Item 2. Properties
Fund II does not own or lease any physical properties.
Item 3.
Item 3. Legal Proceedings
On February 3, 1992 and February 5, 1992, respectively, one Limited Partner from Fund II and one Limited Partner from the Retirement Fund each commenced class actions in the US District Court for the District of Delaware, purportedly on behalf of all persons who purchased limited partnership interests in the Funds between November 10, 1989 and January 5, 1990, against the Funds, the Managing General Partner, the Individual General Partners, the Investment Adviser to the Funds and certain named affiliates of such persons. These actions, alleging that the defendants made material misrepresentations or omitted material information in the offering materials for the Funds concerning the investment purposes of the Funds, were consolidated by the court on March 31, 1992, and a consolidated complaint was filed by the plaintiffs on May 14, 1992. In April 1993, plaintiffs filed an amended complaint, adding claims that certain transactions by the Funds were prohibited by the federal securities laws applicable to the Funds and their affiliates under the Investment Company Act of 1940, as amended. The amended complaint also named the Funds' counsel as a defendant. Defendants moved to dismiss the amended complaint, and, by Opinion and Order dated March 31, 1994, the Court granted in part and denied in part the motions to dismiss. Additionally, by its March 31, 1994 Opinion and Order, the Court certified the case as a class action, and ordered plaintiffs to replead by filing a new complaint reflecting the Court's rulings. On April 15, 1994, plaintiffs served and filed a new complaint, which defendants moved to strike for not conforming to the Court's ruling. On August 3, 1994, the Court granted defendants' motion to strike the new complaint. Plaintiffs thereafter filed a revised second amended complaint dated September 26, 1994. Factual discovery in this litigation has concluded, although plaintiffs have made application to the Court for permission to conduct additional fact discovery. The parties have conducted expert discovery, the conclusion of which is subject to the Courts' decision on a pending matter. The defendants in this action believe that the remaining claims are without merit, although whether or not the plaintiffs prevail, the Funds may be obligated to indemnify and advance litigation expenses to certain of the defendants under the terms and conditions of various indemnity provisions in the Funds' Partnership Agreements and separate indemnification agreements, and the amount of such indemnification and expenses could be material. Fund II has advanced amounts to the indemnified parties based upon amounts which are deemed reimbursable in accordance with the indemnification provisions and has included these amounts in Legal and Professional Fees. In the opinion of legal counsel, the outcome of this case is not determinable at this time.
On August 9, 1994, the same two Limited Partners as noted in the preceding paragraph commenced another putative class action in the US District Court for the District of Delaware, purportedly on behalf of all persons who owned limited partnership interests in the Funds on November 4, 1993, against the Funds, the Managing General Partners, the Individual General Partners, the Investment Adviser to the Funds and certain named affiliates of such persons. Plaintiffs allege that the defendants violated certain provisions of the Investment Company Act of 1940 and the common law in connection with the sale by certain of the defendants of shares of common stock of Snapple Beverage Corp. in a November 1993 secondary offering and seek actual and punitive damages and an accounting in connection therewith. Defendants' motion to dismiss this complaint was denied on December 29, 1995. On August 4, 1995, while defendants' motion to dismiss the original complaint was pending, plaintiffs filed an amended complaint alleging additional violations of the Investment Company Act of 1940 and common law arising out of the secondary offering. The plaintiffs moved for summary judgment on certain of these claims. On October 13, 1995, the defendants in this litigation each filed briefs in opposition to plaintiffs motion and moved to dismiss the amended complaint. By an Opinion dated March 30, 1996, the Court denied plaintiffs' motion for partial summary judgment. By order of the same date, and without opposition by defendants, the Court certified the case as a class action. Defendants also filed separate motions to dismiss, which the Court denied by an order dated June 30, 1996. The parties are now engaged in discovery. Whether or not the plaintiffs prevail, the Funds may be obligated to indemnify and advance litigation expenses to certain of the defendants under the terms and conditions of various indemnity provisions in the Funds' Partnership Agreements and separate indemnification agreements. In the opinion of legal counsel, the outcome of this case is not determinable at this time.
On November 27, 1995, one Limited Partner from Fund II and one Limited Partner from the Retirement Fund filed a putative class action in the United States District Court for the District of Delaware, purportedly on behalf of all persons or entities who owned Units in the Funds between April 5, 1991 and November 27, 1995, against the Funds, the Managing General Partner, the Individual General Partners, the Investment Adviser to the Funds, and certain named affiliates of such persons. The complaint contends that the Funds improperly advanced legal fees and litigation costs to the defendants in connection with three previously filed lawsuits. The plaintiffs are seeking an accounting, rescissory or actual damages, punitive damages, plaintiffs' litigation costs and attorneys fees, pre-judgment and post-judgment interest, and an injunction barring the defendants from further indemnifying themselves. The defendants in this action believe that the claims are without merit and have moved to dismiss the case. On December 18, 1996, the Court denied the defendants' motion to dismiss. Although the defendants believe the advancement of legal fees and litigation costs was properly made pursuant to indemnification agreements signed by the defendants, in the opinion of legal counsel, the outcome of this case is not determinable at this time.
Item 4.
Item 4. Submission of Matters to a Vote of Security-Holders
No matters were submitted to a vote of the Limited Partners of Fund II during the fourth quarter of the year ended December 31, 1997.
Part II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established trading market for the Units. The Partnership Agreement contains restrictions that are intended to prevent the development of a public market. Accordingly, accurate information as to the market values of Units at any given date is not available.
The approximate number of Unit holders as of January 1, 1998, the last effective date of transfer (as described below), was 11,132. The Managing General Partner and Thomas H. Lee as an Individual General Partner also hold general partnership interests in Fund II.
Effective November 9, 1992, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch" or "MLPF&S") introduced a new limited partnership secondary service through Merrill Lynch's Limited Partnership Secondary Transaction Department ("LPSTD"). This service assists Merrill Lynch clients wishing to buy or sell limited partnership interests, but does not represent an established trading market for the Units.
MLPF&S provids estimated values of limited partnerships and other direct investments reported on client account statements and no longer reports the general partner's estimate of limited partnership net asset value to Unit holders. Pursuant to MLPF&S guidelines, estimated values for limited partnership interests originally sold by MLPF&S (such as Fund II's Units) are provided by independent valuation services. MLPF&S clients may contact their MLPF&S Financial Consultants or telephone the number provided to them on their account statements to obtain a general description of the methodology used by the independent valuation services to determine their estimates of value. The estimated values provided by the independent services and the Fund's current net asset value as estimated by the general partner are not market values and Unit holders may not be able to sell their Units or realize either amount upon a sale of their Units. In addition, Unit holders may not realize the independent estimated value or Fund II's current net asset value upon the liquidation of the Fund's assets over its remaining life.
Fund II distributes Distributable Cash from Investments and Distributable Capital Proceeds in accordance with the terms of the Partnership Agreement.
Pursuant to the Partnership Agreement, transfers of Units are recognized on the first day of the fiscal quarter after which the Managing General Partner has been duly notified of a transfer pursuant to the Partnership Agreement. Until a transfer is recognized, the limited partner of record (i.e. the transferor) will continue to receive all the benefits and burdens of ownership of Units (including allocations of profit and loss and distributions), and any transferee will have no rights to distributions of sale proceeds generated at any time prior to the recognition of the transfer and assignment.
Accordingly, Distributable Cash from Investments for a quarter and Distributable Capital Proceeds from sales after transfer or assignment have been entered into, but before such transfer and assignment is recognized by the Managing General Partner, will be payable to the transferor and not the transferee.
Cash Distributions
Fund II has made quarterly distributions including both Distributable Cash from Investments and Distributable Capital Proceeds. See Item 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity & Capital Resources
Capital contributions from the Limited Partners and the General Partners totaled $222,295,000 in the public offering of ML-Lee Acquisition Fund II, L.P. ("Fund II"), the final closing for which was held on December 20, 1989.
At December 31, 1997, Fund II had outstanding a total (at cost) of $91.9 million invested in Mezzanine Investments representing $68 million Managed and $23.9 million Non-Managed portfolio investments. The remaining proceeds were invested in Temporary Investments primarily comprised of commercial paper with maturities less than one month.
Fund II invested substantially all of its net proceeds in Mezzanine Investments, consisting of high-yield subordinated debt and/or preferred stock linked with an equity participation, of middle market companies in connection with friendly leveraged acquisitions, recapitalizations and other leveraged financings. Fund II's Mezzanine Investments typically were issued in private placement transactions which are generally subject to certain restrictions on sales thereby limiting their liquidity. Fund II was fully invested as of December 20, 1992, which was within 36 months from the date of the final closing (after including the reserve for follow-on investments and exclusive of amounts available for reinvestment). The reinvestment period for various amounts of capital proceeds received during the last twelve months of Fund II's investment period terminated at various times through December 18, 1993.
As provided by the Partnership Agreement, the Managing General Partner of Fund II is entitled to receive an incentive distribution ("MGP Distributions") after Limited Partners have received their Priority Return of 10% per annum. The Managing General Partner is required to defer a portion of any MGP Distribution earned from the sale of portfolio investments in excess of 20% of realized capital gains, net realized capital losses and unrealized depreciation, in accordance with the Partnership Agreement (the "Deferred Distribution Amount"). Any Deferred Distribution Amount is distributable to the Partners pro-rata in accordance with their capital contributions, and certain amounts otherwise later payable to Limited Partners from distributable cash from operations are instead payable to the Managing General Partner until the Deferred Distribution Amount is paid. As of December 31, 1997 there is no outstanding Deferred Distribution Amount.
On August 6, 1991, the Independent General Partners approved a reserve for follow-on investments of $24.9 million for Fund II. As of March 19, 1998, the remaining reserve balance was $3.1 million due to follow-on investments in Petco Animal Supplies, Fitz and Floyd, Fine Clothing, Inc., Hills Stores, Ghirardelli Holdings and Anchor Advanced Products. Additionally, $8.29 million of the reserve has been returned to the partners. The level of the reserve was based upon an analysis of potential follow-on investments in specific portfolio companies that may become necessary to protect or enhance Fund II's existing investment.
All net proceeds from the sale of Mezzanine Investments received by Fund II in the future will be distributed to its partners unless applied to or set aside for expenses.
The proportion of distributions provided by net investment income has decreased from prior years due primarily to increased sales and redemptions of Mezzanine Investments and the resulting decrease in investment income as those holdings cease to generate interest income. It is expected that the majority of future cash distributions to Limited Partners will almost entirely be derived from recovered capital and gains, from asset sales, if any, which are subject to market conditions and are inherently unpredictable as to timing. Assuming there are no asset sales in a particular quarter, Limited Partners are expected to receive only small amounts of net distributable cash, which are estimated to be less than one dollar per Limited Partnership Unit each quarter. Distributions therefore are expected to vary significantly in amount and may not be made in every quarter.
Investment in High-Yield Securities
Fund II invested primarily in subordinated debt and preferred stock securities ("High-Yield Securities"), generally linked with an equity participation, issued in conjunction with the mezzanine financing of privately structured, friendly leveraged acquisitions, recapitalizations and other leveraged financings. High-Yield Securities are debt and preferred equity securities that are unrated or are rated by Standard & Poor's Corporation as BB or lower and by Moody's Investor Services, Inc. as Ba or lower. Risk of loss upon default by the issuer is significantly greater with High-Yield Securities than with investment grade securities because High-Yield Securities are generally unsecured and are often subordinated to other creditors of the issuer. Also, these issuers usually have high levels of indebtedness and are more sensitive to adverse economic conditions, such as recession or increasing interest rates, than investment grade issuers. Most of these securities are subject to resale restrictions and generally there is no quoted market for such securities.
Although Fund II cannot eliminate the risks associated with its investments in High-Yield Securities, it has established risk management policies. Fund II subjected each prospective investment to rigorous analysis and made only those investments that were recommended by the Investment Advisor and that met Fund II's investment guidelines or that had otherwise been approved by the Managing General Partner and the Independent General Partners. Fund II's investments were measured against specified Fund II investment and performance guidelines. To limit the exposure of Fund II's capital in any single issuer, Fund II limited the amount of its investment in a particular issuer. Fund II's Investment Adviser also continually monitors portfolio companies in order to minimize the risks associated with its investments in High-Yield Securities.
Certain issuers of Securities held by Fund II (First Alert, Hills and Playtex) have registered their equity securities in public offerings. Although the equity securities of the same class presently held by Fund II were not registered in these offerings, Fund II has the ability under Rule 144 under the Securities Act of 1933 to sell publicly traded equity securities held by it for at least one year on the open market, subject to the volume restrictions set forth in that rule. The Rule 144 volume restrictions generally are not applicable to equity securities of non-affiliated companies held by Fund II for at least two years. In certain cases, Fund II has agreed not to make any sales of equity securities for a specified hold-back period following a public offering.
The Investment Adviser reviews each portfolio company's financial statements quarterly. In addition, the Investment Adviser routinely reviews and discusses financial and operating results with the company's management and where appropriate, attends board of director meetings. In some cases, representatives of the Investment Adviser, acting on behalf of the Funds (and affiliated investors where applicable), serve as one or more of the directors on the boards of portfolio companies. Fund II may, from time to time, make follow-on investments to the extent necessary to protect or enhance its existing investments.
Results of Operations
Investment Income and Expenses
The investment income from operations for the year consists primarily of interest and discount income earned on the investment of Mezzanine Investments and short-term money market instruments.
For the year ended December 31, 1997, Fund II had investment income of $10.2 million, as compared to $14.4 million and $8.5 million for the comparable years ended 1996 and 1995, respectively. The decrease in 1997 investment income as compared to 1996 is due to the sale of income producing portfolio companies in 1997, as well as recognition of previously unrecorded interest income of payment-in-kind securities totalling $7.2 million related to the sale of CST Office Products, Inc. in March of 1996. The increase in 1996 investment income from 1995 is due primarily to the recognition of interest income related to the sale of CST Office Products, Inc. in the first quarter of 1996.
Major expenses for the period consisted of Investment Advisory Fees and Fund Administration Fees.
The Investment Adviser and Fund Administrator both receive their compensation on a quarterly basis. The total Investment Advisory Fees paid by Fund II to the Investment Adviser for the years ended December 31, 1997, 1996 and 1995 were $759,160, $988,882 and $1.5 million, respectively, and were calculated at an annual rate of 1.0% of assets under management (net offering proceeds reduced by cumulative capital reductions and realized losses), with a minimum annual amount of $1.2 million for Fund II and the Retirement Fund on a combined basis. The decrease in Investment Advisory Fees are a direct result of sales of investments, returns of capital distributed to partners and realized losses on investments.
Beginning in November of 1997, the Fund Administration Fee changed to an annual amount of $400,000 for Fund II and the Retirement Fund on a combined basis, plus 100% of all reimbursable expenses (as defined below) incurred by Fund II. Actual out-of-pocket expenses ("reimbursable expenses") primarily consist of printing, audit, tax preparation and custodian fees. For the years ended December 31, 1997, 1996 and 1995, Fund II incurred $140,157, $139,158 and $125,816, respectively, in reimbursable expenses.
The Fund Administration Fees paid to the Fund Administrator for the years ended December 31, 1996 and 1995 were calculated at an annual rate of 0.45% of the excess of net offering proceeds, less 50% of capital reductions and 50% of realized losses. The decrease in Fund Administration Fees were a direct result of sales of investments, returns of capital distributed to partners and realized losses on investments. For the years ended December 31, 1997, 1996 and 1995, Fund Administration Fees were $569,224, $675,250 and $798,478, respectively.
Pursuant to the administrative services agreement between Fund II and the Fund Administrator, for the period ending November 10, 1997, a portion of the actual out-of-pocket expenses incurred in connection with the administration of Fund II was reimbursable to the Fund Administrator.
Legal and Professional Fees were incurred in connection with the litigation proceedings as described in Note 11 to the Financial Statements. Professional fees for the years ended December 31, 1997, 1996 and 1995 were $152,000, $1.3 million and $1.7 million, respectively. These expenses are attributable to legal fees incurred and advanced on behalf of indemnified defendants as well as fees incurred directly by Fund II in connection with the aforementioned litigation proceedings.
For the year ended December 31, 1997, Fund II had net investment income of $8.4 million as compared to $11 million for the same period in 1996 and $4.1 million for the same period in 1995. The decrease in 1997 net investment income as compared to 1996 is due to the recognition of interest income from payment-in-kind securities related to the sale of CST Office Products, Inc., in March of 1996. The increase in 1996 net investment income as compared to 1995 is primarily attributable to interest income in 1996 from payment-in-kind securities related to the sale of CST Office Products, Inc.
Net Assets
Fund II's net assets decreased by $24.3 million during the year ended December 31, 1997, due to the payment of cash distributions to partners of $26.7 million ($18.4 million of the cash distributions paid was return of capital from the sales of portfolio investments) and net unrealized depreciation of $6.1 million, partially offset by net investment income of $8.4 million and realized gains of $92,648 from the sales of Mezzanine Investments.
Unrealized Appreciation and Depreciation on Investments
For the year ended December 31, 1997, Fund II recorded net unrealized depreciation of $6.1 million of which $3.3 million was related to net depreciation in market value of publicly traded securities held as of December 31, 1997. This compares to net unrealized depreciation of $15.7 million for 1996 of which $12.5 million was related to net depreciation in market value of publicly traded securities. Fund II's cumulative net unrealized depreciation on investments as of December 31, 1997 totaled $49.4 million.
For the year ended December 31, 1995, Fund II recorded net unrealized depreciation of $30.6 million of which $22.7 million was related to net unrealized depreciation in market value of publicly traded securities.
Fund II's valuation of the common stock of First Alert, Hills, Playtex and Stanley Furniture reflect their closing market prices at December 31, 1997.
The Managing General Partner and the Investment Adviser review the valuation of Fund II's portfolio investments that do not have a readily ascertainable market value on a quarterly basis with final approval from the Individual General Partners. Portfolio investments are valued at original cost plus accrued value in the case of original issue discount or deferred pay securities. Such investments will be revalued if there is an objective basis for doing so at a different price. Investments will be written down in value if the Managing General Partner and Investment Adviser believe adverse credit developments of a significant nature require a write-down of such securities. Investments will be written up in value only if there has been an arms'-length third party transaction to justify the increased valuation.
Approximately 51% of Fund II's investments (at cost) are invested in private placement securities for which there are no ascertainable market values. Although the Managing General Partner and Investment Adviser use their best judgment in estimating the fair value of these investments, there are inherent limitations in any estimation technique. Therefore, the fair value estimates presented herein are not necessarily indicative of the amount which Fund II could realize in a current transaction.
The First Alert, Hills, Playtex and Stanley Furniture securities held by Fund II are restricted securities under the SEC's Rule 144 and can only be sold under that rule in a registered public offering or pursuant to an exemption from the registration requirement. In addition, resale in some cases is restricted by lockup or other agreements. Fund II may be considered an affiliate of First Alert and Stanley Furniture under the SEC's Rule 144 and, therefore, any resale of securities of those companies, under Rule 144, is limited by the volume limitations in that rule. Accordingly, the values referred to in the financial statements for the remaining First Alert, Hills, Playtex and Stanley Furniture securities held by Fund II do not necessarily represent the prices at which these securities could currently be sold.
The information presented herein is based on pertinent information available to the Managing General Partner and Investment Adviser as of December 31, 1997. Although the Managing General Partner and Investment Adviser are not aware of any factors not disclosed herein that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since that time, and the current estimated fair value of these investments may have changed significantly since that point in time.
For additional information please refer to Supplemental Schedule of Unrealized Appreciation and Depreciation - Schedule 2.
Realized Gains and Losses
For the year ended December 31, 1997, Fund II recorded realized gains from investments of $92,648 as compared to $5.9 million and $8.4 million for the years ended December 31, 1996 and 1995, respectively. For additional information, please refer to the Supplemental Schedule of Realized Gains and Losses - Schedule 1.
Cash Distributions
On February 2, 1998, the Individual General Partners approved the fourth quarter 1997 cash distribution which represents net investment income of $372,822 from Mezzanine Investments, net investment income of $22,982 from Temporary Investments and Net Distributable Capital proceeds from the sale of Stanley Furniture of $87,067 (which includes a return of capital of $44,106). The total amount distributed to Limited Partners was $370,314 or $1.67 per Unit, which was paid on February 13, 1998. The Managing General Partner received a total of $2,764 with respect to its interest in Fund II and $112,010 in MGP Distributions. Thomas H. Lee, as an Individual General Partner, received $84 with respect to his interest in Fund II.
Additionally, on February 2, 1998, the Independent General Partners approved a cash distribution to Limited Partners consisting of a repayment by the Managing General Partner of $328,183 representing an overpayment of an MGP distribution with respect to a transaction effected during the quarter ending December 31, 1995, and to pay Fund II Limited Partners interest on such amount. This distribution totaling $1.67 per Unit was distributed on Febuary 13, 1998, to Limited Partners of record at December 31, 1997.
Because most of Fund II's debt holdings were previously sold or redeemed, remaining portfolio interest income expected to be received by Fund II may not be sufficient to cover Fund II's expenses in the future. As a result, any interest income received will be used to pay Fund II expenses and may not be available for distribution. The majority of future cash distributions to Limited Partners will be derived from recovered capital and gains, from asset sales, if any, which are dependent upon future market conditions and therefore are inherently unpredictable. Cash distributions, therefore, are likely to vary significantly in amount and may not be made in every quarter.
Should Limited Partner's decide to sell their Units, any such sale will be recorded on the books and records of Fund II quarterly, only upon the satisfactory completion and acceptance of Fund II's transfer documents. There can be no assurances that such transfer will be effected before any specified date. Additionally, pursuant to the Partnership Agreement, until a transfer is recognized, the Limited Partner of record (i.e. the transferor) is entitled to receive all the benefits and burdens of ownership of Units, and any transferee has no rights to distributions of sale proceeds generated at any time prior to the recognition of the transfer and assignment. Accordingly, Distributable Cash from Investments for a quarter and Distributable Capital Proceeds from sales after transfer or assignment have been entered into, but before such transfer and assignment is recognized, would be payable to the transferor and not the transferee.
Item 8.
Item 8. Financial Statements and Supplementary Data
ML-LEE ACQUISITION FUND II, L.P.
Report of Independent Accountants
Statements of Assets, Liabilities and Partners' Capital As of December 31, 1997 and December 31, 1996
Statements of Operations For the Years Ended December 31, 1997, 1996 and 1995
Statements of Changes in Net Assets For the Years Ended December 31, 1997, 1996 and 1995
Statements of Cash Flows For the Years Ended December 31, 1997, 1996 and 1995
Statements of Changes in Partners' Capital For the Years Ended December 31, 1997, 1996 and 1995
Schedule of Portfolio Investments - December 31, 1997
Notes to Financial Statements
Supplementary Schedule of Realized Gains and Losses - Schedule 1
Supplementary Schedule of Unrealized Appreciation and Depreciation - Schedule 2
Report of Independent Accountants
To the General and Limited Partners of ML-Lee Acquisition Fund II, L.P.
In our opinion, the accompanying statements of assets, liabilities and partners' capital, including the schedule of portfolio investments, and the related statements of operations, of changes in net assets, of cash flows, and of changes in partners' capital present fairly, in all material respects, the financial position of ML-Lee Acquisition Fund II, L.P. (the "Fund") at December 31, 1997 and 1996, and the results of its operations, the changes in its net assets, its cash flows, and the changes in its partners' capital for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 1997 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations were not received, provide a reasonable basis for the opinion expressed above.
The financial statements include securities, valued at $42,646,000 at December 31, 1997 (91.1% of net assets), whose values have been estimated by the Managing General Partner and the Investment Adviser (with the approval of the Independent General Partners) in the absence of readily ascertainable market values, as further described in Note 2. Those estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material to the financial statements.
Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule of realized gains and losses (Schedule 1) and the schedule of unrealized appreciation and depreciation (Schedule 2) are presented for the purpose of additional analysis and are not a required part of the basic financial statements. These schedules are the responsibility of the Fund's management. Such schedules have been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, are fairly stated in all material respects when considered in relation to the basic financial statements taken as a whole.
PRICE WATERHOUSE LLP
New York, New York March 19, 1998
See the Accompanying Notes to the Financial Statements.
ML-LEE ACQUISITION FUND II, L.P. NOTES TO FINANCIAL STATEMENTS December 31, 1997
1. Organization and Purpose
ML-Lee Acquisition Fund II, L.P. ("Fund II") (formerly T.H. Lee Acquisition Fund II, L.P.) was formed along with ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. (the "Retirement Fund"; collectively referred to as the "Funds") and the Certificates of Limited Partnership were filed under the Delaware Revised Uniform Limited Partnership Act on September 23, 1988. The Funds' operations commenced on November 10, 1989.
Mezzanine Investments II, L.P. (the "Managing General Partner"), subject to the supervision of the Individual General Partners, is responsible for overseeing and monitoring of Fund II's investments. The Managing General Partner is a Delaware limited partnership in which ML Mezzanine II Inc. is the general partner and Thomas H. Lee Advisors II, L.P., the Investment Adviser to the Funds, is the limited partner. The Individual General Partners are Vernon R. Alden, Joseph L. Bower and Stanley H. Feldberg (the "Independent General Partners") and Thomas H. Lee.
Fund II elected to operate as a business development company under the Investment Company Act of 1940. Fund II's primary investment objective is to provide current income and capital appreciation potential by investing in privately-structured, friendly leveraged buyouts and other leveraged transactions. Fund II pursues this objective by investing primarily in subordinated debt and related equity securities issued in conjunction with the "mezzanine financing" of friendly leveraged buyout transactions, leveraged acquisitions and leveraged recapitalizations. Fund II may also invest in "bridge investments" if it is believed that such investments would facilitate the consummation of a mezzanine financing.
As described in the Prospectus, Fund II will terminate no later than January 5, 2000, subject to the right of the Individual General Partners to extend the term for up to one additional two-year period and one additional one-year period if it is in the best interest of Fund II. Fund II will then have five additional years to liquidate its remaining investments.
2. Significant Accounting Policies
Basis of Accounting
For financial reporting purposes, the records of Fund II are maintained using the accrual method of accounting. For federal income tax reporting purposes, the results of operations are adjusted to reflect statutory requirements arising from book to tax differences. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements. Actual reported results could vary from these estimates.
Valuation of Investments
Securities for which market quotations are readily available are valued by reference to such market quotation using the last trade price (if reported) or the last bid price for the period. For securities without a readily ascertainable market value (including securities restricted as to resale for which a corresponding publicly traded class exists), fair value is determined, on a quarterly basis, in good faith by the Managing General Partner and the Investment Adviser with final approval from the Individual General Partners of Fund II. For privately issued securities in which Fund II typically invests, the fair value of an investment is its original cost plus accrued value in the case of original issue discount or deferred pay securities. Such investments will be revalued if there is an objective basis for doing so at a different price. Investments will be written down in value if the Managing General Partner and Investment Adviser believe adverse credit developments of a significant nature require a write-down of such securities. Investments will be written up in value only if there has been an arms'-length third party transaction to justify the increased valuation. Although the Managing General Partner and Investment Adviser use their best judgment in estimating the fair value of these investments, there are inherent limitations in any estimation technique. Therefore, the fair value estimates presented herein are not necessarily indicative of the amount which Fund II could realize in a current transaction. Future confirming events will also affect the estimates of fair value and the effect of such events on the estimates of fair value could be material.
Temporary Investments with maturities of less than 60 days are stated at amortized cost, which approximates market.
The information presented herein is based on pertinent information available to the Managing General Partner and Investment Adviser as of December 31, 1997. Although the Managing General Partner and Investment Adviser are not aware of any factors not disclosed herein that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since that time, and because the portfolio investments of companies whose equity is publicly traded are valued at the last price at December 31, 1997, the current estimated fair value of these investments may have changed significantly since that point in time.
Interest Receivable on Investments
Investments generally will be placed on non-accrual status in the event of a default (after the applicable grace period expires) or if the Investment Adviser and the Managing General Partner determine that there is no reasonable assurance of collecting interest.
Payment-In-Kind Securities
All payment-in-kind securities received in lieu of cash interest payments by Fund II's portfolio companies are recorded at face value (which approximates accrued interest), unless the Investment Adviser and the Managing General Partner determine that there is no reasonable assurance of collecting the full principal amounts of such securities. As of December 31, 1997 and December 31, 1996, Fund II had in its portfolio of investments $441,900 of payment-in-kind notes which excludes $2.5 million and $1.1 million, respectively, of payment-in-kind notes received from notes placed on non-accrual status. As of December 31, 1997 and December 31, 1996, Fund II had in its portfolio of investments $29,059 of payment-in-kind equity securities.
Investment Transactions
Fund II records investment transactions on the date on which it obtains an enforceable right to demand the securities or payment therefor. Fund II records Temporary Investment transactions on the trade date.
Realized gains and losses on investments are determined on the basis of specific identification for accounting and tax purposes.
Sales and Marketing Expenses, Offering Expenses and Sales Commissions
Sales commissions and selling discounts were allocated to the specific partners' accounts in which they were applied. Sales and marketing expenses and offering expenses were allocated between the Funds in proportion to the number of Units issued by each fund and to the partners in proportion to their capital contributions.
Deferred Interest Income
All fees received by Fund II upon the funding of Mezzanine or Bridge Investments are treated as deferred interest income and amortized over the maturity of such investments.
Partners' Capital
Partners' Capital represents Fund II's equity divided in proportion to the Partners' Capital Contributions and does not represent the Partners' Capital Accounts. Profits and losses, as defined in the Partnership Agreement, when realized, are allocated in accordance with the provisions of the Partnership Agreement summarized in Note 3.
3. Allocations of Profits and Losses
Pursuant to the Partnership Agreement, all profits from Temporary Investments generally will be allocated 99.75% to the Limited Partners, 0.23% to the Managing General Partner and 0.02% to the Individual General Partner. Profits from Mezzanine Investments will, in general, be allocated as follows:
first, if the capital accounts of any partners have negative balances, to such partners in proportion to the negative balances in their capital accounts until the balances of all such capital accounts equal zero,
second, 99.75% to the Limited Partners, 0.23% to the Managing General Partner and 0.02% to the Individual General Partner until the sum allocated to the Limited Partners equals any previous losses allocated together with a cumulative Priority Return of 10% on the average daily amount in Mezzanine Investments, and any outstanding Compensatory Payments,
third, 69.75% to the Limited Partners, 30.225% to the Managing General Partner and 0.025% to the Individual General Partner until the Managing General Partner has received 20.281% of the total profits allocated,
thereafter, 79.75% to the Limited Partners, 20.225% to the Managing General Partner and 0.025% to the Individual General Partner.
Losses will be allocated in reverse order of profits previously allocated and thereafter 99.75% to the Limited Partners, 0.23% to the Managing General Partner and 0.02% to the Individual General Partner.
4. Investment Transactions
During February 1997, Fund II sold 272 shares of Stanley Furniture for $24 per share and received total proceeds of $6,528 and recognized a gain of $3,105. On June 30, 1997, Fund II entered into a stock purchase agreement with Stanley Furniture whereby Fund II sold 6,281 shares of Stanley Furniture for $20 per share. Fund II received total proceeds of $125,620 and recognized a gain of $46,582. On November 18, 1997, Fund II sold 3,460 shares of Stanley Furniture for $25 per share. Fund II received total proceeds of $86,500 and recognized a gain of $42,961.
On April 2, 1997, Anchor completed a recapitalization pursuant to which Anchor issued $100,000,000 aggregate principal amount of Senior Notes due 2004 and entered into a new credit facility (the "Recapitalization"). As part of the Recapitalization, Anchor repaid substantially all of its outstanding debt, including all accrued interest and any premiums in connection therewith. As a result, Anchor repaid the Senior Subordinated Note and Junior Subordinated Note held by Fund II, together with all accrued interest and prepayment premiums for an aggregate of $14.5 million.
Immediately prior to the Recapitalization, Fund II owned 162,967 shares of the common stock of Anchor Holdings, Inc., the parent of Anchor. Immediately after the consummation of the Recapitalization, Fund II exercised its warrants to purchase common stock (at an exercise price of $9.50 per share) and acquired an additional 247,710 shares of common stock, bringing its total holdings of common stock to 410,677 shares. In connection with the Recapitalization, Holdings paid a dividend to all holders of Holdings common stock of record as of April 2, 1997, in the amount of $19.02 per share (the "Anchor Dividend"). As a result of such dividend, the Fund received $7.8 million, of which approximately 32% or $2.5 million was returned to partners as return of capital.
On April 11, 1997 the Bankruptcy Court confirmed a plan of Reorganization for Fitz & Floyd. As a result, on April 14, 1997, a follow-on investment of $2.4 million was made in Fitz and Floyd and Fund II received a $2.4 million 12% subordinated note. Additionally, Fund II exchanged the $12.6 million adjustable notes, which Fund II previouslly held, for Series A Preferred Stock and Class A Common Stock in Fitz and Floyd. No gain or loss was recorded on the trasaction.
On August 6, 1991, the Independent General Partners approved a reserve for follow-on investments of $24.9 million for Fund II. As of December 31, 1997, the remaining reserve balance was $3.1 million due to follow-on investments in Petco Animal Supplies, Fitz and Floyd, Fine Clothing, Inc., Hills Stores, Ghirardelli Holdings and Anchor Advanced Products. Additionally, $8.29 million of the reserve has been returned to the partners. The level of the reserve was based upon an analysis of potential follow-on investments in specific portfolio companies that may become necessary to protect or enhance Fund II's existing investment.
Because Fund II primarily invested in high-yield private placement securities, the risk of loss upon default by an issuer is greater than with investment grade securities because high-yield securities are generally unsecured and are often subordinated to other creditors of the issuer. Also, high-yield issuers usually have higher levels of indebtedness and are more sensitive to adverse economic conditions.
Although Fund II cannot eliminate the risks associated with its investments in high-yield securities, it has procedures in place to continually monitor the risks associated with its investments under a variety of market conditions. Any potential Fund II loss would generally be limited to its investment in the portfolio company as reflected in the portfolio of investments.
Should bankruptcy proceedings commence, either voluntarily or by action of the court against a portfolio company, the ability of Fund II to liquidate the position or collect proceeds from the action may be delayed or limited.
5. Unrealized Appreciation and Depreciation of Investments
Fund II's valuation of the Common Stock of First Alert, Hills, Playtex and Stanley reflects their closing market prices at December 31, 1997.
For information, please refer to the Supplemental Schedule of Unrealized Appreciation and Depreciation - Schedule 2.
6. Non-Accrual of Investments
In accordance with Fund II's Accounting Policy, the following securities have been on non-accrual status since the date indicated:
- Florida Orthopedics, Inc., on January 1, 1995. - Stablex Canada, Inc., on June 29, 1995.
7. Investment Advisory Fee
The Investment Adviser provides the identification, management and liquidation of portfolio investments for the Funds. As compensation for services rendered to the Funds, the Investment Adviser receives a quarterly fee at the annual rate of 1% of assets under management (net offering proceeds reduced by cumulative capital reductions and realized losses), with a minimum annual fee of $1.2 million for Fund II and the Retirement Fund on a combined basis. The Investment Advisory Fee is calculated and paid quarterly, in advance. In addition, the Investment Adviser receives 95% of the benefit of any MGP Distributions paid to the Managing General Partner (see Note 10). For the years ended December 31, 1997, 1996 and 1995, Fund II paid $759,160, $988,882 and $1.5 million, respectively, in Investment Advisory Fees to Thomas H. Lee Advisors II, L.P.
8. Fund Administration Fees and Expenses
As compensation for its services, ML Fund Administrators Inc. (the "Fund Administrator"; an affiliate of the Managing General Partner) is entitled to receive from the Funds an Administration Fee and reimbursement for certain out-of-pocket expenses incurred by the Fund Administrator on behalf of the Funds ("reimbursable expenses"). The Fund Administration Fee is calculated and paid quarterly, in advance, by each Fund. For the years ended December 31, 1997, 1996 and 1995, Fund II paid $569,224, $675,250 and $798,478, respectively, in Fund Administration Fees.
Beginning in November of 1997, the Fund Administration Fee changed to an annual amount of $400,000 for Fund II and the Retirement Fund on a combined basis, plus 100% of all reimbursable expenses incurred by Funds . Reimbursable expenses primarily consist of printing, audit, tax preparation and custodian fees. For the years ended December 31, 1997, 1996 and 1995, Fund II incurred $140,157, $139,158 and $125,816, respectively, in reimbursable expenses.
For the period ending November 1997, the Fund Administration Fee was calculated at an annual amount of the greater of $500,000 or 0.45% of the excess of net offering proceeds less 50% of capital reductions and 50% of realized losses plus a portion of reimbursable expenses incurred by Fund II.
In addition, ML Mezzanine II Inc., an affiliate of the Fund Administrator and Merrill Lynch & Co.,Inc., receives 5% of the benefit of any MGP Distributions paid to the Managing General Partner (see Note 10).
9. Independent General Partners' Fees and Expenses
As compensation for their services, each Independent General Partner will receive a combined annual fee of $40,000 (payable quarterly) from the Funds in addition to a $1,000 fee for each meeting attended ($500 if a meeting is held on the same day as a committee meeting of the General Partners) plus reimbursement for any out-of-pocket expenses incurred. Fees and expenses are allocated between the Funds in proportion to the number of units issued by each fund. Compensation for each of the Individual General Partners is reviewed annually. For the years ended December 31, 1997, 1996 and 1995, Independent General Partners' Fees and Expenses were $106,069, $207,269 and $262,832, respectively.
10. Related Party Transactions
Fund II's investments generally were made as co-investments with the Retirement Fund. In addition, certain of the Mezzanine Investments and Bridge Investments which were made by Fund II involve co-investments with entities affiliated with the Investment Adviser. Such co-investments are generally prohibited absent exemptive relief from the Securities and Exchange Commission (the "Commission"). As a result of these affiliations and Fund II's expectation of engaging in such co-investments, the Funds together with ML-Lee Acquisition Fund, L.P., sought an exemptive order from the Commission allowing such co-investments, which was received on September 1, 1989. Fund II's co-investments in Managed Companies, and in certain cases its co-investments in Non-Managed Companies, typically involve the entry by the Funds and other equity security holders into stockholders' agreements. While the provisions of such stockholders' agreements vary, such agreements may include provisions as to corporate governance, registration rights, rights of first offer or first refusal, rights to participate in sales of securities to third parties, rights of majority stockholders to compel minority stockholders to participate in sales of securities to third parties, transfer restrictions, and preemptive rights.
Thomas H. Lee Company, a sole proprietorship owned by Thomas H. Lee, an Individual General Partner of Fund II and an affiliate of the Investment Advisor, typically performs certain management services for Managed Companies and receives management fees in connection therewith, usually pursuant to written agreements with such companies. In addition, certain of the portfolio companies have contractual or other relationships pursuant to which they do business with one another.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") is an affiliate of the Managing General Partner. MLPF&S and certain of its affiliates, in the ordinary course of their business, perform various financial services for various portfolio companies of the Funds, which may include investment banking services, broker/dealer services and economic forecasting, and receive in consideration therewith various fees, commissions and reimbursements. Furthermore, MLPF&S and its affiliates or investment companies advised by affiliates of MLPF&S may, from time to time, purchase or sell securities issued by portfolio companies of the Funds in connection with its ordinary investment operations.
As provided by the Partnership Agreement, the Managing General Partner of Fund II is entitled to receive an incentive distribution ("MGP Distributions") after Limited Partners have received their Priority Return of 10% per annum. The Managing General Partner is required to defer a portion of any MGP Distribution earned from the sale of portfolio investments in excess of 20% of realized capital gains, net realized capital losses and unrealized depreciation, in accordance with the Partnership Agreement (the "Deferred Distribution Amount"). This Deferred Distribution Amount is distributable to the Partners pro-rata in accordance with their capital contributions, and certain amounts otherwise later payable to Limited Partners from distributable cash from operations are instead payable to the Managing General Partner until any Deferred Distribution Amount is paid.
During 1997, Fund II paid the Individual General Partner distributions totaling $5,300 and Managing General Partner distributions totaling $3,490,271 (which includes $3,437,271 of MGP Distributions as defined above). As of December 31, 1997, the Managing General Partner has earned a total of $24.9 million in MGP Distributions, none of which is deferred in payment to the Managing General Partner as a Deferred Distribution amount (the "Deferred Distribution") at this time, in accordance with the Partnership Agreement. To the extent not payable to the Managing General Partner, any Deferred Distribution is distributed to the Partners pro-rata in accordance with their capital contributions, and certain amounts otherwise later payable to Partners from distributable cash from operations would instead be payable solely to the Managing General Partner until the Deferred Distribution amount is paid in full.
Fund II has recorded a receivable of $328,183 or $1.48 per Unit, which represents an amount due from the Managing General Partner at December 31, 1997. This amount is a correction of an MGP Distribution made on December 11, 1995, with respect to a transaction effected at that time.
The Managing General Partner has repaid the amount to Fund II, plus interest, all of which was distributed to Limited Partners along with the fourth quarter distribution made on February 13, 1998 to Limited Partners of record as of December 31, 1997. See Note 13 for further information.
11. Litigation
On February 3, 1992 and February 5, 1992, respectively, one Limited Partner from Fund II and one Limited Partner from the Retirement Fund each commenced class actions in the US District Court for the District of Delaware, purportedly on behalf of all persons who purchased limited partnership interests in the Funds between November 10, 1989 and January 5, 1990, against the Funds, the Managing General Partner, the Individual General Partners, the Investment Adviser to the Funds and certain named affiliates of such persons. These actions, alleging that the defendants made material misrepresentations or omitted material information in the offering materials for the Funds concerning the investment purposes of the Funds, were consolidated by the court on March 31, 1992, and a consolidated complaint was filed by the plaintiffs on May 14, 1992. In April 1993, plaintiffs filed an amended complaint, adding claims that certain transactions by the Funds were prohibited by the federal securities laws applicable to the Funds and their affiliates under the Investment Company Act of 1940, as amended. The amended complaint also named the Funds' counsel as a defendant. Defendants moved to dismiss the amended complaint, and, by Opinion and Order dated March 31, 1994, the Court granted in part and denied in part the motions to dismiss. Additionally, by its March 31, 1994 Opinion and Order, the Court certified the case as a class action, and ordered plaintiffs to replead by filing a new complaint reflecting the Court's rulings. On April 15, 1994, plaintiffs served and filed a new complaint, which defendants moved to strike for not conforming to the Court's ruling. On August 3, 1994, the Court granted defendants' motion to strike the new complaint. Plaintiffs thereafter filed a revised second amended complaint dated September 26, 1994. Factual discovery in this litigation has concluded, although plaintiffs have made application to the Court for permission to conduct additional fact discovery. The parties have conducted expert discovery, the conclusion of which is subject to the Courts' decision on a pending matter. The defendants in this action believe that the remaining claims are without merit, although whether or not the plaintiffs prevail, the Funds may be obligated to indemnify and advance litigation expenses to certain of the defendants under the terms and conditions of various indemnity provisions in the Funds' Partnership Agreements and separate indemnification agreements, and the amount of such indemnification and expenses could be material. Fund II has advanced amounts to the indemnified parties based upon amounts which are deemed reimbursable in accordance with the indemnification provisions and has included these amounts in Legal and Professional Fees. In the opinion of legal counsel, the outcome of this case is not determinable at this time.
On August 9, 1994, the same two Limited Partners as noted in the preceding paragraph commenced another putative class action in the US District Court for the District of Delaware, purportedly on behalf of all persons who owned limited partnership interests in the Funds on November 4, 1993, against the Funds, the Managing General Partners, the Individual General Partners, the Investment Adviser to the Funds and certain named affiliates of such persons. Plaintiffs allege that the defendants violated certain provisions of the Investment Company Act of 1940 and the common law in connection with the sale by certain of the defendants of shares of common stock of Snapple Beverage Corp. in a November 1993 secondary offering and seek actual and punitive damages and an accounting in connection therewith. Defendants' motion to dismiss this complaint was denied on December 29, 1995. On August 4, 1995, while defendants' motion to dismiss the original complaint was pending, plaintiffs filed an amended complaint alleging additional violations of the Investment Company Act of 1940 and common law arising out of the secondary offering. The plaintiffs moved for summary judgment on certain of these claims. On October 13, 1995, the defendants in this litigation each filed briefs in opposition to plaintiffs motion and moved to dismiss the amended complaint. By an Opinion dated March 30, 1996, the Court denied plaintiffs' motion for partial summary judgment. By order of the same date, and without opposition by defendants, the Court certified the case as a class action. Defendants also filed separate motions to dismiss, which the Court denied by an order dated June 30, 1996. The parties are now engaged in discovery. Whether or not the plaintiffs prevail, the Funds may be obligated to indemnify and advance litigation expenses to certain of the defendants under the terms and conditions of various indemnity provisions in the Funds' Partnership Agreements and separate indemnification agreements. In the opinion of legal counsel, the outcome of this case is not determinable at this time.
On November 27, 1995, one Limited Partner from Fund II and one Limited Partner from the Retirement Fund filed a putative class action in the United States District Court for the District of Delaware, purportedly on behalf of all persons or entities who owned Units in the Funds between April 5, 1991 and November 27, 1995, against the Funds, the Managing General Partner, the Individual General Partners, the Investment Adviser to the Funds, and certain named affiliates of such persons. The complaint contends that the Funds improperly advanced legal fees and litigation costs to the defendants in connection with three previously filed lawsuits. The plaintiffs are seeking an accounting, rescissory or actual damages, punitive damages, plaintiffs' litigation costs and attorneys fees, pre-judgment and post-judgment interest, and an injunction barring the defendants from further indemnifying themselves. The defendants in this action believe that the claims are without merit and have moved to dismiss the case. On December 18, 1996, the Court denied the defendants' motion to dismiss. Although the defendants believe the advancement of legal fees and litigation costs was properly made pursuant to indemnification agreements signed by the defendants, in the opinion of legal counsel, the outcome of this case is not determinable at this time.
12. Income Taxes (Statement of Financial Accounting Standards No. 109)
No provision for income taxes has been made because all income and losses are allocated to Fund II's partners for inclusion in their respective tax returns.
Pursuant to the Statement of Financial Accounting Standards No. 109 Accounting for Income Taxes, Fund II is required to disclose any difference in the tax basis of Fund II's assets and liabilities versus the amounts reported in the financial statements. As of December 31, 1997, the tax basis of Fund II's assets are greater than the amounts reported in the financial statements by $49.9 million. This difference is attributable to net unrealized depreciation on investments which has not been recognized for tax purposes.
13. Subsequent Events
On February 2, 1998, the Individual General Partners approved the fourth quarter 1997 cash distribution which represents net investment income of $372,822 from Mezzanine Investments, net investment income of $22,982 from Temporary Investments and Net Distributable Capital proceeds from the sale of Stanley Furniture of $87,067 (which includes a return of capital of $44,106). The total amount distributed to Limited Partners was $370,314 or $1.67 per Unit, which was paid on February 13, 1998. The Managing General Partner received a total of $2,764 with respect to its interest in Fund II and $112,010 in MGP Distributions. Thomas H. Lee, as an Individual General Partner, received $84 with respect to his interest in Fund II.
Additionally, on February 2, 1998, the Independent General Partners approved a cash distribution to Limited Partners consisting of a repayment by the Managing General Partner of $328,183 representing an overpayment of an MGP distribution with respect to a transaction effected during the quarter ending December 31, 1995, and to pay Fund II Limited Partners interest on such amount. This distribution totaling $1.67 per Unit was distributed on Febuary 13, 1998, to Limited Partners of record at December 31, 1997.
On January 6, 1998, Fund II sold its remaining holdings of common stock in Stanley Furniture Company, Inc. The common stock was sold pursuant to a Form S-3 Registration Statement, which was filed by Stanley on December 22, 1997 and declared effective by the Securities and Exchange Commission on December 23, 1997. In connection with the sale, Fund II sold its remaining 3,461 shares of common stock and received net proceeds of $93,447 or $27 per share.
On February 28, 1998, First Alert and Sunbeam Corporation ("Sunbeam") executed a definitive merger agreement whereby Sunbeam will acquire all of the outstanding shares of First Alert Common Stock for approximately $175 million ($5.25 per share) by means of a tender offer (the "Tender Offer"), and assume all of the debt of First Alert. Pursuant to the Tender Offer, which was executed on March 6, 1998, Fund II tendered all of its shares of First Alert Common Stock and expects to receive proceeds of approximately $10.8 million. The per Unit amount to be distributed to Fund II's Limited Partners from this transaction is not determinable at this time. Any distribution of these net Distributable Capital Proceeds after the payment of expenses and the establishment of reserves, as provided for in Fund II's Partnership Agreement, will be distributed to Limited Partners of record as of the date of the expiration of this Tender Offer, which is scheduled to be on April 2, 1998, unless the Tender Offer is extended.
On March 19, 1998 Fund II and Affiliates of the Thomas H. Lee Company sold their remaining holdings in Anchor. Pursuant to this transaction Fund II sold 410,677 shares of Anchor Common Stock for approximately $1.6 Million ($4.00 per share) and recognized a gain of $247,000.
* Restricted Security.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The five General Partners of Fund II are responsible for the management and administration of Fund II and have the same positions and responsibilities with respect to the Retirement Fund. The General Partners of Fund II and the Retirement Fund consist of four Individual General Partners: Vernon R. Alden, Joseph L. Bower, Stanley H. Feldberg (the "Independent General Partners"), Thomas H. Lee and Mezzanine Investments II, L.P., the Managing General Partner. Pursuant to exemptive orders issued by the Securities and Exchange Commission, each Independent General Partner is not an "interested person" of Fund II as such term is defined in the Investment Company Act of 1940.
Individual General Partners
The Individual General Partners provide overall guidance and supervision with respect to the operations of Fund II and perform the various duties imposed on the directors of business development companies by the Investment Company Act of 1940. The Individual General Partners supervise the Managing General Partner and must, with respect to any Mezzanine Investment transactions, either certify that it meets Fund II investment guidelines or specifically approve it as a non-Guideline Investment or Bridge Investment. Fund II's investment and reinvestment period expired in December, 1993, and the only investments now permitted are Follow On Investments in existing portfolio companies. In addition, if a Portfolio Company's performance is in default of a material provision of a lending agreement or has a ratio of operating cash flow to current cash fixed charges for its four most recent fiscal quarters of less than or equal to 1.1 to 1, the Independent General Partners are required to approve any changes in the terms of or sale of such Portfolio Company.
Messrs. Alden, Bower, Feldberg and Lee have served as Individual General Partners of Fund II and the Retirement Fund since 1989. Each Individual General Partner shall hold office until his removal or withdrawal pursuant to the provisions of Fund II's Partnership Agreement.
Mr. Alden, age 75, Individual General Partner of Fund II, ML-Lee Acquisition Fund, L.P. ("Lee I") and the Retirement Fund; and together with the Fund II, the "New Funds"; and together with Lee I, the "Funds"). Director of Digital Equipment Corporation, Intermet Corporation and Sonesta International Hotels Corporation. Chairman of the Japan Society of Boston, Trustee Emeritus of the Boston Symphony Orchestra and the Boston Museum of Science and Honorary Consul General of the Royal Kingdom of Thailand.
Mr. Bower, age 59, Individual General Partner of the Funds. Donald Kirk David Professor of Business Administration. Harvard University Graduate School of Business Administration. Faculty member since 1963. Director of Anika Research, Inc., Brown Group, Inc., New America High Income Fund, Sonesta International Hotels Corporation and The Lincoln Foundation. Trustee of the DeCordova & Dana Museum and Park and the New England Conservatory of Music.
Mr. Feldberg, age 73, Individual General Partner of the Funds. Director of Waban Inc. Trustee of Brandeis University.
Mr. Lee, age 54, Individual General Partner of the Funds. Chairman of the Investment Adviser of the Funds since 1987; Chairman of the Administrative General Partner of the Investment Adviser to the new Funds since 1989; Chairman of the Administrative General Partner of Thomas H. Lee Equity Partners L.P. since 1989. Chairman of the Administrative General Partner of Thomas H. Lee Equity Fund III, L.P. since 1996. Founder of the Thomas H. Lee Company (the "Lee Company") and its President since 1974. Director of Autotote Corporation, Finlay Enterprises Inc., First Security Services Corporation, First Security Services Corporation, Signature Brands USA, Livent, Inc., Miller Import Corporation Playtex Products, Inc., Sondik Supply Corporation and Vail Resorts, Inc. Trustee of Brandeis University (Vice Chairman), Museum of Fine Arts (Boston), the Wang Center for the Performing Arts, Boston's Beth Israel Hospital (Treasurer), NYU Medical Center and the Whitney Museum of American Art. Overseer of Boston Symphony Orchestra and New England Conservatory of Music, Member of the Dean's Council, Faculty of Arts and Sciences and an Executive Committee Member of the Committee on University and an Executive Committee Member of the Committee on University Resources at Harvard University; Member of the Corporation of Belmont Hill School.
The Investment Adviser
The Investment Adviser, pursuant to an investment management agreement among the Investment Adviser, the Thomas H. Lee Company and Fund II dated November 10, 1989, is responsible for the identification, management and liquidation of Mezzanine Investments and Bridge Investments for the Retirement Fund. The Investment Adviser received an Investment Advisory Fee in compensation for these services outlined in Note 7 to the Financial Statements.
Certain officers of the Lee Company have been designated as trustees and executive officers of T. H. Lee Mezzanine II, the administrative general partner of the Investment Adviser.
Title
Thomas H. Lee Chairman, Trustee
John W. Childs President, Trustee
Thomas R. Shepherd Executive Vice President
David V. Harkins Senior Vice President, Trustee
C. Hunter Boll Vice President
Scott A. Schoen Vice President
Wendy L. Masler Treasurer, Clerk
Information concerning Mr. Lee is set forth above.
John W. Childs, age 56, is the founder of J.W. Childs Associates, L.P. Mr. Childs, was Managing Director of the Thomas H. Lee Company ("Lee Company"), from 1987 to 1995. Mr. Childs also serves as President and Trustee of Thomas H. Lee Advisors I ("Advisors I"), the investment advisor to Fund I.
Mr. Shepherd, age 68, is a Managing Director of the Thomas H. Lee Company since 1986. Mr. Shepherd is currently a director of General Nutrition Companies, Inc., Signature Brands USA Inc. and Rayovac Corporation. He is Executive Vice President of Thomas H. Lee Advisors I and T.H. Lee Mezzanine II.
Mr. Harkins, age 57, has been a Managing Director of the Lee Company since 1986 and the Chairman of National Dentex Corporation since 1983. Mr. Harkins is a Senior Vice President and Trustee of Advisors I. He also is a director of National Dentex Corporation, Stanley Furniture Corp. and First Alert, Inc.
Mr. Boll, age 42, has served as a Managing Director of the Lee Company since 1991. From 1986 to 1991 he served as a Vice President of the Lee Company.
Mr. Schoen, age 39, has served as a Managing Director of the Lee Company since 1991. From 1986 to 1990 he served as a Vice President of the Lee Company. Mr. Schoen is a Vice President of Advisors I. Mr. Schoen is also a Director of First Alert, Inc., Signature Brands USA Inc. Rayovac Corporation, Syratech Corporation and Anchor Advanced Products, Inc.
Ms. Masler, age 44, has been Treasurer of the Lee Company since 1984. Ms. Masler is also Treasurer and Clerk of Advisors I.
The Managing General Partner
The Managing General Partner is a limited partnership in which ML Mezzanine II Inc. is the sole general partner and the Investment Adviser is the limited partner. The Managing General Partner is responsible for the supervision of the Retirement Fund's investments.
The executive officers of ML Mezzanine II Inc. are as follows:
Title
Kevin K. Albert Chairman and President
Robert Aufenanger Executive Vice President, Director
James V. Caruso Executive Vice President, Director
Rosalie Y. Goldberg Vice President, Director
Audrey L. Bommer Vice President, Treasurer
Roger F. Castoral, Jr. Vice President, Assistant Treasurer
Kevin Albert, age 45, a Vice President and a Managing Director of Merrill Lynch Investment Banking Group ("ML Investment Banking") joined Merrill Lynch in 1981. Mr. Albert works in the Equity Private Placement Group and is involved in structuring and placing a diversified array of private equity financings including common stock, preferred stock, limited partnership interests and other equity-related securities. Mr. Albert is also a director ML Media Management Inc. ("ML Media"), an affiliate of the managing general partner and a joint venturer of Media Managemnt Partners, the general partner of ML Media Partners, L.P.; a director of ML Film Entertainment Inc. ("ML Film"), an affiliate of the managing general partner of the general partner of ML Delphi Premier Partners, L.P.; a director of ML Opportunity Management Inc. ("ML Opportunity"), a joint venturer in Media Opportunity Management Partners, the general partner of ML Media Opportunity Partners, L.P.; a director of ML Mezzanine Inc. ("ML Mezzanine"), a director of Merrill Lynch Venture Capital Inc. ("ML Venture"), an affiliate of the managing general partner and general partner of the managing general partner of ML Venture Partners I, L.P. ("Venture I"), ML Venture Partners II, L.P. ("Venture II"), and ML Oklahoma Venture Partners Limited Partnership; a director of Merrill Lynch R&D Management Inc. ("ML R&D"), the general partner of the general partner of ML Technology Ventures, L.P. Mr. Albert also serves as an independent general partner of Venture I and Venture II.
Robert Aufenanger, age 44, a Vice President of Merrill Lynch & Co. Corporate Credit and a Director of the Partnership Management Department, joined Merrill Lynch in 1980. Mr. Aufenanger is responsible for the ongoing management of the operations of the equipment, real estate and project related limited partnerships for which subsidiaries of ML Leasing Equipment Corp., and Merrill Lynch, Hubbard Inc., affiliates of Merrill Lynch, are general partners. Mr. Aufenanger is also a director of ML Opportunity Management Inc., MLH Real Estate Inc., ML Film, ML Venture, ML R&D, ML Mezzanine, and ML Media.
James V. Caruso, age 46, a Director in the Investment Banking Group of Merrill Lynch & Co joined Merrill Lynch in 1975. Since June 1992, Mr. Caruso has served as Manager of Merrill Lynch's Partnership Analysis & Finance Department, which is responsible for accounting and the ongoing administration and operations of more than 150 investment limited partnerships as well as the Merrill Lynch affiliated entities that manage or administer such partnerships. He serves as a director of ML Mezzanine, and KECALP Inc., an affiliate of the MGP and general partner.
Rosalie Y. Goldberg, age 60, serves as Vice President of Merrill Lynch Private Client, Manager of the Special Investments Group, Vice President and Director of ML Mezzanine Inc. and Director of MLL Antiquities and MLL Collectibles. Ms. Goldberg joined Merrill Lynch & Co. in 1975.
Audrey L. Bommer, age 31, serves as Vice President in the Investment Banking Group of ML & Co. and joined the firm in 1994. She serves as Vice President and Treasurer of ML Mezzanine Inc. and ML Mezzanine II, Inc. Ms. Bommer manages all accounting, financial reporting and administrative functions in the Merrill Lynch Partnership Analysis and Finance Department.
Roger F. Castoral, Jr., age 30, joined Merrill Lynch Investment Banking in 1995 and serves as Vice President, Assistant Treasurer and controller to the funds. Mr. Castoral is responsible for financial reporting and fund accounting in the Merrill Lynch Partnership Analysis and Finance Department and serves as Vice President and Assistant Treasurer of ML-Mezzanine.
The Fund Administrator
ML Fund Administrators Inc., a Delaware corporation and a subsidiary of Merrill Lynch & Co., Inc., is responsible for the provision of administrative services necessary for the operation of the Funds. The Fund Administrator receives Fund Administration Fees as compensation for these services as outlined in Note 8 to the Financial Statements.
The Fund Administrator is responsible for the day-to-day administrative affairs of the Funds and for the management of the accounts of Limited Partners. The Fund Administrator also provides the Funds, at the Fund Administrator's expense, with office space, facilities, equipment and personnel necessary to carry out its obligations under the Administrative Services Agreement.
Item 11.
Item 11. Executive Compensation
The information with respect to compensation of the Individual General Partners set forth under the caption "Management Arrangements - the Individual General Partners" in the Prospectus pages 73 - 74 is incorporated herein by reference. Fund II paid Independent General Partners, Mr. Alden, Mr. Bower and Mr. Feldberg $78,684 collectively for their services as Independent General Partners in 1997.
The information with respect to the allocation and distribution of Fund II's profits and losses to the Managing General Partner set forth under the caption "Distributions and Allocations - Allocations of Profits and Losses" in the Prospectus pages 86 - 87 is incorporated herein by reference. The Managing General Partner received distributions of $3,490,271 during 1997, including MGP Distributions of $3,437,271 that it distributed, $3,265,407 to the Investment Adviser and $171,864 to ML Mezzanine II Inc.
The information with respect to the Investment Advisory Fee payable to the Investment Adviser (and distributions from the Managing General Partner) set forth under the caption "Management Arrangements - Description of the Advisory Agreement" in the Prospectus pages 74 - 75 is incorporated herein by reference. Pursuant to the Investment Advisory Agreement, Fund II paid the Investment Adviser $759,160 with respect to 1997.
The information with respect to the Fund Administration Fees and Expenses payable to the Fund Administrator set forth under the caption "Management Arrangements - The Fund Administrator" in the Prospectus pages 72 - 73 is incorporated herein by reference. Pursuant to the Administrative Services Agreement, Fund II paid the Fund Administrator a total of $743,298 in 1997.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Fund II is aware of the following persons who are beneficial owners of more than five percent of its Units of limited partnership interest, based upon Axhedules 13D and 13G filed with the Securities and Exchange Commission and a review of Fund II's records.
Amount of Percent of Units of the Name and Address Benificial Fund Beneficially Owned of Beneficial Owner Ownership at January 1, 1998 - ------------------- ---------- ------------------------
Yale University 20,954 9.4% Investment Office 230 Prospect Street New Haven, CT 06511
Farallon Capital Partners, L.P. 21,341(1) 10.0% Farallon Capital Managment, Inc. One Maritime Plaza, Suite 1325 San Francisco, CA 94111
Tinicum Partners, L.P. 21,341(1) 10.0% Farallon Capital Managment, Inc. One Maritime Plaza, Suite 1325 San Francisco, CA 94111
Thomas F. Steyer 21,341(1) 10.0% Farallon Capital Managment, Inc. One Maritime Plaza, Suite 1325 San Francisco, CA 94111
Fleur E. Fairman 21,341(1) 10.0% Farallon Capital Managment, Inc. One Maritime Plaza, Suite 1325 San Francisco, CA 94111
David I. Cohen 21,341(1) 10.0% Farallon Capital Managment, Inc. One Maritime Plaza, Suite 1325 San Francisco, CA 94111
Joseph F. Downes 21,341(1) 10.0% Farallon Capital Managment, Inc. One Maritime Plaza, Suite 1325 San Francisco, CA 94111
Jason M. Fish 21,341(1) 10.0% Farallon Capital Managment, Inc. One Maritime Plaza, Suite 1325 San Francisco, CA 94111
William F. Mellin 21,341(1) 10.0% Farallon Capital Managment, Inc. One Maritime Plaza, Suite 1325 San Francisco, CA 94111
Meridee A. Moore 21,341(1) 10.0% Farallon Capital Managment, Inc. One Maritime Plaza, Suite 1325 San Francisco, CA 94111
Eric M. Ruttenberg 21,341(1) 10.0% Farallon Capital Managment, Inc. One Maritime Plaza, Suite 1325 San Francisco, CA 94111
(1) By reason of Rule 13d-5 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), Farallon Capital Partners, L.P., a California limited partnership ("FCP"), and Tinicum Partners, L.P., a New York limited partnership ("Tinicum"), each may be deemed to own 21,341 Units of limited partnership interest beneficially owned at January 1, 1998 as a result of the direct ownership by FCP of 16,722 such Units and as a result of the direct ownerhip by Tinicum of 4,619 such Units. FCP and Tinicum, however, consider their beneficial interest to be limited to their direct ownership. In addition, by reason of Rule 13d-3 under the Exchange Act, each of the general partners of FCP and RTinicum, Thomas F. ASteyer, Fleur E. Fairman, David I. Cohen,, Joseph F. Downes, Jason M. Fish, William F. Mellin, Meridee A. Moore and Eric M. Ruttenberg, may be deemed to own beneficailly the Units of limited partnship interst by FCP and Tinicum.
Amount of Name of Beneficial Percent of Units Beneficial Owner Ownership of Class - ---------------------------------------------------------------------
Vernon R. Alden 50 Units * Jospeh L. Bower None * Stanley H. Feldberg 25 Units * Thomas H. Lee None *
General Partnes and Officers as a Group
* Less than one percent.
There exists no arrangement known to Fund II, the execution of which may at a subsequent date, result in a change of control of Fund II.
Item 13.
Item 13. Certain Relationships and Related Transactions
Fund II's investments generally are made as co-investments with the Retirement Fund's. In addition, certain of the Mezzanine Investments and Bridge Investments which were made by Fund II may involve co-investments with entities affiliated with the Investment Adviser. Such co-investments are generally prohibited absent exemptive relief from the Securities and Exchange Commission (the "Commission"). As a result of these affiliations and Fund II's expectation of engaging in such co-investments, Fund II together with the Retirement Fund and Fund I, sought an exemptive order from the Commission allowing such co-investments, which was received on September 1, 1989. Fund II's co-investments in Managed Companies, and in certain cases its co-investments in Non-Managed Companies, typically involve the entry by the Funds and other equity security holders into stockholders' agreements. While the provisions of such stockholders' agreements vary, such agreements may include provisions as to corporate governance, registration rights, rights of first offer or first refusal, rights to participate in sales of securities to third parties, rights of majority stockholders to compel minority stockholders to participate in sales of securities to third parties, transfer restrictions, and preemptive rights.
Thomas H. Lee Company, a sole proprietorship owned by Thomas H. Lee, an Individual General Partner of Fund II and an affiliate of the Investment Adviser, typically performs certain management services for Managed Companies and receives management fees in connection therewith usually pursuant to written agreements with such companies. Of the total of eight Managed Companies held by the Funds at December 31, 1997, 5 paid management fees to Thomas H. Lee Company ranging from $110,000 to $180,000 for the fiscal year ended December 31, 1997. In addition, certain of the Managed Companies may have contractual or other relationships pursuant to which they do business with one another.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") is an affiliate of the Managing General Partner. MLPF&S and certain of its affiliates, in the ordinary course of their business, perform various financial services for various portfolio companies of the Funds, which may include investment banking services, broker/dealer services and economic forecasting, and pension plan services and receives in consideration therewith various fees, commissions and reimbursements. The aggregate revenue received by MLPF&S and its affiliates during 1997 for providing such services to Managed Companies in which the Funds have a material interest was not in excess of $100,000. Furthermore, MLPF&S and its affiliates or investment companies advised by affiliates of MLPF&S may, from time to time, purchase or sell securities issued by portfolio companies of the Funds in connection with their ordinary investment operations.
During 1997, Fund II paid Managing General Partner distributions totaling $3,490,271 (which included $3,437,271 of MGP Distributions and $53,000 with respect to its interest in Fund II). Of this MGP Distribution amount, 95% or $3,265,407 was paid to the Investment Adviser and the remaining 5% totalling $171,864 was paid to ML Mezzanine II Inc. The Managing General Partner has earned a total of $24.9 million in MGP Distributions none of which was deferred in payment to the Managing General Partner at December 31, 1997, as a Deferred Distribution Amount in accordance with the Partnership Agreement. Any Deferred Distribution Amount is distributable to the Partners pro-rata in accordance with their capital contributions, and certain amounts otherwise later payable to Limited Partners from distributable cash from operations will instead be payable to the Managing General Partner until the Deferred Distribution Amount is paid in full.
Anchor Products
On March 19, 1998 Fund II and Affiliates of the Thomas H. Lee Company sold their remaining holdings in Anchor. Pursuant to this transaction Fund II sold 410,677 shares of Anchor Common Stock for approximately $1.6 Million ($4.00 per share) and recognized a gain of $247,000.
On April 2, 1997, Anchor completed a recapitalization pursuant to which Anchor issued $100,000,000 aggregate principal amount of Senior Notes due 2004 and entered into a new credit facility (the "Recapitalization"). As part of the Recapitalization, Anchor repaid substantially all of its outstanding debt, including all accrued interest and any premiums in connection therewith. As a result, Anchor repaid the Senior Subordinated Note and Junior Subordinated Note held by Fund II, together with all accrued interest and prepayment premiums for an aggregate of $14.5 million.
Immediately prior to the Recapitalization, Fund II owned 162,967 shares of the common stock of Anchor Holdings, Inc., the parent of Anchor. Immediately after the consummation of the Recapitalization, Fund II exercised its warrants to purchase common stock (at an exercise price of $9.50 per share) and acquired an additional 247,710 shares of common stock, bringing its total holdings of common stock to 410,677 shares. In connection with the Recapitalization, Holdings paid a dividend to all holders of Holdings common stock of record as of April 2, 1997, in the amount of $19.02 per share (the "Anchor Dividend"). As a result of such dividend, the Fund received $7.8 million, of which approximately 32% or $2.5 million was returned to partners as return of capital.
First Alert
On February 28, 1998, First Alert and Sunbeam Corporation ("Sunbeam") executed a definitive merger agreement whereby Sunbeam will acquire all of the outstanding shares of First Alert Common Stock for approximately $175 million ($5.25 per share) by means of a tender offer (the "Tender Offer"), and assume all of the debt of First Alert. Pursuant to the Tender Offer, which was executed on March 6, 1998, Fund II tendered all of its shares of First Alert Common Stock and expects to receive proceeds of approximately $10.8 million. The per Unit amount to be distributed to Fund II's Limited Partners from this transaction is not determinable at this time. Any distribution of these net Distributable Capital Proceeds after the payment of expenses and the establishment of reserves, as provided for in Fund II's Partnership Agreement, will be distributed to Limited Partners of record as of the date of the expiration of this Tender Offer, which is scheduled to be on April 2, 1998, unless the Tender Offer is extended.
As of December 31, 1997, Fund II, the Retirement Fund, and the Lee Affiliates hold 2,058,474, 2,281,524 and 10,081,808 shares, respectively, of First Alert common stock, representing 8.1%, 8.9% and 39.5%, respectively, of its common equity.
David V. Harkins, Scott A. Schoen and Anthony J. DiNovi, officers of the Investment Adviser to the Funds, serve as directors of First Alert.
Playtex Products, Inc.
As of December 31, 1997, Fund II, the Retirement Fund, Fund I and the Lee Affiliates hold 343,726, 183,560, 1,406,204 and 2,249,307 shares of Playtex Products common stock, respectively. Fund II, the Retirement Fund, Fund I and the Lee Affiliates own, respectively, .6%, .3%, 2.6% and 4.2% of the common equity of Playtex.
Thomas H. Lee, who is an Individual General Partner of the Funds and an officer of the Investment Adviser, serves as a director of Playtex.
Stanley Furniture
On January 6, 1998 Fund II and affiliates of the Thomas H Lee Company including Retirement Fund and Fund I, (the "Lee Affiliates", and together with the Fund, the ("Selling Stockholders") sold their remaining holdings of common stock in Stanley Furniture. The common stock of each of the Selling Stockholders was sold pursuant to a Form S-3 Registration Statement, which was filed by Stanley on December 22, 1997 and declared effective by the Securities and Exchange Commission on December 23, 1997. In connection with the sale, Fund II sold its remaining 3,461 shares of common stock and received net proceeds of $93,447 or $27 per share.
During February 1997, Fund II sold 272 shares of Stanley Furniture for $24 per share and received total proceeds of $6,528 and recognized a gain of $3,105. On June 30, 1997, Fund II entered into a stock purchase agreement with Stanley Furniture whereby Fund II sold 6,281 shares of Stanley Furniture for $20 per share. Fund II received total proceeds of $125,620 and recognized a gain of $46,582. On November 18, 1997, Fund II sold 3,460 shares of Stanley Furniture for $25 per share. Fund II received total proceeds of $86,500 and recognized a gain of $42,961.
As of December 31, 1997, Fund II, the Retirement Fund, Fund I and the Lee Affiliates held 3,461, 2,773, 400,719 and 6,248 shares, respectively, of Stanley Furniture representing .3%, .3%, 16% and .4, respectively, of its common equity.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits
Exhibits
3.1 Amended and Restated Certificate Incorporated by reference of Limited Partnership, dated as to Exhibit 3.1 to of August 25, 1989 registrant's Registration Statement on Form N-2 number 33-25816.
3.2 Amended and Restated Agreement of Incorporated by reference Limited Partnership, dated to Exhibit 3.2. to November 10, 1989 Amendment No. 1, registrant's Annual Report dated January 30, 1990. of Form 10-K for the year ending December 31, 1989.
10.1 Investment Advisory Agreement, Incorporated by reference dated November 10, 1989 by and to Exhibit 10.1 to between Registrant, Thomas H. Lee registrant's Annual Report Advisors II, L.P. and Thomas H. of Form 10-K for the year Lee Company. ended December 31, 1991.
10.2 Custodian Agreement, dated Incorporated by reference November 10, 1989, by and between to Exhibit 10.2 to Registrant and State Street Bank registrant's Annual Report and Trust Company. of Form 10-K for the year ended December 31, 1991.
10.3 Administrative Services Agreement, Incorporated by reference dated November 10, 1989 by and to Exhibit 10.3 to between Registrant and ML Fund registrant's Annual Report Administrators Inc. of Form 10-K for the year ended December 31, 1991.
27 Financial Data Schedule for the Filed Herewith. year ended December 31, 1996
28 Pages 21-91 of the Prospectus Incorporated by reference dated September 6,1989, filed to Exhibit 28 to pursuant to Rule 497(b) under the registrant's Annual Report Securities Act of 1933. of Form 10-K for the year ended December 31, 1991.
(b) Forms 8-K None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 30th day of March, 1998.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
By: Mezzanine Investments II, L.P. Managing General Partner
By: ML Mezzanine II Inc., its General Partner
/s/ Kevin K. Albert Dated: March 30, 1998 Kevin K. Albert President, ML Mezzanine II Inc., General Partner of Mezzanine Investments II, L.P., the Managing General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on the 30th day of March, 1998.
Signature Title
/s/ Kevin K. Albert ML Mezzanine II Inc. Kevin K. Albert President and Director (Principal Executive Officer of Registrant)
/s/ Vernon R. Alden Individual General Partner Vernon R. Alden ML-Lee Acquisition Fund (Retirement Accounts) II, L.P.
/s/ Audrey Bommer ML Mezzanine II Inc. Audrey Bommer Vice President and Treasurer (Principal Financial Officer of Registrant)
/s/ Joseph L. Bower Individual General Partner Joseph L. Bower ML-Lee Acquisition Fund (Retirement Accounts) II, L.P.
/s/ Roger F. Castoral, Jr. ML Mezzanine II Inc. Roger F. Castoral, Jr. Vice President and Assistant Treasurer (Principal Accounting Officer of Registrant)
/s/ Stanley H. Feldberg Individual General Partner Stanley H. Feldberg ML-Lee Acquisition Fund (Retirement Accounts) II, L.P.
/s/ Thomas H. Lee Individual General Partner Thomas H. Lee ML-Lee Acquisition Fund (Retirement Accounts) II, L.P.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
By: Mezzanine Investments II, L.P. Managing General Partner
By: ML Mezzanine II Inc., its General Partner
Dated: March 30, 1998 Kevin K. Albert President, ML Mezzanine II Inc., General Partner of Mezzanine Investments II, L.P., the Managing General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on the 30th day of March, 1998.
Signature Title
_____________________ ML Mezzanine II, Inc. Kevin K. Albert President and Director (Principal Executive Officer of Registrant)
_____________________ Individual General Partner Vernon R. Alden ML-Lee Acquisition Fund (Retirement Accounts) II, L.P.
_____________________ ML Mezzanine II Inc. Audrey Bommer Vice President and Treasurer (Principal Financial Officer of Registrant)
______________________ Individual General Partner Joseph L. Bower ML-Lee Acquisition Fund (Retirement Accounts) II, L.P.
_____________________ ML Mezzanine II Inc. Roger F. Castoral, Jr. Vice President and Assistant Treasurer (Principal Accounting Officer of Registrant)
_____________________ Individual General Partner Stanley H. Feldberg ML-Lee Acquisition Fund (Retirement Accounts) II, L.P.
_____________________ Individual General Partner Thomas H. Lee ML-Lee Acquisition Fund (Retirement Accounts) II, L.P.