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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, 1996
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 as amended("Investment Company
Act"). The Retirement Fund's primary investment objective is to provide current
income and capital appreciation potential by investing in privately structured,
friendly leveraged buyouts and other leveraged transactions. The Retirement Fund
pursued this objective by investing primarily in subordinated debt and related
equity securities issued in conjunction with the "mezzanine financing" of
friendly leveraged buyout transactions, leveraged acquisitions and leveraged
recapitalizations. The Retirement Fund may also invest in "bridge investments"
if it is believed that such investments would facilitate the consummation of a
mezzanine financing. The Retirement Fund considers this activity to constitute a
single industry segment of mezzanine financing investing.
The Retirement Fund invested substantially all of its net proceeds in
Mezzanine Investments consisting of high-yield subordinated debt and/or
preferred stock linked with an equity participation of middle market companies
in connection with friendly leveraged acquisitions, recapitalizations and other
leveraged financings. The Retirement Fund's Mezzanine Investments typically were
issued in private placement transactions which are generally subject to certain
restrictions on sales thereby limiting their liquidity. The Retirement Fund was
fully invested as of December 20, 1992, which was within 36 months from the date
of the final closing (after including the reserve for follow-on investments and
exclusive of amounts available for reinvestment). The reinvestment period for
various amounts of capital proceeds received during the last twelve months of
the Retirement Fund's investment period terminated at various times through
December 18, 1993.
The Funds together offered an aggregate of 1 million units of limited
partnership interest ("Units") at $1,000 per Unit with the Securities and
Exchange Commission pursuant to a Registration Statement on Form N-2 (File No.
33-25816), effective September 6, 1989. The information set forth under the
heading "Risk and Other Important Factors", "Estimated Use of Proceeds",
"Mezzanine Financing" and "Investment Objectives and Policies" on pages 21
through 46 and "Conflicts of Interest" on pages 79 through 82 in the Prospectus
of the Retirement Fund dated September 6, 1989, filed with the Securities and
Exchange Commission pursuant to Rule 497(b) under the Securities Act of 1933
(the "Prospectus"), is incorporated herein by reference.
The offering of Units commenced on September 6, 1989. On November 10 and
December 20, 1989, the Retirement Fund had its first and second closings
respectively, at which time the Managing General Partner admitted additional
Limited Partners to the Retirement Fund representing 177,515 Units of limited
partnership interest. The additional Limited Partners' total capital
contributions were $164,201,375, which excludes discounts allowed of $1,447,740
and is net of sales commissions and advisory fees of $11,865,885. The Managing
General Partner's aggregate contribution was $500,000. Thomas H. Lee, as an
Individual General Partner, contributed $50,000. For their services as selling
agent, the Retirement Fund paid sales commissions to Merrill Lynch, Pierce,
Fenner and Smith Incorporated ("MLPF&S") in the amount of $9,492,708 (exclusive
of discounts of $1,158,192). In addition, the Retirement Fund paid a financial
advisory fee to MLPF&S in the amount of $2,373,177 (exclusive of discounts of
$289,548).
Mezzanine and Bridge Investments
At December 31, 1996, the Retirement Fund had outstanding a total of $63.8
million invested in Mezzanine Investments representing $46.5 million Managed and
$17.3 million Non-Managed portfolio investments. At December 31, 1996, there
were no Bridge Investments outstanding for the Funds. The Funds co-invest in all
Mezzanine and Bridge Investments, allocating such investments in proportion to
their capital available for investment.
The Retirement Fund's reinvestment period ended on December 18, 1993 and,
accordingly, no new investments were made after that date other than the funding
of investments which were committed to prior to that date.
REVIEW OF INVESTMENTS SOLD DURING 1996
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. On March 22, 1996, the Retirement
Fund sold its entire investment in CST and realized a gain of $2.3 million and
recognized $3.9 million of interest income for payment in kind notes previously
classified as non-accrual. Net Distributable proceeds of $42.04 per Unit were
distributed on May 3, 1996 to Limited Partners of record as of the date of such
sale.
Ghirardelli Holdings Company ("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.
On April 1, 1996, the Retirement Fund sold its entire investment in
Ghirardelli to an investor group comprised of the Chief Executive Officer of
Ghirardelli and certain other investors. The Retirement Fund realized a gain of
$2.6 million on this transaction. Net Distributable proceeds of $46.38 per Unit
were distributed on May 3, 1996 to Limited Partners of record as of the date of
such sale.
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. On
May 17, 1996, the Retirement Fund sold its entire investment in National Tobacco
Company and received net proceeds of $5.9 million. The Retirement Fund realized
a gain of $1.5 million on this 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 4, 1996, Petco filed a registration statement with the Securities
and Exchange Commission for an offering of 5 million shares of Common Stock. Of
the 5 million shares offered, 2.6 million were offered by Petco and the
remaining shares were offered by certain current stockholders, including the
Retirement Fund. The offering was effected on April 30, 1996, and on this date,
the Retirement Fund sold its entire investment in Petco, which consisted of
93,568 shares of Common Stock. The Retirement Fund realized a gain of $1.5
million on the sale.
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, 1996:
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. This investment is valued at cost at December 31,
1996.
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, 1996.
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, 1996.
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 31, 1996 reflects unrealized depreciation
of $12 million for the year ended December 31, 1996, bringing the aggregate net
unrealized appreciation through December 31, 1996 to $4.0 million.
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 $1.1 million on this investment for the
year ended December 31, 1996. The closing market price of this investment
reflects an aggregate net unrealized depreciation of approximately $16.9 million
through December 31, 1996.
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
approximately $91,000 of unrealized appreciation recorded for the year ended
December 31, 1996 and $1.4 million of cumulative net unrealized depreciation
through December 31, 1996.
Stanley Furniture Company, Inc. ("Stanley Furniture")
Stanley Furniture designs, manufactures and markets furniture and fabric
products.
On November 13, 1996, Stanley Furniture completed a public offering of
1,000,000 shares of common stock at $16.00 per share. Following the offering,
Stanley purchased a total of 150,000 shares from the selling shareholders
including the Retirement Fund at the same price per share. Pursuant to these
transactions, the Retirement Fund sold a total of 7,716 shares of Stanley
Furniture common stock for a net price of $15.12 per share. Fund II received
total proceeds of $116,666 and recognized a gain of approximately $20,000.
Based upon the closing bid price at December 31, 1996, the Retirement
Fund's valuation of Stanley Furniture reflects an aggregate of approximately
$79,000 in net unrealized appreciation through December 31, 1996.
During February 1997, the Retirement Fund sold an additional 218 shares of
Stanley common stock pursuant to the provisions of Rule 144 under the Securities
Act of 1933, as amended. Total proceeds from the sale were approximately
$5,232.
Cinnabon International, Inc. ("Cinnabon") (formerly Restaurants Unlimited)
On August 7, 1996, Restaurants Unlimited, Inc sold its full service
restaurant business division to a company owned and controlled by certain
members of the Company's management group. As part of the agreement to sell the
restaurant division, the Company agreed to change its name from Restaurants
Unlimited, Inc., to Cinnabon and agreed to modify the terms of its Class A and B
Preferred Stock, resulting in the buyer of the restaurant division having
indirect responsibility for payment of one-third of the obligation to the
preferred stockholders. Proceeds from the sale of approximately $24.5 million
were used to pay down Cinnabon's then existing bank debt.
Cinnabon 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. The investment in Cinnabon is valued at cost
at December 31, 1996.
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, 1996:
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 amoritized cost at December 31, 1996.
Fitz and Floyd Corporation ("FFSC")
During 1996, FFSC filed a voluntary petition for protection under Chapter
11 of the US Bankruptcy Code. The Retirement Fund has surrendered its equity
holdings in FFSC, which resulted in a realized loss of approximately $13,000. As
of December 31, 1996, the Retirement Fund wrote down the Senior Adjustable Rate
Notes to $2.0 million, which resulted in aggregate unrealized depreciation of
$6.3 million on this investment. See Note 4 to the financial statements for more
information.
FLA. Orthopedics, Inc.
FLA. Orthopedics, headquartered in Miami, manufactures, markets and
distributes production in two major lines of business: ergonomically designed
safety products and orthopedic soft goods. On August 2, 1996, the Retirement
Fund surrendered its 12.5% subordinate note and exchanged all common equity for
preferred stock and new common stock purchase warrants. The Retirement Fund
realized a loss of $3.2 million on the note surrendered.
As of December 31, 1996, the Retirement Fund has valued its remaining
investment in FLA. Orthopedics, Inc. at zero, which resulted in cumulative
unrealized depreciation of $987,000.
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
total unrealized depreciation of approximately $1.8 million through December 31,
1996.
Competition
The Retirement Fund has completed its investment period and its
reinvestment program and, therefore, will no longer have to compete for
investments. A majority of the portfolio companies are participating in
extremely competitive businesses.
Employees
The Retirement Fund has no employees. The Investment Adviser, subject to
the supervision of the Managing General Partner and the Individual General
Partners, manages and controls the Retirement Fund's investments. The Managing
General Partner is responsible for managing the Temporary Investments of the
Retirement Fund. The Fund Administrator performs administrative services for the
Retirement Fund. The Fund Administrator is a subsidiary of Merrill Lynch & Co.
Inc., the parent of MLPF&S.
Item 2. Properties
The Retirement Fund does not own or lease any physical properties.
Item 3. Legal Proceedings
On 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 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, although plaintiffs' have made application to the
Court for permission to conduct additional fact discovery. The parties have
conducted expert discovery, the conclusion of which is subject to the Courts'
decision on a pending motion. 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.
In the opinion of legal council, 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. Defendants' motion to dismiss this complaint was denied
on December 29, 1995. On August 4, 1995, while defendants' motion to dismiss the
original complaint was pending, 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' motion and moved to
dismiss the amended complaint. By an Opinion dated March 30, 1996, the
defendants Court denied plaintiffs' motion for partial summary judgment. By
order of the same date, and without opposition by defendants, the Court
certified the case as a class action. Defendants also filed separate motions to
dismiss, which the Court denied by an order dated June 30, 1996. The parties are
now engaged in discovery. 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. In the
opinion of legal council, 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. On December 18, 1996, the Court denied the
defendants' motion to dismiss. Although the defendants believe the advancement
of legal fees and litigation costs was properly made pursuant to indemnification
agreements signed by the defendants. In the opinion of legal council, 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, 1996.
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
There is no established trading market for the Units. The Partnership
Agreement contains restrictions that are intended to prevent the development of
a public market. Accordingly, accurate information as to the market values of
Units at any given date is not available.
The approximate number of Unit holders as of January 1, 1997, the last
effective date of transfer (as described below), was 20,267. 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 the December 1994 client account statements, MLPF&S
implemented new guidelines for providing estimated values of limited
partnerships and other direct investments reported on client account statements.
As a result, MLPF&S no longer reports the General Partner's estimates of limited
partnership net asset value to Unit holders. Pursuant to such MLPF&S guidelines,
estimated values for limited partnership interests originally sold by MLPF&S
(such as the Retirement Fund's Units) will be provided two times per year to
MLPF&S by independent services. These 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 month-end account statements through May of the following year, and on
information available to the services on March 31st for reporting on June
through November MLPF&S client account statements of the same year. MLPF&S
clients may contact their MLPF&S 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
estimates of value. The estimated values provided by the independent services
and the Retirement Fund's current net asset value as estimated by the general
partner are not market values and Unit holders may not be able to sell their
Units or realize either amount upon a sale of their Units. In addition, Unit
holders may not realize the independent estimated value or the Retirement Fund's
current net asset value upon the liquidation of the Retirement Fund's assets
over its remaining life.
The Retirement Fund distributes Distributable Cash from Investments and
Distributable Capital Proceeds in accordance with the terms of the Partnership
Agreement.
Pursuant to the Partnership Agreement, transfers of Units are recognized on
the first day of the fiscal quarter after which the Managing General Partner has
been duly notified of a transfer pursuant to the Partnership Agreement. Until a
transfer is recognized, the limited partner of record (i.e. the transferor) will
continue to receive all the benefits and burdens of ownership of Units
(including allocations of profit and loss and distributions), and any transferee
will have no rights to distributions of sale proceeds generated at any time
prior to the recognition of the transfer and assignment.
Accordingly, Distributable Cash from Investments for a quarter and
Distributable Capital Proceeds from sales after transfer or assignment have been
entered into, but before such 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. See
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources - the information contained,
which is incorporated herein by reference.
Item 6. Selected Financial Data
Supplemental Information Schedule
For the Years Ended December 31,
TOTAL FUND INFORMATION: 1996 1995 1994 1993 1992
----------- ------------ ------------ ------------- -------------
Net Investment Income $ 5,516,846 $ 3,071,361 $ 5,571,207 $ 4,904,017 $ 10,308,795
Net Realized Gain on Investments 4,755,563 9,262,616 74,326,557 15,978,135 943,644
Net Change in (Depreciation)
Appreciation on Investments (14,768,911) (28,395,532) (114,349,601) 94,671,310 48,214,869
Cash Distributions to Partners 34,722,409 29,053,844 110,407,812 42,359,885 11,613,395
Net Assets 49,257,119 88,476,031 133,591,430 278,451,079 205,257,502
Cost of Mezzanine Investments 63,818,387 88,353,161 96,897,659 105,516,167 111,813,880
Total Assets 49,627,131 89,303,296 134,369,173 279,629,574 206,423,808
PER UNIT OF LIMITED PARTNERSHIP INTEREST:
Investment Income $ 35.32 $ 30.42 $ 47.26 $ 51.37 $ 78.40
Expenses 15.56 (18.88) (21.99) (25.62) (20.51)
----------- ----------- ------------ ------------ -------------
Net Investment Income $ 19.76 $ 11.54 $ 25.27 $ 25.75 $ 57.89
----------- ----------- ------------ ------------ -------------
Net Realized Gains on Sales of Investments 21.99 43.12 302.22 81.82 5.30
Net Change in Unrealized (Depreciation)
Appreciation on Investments (82.94) (159.46) (642.18) 531.67 270.77
Cash Distributions 166.55 (a) 138.43 526.12 237.89 65.22
Cumulative Cash Distributions 1,256.87 1,090.32 951.89 425.77 187.88
Net Asset Value $ 262.93 $ 470.67 $ 713.90 $ 1,554.72 $ 1,153.37
(a) Includes $20.4 million or $114.94 per limited partnership Unit return of
capital from the sale of portfolio investments during 1996.
See Cash Distributions Schedule for additional information, including
return of capital.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity & Capital Resources
As of December 31, 1996, 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, 1996 were $96 million,
after adjusting for returns of capital distributed to partners, volume
discounts, sales commissions and organizational, offering, sales and marketing
expenses.
At December 31, 1996, the Retirement Fund had outstanding a total (at cost)
of $63.8 million invested in Mezzanine Investments representing $46.5 million
Managed and $17.3 million Non-Managed portfolio investments. The remaining
proceeds were invested in Temporary Investments primarily comprised of
commercial paper with maturities of less than one month.
The Retirement Fund invested substantially all of its net proceeds in
Mezzanine Investments consisting of high-yield subordinated debt and/or
preferred stock linked with an equity participation of middle market companies
in connection with friendly leveraged acquisitions, recapitalizations and other
leveraged financings. The Retirement Fund's Mezzanine Investments typically were
issued in private placement transactions which are generally subject to certain
restrictions on sales thereby limiting their liquidity. The Retirement Fund was
fully invested as of December 20, 1992, which was within 36 months from the date
of the final closing (after including the reserve for follow-on investments and
exclusive of amounts available for reinvestment). The reinvestment period for
various amounts of capital proceeds received during the last twelve months of
the Retirement Fund's investment period terminated at various times through
December 18, 1993.
As provided by the Partnership Agreement, the Managing General Partner of
the Retirement Fund is entitled to receive an incentive distribution after
Limited Partners have received their Priority Return of 10% per annum. The
Managing General Partner is required to defer a portion of any incentive
distribution earned from the sale of portfolio investments in excess of 20% of
realized capital gains, net realized capital losses and unrealized depreciation,
in accordance with the Partnership Agreement (the "Deferred Distribution
Amount"). This Deferred Distribution Amount is distributable to the Partners
pro-rata in accordance with their capital contributions, and certain amounts
otherwise later payable to Limited Partners from Distributable Cash from
operations are instead payable to the Managing General Partner until the
Deferred Distribution Amount is paid in full. As of March 20, 1997, there is a
Deferred Distribution Amount owed to the Managing General Partner of $2,528,616.
On August 6, 1991, the Independent General Partners approved a reserve for
follow-on investments of $20.0 million for the Retirement Fund. As of March 20,
1997, the reserve balance was reduced to $7.2 million due to follow-on
investments in Petco Animal Supplies, FFSC, Inc., Fine Clothing, Inc., Hills and
Ghirardelli. Additionally, $5.7 million of the reserve had been returned to the
partners during 1995 and $1 million was returned to partners as part of the
fourth quarter cash distribution made on February 14, 1997. 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. During 1996, the Independent General
Partners have approved a follow on investment in FFSC, Inc. of approximately
$1.6 million, which has not been funded as of March 20, 1997.
All net proceeds from the sale of Mezzanine Investments received by the
Retirement Fund in the future will be distributed to its partners unless applied
to or set aside for expenses or follow-on investments.
The proportion of distributions provided by net investment income has
decreased significantly from prior years due primarily to increased sales and
redemptions of Mezzanine Investments and a resulting decrease in investment
income as those holdings cease to generate interest income. 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 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 invested primarily in subordinated debt and preferred
stock securities ("High-Yield Securities"), generally linked with an equity
participation, issued in conjunction with the mezzanine financing of privately
structured, friendly leveraged acquisitions, recapitalizations and other
leveraged financings. High-Yield Securities are debt and preferred equity
securities that are unrated or are rated by Standard & Poor's Corporation as BB
or lower and by Moody's Investor Services, Inc. as Ba or lower. Risk of loss
upon default by the issuer is significantly greater with High-Yield Securities
than with investment grade securities because High-Yield Securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Also, these issuers usually have high levels of indebtedness and are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates, than investment grade issuers. Most of these securities are
subject to resale restrictions and generally there is no quoted market for such
securities.
Although the Retirement Fund cannot eliminate the risks associated with its
investments in High-Yield Securities, it has established risk management
policies. The Retirement Fund subjected each prospective investment to rigorous
analysis and made only those investments that were recommended by the Investment
Adviser and that met the Retirement Fund's investment guidelines or that had
otherwise been approved by the Managing General Partner and the Independent
General Partners. The Retirement Fund's investments were measured against
specified Retirement Fund investment and performance guidelines. To limit the
exposure of the Retirement Fund's capital in any single issuer, the Retirement
Fund limited the amount of its investment in a particular issuer. The Retirement
Fund's Investment Adviser also continually monitors portfolio companies in order
to minimize the risks associated with its investments in High-Yield Securities.
Certain issuers of Securities held by the Retirement Fund (First Alert,
Hills, 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 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, 1996, the Retirement Fund had investment
income of $8.3 million as compared to $6.4 million for the same period in 1995
and $9.5 million for the same period in 1994. The increase in investment income
from 1995 to 1996 is due primarily to the recognition of interest income from
payment-in-kind securities related to the sale of CST Office Products, Inc. The
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 was the sale of Mezzanine Investments during 1995.
Major expenses for the period consisted of Legal and Professional Fees,
Investment Advisory Fees and Fund Administration Fees and Reimbursable
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, 1996, 1995 and 1994 were $1.1
million, $1.4 million and $1.7 million, respectively. These expenses are
attributable to legal fees incurred and advanced on behalf of indemnified
defendants as well as fees incurred directly by the Retirement Fund in
connection with the aforementioned litigation proceedings.
The Investment Adviser and Fund Administrator both receive their
compensation on a quarterly basis. The total Investment Advisory Fees paid to
the Investment Adviser by the Retirement Fund for the years ended December 31,
1996, 1995 and 1994 was $807,939, $1.1 million and $1.2 million, respectively,
and were calculated at an annual rate of 1.0% of assets under management (net
offering proceeds reduced by cumulative capital reductions and realized losses),
with a minimum annual amount of $1,200,000 for Fund II and the Retirement Fund
on a combined basis. These decreases in Investment Advisory Fees are a direct
result of the sales of investments, returns of capital to Partners and realized
losses on investments.
The Fund Administration Fees paid to the Fund Administrator by the
Retirement Fund for the years ended December 31, 1996, 1995 and 1994 were
$544,478, $602,002 and $633,558, respectively, and were calculated at an annual
rate of 0.45% of the excess of net offering proceeds, less 50% of capital
reductions and realized losses. These decreases in Fund Administration Fees 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,
audit, tax preparation and custodian fees. For the years ended December 31,
1996, 1995 and 1994, the Retirement Fund incurred $110,370, $100,721 and
$220,205, respectively, in reimbursable expenses.
For the year ended December 31, 1996, the Retirement Fund had net
investment income of $5.5 million, as compared to $3.1 million for the same
period in 1995 and $5.6 million for the same period in 1994. The increase in net
investment income from 1995 to 1996 is the result of additional payment-in-kind
interest income recorded upon the sale of CST in the first quarter of 1996 and
lower Investment Advisory, Fund Administration and Legal and Professional Fees
recorded in 1996. The decrease in 1995 as compared to 1994 net investment income
is primarily attributable to a decrease in income from Mezzanine Investments and
Temporary Investments partially offset by lower expenses, primarily Legal and
Professional Fees.
Net Assets
The Retirement Fund's net assets decreased by $39.2 million during the year
ended December 31, 1996, due to the payment of cash distributions to partners of
$34.7 million ($20.5 million of the cash distributions paid was return of
capital from the sales of portfolio investments) and net unrealized depreciation
of $14.8 million, partially offset by net investment income of $5.5 million and
realized gains of $4.8 million from the sale of Mezzanine Investments.
Unrealized Appreciation and Depreciation on Investments
For the year ended December 31, 1996, the Retirement Fund recorded net
unrealized depreciation of $14.8 million of which $12.8 million was related to
net depreciation in market value of publicly traded securities held as of
December 31, 1996. The unrealized depreciation for 1996 can be attributed
primarily to the decrease in value of the Retirement Fund's investment in First
Alert and Hills Stores Company at December 31, 1996, as well as the reversal of
unrealized appreciation of Petco upon the sale of Petco Securities held by the
Retirement Fund. This compares to a net unrealized depreciation of $28.4 million
for the same period in 1995 of which $23.3 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,
1996 totaled $23.2 million.
The Retirement Fund's valuation of the common stock of First Alert, Hills,
Playtex and Stanley Furniture reflect their closing market prices at December
31, 1996.
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.
Appoximately 53% of the Retirement Fund's investments (at cost) are
invested in private placement securities for which there are no ascertainable
market values. Although the Managing General Partner and Investment Adviser use
their best judgment in estimating the fair value of these investments, there are
inherent limitations in any estimation technique. Therefore, the fair value
estimates presented herein are not necessarily indicative of the amount which
the Retirement Fund could realize in a current transaction.
The First Alert, 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 pursuant to Rule
144 under the Securities Act of 1993 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, 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, 1996. Although the Managing General Partner and Investment Adviser are not
aware of any factors not disclosed herein that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued since that time, and the current estimated fair value of these
investments may have changed significantly since that point in time.
For additional information, please refer to Supplemental Schedule of
Unrealized Appreciation and Depreciation - Schedule 2.
Realized Gains and Losses
For the year ended December 31, 1996, the Retirement Fund had net realized
gains from investments of $4.8 million as compared to $9.2 million and $74.3
million for the same periods in 1995 and 1994, respectively.
For additional information, please refer to Supplemental Schedule of
Realized Gains and Losses - Schedule 1.
Cash Distributions
On February 3, 1997, the Individual General Partners approved the fourth
quarter 1996 cash distribution totalling $1,361,776 which represents net
investment income of $183,864 from Mezzanine Investments, net investment income
from Temporary Investments of $61,246 and net Distributable Capital Proceeds
from the sale of Stanley Furniture common stock of $116,666 (which includes
return of capital of $97,093). Additionally, a return of the reserve for
follow-on investments of $1 million was included with the fourth quarter
distribution. The total amount distributed to Limited Partners was $1,175,149 or
$6.62 per Unit, which was paid on February 14, 1997. The Managing General
Partner received a total of $3,310 with respect to its interest in the
Retirement Fund and $182,986 in incentive distributions. Thomas H. Lee, as an
Individual General Partner, received $331 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 Limited Per Unit Managing Individual
Distributed Partners Return of General Incentive General
Cash Amount Per Unit Capital Partner Fee (b) Partner
----------- ---------- -------- --------- --------- --------- ----------
Fourth Quarter 1989 $ 1,049,749 $ 1,046,507 $ 6.59 $ - $ 2,947 $ - $ 295
First Quarter 1990 2,906,023 2,897,045 16.32 - 8,162 816
Second Quarter 1990 3,586,751 3,479,294 19.60 - 10,073 96,377 1,007
Third Quarter 1990 2,735,077 2,726,630 15.36 - 7,679 - 768
Fourth Quarter 1990 4,076,832 3,891,129 21.92 - 11,446 173,112 1,145
First Quarter 1991 2,297,038 2,289,944 12.90 - 6,449 - 645
Second Quarter 1991 2,919,747 2,910,729 16.90 - 8,198 - 820
Third Quarter 1991 2,327,308 2,320,120 13.07 - 6,535 - 653
Fourth Quarter 1991 2,646,044 2,637,873 14.86 - 7,428 - 743
First Quarter 1992 3,055,858 3,046,157 17.16 - 8,843 - 858
Second Quarter 1992 3,272,572 3,262,726 18.38 - 8,927 - 919
Third Quarter 1992 2,638,921 2,630,772 14.82 - 7,408 - 741
Fourth Quarter 1992 2,897,119 2,888,169 16.27 - 8,136 - 814
Snapple Distribution
on 4/13/93 12,786,849 12,747,352 71.81 71.81 35,906 - 3,591
First Quarter 1993 19,889,862 19,828,426 111.70 97.16 55,851 - 5,585
Second Quarter 1993 1,230,430 1,226,629 6.91 3.49 3,455 - 346
Third Quarter 1993 5,555,625 5,538,468 31.20 1.89 15,597 - 1,560
Fourth Quarter 1993 13,364,699 11,905,931 67.07 - 38,388 1,416,541 3,839
First Quarter 1994 14,934,550 14,117,768 79.53 72.50 41,938 770,650 4,194
Second Quarter 1994 3,184,138 2,792,311 15.73 10.00 8,941 381,992 894
Third Quarter 1994 810,197 807,693 4.55 2.79 2,276 - 228
Snapple Distribution
on 12/15/94 78,114,228 63,770,489 359.24 13.81 237,847 14,082,107 23,785
Fourth Quarter 1994 279,288 221,894 1.25 - 627 56,704 63
EquiCredit Distribution
on 2/14/95 8,303,171 6,860,956 38.65 3.82 24,411 1,415,363 2,441
First Quarter 1995 5,893,413 4,899,415 27.60 26.48 13,801 978,817 1,380
Second Quarter 1995 2,077,699 1,352,664 7.62 .38 4,820 719,733 482
Third Quarter 1995 1,890,622 1,088,166 6.13 5.61 3,069 799,080 307
Sun Pharmaceuticals
Distribution on
12/11/95 10,609,652 10,150,307 57.18 51.57 28,591 427,895 2,859
Fourth Quarter 1995 19,587 19,527 .11 - 55 - 5
CST Distribution on
5/3/96 13,796,491 9,773,975 55.06 42.04 27,529 3,992,234 2,753
First Quarter 1996 765,250 76,331 .43 - 217 688,680 22
Ghirardelli
Distribution on
5/3/96 10,731,976 10,698,829 60.27 46.38 30,134 - 3,013
Second Quarter 1996 9,302,264 8,889,952 50.08 26.52 25,043 384,765 2,504
Third Quarter 1996 106,839 106,509 .60 - 300 - 30
Fourth Quarter 1996 1,361,776 1,175,149 6.62 6.17 3,310 182,986 331
------------ ------------ --------- --------- --------- ----------- ---------
Totals $251,417,645 $224,075,836 $1,263.49 $ 482.42 $ 704,337 $26,567,036(c) $ 70,436
============ ============ ========= ========= ========= =========== =========
(a) Distributions are paid no later than 45 days after the end of each quarter.
(b) Incentive distribution to the Managing General Partner for exceeding the
cumulative Priority Return on Mezzanine Investments to Limited Partners.
(c) Subsequent to the Distribution paid on February 14, 1997, there was a
Deferred Distribution Amount outstanding of $2,528,616 or $14.24 per Limited
Partner Unit that is payable to the Managing General Partner. This amount will
be paid to the Managing General Partner from certain future Distributable Cash
from Operations until the Deferred Distribution Amount is paid in full.
Item 8. Financial Statements and Supplementary Data
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
TABLE OF CONTENTS
Report of Independent Accountants
Statements of Assets, Liabilities and Partners' Capital
As of December 31, 1996 and December 31, 1995
Statements of Operations
For the Years Ended December 31, 1996, 1995 and 1994
Statements of Changes in Net Assets
For the Years Ended December 31, 1996, 1995 and 1994
Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
Statements of Changes in Partners' Capital
For the Years Ended December 31, 1996, 1995 and 1994
Schedule of Portfolio Investments - December 31, 1996
Notes to Financial Statements
Supplementary Schedule of Realized Gains and Losses - Schedule 1
Supplementary Schedule of Unrealized Appreciation and Depreciation - Schedule 2
Report of Independent Accountants
To the General and Limited Partners of
ML-Lee Acquisition Fund (Retirement Accounts) II, L.P.
In our opinion, the accompanying statements of assets, liabilities and
partners' capital, including the schedule of portfolio investments, and the
related statements of operations, of changes in net assets, of cash flows, and
of changes in partners' capital present fairly, in all material respects, the
financial position of ML-Lee Acquisition Fund (Retirement Accounts) II, L.P.
(the "Fund") at December 31, 1996 and 1995, 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, 1996, 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, 1996 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 $40,547,088 at
December 31, 1996 (82.3% 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
March 20, 1997
execpt as to Note 13 which is as of March 26, 1997
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
December 31, 1996 December 31, 1995
----------------- -----------------
ASSETS:
Investments - Notes 2,4,5
Portfolio Investments at fair value
Managed Companies (amortized cost $46,467
at December 31, 1996 and $63,435 at December 31, 1995) $ 32,302 $ 62,874
Non-Managed Companies (amortized cost $17,353
at December 31, 1996 and $24,931 at December 31, 1995) 8,244 16,970
Temporary Investments, at amortized cost (cost $8,390
at December 31, 1996 and $8,202 at December 31, 1995) 8,405 8,218
Cash (of which $131 is restricted at December 31, 1996) 141 1
Accrued Interest Receivable - Note 2 531 1,237
Prepaid Expenses 4 4
--------------- ---------------
TOTAL ASSETS $ 49,627 $ 89,304
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities
Legal and Professional Fees Payable $ 119 $ 311
Reimbursable Administrative Expenses Payable - Note 8 35 46
Independent General Partners' Fees Payable - Note 9 28 45
Deferred Interest Income - Note 2 188 426
--------------- ---------------
Total Liabilities 370 828
--------------- ---------------
Partners' Capital - Note 2
Individual General Partner 18 28
Managing General Partner 2,566 4,897
Limited Partners (177,515 Units) 46,673 83,551
--------------- ---------------
Total Partners' Capital 49,257 88,476
--------------- ---------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 49,627 $ 89,304
=============== ===============
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
Year Ended Year Ended Year Ended
---------------- ---------------- ----------------
December 31, 1996 December 31, 1995 December 31, 1994
---------------- ---------------- ----------------
INVESTMENT INCOME - Notes 2,4,6:
Interest $ 7,557 $ 5,530 $ 8,277
Discount & Dividends 730 903 1,209
---------------- ---------------- ----------------
TOTAL INCOME 8,287 6,433 9,486
---------------- ---------------- ----------------
EXPENSES:
Investment Advisory Fee - Note 7 808 1,064 1,202
Fund Administration Fee - Note 8 544 602 634
Reimbursable Administrative Expenses-Note 8 110 101 220
Legal and Professional Fees 1,125 1,389 1,659
Independent General Partners' Fees and Expenses - Note 9 179 201 155
Amortization of Deferred Organization Expenses - Note 2 -- -- 40
Insurance Expense 4 5 5
---------------- ---------------- ----------------
TOTAL EXPENSES 2,770 3,362 3,915
---------------- ---------------- ----------------
NET INVESTMENT INCOME 5,517 3,071 5,571
---------------- ---------------- ----------------
Net Realized Gain on Investments - Note 4 and Schedule 1 4,756 9,263 74,327
Net Change in Unrealized Depreciation ---------------- ---------------- ----------------
from Investments - Note 5 and Schedule 2:
Publicly Traded Securities (13,603) (23,262) (111,096)
Nonpublic Securities (1,166) (5,133) (3,254)
---------------- ---------------- ----------------
SUBTOTAL (14,769) (28,395) (114,350)
---------------- ---------------- ----------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS (4,496) (16,061) (34,452)
Less: Incentive Fees Earned by Managing General Partner (2,566) (2,592) (21,518)
---------------- ---------------- ----------------
NET DECREASE AVAILABLE FOR PRO-RATA
DISTRIBUTION TO ALL PARTNERS $ (7,062) $ (18,653) $ (55,970)
================ ================ ================
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
--------------- --------------- ---------------
FROM OPERATIONS:
Net Investment Income $ 5,517 $ 3,071 $ 5,571
Net Realized Gain on Investments 4,756 9,263 74,327
Net Change in Unrealized Depreciation
From Investments (14,769) (28,395) (114,350)
--------------- --------------- ---------------
Net Decrease in Net Assets Resulting from Operations (4,496) (16,061) (34,452)
Cash Distributions to Partners (34,723) (29,054) (110,408)
--------------- --------------- ---------------
Total Decrease (39,219) (45,115) (144,860)
NET ASSETS:
Beginning of Year 88,476 133,591 278,451
--------------- --------------- ---------------
End of Year $ 49,257 $ 88,476 $ 133,591
=============== =============== ===============
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
--------------- --------------- ---------------
Increase (Decrease) in Cash and Cash Equivalents
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest, Dividends and Discount Income $ 8,856 $ 5,763 $ 10,001
Fund Administration Fee (544) (602) (634)
Investment Advisory Fee (808) (1,064) (1,202)
Independent General Partners' Fees and Expenses (196) (218) (147)
(Purchase) Sale of Temporary Investments, Net (188) 8,127 20,797
Purchase of Portfolio Company Investments -- (1,865) (6,887)
Proceeds from Sales of Portfolio Company Investments 29,185 20,176 90,308
Reimbursable Administrative Expenses (121) (125) (150)
Closing Fees Received -- -- 40
Legal and Professional Fees (1,321) (1,138) (1,718)
--------------- --------------- ---------------
Net Cash Provided by Operating Activities 34,863 29,054 110,408
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Distributions to Partners (34,723) (29,054) (110,408)
--------------- --------------- ---------------
Net Cash Applied to Financing Activities (34,723) (29,054) (110,408)
--------------- --------------- ---------------
Net Increase in Cash 140 -- --
Cash at Beginning of Period 1 1 1
--------------- --------------- ---------------
Cash at End of Period $ 141 $ 1 $ 1
=============== =============== ===============
RECONCILIATION OF NET INVESTMENT INCOME
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Investment Income $ 5,517 $ 3,071 $ 5,571
--------------- --------------- ---------------
Adjustments to Reconcile Net Investment Income to
Net Cash Provided by Operating Activities:
Decrease in Investments 24,342 17,176 30,152
(Increase) Decrease in Accrued Interest Receivables 468 (670) 515
Decrease in Prepaid Expenses -- -- 8
Increase (Decrease) in Legal and Professional Fees Payable (192) 255 (62)
Increase (Decrease) in Reimbursable Administrative Expenses Payable (11) (24) 70
Increase (Decrease) in Independent General Partners' Fees Payable (17) (17) 16
Amortization of Deferred Organization Expenses -- -- 40
Increase in Deferred Closing Fee -- -- 40
Decrease in Option Payable -- -- (269)
Net Realized Gains on Sales of Investments 4,756 9,263 74,327
--------------- --------------- ---------------
Total Adjustments 29,346 25,983 104,837
--------------- --------------- ---------------
Net Cash Provided by Operating Activities $ 34,863 $ 29,054 $ 110,408
=============== =============== ===============
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
Notes 2 and 3 ------------ ----------- ------------ ------------
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 Investments 21 20,657 53,649 74,327
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
Allocation of Net Realized Gain on Investments 3 1,605 7,655 9,263
Allocation of Net Change in Unrealized
Depreciation From Investments (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
========= ========= ========= =========
For the year Ended December 31, 1996
Partners' Capital at January 1, 1996 $ 28 $ 4,897 $ 83,551 $ 88,476
Allocation of Net Investment Income 2 2,007 3,508 5,517
Allocation of Net Realized Gain on Investments 1 852 3,903 4,756
Allocation of Net Change in Unrealized
Depreciation From Investments (4) (41) (14,724) (14,769)
Cash Distributions to Partners (9) (5,149) (29,565) (34,723)
--------- --------- --------- ---------
Partners' Capital at December 31, 1996 $ 18 $ 2,566 $ 46,673 $ 49,257
========= ========= ========= =========
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 1996
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares/Warrants 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 16.62
-------------------------------
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 18.71
-------------------------------
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
-------------------------------
FIRST ALERT, INC.(b) - Note 5
2,281,524 Shares First Alert, Inc., Common Stock(a)(d) 07/31/92 3,680 7,700
(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 7,700 15.73
-------------------------------
HILLS STORES COMPANY - Note 5
244,818 Shares Hills Stores Company, Common Stock(a)(d) 04/03/90 16,153 1,469
33,427 Shares Hills Stores Company, Common Stock(a)(d) 08/21/95 2,418 200
(2.5% of fully diluted common equity) (i) -------------------------------
18,571 1,669 3.41
-------------------------------
PLAYTEX PRODUCTS, INC.(b) - Note 5
183,560 Shares Playtex Products, Inc., Common Stock(a)(d) 03/29/90 2,830 1,468
(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 1,468 3.00
-------------------------------
CINNABON INTERNATIONAL, INC.(formerly 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 8.08
-------------------------------
STANLEY FURNITURE COMPANY, INC. (b) - Notes 4, 5
10,795 Shares Stanley Furniture Company, Inc., Common Stock(a)(d) 06/30/91 136 215
(0.4% of fully diluted common equity)(i)
7,716 Shares Common Stock
Purchased 6/30/91 $ 97
Sold 6,710 11/13/96 $ 102
Sold 1,006 12/13/96 $ 15
Realized Gain $ 20 136 215 0.44
-------------------------------
TOTAL INVESTMENT IN MANAGED COMPANIES $46,467 $ 32,302 65.99
===============================
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares/Warrants Investment Date Cost(e) (Note 2) Investments
NON-MANAGED COMPANIES
BIOLEASE, INC.
$513 Biolease, Inc., 13% Sub. Nt. due 06/06/04(c) 06/08/94 $ 443 $ 461
63.20 Shares Biolease, Inc., Common Stock(d) 06/08/94 62 61
6,554 Warrants Biotransplant, Inc., Common Stock Purchase Warrants(d) 06/08/94 9 9
-------------------------------
514 531 1.08
-------------------------------
FITZ AND FLOYD (b) - Notes 4,5,6
$6,719 FFSC, Inc., Adjustable Rate Sr. Sub. Nt. due 03/31/03(c)(g) 03/31/93 6,709 1,600
$1,581 FFSC, Inc., Adjustable Rate Sr. Sub. Nt. due 03/31/03(c)(g) 07/30/93 1,578 376
1,661,663 Shares Common Stock
Purchased Various $ 13
Surrendered May 1996 $ 0
Realized Loss $ (13) -------------------------------
8,287 1,976 4.04
-------------------------------
FLA. ORTHOPEDICS, INC - Notes 4,5
$12,634 Shares FLA. Holdings, Inc. Series B Preferred Stock (d) 08/02/93 987 0
2,493 Warrants FLA. Holdings, Inc. Common Stock Purchase Warrants(d) 08/02/93 0 0
$3,158 12.5% Sub. Note
Purchased 8/02/93 $ 3,158
Surrendered 8/02/96 $ -
Realized Loss $(3,158) -------------------------------
987 0 0.00
-------------------------------
SORETOX - Notes 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 12/06/91 0 0
-------------------------------
7,565 5,737 11.72
-------------------------------
TOTAL INVESTMENT IN NON-MANAGED COMPANIES 17,353 8,244 16.84
-------------------------------
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes Various 34,525 26,404 53.94
Preferred Stock, Common Stock, Warrants and Stock Rights Various 29,295 14,142 28.89
-------------------------------
TOTAL MEZZANINE INVESTMENTS $63,820 $ 40,546 82.83
===============================
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$4,000 State Street Clipper Receivable, 5.46% due 1/02/97 12/17/96 3,990 3,999
$ 365 Ford Motor Credit, 5.55% due 01/06/97 12/20/96 364 365
$4,045 Ford Motor Credit, 5.62% due 01/08/97 12/24/96 4,036 4,041
-------------------------------
TOTAL INVESTMENT IN COMMERCIAL PAPER 8,390 8,405 17.17
-------------------------------
TOTAL TEMPORARY INVESTMENTS $ 8,390 $ 8,405 17.17
-------------------------------
TOTAL INVESTMENT PORTFOLIO $72,210 $ 48,951 100.00%
===============================
(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 $18 for Mezzanine Investments
and $15 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, 1996
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 described in the Prospectus, the Retirement Fund will terminate no later
than December 20, 1999, subject to the right of the Individual General Partners
to extend the term for up to one additional two-year period and one additional
one-year period if it is in the best interest of the Retirement Fund. The
Retirement Fund will then have five additional years to liquidate its remaining
investments.
2. Significant Accounting Policies
Basis of Accounting
For financial reporting purposes, the records of the Retirement Fund are
maintained using the accrual method of accounting. For federal income tax
reporting purposes, the results of operations are adjusted to reflect statutory
requirements arising from book to tax differences. The preparation of financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts and
disclosures in the financial statements. Actual reported results could vary from
these estimates.
Valuation of Investments
Securities for which market quotations are readily available are valued by
reference to such market quotation using the last trade price (if reported) or
the last bid price for the period. For securities without a readily
ascertainable market value (including securities restricted as to resale for
which a corresponding publicly traded class exists), fair value is determined,
on a quarterly basis, in good faith by the Managing General Partner and the
Investment Adviser with final approval from the Individual General Partners of
the Retirement Fund. For privately issued securities in which the Retirement
Fund typically invests, the fair value of an investment is 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, 1996. 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, 1996, 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, 1996 and
December 31, 1995, the Retirement Fund has in its portfolio of investments
$504,150 and $739,601, respectively, of payment-in-kind notes which excludes
$1.3 million and $4.3 million, respectively, of payment-in-kind notes received
from notes placed on non-accrual status. As of December 31, 1996 and December
31, 1995, the Retirement Fund has in its portfolio of investments $14,640 and
$1.2 million, 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, as defined in the Partnership
Agreement, when realized, are allocated in accordance with the provisions of the
Partnership Agreement summarized in Note 3.
3. Allocations of Profits and Losses
Pursuant to the Partnership Agreement, all profits from Temporary
Investments generally will be allocated 99.69% to the Limited Partners, 0.28% to
the Managing General Partner and 0.03% to the Individual General Partner.
Profits from Mezzanine Investments will, in general, be allocated as follows:
first, if the capital accounts of any partners have negative balances,
to such partners in proportion to the negative balances in their capital
accounts until the balances of all such capital accounts equal zero,
second, 99.69% to the Limited Partners, 0.28% to the Managing General
Partner and 0.03% to the Individual General Partner until the sum
allocated to the Limited Partners equals any previous losses allocated
together with a cumulative Priority Return of 10% on the average daily
amount in Mezzanine Investments, and any outstanding Compensatory
Payments,
third, 69.69% to the Limited Partners, 30.281% to the Managing General
Partner and .029% to the Individual General Partner until the Managing
General Partner has received 20.281% of the total profits allocated,
thereafter, 79.69% to the Limited Partners, 20.281% to the Managing
General Partner and 0.029% to the Individual General Partner.
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 March 22, 1996 by means of merger of Lee-CST Holding Corp. with an
unaffiliated 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 an aggregate of $11.3 million for the $3,395,000 principal amount 12%
senior subordinated note, the $3.4 million principal amount 18% junior
subordinated note, approximately $4 million 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.
On April 4, 1996, Petco filed a registration statement with the Securities
and Exchange Commission for an offering of 5 million shares of Common Stock. Of
the 5 million shares offered, 2.6 million were offered by Petco and the
remaining shares were offered by certain current stockholders, including the
Retirement Fund. The offering was effected on April 30, 1996, and the Retirement
Fund sold its entire investment in Petco, which consisted of 93,568 shares of
Common Stock and received net proceeds of $2.6 million or $27.36 per share. The
Retirement Fund realized a gain of $1.5 million on the sale.
On April 1, 1996, the Retirement Fund sold its entire investment in
Ghirardelli Holdings Corp. ("Ghirardelli") to an investor group comprised of the
Chief Executive Officer of Ghirardelli and certain other investors. The
Retirement Fund received net proceeds from the sale of $10.9 million which
consisted of $5.6 million as prepayment for the 13% Subordinated Note (including
$88,504 of accrued interest), $3.6 million for the common stock (of which
$130,540 is being held in escrow) and $1.7 million for the preferred stock
(including $30,192 of accrued dividends). The sale resulted in a realized gain
of $2.6 million to the Retirement Fund.
Operating performance at Fitz & Floyd Corp. ("FFSC"), has fallen
substantially below plan. On March 29, 1996, FFSC filed a voluntary petition for
protection under Chapter 11 of the United States Bankruptcy Code, and continues
operating the business as debtor-in-possession. In May 1996, the Retirement Fund
surrendered its common stock in FFSC and realized a loss of $13,000. The
Investment Adviser is working to implement a plan of joint reorganization for
FFSC.
On May 17, 1996, pursuant to a Redemption and Repurchase Agreement with
National Tobacco Company, a Non-Managed Company in the Retirement Fund's
portfolio, and certain existing lenders, the Retirement Fund received net
proceeds of $5.9 million from the repayment and redemption of its investment in
National Tobacco. In connection with the Agreement, National Tobacco prepaid the
Subordinated Notes, plus all accrued and unpaid interest, and redeemed the
partnership interest in National Tobacco held by the Retirement Fund. The
Retirement Fund recognized a gain of $1.5 million from the transaction.
On August 2, 1996, the Retirement Fund entered into a Stock Purchase and
Settlement Agreement with Florida Orthopedics Inc. and various other affiliated
entities. In connection with this agreement, the Retirement Fund (I) surrendered
its 12.5% subordinated note and, (II) exchanged all of its common stock and
common stock purchase warrants for the issuance of new preferred equity and new
common stock purchase warrants. The Retirement Fund realized a loss of $3.2
million on the subordinated note surrendered.
On November 13, 1996, Stanley Furniture completed a public offering of
1,000,000 shares of common stock at $16.00 per share. Following the offering,
Stanley purchased a total of 150,000 shares from the selling shareholders
including the Retirement Fund at the same price per share. Pursuant to these
transactions, the Retirement Fund sold a total of 7,716 shares of Stanley
Furniture common stock for a net price of $15.12 per share. Fund II received
total proceeds of $116,666 and recognized a gain of approximately $20,000.
On August 6, 1991, the Independent General Partners approved a reserve for
follow-on investments of $20.0 million for the Retirement Fund. Following the
fourth quarter 1996 cash distribution made on February 14, 1997, the reserve
balance was reduced to $7.2 million due to follow-on investments in Petco Animal
Supplies, FFSC, Inc., Fine Clothing, Inc., Hills and Ghirardelli. Additionally,
$5.7 million of the reserve had been returned to the partners during 1995 and $1
million was returned to partners on February 14, 1997. 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. During 1996, the Independent General
Partners have approved a follow on investment in FFSC, Inc. of approximately
$1.6 million, which has not been funded as of March 20, 1997.
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, 1996, the Retirement Fund recorded net
unrealized depreciation of $14.8 million of which $12.8 million was related to
net depreciation in market value of publicly traded securities held as of
December 31, 1996. This depreciation can be attributed primarily to the decrease
in value of the Retirement Fund's investment in First Alert and Hills Stores
Company at December 31, 1996, as well as the reversal of unrealized appreciation
of Petco upon the sale of Petco Securities held by the Retirement Fund. This
compares to a net unrealized depreciation of $28.4 million for the same period
in 1995 of which $23.3 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, 1996 totaled $23.3 million.
For the year ended December 31, 1994, the Retirement Fund recorded net
unrealized depreciation of $114.3 million of which $111.1 was related to net
depreciation in market value of publicly traded securities.
The Retirement Fund's valuation of the Common Stock of First Alert, Hills,
Playtex and Stanley Furniture reflects their closing market prices at December
31, 1996.
For additional information, please refer to the Supplemental Schedule of
Unrealized Appreciation and Depreciation - Schedule 2.
6. Non-Accrual of Investments
In accordance with the Retirement Fund's Accounting Policy, the following
securities have been on non-accrual status since the date indicated:
- FFSC, Inc. on January 1, 1994.
- 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 and realized losses), with a minimum annual fee of
$1.2 million for Fund II and the Retirement Fund on a combined basis. The
Investment Advisory Fee is calculated and paid quarterly in advance. In
addition, the Investment Adviser receives 95% of the benefit of any MGP
Distributions paid to the Managing General Partner (see Note 10). For the years
ended December 31, 1996, 1995 and 1994, the Retirement Fund paid $807,939, $1.1
million and $1.2 million, 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 and realized
losses. In addition, ML Mezzanine II Inc., an affiliate of the Fund
Administrator and of Merrill Lynch & Co. Inc., receives 5% of the benefit of any
MGP Distributions paid to the Managing General Partner (see Note 10). 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,
1996, 1995 and 1994, the Retirement Fund paid $544,478, $602,002 and $633,558,
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,
audit, tax preparation and custodian fees. For the years ended December 31,
1996, 1995 and 1994, the Retirement Fund incurred $110,370, $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, 1996, 1995 and 1994, the Retirement Fund incurred $179,150,
$201,406 and $153,909, 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.
During 1996, the Retirement Fund paid Managing General Partner
distributions totaling $5,148,957 (which included $5,065,679 of incentive
distributions and $83,278 with respect to its interest in the Retirement Fund).
Of this incentive fee amount, 95% or $4,812,395 was paid to the Investment
Adviser and the remaining 5% totaling $253,284 was paid to ML Mezzanine II Inc.
The Managing General Partner earned a total of $28.7 million in Incentive
Distributions of which $2.5 million was deferred in payment to the Managing
General Partner as a Deferred Distribution Amount in accordance with the
Partnership Agreement. This Deferred Distribution Amount is distributable to the
Partners pro-rata in accordance with their capital contributions, and certain
amounts otherwise later payable to Limited Partners from distributable cash from
operations will 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 the Retirement Fund and one Limited Partner from the Fund II 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 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, although plaintiffs' have made application to the
Court for permission to conduct additional fact discovery. The parties have
conducted expert discovery, the conclusion of which is subject to the Courts'
decision on a pending motion. 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.
In the opinion of legal council, 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. Defendants' motion to dismiss this complaint was denied
on December 29, 1995. On August 4, 1995, while defendants' motion to dismiss the
original complaint was pending, 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' motion and moved to
dismiss the amended complaint. By an Opinion dated March 30, 1996, the
defendants Court denied plaintiffs' motion for partial summary judgment. By
order of the same date, and without opposition by defendants, the Court
certified the case as a class action. Defendants also filed separate motions to
dismiss, which the Court denied by an order dated June 30, 1996. The parties are
now engaged in discovery. 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. In the
opinion of legal council, 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. On December 18, 1996, the Court denied the
defendants' motion to dismiss. Although the defendants believe the advancement
of legal fees and litigation costs was properly made pursuant to indemnification
agreements signed by the defendants. In the opinion of legal council, the
outcome of this case is not determinable at this time.
12. Income Taxes (Statement of Financial Accounting Standards No. 109)
No provision for income taxes has been made because all income and losses
are allocated to the Retirement Fund's partners for inclusion in their
respective tax returns.
Pursuant to the Statement of Financial Accounting Standards No. 109
Accounting for Income Taxes, the Retirement Fund is required to disclose any
difference in the tax basis of the Retirement Fund's assets and liabilities
versus the amounts reported in the financial statements. As of December 31,
1996, the tax basis of the Retirement Fund's assets are greater than the amounts
reported in the financial statements by $23.9 million. This difference is
primarily attributable to net unrealized depreciation and appreciation on
investments which has not been recognized for tax purposes.
13. Subsequent Events
On February 3, 1997, the Individual General Partners approved the fourth
quarter 1996 cash distribution totaling $1,361,776 which represents net
investment income of $183,864 from Mezzanine Investments, net investment income
from Temporary Investments of $61,246 and net Distributable Capital Proceeds
from the sale of Stanley Furniture common stock of $116,666 (which includes
return of capital of $97,093). Additionally, a return of the reserve for
follow-on investments of $1 million was included with the fourth quarter
distribution. The total amount distributed to Limited Partners was $1,175,149 or
$6.62 per Unit, which was paid on February 14, 1997. The Managing General
Partner received a total of $3,310 with respect to its interest in the
Retirement Fund and $182,986 in incentive distributions. Thomas H. Lee, as an
Individual General Partner, received $331 with respect to his interest in the
Retirement Fund.
Anchor Advanced Products, Inc. ("Anchor") is in the process of completing a
bond financing pursuant to Rule 144A under the Securities Act of 1933, as
amended. On March 26, 1997, the Investment Adviser informed the fund that the
pricing terms of the bond financing had been established. If the financing is
completed, the proceeds of the bond financing and related transactions will be
used to repay substantially all of Anchor's outstanding debt (including accrued
interest and premiums, if any), and to pay a dividend on the capital stock of
Anchor Holdings, Inc., the parent of Anchor (collectively, the
"Recapitalization"). The Retirement Fund's share of this dividend, assuming
exercise of the warrants as discussed below, will be $4.2 milion. The
Recapitalization is expected to be consummated during the first week of April,
1997. In connection with the Recapitalization, the Retirement Fund anticipates
that it will exercise its warrants to purchase common stock of Anchor Holdings,
Inc. at $9.50 per share.
SCHEDULE 1
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SUPPLEMENTARY SCHEDULE OF REALIZED GAINS AND LOSSES
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
Principle Amount/ Investment Realized
SECURITY Number of Shares Cost Net Proceeds Gain(Loss)
---------------- ---------------- ---------------- ----------------
CST Office Products, Inc.
` Common Stock 87,051 $ 696 $ 1,393 $ 697
Notes $ 6,790 6,790 6,857 67
Warrants 94,668 -- 1,514 1,514
Ghirardelli Holding Corp.
Notes $ 5,328 5,328 5,535 207
Common Stock 616,839 1,332 3,611 2,279
Preferred Stock 15,984 1,598 1,715 117
Petco
Common Stock 93,568 1,023 2,560 1,537
FFSC, Inc.
Common Stock 1,661,663 13 -- (13)
National Tobacco Company, LP
Notes $ 4,128 4,128 5,525 1,397
Partnership Interest $ 266 266 358 92
Florida Orthopedics
Subordinated Note $ 3,158 3,158 -- (3,158)
Stanley Funriture
Common Stock 7,716 97 117 20
----------- ----------- -----------
$ 24,429 $ 29,185 $ 4,756
=========== =========== ===========
SCHEDULE 2
SUPPLEMENTARY SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
ML-LEE ACQUISITION (RETIREMENT ACCOUNTS) II, L.P.
FOR THE PERIOD ENDED December 31, 1996
(DOLLARS IN THOUSANDS)
Total Unrealized
Appreciation/ Unrealized Appreciation/ (Depreciation) For
Investment Fair (Depreciation) 1991
SECURITY Cost Value Dec. 31, 1996 1996 1995 1994 1993 1992 & PRIOR
- ----------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
PUBLICLY TRADED SECURITIES:
First Alert, Inc.
Common Stock * $ 3,680 $ 7,700 $ 4,020 $ (11,977) $ (13,689) $ 29,687 $ -- $ -- $ --
Hills Stores Company
Common Stock * 18,571 1,669 (16,902) (1,079) (3,055) 101 (12,869) -- --
Playtex Products, Inc.
Common Stock * 2,830 1,468 (1,362) 91 69 (1,347) (583) -- 408
Stanley
Common Stock * 136 215 79 164 (37) (63) 15 -- --
TOTAL UNREALIZED APPRECIATION --------- --------- --------- --------- -------- ------ --------
(DEPRECIATION) FROM PUBLICLY $ (14,165) $ (12,801) $ (16,712) $ 28,378 $ (13,437) $ -- $ 408
TRADED SECURITIES --------- --------- --------- --------- -------- ------ --------
NON PUBLIC SECURITIES:
FFSC, Inc.
Common Stock $ -- $ -- -- 13 $ -- $ (13) $ -- $ -- $ --
Adj Rate Sr Subordinated Note * 8,287 1,976 (6,311) (4,337) (1,975) -- -- -- --
FLA. Orthopedics, Inc.
Preferred Stock* 987 -- (987) -- -- (987) -- -- --
Subordinated Note -- -- -- 3,158 (3,158) -- -- -- --
Stablex Canada Inc.
Subordinated Note* 7,565 5,737 (1,828) -- -- (1,828) -- -- --
TOTAL UNREALIZED APPRECIATION -------- --------- --------- --------- --------- ------- --------
(DEPRECIATION) FROM NON PUBLIC $ (9,126) $ (1,166) $ (5,133) $ (2,828) $ -- $ -- $ --
SECURITIES -------- --------- --------- --------- --------- ------- --------
UNREALIZED APPRECIATION/ (DEPRECIATION)
FOR INVESTMENTS SOLD
Sold in 1996
Petco Animal Supplies
Common Stock $ -- $ -- -- $ (802) $ 1,041 $ (239) $ -- -- --
Sold Prior to 1996
Various -- -- -- -- (7,591) (139,661) 108,108 $ 48,215 (9,071)
Total Unrealized Appreciation/ -------- ------- --------- --------- --------- -------- -------
(Depreciation) for Investments sold: -- (802) (6,550) (139,900) 108,108 48,215 (9,071)
-------- --------- --------- --------- --------- -------- -------
NET UNREALIZED APPRECIATION
(DEPRECIATION) $ (23,291) $(14,769) $ (28,395) $(114,350) $ 94,671 $ 48,215 $ (8,663)
========= ======== ========= ========= ========= ======== ========
* 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 Fund II
and the Retirement Fund consist of four Individual General Partners: Vernon R.
Alden, Joseph L. Bower, Stanley H. Feldberg (the "Independent General
Partners"), Thomas H. Lee and Mezzanine Investments II, L.P., the Managing
General Partner. Pursuant to exemptive orders issued by the Securities and
Exchange Commission, each Independent General Partner is not an "interested
person" of the Retirement Fund as such term is defined in the Investment Company
Act of 1940.
Individual General Partners
The Individual General Partners provide overall guidance and supervision
with respect to the operations of the Retirement Fund and perform the various
duties imposed on the directors of business development companies by the
Investment Company Act of 1940. The Individual General Partners supervise the
Managing General Partner and must, with respect to any Mezzanine Investment
transactions, either certify that it meets the Retirement Fund investment
guidelines or specifically approve it as a non-Guideline Investment or Bridge
Investment. The Retirement Fund's investment and reinvestment period expired in
December, 1993, and the only investments now permitted are Follow On Investments
in existing portfolio companies. In addition, if a Portfolio Company's
performance is in default of a material provision of a lending agreement or has
a ratio of operating cash flow to current cash fixed charges for its four most
recent fiscal quarters of less than or equal to 1.1 to 1, the Independent
General Partners are required to approve any changes in the terms of or sale of
such Portfolio Company.
Messrs. Alden, Bower, Feldberg and Lee have served as Individual General
Partners of the Retirement Fund and Fund II since 1989. Each Individual General
Partner shall hold office until his removal or withdrawal pursuant to the
provisions of the Retirement Fund's Partnership Agreement.
Mr. Alden, age 74, is a director of 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
has also served as an Individual General Partner of ML-Lee Acquisition Fund,
L.P. ("Fund I") since its inception in 1987.
Mr. Bower, age 58, is the Donald Kirk David Professor of Business
Administration 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 has also served as
an Individual General Partner of Fund I since its inception in 1987.
Mr. Feldberg, age 72, is director of Waban Inc. He also serves as a Trustee
of Brandeis University. Mr. Feldberg has also served as an Individual General
Partner of Fund I since its inception in 1987.
Mr. Lee, age 53, 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, is an 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 has also served as an Individual General Partner of
Fund I since its inception in 1987. In addition, Mr. Lee is an Individual
General Partner of the Equity Advisors III Limited Partnership, the Investment
Advisor to Thomas H. Lee Equity Fund III, L.P.
From 1966 through 1974, Mr. Lee was with First National Bank of Boston
where he directed the bank's high technology lending group 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, Finlay Enterprises Inc., Health o meter
Products, Inc., First Security Services Corporation, Livent Inc, Miller Import
Corporation, Vail Resorts, Inc. and Playtex Products Inc.
Mr. Lee is a trustee of Brandeis University (Vice Chairman), Museum of Fine
Arts (Boston), the Wang Center for the Performing Arts, Boston's Beth Israel
Hospital (Treasurer) and the Whitney Muuseum of American Art. 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 55, is the founder of J.W. Childs Associates, 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 also serves as Chairman of the Jane Coffin Childs
Fund for medical research.
Mr. Shepherd, age 67, 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
Products, Inc. and Rayovac Corporation. 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
Advisors I. He also is a director of Kevlin Microwave Corp., National Dentex
Corporation, Stanley Furniture Corp. and First Alert, Inc.
Mr. Boll, age 41, 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 Stanley Furniture Corp., Petco
Animal Supplies, Inc. and Big V Supermarkets, Inc.
Mr. Schoen, age 38, 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 Ltd., Rayovac Corporation
and Anchor Advanced Products, Inc.
Ms. Masler, age 43, 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. Vice President, Assistant Treasurer
Kevin Albert, age 44, a Vice President and a Managing Director of Merrill
Lynch Investment Banking Group ("ML Investment Banking") joined Merrill Lynch in
1981. Mr. Albert works in the Equity Private Placement Group and is involved in
structuring and placing a diversified array of private equity financings
including common stock, preferred stock, limited partnership interests and other
equity-related securities. Mr. Albert is also a director ML Media Management
Inc. ("ML Media"), an affiliate of the managing general partner and a joint
venturer of Media Managemnt Partners, the general partner of ML Media Partners,
LP.; a director of ML Film Entertainment Inc. ("ML Film"), an affiliate of the
managing general partner the general partners of Delphi Film Associates IV, V
and ML Delphi Premier Partners, L.P.; a director of ML Opportunity Management
Inc. ("ML Opportunity"), a joint venture in Media Opportunity Management
Partners, the general partner of ML Media Opportunity Partners, L.P.; a director
of ML Mezzanine Inc. ("ML Mezzanine"), a director of Merrill Lynch Venture
Capital Inc. ("ML Venture"), an affiliate of the managing general partner and
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"), the general partner of the general partner of ML Technology
Ventures, L.P. Mr. Albert also serves as an independent general partner of
Venture I and Venture II.
Robert Aufenanger, age 43, a Vice President of Merrill Lynch & Co.
Corporate Credit 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, real estate and project related limited
partnerships for which subsidiaries of ML Leasing Equipment Corp., and Merrill
Lynch, Hubbard Inc., affiliates of Merrill Lynch, are general partners. Mr.
Aufenanger is also a director of ML Opportunity Management Inc., MLH Real Estate
Inc., ML Film, ML Venture, ML R&D, ML Mezzanine, and ML Media.
James V. Caruso, age 45, a Director in the Investment Banking Group of
Merrill Lynch & Co joined Merrill Lynch in 1975. Since June 1992, Mr. Caruso has
served as Manager of Merrill Lynch's Partnership Analysis & Finance 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, and KECALP Inc., an affiliate of the
MGP and general partner.
Rosalie Y. Goldberg, age 59, 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 30, joined ML Investment Banking in 1994 and serves
as Treasurer and Chief Financial Officer to the Funds. Ms. Bommer manages all
accounting, financial reporting and administrative functions in the Merrill
Lynch Partnership Analysis and Finance Department. She also serves as Vice
President and Treasurer of ML Mezzanine.
Roger F. Castoral, Jr., age 29, joined Merrill Lynch Investment Banking in
1995 and serves as Vice President, Assistant Treasurer and controller to the
funds. Mr. Castoral is responsible for financial reporting and fund accounting
in the Merrill Lynch Partnership Analysis and Finance Department and serves as
Vice President and Assistant Treasurer of ML-Mezzanine.
The Fund Administrator
ML Fund Administrators Inc., a Delaware corporation and a subsidiary of
Merrill Lynch & Co., Inc., is responsible for the provision of administrative
services necessary for the operation of the Funds. The Fund Administrator
receives Fund Administration Fees as compensation for these services as outlined
in Note 8 to the Financial Statements.
The Fund Administrator is responsible for the day-to-day administrative
affairs of the Funds and for the management of the accounts of Limited Partners.
The Fund Administrator also provides the Funds, at the Fund Administrator's
expense, with office space, facilities, equipment and personnel necessary to
carry out its obligations under the Administrative Services Agreement.
Item 11. Executive Compensation
The information with respect to compensation of the Individual General
Partners set forth under the caption "Management Arrangements - the Individual
General Partners" in the Prospectus pages 73 - 74 is incorporated herein by
reference. The Retirement Fund paid Independent General Partners, Mr. Alden, Mr.
Bower and Mr. Feldberg each $22,008 for their services as Independent General
Partners in 1996.
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 $5,148,957 with respect to
1996, including incentive distributions of $5,065,679 that it distributed,
$4,812,395 to the Investment Adviser and $253,284 to ML Mezzanine II Inc.
The information with respect to the Investment Advisory Fee payable to the
Investment Adviser (and distributions from the Managing General Partner) set
forth under the caption "Management Arrangements - Description of the Advisory
Agreement" in the Prospectus pages 74 - 75 is incorporated herein by reference.
Pursuant to the Investment Advisory Agreement, the Retirement Fund paid the
Investment Adviser $807,939 with respect to 1996.
The information with respect to the Fund Administration Fees and Expenses
payable to the Fund Administrator set forth under the caption "Management
Arrangements - The Fund Administrator" in the Prospectus pages 72 - 73 is
incorporated herein by reference. Pursuant to the Administrative Services
Agreement, the Retirement Fund paid the Fund Administrator a total of $544,478
in 1996.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of January 1, 1997, the Common Fund, which owns 21,448 Units of the
outstanding Units of limited partnership interest, or 12.08% of the Retirement
Fund, is the only entity known to the management of the Retirement Fund which
may be deemed to be a beneficial owner of more than five percent of the
outstanding units of the Retirement Fund. The Common Fund is located at 363 Reef
Road, P.O. Box 940, Fairfield, CT 06430. Mr. Bower owns 11 units of the
Retirement Fund.
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 eight Managed
Companies held by the Funds at December 31, 1996, six paid management fees to
Thomas H. Lee Company ranging from $120,000 to $270,000 for the fiscal year
ended December 31, 1996. 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 1996 for providing such services to Managed Companies in which the Funds
have a material interest was not in excess of $100,000. Furthermore, MLPF&S and
its affiliates or investment companies advised by affiliates of MLPF&S may, from
time to time, purchase or sell securities issued by portfolio companies of the
Funds in connection with their ordinary investment operations.
During 1996, the Retirement Fund paid Managing General Partner
distributions totaling $5,148,957 (which included $5,065,679 of incentive
distributions and $83,278 with respect to its interest in the Retirement Fund).
Of this incentive distribution amount, 95% or $4,812,395 was paid to the
Investment Adviser and the remaining 5% totalling $253,284 was paid to ML
Mezzanine II Inc. The Managing General Partner earned $28.7 million in Incentive
Fees of which $2.5 million 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 is distributable to the Partners pro-rata in
accordance with their capital contributions, and certain amounts otherwise later
payable to Limited Partners from distributable cash from operations will instead
be payable to the Managing General Partner until the Deferred Distribution
Amount is paid in full.
CST Office Products, Inc.
On March 22, 1996, the Retirement Fund sold its entire investment in CST
Office Products, Inc. See Note 4 to the Financial Statements for further
information.
First Alert
As of December 31, 1996, the Retirement Fund, Fund II, and the Lee
Affiliates hold 2,281,524, 2,058,474 and 10,102,268 shares, respectively, of
First Alert common stock, representing 8.9%, 8.1%, and 39.6%, respectively, of
its common equity.
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 April 1, 1996, the Retirement Fund sold its entire investment in
Ghirardelli to an investor group comprised of the Cheif Executive Officer of
Ghirardelli and certain other investors. See Note 4 to the Financial Statements
for further information.
Petco Animal Supplies, Inc.
On April 4, 1996, Petco filed a registration statement with the Securities
and Exchange Commission for an offering of 5 million shares of Common Stock. Of
the 5 million shares offered, 2.6 million were offered by Petco and the
remaining shares were offered by certain current stockholders, including the
Retirement Fund. The offering was effected on April 30, 1996 and the Retirement
Fund sold its entire investment in Petco, which consisted of 93,568 shares of
Common Stock and received net proceeds of $2,560,021 or $27.36 per share. The
Retirement Fund realized a gain of $1,537,444 on the sale.
C. Hunter Boll, an officer of the Investment Adviser to Fund I, the
Retirement Fund and Fund II, serves as a director of Petco.
Playtex Products, Inc.
As of December 31, 1996, the Retirement Fund holds 183,560 shares of 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 Lee
Affiliates hold 2,249,307 shares. The Retirement Fund, Fund II, Fund I and the
other Lee Affiliates own, respectively, .3%, .6%, 2.6% and 4.2% of the common
equity of Playtex.
Thomas H. Lee, who is an Individual General Partner of the Funds and an
officer of the Investment Adviser, serves as a director of Playtex.
Stanley Furniture Company, Inc.
On November 13, 1996, Stanley Furniture completed a public offering of
1,000,000 shares of its common stock at $16.00 per share. These shares were sold
by the Retirement Fund, Fund II, Fund I and the Lee Affiliates. In the offering,
the Retirement Fund, Fund II, Fund I and the Lee Affiliates, respectively, sold
6,710, 8,375, 969,788 and 14,330 shares of Stanley Common Stock, generating
proceeds of $101,455, $126,630, $14.7 million and $216,670, respectively.
Following the offering, Stanley purchased a total of 150,000 shares from the
selling stockholders for the same net price per share. Pursuant to this
transaction, Stanley purchased 1,006, 1,256, 145,468 and 2,529 shares of Stanley
Common Stock from the Retirement Fund, Fund II, Fund I and the Lee Affiliates,
respectively, generating proceeds of $15,210, $18,990, $2.2 million and $38,238,
respectively. As of December 31, 1996, the Retirement Fund, Fund II, Fund I and
the Lee Affiliates, respectively, held 10,795, 13,474, 1,560,296 and 24,437
shares of Stanley Common Stock.
During February 1997, the Retirement Fund, Fund II, Fund I and the Lee
Affiliates respectively, sold 218, 272, 31,515, and 495 shares of Stanley Common
Stock pursuant to the provisions of Rule 144 under the Securities Act of 1933,
as amended, generating proceeds of $5,232, $6,528, $756,335 and $11,880,
respectively.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits
Exhibits
3.1 Amended and Restated Certificate Incorporated by reference
of Limited Partnership, dated as to Exhibit 3.1 to
of August 25, 1989 registrant's Registration
Statement on Form N-2
number 33-25816.
3.2 Amended and Restated Agreement of Incorporated by reference
Limited Partnership, dated to Exhibit 3.2. to
November 10, 1989 Amendment No. 1, registrant's Annual Report
dated January 30, 1990. of Form 10-K for the year
ending December 31, 1989.
10.1 Investment Advisory Agreement, Incorporated by reference
dated November 10, 1989 by and to Exhibit 10.1 to
between Registrant, Thomas H. Lee registrant's Annual Report
Advisors II, L.P. and Thomas H. of Form 10-K for the year
Lee Company. ended December 31, 1991.
10.2 Custodian Agreement, dated Incorporated by reference
November 10, 1989, by and between to Exhibit 10.2 to
Registrant and State Street Bank registrant's Annual Report
and Trust Company. of Form 10-K for the year
ended December 31, 1991.
10.3 Administrative Services Agreement, Incorporated by reference
dated November 10, 1989 by and to Exhibit 10.3 to
between Registrant and ML Fund registrant's Annual Report
Administrators Inc. of Form 10-K for the year
ended December 31, 1991.
27 Financial Data Schedule for the Filed Herewith.
year ended December 31, 1996
28 Pages 21-91 of the Prospectus Incorporated by reference
dated September 6,1989, filed to Exhibit 28 to
pursuant to Rule 497(b) under the registrant's Annual Report
Securities Act of 1933. of Form 10-K for the year
ended December 31, 1991.
(b) Forms 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 27th day of March,
1997.
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 27, 1997 Kevin K. Albert
President, ML Mezzanine II Inc.,
General Partner of Mezzanine
Investments II, L.P., the Managing
General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on the 27th day of March, 1997.
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. Vice President and 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 27, 1997 Kevin K. Albert
President, ML Mezzanine II Inc.,
General Partner of Mezzanine
Investments II, L.P., the Managing
General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on the 27th day of March, 1997.
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. Vice President and 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.