<PAGE>
PROXY
ML-LEE ACQUISITION FUND, L.P.
World Financial Center - South Tower
New York, New York 10080
This Proxy is solicited on behalf of the Individual General Partners
The undersigned hereby appoints THOMAS H. LEE and JOSEPH L. BOWER and each of
them as Proxies, each with the power to appoint his substitute, and hereby
authorizes each of them to represent and to vote, as designated herein, all
units of limited partnership interest ("Units") of the ML-Lee Acquisition Fund,
L.P. (the "Fund") held of record by the undersigned on April 15, 1997 at the
Annual Meeting of the Limited Partners of the Fund to be held on June 13, 1997
or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED LIMITED PARTNER. IF THIS PROXY IS SIGNED AND RETURNED WITHOUT
SPECIFIC DIRECTION, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2 AND 3.
(Continued and to be signed on the reverse side)
<PAGE>
<TABLE>
<CAPTION>
1. ELECTION OF INDIVIDUAL
GENERAL PARTNERS NOMINEES: Vernon R. Alden, Joseph L. Bower, Stanley H. Feldberg, Thomas H. Lee
/ / FOR ALL / / WITHHOLD ALL To withhold authority to vote for one or more individual nominees write the
name or names on this line _________________________________________
NOMINEE: Mezzanine Investments, L.P.
<S> <C> <C> <C> <C>
2. ELECTION OF MANAGING
GENERAL PARTNER
/ / FOR / / WITHHOLD
FOR AGAINST ABSTAIN
3. Proposal to ratify the 4. In the discretion of such proxies, upon such
selection of Price Waterhouse other business as may properly come before
LLP as independent accountants the meeting or any adjournment hereof.
of the Fund for its fiscal year
ending December 31, 1997.
/ / / / / /
</TABLE>
/ / PLEASE CHECK HERE if you plan to attend the Annual Meeting.
Please sign exactly as name appears
hereon. When Units are held by joint
tenants, both should sign. When signing
as attorney, or as executor,
administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign in full
corporate name by president or other
authorized officer. If a partnership,
please sign in partnership name by
authorized person.
Signature(s) _________________________
Date ______________
Signature(s)____________________________
_
Date _______________
/ /
YOUR VOTE IS IMPORTANT. Please complete, sign and return this card as soon as
possible. Mark each vote with an X in the box.
<PAGE>
ML-LEE ACQUISITION FUND, L.P.
NOTICE OF 1997 ANNUAL MEETING
OF LIMITED PARTNERS
JUNE 11, 1997
To the Limited Partners of
ML-LEE ACQUISITION FUND, L.P.
Notice is hereby given that the 1997 Annual Meeting of Limited Partners (the
"Meeting") of ML-Lee Acquisition Fund, L.P. (the "Fund") will be held at the
offices of Hutchins, Wheeler & Dittmar, 101 Federal Street, 31st Floor, Boston,
Massachusetts 02110, on June 11, 1997, at 10:00 A.M. for the following purposes:
1. To elect four Individual General Partners to serve for the ensuing year;
2. To elect one Managing General Partner to serve for the ensuing year;
3. To consider and act upon the proposal to ratify the selection of Price
Waterhouse LLP as independent accountants of the Fund for its fiscal year ending
December 31, 1997; and
4. To transact such other business as may properly come before the meeting or
any adjournment thereof.
The Individual General Partners of the Fund have fixed the close of business
on April 14, 1997 as the record date for the determination of Limited Partners
entitled to notice of and to vote at the Meeting or any adjournment thereof.
A complete list of the Limited Partners of the Fund entitled to vote at the
Meeting will be available and open to the examination of any Limited Partner of
the Fund for any purpose germane to the Meeting during ordinary business hours
from and after April 14, 1997, at the office of the Fund, World Financial
Center, South Tower, New York, New York 10080.
<PAGE>
You are cordially invited to attend the Meeting. All Limited Partners, even
those planning to attend the Meeting, are urged to complete, date and sign the
enclosed form of proxy and return it promptly in the envelope provided for that
purpose. Since mail delays may occur, it is important that the proxy be returned
well in advance of the meeting. If you decide to attend the Meeting and wish to
vote personally, you may revoke your proxy at any time before it is exercised.
The enclosed proxy is being solicited by the Individual General Partners of the
Fund.
By Order of the
Individual
General Partners
THOMAS H. LEE
Individual General Partner
Boston, Massachusetts
Dated: April 30, 1997
LIMITED PARTNERS ARE URGED TO VOTE, SIGN AND DATE
THE ENCLOSED FORM OF PROXY AND TO RETURN IT IN THE
ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF
MAILED IN THE UNITED STATES.
<PAGE>
PROXY STATEMENT
ML-LEE ACQUISITION FUND, L.P.
WORLD FINANCIAL CENTER
SOUTH TOWER
NEW YORK, NEW YORK 10080
1997 ANNUAL MEETING OF LIMITED PARTNERS
JUNE 11, 1997
INTRODUCTION
ML-Lee Acquisition Fund, L.P. (the "Fund") is a limited partnership organized
under the Delaware Revised Uniform Limited Partnership Act. The Fund, a business
development company under the Investment Company Act of 1940, commenced
operations on October 19, 1987, following the initial closing of its public
offering. As of April 14, 1997, the Fund had outstanding 487,489 units of
limited partnership interest (the "Units"). The Fund is managed by five General
Partners, consisting of four Individual General Partners and the Managing
General Partner, described below. In accordance with the terms of its Amended
and Restated Agreement of Limited Partnership, as amended (the "Partnership
Agreement"), the Fund is required to hold annual meetings of the Limited
Partners of the Fund to approve certain Fund matters, including the election of
Individual General Partners, the election of the Managing General Partner and
the ratification of the selection of the independent public accountants for the
Fund.
This Proxy Statement is furnished in connection with the solicitation of
proxies to be voted at the 1997 Annual Meeting of Limited Partners of the Fund
(the "Meeting"), to be held at the offices of Hutchins, Wheeler & Dittmar, 101
Federal Street, 31st Floor, Boston, Massachusetts 02110, on June 11, 1997, at
10:00 A.M. The enclosed proxy is being solicited on behalf of the Individual
General Partners of the Fund. The approximate mailing date of this Proxy
Statement is April 30, 1997.
All properly executed proxies received prior to the Meeting will be voted at
the Meeting in accordance with the instructions marked thereon or otherwise as
provided therein. Unless instructions to the contrary are marked, proxies will
be voted for the election of four Individual General Partners, for the election
of one Managing General Partner and for the ratification of the selection of
independent accountants. Any proxy may be revoked at any time prior to the
exercise thereof by giving notice to the Fund at its principal office.
The Fund has retained Tritech Services to tabulate the votes in connection
with the matters to be acted upon at the Meeting. Abstentions and broker "no
votes" will be counted as present in determining whether the Meeting's quorum
require-
1
<PAGE>
ment is satisfied. When any matter to be acted upon at the Meeting requires a
favorable vote by the Limited Partners entitled to vote at the Meeting who hold
at least a majority of the Units outstanding, abstentions and broker "no votes"
will be considered a vote "Against" the matter; otherwise, abstentions and
broker "no votes" will have no effect on the outcome, that is, they will not be
considered.
The Individual General Partners have fixed the close of business on April 14,
1997 as the record date for the determination of Limited Partners entitled to
notice of and to vote at the Meeting and at any adjournment thereof. Limited
Partners on the record date will be entitled to one vote for each interest held
in the Fund represented by a $1,000 capital contribution to the Fund (a "Unit").
The following table sets forth as of April 14, 1997 the only persons known to
the management of the Fund who may be deemed to be beneficial owners of more
than five percent of the outstanding Units of limited partnership interest of
the Fund.
<TABLE>
<CAPTION>
PERCENT OF UNITS
OF THE FUND
AMOUNT OF BENEFICIALLY
NAME AND ADDRESS BENEFICIAL OWNED AT
OF BENEFICIAL OWNER OWNERSHIP APRIL 14, 1997
<S> <C> <C>
Yale University 31,537(1) 6.47%
Investment Office
230 Prospect Street
New Haven, CT 06511
Farallon Capital Partners, L.P. 30,200(2) 6.19%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Tinicum Partners, L.P. 30,200(2) 6.19%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Thomas F. Steyer 30,200(2) 6.19%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Fleur E. Fairman 30,200(2) 6.19%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
David I. Cohen 30,200(2) 6.19%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
PERCENT OF UNITS
OF THE FUND
AMOUNT OF BENEFICIALLY
NAME AND ADDRESS BENEFICIAL OWNED AT
OF BENEFICIAL OWNER OWNERSHIP APRIL 14, 1997
Joseph F. Downes 30,200(2) 6.19%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1250
San Francisco, CA 94111
Jason M. Fish 30,200(2) 6.19%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1250
San Francisco, CA 94111
William F. Mellin 30,200(2) 6.19%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1250
San Francisco, CA 94111
Meridee A. Moore 30,200(2) 6.19%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1250
San Francisco, CA 94111
Eric M. Ruttenberg 30,200(2) 6.19%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
</TABLE>
--------
(1) Based upon a statement on Schedule 13G dated February 8, 1995.
(2) 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 30,200 Units of limited
partnership interest constituting approximately 6.19% of the Units of limited
partnership interest, as a result of the direct ownership by FCP of 23,690 of
such Units and as a result of the direct ownership by Tinicum of 6,510 of such
Units. FCP and Tinicum, however, consider their beneficial interests 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 Tinicum, Thomas F.
Steyer, Fleur E. Fairman, David I. Cohen, Joseph F. Downes, Jason M. Fish,
William F. Mellin, Meridee A Moore and Eric M. Ruttenberg, may be deemed to own
beneficially the Units of limited partnership interest owned by FCP and
Tinicum.
3
<PAGE>
The Individual General Partners of the Fund know of no business other than
that mentioned in Items 1 through 3 of the Notice of Meeting which will be
presented for consideration at the Meeting. If any other matter is properly
presented, it is the intention of the persons named in the enclosed proxy to
vote in accordance with their best judgment.
ELECTION OF GENERAL PARTNERS
The five General Partners of the Fund, who are elected annually by the Limited
Partners, are responsible for the management and administration of the Fund. The
General Partners consist of four Individual General Partners and the Managing
General Partner. As required by the Investment Company Act of 1940, a majority
of the General Partners must be individuals who are not "interested persons" of
the Fund as defined in the Investment Company Act of 1940. In 1987, the
Securities and Exchange Commission issued an order declaring that three
Individual General Partners of the Fund (the "Independent General Partners"),
excluding Thomas H. Lee, are not "interested persons" of the Fund as defined in
the Investment Company Act of 1940 solely by reason of their being general
partners of the Fund. Mr. Lee and the Managing General Partner are considered
interested persons, as described below.
The Individual General Partners provide overall guidance and supervision with
respect to the operations of the Fund and perform the various duties imposed on
the directors of business development companies by the Investment Company Act of
1940. The Individual General Partners supervise the Managing General Partner and
must verify that all transactions made in accordance with the Fund's Guidelines
for investments fully comply with the Guidelines and specifically approve each
Qualified Investment that is a non-Guideline investment or a Bridge Investment.
The Fund's investment and reinvestment period expired in 1992 and the only
investments now permitted are Follow-On Investments in existing Portfolio
Companies. In addition, if a Portfolio Company is in default under a material
provision of a lending agreement or has a ratio of operating income to current
fixed charges that is less than or equal to 1.1 to 1, the Individual General
Partners are required to approve any changes in the terms of or dispositions of
the Fund's investment in such Portfolio Company.
The Managing General Partner is responsible for purchasing investments for the
Fund which have been determined by the Independent General Partners to meet the
Fund's investment Guidelines or approved by them notwithstanding the failure to
meet all the Guidelines, for recommending the approval of non-Guideline and
Bridge Investments and modifications of the terms of or dispositions of Fund
investments in a troubled company, for investing and managing Temporary
Investments, for the admission of assignee Limited Partners to the Fund and,
subject to the supervision of the Individual General Partners, for supervising
the Investment Adviser.
4
<PAGE>
INDIVIDUAL GENERAL PARTNERS
At the Meeting, four Individual General Partners will be elected to serve
until the next Annual Meeting of Limited Partners and until their successors are
elected and qualified. In the election of Individual General Partners, the four
candidates receiving the highest number of votes cast shall be so elected. It is
the intention of the persons named in the enclosed proxy to nominate and vote in
favor of the election of the persons listed below.
Each nominee listed below has consented to continue to serve as an Individual
General Partner. The Individual General Partners of the Fund know of no reason
why any of these nominees will be unable to serve, but in the event of any such
unavailability, the proxies received will be voted for such substitute nominees
as the Individual General Partners may recommend.
Certain information concerning the nominees, as of April 14, 1997, is set
forth below.
<TABLE>
<CAPTION>
UNITS OF
INDIVIDUAL THE FUND PRINCIPAL OCCUPATION
GENERAL BENEFICIALLY DURING THE PAST
NAME AND ADDRESS PARTNER OWNED AS OF FIVE YEARS AND
OF NOMINEES AGE SINCE APRIL 14, 1997(1) DIRECTORSHIPS
<S> <C> <C> <C> <C>
Vernon R. Alden(2) 74 1987 -50- Individual General Partner of
420 Boylston Street the Fund, ML-Lee Acquisition
Suite 403 Fund II, L.P. ("Fund II") and
Boston, MA 02116 ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.
(the "Retirement Fund"; and
together with Fund II, the "New
Funds"; and together with the
Fund and Fund II the "Funds").
Director of Colgate Palmolive
Company, 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.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
UNITS OF
INDIVIDUAL THE FUND PRINCIPAL OCCUPATION
GENERAL BENEFICIALLY DURING THE PAST
NAME AND ADDRESS PARTNER OWNED AS OF FIVE YEARS AND
OF NOMINEES AGE SINCE APRIL 14, 1997(1) DIRECTORSHIPS
Joseph L. Bower(2) 58 1987 -25- Individual General Partner
Harvard University of the Funds. Donald Kirk
Graduate School of David Professor of Business
Business Administration Administration. Harvard
Boston, MA 02163 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 Vice-Chairman of
the New England Conservatory
of Music.
Stanley H. Feldberg(2) 72 1987 -25- Individual General Partner
One Sanderling Court of the Funds. Director of
Hilton Head, SC 29926 Waban, Inc. Trustee of
Brandeis University.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
UNITS OF
INDIVIDUAL THE FUND PRINCIPAL OCCUPATION
GENERAL BENEFICIALLY DURING THE PAST
NAME AND ADDRESS PARTNER OWNED AS OF FIVE YEARS AND
OF NOMINEES AGE SINCE APRIL 14, 1997(1) DIRECTORSHIPS
Thomas H. Lee(3) 53 1987 -20- Individual General Partner of the
75 State Street Funds. Chairman of the Investment
Boston, MA 02109 Adviser of the Fund 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, Health o meter
Products, Inc., 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, 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 Resources at Harvard
University; Member of the
Corporation of Belmont Hill
School.
UNITS OF
INDIVIDUAL THE FUND PRINCIPAL OCCUPATION
GENERAL BENEFICIALLY DURING THE PAST
NAME AND ADDRESS PARTNER OWNED AS OF FIVE YEARS AND
OF NOMINEES AGE SINCE APRIL 14, 1997(1) DIRECTORSHIPS
General Partners and -185-(4)
Officers as a Group
(10 persons)
</TABLE>
7
<PAGE>
--------
(1) In each case, represents less than 1% of Units outstanding.
(2) Member of Audit Committee of the Individual General Partners.
(3) Mr. Lee is the Chairman, a Trustee and a majority shareholder of the
Investment Adviser; therefore, he is deemed to be an interested person, as
defined in the Investment Company Act of 1940, of the Fund.
(4) Does not include Capital Contributions made by the Managing General Partner,
which are described in "Managing General Partner".
COMMITTEE AND INDIVIDUAL GENERAL PARTNERS' MEETINGS
The Individual General Partners have a standing Audit Committee which consists
of the Independent General Partners. The purposes of the Audit Committee are (i)
to recommend to the Independent General Partners the firm of independent public
accountants that conducts the Fund's annual audit and (ii) to review the scope
of the annual audit conducted by the Fund's independent public accountants and
the evaluation by such accountants of the accounting procedures followed by the
Fund. The Audit Committee held three meetings in 1996. The Individual General
Partners do not have a nominating or compensation committee.
During the fiscal year ended December 31, 1996, the Individual General
Partners held eight meetings. Each Individual General Partner nominated for
election attended at least 75% of (i) the meetings of the Individual General
Partners and (ii) if a member of the Audit Committee, the meetings of the Audit
Committee held during such fiscal year except for Mr. Lee, who did attend at
least 75% of the meetings of the Individual General Partners at which he was
entitled to vote on the action taken.
Compensation. The Fund paid each Independent General Partner an annual fee of
$40,000 in quarterly installments plus $1,000 per meeting of the Individual
General Partners attended, together with all actual out-of-pocket expenses
relating to attendance at meetings. The Independent General Partners receive
$1,000 for each committee meeting attended unless such committee meeting is held
on the same day as a meeting of the Individual General Partners. In such case,
the Independent General Partners receive $500 for each committee meeting
attended. The aggregate fees and expenses incurred by the Fund to the
Independent General Partners totaled $146,240 for the fiscal year ended December
31, 1996. Thomas H. Lee, as an interested Individual General Partner, does not
receive any additional compensation therefor.
8
<PAGE>
Set forth below is a chart showing the aggregate fees and expenses paid by the
Fund to each of the Individual General Partners during the fiscal year ended
December 31, 1996, as well as the aggregate fees and expenses paid to each
Individual General Partner by the Fund, Fund II and the Retirement Fund
(collectively, the "Fund Complex") for their services as Individual General
Partners to the Funds during the fiscal year ended December 31, 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Pension or Total Compensation
Retirement from Fund and
Aggregate Benefits Accrued Fund Complex
Compensation as Part of Fund Paid to Individual
Name From Fund Expenses General Partners
------------------- ------------ ---------------- ------------------
Vernon R. Alden $48,000 $ 0 $97,500
Joseph L. Bower 48,000 0 97,500
Stanley H. Feldberg 48,000 0 97,500
Thomas H. Lee 0 0 0
</TABLE>
MANAGING GENERAL PARTNER
At the Meeting, a Managing General Partner will be elected to serve until the
next Annual Meeting of Limited Partners and until its successor is elected and
qualified. In the election of Managing General Partner, the one candidate
receiving the highest number of votes cast shall be so elected. The Managing
General Partner will receive reimbursement of certain expenses and the
distributions and allocations described below. The Fund considers its
relationship with the Managing General Partner to be an investment advisory
relationship. It is the intention of the persons named in the enclosed proxy to
nominate and vote in favor of the election of the Managing General Partner
discussed below, which will receive the compensation, distributions and
allocations described below. The nominee discussed below has consented to
continue to serve as Managing General Partner.
Information Concerning the Managing General Partner. Mezzanine Investments,
L.P. (the "Managing General Partner") is a limited partnership organized under
the Delaware Revised Uniform Limited Partnership Act. The Managing General
Partner maintains its principal office at World Financial Center, South Tower,
New York, New York 10080. The Managing General Partner has acted as the managing
general partner of the Fund since the Fund commenced operations on October 19,
1987. The Managing General Partner is engaged in no other activities at the date
of this proxy statement.
The sole general partner of the Managing General Partner is ML Mezzanine Inc.
("ML Mezzanine"), an indirect wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. ("ML"). ML Mezzanine maintains its principal office at World Financial
Center, South Tower, New York, New York 10080 and ML maintains its principal
office at World Financial Center, North Tower, New York, New York 10281. ML
9
<PAGE>
Fund Administrators Inc. (the "Fund Administrator"), a Delaware corporation and
an indirect wholly-owned subsidiary of ML, provides administrative services for
the Fund pursuant to an Administrative Services Agreement between the Fund and
the Fund Administrator, dated June 30, 1989 (the "Administrative Services
Agreement"). Information concerning the Fund Administrator is set forth below
under "Information Concerning the Fund Administrator." The sole limited partner
of the Managing General Partner is Thomas H. Lee Advisors I (the "Investment
Adviser"). Information concerning the Investment Adviser is set forth below
under "The Management Agreement." The Managing General Partner's unaudited
balance sheet at December 31, 1996 is appended to this proxy statement as
Exhibit A.
The Partnership Agreement obligates the Managing General Partner to contribute
cash to the capital of the Fund so that the Managing General Partner's Capital
Contribution at all times will be equal to one percent (1%) of the aggregate
Capital Contributions of all Partners of the Fund. The Managing General Partner
has contributed $4,924,136 to the capital of the Fund.
The following table sets forth information concerning the directors and
executive officers of ML Mezzanine Inc. Unless otherwise noted, the address of
each such person is World Financial Center, South Tower, New York, New York
10080.
10
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OFFICER PRINCIPAL OCCUPATION
OR DURING THE PAST
DIRECTOR FIVE YEARS AND
NAME AGE TITLE SINCE* DIRECTORSHIPS
Kevin K. Albert (1) 44 Chairman, 1990 Vice President and a Managing
World Financial President, 1987 Director of the Investment Banking
Center Director Group ("ML Investment Banking") of
North Tower Merrill Lynch, Pierce, Fenner & Smith
New York, NY 10281 Incorporated ("Merrill Lynch"). Mr.
Albert is the manager of 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 of ML Media Management Inc.
("ML Media"), an affiliate of the
Managing General Partner and a joint
venturer of Media Management
Partners, the general partner of ML
Media Partners, L.P.; a director of
ML Film Entertainment Inc. ("ML
Film"), an affiliate of the Managing
General Partner, the general partners
of Delphi Film Associates IV, V, and
ML Delphi Premier Partners, L.P.; a
director of ML Opportunity Management
Inc. ("ML Opportunity"), a joint
venturer in Media Opportunity
Management Partners, the general
partner of ML Media Opportunity
Partners, L.P.; a director of ML
Mezzanine II Inc. ("ML Mezzanine
II"), a director of Merrill Lynch
Venture Capital Inc. ("ML Venture"),
an affiliate of the Managing General
Partner and the general partner of
the managing general partner
of ML Venture Partners I, L.P.
("Venture I"), ML Venture Partners
II, L.P. ("Venture II"), and ML
Oklahoma Venture Partners Limited
Partnership ("Oklahoma"); a director
of Merrill Lynch R&D Management Inc.
("ML R&D"), the general partner
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OFFICER PRINCIPAL OCCUPATION
OR DURING THE PAST
DIRECTOR FIVE YEARS AND
NAME AGE TITLE SINCE* DIRECTORSHIPS
of the general partner of ML
Technology Ventures, L.P.; Mr.
Albert also serves an as independent
general partner of Venture I and
Venture II. Mr. Albert joined
Merrill Lynch in 1981.
James V. Caruso 45 Executive 1993 Director of ML Investment Banking.
Vice Since June 1992 , Mr. Caruso has
President, served as Manager of Merrill Lynch's
Director Partnership Analysis and Finance
Group (the "Partnership
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. Mr. Caruso serves as a
director of ML Mezzanine II, KECALP
Inc., and affiliate of the Managing
General Partner. Mr. Caruso joined
Merrill Lynch in 1975.
Robert F. Aufenanger 43 Executive 1993 Vice President of Merrill Lynch &
Vice Co. Corporate Credit and a Director
President, of the Partnership Management
Director Department. 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 the
Managing General Partner, are
general partners. Mr. Aufenanger
serves as a director of ML
Opportunity, MLH Real Estate, Inc.,
ML Mezzanine II, ML Venture and ML
R&D. Mr. Aufenanger joined Merrill
Lynch in 1980.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OFFICER PRINCIPAL OCCUPATION
OR DURING THE PAST
DIRECTOR FIVE YEARS AND
NAME AGE TITLE SINCE* DIRECTORSHIPS
Rosalie Y. Goldberg 59 Vice 1987 Director of Merrill Lynch Private
President, Client Group. Ms. Goldberg also is
Director Manager of the Merrill Lynch
Special Investments Group, a vice
president and a director of ML
Mezzanine II, and a director of
MLL Antiquities and MLL
Collectibles. Ms. Goldberg joined
Merrill Lynch in 1975.
Audrey L. Bommer 30 Vice 1994 Joined ML Investment Banking in
President, April 1994 and serves as Treasurer
Treasurer and chief financial officer to the
Funds. Ms. Bommer manages all
financial reporting, accounting,
ministerial and administrative
services in the Partnership
Management Department. Ms. Bommer
also serves as Vice President and
Treasurer of ML Mezzanine II. From
1989 to 1993, Ms. Bommer was a
Senior Auditor with Grant
Thornton, LLP.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OFFICER PRINCIPAL OCCUPATION
OR DURING THE PAST
DIRECTOR FIVE YEARS AND
NAME AGE TITLE SINCE* DIRECTORSHIPS
Roger F. Castoral, Jr. 28 Vice 1995 Joined ML Investment Banking in
President 1995 and serves as Vice President
Assistant and Assistant Treasurer to the
Treasurer Funds. Mr. Castoral is
responsible for fund accounting
and financial reporting functions
in the Partnership Management
Department. Mr. Castoral also
serves as Vice President and
Assistant Treasurer of ML
Mezzanine II. From 1993 to 1995,
Mr. Castoral was an Assistant
Controller with Midlantic
Corporation. From 1991 to 1993,
Mr. Castoral was a senior auditor
with Midlantic Corporation. Prior
to joining Midlantic, Mr.
Castoral was a staff accountant
at KPMG Peat Marwick.
</TABLE>
--------
(1) As of April 14, 1997, Mr. Albert beneficially owned 25 Units, which
represents less than 1% of Units outstanding.
*Officers of ML Mezzanine serve at the pleasure of its Board of Directors.
14
<PAGE>
Distributions. The Fund made cash distributions to the Managing General
Partner of $1,959,308 during the Fund's fiscal year ended December 31, 1996, all
of which related to the MGP's capital contribution. There were no MGP
Distributions as defined below by the Fund with respect to the Fund's fiscal
year ended December 31, 1996. All distributions to Partners are made according
to the following formula:
1. Current Returns. All cash dividends, interest and other income received by
the Fund in excess of the Fund's expenses and reserves for expenses and
Follow-On investments are distributed to the Limited Partners and to the
Managing General Partner quarterly, within 45 days after the end of each
calendar quarter, as follows:
a. From Mezzanine Investments,
first, 99% to the Limited Partners and 1% to the Managing General Partner,
until the Limited Partners, as a class, have received from cumulative
distributions from Mezzanine Investments, an amount equal to an aggregate
return (cumulative but not compounded) of 10% per annum on the average daily
amount of Gross Capital Contributions represented by Mezzanine Investments
(the "Priority Return"), and any outstanding unpaid Compensatory Payment
balance (defined below),
second, 100% to the Managing General Partner until the Managing General
Partner shall have received an amount equal to any outstanding Deferred
Distribution Amount (defined below),
third, 69% to the Limited Partners and 31% to the Managing General Partner
(30% being an incentive distribution, an "MGP Distribution") until the
Managing General Partner has received from all distributions with respect to
Mezzanine Investments then or theretofore made (other than as a return of
capital), an amount equal to 21% of all such distributions, and
fourth, thereafter, 79% to the Limited Partners and 21% to the Managing
General Partner (20% being an MGP Distribution).
b. From all Other Sources,
99% to the Limited Partners and 1% to the Managing General Partner.
2. Capital Transactions. The net proceeds from the disposition of Qualified
Investments and Temporary Investments, including distributions of returns of
capital from investments, and proceeds of any refinancing ("Capital
Transactions"), that are not applied against outstanding debts of the Fund or
reserved for follow-on investments or Fund expenses, will be distributed as
soon as practicable after such Capital Transaction as follows:
a. From Mezzanine Investments,
first, 99% to the Limited Partners and 1% to the Managing General Partner,
until the Limited Partners, as a class, have received from cumulative
15
<PAGE>
distributions from Mezzanine Investments, an amount equal to the Priority
Return and any outstanding unpaid Compensatory Payment balance,
second, 100% to the Managing General Partner until the Managing General
Partner shall have received an amount equal to any outstanding Deferred
Distribution Amount,
third, 99% to the Limited Partners and 1% to the Managing General Partner
until the Limited Partners, as a class, have received an amount equal to the
amount of their Net Capital Contributions represented by Mezzanine
Investments then or theretofore liquidated together with the Priority Return
and any outstanding Compensatory Payment,
fourth, 69% to the Limited Partners and 31% to the Managing General Partner
(30% being an MGP Distribution), until the Managing General Partner has
received from all distributions with respect to Mezzanine Investments then
or theretofore made, 21% of all distributions, and
fifth, thereafter, 79% to the Limited Partners and 21% to the Managing
General Partner (20% being an MGP Distribution).
b. From all Other Sources,
99% to the Limited Partners and 1% to the Managing General Partner.
For purposes of the distributions described above, Gross Capital Contributions
represented by Mezzanine Investments is the proportionate amount of the Fund's
equity that is invested in Mezzanine Investments (the "Net Capital Contributions
represented by Mezzanine Investments"), grossed up for the related selling
commissions (assuming no discounts), marketing and sales expenses and
organization and offering expenses of the Fund.
Compensatory Payment means an amount equal to the aggregate of: (i) the
cumulative amount by which the Distributable Capital Proceeds related to the
Sales of Qualified Investments are less than the Fund's cost of such Qualified
Investments, but only to the extent of the excess of cumulative MGP
Distributions then or theretofore made over the cumulative amounts of payments
then or theretofore made as Compensatory Payments pursuant to the distribution
process summarized above and (ii) the cumulative amount of MGP Distributions
with respect to those portions of Bridge Investments which were expected to
become Mezzanine Investments at liquidation within nine months, but which did
not actually become Mezzanine Investments within nine months, or with the
approval of the Individual General Partners twelve months.
In addition, to the extent that making any MGP Distribution from sales would
result in the Managing General Partner receiving cumulative MGP Distributions
from dispositions of Qualified Investments in excess of 20% of the cumulative
capital gains realized by the Fund (net of realized capital losses and
unrealized net capital depreciation), such distribution will instead be deferred
(the "Deferred Distribution Amount").
16
<PAGE>
Allocations of Profits and Losses. Profits and Losses for tax and accounting
purposes are determined and allocated as of, and within sixty days after, the
end of each calendar year. Profits and Losses are allocated consistently with,
and generally in the same proportions as, cash distributions (other than as to
distributions of capital). All unrealized gains and losses at the termination of
the Fund will be deemed realized at that time. Unrealized gains and losses
attributable to any securities distributed in kind to Partners will be deemed
realized upon such distribution.
Removal of the Managing General Partner. The Managing General Partner may be
removed from the Fund either (i) by a majority of the Independant General
Partners of the Fund, (ii) by failure to be re-elected by the Limited Partners
or (iii) with the consent of a majority in interest of the Limited Partners.
Information Concerning the Fund Administrator. Pursuant to the Administrative
Services Agreement, the Fund Administrator is responsible for the day-to- day
administrative affairs of the Fund and for the management of the accounts of
Limited Partners. The Fund Administrator also provides the Fund, at the Fund
Administrator's expense (except as provided below), with office space,
facilities, equipment and personnel necessary to carry out its obligations under
such agreement and such other services as the Fund Administrator, subject to
supervision by the Individual General Partners, from time to time determines to
be necessary and appropriate.
The Fund Administration Fee. As of October 19, 1995, the Fund pays the Fund
Administrator a quarterly fee payable in advance (the "Fund Administration Fee")
at the annual rate of $300,000 plus all actual out-of-pocket expenses incurred
on behalf of the Fund (but not for compensation of the executive officers of the
Fund Administrator), but in no event exceeding in aggregate the annual amount of
$2.0 million. Prior to October 19, 1995, the Fund Administrator paid all
expenses relating to administration of the Fund other than extraordinary legal
and related expenses and certain expenses of insurance and bonding which have
been and continue to be borne by the Fund. The officers and directors of the
Fund Administrator do not receive any compensation for their services from the
Fund. The Fund Administration Fees and expenses paid by the Fund to the Fund
Administrator for the fiscal year ended December 31, 1996, totaled $781,790.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Fund's
officers and Individual General Partners and persons owning more than 10% of the
outstanding Units of the Fund to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers, General
Partners and greater than 10% holders of Units are required by SEC regulation to
furnish the Fund, through its Managing General Partner, with copies of all
Section 16(a) Forms they file.
17
<PAGE>
Based solely on copies of such Forms furnished as provided above, or written
representations that no Forms 5 were required, the Fund believes that during
1996 through the date hereof all Section 16(a) filing requirements applicable to
its officers, General Partners and owners of greater than 10% of its Units were
complied with.
SELECTION OF INDEPENDENT ACCOUNTANTS
At their meeting held in person on December 6, 1996, the Independent General
Partners of the Fund unanimously selected the firm of Price Waterhouse LLP,
independent accountants, to audit the financial statements of the Fund for the
fiscal year ending December 31, 1997. The Fund knows of no direct or indirect
financial interest of such firm in the Fund. Such appointment is subject to
ratification or rejection by the Limited Partners of the Fund. Unless a contrary
specification is made, the accompanying proxy will be voted in favor of
ratifying the selection of such accountants.
Representatives of Price Waterhouse LLP are expected to be present at the
Meeting and will have the opportunity to respond to questions from Limited
Partners and to make a statement if they so desire.
THE MANAGEMENT AGREEMENT
Thomas H. Lee Advisors I, the Investment Adviser, pursuant to an investment
management agreement among the predecessor to the Investment Adviser, the Lee
Company and the Fund, dated September 14, 1987, as amended March 18, 1988 and as
assumed by the Investment Adviser December 29, 1988 (the "Management
Agreement"), is responsible for the identification of all Qualified Investments
made by the Funds and performs the managerial functions usually carried out by
an investment adviser to a business development company. The Investment Adviser
and its predecessor entity, Thomas H. Lee Advisors, Inc., have served as the
investment adviser for the Fund since the Fund commenced operations on October
19, 1987, and the Limited Partners ratified and approved the Management
Agreement at their first two annual meetings held on May 12, 1988 and May 5,
1989.
The Management Agreement has been approved by all of the Independent General
Partners. Unless earlier terminated, the Management Agreement will continue from
year to year if approved by a majority of the Independent General Partners. The
Management Agreement is not assignable (within the meaning of the Investment
Company Act of 1940) and may be terminated without penalty on 60 days' written
notice at the option of the Fund or the Investment Adviser or by vote of the
Limited Partners.
Information Concerning the Investment Adviser. The Investment Adviser is a
Massachusetts business trust with transferable shares, the majority of whose
shares are owned by Thomas H. Lee and more than 10% of whose shares are owned by
John W. Childs. The Investment Adviser maintains its principal office at the
offices of the Thomas H. Lee Company at 75 State Street, Boston, Massachusetts
02109. The Investment Adviser's unaudited balance sheet at December 31, 1996 is
appended to this proxy statement as Exhibit B.
18
<PAGE>
The following table sets forth information concerning the Trustees and
officers of the Investment Adviser. Information concerning Thomas H. Lee, the
Chairman and a Trustee of the Investment Adviser, is set forth under "Election
of General Partners -- Individual General Partners." Unless otherwise noted, the
address of each such person is 75 State Street, Boston, Massachusetts 02109.
19
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OFFICER OR PRINCIPAL OCCUPATION
TRUSTEE DURING PAST
(DIRECTOR) FIVE YEARS AND
NAME AGE TITLE SINCE* DIRECTORSHIPS
John W. Childs(1)(2) 55 President, 1987 President of J.W. Childs
One Federal Street Trustee Associates, L.P. Managing
Boston, MA 02110 Director of the Lee Company
from 1987 to 1995. President
and Trustee of T.H. Lee
Mezzanine II, the
Administrative General Partner
of the Investment Adviser to
the New Funds ("T.H. Lee
Mezzanine II").
Thomas R. Shepherd 67 Executive 1987 Managing Director of the Lee
Vice President Company since 1986. Executive
Vice President of T.H. Lee
Mezzanine II. Director of
General Nutrition Companies,
Inc., Health o meter Products,
Inc. and Rayovac Corporation.
David V. Harkins 56 Senior 1987 Managing Director of the Lee
Vice President, Company since 1986. Senior Vice
Trustee President and Trustee of T.H.
Lee Mezzanine II. Chairman of
National Dentex Corporation
since 1983. Director of Stanley
Furniture Company, Inc.,
National Dentex Corporation and
First Alert, Inc.
C. Hunter Boll 41 Vice President 1987 Managing Director of the Lee
Company since 1991; Vice
President of the Lee Company
from 1986 to 1991. Vice
President of T.H. Lee Mezzanine
II. Director of Petco Animal
Supplies, Inc., and Stanley
Furniture Company, Inc.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OFFICER OR PRINCIPAL OCCUPATION
TRUSTEE DURING PAST
(DIRECTOR) FIVE YEARS AND
NAME AGE TITLE SINCE* DIRECTORSHIPS
Scott A. Schoen 38 Vice President 1987 Managing Director of the Lee
Company since 1991; Vice
President of the Lee Company
from 1986 to 1990. Vice
President of T.H. Lee Mezzanine
II. Director of First Alert,
Inc., Health o meter, Inc.,
LaSalle Reinsurance Limited,
Rayovac Corporation, Anchor
Advanced Products, Inc. and
Alliance International Group,
Inc.
Wendy L. Masler 43 Treasurer, 1987 Senior Vice President and
Clerk Treasurer of the Lee Clerk
Company since 1984. Treasurer
and Clerk of T.H. Lee Mezzanine
II.
</TABLE>
--------
(1) Mr. Childs owns in excess of 10% of the outstanding Shares of the Investment
Adviser. Other than Thomas H. Lee, who owns a majority of the outstanding
Shares, and Mr. Childs, no one owns more than 10% of the Investment Adviser's
Shares.
(2) The Fund's investment and reinvestment periods have expired and the Fund is
currently being managed with a view towards realizing value, including gains
when possible, from the Fund's remaining investments. On July 1, 1995, Mr.
Childs formed a new investment company to provide investment services to a new
equity fund he is sponsoring, which will make equity investments unrelated to
the Fund. As of such date, Mr. Childs ceased to be a managing director of
Thomas H. Lee Company. Mr. Childs nevertheless continues in his position as
President of the Investment Adviser. Mr. Childs maintains his economic
interest in the Investment Adviser and continues to have a financial interest
aligned with the Fund. Mr. Childs continues to devote the time and attention
to the Investment Adviser and the Fund as required in that capacity.
*Officers of the Investment Adviser serve at the pleasure of its Board of
Directors. Dates include service with the Investment Advisor's predecessor
entity.
TERMS OF THE MANAGEMENT AGREEMENT
The Management Agreement requires the Investment Adviser to perform, subject
to the supervision of the General Partners, managerial and investment advisory
services necessary for the operation of the Fund in carrying out its investment
objective and policies, including providing managerial assistance to Managed
Companies of the Fund and other services related to Mezzanine and Bridge
Investments. Management services consist of providing the Fund with office space
and
21
<PAGE>
equipment and dealing with service agents, accountants, attorneys, brokers and
others.
The Investment Adviser is responsible for locating, structuring, acquiring,
monitoring and disposing of Qualified Investments for the Fund and structuring
the Fund's financing. The Fund will make only the Qualified Investments
recommended to it by the Investment Adviser, and the Investment Adviser (subject
to the supervision of the General Partners) has the exclusive power and
authority to make, monitor, manage and control the Fund's Qualified Investments.
The Investment Adviser will determine the manner in which voting rights, rights
to consent to corporate action, and any other rights pertaining to the Fund's
Qualified Investments will be exercised.
Management Fee. The Fund pays the Investment Adviser a quarterly fee, payable
in advance, at an annual rate, subject to reduction by a portion of certain
deductible fees, equal to the greater of $1.2 million and one percent of assets
under management; for this purpose "assets under management" is an amount equal
to the amount of the Partners' Capital Contributions (net of selling
commissions, marketing and sales expenses and organizational and offering
expenses paid by the Fund), reduced by the cumulative amount of capital
distributed to the Partners and realized capital losses, and increased by
outstanding Fund financing. The amount of this management fee is higher than
that paid by most other investment funds. Deductible fees consist of (i) as to
break-up fees paid to the Investment Adviser or any affiliate thereof relating
to a company in which a Qualified Investment is structured but not consummated,
the amount of such fee (net of expenses), which is proportionate to the
percentage (and if not ascertainable then 35%) of common equity the Fund had or
would have had in such company (the "equity percentage") and (ii) as to any
investment banking fee paid the Investment Adviser or an affiliate thereof by
persons unaffiliated with the Investment Adviser or the Fund, the amount of such
fee in excess of one percent of the funding on which it was paid, which is
proportionate to the equity percentage. The Investment Adviser may retain
without reduction in its fees the amount of any investment banking fees to the
extent not in excess of one percent of the funding on which the fee was paid,
and the full amount of any management fees paid with respect to Portfolio
Companies. See "Certain Transactions."
In addition, pursuant to the Amended and Restated Agreement of Limited
Partnership of the Managing General Partner, as amended, the Investment Adviser
receives those MGP Distributions which are related to investments made by the
Fund for which the Investment Adviser acted in the capacity of investment
adviser to the Fund. See "Election Of General Partners -- Managing General
Partner -- Distributions."
Payment of Expenses. The Investment Adviser bears the expense of maintaining
the staff necessary for performing its obligations under the Management
Agreement, and all other expenses associated with its duties. The Investment
Advisor generally recovers its fees and expenses from the Portfolio Companies in
completed transactions. However, after an investment has been certified by the
22
<PAGE>
Investment Adviser as meeting the Guidelines, or approved by the Independent
General Partners and the Managing General Partner, all legal fees and expenses
associated with negotiating and structuring the Fund's investment, if not borne
by the Portfolio Company or a third party, will be borne by the Fund.
Furthermore, in connection with the disposition of a Qualified Investment, all
fees, commissions and legal fees and expenses, if not borne by the Portfolio
Company or a third party, will be borne by the Fund on a pro rata basis in
proportion to its share of the total amount of securities being sold or
otherwise disposed of. The Fund's obligation in each case is without regard to
whether or not the transaction is consummated; provided, however, any
unconsummated sale must have been pursued on the basis of the reasonable
business judgment of the Investment Adviser.
During the Fund's fiscal year ended December 31, 1996, the Investment Advisory
Fees paid by the Fund to the Investment Adviser totaled $1,282,991.
CERTAIN TRANSACTIONS
Subject to any policies established by the Individual General Partners, the
Investment Adviser is responsible for the management of the Fund's Mezzanine
Investments and Bridge Investments and is responsible for conducting the
negotiations with respect to the acquisition of such investments on behalf of
the Fund.
Certain of the Mezzanine Investments and Bridge Investments which may be made
by the Fund may involve co-investments with entities affiliated with the
Investment Adviser. Such co-investments are generally prohibited absent
exemptive relief from the Securities and Exchange Commission (the "Commission").
As a result of these affiliations and the Fund's expectation of engaging in such
co- investments, the Fund sought an exemptive order from the Commission allowing
such co-investment, which was received on September 23, 1987. An additional
exemptive order, allowing co-investment with the New Funds was received from the
Commission on September 1, 1989. The Funds' co-investments in Managed Companies,
and in certain cases their co-investments in Non-Managed Companies, typically
involved the entry by the Fund 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.
Set forth below is a description of the transactions involving the Fund and
affiliates of the Investment Adviser, including co-investments pursuant to the
above exemptive orders, which were consummated, or which were approved but had
not yet been consummated, during the period from January 1, 1996 through April
14, 1997. For descriptions of acquisitions and dispositions of securities of
Portfolio Companies in which the Fund participated but the Lee Affiliates did
not participate, see the Fund's Annual Report for fiscal year 1996.
23
<PAGE>
Duro-Test Corporation. On November 1, 1995, Duro-Test Corporation
("Duro-Test") was acquired by a third party by merger, for approximately $33
million. In the merger, the Fund and the Lee Affiliates sold all of the
securities of Duro-Test held by them. Proceeds to the Fund totaled $4.6 million
of which $1.7 million was held in escrow. Proceeds to the Lee Affiliates totaled
approximately $218,000 of which approximately $80,000 was held in escrow. On
September 27, 1996, the then remaining amounts in the escrow fund were released
to all former Duro-Test stockholders, at which time the Fund received $989,738
and the Lee Affiliates received an aggregate of $44,876.
General Nutrition Companies, Inc. As of December 31, 1995, the Fund owned
4,903,766 shares, and the Lee Affiliates owned 11,454,578 shares, of GNC Common
Stock, which represented approximately 5.3% and 12.4%, respectively, of GNC's
Common Stock.
On February 13, 1996, GNC completed a public offering of 17,994,176 shares of
Common Stock, including shares sold as a result of the exercise of the
underwriters' overallotment option, at a net price per share, after
underwriters' discounts and commissions, of $20.7475 (the "1996 Offering"). Of
the shares sold, 16,358,342 were offered by the Lee Affiliates and the Fund, and
the 1,635,834 shares subject to the underwriters' overallotment option were
offered by the Company. In the 1996 Offering, the Fund sold all of its remaining
4,903,766 shares of Common Stock, and received proceeds of $101.7 million, and
the Lee Affiliates sold all of their remaining 11,454,578 shares of Common
Stock, and received aggregate proceeds of $237.7 million.
Petco Animal Supplies, Inc. As of December 31, 1995, the Fund, Fund II, the
Retirement Fund and the Lee Affiliates, respectively, held 1,472,622, 175,238,
93,568 and 16,146 shares of Petco Common Stock, representing approximately
11.0%, 1.3%, 0.7% and 0.1% of Petco's outstanding Common Stock.
On April 30, 1996, Petco completed a public offering of 5 million shares of
its Common Stock (the "Petco Offering"). Of such shares, 2.6 million were sold
by Petco and 2.4 million were sold by Petco's shareholders, including the Funds
and the Lee Affiliates. As part of the Petco Offering, each of the Funds and the
Lee Affiliates sold all of their remaining shares of Petco Common Stock, which
resulted in proceeds of $40.3 million for Fund I, $4.8 million for Fund II, $2.6
million for the Retirement Fund and an aggregate of approximately $442,000 for
the Lee Affiliates.
Omega Wire, Inc. In connection with the sale of THL-Omega Holding Corporation
("Omega") to an unaffiliated third party on March 31, 1995, the Fund sold all of
its 80,000 shares of Omega Common Stock, and the Lee Affiliates sold all of
their 80,000 shares of Omega Common Stock, for $310 per share. Approximately
$1.2 million of the proceeds from the sale of the Common Stock payable to the
Fund, along with a proportionate amount from all other shareholders including
the Lee Affiliates, was placed in an escrow account for a one-year period,
pursuant to the terms of the transaction. All amounts, including interest
thereon, were released
24
<PAGE>
to the Fund, and all other shareholders, including the Lee Affiliates, on April
5, 1996.
Stanley Furniture Company, Inc. As of December 31, 1995, the Fund, Fund II,
the Retirement Fund and the Lee Affiliates, respectively, held 2,675,552,
23,105, 18,511 and 40,403 shares of Stanley Common Stock, representing
approximately 50.2%, 0.4%, 0.4% and 0.9% of Stanley's outstanding Common Stock.
On November 13, 1996, Stanley completed a public offering of 1.0 million
shares of its common stock at a gross price of $16.00 per share. These shares
were offered by the Fund, Fund II, the Retirement Fund and the Lee Affiliates
for a net price (after underwriters' discount) of $15.12 per share. In the
offering, the Fund, Fund II, the Retirement Fund and the Lee Affiliates,
respectively, sold 969,788, 8,375, 6,710 and 14,659 shares of Stanley Common
Stock, generating proceeds of $14.7 million, $126,630, $101,455 and $221,644,
respectively. Following the consummation of the offering, Stanley purchased an
additional 150,000 shares from the selling stockholders (pursuant to a
contractual arrangement) for the same price per share. Pursuant to this
arrangement, Stanley purchased 145,468, 1,256, 1,006 and 2,200 shares of Stanley
Common Stock from the Fund, Fund II, the Retirement Fund and the Lee Affiliates,
respectively, generating proceeds of $2.2 million, $18,990, $15,210 and $33,264,
respectively. As of December 31, 1996, the Fund, Fund II, the Retirement Fund
and the Lee Affiliates, respectively, held 1,560,296, 13,474, 10,795 and 23,584
shares of Stanley Common Stock, representing approximately 32.9%, 0.4%, 0.4% and
0.5% of Stanley's outstanding Common Stock.
During February 1997, the Fund, Fund II, the Retirement Fund and the Lee
Affiliates sold 31,515 shares, 272 shares, 218 shares, and 480 shares of Stanley
Common Stock, respectively, pursuant to the provisions of Rule 144 under the
Securities Act of 1933, as amended, generating proceeds of $756,335, $6,528,
$5,232 and $11,520, respectively.
CMI Holding Corp. As of December 31, 1995, the Fund and the Lee Affiliates,
respectively, held 192,933 and 4,081 shares of CMI Holding Corp. Common Stock,
representing approximately 82.1% and 1.7% of CMI's outstanding Common Stock. In
addition, the Fund held all 189,996 shares of CMI's preferred stock and a
warrant to acquire an additional 100,000 shares of CMI's common stock.
On July 23, 1996 CMI completed a restructuring pursuant to which CMI's
subordinated lender took control. In connection therewith, all of the then
outstanding Common Stock (including the Common Stock held by the Fund and the
Lee Affiliates) was canceled for nominal consideration and all of the then
outstanding preferred stock held by the Fund was exchanged for warrants to
purchase preferred stock and Common Stock. In addition, as part of the
transaction, the Fund obtained the release of $3.3 million in escrow proceeds
(which included $186,603 of interest) from the 1995 restructuring. As of
December 31, 1996, the Fund holds warrants to purchase 15,406 shares of
preferred stock and warrants to purchase 39,487 shares of Common Stock,
representing 7.5% of the Common Stock of CMI. The Lee Affiliates have no
ownership position with respect to CMI.
25
<PAGE>
GENERAL INFORMATION
MLPF&S, and certain of its affiliates perform various financial services for
various portfolio companies of the Fund in the ordinary course of business,
including investment banking services, broker/dealer services, economic
forecasting and pension plan services. In connection therewith, such persons
receive various fees, commissions and reimbursements. The aggregate revenue
received by such persons during 1996 for providing such services to Managed
Companies in which the Fund has a material interest (other than those
specifically set forth above or below) was not in excess of $100,000.
Furthermore, MLPF&S and its affiliates or investment companies advised by
affiliates of MLPF&S may, from time to time, purchase or sell securities issued
by portfolio companies of the Fund in connection with their ordinary investment
operations.
The Lee Company typically performs certain management services for managed
portfolio companies of the Fund and receives management fees in connection
therewith, usually pursuant to written agreements with such companies. Of the
total of eight managed portfolio companies of the Fund, four paid management
fees to the Lee Company (exclusive of reimbursement of expenses) ranging from
$12,750 to $280,000 with respect to the year ended December 31, 1996. In
addition, certain managed portfolio companies of the Funds have contractual or
other relationships pursuant to which they do business with one another.
Additional co-investments, investment modifications and follow-on investments
are expected to be made by the Lee Affiliates in various investments with the
Fund from time to time.
The Managing General Partner is responsible for the management of the Fund's
short-term investments. In placing orders for money market securities, it is the
policy of the Managing General Partner to obtain the best net results taking
into account such factors as price (including the applicable dealer spread), the
size, type and difficulty of the transaction involved, the firm's general
execution and operational facilities, and the firm's risk in positioning the
securities involved. While the Managing General Partner generally seeks
reasonably competitive spreads or commissions, the Fund will not necessarily be
paying the lowest spread or commission available. Affiliates of the Fund may not
serve as the Fund's dealer in connection with such transactions.
ADDITIONAL INFORMATION
The expense of preparation, printing and mailing of the enclosed form of proxy
and accompanying Notice and Proxy Statement will be borne by the Fund. The Fund
will pay all reasonable expenses in forwarding proxy solicitation material to
the beneficial owners of the Units.
Approval of the selection of accountants requires the vote (a) of 67% or more
of the Units in the Fund present at the Meeting if the holders of more than 50%
of the outstanding Units are present or represented by proxy, or (b) of more
than 50% of the outstanding Units, whichever is less. The Individual General
Partners and Managing General Partner will be elected if they receive more votes
than any other
26
<PAGE>
candidate at a meeting at which a majority of the Limited Partners who hold a
majority of the outstanding Units are present in person or by proxy. In order to
obtain the necessary quorum at the Meeting, supplementary solicitation may be
made by mail, telephone, telegraph, or personal interview by officers of the
Investment Adviser or the Fund Administrator. It is anticipated that the cost of
such supplementary solicitation, if any, will be nominal and will be borne by
the Fund.
The Partnership Agreement provides that the Limited Partners of the Fund are
prohibited from exercising certain rights of Limited Partners, including the
right to elect General Partners and to approve certain fund matters, unless
prior to the exercise of such rights, counsel for the Fund has delivered to the
Fund an opinion to the effect that neither the existence of such rights nor the
exercise thereof will violate the provisions of the Revised Uniform Limited
Partnership Act of the State of Delaware, as amended, or the applicable laws of
the jurisdictions in which the Fund is then formed or qualified, will adversely
affect the limited liability of the Limited Partners or will adversely affect
the classification of the Fund as a partnership for federal income tax purposes.
Counsel to the Fund will deliver an opinion to the Fund with respect to the
foregoing. In rendering such opinion, counsel for the Fund may rely as to
matters of Delaware law upon the opinion of special Delaware counsel to the
Fund.
PROPOSALS OF LIMITED PARTNERS
Proposals of Limited Partners intended to be presented at the next Annual
Meeting of Limited Partners of the Fund must be received by the Fund for
inclusion in its proxy statement and form of proxy relating to that meeting by
December 31, 1997.
By Order of the
Individual General Partners
THOMAS H. LEE
Individual General
Partner
Dated: April 30, 1997
27
<PAGE>
EXHIBIT A
MEZZANINE INVESTMENTS, L.P.
BALANCE SHEET
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS NOTES
Cash. . . . . . . . . . . . . . . . . . . . $ 7,099
Investments in ML-Lee Acquisition Fund, L.P. 1,309,922
--------------
Total Assets. . . . . . . . . . . . . . . . $ 1,317,021
--------------
--------------
PARTNERS' CAPITAL
Partners' Capital
General Partner. . . . . . . . . . . . . . . 1,3 $ 3,353,723
Limited Partner. . . . . . . . . . . . . . . (2,036,702)
--------------
Total Partners' Capital. . . . . . . . . . . $ 1,317,021
--------------
--------------
</TABLE>
See Accompanying Notes to Balance Sheet.
A-1
<PAGE>
MEZZANINE INVESTMENTS, L.P.
NOTES TO BALANCE SHEET
DECEMBER 31, 1996
(UNAUDITED)
1. ORGANIZATION
Mezzanine Investments, L.P. (the "Managing General Partner") was formed and
the Certificate of Limited Partnership was filed under the Delaware Revised
Uniform Limited Partnership Act on February 1, 1985. The Managing General
Partner is a registered investment adviser and the Managing General Partner of
ML-Lee Acquisition Fund, L.P. (the "Fund") and is responsible for supervising
the Fund's investments. The Managing General Partner is a limited partnership in
which ML Mezzanine Inc. ("ML Mezzanine"), an indirect subsidiary of Merrill
Lynch & Co., Inc., acts as the general partner. ML Mezzanine performs the
responsibilities of the Managing General Partner with respect to the Fund. The
Limited Partner of the Managing General Partner is Thomas H. Lee Advisors I (the
"Investment Adviser"), which is an affiliate of the Thomas H. Lee Company, a
sole proprietorship owned by Thomas H. Lee.
The Fund has elected to operate as a business development company under the
Investment Company Act of 1940. Its primary investment objective is to provide
current income and long-term capital appreciation by investing in mezzanine
securities usually issued in connection with leveraged acquisitions and
recapitalizations of businesses.
2. INVESTMENT IN FUND
Under the terms of the Amended and Restated Agreement of Limited Partnership
of the Fund, as amended (the "Partnership Agreement"), the Managing General
Partner on October 19, 1987, admitted additional limited partners to the Fund at
the Fund's first closing. The total capital contributions of all such limited
partners were $403,383,350 reflecting $132,650 of volume discounts. On November
20, 1987, the Managing General Partner admitted additional limited partners to
the Fund at the Fund's second closing. The total capital contributions of all
such limited partners were $19,862,000 reflecting $15,000 of volume discounts.
On May 20, 1988 the Managing General Partner admitted an additional limited
partner to the Fund at the Fund's third closing. The total capital contribution
of such limited partner was $49,999,688 reflecting $3,333,312 of volume
discounts. On June 15, 1988 the Managing General Partner admitted additional
limited partners to the Fund at the Fund's fourth closing. The total capital
contributions of all such limited partners were $10,124,720 reflecting $638,280
of volume discounts. As of December 31, 1996, the aggregate capital
contributions of all limited partners were $483,369,758 reflecting $4,119,242 of
volume discounts. The Managing General Partner has acquired an interest in the
Fund in exchange for its cash contributions. The Managing General Partner
contributed $4,924,136 to the Fund and will con-
A-2
<PAGE>
tribute or withdraw cash, if necessary, so that it will maintain a one percent
interest in the total capital contributions to the Fund.
3. CAPITAL REQUIREMENTS
The General Partner shall remain at all times a net worth at a level that is
sufficient to meet all requirements of currently applicable U.S. income tax
regulations.
4. CASH DISTRIBUTIONS
For the year ended December 31, 1996, the Managing General Partner received
$1,959,308 in cash distributions from the Fund. This amount was approved by the
Individual General Partners of the Fund throughout the fiscal year and
represents 1% of the total cash distributions that were distributed.
5. OTHER
On February 6, 1996, the New York Supreme Court, county of New York, issued a
decision, after trial, in Winston v. Mezzanine Investments, L.P. The Court found
that the incentive distributions to the Fund's Managing General Partner for the
fourth quarter of 1989 through the fourth quarter of 1990 had been paid in
violation of the Fund's Agreement of Limited Partnership, as amended, and held
the General Partners liable for repayment to the plaintiff class of $6,627,752
of excessive distributions, plus interest. The defendants are considering the
impact of the Court's decision on the administration of the Fund.
A-3
<PAGE>
EXHIBIT B
THOMAS H. LEE ADVISORS I
BALANCE SHEET
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash. . . . . . . . . . . . . . . . . . . . . . $ 5,106
--------
Total Assets. . . . . . . . . . . . . . . . . . $ 5,106
--------
--------
LIABILITIES AND BENEFICIARIES' EQUITY
Liabilities
Accounts Payable. . . . . . . . . . . . . . . . $ 0
Beneficiaries' Equity
Beneficial Interest. . . . . . . . . . . . . . 25,000
Retained Deficit. . . . . . . . . . . . . . . . (19,894)
--------
Total Beneficiaries' Equity. . . . . . . . . . $ 5,106
--------
Total Liabilities and Beneficiaries' Equity. . $ 5,106
--------
--------
</TABLE>
See Accompanying Notes to Balance Sheet.
B-1
<PAGE>
THOMAS H. LEE ADVISORS I
NOTES TO BALANCE SHEET
DECEMBER 31, 1996
(UNAUDITED)
1. ORGANIZATION AND PURPOSE
Thomas H. Lee Advisors I ("Advisors") is a Massachusetts business trust,
previously a Massachusetts corporation formed on March 31, 1987. Advisors serves
as the Investment Adviser to ML-Lee Acquisition Fund, L.P. (the "Fund"), and is
responsible for the identification, management and liquidation of investments
for the Fund. Advisors is a limited partner of Mezzanine Investments, L.P., the
Managing General Partner of the Fund. Thomas H. Lee, the majority shareholder of
Advisors, is also a General Partner of the Fund. Advisors is a registered
investment adviser.
2. SIGNIFICANT ACCOUNTING POLICIES
No provision for federal income taxes has been made since the liability for
such taxes is that of the stockholders rather than the business trust.
3. RELATED PARTY TRANSACTIONS
As compensation for its investment advisory services, Advisors receives a
quarterly fee from the Fund at the annual rate of 1.0% of assets under
management with a minimum annual payment of $1,200,000, subject to adjustment.
Advisors also receives, from the Managing General Partner, an Incentive
Return, after the Limited Partners have received the 10% Priority Return. The
Incentive Return will aggregate not more than 20% of the Fund's current income
and capital gains.
Advisors has an agreement with Thomas H. Lee Company, a sole proprietorship
owned by Thomas H. Lee, that Thomas H. Lee Company will pay the expenses of
identifying, managing and liquidating Fund investments to the extent that these
expenses are not paid by the Fund or the portfolio companies.
4. OTHER
On February 6, 1996, the New York Supreme court, County of New York, issued a
decision, after trial, in Winston v. Mezzanine Investments, L.P. The Court found
that the incentive distributions to the Fund's Managing General Partner for the
fourth quarter of 1989 through the fourth quarter of 1990 had been paid in
violation of the Fund's Agreement of Limited Partnership, as amended, and held
the General Partners liable for repayment to the plaintiff class of $6,627,752
of excessive distributions, plus interest. The defendants are considering the
impact of the Court's decision on the administration of the Fund.
B-2