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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 2001
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 0-17383
ML-LEE ACQUISITION FUND II, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 04-3028398
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4 World Financial Center, 26th Floor
New York, New York 10080
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (800) 288-3694
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
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(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 definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Prospectus of the Registrant dated September 6, 1989 are
incorporated by reference in Part I, Part II, and Part III hereof.
PART I
Item 1. Business
Formation
ML-Lee Acquisition Fund II, L.P. ("Fund II"), a Delaware limited partnership,
was formed on September 23, 1988 along with ML-Lee Acquisition Fund (Retirement
Accounts) II, L.P. (the "Retirement Fund" and together with Fund II; the
"Funds"). The Funds commenced operations on November 10, 1989.
Mezzanine Investments II, L.P. (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
(the "Investment Adviser"), is the limited partner. The Managing General Partner
is responsible for overseeing and monitoring the investments of the Funds,
subject to the overall supervision of four individual general partners (the
"Individual General Partners"; and together with the Managing General Partner,
the "General Partners"). The Individual General Partners of the Funds include
Thomas H. Lee and three independent general partners: Vernon R. Alden, Joseph L.
Bower and Stanley H. Feldberg (the "Independent General Partners"), who are
non-interested persons as defined in the Investment Company Act of 1940. ML Fund
Administrators Inc. (the "Fund Administrator"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc., is responsible for the administrative
services necessary for the operations of the Funds.
In December 2001, the Individual General Partners approved the final extension
of the term of Fund II for an additional one year period, to allow for the
orderly liquidation of Fund II's remaining assets. Fund II is now scheduled to
terminate on January 5, 2003. Thereafter, pursuant to Fund II's amended and
restated agreement of limited partnership, as amended (the "Partnership
Agreement"), Fund II will have up to an additional five year period to liquidate
its remaining assets, if such additional period is required.
The Funds elected to operate as a business development company under the
Investment Company Act of 1940, as amended (the "Investment Company Act"). The
primary investment objective of the Funds is to provide current income and
capital appreciation potential to its partners by investing in privately
structured, friendly leveraged buyouts and other leveraged transactions. The
Funds pursued this objective by investing primarily in subordinated debt and
related equity securities issued in conjunction with the mezzanine financings of
friendly leveraged buyout transactions, leveraged acquisitions and
recapitalizations ("Mezzanine Investments"). The Funds also invested in bridge
investments, as such investments facilitated the consummation of mezzanine
financings. The activity of the Funds is considered to constitute the single
industry segment of mezzanine financing investing.
The Funds have invested substantially all of their respective net proceeds in
Mezzanine Investments consisting of high-yield subordinated debt and/or
preferred stock with equity participation, of middle market companies in
connection with friendly leveraged acquisitions, recapitalizations and other
leveraged financings. The Funds will not make any additional Mezzanine
Investments.
The Funds offered an aggregate of 1 million units of limited partnership
interest ("Units") at $1,000 per Unit. The Units were registered under the
Securities and Exchange Commission pursuant to a Registration Statement on Form
N-2 (File No. 33-25816), effective September 6, 1989. The information set forth
under the heading "Risk and Other Important Factors", "Estimated Use of
Proceeds", "Mezzanine Financing", "Investment Objectives and Policies" and
"Conflicts of Interest" in the Prospectus of the Funds 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, 1989,
December 20, 1989 and January 5, 1990, Fund II held its first, second and third
closings, respectively, at which time the Managing General Partner admitted the
additional Limited Partners to Fund II representing 221,745 Units. Capital
contributions of the additional Limited Partners totaled $205,114,126, exclusive
of discounts allowed of $3,119,607 and net of sales commissions and financial
advisory fees of $13,511,267. Additionally, the Managing General Partner
contributed $500,000 and Thomas H. Lee, an Individual General Partner of the
Funds, contributed $50,000 to Fund II. In connection with the offering of Units,
Fund II paid sales commissions to Merrill Lynch, Pierce, Fenner and Smith
Incorporated ("MLPF&S") totaling $10,800,450, exclusive of discounts of
$2,504,250. In addition, Fund II paid a financial advisory fee to MLPF&S of
$2,710,817, exclusive of discounts of $615,357.
The Portfolio Investments
Fund II's portfolio investments were made on a coinvestment basis with the
Retirement Fund in proportion to the total capital available for investment by
the Funds. As of December 31, 2001, the portfolio investments of Fund II
consisted of a $14,537,000 investment in Big V Supermarkets, Inc. ("Big V") and
Big V Holdings Corp. ("BVH", Big V's parent company and defined herein with Big
V and certain other related entities as the "Big V Entities"), and a $1,513,000
investment in FLA. Orthopedics, Inc. As of December 31, 2001, both of these
investments had a fair value of $0.
Big V Supermarkets, Inc. - Big V is a regional supermarket retailer doing
business in the Northeastern United States under the ShopRite name. Big V
operates several supermarkets, principally in the Hudson Valley region of New
York State. Big V filed for bankruptcy protection in November 2000. As a result,
further principal and interest payments on Fund II's $10.4 million subordinated
note have been stayed. See Note 6 of notes to financial statements included in
Part II, Item 8 of this Form 10-K for additional information. On September 30,
2001, Fund II wrote-down the carrying value of its investments in the Big V
Entities to $0 and reversed $569,000 of accrued interest on the Big V
subordinated note.
FLA. Orthopedics, Inc. - FLA. Orthopedics, Inc., headquartered in Miami
Florida, manufactures, markets and distributes products
in two major lines of business: ergonomically designed safety products and
orthopedic soft goods. Fund II's $1.5 million investment in FLA. Orthopedics,
Inc. is valued at $0 as of December 31, 2001.
BioLease, Inc. and BioTransplant, Inc. - In July 2001, Fund II received net
proceeds of $848,000 from the sale of its holdings of BioLease, Inc. and
BioTransplant, Inc., comprised of $189,000 full repayment of deferred interest
promissory notes and $659,000 repayment of subordinated notes. Additionally,
Fund II received accrued interest payments of $25,000. The sale resulted in a
net realized loss of $39,000 for 2001 as shown below.
Net
Investment Net Realized
Security Cost Proceeds Gain (Loss)
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BioLease, Inc. - Subordinated Note ($668,000 face value) $ 604,000 $ 659,000 $ 55,000
BioLease, Inc. - 96.56 common shares 94,000 - (94,000)
BioLease, Inc. - deferred interest promissory note
($189,000 face value) 189,000 189,000 -
BioTransplant, Inc. - common stock options - - -
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Totals $ 887,000 $ 848,000 $ (39,000)
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Competition
The Funds have completed their investment period and its reinvestment program
and, therefore, will no longer be competing for new investment opportunities.
The Funds remaining portfolio companies participate in very competitive business
segments.
Employees
Fund II has no employees. The Investment Adviser, subject to the supervision of
the Managing General Partner and the Individual General Partners, is responsible
for overseeing and monitoring the Funds portfolio investments. The Managing
General Partner is responsible for managing the Temporary Investments of Fund
II. The Fund Administrator is responsible for the administrative services of
Fund II. The Fund Administrator is a subsidiary of Merrill Lynch & Co., the
parent of MLPF&S.
Item 2. Properties.
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Fund II does not own or lease any physical properties.
Item 3. Legal Proceedings.
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Fund II is not a party to any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
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No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
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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 value of the Units at
any given date is not available. The approximate number of Unit holders as of
March 15, 2002 was 16,830. The Managing General Partner and Thomas H. Lee, an
Individual General Partner, also hold interests in Fund II.
MLPF&S reports estimated values of limited partnerships and other direct
investments on client account statements and no longer reports the general
partner's estimate of limited partnership net asset value to Unit holders.
Pursuant to MLPF&S guidelines, estimated values for limited partnership
interests originally sold by MLPF&S, including Units of the Funds, are provided
by independent valuation services. MLPF&S clients may contact their Financial
Advisor to obtain a general description of the methodology used by the
independent valuation services in determining the estimated values. The
estimated values provided by the independent services and Fund II's current net
asset value as estimated by the general partner are not market values and Unit
holders may not be able to sell their Units or realize either amount upon a sale
of their Units. In addition, Unit holders may not realize the independent
estimated value or Fund II's current net asset value upon the liquidation of
assets over its remaining life.
Fund II distributes Distributable Cash from Investments and Distributable
Capital Proceeds in accordance with the terms of the Partnership Agreement.
Pursuant to the Partnership Agreement, transfers of Units are recognized on the
first day of the fiscal quarter after which the Managing General Partner has
been duly notified of a transfer pursuant to the Partnership Agreement. Until a
transfer is recognized, the limited partner of record (i.e. the transferor) will
continue to receive all of the benefits and burdens of ownership of Units,
including allocations of profit and loss and distributions, and any transferee
will have no rights to distributions of sale proceeds generated at any time
prior to the recognition of the transfer and assignment. Accordingly,
Distributable Cash from Investments for a quarter and Distributable Capital
Proceeds from sales after transfer or assignment have been entered into, but
before such transfer and assignment is recognized by the Managing General
Partner, will be payable to the transferor and not the transferee.
Cash Distributions
Generally, Fund II has made quarterly distributions including both Distributable
Cash from Investments and Distributable Capital Proceeds. However, Fund II's
ability to make future cash distributions is restricted. See Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources, included in Part II of this Form
10-K.
Item 6. Selected Financial Data.
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Years Ended December 31,
2001 2000 1999 1998 1997
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Net Investment Income (Loss) $ (798,359) $ 1,923,644 $ 1,096,665 $ 2,822,809 $ 8,426,190
Net Realized Gain (Loss) on Sales of
Investments (39,534) 29,324 (4,532,421) (26,634,967) 92,648
Net Change in Unrealized Appreciation
of Investments (14,171,670) 46,899 13,635,980 33,816,479 (6,129,993)
Cash Distributions to Partners - - 8,350,808 25,810,638 26,672,357
Net Assets 19,865,399 34,874,963 32,875,097 31,025,683 46,832,011
Cost of Mezzanine Investments 16,049,255 16,719,729 19,440,708 41,110,511 91,989,046
Total Assets 20,086,890 35,040,577 33,034,443 31,176,545 47,105,834
PER UNIT OF LIMITED PARTNERSHIP INTEREST:
Investment Income $ 2.04 $ 11.97 $ 7.58 $ 17.84 $ 36.43
Expenses 5.64 4.61 4.13 6.81 7.79
Net Investment Income (Loss) (3.60) 7.36 3.45 11.03 28.64
Net Realized Gain (Loss) from Investments (0.18) 0.13 (20.61) (124.73) 0.42
Net Change in Unrealized Appreciation
of Investments (63.91) 0.21 61.34 152.12 (27.58)
Cash Distributions - - 34.92 109.19 106.00
Cumulative Cash Distributions 1,302.98 1,302.98 1,302.98 1,267.87 1,158.68
Net Asset Value 86.75 154.44 146.74 137.49 209.93
See cash distributions schedule for additional information.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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Liquidity and Capital Resources
As of December 31, 2001, ML-Lee Acquisition Fund II, L.P. ("Fund II") held
$274,000 in an interest-bearing cash account and $19,798,000 in temporary
investments consisting of short-term discounted commercial paper securities with
maturities of less than 90 days. For the years ended December 31, 2001, 2000 and
1999, Fund II earned interest from such investments totaling $784,000,
$1,035,000 and $347,000, respectively. Interest earned in future periods is
subject to fluctuations in short-term interest rates and changes in amounts
available for investment in such securities. Funds needed to cover future
operating expenses of Fund II and contingent obligations, if any, as discussed
below, will be obtained from these existing cash reserves, future interest on
such reserves and other investment income and proceeds, if any, from the sale of
portfolio investments. Fund II, together with ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P., are referred to herein as the "Funds".
In connection with certain contingencies relating to Fund II's investment in Big
V Supermarkets, Inc. ("Big V") and Big V Holdings Corp. ("BVH", Big V's parent
company and defined herein with Big V and certain other related entities as the
"Big V Entities"), the General Partners of Fund II have suspended further
distributions to the partners of Fund II until the responsibilities of Fund II
with respect to such contingencies can be determined. See Note 6 of notes to
financial statements for additional information.
As of December 31, 2001, Fund II's remaining portfolio investments consisted of
its investments in the Big V Entities and FLA. Orthopedics, Inc. These
investments had a combined cost of $16,050,000 and fair value of $0. During the
quarter ended September 30, 2001, Fund II wrote-down the carrying value of its
investments in the Big V Entities to $0 and reversed $569,000 of accrued
interest on the Big V subordinated note held by Fund II. Neither of these
remaining portfolio investments was considered to be income producing as of
December 31, 2001.
In July 2001, Fund II received net proceeds of $848,000 from the sale of its
holdings of BioLease, Inc. and BioTransplant, Inc. Fund II also received accrued
interest payments of $25,000 in connection with the sale of the BioLease, Inc.
notes. As discussed above, such proceeds are being held as cash reserves for the
payment of operating expenses and contingencies, if any, relating to Fund II's
investments in the Big V Entities.
In July 2001, the Investment Adviser voluntarily agreed to reduce the annual
Investment Advisory Fee payable by the Funds by 50%. Accordingly, the combined
annual Investment Advisory Fee payable by the Funds was reduced from $1,200,000
to $600,000, effective as of July 1, 2001. Accordingly, Fund II's proportionate
share of such annual fee was reduced from $666,000 to $333,000. The Investment
Advisory Fee is paid quarterly in advance.
In December 2001, the Individual General Partners approved the final extension
of the term of Fund II for an additional one year period, to allow for the
orderly liquidation of Fund II's remaining assets. Fund II is now scheduled to
terminate on January 5, 2003. Thereafter, pursuant to the Partnership Agreement,
Fund II will have up to an additional five year period to liquidate its
remaining assets, if such additional period is required.
As provided by the Partnership Agreement of Fund II, the Managing General
Partner of Fund II is entitled to receive an incentive distribution after
limited partners have received their Priority Return (as defined in the
Partnership Agreement) of 10% per annum ("MGP Distributions"). The Managing
General Partner is required to defer a portion of any MGP Distribution earned
from the sale of portfolio investments in excess of 20% of realized capital
gains, net realized capital losses and unrealized depreciation, in accordance
with the Partnership Agreement (the "Deferred Distribution Amount"). Any
Deferred Distribution Amount is distributable to the partners pro-rata in
accordance with their capital contributions, and certain amounts otherwise later
payable to limited partners from distributable cash from operations are instead
payable to the Managing General Partner until the Deferred Distribution Amount
is paid. As of December 31, 2001, there is no outstanding Deferred Distribution
Amount.
Results of Operations
Net Investment Income or Loss - For the year ended December 31, 2001, Fund II
had a net investment loss of $798,000 as compared to net investment income of
$1,923,000 and $1,097,000 for the years ended December 31, 2000 and 1999,
respectively.
The unfavorable change in net investment income for the year ended 2001 as
compared to 2000 resulted from a $2,673,000 decrease in investment income and a
$48,000 increase in operating expenses. The decline in investment income
includes a $2,422,000 decrease in interest from portfolio investments and a
$251,000 decrease in interest from temporary investments. The decrease in
interest from temporary investments primarily resulted from a reduction in
short-term interest rates during 2001 compared to 2000. The decrease in interest
income from portfolio investments primarily resulted from the suspension of
interest accruals on the $10,430,000 subordinated note due from Big V as of
January 1, 2001, and the reversal, on September 30, 2001, of $569,000 of accrued
interest due on the Big V subordinated note, as discussed above. Additionally,
the carrying value of Fund II's investments in the Big V Entities was reduced to
$0 on September 30, 2001. Also, a one-time adjustment of $205,000 to correct a
prior period understatement of interest from portfolio investments was included
in the 2000 period. These declines in interest from portfolio investments were
partially offset by $189,000 of deferred interest on the subordinated note due
from BioLease, Inc., which was recorded during the second quarter of 2001 as a
payment in-kind note. The note was paid in full in July 2001 as part of the sale
of Fund II's holdings of BioLease, Inc. and BioTransplant, Inc., as discussed
below. The increase in operating expenses for the 2001 period compared to the
same period in 2000 primarily resulted from increases in legal fees relating to
Fund II's investments in the Big V Entities, partially offset by the 50%
reduction in the Investment Advisory Fee, as discussed below.
The increase in net investment income for the year ended 2000 as compared to
1999 resulted from a $718,000 increase in investment income and a $108,000
decrease in operating expenses. The increase in investment income during 2000,
as compared to 1999, primarily is attributable to an increase in income earned
on Temporary Investments as a result of investing the Fitz and Floyd sale
proceeds, the BioLease partial paydown proceeds, the Big V partial maturity
proceeds, the BioTransplant stock sale proceeds and income from operations from
the third quarter 1999 and forward, all of which have been reserved. This
increase was partially offset by a decrease in income earned on Mezzanine
Investments as a result of the August 1999 sale of Fitz and Floyd, the April
2000 partial paydown of the BioLease subordinated note and the June 2000 partial
maturity of the Big V senior subordinated note. In addition, the increase in
investment income during 2000, as compared to 1999, is attributable to a
$205,000 adjustment in the first quarter of 2000 to correct for a 1999
understatement of Mezzanine Investment income. The decline in operating expenses
primarily is the result of a reduction of operating expenses reimbursable to the
Fund Administrator, as discussed below.
The Investment Adviser is responsible for the identification, management and
liquidation of the portfolio investments of the Funds. As compensation for
services rendered to the Funds, the Investment Adviser had received an
Investment Advisory Fee at an annual rate of 1% of the combined assets under
management of the Funds (net offering proceeds reduced by cumulative capital
reductions and realized losses), with a minimum fee of $1,200,000. Fund II's
proportionate share of such fee was $666,000. In July 2001, the Investment
Adviser voluntarily agreed to reduce the annual Investment Advisory Fee payable
by the Funds by 50%. Accordingly, the combined annual Investment Advisory Fee
payable by the Funds was reduced to $600,000, effective as of July 1, 2001. Fund
II's proportionate share of such annual fee is $333,000. The Investment Advisory
Fee for the years ended December 31, 2001, 2000 and 1999 was $500,000, $666,000
and $666,000, respectively.
As compensation for its services to the Funds, the Fund Administrator receives
an annual fee of $400,000. Fund II's proportionate share of such annual fee is
$222,000. As a result, the Fund Administration Fee for each of the years ended
December 31, 2001, 2000 and 1999 was $222,000. Additionally, the Fund
Administrator is entitled to reimbursement of 100% of the operating expenses
paid by the Fund Administrator on behalf of the Funds ("Reimbursable
Administrative Expenses"). Reimbursable Administrative Expenses primarily
consist of printing and mailing, audit, tax preparation, legal and custody fees.
Reimbursable Administrative Expenses for the years ended December 31, 2001, 2000
and 1999 were $163,000, $172,000 and $276,000, respectively.
Realized Gains and Losses from Portfolio Investments - For the year ended
December 31, 2001, Fund II had a net realized loss from its portfolio
investments of $39,000. In July 2001, Fund II received net proceeds of $848,000
from the sale of its holdings of BioLease, Inc. and BioTransplant, Inc.,
comprised of $189,000 full repayment of deferred interest promissory notes and
$659,000 repayment of subordinated notes. Additionally, Fund II received accrued
interest payments of $25,000. Fund II received no compensation for its equity
holdings of BioLease, Inc. and BioTransplant, Inc. See Note 5 of notes to
financial statements.
For the year ended December 31, 2000, Fund II had a net realized gain from its
portfolio investments of $29,000. During 2000, a $116,000 partial repayment of
the subordinated note due from BioLease, Inc. resulted in a realized loss of
$7,000. Additionally, Fund II sold 10,014 common shares of BioTransplant, Inc.
for $91,000, resulting in a realized gain of $36,000.
For the year ended December 31, 1999, Fund II had a net realized loss from its
portfolio investments of $4,533,000. During 1999, Fund II sold all of its
holdings of 1) Stablex Canada, Inc. for $5,605,000, realizing a loss of
$1,026,000 and 2) Fitz and Floyd, Inc. for $11,532,000, realizing a loss of
$3,507,000.
Changes in Unrealized Depreciation of Portfolio Investments - For the year ended
December 31, 2001, Fund II had a $14,172,000 unfavorable change in unrealized
depreciation of portfolio investments, primarily resulting from a $14,537,000
downward revaluation of Fund II's investments in the Big V Entities, which
reduced the carrying value of this investment to $0 as of December 31, 2001.
This decline was partially offset by a $316,000 upward revaluation of the
$668,000 subordinated note due from BioLease, Inc., which was repaid in July
2001, as discussed above. Additionally, during 2001, $49,000 of unrealized
depreciation was reversed due to the sale of Fund II's investment in BioLease,
Inc. and BioTransplant, Inc.
For the year ended December 31, 2000, Fund II had a $47,000 favorable change in
unrealized depreciation of portfolio investments, resulting from the reversal of
unrealized depreciation relating to the $116,000 partial repayment of the
subordinated note due from BioLease, Inc., as discussed above.
For the year ended December 31, 1999, Fund II had a $13,636,000 favorable change
in unrealized depreciation of portfolio investments, resulting from the reversal
of unrealized depreciation relating to the sale of Fund II's holdings of Stablex
Canada, Inc. and Fitz and Floyd, Inc., as discussed above.
Net Assets - As of December 31, 2001, Fund II's net assets were $19,865,000
compared to $34,874,000 as of December 31, 2000. The $15,009,000 decrease
reflects the net decrease in net assets from operations for 2001, which is
comprised of the unfavorable change in unrealized depreciation of $14,172,000,
the net realized loss from investments of $39,000 and the net investment loss of
$798,000.
As of December 31, 2000, Fund II's net assets were $34,874,000 compared to
$32,875,000 as of December 31, 1999. The $1,999,000 increase reflects the net
increase in net assets from operations for 2000, which is comprised of the net
investment income of $1,923,000, the net realized gain from investments of
$29,000 and the favorable change in unrealized depreciation of $47,000.
As of December 31, 1999, Fund II's net assets were $32,875,000 compared to
$31,026,000 as of December 31, 1998. The $1,849,000 increase reflects the net
increase in net assets from operations for 1999 of $10,200,000 exceeding the
$8,351,000 cash distribution paid to partners during 1999. The net increase in
net assets from operations for 1999 is comprised of the net investment income of
$1,097,000, and the favorable change in unrealized depreciation of $13,636,000
partially offset by the net realized loss from investments of $4,533,000
The net asset value per $1,000 unit of limited partnership interest ("Unit") of
Fund II as of December 31, 2001, December 31, 2000 and December 31, 1999, was
$87, $154 and $147, respectively. The computed net asset value does not
represent the current market value of a Unit, and limited partners may not be
able to realize this value upon a sale of their Units or ultimate liquidation of
Fund II's assets.
As discussed above, in connection with certain contingencies relating to the
Funds' investments in the Big V Entities, the General Partners have suspended
further distributions to the partners of the Funds until the responsibilities of
the Funds with respect to such contingencies can be determined. See Note 6 of
notes to financial statements for additional information. Any potential adverse
effect of such contingencies to the net assets of Fund II could reduce the
computed net asset value. The information presented herein is based on pertinent
information available to the Investment Adviser and the Managing General
Partner. The Investment Adviser and Managing General Partner currently are not
aware of any factors not disclosed herein that could significantly affect the
computed net asset values.
Forward Looking Information
In addition to historical information contained or incorporated by reference in
this report on Form 10-K, Fund II may make or publish forward-looking statements
about management expectations, strategic objectives, business prospects,
anticipated financial performance, and other similar matters. In order to comply
with the terms of the safe harbor for such statements provided by the Private
Securities Litigation Reform Act of 1995, Fund II notes that a variety of
factors, many of which are beyond its control, affect its operations,
performance, business strategy, and results and could cause actual results and
experience to differ materially from the expectations expressed in these
statements. These factors include, but are not limited to, the effect of
changing economic and market conditions, trends in business and finance and in
investor sentiment, the level of volatility of interest rates, the actions
undertaken by both current and potential new competitors, the impact of current,
pending, and future legislation and regulation both in the United States and
throughout the world, the impact of current ongoing litigation as it relates to
Fund II, and the other risks and uncertainties detailed in this Form 10-K. Fund
II undertakes no responsibility to update publicly or revise any forward-looking
statements.
Cash Distributions - In connection with certain contingencies relating to the
Funds investment in Big V and BVH, the Individual General Partners of the Funds
have suspended further distributions to the partners of the Funds until the
responsibilities of the Funds with respect to such contingencies can be
determined. See Note 6 of notes to financial statements for additional
information.
No cash distributions were paid to partners during 2001 or 2000. Cash
distributions paid during 1999 and cumulative cash distributions paid to
partners from inception of Fund II through December 31, 2001 are shown below:
Managing Individual Per
General General Limited $1,000
Distribution Date Partner Partner Partners Unit
- ------------------------------------------------ --------------- ------------- --------------- --------------
Inception to December 31, 1998 $ 26,669,124 $ 67,102 $ 280,883,204 $ 1,268.06
First Quarter of 1999 408,103 386 1,711,871 7.72
Second Quarter of 1999 111,278 1,311 5,814,154 26.22
Third Quarter of 1999 86,346 49 217,310 .98
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Cumulative totals as of December 31, 2001 $ 27,274,851 $ 68,848 $ 288,626,539 $ 1,302.98
=============== ========== =============== ============
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Fund II is subject to market risk arising from changes in the value of its
portfolio investments, temporary investments and interest-bearing cash
equivalents, which may result from fluctuations in interest rates and equity
prices. Fund II has calculated its market risk related to its holdings of these
investments based on changes in interest rates and equity prices utilizing a
sensitivity analysis. The sensitivity analysis estimates the hypothetical change
in fair values, cash flows and earnings based on an assumed 10% change (increase
or decrease) in interest rates and equity prices. To perform the sensitivity
analysis, the assumed 10% change is applied to market rates and prices on
investments held by Fund II at the end of the accounting period.
Fund II's remaining portfolio investments had a fair value of $0 as of December
31, 2001. Therefore, no additional market risk exists with respect to Fund II's
portfolio investments.
As of December 31, 2001, Fund II held temporary investments consisting of two
separate discounted commercial paper instruments with remaining maturities of 5
days or less. These temporary investments were carried at an aggregate amortized
cost of $19,798,000 as of December 31, 2001. An assumed 10% increase in the
market interest rates of such temporary investments held by Fund II as of
December 31, 2001, would result in a reduction to the fair value of such
investments and an unrealized loss that is considered to be immaterial. Market
risk relating to Fund II's interest-bearing cash equivalents held as of December
31, 2001 is also considered to be immaterial.
Item 8. Financial Statement and Supplemental Data
ML-LEE ACQUISITION FUND II, L.P.
INDEX
Report of Independent Accountants
Statements of Assets, Liabilities and Partners' Capital as of December 31, 2001
and December 31, 2000
Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999
Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999
Statements of Changes in Partners' Capital for the Years Ended December 31,
2001, 2000 and 1999
Schedule of Investments as of December 31, 2001 and 2000
Notes to Financial Statements
REPORT OF INDEPENDENT ACCOUNTANTS
To the General and Limited Partners of ML-Lee Acquisition Fund II, L.P.
In our opinion, the accompanying statements of assets, liabilities and partners'
capital, including the schedule of investments, and the related statements of
operations, of cash flows and of changes in partners' capital present fairly, in
all material respects, the financial position of ML-Lee Acquisition Fund II,
L.P. (the "Fund") at December 31, 2001 and December 31, 2000, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 2001 and December 31, 2000 by correspondence with the custodian,
provide a reasonable basis for our opinion.
The financial statements include securities, valued at $0 and $14.9 million as
of December 31, 2001 and December 31, 2000, respectively (representing 0% and
42.6% of net assets, respectively), whose values have been estimated by the
Managing General Partner and the Investment Adviser (with the approval of the
Independent General Partners) in the absence of readily ascertainable market
values, as further described in Note 2. Those estimated values may differ
significantly from the values that would have been used had a ready market for
the securities existed, and the differences could be material to the financial
statements.
As discussed in Note 1, the Fund is scheduled to dissolve on January 5, 2003.
Thereafter, pursuant to the partnership agreement, the Fund will have up to an
additional five-year period to liquidate its remaining assets, if such
additional period is required.
PricewaterhouseCoopers LLP
New York, New York
April 4, 2002
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(dollars in thousands)
December 31, December 31,
2001 2000
------------------ ------------------
Assets
Investments:
Portfolio investments at fair value (cost $16,050 as of
December 31, 2001 and $16,720 as of December 31, 2000) $ - $ 14,871
Temporary investments at amortized cost 19,798 19,393
Cash - interest bearing 274 162
Accrued interest receivable - 591
Prepaid insurance 15 23
------------ -------------
Total Assets $ 20,087 $ 35,040
============ =============
Liabilities and Partners' Capital
Liabilities:
Reimbursable administrative expenses payable $ 113 $ 116
Accounts payable and accrued expenses 104 42
Due to Independent General Partners 5 4
Deferred interest income - 4
------------ -------------
Total Liabilities 222 166
------------ -------------
Partners' Capital:
Individual General Partner 11 13
Managing General Partner 580 612
Limited Partners (221,745 Units) 19,274 34,249
------------ -------------
Total Partners' Capital 19,865 34,874
------------ -------------
Total Liabilities and Partners' Capital $ 20,087 $ 35,040
============ =============
See notes to financial statements.
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2001, 2000 and 1999
(dollars in thousands)
2001 2000 1999
------------- ------------- --------------
Investment Income and Expenses
Investment Income:
Interest from portfolio investments $ 239 $ 2,092 $ 2,062
Reversal of accrued interest from portfolio investment (569) - -
Interest from temporary investments 784 1,035 347
------------- ----------- --------------
Total investment income 454 3,127 2,409
------------- ----------- --------------
Expenses:
Investment advisory fee 500 666 666
Fund administration fee 222 222 222
Reimbursable administrative expenses 163 172 276
Independent General Partners' fees and expenses 106 93 91
Legal fees 253 43 52
Insurance expense 8 8 5
------------- ----------- ---------------
Total expenses 1,252 1,204 1,312
------------- ----------- ---------------
Net Investment Income (Loss) (798) 1,923 1,097
------------- ----------- ---------------
Net Realized and Unrealized Gain (Loss)
From Investments
Net realized (loss) gain from investments (39) 29 (4,533)
Change in unrealized depreciation of investments (14,172) 47 13,636
------------- ----------- ---------------
Net realized and unrealized gain (loss) from investments (14,211) 76 9,103
------------- ----------- ---------------
Net Increase (Decrease) in Net Assets Resulting
From Operations (15,009) 1,999 10,200
Less: Earned MGP Distributions - (297) (380)
------------- ----------- ---------------
Net Increase (Decrease) in Net Assets
Available for Pro-Rata Distribution to Partners $ (15,009) $ 1,702 $ 9,820
============= =========== ===========
See notes to financial statements.
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999
(dollars in thousands)
2001 2000 1999
--------------- --------------- ---------------
Cash Flows From Operating Activities:
Interest income $ 928 $ 2,562 $ 3,586
Investment advisory fee (500) (666) (666)
Fund administration fee (222) (222) (222)
Independent General Partners' fees and expenses (105) (83) (103)
Reimbursable administrative expenses (166) (173) (193)
Legal fees (191) (47) (77)
Insurance expense - (25) (8)
Net purchase of temporary investments (480) (4,016) (11,854)
Proceeds from dispositions and repayments
of portfolio investments 848 2,796 17,919
----------- ------------- ----------------
Net cash provided by operating activities 112 126 8,382
----------- ------------- ----------------
Cash Flows From Financing Activities:
Cash distributions to Partners - - (8,351)
----------- ------------- ----------------
Net Increase in Cash 112 126 31
Cash at Beginning of Year 162 36 5
----------- ------------- ----------------
Cash at End of Year $ 274 $ 162 $ 36
=========== ============= ================
Reconciliation of net investment income (loss) to net cash provided by operating
activities:
Net investment income (loss) $ (798) $ 1,923 $ 1,097
----------- ------------- ----------------
Adjustments to reconcile net investment income (loss) to net cash provided by
operating activities:
Reversal of accrued interest from portfolio investment 569 - -
Amortization of commitment fee income (4) - -
(Increase) decrease in investments at cost 218 (1,290) 9,816
(Increase) decrease in receivable for securities sold - - 782
(Increase) decrease in accrued interest receivable 98 (565) 1,177
(Increase) decrease in prepaid expenses 8 (17) (3)
Increase (decrease) in accounts payable and accrued expenses 62 37 (25)
Increase (decrease) in reimbursable administrative
expenses payable (3) (1) 83
Increase (decrease) in due to Independent General Partners 1 10 (12)
Net realized gain (loss) from portfolio investments (39) 29 (4,533)
----------- ------------- ----------------
Total adjustments 910 (1,797) 7,285
----------- ------------- ----------------
Net cash provided by operating activities $ 112 $ 126 $ 8,382
=========== ============= ================
See notes to financial statements.
ML-LEE ACQUISITION FUND II, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
For the Years Ended December 31, 2001, 2000 and 1999
(dollars in thousands)
Individual Managing
General General Limited
Partner Partner Partners Total
- ----------------------------------------------------------------------------------------- ------------- ------------
Balance as of December 31, 1998 $ 13 $ 525 $ 30,488 $ 31,026
Net investment income - (a) 332 765 1,097
Net realized loss from investments (1) 40 (4,572)
(4,533)
Change in unrealized depreciation of investments 3 31 13,602 13,636
Cash Distributions paid to Partners (2) (606) (7,743) (8,351)
-------- ---------- ------------ ------------
Balance as of December 31, 1999 13 322 32,540 32,875
Net investment income - (a) 290 1,633 1,923
Net realized gain from investments - (a) - (a) 29 29
Change in unrealized depreciation of investments - (a) - (a) 47 47
-------- ---------- ------------ ------------
Balance as of December 31, 2000 13 612 34,249 34,874
Net investment loss - (a) - (a) (798) (798)
Net realized loss from investments - (a) - (a) (39) (39)
Change in unrealized depreciation of investments (2) (32) (14,138) (14,172)
-------- ---------- ------------ ------------
Balance as of December 31, 2001 $ 11 $ 580 $ 19,274 (b) $ 19,865
======== ========== ============= ============
(a) Allocated amounts are less than $1,000.
(b) The net asset value per $1,000 unit of limited partnership interest
("Unit") was $87, $154 and $147 as of December 31, 2001, 2000 and 1999,
respectively. As of December 31, 2001, 2000 and 1999, cumulative cash
distributions paid to limited partners from inception of Fund II totaled
$1,303 per Unit.
See notes to financial statements.
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF INVESTMENTS
As of December 31, 2001
(dollars in thousands)
PORTFOLIO INVESTMENTS:
Initial
Investment
Date Cost Fair Value
Managed Companies:
Big V Supermarkets, Inc. (a) (b) Dec. 1990
Senior Subordinated Note 14.14% due 3/15/01 $ 10,430 $ -
117,333 shares of common stock of Big V Holding Corp. 4,107 -
---------- -----------
Total investment in Managed Companies 14,537 -
---------- -----------
Non-Managed Companies:
FLA. Orthopedics, Inc. Aug. 1993
19,366 shares of Series B preferred stock of FLA. Holdings, Inc. 1,513 -
Warrants to purchase 3,822 common shares of FLA. Holdings, Inc. - -
---------- -----------
Total investment in Non-Managed Companies 1,513 -
---------- -----------
Total Portfolio Investments (c) $ 16,050 $ -
========== ===========
TEMPORARY INVESTMENTS:
Maturity Original Amortized Amortized
Issuer Yield Date Cost Discount Cost
- -----------------------------------------------------------------------------------------------------------------------------
American General Corp. 1.85% 1/2/02 $ 9,975 $ 24 $ 9,999
U.S. Treasury Bill 1.77% 1/3/02 9,776 23 9,799
----------- --------- -----------
Total Temporary Investments $ 19,751 $ 47 $ 19,798
=========== ========= ===========
(a) Issuer may be deemed an affiliate of Fund II as defined in the Investment
Company Act of 1940. All portfolio securities are restricted and non-income
producing.
(b) Big V Supermarkets, Inc. filed for bankruptcy protection in November 2000.
As a result, further principal and interest payments have been stayed.
(c) In July 2001, Fund II sold its holdings of BioLease, Inc. and BioTransplant
Inc. See notes to financial statements.
See notes to financial statements.
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF INVESTMENTS
As of December 31, 2000
(dollars in thousands)
PORTFOLIO INVESTMENTS:
Initial
Investment
Date Cost Fair Value
Managed Companies:
Big V Supermarkets, Inc. (a) (b) Dec. 1990
Senior Subordinated Note 14.14% due 3/15/01 $ 10,430 $ 10,430
117,333 shares of common stock of Big V Holding Corp. 4,107 4,107
---------- -----------
Total investment in Managed Companies 14,537 14,537
---------- -----------
Non-Managed Companies:
BioLease, Inc. June 1994
Subordinated Note 13% due 6/06/04 (c) 576 334
96.56 shares of common stock 94 -
9,362 common stock options of BioTransplant, Inc. - -
---------- -----------
670 334
---------- -----------
FLA. Orthopedics, Inc. Aug. 1993
19,366 shares of Series B preferred stock of FLA. Holdings, Inc. 1,513 -
Warrants to purchase 3,822 common shares of FLA. Holdings, Inc. - -
---------- -----------
1,513 -
---------- -----------
Total investment in Non-Managed Companies 2,183 334
---------- -----------
Total Portfolio Investments $ 16,720 $ 14,871
========== ===========
TEMPORARY INVESTMENTS:
Maturity Original Amortized Amortized
Issuer Yield Date Cost Discount Cost
- -----------------------------------------------------------------------------------------------------------------------------
General Electric Corp. 6.44% 1/03/01 $ 9,934 $ 62 $ 9,996
Clipper Receivable Corp. 6.50% 1/03/01 9,337 60 9,397
----------- --------- -----------
Total Temporary Investments $ 19,271 $ 122 $ 19,393
=========== ========= ===========
(a) Issuer may be deemed an affiliate of Fund II as defined in the Investment
Company Act of 1940. All portfolio securities are restricted and non-income
producing.
(b) Big V Supermarkets, Inc. filed for bankruptcy protection in November 2000. As a result, further principal and interest
payments have been stayed.
(c) Cost excludes $28 of unamortized discount.
See notes to financial statements.
ML-LEE ACQUISITION FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Purpose
ML-Lee Acquisition Fund II, L.P. ("Fund II"), a Delaware limited partnership,
was formed on September 23, 1988 along with ML-Lee Acquisition Fund (Retirement
Accounts) II, L.P. (the "Retirement Fund" and together with Fund II; the
"Funds"). The Funds commenced operations on November 10, 1989.
Mezzanine Investments II, L.P. (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
(the "Investment Adviser"), is the limited partner. The Managing General Partner
is responsible for overseeing and monitoring the investments of Fund II, subject
to the overall supervision of four individual general partners (the "Individual
General Partners"; and together with the Managing General Partner, the "General
Partners"). The Individual General Partners of Fund II include Thomas H. Lee and
three independent general partners: Vernon R. Alden, Joseph L. Bower and Stanley
H. Feldberg (the "Independent General Partners"), who are non-interested persons
as defined in the Investment Company Act of 1940. ML Fund Administrators Inc.
(the "Fund Administrator"), an indirect wholly-owned subsidiary of Merrill Lynch
& Co., Inc., is responsible for the administrative services necessary for the
operations of Fund II.
The primary objective of Fund II is to provide current income and capital
appreciation by investing in privately structured, friendly leveraged buyouts
and other leveraged transactions. Fund II has pursued this objective by
investing primarily in subordinated debt and related equity securities issued in
conjunction with the mezzanine financings of friendly leveraged buyout
transactions, leveraged acquisitions and recapitalizations.
In December 2001, the Individual General Partners approved the final extension
of the term of Fund II for an additional one year period, to allow for the
orderly liquidation of Fund II's remaining assets. Fund II is now scheduled to
terminate on January 5, 2003. Thereafter, pursuant to Fund II's amended and
restated agreement of limited partnership, as amended (the "Partnership
Agreement"), Fund II will have up to an additional five year period to liquidate
its remaining assets, if such additional period is required.
2. Significant Accounting Policies
Valuation of Investments - The fair value of publicly listed securities for
which market quotations are readily available, are valued using the public
market price as of the last day of the valuation period. The fair value of
publicly listed securities for which market quotations are not readily
available, including securities restricted as to resale for which a
corresponding publicly traded class exists, are valued in good faith by the
Investment Adviser after approval by the Managing General Partner and approval
of the Individual General Partners. Privately held securities generally are
valued at original cost plus accrued value in the case of original issue
discount or deferred pay securities. Such privately held investments generally
are revalued if there is an objective basis for doing so at a different price.
Investments are written down in value if the Investment Adviser and the General
Partners believe adverse credit developments of a significant nature require a
write-down of such securities. Investments are written up in value only if there
has been an arms length third party transaction to support the increased
valuation. Although the Investment Adviser and the General Partners use their
best judgment in estimating the fair value of Fund II's portfolio investments,
there are inherent limitations in any estimation technique. Therefore, the fair
value estimates presented herein are not necessarily indicative of the amount
that could be realized if a readily available market existed for such
securities, and the differences could be material.
ML-LEE ACQUISITION FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
Temporary Investments - Investments in short term money market instruments with
maturities of 90 days or less are stated at amortized cost, which approximates
market value.
Investment Transactions - Investment transactions are recorded on the accrual
method. Investments are recorded on the trade date, or the date Fund II obtains
an enforceable right to demand the securities or payment therefore. Realized
gains and losses on investments sold are computed on a specific identification
basis.
Deferred Interest Income - All fees received by Fund II upon the funding of
Mezzanine or Bridge Investments were treated as deferred interest income and
amortized over the maturity of such investments.
Income Taxes - No provision for income taxes has been made since all income and
losses are allocable to the partners for inclusion in their respective tax
returns. Fund II's net assets for financial reporting purposes differ from its
net assets for tax purposes. Net unrealized depreciation of investments of
$16.05 million as of December 31, 2001, was recorded for financial statement
purposes, but was not recognized for tax purposes. Additionally, syndication
costs relating to the offering of limited partnership interests totaling $19.6
million were charged to partners' capital on the financial statements. These
amounts have not been deducted or charged against partners' capital for tax
purposes.
Reclassification - Certain reclassifications have been made to the prior period
financial statements to conform with the current period presentation.
3. Allocations of Profits and Losses
Pursuant to the Partnership Agreement, all profits from Temporary Investments
generally are allocated 99.75% to the Limited Partners, 0.23% to the Managing
General Partner and 0.02% to the Individual General Partner. Profits from
Mezzanine Investments generally are allocated as follows:
o 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;
o second, 99.75% to the Limited Partners, 0.23% to the Managing General
Partner and 0.02% to the Individual General Partner until the sum
allocated to the Limited Partners equals any previous losses allocated
together with a cumulative Priority Return of 10% on the average daily
amount in Mezzanine Investments, and any outstanding Compensatory
Payments;
o third, 69.75% to the Limited Partners, 30.225% to the Managing General
Partner and 0.025% to the Individual General Partner until the Managing
General Partner has received 20.281% of the total profits allocated; and
o thereafter, 79.75% to the Limited Partners, 20.225% to the Managing
General Partner and 0.025% to the Individual General Partner.
ML-LEE ACQUISITION FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
4. Related Party Transactions
The Investment Adviser is responsible for the identification, management and
liquidation of the portfolio investments of the Funds. As compensation for
services rendered to the Funds, the Investment Adviser had received an
Investment Advisory Fee at an annual rate of 1% of the combined assets under
management of the Funds (net offering proceeds reduced by cumulative capital
reductions and realized losses), with a minimum fee of $1,200,000. Fund II's
proportionate share of such annual fee was $666,000. In July 2001, the
Investment Adviser voluntarily agreed to reduce the annual Investment Advisory
Fee payable by the Funds by 50%. Accordingly, the combined annual Investment
Advisory Fee payable by the Funds was reduced to $600,000, effective as of July
1, 2001. Fund II's proportionate share of such annual fee is $333,000. The
Investment Advisory Fee is paid quarterly in advance.
As compensation for its services to the Funds, the Fund Administrator receives
an annual fee of $400,000, payable quarterly in advance. Fund II's proportionate
share of such annual fee is $222,000. Additionally, the Fund Administrator is
entitled to reimbursement of 100% of the operating expenses paid by the Fund
Administrator on behalf of the Funds ("Reimbursable Administrative Expenses").
Reimbursable Administrative Expenses primarily consist of printing and mailing,
audit, tax preparation, legal fees and custody fees.
As provided by Fund II's Partnership Agreement, the Managing General Partner of
Fund II is entitled to receive an incentive distribution after Limited Partners
have received a Priority Return (as defined in the Partnership Agreement) of 10%
per annum ("MGP Distributions"). Of the MGP Distributions, the Investment
Adviser is entitled to receive 95% and ML Mezzanine II Inc. is entitled to
receive 5%. During 2001, the Managing General Partner received no cash
distributions.
As compensation for their services to the Funds, each of the Independent General
Partners receives a combined annual fee of $40,000; $1,000 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 out-of-pocket costs incurred in
connections with such meetings. Fund II's proportionate share of the annual fee
and meeting fee paid to each of the Independent General Partners is $22,200 and
$555, respectively.
5. Net Realized Loss from Portfolio Investments
In July 2001, Fund II received net proceeds of $848,000 from the sale of its
holdings of BioLease, Inc. and BioTransplant, Inc., comprised of $189,000 full
repayment of deferred interest promissory notes and $659,000 repayment of
subordinated notes. Additionally, Fund II received accrued interest payments of
$25,000. The sale resulted in a net realized loss of $39,000 for 2001 as shown
below.
Net
Investment Net Realized
Security Cost Proceeds Gain (Loss)
- -----------------------------------------------------------------------------------------------------------------------------
BioLease, Inc. - Subordinated Note ($668,000 face value) $ 604,000 $ 659,000 $ 55,000
BioLease, Inc. - 96.56 common shares 94,000 - (94,000)
BioLease, Inc. - deferred interest promissory note
($189,000 face value) 189,000 189,000 -
BioTransplant, Inc. - common stock options - - -
-------------- ------------- -------------
Totals $ 887,000 $ 848,000 $ (39,000)
============== ============= =============
ML-LEE ACQUISITION FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
6. Portfolio Investments
At the quarterly meetings held since September 19, 2000, the General Partners,
as part of their recurring review of Fund II's reserves available for
distribution, have reviewed certain contractual covenants, commitments and
contingencies which may affect Fund II by virtue of its investments in Big V
Supermarkets, Inc. ("Big V") and Big V Holdings Corp. ("BVH", Big V's parent
company and defined herein with Big V and certain other related entities as the
"Big V Entities"). Such potential obligations arise from letter agreements (the
"Agreements") entered into by Wakefern Food Corporation ("Wakefern," Big V's
current supplier), Big V (together with certain of its related companies), and
Fund II (together with other investor groups in Big V) in December 1990 and
November 1993. Since the covenants, commitments and contingencies associated
with the Agreements may have the effect of delaying and/or decreasing the amount
of future distributions, the General Partners determined that further
distributions should not be made until any responsibilities of Fund II, with
respect to such covenants, commitments and contingencies, have been determined.
On November 22, 2000, following careful analysis of its business operations,
finances, and the outlook for the operating region in which Big V competes with
other supermarket retailers, the Big V Entities filed voluntary petitions under
Chapter 11 of the United States Bankruptcy Code (the "Big V Bankruptcy") in the
United States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court"), in order to implement a major financial and operational restructuring
of its business.
At issue in the Big V Bankruptcy and related litigation, among other things,
have been the terms under which change in the Wakefern distribution agreement
could be effectuated and the cost of such change, if any, to Big V.
Particularly, the Big V Entities initiated litigation with Wakefern seeking a
declaration that Big V could exit the Wakefern food cooperative by tendering the
shares of Wakefern owned by Big V back to Wakefern, transitioning to a new
supplier, and continuing to operate as an independent grocery store chain,
without incurring a payment obligation to Wakefern (a so-called "Withdrawal
Penalty") under the Agreements (the "Wakefern Litigation"). Wakefern took the
position that such an effort by Big V would trigger a Withdrawal Penalty.
On or about September 12, 2001, the Bankruptcy Court docketed its judgment in
favor of Wakefern in the Wakefern Litigation, thereby denying the request by the
Big V Entities for a declaration that Big V could exit the Wakefern food
cooperative by tendering the shares of Wakefern owned by Big V back to Wakefern,
transitioning to a new supplier, and continuing to operate as an independent
grocery store chain, without incurring a Withdrawal Penalty. On or about
September 17, 2001, the Bankruptcy Court docketed its written opinion explaining
its reasons for its decision. On or about September 24, 2001, Big V filed a
notice of appeal from the judgment entered in this matter.
On or about November 16, 2001, Big V announced that it had entered into a term
sheet with Wakefern that would form the basis of a plan of reorganization to be
proposed to Big V's creditors and interest holders by both the Big V Entities
and Wakefern. On January 15, 2002, the Big V Entities and Wakefern filed their
Joint Consolidated Liquidating Plan of Reorganization (the "Wakefern Plan").
Among other things, the Wakefern Plan provides for the sale of the Big V
Entities' assets to Wakefern in exchange for consideration of approximately $150
million, including assumption of certain liabilities and the implementation of
certain offsets and the resolution of various disputed and contingent claims by
and
ML-LEE ACQUISITION FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
between the Big V Entities and Wakefern. The Wakefern Plan also provides that
Wakefern will release direct claims that it might have against Fund II and
others, including claims under the Agreements. The Wakefern Plan ascribes no
value to the equity held by Fund II.
On or about December 13, 2001, Big V received a non-binding offer for the assets
of the Big V Entities from The Stop & Shop Supermarket Company ("S&S"). On or
about January 17, 2002, S&S entered into a letter of intent with the Official
Committee of Unsecured Creditors in Big V's bankruptcy case (the "Committee"),
the Unofficial Committee of Holders of Big V's 11% Senior Subordinated Notes
(the "Noteholders") and the Agent for Big V's pre-petition lenders (the
"Banks"), which letter of intent set forth an offer to purchase the Big V assets
for approximately $255 million, subject to certain adjustments and predicated on
certain potential litigation being resolved in a favorable manner. On February
22, 2002, the Bankruptcy Court modified the Big V Entities' exclusive right to
file a plan of reorganization to permit a competing plan of reorganization to be
filed based on the S&S letter of intent. S&S, the Committee, the Noteholders and
the Banks filed their Joint Consolidated Liquidating Plan of Reorganization on
or about March 1, 2002 (the "S&S Plan"). Although the S&S Plan contemplates a
purchase of the Big V Entities' assets for an amount greater than the $150
million purchase price in the Wakefern Plan, it is unclear whether or to what
extent any additional value would be available for distribution to creditors of
Big V. In any event, like the proposed Wakefern Plan, the proposed S&S Plan
ascribes no value to the equity held by Fund II. In addition, Fund II
understands that Big V has determined to proceed with the proposed Wakefern Plan
in accordance with the provisions of the Bankruptcy Code.
Subsequent to the Bankruptcy Court's decision in the Wakefern Litigation, Fund
II, other investors in Big V, and the individuals who presently serve as
directors of Big V, have received written demands for damages from various
creditors of Big V, including the Committee, the Noteholders and the Banks. Such
creditors assert that they have been damaged by reason of the strategy adopted
by Big V and its controlling shareholders (which group is alleged to include
Fund II), to withdraw from Wakefern and switch distributors. Certain of these
creditors also have asserted that a principal and interest payment made by Big V
to Fund II on account of the Senior Subordinated Note (as defined below) in June
2000 in the amount of $2,607,400 can be recovered from Fund II as a "preference"
under the Bankruptcy Code. In addition, a lawsuit has been filed in New York by
three former Big V officers who own a small percentage of Big V's stock,
complaining of strategic decisions made by Big V and of their alleged wrongful
termination, although this lawsuit has subsequently been discussed voluntarily
by these former officers without prejudice. Fund II does not believe any of the
claims or potential claims have merit, intends to vigorously contest any such
claims and believes that, subject to the retention amount, insurance is likely
available to cover some or all of these claims.
Currently, Fund II holds a Senior Subordinated Note issued by Big V with
outstanding principal of approximately $10.4 million (the "Senior Subordinated
Note"), as well as 117,333 shares of BVH common stock. At the time of the Big V
Bankruptcy filing, Big V had failed to make the November 15, 2000 interest
payment due Fund II under such Senior Subordinated Note. Since the Big V
Bankruptcy filing, the December 15, 2000 and March 15, 2001 principal payments
and the February 15, 2001 and March 15, 2001 interest payments due Fund II under
such note have been stayed. As a result of the uncertainties surrounding the Big
V Bankruptcy, Fund II stopped accruing interest on the Senior Subordinated Note
as of January 1, 2001.
Based on the Bankruptcy Court's prior indication that it would enter judgment in
favor of Wakefern in the Wakefern Litigation and uncertainties about the
potential impact that this decision may have had on the ability of Big V to
transition to a new supplier without incurring a Withdrawal Penalty (subject to
then
ML-LEE ACQUISITION FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS, continued
existing questions about the amount or enforceability of that Withdrawal
Penalty), Fund II, in accordance with its valuation procedures, determined, as
of June 30, 2001, to retain a carrying value of approximately $10.4 million for
the Senior Subordinated Note and to write down the carrying value of the 117,333
shares of BVH common stock from its previously reported cost basis of
approximately $4.1 million to a nominal valuation of approximately $7,000.
Because the Bankruptcy Court subsequently held that Big V could not exit
Wakefern without incurring a Withdrawal Penalty, Fund II now believes that value
will be attributed to a Withdrawal Penalty, whether a transaction is concluded
with Wakefern or with a third party. Although the value that will have to be
attributed to a Withdrawal Penalty is uncertain, as the Bankruptcy Court has not
specifically ruled on the proper amount of the Withdrawal Penalty, Fund II
believes that the value likely to be attributed to the Withdrawal Penalty makes
it highly unlikely that Fund II will receive further payment on account of its
investment in Big V. Therefore, as of September 30, 2001, Fund II wrote down to
zero the remaining $10.4 million carrying value of its debt and equity
investments in the Big V Entities and wrote-off accrued interest on the Senior
Subordinated Note of $569,000. In addition, Fund II could conceivably be exposed
to losses in excess of its original debt and equity investments in the Big V
Entities.
Neither the Investment Adviser nor the General Partners can predict the ultimate
outcome of the Big V Bankruptcy or related litigation proceedings, including
such proceedings' ultimate impact on the other assets held by Fund II. In
addition, the General Partners cannot currently predict how the Big V Bankruptcy
may affect the timing of the future liquidation of Fund II, or the amount of
liquidation proceeds that limited partners will ultimately receive. In addition,
the General Partners will continue to review Fund II's reserves each quarter in
light of the foregoing matter, and distributions will be made in accordance with
Fund II's Partnership Agreement.
7. Financial Highlights
The following performance ratios for the period ended December 31, 2001 are
presented for the Limited Partners as a single class, taken as a whole. The
actual ratios of each individual investor may vary and are dependent upon the
specific allocations of income and expense to such investor and the timing of
capital transactions for such investor.
The net investment income ratio and the expense ratio are computed using the
weighted average net assets of the Limited Partners during the period. The
weighted average net assets calculation reflects a measure of net assets after
each capital contribution, distribution or other significant change in net
assets and at the end of each quarterly accounting period.
Net investment income ratio (2.72)%
=====
Expense ratio 4.27%
====
Total return ratio (43.72)%
======
The allocation of profit and loss and net asset value per unit of limited
partnership interest for the year ended December 31, 2001 is summarized below:
Net asset value as of December 31, 2000 $ 154.44
Net investment loss (3.60)
Net realized loss from investments (0.18)
Net change in unrealized appreciation (63.91)
--------
Net asset value as of December 31, 2001 $ 86.75
=========
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 General Partners of ML-Lee Acquisition Fund II, L.P. ("Fund II") consist of
the four Individual General Partners and the Managing General Partner. The five
General Partners are responsible for the management and administration of Fund
II and ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. (the "Retirement
Fund" and together with Fund II referred to herein as the "Funds"). As required
by the Investment Company Act of 1940 (the "1940 Act"), a majority of the
General Partners are individuals who are not "interested persons" of the Funds
as defined in the 1940 Act.
Individual General Partners
The Individual General Partners provide overall guidance and supervision with
respect to the operations of the Funds and perform the various duties imposed on
the directors of business development companies by the 1940 Act. The Individual
General Partners supervise the Managing General Partner and must, with respect
to any Mezzanine Investment transactions, either certify that the transaction
meets the investment guidelines of the Funds or specifically approve the
transaction as a non-Guideline Investment or Bridge Investment. The Funds
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.
Vernon R. Alden, Joseph L. Bower and Stanley H. Feldberg (the "Independent
General Partners") and Thomas H. Lee have served as the individual general
partners (the "Individual General Partners") of the Funds since 1989. Each
Individual General Partner shall hold office until his removal or withdrawal.
Mr. Alden, 78, Independent General Partner of the Funds, Director of
Sonesta International Hotels Corporation, Chairman of the Japan Society of
Boston, Trustee Emeritus of the Boston Symphony Orchestra and the Boston Museum
of Science.
Mr. Bower, 63, Independent General Partner of the Funds, Donald Kirk David
Professor of Business Administration, Harvard Business School faculty member
since 1963, Director of Anika Therapeutics, Inc., Brown Shoe Co., Loews, Inc.,
New America High Income Fund, Sonesta International Hotels Corporation, The TH
Lee Putnam EOP, and The Lincoln Foundation. Also, Trustee of the DeCordova &
Dana Museum and Sculpture Park and the New England Conservatory of Music.
Mr. Feldberg, 77, Independent General Partner of the Funds, Chairman of the
Board of Storm Eye Institute at Medical University of South Carolina, former
Director of TJX Companies, Inc. and Waban Inc., Trustee - Emeritus of Brandeis
University and Honorary Trustee of Beth Israel Deaconess Medical Center.
Mr. Lee, 58, Individual General Partner of the Funds, Chairman of the
Administrative General Partner of the Investment Adviser to the Funds since
1989, Chairman of the Administrative General Partner of Thomas H. Lee Equity
Partners L.P. since 1989, Chairman of the Administrative General Partner of
Thomas H. Lee Equity Fund III, L.P. since 1996, Chairman of the General Partner
of Thomas H. Lee Equity Fund IV, L.P. since 1998 and Chairman of the General
Partner of Thomas H. Lee Equity Fund V, L.P. since 2000. Founder of the Thomas
H. Lee Company (the "Lee Company") and its President from 1974 to 1999; Chairman
of the General Partner of Thomas H. Lee Partners, L.P. since 1999. Director of
Finlay Enterprises Inc., Metris Companies, Inc., Vertis Holdings, Inc., Miller
Import Corporation, Wyndham International, Inc., The Smith and Wollensky
Restaurant Group, Inc., and Vail Resorts, Inc. Mr. Lee also serves in a trustee
or other capacity for numerous civic and charitable organizations.
The Investment Adviser
The Investment Adviser, pursuant to an investment management agreement among the
Investment Adviser, the Lee Company and Fund II dated November 10, 1989, is
responsible for the identification, management and liquidation of the portfolio
investments of the Funds. The Investment Adviser has received an Investment
Advisory Fee for such services as discussed in Note 4 to the notes to Financial
Statements.
Certain officers of the General Partner of Thomas H. Lee Partners, L.P.
have been designated as trustees and executive officers of TH Lee Mezzanine II
the administrative general partner of the Investment Adviser.
Served in
Present
Name Capacity Since Title
- ---------------------------------------------------------------------------
Thomas H. Lee 11/10/89 Chairman, Trustee
Thomas R. Shepherd 11/10/89 Executive Vice President
David V. Harkins 11/10/89 Senior Vice President, Trustee
C. Hunter Boll 11/10/89 Vice President, Trustee
Scott A. Schoen 11/10/89 Vice President
Joseph Pesce 07/01/01 Treasurer
Information concerning Mr. Lee is set forth above.
Mr. Shepherd, 72, is Chairman of TSG Equity Partners, LLC. Mr. Shepherd is
also currently a director of CCI, Inc., Community Resource Systems, Inc., 4R
Systems, Inc., Myutility, Inc., OptaSite, Inc., Rayovac Corporation and Vermont
Teddy Bear Co.
Mr. Harkins, 61, has been affiliated with Thomas H. Lee Partners, L.P. and
its predecessor, Thomas H. Lee Company since it's founding in 1974 and currently
serves as President of Thomas H. Lee Partners, L.P. In addition, he has over 30
years experience in the investment and venture capital industry with the John
Hancock Mutual Life Insurance Company, where he began his career, as well as
with TA Associates and Massachusetts Capital Corporation. Mr. Harkins also
serves as President and Trustee of T.H. Lee Mezzanine II, the Administrative
General Partner of Thomas H. Lee Advisors II, L.P., which is the sole limited
partner of the Managing General Partner of ML-Lee Acquisition Fund II, L.P. and
ML-Lee Acquisition Fund (Retirement Accounts) II, L.P., Principal Managing
Director of Thomas H. Lee Advisors, LLC, TH Lee, Putnam Capital Advisors, LLC
and Thomas H. Lee Management Company, LLC, President of THL Fund IV Bridge Corp.
and THL Investment Management Corp., and Vice President of THL Equity Holdings
III, Inc. Mr. Harkins also founded National Dentex Corporation and currently
serves as Chairman of the Board. He is also currently a director of Conseco
Inc., Cott Corporation, Fisher Scientific International, Inc., Metris Companies
Inc., Stanley Furniture Company, Inc. and Syratech Corporation. Mr. Harkins
received a B.S. from the United States Military Academy.
Mr. Boll, 46, has been employed by Thomas H. Lee Partners, L.P. and its
predecessor, Thomas H. Lee Company, since 1986 and currently serves as a
Principal Managing Director. From 1984 through 1986, Mr. Boll was with The
Boston Consulting Group. From 1977 through 1982, he served as an Assistant Vice
President of the Energy and Minerals Division of Chemical Bank. Mr. Boll is also
Vice President and Trustee of THL Equity Trust III, the General Partner of THL
Equity Advisors III, L.P., which is the General Partner of Thomas H. Lee Equity
Fund III, L.P. and Vice President and Trustee of T.H. Lee Mezzanine II, the
Administrative General Partner of Thomas H. Lee Advisors II, L.P., which is the
sole limited partner of the Managing General Partner of ML-Lee Acquisition Fund
II, L.P. and ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. Mr. Boll is
a director of Cott Corporation, Smith & Wollensky Restaurant Group, Inc.,
TransWestern Holdings, L.P., Metris Companies Inc., United Industries
Corporation and Big V Supermarkets, Inc. Mr. Boll received a B.A. in Economics
from Middlebury College and an M.B.A. from the Stanford Graduate School of
Business.
Mr. Schoen, 43, has been employed by Thomas H. Lee Partners, L.P. and its
predecessor, Thomas H. Lee Company, since 1986 and currently serves as a
Principal Managing Director. In addition, Mr. Schoen is a Vice President of
Thomas H. Lee Advisors, LLC and Thomas H. Lee Advisors II, L.P. Mr. Schoen is
also a Trustee of THL Equity Trust III, the general partner of THL Equity
Advisors III, L.P., which is the general partner of Thomas H. Lee Equity Fund
III, L.P. and Vice President of T.H. Lee Mezzanine II, the Administrative
General Partner of Thomas H. Lee Advisors II, L.P., which is the sole limited
partner of the Managing General Partner of ML-Lee Acquisition Fund II, L.P. and
ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. Mr. Schoen is also
Principal Managing Director of the Thomas H. Lee Management Co. and, through his
position as Principal Managing Director of Thomas H. Lee Partners, L.P., of the
Thomas H. Lee Equity Fund V and Thomas H. Lee Equity Fund IV. Mr. Schoen is also
a director of ARC Holdings, LLC, Axis Specialty Limited, Rayovac Corporation,
Syratech Corporation, TransWestern Holdings, L.P., United Industries Corporation
and Wyndham International Inc. Prior to joining Thomas H. Lee Partners, L.P.,
Mr. Schoen was in the Private Finance Department of Goldman, Sachs & Co. Mr.
Schoen received a B.A. in History from Yale University, a J.D. from Harvard Law
School and an M.B.A. from the Harvard Graduate School of Business
Administration. He is a member of the New York Bar.
Mr. Pesce, 53, has been Senior Vice President of Finance, Chief Financial
Officer and Treasurer of Thomas H. Lee Partners, L.P. since July 2001. Prior to
joining Thomas H Lee Partners, L.P., from July 1999 to July 2001, Mr. Pesce was
the Executive Vice-President of Finance and Administration and CFO of
Renaissance Worldwide Inc., and from October 1994 through June 1999, Mr. Pesce
was the Executive Vice-President of Finance and Administration and CFO of
Concentra Managed Care, Inc.
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 Fund
II's investments.
The executive officers of ML Mezzanine II Inc. are as follows:
Served in
Present
Name Capacity Since (1) Title
- ---------------------------------------------------------------------
Kevin K. Albert 7/31/89 Chairman, President and Director
James V. Caruso 1/28/93 Executive Vice President
1/27/93 Director
Curt W. Cariddi 2/08/02 Treasurer
Joseph Leung 2/08/02 Vice President, Assistant Treasurer
(1) Directors hold office until their successors are elected and qualified. All
executive officers serve at the pleasure of the Board of Directors.
Kevin K. Albert, 49, a Managing Director of Merrill Lynch Investment Banking
Group ("MLIBK") is responsible for the Private Equity Group and Exclusive Sales
and Divestitures Group. He joined Merrill Lynch in 1981. Mr. Albert's work in
the Private Equity Group 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. His work in
the Exclusive Sales and Divestitures Group involves managing a team of
investment bankers executing middle-market exclusive sales transactions. Mr.
Albert is also a director of ML Media Management Inc. ("ML Media"), an affiliate
of ML Mezzanine II Inc. ("ML Mezzanine II") and a joint venturer of Media
Management Partners, the general partner of ML Media Partners, L.P.
James V. Caruso, 50, Director of MLIBK joined Merrill Lynch in January 1975. Mr.
Caruso is the director of Technology for the Global Investment Banking Group. He
is responsible for ensuring that the business requirements of MLIBK are
supported by managing the development of new technologies and enhancing existing
systems.
Curtis W. Cariddi, 46, a Director and Chief Financial Officer for the Merrill
Lynch Private Equity Division, joined Merrill Lynch in February 1986. His
responsibilities include controllership, financial management, and financial
reporting and administrative functions for Merrill Lynch private equity
initiatives including, direct investments, investments in third-party private
equity funds and Merrill Lynch-sponsored funds. He has held a number of finance
positions at both the corporate level as well as in the Firm's operating
divisions including, International Private Client Group, U.S. Private Client
Group and Global Markets & Investment Banking.
Joseph Leung, 36, a Vice President of Merrill Lynch Global Markets and
Investment Banking since 2001 and previously a Vice President of Merrill Lynch
Investment Managers, L.P., joined Merrill Lynch in 2000. Mr. Leung's
responsibilities include financial management and financial reporting and
administrative functions for certain partnerships and other entities for which
subsidiaries of Merrill Lynch are the general partner or manager. Prior to
joining Merrill Lynch, from 1995 through 2000, Mr. Leung was the Treasurer and
Chief Accounting Officer for Winmill & Co. Incorporated. His responsibilities
included controllership, financial reporting and administrative functions.
The Fund Administrator
ML Fund Administrators Inc., a Delaware corporation and a subsidiary of Merrill
Lynch & Co., Inc., is responsible for the provision of certain administrative
services necessary for the operation of the Funds. The Fund Administrator
receives a Fund Administration Fee for such services as discussed in Note 4 to
the notes to 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.
The Fund Administrator has arranged for Palmeri Fund Administrators, Inc.,
an independent administrative services company, to provide administrative
services to the Funds. Fees for such services are paid directly by the Fund
Administrator.
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 on pages 73 and 74 is incorporated herein by
reference. As compensation for their services to the Funds, each of the
Independent General Partners receives a combined annual fee of $40,000, $1,000
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 out-of-pocket
costs incurred in connections with such meetings. Fund II's proportionate share
of the annual fee and meeting fee paid to the each of the Independent General
Partners is $22,200 and $555, respectively. The Independent General Partners
received annual fees and meeting fees totaling $79,920 from Fund II for the year
ended 2001.
The information with respect to the allocation and distribution of profits and
losses of Fund II to the Managing General Partner set forth under the caption
"Distributions and Allocations - Allocations of Profits and Losses" in the
Prospectus on pages 86 and 87 is incorporated herein by reference. The Managing
General Partner received no distributions during 2001.
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 on pages 74 and 75 is incorporated herein by
reference. The Investment Adviser had received an Investment Advisory Fee at an
annual rate of 1% of the combined assets under management of the Funds (net
offering proceeds reduced by cumulative capital reductions and realized losses),
with a minimum fee of $1,200,000. Fund II's proportionate share of such annual
fee was $666,000. In July 2001, the Investment Adviser voluntarily agreed to
reduce the annual Investment Advisory Fee payable by the Funds by 50%.
Accordingly, the combined annual Investment Advisory Fee payable by the Funds
was reduced to $600,000, effective as of July 1, 2001. Fund II's proportionate
share of such annual fee is $333,000. The Investment Advisory Fee is paid
quarterly in advance. The Investment Advisory Fee incurred by Fund II was
$500,000 for 2001.
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 on pages 72 and 73 is
incorporated herein by reference. The Fund Administration fee incurred by Fund
II was $222,000 for 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
As of March 15, 2002, the Managing General Partner is aware of the following
persons who are beneficial owners of more than five percent of the units of
limited partnership interest in Fund II ("Units").
Amount of % of Units
Name and Address Beneficial Beneficially
of Beneficial Owner Ownership Owned
- ----------------------------------------------------------------------------------------
Yale University 20,954 9.4%
Investment Office
230 Prospect Street
New Haven, CT 06511
Farallon Capital Partners, L.P. 21,341(1) 10.0%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Tinicum Partners, L.P. 21,341(1) 10.0%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Thomas F. Steyer 21,341(1) 10.0%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Fleur E. Fairman 21,341(1) 10.0%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
David I. Cohen 21,341(1) 10.0%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Joseph F. Downes 21,341(1) 10.0%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Jason M. Fish 21,341(1) 10.0%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
William F. Mellin 21,341(1) 10.0%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Meridee A. Moore 21,341(1) 10.0%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Eric M. Ruttenberg 21,341(1) 10.0%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
(1) By reason of Rule 13d-5 under the Securities Exchange Act of 1934, as
amended, (the "34 Act") Farallon Capital Partners, L.P., a California limited
partnership ("FCP"), and Tinicum Partners, L.P., a New York limited partnership
("Tinicum"), each may be deemed to own 21,341 Units as of March 15, 2002 as a
result of the direct ownership by FCP of 16,722 such Units and the direct
ownership by Tinicum of 4,619 such Units. FCP and Tinicum, however, consider
their beneficial interest to be limited to their direct ownership. In addition,
by reason of Rule 13d-3 under the 34 Act, each of the general partners of FCP
and Tinicum, Thomas F. Steyer, Fleur E. Fairman, David I. Cohen, Joseph F.
Downes, Jason M. Fish, William F. Mellin, Meridee A. Moore and Eric M.
Ruttenberg, may be deemed to own beneficially the Units held by FCP and Tinicum.
Units held by the General Partners and officers of the Investment Adviser and
Mezzanine II as of March 15, 2002 are as follows:
Units
Name Held Percentage
Vernon R. Alden 50 Units *
Joseph L. Bower None n/a
Stanley H. Feldberg 25 Units *
Thomas H. Lee 11,011 Units 4.97%
All General Partners and
Officers as a Group 13,533 Units 6.10%
* Less than one percent.
The Managing General Partner is not aware of any arrangement that may, at a
subsequent date, result in a change of control of Fund II.
Item 13. Certain Relationships and Related Transactions
Fund II's investments generally were made as co-investments with the Retirement
Fund. In addition, certain of the portfolio investments may involve
co-investments with other entities affiliated with the Investment Adviser. Such
co-investments with affiliates generally are prohibited unless exemptive relief
is received from the Securities and Exchange Commission (the "Commission"). As a
result of these affiliations and Fund II's expectation of engaging in such
co-investments, the Funds and ML-Lee Acquisition Fund, L.P., sought an exemptive
order from the Commission allowing such co-investments, which was received on
September 1, 1989. Fund II's co-investments in Managed Companies and in certain
cases its co-investments in Non-Managed Companies, typically involve the entry
by the Funds and other equity security holders into stockholders' agreements.
While the provisions of such stockholders' agreements vary, such agreements may
include provisions as to corporate governance, registration rights, rights of
first offer or first refusal, rights to participate in sales of securities to
third parties, rights of majority stockholders to compel minority stockholders
to participate in sales of securities to third parties, transfer restrictions,
and preemptive rights.
Thomas H. Lee Partners, L.P., an affiliate of the Investment Adviser, in the
past has performed certain management services for Managed Companies and
received management fees in connection therewith usually pursuant to written
agreements with such companies. The Funds did not have any Managed Company in
their portfolios as of December 31, 2001, which paid management fees to Thomas
H. Lee Partners, L.P. for the fiscal year ended December 31, 2001.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits.
(1) Financial Statements.
See Item 8. Financial Statements and Supplemental Data.
(2) Financial Statement Schedules.
No Financial Statement Schedules are included because of the absence of
conditions that require such inclusion or because the required information is
included in the financial statements or set forth in the Notes thereto.
(3) Exhibits.
3.1 Amended and Restated Certificate Incorporated by reference
of Limited Partnership, dated as to Exhibit 3.1 to registrant's
of August 25, 1989 Registration Statement on
Form N-2, # 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
ended 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.
28 Pages 21-91 of the Prospectus Incorporated by reference
dated September 6,1989, filed to Exhibit 28 to
pursuant to Rule 497(b) under the registrant's Annual Report
Securities Act of 1933. of Form 10-K for the year
ended December 31, 1991.
(b) Reports on Form 8-K.
The following Reports on Form 8-K ("Reports") were filed during the last quarter
of the fiscal period covered by this annual report.
(1) A Report on Form 8-K was filed on December 4, 2001 to provide an
update of the bankruptcy proceedings and plan of reorganization of Big V
Supermarkets, Inc.
(2) A Report on Form 8-K was filed on December 26, 2001 to disclose the
approval by the General Partners of final extension of Fund II.
(c) Exhibits.
See (a) (3) above.
(d) Financial Statement Schedules.
See (a) (2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 15th day of April
2002.
ML-LEE ACQUISITION FUND II, L.P.
By: Mezzanine Investments II, L.P.
Managing General Partner
By: ML Mezzanine II Inc.,
it's General Partne
/s/ Kevin K. Albert
-------------------------------------------------
By: Kevin K. Albert
President, ML Mezzanine II Inc. and
General Partner of Mezzanine Investments II, L.P.
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 15th day of April 2002.
By: /s/ Kevin K. Albert By: /s/ Vernon R. Alden
------------------------------------------------- -------------------------------------------------
Kevin K. Albert Vernon R. Alden
President, ML Mezzanine II Inc. Individual General Partner
(Principal Executive Officer) ML-Lee Acquisition Fund II, L.P.
By: /s/ Joseph Leung By: /s/ Joseph L. Bower
------------------------------------------------- -------------------------------------------------
Joseph Leung Joseph L. Bower
Vice President and Assistant Treasurer Individual General Partner
ML Mezzanine II Inc. ML-Lee Acquisition Fund II, L.P.
(Principal Financial and Accounting Officer)
By: /s/ Stanley H. Feldberg
-------------------------------------------------
Stanley H. Feldberg
Individual General Partner
ML-Lee Acquisition Fund II, L.P.
By: /s/ Thomas H. Lee
-------------------------------------------------
Thomas H. Lee
Individual General Partner
ML-Lee Acquisition Fund II, L.P.