustee of
Advisor I. He also is a director of EquiCredit Corporation, Kevlin Microwave
Corp., National Dentex Corporation and Stanley Furniture Corp.
Mr. Boll, age 40, 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.
Prior to joining the Lee Company, he worked as a consultant with The Boston
Consulting Group from 1984 to 1986, and was Assistant Vice President of the
Energy and Minerals Division of Chemical Bank from 1977 to 1982. Mr. Boll is a
Vice President of Advisors I and a director of Snapple Beverage Corp., Stanley
Furniture Corp. and Big V Supermarkets, Inc.
Mr. Schoen, age 37, 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.
Prior to joining the Lee Company he was an Associate in the Private Finance
Department of Goldman, Sachs & Co. from 1984 to 1986. Mr. Schoen is a Vice
President of Advisors I. Mr. Schoen is also a director of First Alert, Inc.,
Health o meter Products, Inc. and LaSalle Reinsurance Limited.
Ms. Masler, age 42, has been Treasurer of the Lee Company since 1984. From
1981 to 1984 she was employed by Paine Webber Properties Incorporated and prior
to that she was a Senior Auditor with Touche Ross & Co. 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
Robert Aufenanger Executive Vice President, Director
James V. Caruso Executive Vice President, Director
Rosalie Y. Goldberg Vice President, Director
Audrey L. Bommer Vice President, Treasurer
Roger F. Castoral, Jr. Assistant Treasurer
Kevin Albert, age 43, a Vice President and a Managing Director of
Merrill Lynch Investment Banking Group ("ML Investment Banking") joined Merrill
Lynch in 1981. Mr. Albert is the manager of the Equity Private Placement Group
of ML Investment Banking and is involved in structuring, marketing and closing a
diversified array of private equity financings including common stock, preferred
stock, limited partnership interests and other equity-related securities. Mr.
Albert has a B.A. and an M.B.A. from the University of California, Los Angeles.
Mr. Albert is also a director of ML Media Management Inc. ("ML Media"), an
affiliate of the Managing General Partner and a joint venture of Media
Management Partners, the general partner of ML Media Partners, L.P.; a director
of ML Film Entertainment Inc. ("ML Film"), an affiliate of the Managing General
Partner and the managing general partner of the general partners of Delphi Film
Associates, Delphi Film Associates III, IV, V and ML Delphi Premier Partners,
L.P.; a director of ML Opportunity Management Inc. ("ML Opportunity"), an
affiliate of the General Partner and a joint venture in Media Opportunity
Management Partners, the general partner of ML Media Opportunity Partners, L.P.;
a director of MLL Antiquities Inc. ("MLL Antiquities"), an affiliate of the
Managing General Partner and the administrative general partner of The Athena
Fund II, L.P.; ML Mezzanine Inc. ("ML Mezzanine"), an affiliate of the General
Partner and the 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 the Managing General Partner and the general partner
of the managing general partner of ML Venture Partners I, L.P. ("Venture I"), ML
Venture Partners II, L.P. ("Venture II"), and ML Oklahoma Venture Partners
Limited Partnership; a director of Merrill Lynch R&D Management Inc. ("ML R&D"),
an affiliate of the general partner and the general partner of the General
Partner of ML Technology Ventures, L.P.; and a director of MLL Collectibles Inc.
("MLL Collectibles"), an affiliate of the General Partner and the administrative
general partner of The NFA World Coin Fund, L.P. Mr. Albert also serves as an
independent general partner of Venture I and Venture II.
Robert Aufenanger, age 42, a Vice President of Merrill Lynch & Co.
Corporate Strategy Credit and Research and a Director of the Partnership
Management Department, joined Merrill Lynch in 1980. Mr. Aufenanger is
responsible for the ongoing management of the operations of the equipment and
project related limited partnerships for which subsidiaries of ML Leasing
Equipment Corp., an affiliate of Merrill Lynch, are general partners. Mr.
Aufenanger is also a director of, ML Media, ML Film, ML Opportunity, MLL
Antiquities, ML Mezzanine, ML Venture, ML R&D and MLL Collectibles. Mr.
Aufenanger is an executive officer of Mid-Miami Diagnostics Inc. ("Mid-Miami
Inc."). On October 28, 1994, both Mid-Miami Inc. and Mid-Miami Diagnostics,
L.P., a limited partnership of which Mid Miami, Inc. is the general partner,
filed voluntary petitions for protection form creditors under Chapter 7 of the
United States Bankruptcy Code in the United States Bankruptcy Court for the
Southern District of New York.
James V. Caruso, age 44, a Director in the Investment Banking Group of
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), joined
Merrill Lynch in 1975. Since June 1992, Mr. Caruso has served as Manager of
Merrill Lynch's Partnership Analysis & Management Department, which is
responsible for accounting and the ongoing administration and operations of more
than 150 investment limited partnership as well as the Merrill Lynch affiliated
entities that manage or administer such partnerships. He serves as a director of
ML Mezzanine Inc., ML Eneregy Investments, Inc. and KECALP Inc. an affiliate of
the MGP and general partner.
Rosalie Y. Goldberg, age 58, serves as Vice President of Merrill Lynch
Private Client, Manager of the Special Investments Group, Vice President and
Director of ML Mezzanine Inc. and Director of MLL Antiquities and MLL
Collectibles. Ms. Goldberg joined Merrill Lynch & Co. in 1975.
Audrey L. Bommer, age 29, joined ML Investment Banking in 1994 and
serves as treasurer and controller to the Funds. Ms. Bommer manages all
accounting, financial reporting and administrative functions in the Merrill
Lynch Partnership Analysis and Management Department. She also serves as Vice
President and Treasurer of ML Mezzanine II, Inc.
Roger F. Castoral, Jr., age 28, joined Merrill Lynch Investment Banking
in 1995 and serves as Assistant Treasurer and controller to the funds. Mr.
Castoral is responsible for financial reporting and fund accounting in the
Merrill Lynch Partnership Analysis and Management Department and serves as
Assistant Treasurer of ML-Mezzanine II, Inc.
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 in compensation an reimbursement for a portion
of administrative expenses paid on behalf of the Fund for services as outlined
in Note 8 to the Financial Statements.
The Fund Administrator is responsible for the day-to-day administrative
affairs of the Funds and for the management of the accounts of Limited Partners.
The Fund Administrator also provides the Funds, at the Fund Administrator's
expense, with office space, facilities, equipment and personnel necessary to
carry out its obligations under the Administrative Services Agreement.
Item 11. Executive Compensation
The information with respect to compensation of the Individual General
Partners set forth under the caption "Management Arrangements - the Individual
General Partners" in the Prospectus pages 73 - 74 is incorporated herein by
reference. The Retirement Fund paid Independent General Partners, Mr. Alden, Mr.
Bower and Mr. Feldberg each $27,789, for their services as Independent General
Partners in 1995.
The information with respect to the allocation and distribution of the
Retirement Fund's profits and losses to the Managing General Partner set forth
under the caption "Distributions and Allocations - Allocations of Profits and
Losses" in the Prospectus pages 86 - 87 is incorporated herein by reference. The
Managing General Partner received distributions of $4,472,080 with respect to
1995, including Incentive Fees of $4,396,764 that it distributed, $4,176,926 to
the Investment Adviser and $219,838 to ML Mezzanine II Inc.
The information with respect to the Management Fee payable to the
Investment Adviser (and distributions from the Managing General Partner) set
forth under the caption "Management Arrangements - Description of the Advisory
Agreement" in the Prospectus pages 74 - 75 is incorporated herein by reference.
Pursuant to the Investment Advisory Agreement, the Retirement Fund paid the
Investment Adviser $1,063,604 with respect to 1995.
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 Administration Service
Agreement, the Retirement Fund paid the Fund Administrator a total of $727,248
in 1995.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of March 15, 1996, Common Fund is the only entity known to the
management of the Retirement Fund which may be deemed to be a beneficial owner
of more than five percent of the outstanding units of the Retirement Fund. As of
March 15, 1996, the Common Fund owns 21,448 Units of the outstanding Units of
limited partnership interest or 12.08% of the Retirement Fund. The Common Fund
is located at 363 Reef Road, P.O. Box 940, Fairfield, CT 06430. Mr. Bower owns
11 units of the Retirement Fund.
There exists no arrangement known to the Retirement Fund, the execution
of which may at a subsequent date result in a change of control of the
Retirement Fund.
Item 13. Certain Relationships and Related Transactions
The Retirement Fund's investments generally are made as co-investments
with Fund II. In addition, certain of the Mezzanine Investments and Bridge
Investments which were made by the Retirement Fund may involve co-investments
with entities affiliated with the Investment Adviser. Such co-investments are
generally prohibited absent exemptive relief from the Securities and Exchange
Commission (the "Commission"). As a result of these affiliations and the
Retirement Fund's expectation of engaging in such co-investments, the Retirement
Fund together with Fund II and Fund I, sought an exemptive order from the
Commission allowing such co-investments, which was received on September 1,
1989. The Retirement Fund's co-investments in Managed Companies, and in certain
cases its co-investments in Non-Managed Companies, typically involve the entry
by the Funds and other equity security holders into stockholders' agreements.
While the provisions of such stockholders' agreements vary, such agreements may
include provisions as to corporate governance, registration rights, rights of
first offer or first refusal, rights to participate in sales of securities to
third parties, rights of majority stockholders to compel minority stockholders
to participate in sales of securities to third parties, transfer restrictions,
and preemptive rights.
Thomas H. Lee Company, a sole proprietorship owned by Thomas H. Lee, an
Individual General Partner of the Retirement Fund and an affiliate of the
Investment Adviser, typically performs certain management services for Managed
Companies and receives management fees in connection therewith usually pursuant
to written agreements with such companies. Of the total of eleven Managed
Companies of the Funds, eight paid management fees to Thomas H. Lee Company
ranging from $120,000 to $270,000 for the fiscal year ended December 31, 1995.
In addition, certain of the Managed Companies have contractual or other
relationships pursuant to which they do business with one another.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") is an
affiliate of the Managing General Partner. MLPF&S and certain of its affiliates,
in the ordinary course of their business, perform various financial services for
various portfolio companies of the Funds, which may include investment banking
services, broker/dealer services and economic forecasting, and pension plan
services and receives in consideration therewith various fees, commissions and
reimbursements. The aggregate revenue received by MLPF&S and its affiliates
during 1995 for providing such services to Managed Companies in which the Funds
have a material interest (other than those specifically set forth below) 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 1995, the Retirement Fund paid Managing General Partner
distributions totalling $4,472,080 (which includes $4,396,764 of incentive fees
and $75,316 with respect to its interest in the Retirement Fund). Of this
incentive fee amount, 95% or $4,176,926 was paid to the Investment Advisor and
the remaining 5% totalling $219,838 was paid to ML Mezzanine Inc. As of December
31, 1995, the Managing General Partner has earned $24,110,044 in Incentive Fees
of which $5,211,680 was deferred in payment to the Managing General Partner as a
Deferred Distribution Amount in accordance with the Partnership Agreement. To
the extent not payable to the Managing General Partner, this Deferred
Distribution Amount was distributed 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 would instead be
payable to the Managing General Partner until the Deferred Distribution Amount
is paid in full.
CST Office Products, Inc.
On March 22, 1996 the Retirement Fund sold its entire investment in CST
Office Products, Inc. See Note 14 to the Financial Statements for further
information.
As of December 31, 1995 the Retirement Fund, Fund II and the Lee
Affiliates owned 11.9%, 22.3% and 65.9%, respectively, of the common equity of
CST on a fully diluted basis.
EquiCredit
On January 27, 1995, the Retirement Fund sold its entire investment in
Equicredit, consisting of 259,474 shares of Common Stock, realizing a gain of
$7,623,346 on an original investment of $679,822.
Prior the sale of the EquiCredit Investment, the Retirement Fund, Fund
II and the Affiliates held 2.4%, 2.2% and 10.7%, respectively, of the common
equity of EquiCredit on a fully diluted basis.
First Alert
As of December 31, 1995, the Retirement Fund, Fund II and the Lee
Affiliates hold 2,058,474, 2,281,524 and 10,102,268 shares, respectively, of
First Alert common stock, representing 8.1%, 8.9%, and 39.6%, respectively, of
its common equity on a fully-diluted basis.
David V. Harkins, Scott A. Schoen and Anthony J. DiNovi, officers of the
Investment Adviser to the Funds, serve as directors of First Alert.
Ghirardelli
On May 12, 1995, the Retirement Fund made a follow-on investment in
Ghirardelli Holdings Corp. for a total of $1,864,800. The Retirement Fund
received 15,984 shares of Series A Preferred Stock for $1,598,400 and 84,039
additional shares of Common Stock for $266,400.
As of December 31, 1995 the Retirement Fund and Fund II and the Lee
Affiliates hold 540,892 and 616,839 and 3,476,250 shares, respectively, of
Ghirardelli's common shares which represents 10.6%, 9.3% and 59.8% of equity on
a fully diluted basis.
On February 14, 1996, Ghirardelli Holdings Corporation ("Ghirardelli"),
Ghirardelli Chocolate Company, and all of the equityholders of Ghirardelli,
including the Funds and certain Lee Affiliates, executed a Stock Purchase
Agreement. Please see Note 14 to the Financial Statements for further
information.
Petco Animal Supplies, Inc.
On April 27, 1995, Petco completed a public offering of approximately
$3.6 million shares of common stock (the "Petco Offering") at a net price of
$19.71 per share. As part of the Petco Offering the Retirement Fund sold 64,151
(including shares sold as a result of the exercise of the underwriters'
overallotment option) representing 51% of its Petco holdings. The Retirement
Fund received proceeds of $1.3 million and realized a gain of $212,949 on the
sale of the equity.
As of December 31, 1995, the Retirement Fund and Fund II, hold 62,379
shares and 116,825 shares of Petco common stock, respectively. In addition, Fund
I holds 981,748 shares of Petco common stock, and the Lee Affiliates, in the
aggregate, hold 10,764 shares of Petco common stock. As of such date, Fund I,
Fund II, the Retirement Fund and the Lee Affiliates, respectively, hold 11.0%,
1.3%, .7% and .1% of the common equity of Petco.
C. Hunter Boll, an officer of the Investment Adviser to Fund I, Fund II and
the Retirement Fund, serves as a director of Petco.
Playtex Products Inc.
On October 17, 1995 Playtex Products, Inc. and Banana Boat Holding Corp.
entered an Agreement and Plan of Merger (the "Agreement") pursuant to which
Playtex agreed to acquire all of the outstanding equity of Banana Boat that it
did not already own. In accordance with the Agreement, the 12.5% Subordinated
Note held by the Retirement Fund, plus all accrued interest, was paid in full by
Playtex upon consummation of the merger. Additionally, the Retirement Fund
received net proceeds of $173.55 per share for each of the 8,218.5 Common Stock
Purchase Warrants that were exercised pursuant to the Agreement. As a result, on
October 31, 1995, the Retirement Fund received total proceeds of $10.7 million
which resulted in a gain of $1.4 million.
On June 6, 1995, Playtex sold 20,000,000 of newly issued Common Stock, or
approximately 40% of its outstanding equity, to an investment group led by Hass
Wheat Harrison Inc. for $9.00 per share, or $180 million (the "Haas
Investment"). None of Playtex's existing shareholders, including the Retirement
Fund or the Lee Affiliates, sold any of their stock in connection with the Haas
Investment. An affiliate of Merrill Lynch & Co., Inc. has approximately a 4%
capital interest as a limited partner in the limited partnership that made the
Haas Investment.
As of December 31, 1995, the Retirement Fund holds 183,560 shares of the
common stock of Playtex and Fund II holds 343,726 shares of Playtex common
stock. In addition, Fund I holds 1,406,204 shares of Playtex common stock and
the other Lee Affiliates hold 2,249,288 shares. The Retirement Fund, Fund II,
Fund I and the other Lee Affiliates own, respectively, .3%, .6%, 2.6%, and 4.2%
of the fully diluted common equity of Playtex.
Thomas H. Lee, who is an Individual General Partner of the Funds and the
Chairman and an officer of the Investment Adviser, serves as director of
Playtex.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits
Financial Statements and Financial Statement Schedules
See Item 8. "Financial Statements and Supplementary Data Table of Contents"
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, 1995
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 29th day of March,
1996.
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 29, 1996 Kevin K. Albert
President, ML Mezzanine II Inc.,
a 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 29th day of March, 1996.
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/ Audrey Bommer ML Mezzanine II, Inc.
Audrey Bommer Vice President and Treasurer
(Principal Financial Officer of Registrant)
/s/ Joseph L. Bower Individual General Partner
Joseph L. Bower ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.
/s/ Roger F. Castoral, Jr. ML Mezzanine II, Inc.
Roger F. Castoral, Jr. Assistant Treasurer
(Principal Accounting Officer of Registrant)
/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.
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.
ML-LEE ACQUISITION FUND
(RETIREMENT ACCOUNTS) II, L.P.
By: Mezzanine Investments II, L.P.
Managing General Partner
By: ML Mezzanine II, Inc.,
its General Partner
Dated: March 29, 1996 Kevin K. Albert
President, ML Mezzanine II Inc.,
a 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 29th day of March, 1996.
Signature Title
_____________________ ML Mezzanine II, Inc.
Kevin K. Albert President and Director
(Principal Executive Officer of Registrant)
_____________________ Individual General Partner
Vernon R. Alden ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.
_____________________ ML Mezzanine II Inc.
Audrey Bommer Vice President and Treasurer
(Principal Financial Officer of Registrant)
______________________ Individual General Partner
Joseph L. Bower ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.
_____________________ ML Mezzanine II Inc.
Roger F. Castoral, Jr. Assistant Treasurer
(Principal Accounting Officer of Registrant)
_____________________ Individual General Partner
Stanley H. Feldberg ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.
_____________________ Individual General Partner
Thomas H. Lee ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.