UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1995
Commission File Number 0-17383
ML-LEE ACQUISITION FUND II, L.P.
(Exact name of registrant as specified in its Governing Instruments)
Delaware 04-3028398
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
World Financial Center
South Tower - 23rd Floor
New York, New York 10080-6123
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (212) 236-7339
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in a definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of voting securities held by non-affiliates: Not
Applicable.
Documents Incorporated by Reference: Portions of the Prospectus of the
Registrant dated September 6, 1989, filed with the Securities and Exchange
Commission pursuant to Rule 497(b), are incorporated by reference in Parts I, II
and III hereof.
<PAGE>
Part I
Item l. Business
Formation
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 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. ML Fund Administrators Inc. (the "Fund
Administrator") is an indirect wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. and is responsible for the day-to-day administrative services necessary for
the operations of Fund II.
Fund II has elected to operate as a business development company under
the Investment Company Act of 1940 ("Investment Company Act"). 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 recapitalizations. Fund II may also
invest in "bridge investments" if it is believed that such investments would
facilitate the consummation of a mezzanine financing. Fund II considers this
activity to constitute a single industry segment of mezzanine financing
investing.
The Funds offered an aggregate 1 million units of limited partnership
interest ("Units") at $1,000 per Unit with the Securities and Exchange
Commission pursuant to a Registration Statement on Form N-2 (File No. 33-25816),
effective September 6, 1989. The information under the heading "Risk and Other
Important Factors", "Estimated Use of Proceeds", "Mezzanine Financing" and
"Investment Objectives and Policies" on pages 21 through 46 and "Conflicts of
Interest" on pages 79 through 82 in the Prospectus dated September 6, 1989,
filed with the Securities and Exchange Commission pursuant to Rule 497(b) under
the Securities Act of 1933 (the "Prospectus"), is incorporated herein by
reference.
The offering of Units commenced on September 6, 1989. On November 10 and
December 20, 1989 and January 5, 1990, Fund II had its first, second and third
closings respectively, at which time the Managing General Partner admitted
additional Limited Partners to Fund II representing 221,745 Units of limited
partnership interest. The additional Limited Partners' total capital
contributions were $205,114,126, which excludes discounts allowed of $3,119,607
and is net of sales commissions and advisory fees of $13,511,267. The Managing
General Partner's aggregate contribution was $500,000. Thomas H. Lee, as an
Individual General Partner, contributed $50,000. For their services as selling
agent, Fund II paid sales commissions to Merrill Lynch, Pierce, Fenner and Smith
Incorporated ("MLPF&S") in the amount of $10,800,450 (exclusive of discounts of
$2,504,250). In addition, Fund II paid a financial advisory fee to MLPF&S in the
amount of $2,710,817 (exclusive of discounts of $615,357).
<PAGE>
Mezzanine and Bridge Investments
At December 31, 1995, Fund II had outstanding a total of $135.8 million
invested in Mezzanine Investments representing $105.5 million Managed and $30.3
million Non-Managed portfolio investments. At December 31, 1995, there were no
Bridge Investments outstanding for the Funds. The Funds co-invest in all
Mezzanine and Bridge Investments, allocating such investments in proportion to
their capital available for investment.
Fund II's reinvestment period ended on December 21, 1993 and
accordingly, no new investments can be made after that date, other than the
funding of investments which were committed to prior to that date.
REVIEW OF INVESTMENTS IN MANAGED COMPANIES
The following is a brief description of the companies in Fund II's
Managed Company portfolio during the year ended December 31, 1995:
Publicly Held Managed Portfolio Companies
EquiCredit Corporation ("EquiCredit")
On September 26, 1994 Barnett Banks, Inc. signed a definitive agreement
to acquire all of the outstanding EquiCredit common stock for $32 per share.
This transaction closed on January 27, 1995. Fund II sold its entire investment
of 227,437 shares, realizing a gain of $6.7 million on an original investment of
$595,886.
First Alert, Inc. ("First Alert")
First Alert is a designer and manufacturer of residential smoke
detectors, fire extinguishers, portable rechargeable lights and other security
and safety products. Fund II owns 2,058,474 shares of First Alert common stock.
The closing market price at December 29, 1995 reflects unrealized depreciation
of $12.4 million for the year ended December 31, 1995, bringing the aggregate
net unrealized appreciation to $14.4 million.
Hills Stores Company, ("Hills")
Hills is an operator of discount department stores in the Northeast and
Midwest and offers a broad selection of merchandise at everyday low prices,
targeted primarily at the female shopper. Fund II recorded net unrealized
depreciation of approximately $5.7 million on this investment for the year ended
December 31, 1995. The closing market price of this investment reflects an
aggregate net unrealized depreciation of approximately $29.6 million through
December 31, 1995.
On August 21, 1995, Fund II entered into a stock purchase and exchange
agreement with Hills Stores Company and exchanged the 219,156 Common Stock
Rights held by Fund II for 62,616 shares of Hills Stores Common Stock. No gain
or loss was recognized on the transaction.
<PAGE>
Petco Animal Supplies, Inc. ("Petco")
Petco is a leading retailer of premium pet food and supplies, operating
more stores than any other specialty pet food and supply retailer in the United
States.
On April 27, 1995, Petco completed a public offering of approximately
3.6 million shares of Common Stock (the "Petco Offering") at a net price of
$19.71 per share. As part of the Petco Offering, Fund II sold 120,143 shares
(including shares sold as a result of the exercise of the underwriters'
overallotment option) representing 51% of its Petco holdings. Fund II received
proceeds of $2.4 million and realized a gain of $398,815 on the sale of the
equity. The closing market price of Petco common stock on December 29, 1995
reflects unrealized appreciation of $1.9 million for the year ended December 31,
1995. The closing market price of this investment reflects an aggregate net
unrealized appreciation of $1.5 million through December 31, 1995.
Playtex Products, Inc. ("Playtex")
Playtex manufactures and sells feminine hygiene and nursery products, household
rubber gloves, toothbrushes and Jhirmack and LaCoupe haircare products. Fund
II's year-end valuation of this investment reflects approximately $129,000 of
unrealized appreciation recorded in 1995 and $2.7 million of cumulative net
unrealized depreciation through 1995.
Stanley Furniture Company, Inc. ("Stanley Furniture")
Stanley Furniture designs, manufactures and markets furniture and fabric
products. Based upon the closing bid price at December 29, 1995, Fund II
recorded approximately $46,000 of unrealized depreciation on its equity in
Stanley Furniture for the year ended December 31, 1995. Fund II's year-end
valuation of this investment reflects an aggregate of approximately $106,000 in
net unrealized depreciation.
<PAGE>
Non Publicly Held Managed Portfolio Companies
Anchor Advanced Products, Inc. ("Anchor")
Anchor is a large manufacturer of toothbrushes and cosmetic packaging products.
Anchor holds a major share of the U.S. market for contract manufacturing of
toothbrushes, supplying many of the brand marketers. In addition, Anchor has a
strong position in key areas of the cosmetic packaging market, including nail
polish brushes, mascara packages and applicators and lipstick packaging
products. This investment is valued at cost at December 31, 1995.
Big V Supermarkets, Inc. ("Big V")
Big V is a regional supermarket retailer in the Northeastern United States doing
business under the ShopRite name. Big V currently operates several supermarkets
principally in the Hudson Valley region of New York State. The investment in Big
V is valued at cost at December 31, 1995.
Cole National Corp. ("Cole")
Cole was founded in 1944 as a provider of key duplication services. Since then,
Cole has grown as a retailer and operates three separate retail subsidiaries:
Cole Vision, Things Remembered and Cole Key. The investment in Cole is valued at
cost at December 31, 1995.
CST Office Products Corp. ("CST")
CST is a provider of stock computer forms to the resale market. CST operates
several manufacturing plants throughout the U.S., which produce business forms
and related office products. Fund II is currently not accruing interest on this
investment. The investment in CST is valued at cost at December 31, 1995. On
March 22, 1996 Fund II sold its entire investment in CST and realized a gain of
$4.3 million and $7.2 million of additional interest income for payment in kind
notes previously classified as non-accrual. Please see Note 14 to the Financial
Statements for further information.
Ghirardelli Holdings Company ("Ghirardelli")
Ghirardelli is a marketer of premium chocolate products. Ghirardelli's products
are sold through a variety of distribution channels including three
company-owned retail shops, two of which are located in Ghirardelli Square, a
prominent San Francisco landmark. Fund II made a follow-on investment in
Ghirardelli for $1.6 million on May 12, 1995 and received 14,016 shares of
Preferred stock and 73,692 shares of Common Stock. The investment in Ghirardelli
is valued at cost at December 31, 1995.
In February, 1996 Fund II executed a stock purchase Agreement pursuant to which
Fund II will sell its entire investment in Ghirardelli. See Note 14 to the
Financial Statements for more information.
Restaurants Unlimited Corporation ("RU Corp.")
RU Corp., through its Cinnabon division, operates and franchises a national
chain of specialty cinnamon roll bakeries in more than 250 locations, operating
under the Cinnabon World Famous Cinnamon Rolls brand name. In addition, through
its Restaurants Unlimited, Inc. division, RU Corp. owns and operates 23 unique
full-service restaurants located primarily on the West Coast of the United
States. These restaurants operate under various trade names, including Cutters,
Kincaid's, Horatio's and Palomino. The investment in RU Corp.is valued at cost
at December 31, 1995.
<PAGE>
Sun Pharmaceuticals Corp.
On October 17, 1995 Playtex Products, Inc. and Banana Boat Holding Corp. entered
an Agreement and Plan of Merger (the "Agreement") pursuant to which Playtex
agreed to acquire all of the outstanding equity of Banana Boat that it did not
already own. In accordance with the Agreement, the 12.5% Subordinated Note held
by Fund II, plus all accrued interest, was paid in full by Playtex upon
consummation of the merger. Additionally, Fund II received net proceeds of
$173.55 per share for each of the 7,444.5 Common Stock Purchase Warrants that
were exercised pursuant to the Agreement. Fund II received total proceeds of
$9.6 million which resulted in a gain of $1.3 million.
REVIEW OF INVESTMENTS IN NON-MANAGED COMPANIES
The following is a brief description of the companies in Fund II's Non-Managed
Company portfolio during the year ended December 31, 1995:
BioLease, Inc. ("BioLease")
BioLease provides built-to-suit wet-laboratory space in the Boston area to
a consortium of emerging growth bio-technology companies sponsored by the
venture capital funds managed by Health Care Investment Corporation. The
investment in BioLease is valued at amoritized cost at December 31, 1995.
Fitz Floyd/Silvestri Corporation
FFSC, Inc. consists of two businesses, Fitz Floyd and Silvestri
Corporation. Fitz and Floyd is one of the industry leaders in fine china
dinnerware and ceramic giftware whose products are retailed through leading
specialty and department stores and catalogs throughout the U.S. and Canada, and
through nine company-operated stores. Silvestri designs, imports and markets a
broad line of Christmas decorations, home accessories and seasonal gifts which
are sold through stores and catalogs. As of December 31, 1995, Fund II has
valued its equity holdings in FFSC at zero and written down the Senior
Adjustable Rate Notes to $9.7 million, which resulted in aggregate unrealized
depreciation of $3 million.
FLA. Orthopedics, Inc.
FLA. Orthopedics, headquartered in Miami, manufactures, markets and
distributes production in two major lines of business: ergonomically designed
safety products and orthopedic soft goods.
Fund II has pledged a $605,200 certificate of deposit to secure its
obligation to purchase additional FLA. Orthopedics, Inc. securities in 1996, in
the event that certain performance tests are not met. As of December 31, 1995,
Fund II has valued its investment in FLA. Orthopedics, Inc. at zero, which
resulted in cummulative unrealized depreciation of $6.4 million.
National Tobacco Company
National Tobacco Company is a producer of loose-leaf chewing tobacco in the
United States whose product is primarily sold under the Beech-Nut brand name.
The investment in National Tobacco Company is valued at cost at December 31,
1995.
<PAGE>
Soretox
Soretox, through its wholly-owned subsidiary Stablex Canada Inc., is an
inorganic hazardous waste management company operating in Eastern Canada and the
Northeastern United States. Fund II is currently not accruing interest on this
investment. Fund II's year end valuation reflects total unrealized depreciation
of approximately $1.6 million.
Effective June 29, 1995, Soretox structured a management led buyout of the
company. As a result, the Stablex Canada, Inc. $6,189,075, 14% Subordinated Note
and the 183,921 shares of 176347 Canada Inc. Common Stock Purchase Warrants held
by Fund II were exchanged for a Stablex Canada, Inc. $3,503,250 principal amount
10% Senior Subordinated Note, a $3,127,725 principal amount 11% Junior
Subordinated Note and 2,004 shares of Seaway TLC, Inc. Common Stock Purchase
Warrants. No gain or loss was recorded on the transaction.
Competition
Fund II has completed its investment period and its reinvestment program
and therefore, will no longer have to compete for investments. A majority of the
portfolio companies are participating in extremely competitive businesses. Also,
to the extent that there is more competition in the market to sell Fund II's
assets, the market will become more constrained.
Employees
Fund II has no employees. The Investment Adviser, subject to the
supervision of the Managing General Partner and the Individual General Partners,
manages and controls Fund II's investments. The Managing General Partner is
responsible for managing the Temporary Investments of Fund II. The Fund
Administrator performs administrative services for Fund II. The Fund
Administrator is a subsidiary of Merrill Lynch & Co, Inc., the parent of MLPF&S.
Item 2. Properties
Fund II does not own or lease any physical properties.
Item 3. Legal Proceedings
On February 3, 1992 and February 5, 1992, respectively, one Limited Partner
from Fund II and one Limited Partner from the Retirement Fund each commenced
class actions in the US District Court for the District of Delaware, purportedly
on behalf of all persons who purchased limited partnership interests in the
Funds between November 10, 1989 and January 5, 1990, against the Funds, the
Managing General Partner, the Individual General Partners, the Investment
Adviser to the Funds and certain named affiliates of such persons. These
actions, alleging that the defendants in the action made material
misrepresentations or omitted material information in the offering materials for
the Funds concerning the investment purposes of the Funds, were consolidated by
the court on March 31, 1992, and a consolidated complaint was filed by the
plaintiffs on May 14, 1992. In April 1993, plaintiffs filed an amended
complaint, adding claims that certain transactions by the Funds were prohibited
by the federal securities laws applicable to the Funds and their affiliates
under the Investment Company Act of 1940, as amended. The amended complaint also
named the Funds' counsel as a defendant. Defendants moved to dismiss the amended
complaint, and, by Opinion and Order dated March 31, 1994, the Court granted in
part and denied in part the motions to dismiss. Additionally, by its March 31,
1994 Opinion and Order, the Court certified the case as a class action, and
ordered plaintiffs to replead by filing a new complaint reflecting the Court's
rulings. On April 15, 1994, plaintiffs served and filed a new complaint, which
defendants moved to strike for not conforming to the court's ruling. On August
3, 1994, the Court granted defendants' motion to strike the new complaint.
Plaintiffs thereafter filed a revised second amended complaint dated September
26, 1994. Factual discovery in this litigation has concluded. Expert discovery
is currently set to conclude in early 1996. The defendants in this action
believe that the remaining claims are without merit, although whether or not the
plaintiffs prevail, the Funds may be obligated to indemnify and advance
litigation expenses to certain of the defendants under the terms and conditions
of various indemnity provisions in the Funds' Partnership Agreements and
separate indemnification agreements, and the amount of such indemnification and
expenses could be material. 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 professional fees.
The outcome of this case is not determinable at this time.
<PAGE>
On August 9, 1994, the same two Limited Partners 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. The defendants have filed papers in opposition to the
motion for partial summary judgment on January 10, 1995. On August 4, 1995,
plaintiffs filed an amended complaint alleging additional violations of the
Investment Company Act of 1940 and common law arising out of the secondary
offering. The plaintiffs moved for summary judgment on certain of these claims.
On October 13, 1995, the defendants in this litigation each filed briefs in
opposition to plaintiffs motion. Because the defendants in this action believe
that the claims are without merit, each defendant also filed a separate motion
to dismiss, although whether or not the plaintiffs prevail, the Funds may be
obligated to indemnify and advance litigation expenses to certain of the
defendants under the terms and conditions of various indemnity provisions in the
Funds' Partnership Agreements and separate indemnification agreements. The
outcome of this case is not determinable at this time.
On November 2, 3 and 4, 1994, stockholders of Snapple Beverage Corp.
commenced approximately twenty putative class actions in the Delaware Chancery
Court, purportedly on behalf of all public stockholders of Snapple, against
Snapple, the Funds, Thomas H. Lee Equity Partners, L.P., and some or all of
Snapple's directors. Since then, the plaintiffs have filed a Consolidated
Amended Complaint against Snapple, the Funds, Thomas H. Lee Equity Partners,
L.P., some or all of Snapple's directors and Quaker Oats. The complaint alleges
that the sale of Snapple to Quaker Oats was at an unfair price and in violation
of the defendants' fiduciary duties to public stockholders. The plaintiffs
sought an injunction against the merger transaction, an accounting for any
damages suffered by the public stockholders, and attorneys' fees and related
expenses. The Court on November 15, 1994, denied plaintiffs application to take
expedited discovery and request to schedule a preliminary injunction hearing.
The defendants in these actions believe that the claims are without merit,
although whether or not the plaintiffs prevail, the Funds may be obligated to
indemnify and advance litigation expenses to certain of the defendants under the
terms and conditions of various indemnity provisions in the Funds' Partnership
Agreements and separate indemnification agreements. The outcome of this case is
not determinable at this time.
On November 27, 1995, one Limited Partner from Fund II and one Limited
partner from the Retirement Fund filed a putative class action in the United
States District Court for the District of Delaware, purportedly on behalf on
behalf of all persons or entities who owned units in the Funds between April 5,
1991 and November 27, 1995, against the Funds, the Managing General Partner, the
Individual General Partners, the Investment Adviser to the Funds, and certain
named affiliates of such persons. The complaint contends that the Funds
improperly advanced legal fees and litigation costs to the defendants in
connection with three previously filed lawsuits. The plaintiffs are seeking an
accounting, rescissory or actual damages, punitive damages, plaintiffs'
litigation costs and attorneys fees, pre-judgment and post-judgment interest,
and an injunction barring the defendants from further indemnifying themselves.
The defendants in this action believe that the claims are without merit and have
moved to mismiss the case. Although the defendants believe the advancement of
legal fees and litigation costs was properly made pursuant to indemnification
agreements signed by the defendants, the outcome of this case is not
determinable at this time.
Item 4. Submission of Matters to a Vote of Security-Holders
No matters were submitted to a vote of the Limited Partners of Fund II
during the fourth quarter of the year ended December 31, 1995.
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
There is no established trading market for the Units. The Partnership
Agreement contains restrictions that are intended to prevent the development of
a public market. Accordingly, accurate information as to the market values of
Units at any given date is not available.
The approximate number of holders of Units as of March 15, 1996 is
11,790. The Managing General Partner and Thomas H. Lee as an Individual General
Partner also hold general partner 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.
Beginning with December 1994 client account statements, MLPF&S
implemented new guidelines for valuing and reporting limited partnership
investments on client account statements. As a result, the Managing General
Partner's estimate is no longer reported on these statements, although the
Managing General Partner may continue to provide its estimate of net asset value
in reports to Unit holders. Pursuant to such MLPF&S guidelines, estimated values
for limited partnership interests originally sold by MLPF&S (such as Units in
Fund II) are provided to MLPF&S by independent valuation services. Commencing
this year, such estimated values will be updated two times per year. The
estimated values will be based on financial and other information available to
the independent services on the prior August 15th for reporting on December
year-end client account statements, and on information available to the services
on March 31st for reporting on June month-end MLPF&S client account statements.
The Managing General Partner's estimate of net asset value as set forth in the
Fund's year-end financial statements reflects the value of the Fund's underlying
assets remaining at fiscal year end, whereas the value provided by the
independent services reflects the estimated value of the Units themselves based
on information that was available on the prior August 15th. MLPF&S clients may
contact their Merrill Lynch Financial Consultants or telephone the number
provided to them on their account statements to obtain a general description of
the methodology used by the independent valuation services to determine their
estimated value, provided the independent services are not market values and
Unit holders may not be able to sell their Units or realize the amounts shown on
their MLPF&S statements upon a sale. In addition, Unit holders may not realize
the amount shown on their account statements upon the liquidation of Fund II
over its remaining life.
<PAGE>
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 sale proceeds from sales after transfer or assignment have been
entered into, but before such transferred and assignment is recognized by the
Managing General Partner, will be payable to the transferor and not the
transferee.
Cash Distributions
Fund II has made quarterly distributions including both Distributable
Cash from Investments and Distributable Capital Proceeds. Fund II's ability to
make future cash distributions is restricted in part by the factors as set forth
in Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Cash Distributions - the information in which is
incorporated herein by reference.
<PAGE>
<TABLE>
<CAPTION>
Item 6. Selected Financial Data
Supplemental Information Schedule
<S> <C> <C> <C> <C> <C>
Selected Financial Data
For the Years Ended December 31,
Total Fund Information: 1995 1994 1993 1992 1991
-------------- -------------- ---------------- --------------- -----------
Net Investment Income $ 4,146,846 $ 7,816,305 $ 4,967,971 $ 11,835,023 $ 11,790,746
Net Realized Gain on Sales of Investments 8,372,906 63,853,148 13,201,921 1,102,509 1,228,566
Net Change in (Depreciation) Appreciation (30,559,313) (100,354,280) 80,586,157 38,881,428 486,181
on Investments
Cash Distributions to Partners 29,490,761 (b) 101,901,964 31,187,989 13,773,393 16,087,444
Net Assets 119,183,669 166,713,991 297,300,782 229,732,722 191,687,155
Cost of Mezzanine Investments 135,797,397 144,603,700 148,865,244 150,751,778 119,544,224
Total Assets 120,346,488 167,805,653 299,130,035 231,416,644 193,166,159
Per Unit of Limited Partnership Interest:
Investment Income $ 32.05 $ 49.88 $ 52.20 $ 73.49 $ 68.38
Expenses (19.71) (19.70) (29.85) (20.25) (15.34)
----------- ------------ ------------- ------------ -----------
Net Investment Income $ 12.34 $ 30.18 $ 22.35 $ 53.24 $ 53.04
=========== ============ ============= ============ ===========
Net Realized Gain on Sales of $ 34.23 $ 225.61 $ 59.39 $ 4.96 $ 5.53
Investments
Net Change in (Depreciation) Appreciation
on Investments (137.47) (451.45) 362.52 174.91 2.19
Cash Distributions(c) 110.56 (b) 413.35 140.30 61.96 71.50
Cumulative Cash Distributions (a) 858.06 747.50 334.15 193.85 131.89
Net Asset Value 528.63 730.09 1,339.10 1,035.14 863.99
(a) For periods prior to the 3rd quarter 1991, the amount shown is for the
first closing participants only. Subsequent closings amounts as to such
periods will vary.
(b) Includes $15.3 million or $68.94 per limited partnership Unit return of
capital from the sale of EquiCredit, Petco and Sun Pharmaceuticals and
returns of the reserve for the follow on investments.
(c) See Cash Distributions Schedule on pages 20-21 for additional information
including return of capital for years prior to 1995.
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity & Capital Resources
As of December 31, 1995, capital contributions from the Limited Partners
and the General Partners totaled $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. Net proceeds available for investment by Fund II as of
December 31, 1995 were $163,692,448, after adjusting for returns of capital
distributed to partners, volume discounts, sales commissions and organizational,
offering, sales and marketing expenses.
At December 31, 1995, Fund II had outstanding a total of $135,799,399
invested in Mezzanine Investments representing $105,476,755 Managed and
$30,321,742 Non-Managed portfolio investments. The remaining proceeds were
invested in Temporary Investments primarily comprised of commercial paper and
bankers' acceptances with maturities of less than two months.
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.
Upon the consummation of the sale of Snapple common stock in December,
1994, Fund II received gross proceeds of approximately $68 million. As provided
by the Partnership Agreement, the Managing General Partner of Fund II received
incentive fees from this transaction to the extent certain returns of capital
and priority returns were achieved. The Managing General Partner was entitled to
an incentive MGP distribution of approximately $14.8 million, $4.86 million of
which was deferred in payment (the "Deferred Distribution Amount") to the
Managing General Partner in accordance with the Partnership Agreement. This
Deferred Distribution Amount is distributed to the Partners pro-rata in
accordance with their capital contributions, and certain amounts otherwise later
payable to Limited Partners from distributable cash from operations are instead
payable to the Managing General Partner until the Deferred Distribution Amount
is paid in full. The Limited Partners received approximately $58.3 million or
$263.08 per Unit from the Snapple proceeds on December 14, 1994. As of February
14, 1996, the Deferred Distribution Amount owed to the Managing General Partner
was $2,433,083.
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, 1995, the
reserve balance was reduced to $9.9 million due to follow-on investments of $285
in Petco Animal Supplies, $2.4 million in Fitz and Floyd/Silvestri, Corp.,
$240,060 in Fine Clothing, Inc., $4.5 million in Hills Stores and $1.6 million
in Ghirardelli Holdings. Additionally $6.29 million of the reserve has been
returned to the partners during 1995. The level of the reserve was based upon an
analysis of potential follow-on investments in specific portfolio companies that
may become necessary to protect or enhance Fund II's existing investment. As of
March 6, 1996, the Independent General Partners have approved retention of the
reserve at its current level.
All net proceeds from the sale of Mezzanine Investments received by Fund II
in the future will be distributed to its partners unless applied to or set aside
for expenses or follow-on investments.
<PAGE>
The proportion of distributions provided by net investment income has
dropped significantly from prior years, due primarily to increased sales and
redemptions of Mezzanine Investments and a resulting decrease in investment
income as those holdings cease to generate interest income. Pursuant to the
terms of the Partnership Agreement, all net investment income from Mezzanine
Investments will be distributed to the Managing General Partner until the
Managing General Partner receives an amount equal to any outstanding Deferred
Distribution Amount. Given these circumstances, it is expected that the majority
of future cash distributions to Limited Partners for the next few years will
almost entirely be derived from gains and recovered capital from asset sales,
which are subject to market conditions and are inherently unpredictable as to
timing. Assuming there are no asset sales in a particular quarter, Limited
Partners are expected to receive only small amounts of net distributable cash
from Temporary Investments, estimated to be less than one dollar per Limited
Partnership Unit each quarter for the next few years. Distributions therefore
are expected to vary significantly in amount and may not be made in every
quarter.
Investment in High-Yield Securities
Fund II invests primarily in subordinated debt and preferred stock
securities ("High-Yield Securities"), generally linked with an equity
participation, issued in conjunction with the mezzanine financing of privately
structured, friendly leveraged acquisitions, recapitalizations and other
leveraged financings. High-Yield Securities are debt and preferred equity
securities that are unrated or are rated by Standard & Poor's Corporation as BB
or lower and by Moody's Investor Services, Inc. as Ba or lower. Risk of loss
upon default by the issuer is significantly greater with High-Yield Securities
than with investment grade securities because High-Yield Securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Also, these issuers usually have high levels of indebtedness and are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates, than investment grade issuers. Most of these securities are
subject to resale restrictions and generally there is no quoted market for such
securities.
Although Fund II cannot eliminate the risks associated with its investments
in High-Yield Securities, it has established and implemented risk management
policies. Fund II subjected each prospective investment to rigorous analysis and
made only those investments that were recommended by the Investment Adviser and
that meet 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 High-Yield Securities held by Fund II (First Alert,
Hills, Petco, Playtex and Stanley Furniture) have registered their equity
securities in public offerings. Although the equity securities of the same class
presently held by Fund II (other than Hills and Stanley Furniture) 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 two years on the open market, subject to the volume restrictions set
forth in that rule. The Rule 144 volume restrictions generally are not
applicable to equity securities of non-affiliated companies held by Fund II for
at least three 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.
<PAGE>
Results of Operations
Investment Income and Expenses
The investment income from operations for the period consists primarily of
interest and discount income earned on the investment of proceeds from partners'
contributions in Mezzanine Investments and short-term money market instruments.
For the year ended December 31, 1995, Fund II had investment income of
$8,527,526, as compared to $12,917,223 for the same period in 1994 and
$11,604,260 for the same period in 1993. This decrease in 1995 investment income
from 1994 is due primarily to the substantial decline in short-term interest
rates and in the amount of Temporary Investments held by Fund II after
distributions of return of capital to partners during 1995. Also contributing to
the decrease in investment income are the sales of income generating Mezzanine
Investments. The increase in 1994 investment income from 1993 was due primarily
to the recognition of previously unrecorded interest, dividend and discount
income related to Petco which had been placed on non-accrual status on January
1, 1991, partially offset by sales and redemptions of Mezzanine Investments.
Major expenses for the period consisted of Legal and professional fees,
Investment Advisory Fees, Fund Administration Fees and Expenses and Independent
General Partner Fees and Expenses.
Legal and Professional fees were primarily incurred in connection with the
litigation proceedings as described in Note 11 to the Financial Statements.
Professional fees for the years ended December 31, 1995, 1994 and 1993 were
$1,651,318, $2,050,715, and $3,356,988, 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.
The Investment Adviser and Fund Administrator both receive their
compensation on a quarterly basis. The total Investment Advisory Fees paid to
the Investment Adviser for the years ended December 31, 1995, 1994 and 1993 were
$1,536,560, $1,699,673, and $1,892,255 respectively, and were calculated at an
annual rate of 1.0% of assets under management (net offering proceeds reduced by
cumulative capital reductions), with a minimum annual amount of $1,200,000 for
Fund II and the Retirement Fund on a combined basis. These decreases in
Investment Advisory Fees are a direct result of the sales of investments,
returns of capital distributed to partners and realized losses on investments.
The Fund Administration Fees paid to the Fund Administrator for the years
ended December 31, 1995, 1994 and 1993 were $798,478, $835,643, and $899,441
respectively, and were calculated at an annual rate of 0.45% of the excess of
net offering proceeds, less 50% of capital reductions. These decreases in Fund
Administration Fees are a direct result of sales of investments, returns of
capital distributed to partners and realized losses on investments.
Pursuant to the administrative services agreement between Fund II and the
Fund Administrator, effective November 10, 1993, a portion of the actual
out-of-pocket expenses incurred in connection with the administration of Fund II
is reimbursable to the Fund Administrator. Actual out-of-pocket expenses
("reimbursable expenses") primarily consist of printing, audits, tax preparation
and custodian fees.
<PAGE>
For the year ended December 31, 1995, Fund II had net investment income of
$4,146,846 as compared to $7,816,305, for the same period in 1994 and $4,967,971
for the same period in 1993. This decrease in 1995 as compared to 1994 is
primarily attributable to a decrease in income from Mezzanine Investments and
Temporary Investments partially offset by lower expenses, primarily Investment
Advisory Fees, Fund Administration Fees and Legal and Professional Fees. The
increase in 1994 net investment income as compared to 1993 can be attributed to
the Petco's March 17, 1994 initial public offering and the recognition of
thirty-eight and one half months of interest, discount and dividend income
recorded in the first quarter of 1994. Also, lower Investment Advisory Fees,
Fund Administration Fees and Legal and Professional Fees contributed to the
increase in net investment income for 1994 compared to 1993.
Net Assets
Fund II's net assets decreased by $47,530,322 during the year ended
December 31, 1995, due to the payment of cash distributions to partners of
$29,490,761($15,324,100 of the cash distributions paid was return of capital
from the sales of portfolio investments) and net unrealized depreciation of
$30,559,313, partially offset by net investment income of $4,146,846 and
realized gains of $8,373,472 from the sales of Mezzanine Investments.
Fund II's net assets decreased by $130,586,791 during the year ended
December 31, 1994, due to the payment of cash distributions to partners of
$101,901,964 ($19,141,132 of cash distributions paid was return of capital from
the sales of portfolio investments) and net unrealized depreciation of
$100,354,280, partially offset by net investment income of $7,816,305 and
realized gains from the sales of Mezzanine Investments and the cancellation of
an option of $63,853,148. The 1994 decrease in net assets over the year is
considerably larger than the increase in the comparable 1993 period. This is
primarily attributed to the substantial increase in depreciation recorded in
1994 compared with the appreciation recorded in 1993 and the increase in cash
distributions paid during 1994 from the sale of the Snapple common stock.
Unrealized Appreciation and Depreciation on Investments
For the year ended December 31, 1995, Fund II recorded net unrealized
depreciation of $30.6 million of which $22.7 million was related to net
depreciation in market value of publicly traded securities. The unrealized
depreciation can be attributed primarily to the decrease in value of First Alert
and Hills Stores Company at December 31, 1995, as well as the reversal of
unrealized appreciation of EquiCredit upon the sale of EquiCredit Securities
held by Fund II. This compares to a net unrealized depreciation of $100.3
million of which $96.5 million was related to net depreciation in market value
of publicly traded securities at December 31, 1994. Fund II's cumulative net
unrealized depreciation on investments as of December 31, 1995 totaled $27.5
million.
For the year ended December 31, 1993, Fund II recorded net unrealized
appreciation of $80.6 million of which $60.1 million was related to net
appreciation in market value of publicly traded securities. The increase can be
attributed primarily to the increase in valuation of Snapple Beverage Corp.
Fund II's valuation of the common stock of First Alert, Hills, Petco,
Playtex and Stanley Furniture reflect their closing market prices at December
31, 1995.
<PAGE>
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.
A substantial number of Fund II's assets (at cost) are invested in
private placement securities for which there are no ascertainable market values.
Although the Managing General Partner and Investment Adviser use their best
judgment in estimating the fair value of these investments, there are inherent
limitations in any estimation technique. Therefore, the fair value estimates
presented herein are not necessarily indicative of the amount which Fund II
could realize in a current transaction.
The First Alert, Petco, Hills, Stanley Furniture and Playtex 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, Petco,
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, 1995. Although the Managing General Partner and Investment Adviser are not
aware of any factors not disclosed herein that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued since that time, and the current estimated fair value of these
investments may have changed significantly since that point in time.
For additional information, please refer to the Supplemental Schedule of
Unrealized Appreciation and Depreciation (Schedule 2 - pages 40-41).
Realized Gains and Losses
For the year ended December 31, 1995, Fund II had net realized gains from
investments of $8.4 million, as compared to $63.9 million and $13.2 million for
the years ended December 31, 1994 and 1993, respectively. For additional
information, please refer to the Supplemental Schedule of Realized Gains and
Losses (Schedule 1 - page 39).
Cash Distributions
On February 8, 1996, the Individual General Partners approved the fourth
quarter 1995 cash distribution totalling $333,445 which represents net
investment income of $165,100 from Mezzanine Investments and $168,345 from
Temporary Investments. The total amount distributed to Limited Partners was
$332,618 or $1.50 per Unit, which was paid on February 14, 1996. The Managing
General Partner received a total of $752, with respect to its interest in Fund
II. Thomas H. Lee, as an Individual General Partner, received $75 with respect
to his interest in Fund II.
<PAGE>
<TABLE>
<CAPTION>
Cash Distributions
The following table represents distributions approved by the Individual General
Partners of ML-Lee Acquisition Fund II, L.P. since inception (November 10,
1989):
<S> <C> <C> <C> <C> <C> <C>
Total Limited Managing Individual
Distributed Partners Per General Incentive General
Cash(a) Amount Unit Partner Fee(b) Partner
--------------- ------------ -------- ---------- ----------- ----------
Fourth Quarter 1989 $1,224,768 $1,221,692 $6.27 $2,796 $- $280
First Quarter 1990 3,776,596 3,767,253 17.00 8,494 - 849
Second Quarter 1990 4,943,920 4,751,996 21.43 11,120 179,692 1,112
Third Quarter 1990 3,487,811 3,479,179 15.69 7,847 - 785
Fourth Quarter 1990 6,045,031 5,705,499 25.73 13,598 324,574 1,360
First Quarter 1991 2,889,835 2,882,685 13.00 6,500 - 650
Second Quarter 1991 4,216,058 4,205,629 19.56 9,481 - 948
Third Quarter 1991 2,936,520 2,929,252 13.21 6,607 - 661
Fourth Quarter 1991 3,438,901 3,430,395 15.47 7,733 - 773
First Quarter 1992 3,599,446 3,590,052 16.19 8,584 - 810
Second Quarter 1992 3,829,652 3,820,667 17.23 8,124 - 861
Third Quarter 1992 2,905,394 2,898,207 13.07 6,534 - 653
Fourth Quarter 1992 3,027,660 3,020,167 13.62 6,812 - 681
First Quarter 1993 21,642,642 21,589,093 97.36 (c) 48,681 - 4,868
Second Quarter 1993 1,442,695 1,439,125 6.49 3,245 - 325
Third Quarter 1993 5,074,991 5,062,438 22.83 (d) 11,412 - 1,141
Fourth Quarter 1993 11,803,865 11,774,660 53.10 (e) 26,550 - 2,655
First Quarter 1994 16,087,488 16,047,686 72.37 (f) 36,184 - 3,618
Second Quarter 1994 4,214,710 4,204,285 18.96 (g) 9,477 - 948
Third Quarter 1994 1,298,201 1,294,991 5.84 (h) 2,918 - 292
Distribution on
12/15/94 for
proceeds from the
sale of Snapple 68,497,700 58,336,675 263.08 (i) 164,845 9,979,695 16,485
Fourth Quarter 1994 375,092 241,702 1.09 543 132,793 54
Distribution on
2/14/95 for
proceeds from the
sale of EquiCredit 7,276,582 6,359,647 28.68 (j) 16,826 898,426 1,683
First Quarter 1995 6,731,899 5,505,928 24.83 12,418 1,212,311 1,242
Second Quarter 1995 3,477,482 2,084,403 9.40 (k) 6,215 1,386,242 622
Third Quarter 1995 2,019,088 1,124,247 5.07 2,536 892,051 254
Distribution on
12/11/95 from
the sale of Sun 9,610,616 9,200,200 41.49 (l) 20,744 387,598 2,074
Pharmaceuticals
Fourth Quarter 1995 333,445 332,618 1.50 752 - 75
------------- ------------ ------- --------- ----------- --------
Totals $ 206,208,088 $190,300,371 $859.56 $ 467,576 $15,393,382 (m) $ 46,759
============= ============ ======= ========= =========== ========
<PAGE>
(a) Distributions are paid no later than 45 days after the end of each quarter.
(b) Incentive distribution to the Managing General Partner for exceeding the
cumulative Priority
Return of 10% on Mezzanine Investments to Limited Partners.
(c) Includes $85.75 per Unit return of capital from the sale of EquiCredit and Playtex
securities.
(d) Includes $2.45 per Unit return of capital from the sale of EquiCredit securities.
(e) Includes $1.33 per Unit return of capital from the sale of EquiCredit and Snapple
securities.
(f) Includes $59.42 per Unit return of capital from the redemption of BRK Electronics
and Petco Notes.
(g) Includes $12.24 per Unit return of uninvested proceeds.
(h) Includes $3.42 per Unit return of uninvested proceeds.
(i) Includes $9.70 per Unit return of capital from the sale of Snapple Common Stock.
(j) Includes $2.68 per Unit return of capital from the sale of EquiCredit Common Stock.
(k) Includes $0.57 per Unit return of capital from the sale of Petco Common Stock.
(l) Includes $37.42 per Unit return of capital from the sale of Sun Pharmaceuticals.
(m) As of February 14, 1996, there is a Deferred Distribution Amount
outstanding of $2,433,083 that is payable to the Managing General
Partner. This amounts equates to $10.97 per Limited Partner Unit and
will be paid out of Net Mezzanine Income, after the priority return has
been reached, before this source of income can be distributed to the Limited Partners.
</TABLE>
<PAGE>
Item 8. Financial Statements and Supplementary Data
ML-LEE ACQUISITION FUND II, L.P.
TABLE OF CONTENTS
Report of Independent Accountants
Statements of Assets, Liabilities and Partners' Capital
As of December 31, 1995 and December 31, 1994
Statements of Operations
For the Years Ended December 31, 1995,
December 31, 1994 and December 31, 1993
Statements of Changes in Net Assets
For the Years Ended December 31, 1995,
December 31, 1994 and December 31, 1993
Statements of Cash Flows
For the Years Ended December 31, 1995,
December 31, 1994 and December 31, 1993
Statements of Changes in Partners' Capital
For the Years Ended December 31, 1995,
December 31, 1994 and December 31, 1993
Schedule of Portfolio Investments - December 31, 1995
Notes to Financial Statements
Supplementary Schedule of Realized Gains and Losses (Schedule 1)
Supplementary Schedule of Unrealized Appreciation and Depreciation (Schedule 2)
<PAGE>
Report of Independent Accountants
March 15, 1996, except as to Note 14 which is as of March 22, 1996.
To the General and Limited Partners of ML-Lee Acquisition Fund 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, 1995 and 1994, and the results of its operations, the changes in its net
assets, its cash flows, and the changes in its partners' capital for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1995 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations were not received, provide a reasonable
basis for the opinion expressed above.
The financial statements include securities, valued at $107,675,644 at
December 31, 1995 (90.3% of net assets), whose values have been estimated by the
Managing General Partner and the Investment Adviser (with the approval of the
Independent General Partners) in the absence of readily ascertainable market
values, as further described in Note 2. We have reviewed the procedures used by
the Managing General Partner and the Investment Adviser in arriving at their
estimate of value and have inspected underlying documentation, and, in the
circumstances, we believe the procedures are reasonable and the documentation
appropriate. However, those estimated values may differ significantly from the
values that would have been used had a ready market for the securities existed,
and the differences could be material to the financial statements.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule of realized gains and
losses (Schedule 1) and the schedule of unrealized appreciation and depreciation
(Schedule 2) are presented for the purpose of additional analysis and are not a
required part of the basic financial statements. These schedules are the
responsibility of the Fund's management. Such schedules have been subjected to
the auditing procedures applied in our audits of the basic financial statements
and, in our opinion, are fairly stated in all material respects when considered
in relation to the basic financial statements taken as a whole.
PRICE WATERHOUSE LLP
New York, New York
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
<S> <C> <C>
For the Years Ended
December 31, 1995 December 31, 1994
ASSETS:
Investments - Notes 2,4,5,
Portfolio Investments at fair value
Managed Companies (amortized cost $105,477
at December 31, 1995 and $114,726 at December 31, 1994) $ 88,955 $ 120,895
Non-Managed Companies (amortized cost $30,341)
at December 31, 1995 and $29,888 at December 31, 1994) 19,340 26,753
Temporary Investments, at amortized cost (cost $10,024
at December 31, 1995 and $18,345 at December 31, 1994) 10,042 18,390
Cash 1 1
Accrued Interest Receivable - Note 2 2,005 1,763
Prepaid Expenses 4 4
------------ ------------
TOTAL ASSETS $ 120,347 $ 167,806
============ ============
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities
Legal and Professional Fees Payable $ 363 $ 72
Reimbursable Administrative Expenses Payable 57 88
Independent General Partners' Fees Payable - Note 9 66 46
Deferred Interest Income - Note 2 678 886
------------ ------------
Total Liabilities 1,164 1,092
------------ ------------
Partners' Capital - Note 2
Individual General Partner 29 40
Managing General Partner 1,932 4,780
Limited Partners (221,745 Units) 117,222 161,894
------------ ------------
Total Partners' Capital 119,183 166,714
------------ ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 120,347 $ 167,806
============ ============
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
For the Years Ended
December 31, December 31, December 31,
1995 1994 1993
-------- --------- -------
INVESTMENT INCOME - Notes 2,4,6:
Interest $ 7,523 $ 11,395 $ 9,962
Discount 928 1,438 1,463
Dividends 76 84 179
-------- --------- -------
TOTAL INCOME 8,527 12,917 11,604
-------- --------- -------
EXPENSES:
Investment Advisory Fee - Note 7 1,537 1,700 1,892
Fund Administration Fee - Note 8 798 836 899
Reimbursable Administrative Expenses-Note 8 126 275 -
Legal and Professional Fees 1,651 2,051 3,357
Independent General Partners' Fees and Expenses - Note 9 263 184 424
Amortization of Deferred Organization Expenses - Note 2 - 50 58
Insurance Expense 5 5 6
-------- --------- -------
TOTAL EXPENSES 4,380 5,101 6,636
-------- --------- -------
NET INVESTMENT INCOME 4,147 7,816 4,968
Net Realized Gain on Investments - Note 4 and Schedule 1 8,373 63,853 13,202
Net Change in Unrealized Appreciation (Depreciation) on
Investments - Note 5 and Schedule 2
Publicly Traded Securities (22,693) (96,537) 60,130
Nonpublic Securities (7,867) (3,817) 20,456
-------- --------- -------
Subtotal (30,560) (100,354) 80,586
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS (18,040) (28,685) 98,756
-------- --------- -------
Less: Incentive Fee to Managing General Partner (2,162) (14,773) -
-------- --------- -------
NET INCREASE (DECREASE) AVAILABLE FOR PRO-RATA
DISTRIBUTION TO ALL PARTNERS $(20,202) $ (43,458) $98,756
======== ========= =======
See the Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
For the Years Ended
December 31, December 31, December 31,
1995 1994 1993
---------- ----------- -----------
FROM OPERATIONS:
Net Investment Income
$ 4,147 $ 7,816 $ 4,968
Net Realized Gain on Investments 8,373 63,853 13,202
Net Change in Unrealized Appreciation
(Depreciation) on Investments (30,560) (100,354) 80,586
--------- --------- ---------
Net Increase (Decrease) in Net Assets
Resulting from Operations (18,040) (28,685) 98,756
Cash Distributions to Partners
(29,491) (101,902) (31,188)
--------- -------- ---------
Total Increase (Decrease) (47,531) (130,587) 67,568
NET ASSETS:
Beginning of Year 166,714 297,301 229,733
--------- --------- ---------
End of Year $ 119,183 $ 166,714 $ 297,301
========= ========= =========
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
For the Years Ended
December 31, December 31, December 31,
Increase in Cash and Cash Equivalents 1995 1994 1993
------------------ ------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest, Dividends and Discount Income $ 7,650 $ 13,218 $ 11,615
Closing Fees Received - 60 197
Legal and Professional Fees (1,363) (2,161) (3,211)
Investment Advisory Fee (1,537) (1,700) (1,892)
Fund Administration Fee (799) (836) (899)
Reimbursable Administrative Expenses (156) (187) -
Independent General Partners' Fees and Expenses (242) (222) (344)
Sale of Temporary Investments, Net 8,321 24,728 10,416
Purchase of Portfolio Company Investments (1,635) (11,358) (19,823)
Proceeds from Sales of Portfolio Company
Investments 19,256 80,364 35,150
Insurance Expense (4) (4) (7)
Miscellaneous Expense - - (14)
----------- --------------- -----------
Net Cash Provided by Operating Activities 29,491 101,902 31,188
----------- --------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Distributions to Partners (29,491) (101,902) (31,188)
----------- --------------- -----------
Net Cash Applied to Financing Activities (29,491) (101,902) (31,188)
----------- --------------- -----------
Net Increase in Cash - - -
Cash at Beginning of Year 1 1 1
----------- --------------- ------------
Cash at End of Year $ 1 $ 1 $ 1
=========== =============== ============
RECONCILIATION OF NET INVESTMENT INCOME
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Investment Income $ 4,147 $ 7,816 $ 4,968
----------- --------------- ------------
Adjustments to Reconcile Net Investment Income to
Net Cash Provided by Operating Activities:
Decrease in Investments 17,569 30,370 12,541
(Increase) Decrease in Accrued Interest
Receivables (878) 301 10
(Increase) Decrease in Prepaid Expenses - 15 (14)
Amortization of Deferred Organization Expenses - 50 58
Increase (Decrease) in Legal and
Professional Fees Payable 291 (109) 146
Increase (Decrease)in Reimbursable
Administrative Expenses Payable (31) 88 -
Increase (Decease) in Independent General
Partners' Fees Payable 20 (39) 80
Increase in Deferred Closing Fees - 60 197
Decrease in Option Payable - (503) -
Net Realized Gain on Sales of Investments 8,373 63,853 13,202
----------- --------------- ------------
Total Adjustments 25,344 94,086 26,220
----------- --------------- ------------
Net Cash Provided by Operating Activities $ 29,491 $ 101,902 $ 31,188
=========== =============== ============
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Individual Managing
General General Limited
Partner Partner Partners Total
------------- -------------- --------------- ----------------
For the Year Ended December 31, 1993
Partners' Capital at January 1, 1993 $ 56 $ 139 $ 229,538 $ 229,733
Allocation of Net Investment Income 1 11 4,956 4,968
Allocation of Net Realized Gain on Investments 3 30 13,169 13,202
Allocation of Net Change in Unrealized Appreciation
From Investments 18 181 80,387 80,586
Cash Distributions to Partners (7) (70) (31,111) (31,188)
---------- --------- ------------ -----------
Partners' Capital at December 31, 1993 $ 71 $ 291 $ 296,939 $ 297,301
========== ========= ============ ===========
For the Year Ended December 31, 1994
Partners' Capital at January 1, 1994 $ 71 $ 291 $ 296,939 $ 297,301
Allocation of Net Investment Income 2 1,122 6,692 7,816
Allocation of Net Realized Gain on Investments 14 13,812 50,027 63,853
Allocation of Net Change in Unrealized Depreciation
From Investments (23) (225) (100,106) (100,354)
Cash Distributions to Partners (24) (10,220) (91,658) (101,902)
--------- --------- ----------- -----------
Partners' Capital at December 31, 1994 $ 40 $ 4,780 $ 161,894 $ 166,714
========= ========= =========== ===========
For the Year Ended December 31, 1995
Partners' Capital at January 1, 1995 $ 40 $ 4,780 $ 161,894 $ 166,714
Allocation of Net Investment Income - Note 3 1 1,410 2,736 4,147
Allocation of Net Realized Gain on Investments - 1 780 7,592 8,373
Notes 3,4
Allocation of Net Change in Unrealized Appreciation (7) (69) (30,484) (30,560)
From Investments - Notes 2,5
Cash Distributions to Partners (6) (4,969) (24,516) (29,491)
---------- --------- ----------- -----------
Partners' Capital at December 31, 1995 - Notes 2,3 $ 29 $ 1,932 $ 117,222 $ 119,183
========== ========= =========== ===========
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost(e) (Note 2)
Investments
<S> <C> <C> <C> <C> <C>
MEZZANINE INVESTMENTS
MANAGED COMPANIES
ANCHOR ADVANCED PRODUCTS, INC. (b)
$5,867 Anchor Advanced Products, Inc., Sr. Sub. Nt.11.67% due 04/30/00(c) 04/30/90 $5,867 $5,867
$7,822 Anchor Advanced Products, Inc., Jr. Sub. Nt.17.5% due 04/30/00(c) 04/30/90 7,822 7,822
162,967 Shares Anchor Holdings Inc., Common Stock (d) 04/30/90 1,548 1,548
247,710 Warrants Anchor Holdings Inc., Common Stock Purchase Warrants(d) 04/30/90 0 0
(26.1% of fully diluted common equity assuming exercise
of warrants) (i) 15,237 15,237 12.88
BIG V SUPERMARKETS, INC. (b)
$13,037 Big V Supermarkets, Inc., Sr. Sub. Nt. 14.14% due 03/15/01(c) 12/27/90 13,037 13,037
117,333 Shares Big V Holding Corp., Common Stock(d) 12/27/90 4,107 4,107
(16.6% of fully diluted common equity) (i) 17,144 17,144 14.49
COLE NATIONAL CORPORATION
1,341 Warrants Cole National Corporation, Common Stock Purchase Warrants(d) 09/26/90 0 0
(0.0% of fully diluted common equity assuming exercise
of warrants)(i)
$1,393 13% Sr. Secured Bridge Note
Purchased 09/25/90 $1,393
Repaid 11/15/90 $1,393
Realized Gain $ 0
0 0 0.00
See the Accompanying Notes to the Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost(e) (Note 2)
Investments
<S> <C> <C> <C> <C> <C>
CST OFFICE PRODUCTS, INC. (b) - Note 6,14
$6,355 Lee-CST Acquisition Corp., Sr. Sub. Nt. 12% due 03/31/00(c)(g) 03/30/90 $ 6,355 $ 6,355
$6,355 Lee-CST Acquisition Corp., Jr. Sub. Nt. 18% due 03/30/00(c)(g) 03/30/90 6,355 6,355
$3,165 CST Office Products Corp., Sr. Sub. Nt. 15% due 03/31/00(c)(f)(g) Various 195 195
$4,308 CST Office Products Corp., Jr. Sub. Nt. 15% due 06/30/96(c)(f)(g) Various 0 0
162,949 Shares Lee-CST Holding Corp., Common Stock (d) 03/30/90 1,304 1,304
177,207 Warrants Lee-CST Holding Corp., Common Stock Purchase Warrants(d) 03/30/90 0 0
(22.3% of fully diluted common equity assuming exercise
(of warrants)(i)
14,209 14,209 12.01
2,058,474 Shares FIRST ALERT, INC., (b) Note 5
First Alert, Inc., Common Stock(a)(d) 07/31/92 3,320 17,754
(8.1% of fully diluted common equity) (i)
$ 10,198 12.5% Sub. Note
Purchased 07/31/92 $10,198
Repaid 03/28/94 $10,198
Realized Gain $ 0
3,320 17,754 14.99
GHIRARDELLI HOLDINGS CORPORATION (b) - Notes 4,14
$4,672 Ghirardelli Holdings Corporation, 13% Subordinated Note
due 03/31/02(c) 03/31/92 4,672 4,672
467,200 Shares Ghirardelli Holdings Corporation, Common Stock(d) 03/31/92 934 934
73,692 Shares Ghirardelli Holdings Corporation, Common Stock(d) 05/12/95 234 234
14,016 Shares Ghirardelli Holdings Corporation, Series A Preferred Stock(d) 05/12/95 1,402 1,402
(9.3% of fully diluted common equity)(i)
$7,008 Sr. Bridge Note
Purchased 03/31/92 $7,008
Repaid 06/11/92 $7,008
Realized Gain $ 0
7,242 7,242 6.11
See the Accompanying Notes to the Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost(e) (Note 2)
Investments
<S> <C> <C> <C> <C> <C>
HILLS STORES COMPANY - Notes 4,5
458,432 Shares Hills Stores Company, Common Stock(a)(d) 04/03/90 $30,246 $ 4,527
62,616 Shares Hills Stores Company, Common Stock(a)(h) 08/21/95 4,530 618
(4.6% of fully diluted common equity) (i) 34,776 5,145 4.35
PETCO ANIMAL SUPPLIES, INC. (b) - Notes 4,5
116,825 Shares Petco Animal Supplies, Common Stock(a)(d)(f) Various 1,915 3,417
(1.3% of fully diluted common equity) (i)
$52 14% Sr. Sub. Bridge Notes
Purchased various $ 52
Repaid 04/19/91 $ 52
Realized Gain $ 0
$1,667 12.5% Sr. Sub. Notes
Purchased various $1,667
Repaid 03/28/94 $1,667
Realized Gain $ 0
120,143 Shares Common Stock
Purchased various $1,969
Sold 04/26/95 $2,368
Realized Gain $ 399
Total Realized Gain $ 399
1,915 3,417 2.89
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost(e) (Note 2)
Investments
<S> <C> <C> <C> <C> <C>
PLAYTEX PRODUCTS, INC. (b) - Notes 4,5
343,726 Shares Playtex Products, Inc., Common Stock(a)(d) 03/29/90 $ 5,299 $ 2,578
(.6% of fully diluted common equity) (i)
$7,333 15% Subordinated Note
Purchased 03/29/90 $7,333
Sold 09/28/90 $7,349
Realized Gain $ 16
84,870 Shares Common Stock
Purchased 03/29/90 $ 282
Sold 12/20/91 $ 328
Realized Gain $ 46
$7,334 15% Subordinated Note
Purchased 03/29/90 $7,334
Sold 02/01/93 $7,327
Realized Loss $ (7)
Total Net Realized Gain $ 55
5,299 2,578 2.18
RESTAURANTS UNLIMITED
$6,044 Restaurants Unlimited, 11% Subordinated Note due 06/30/02(c) 06/03/94 6,044 6,044
391,302 Warrants Restaurants Unlimited, Common Stock Warrants(d) 06/03/94 06/03/94 0 0
(2.1% of fully diluted common equity) (i) 6,044 6,044 5.11
STANLEY FURNITURE COMPANY, INC. (b) - Note 5
23,105 Shares Stanley Furniture Company, Inc., Common Stock(a)(d) 06/30/91 291 185
(0.4% of fully diluted common equity) (i)
291 185 0.17
TOTAL INVESTMENT IN MANAGED COMPANIES $105,477 $ 88,955 75.18
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost(e) (Note 2)
Investments
<S> <C> <C> <C> <C> <C>
NON-MANAGED COMPANIES
BIOLEASE, INC.
$784 Biolease, Inc., 13% Sub. Nt. due 06/06/04 (c) 06/08/94 $ 676 $ 693
96.56 Shares BioLease, Inc., Common Stock (d) 06/08/94 94 94
40,057 Warrants Biotransplant, Inc., Common Stock Purchase Warrants(d) 06/08/94 14 14
784 801 0.68
FITZ AND FLOYD/SYLVESTRI -Notes 5,6
$10,281 FFSC, Inc., Adjustable Rate Sr. Sub. Nt. due 03/31/03(c)(g) 03/31/93 10,266 7,818
$ 2,419 FFSC, Inc., Adjustable Rate Sr. Sub. Nt. due 03/31/03(c)(g) 07/30/93 2,414 1,840
1,511,856 Shares FF Holding Co., Common Stock (d) 03/31/93 15 0
514,636 Shares FF Holding Co., Common Stock (d) 07/30/93 5 0
515,845 Shares FF Holding Co., Common Stock (d) 12/22/94 0 0
12,700 9,658 8.16
FLA. ORTHOPEDICS, INC. - Notes 5,6,12
$4,842 FLA. Acquisition Corp., 12.5% Sub. Nt. due 07/31/99(c)(g) 08/02/93 4,842 0
121,040 Shares FLA. Holdings, Inc. Common Stock(d) 08/02/93 1,513 0
72,624 Warrants FLA. Holdings, Inc. Common Stock Purchase Warrants(d) 08/02/93 0 0
6,355 0 0.00
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost(e) (Note 2)
Investments
<S> <C> <C> <C> <C> <C>
NATIONAL TOBACCO COMPANY, L.P.
$3,503 National Tobacco Company, 13% Sub. Nt. due 10/15/98(c) 04/14/92 $ 3,503 $ 3,503
$ 115 National Tobacco Company, 16% Sub. Nt. due 10/15/98(c)(f) 06/30/93 115 115
$ 234 National Tobacco Company, Class A Partnership Int.(d) 04/14/92 234 234
3,852 3,852 3.26
SORETOX - Notes 4,5,6
$3,503 Stablex Canada, Inc., Sub. Nt. 10% due 06/30/07(c)(f)(g) 06/29/95 3,503 2,590
$3,128 Stablex Canada, Inc., Jr. Sub. Nt. 11% due 06/30/09(c)(f)(g) 06/29/95 3,128 2,439
2,004 Warrants Seaway TLC, Inc. Common Stock Purchase Warrants 06/29/95 0 0
6,631 5,029 4.25
TOTAL INVESTMENT IN NON-MANAGED COMPANIES $30,322 19,340 16.35
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes Various 78,794 69,345 58.59
Partnership Interest 04/14/92 234 234 0.20
Preferred Stock, Common Stock, Warrants and Stock Rights Various 56,771 38,716 32.72
TOTAL MEZZANINE INVESTMENTS $135,799 $108,295 91.51
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost(e) (Note 2)
Investments
<S> <C> <C> <C> <C> <C>
TEMPORARY INVESTMENTS
CERTIFICATES OF DEPOSIT AND TIME DEPOSITS
$ 605 Banque Nationale de Paris, 3.875% due 03/29/96 - Note 12 08/18/93 $ 605 $ 605
TOTAL INVESTMENT IN C/D'S AND TIME DEPOSITS 605 605 0.52
COMMERCIAL PAPER
$ 1,139 Ford Motor Credit Company, 5.92% due 01/02/96 12/27/95 1,139 1,140
$ 8,280 Ford Motor Credit Company, 5.81%, due 01/03/96 12/19/95 8,280 8,297
TOTAL INVESTMENT IN COMMERCIAL PAPER 9,419 9,437 7.97
TOTAL TEMPORARY INVESTMENTS 10,024 10,042 8.49
TOTAL INVESTMENT PORTFOLIO $145,823 $118,337 100.00%
(a) Publicly traded class of securities.
(b) Represents investment in affiliates as defined in the Investment Company Act of 1940.
(c) Restricted security.
(d) Restricted non-income producing equity security.
(e) Represents original cost and excludes accretion of discount of $19 or
Mezzanine Investments and $18 for Temporary Investments.
(f) Inclusive of receipt of payment-in-kind securities.
(g) Non-accrual investment status.
(h) Non-income producing equity security.
(i) Percentages of common equity have not been audited by Price Waterhouse LLP.
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
ML-LEE ACQUISITION FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
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 has 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 stated 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.
<PAGE>
Temporary Investments with maturities of less than 60 days are stated at
amortized cost, which approximates market.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of December
31, 1995. Although the Managing General Partner and Investment Adviser are not
aware of any factors not disclosed herein that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued since that time, and because the portfolio investments of companies
whose equity is publicly traded are valued at the last price at December 31,
1995, the current estimated fair value of these investments may have changed
significantly since that point in time.
Interest Receivable on Investments
Investments generally will be placed on non-accrual status in the event of
a default (after the applicable grace period expires) or if the Investment
Adviser and the Managing General Partner determine that there is no reasonable
assurance of collecting interest.
Payment-In-Kind Securities
All payment-in-kind securities received in lieu of cash interest payments
by 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, 1995 and December 31,
1994, Fund II had in its portfolio of investments $751,907 and $310,007,
respectively, of payment-in-kind notes which excludes $7,637,720 and $4,479,539,
respectively, of payment-in-kind notes received from notes placed on non-accrual
status. As of December 31, 1995 and December 31, 1994, Fund II has in its
portfolio of investments $2,293,457 and $2,240,790 respectively, of
payment-in-kind equity securities.
Deferred Organization Expenses
Organization costs of $292,128 for Fund II were fully amortized as of
November 10, 1994.
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.
<PAGE>
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, 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.
<PAGE>
4. Investment Transactions
On January 27, 1995, Fund II sold 227,437 shares of EquiCredit Common Stock
realizing a gain of $6,682,098 on an original investment of $595,886.
On April 27, 1995, Petco Animal Supplies, Inc. ("Petco") completed a public
offering of approximately 3.6 million shares of Common Stock (the "Petco
Offering") at a net price of $19.71 per share. Of the shares sold, approximately
2.4 million shares were offered by Petco and approximately 1.2 million were
offered by certain existing shareholders, including Fund II. As part of the
Petco Offering, Fund II sold 120,143 shares (including shares sold as a result
of the exercise of the underwriters' overallotment option) representing 51% of
its Petco holdings. Fund II received proceeds of $2,368,319 and realized a gain
of $398,415 on the sale of the equity.
On May 12, 1995, Fund II made a follow-on investment in Ghirardelli
Holdings Corp. for a total of $1,635,200. Fund II received 14,016 shares of
Series A Preferred Stock for $1,401,600 and 73,692 additional shares of Common
Stock for $233,600.
Effective June 29, 1995, Soretox structured a management led buyout of the
company. As a result, the Stablex Canada, Inc. $6,189,075, 14% Subordinated Note
and the 183,921 shares of 176347 Canada Inc. Common Stock Purchase Warrants held
by Fund II were exchanged for a Stablex Canada, Inc. $3,503,250 principal amount
10% Subordinated Note, a $3,127,725 principal amount 11% Junior Subordinated
Note and 2,004 shares of Seaway TLC, Inc. Common Stock Purchase Warrants. No
gain or loss was recorded on the transaction.
On August 21, 1995, Fund II entered into a stock purchase and exchange
agreement with Hills Stores Company and exchanged the 219,156 Common Stock
Rights held by Fund II for 62,616 shares of Hills Stores Common Stock. No gain
or loss was recognized on the transaction. The common shares received were
registered with the Securities and Exchange Commission in the fourth quarter of
1995.
On October 17, 1995 Playtex Products, Inc. and Banana Boat Holding Corp.
entered an Agreement and Plan of Merger (the "Agreement") pursuant to which
Playtex agreed to acquire all of the outstanding equity of Banana Boat that it
did not already own. In accordance with the Agreement, the 12.5% Subordinated
Note held by Fund II, plus all accrued interest, was paid in full by Playtex
upon consummation of the merger. Additionally, Fund II received net proceeds of
$173.55 per share for each of the 7,444.5 Common Stock Purchase Warrants that
were exercised pursuant to the Agreement. Fund II received total proceeds of
$9.7 million which resulted in a gain of $1.3 million.
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, 1995, the
reserve balance was reduced to $9.9 million due to follow-on investments of $285
in Petco Animal Supplies, $2.4 million in Fitz and Floyd, Inc., $240,060 in Fine
Clothing, Inc., $4.5 million in Hills Stores and $1.6 million in Ghirardelli
Holdings. Additionally $6.29 million of the reserve has been returned to the
partners during 1995. The level of the reserve was based upon an analysis of
potential follow-on investments in specific portfolio companies that may become
necessary to protect or enhance Fund II's existing investment. As of March 6,
1996, the Independent General Partners have approved retention of the reserve at
its current level.
Because Fund II primarily invests in high-yield private placement
securities, the risk of loss upon default by an issuer is greater than with
investment grade securities because high-yield securities are generally
unsecured and are often subordinated to other creditors of the issuer. Also,
high-yield issuers usually have higher levels of indebtedness and are more
sensitive to adverse economic conditions.
<PAGE>
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
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
depreciation in market value of publicly traded securities. The unrealized
depreciation can be attributed primarily to the decrease in value of First Alert
and Hills Stores Company at December 31, 1995, as well as the reversal of
unrealized appreciation of EquiCredit from the sale of the EquiCredit securities
held by Fund II. This compares to a net unrealized depreciation of $100.3
million of which $96.5 million was related to net depreciation in market value
of publicly traded securities at December 31, 1994. Fund II's cumulative net
unrealized depreciation on investments as of December 31, 1995 totaled $27.5
million
For the year ended December 31, 1993, Fund II recorded net unrealized
appreciation of $80.6 million of which $60.1 million was related to net
appreciation in market value of publicly traded securities. The increase was
primarily attributed to the increase in valuation on Snapple Beverage Corp. Fund
II's valuation of the common stock of First Alert, Hills, Petco, Playtex and
Stanley Furniture reflects their closing market prices at December 31, 1995.
For additional information, please refer to the Supplemental Schedule of
Unrealized Appreciation and Depreciation (Schedule 2 - pages 40-41).
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:
CST Office Products, Inc. on October 1, 1992 (See Note 14).
Fitz and Floyd/Silverstri Corporation on January 1, 1994.
FLA Orthopedics, Inc. on January 1, 1995.
Stablex Canada, Inc. on June 29, 1995.
7. Investment Advisory Fee
The Investment Adviser provides the identification, management and
liquidation of portfolio investments for the Funds. As compensation for services
rendered to the Funds, the Investment Adviser receives a quarterly fee at the
annual rate of 1% of assets under management (net offering proceeds reduced by
cumulative capital reductions), with a minimum annual fee of $1.2 million for
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, 1995, 1994 and
1993, Fund II paid $1,536,560, $1,699,673, and $1,892,255, respectively, in
Investment Advisory Fees to Thomas H. Lee Advisors II, L.P.
<PAGE>
8. Fund Administration Fees and Expenses
As compensation for its services, ML Fund Administrators Inc. (the "Fund
Administrator"; an affiliate of the Managing General Partner), is entitled to
receive from the Funds an annual amount of the greater of $500,000 or 0.45% of
the excess of net offering proceeds less 50% of capital reductions. In addition,
ML Mezzanine II Inc., an affiliate of the Fund Administrator and of Merrill
Lynch & Co. Inc., receives 5% of the benefit of any MGP Distributions paid to
the Managing General Partner (see Note 10). The Fund Administration Fee is
calculated and paid quarterly, in advance, by each fund in proportion with the
net offering proceeds. For the years ended December 31, 1995, 1994 and 1993,
Fund II paid $798,478, $835,643, and $899,441, respectively, in Fund
Administration Fees.
Pursuant to the administrative services agreement between Fund II and the
Fund Administrator, effective November 10, 1993, a portion of the actual
out-of-pocket expenses incurred in connection with the administration of Fund II
is being reimbursed to the Fund Administrator. Actual out-of-pocket expenses
("reimbursable expenses") primarily consist of printing, audits, tax preparation
and custodian fees. For the year ended December 31, 1995 and 1994, Fund II
incurred $125,816 and $275,079, respectively, in reimbursable expenses.
9. Independent General Partners' Fees and Expenses
As compensation for their services, each Independent General Partner will
receive a combined annual fee of $40,000 (payable quarterly) from the Funds in
addition to a $1,000 fee for each meeting attended ($500 if a meeting is held on
the same day as a committee meeting of the General Partners) plus reimbursement
for any out-of-pocket expenses incurred. Fees and expenses are allocated between
the Funds in proportion to the number of Units issued by each fund and
compensation for each of the Independent General Partners is reviewed annually
by the Individual General Partners. For the years ended December 31, 1995, 1994
and 1993, Fund II incurred $262,832, $184,280, and $423,743, respectively, in
Independent General Partners' Fees and Expenses.
10. Related Party Transactions
Fund II's investments generally are 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.
<PAGE>
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. In addition, certain of the portfolio
companies have contractual or other relationships pursuant to which they do
business with one another.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") is an
affiliate of the Managing General Partner. MLPF&S and certain of its affiliates,
in the ordinary course of their business, perform various financial services for
various portfolio companies of the Funds, which may include investment banking
services, broker/dealer services and economic forecasting, and receive in
consideration therewith various fees, commissions and reimbursements.
Furthermore, MLPF&S and its affiliates or investment companies advised by
affiliates of MLPF&S may, from time to time, purchase or sell securities issued
by portfolio companies of the Funds in connection with its ordinary investment
operations.
For the year ended December 31, 1995, Fund II paid $156,459 to the Fund
Administrator for reimbursable out-of-pocket expenses. (Please refer to Note 8
for further information).
During 1995, the Fund II paid Managing General Partner distributions
totalling $4,968,705 (which includes $4,909,422 of incentive fees and $59,283
with respect to its interest in Fund II). Of this incentive fee amount, 95% or
$4,663,951 was paid to the Investment Advisor and the remaining 5% totalling
$245,471 was paid to ML Mezzanine II Inc. As of December 31, 1995, the Managing
General Partner has earned $16,934,602 in incentive fees of which $2,433,083 was
deferred in payment to the Managing General Partner as a Deferred Distribution
Amount in accordance with the Partnership Agreement. This Deferred Distribution
Amount was distributed to the Partners pro-rata in accordance with their capital
contributions, and certain amounts otherwise later payable to Limited Partners
from distributable cash from operations would instead be payable solely to the
Managing General Partner until the Deferred Distribution Amount is paid in full.
11. Litigation
On April 5, 1991, two Limited Partners of Fund II filed a putative class
action in the United States District Court for the Southern District of New
York, purportedly on behalf of the class of all Limited Partners of record as of
September 30, 1990, against Fund II, the Managing General Partner, the
Individual General Partners and the Investment Adviser. The complaint alleges
that the disclosure in Fund II's proxy statement for the Special Meeting of
Limited Partners held May 22, 1990 violated Federal statutes and rules
promulgated by the Securities and Exchange Commission. The complaint seeks
monetary damages, which are not quantified, and other relief. On December 30,
1992, the United States District Court for the Southern District of New York
granted the defendants' motion to dismiss the plaintiffs' complaint, with leave
to the plaintiffs to file an amended complaint no later than February 15, 1993.
On February 11, 1993, plaintiffs filed an amended complaint alleging, in
addition to the allegation set forth in the original complaint, that if certain
facts were disclosed in the 1990 proxy statement, plaintiffs and the other
members of the class would have voted differently in the elections to which the
proxy statement pertained. The defendants thereafter moved to dismiss the
amended complaint. In December 1994, the parties entered into a proposed
stipulation and settlement to resolve the litigation and on August 7, 1995 there
was a settlement hearing pursuant to which the settlement was approved on August
10, 1995. The settlement was thereafter effected. 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
professional fees.
<PAGE>
On February 3, 1992 and February 5, 1992, respectively, one Limited Partner
from Fund II and one Limited Partner from the Retirement Fund each commenced
class actions in the US District Court for the District of Delaware, purportedly
on behalf of all persons who purchased limited partnership interests in the
Funds between November 10, 1989 and January 5, 1990, against the Funds, the
Managing General Partner, the Individual General Partners, the Investment
Adviser to the Funds and certain named affiliates of such persons. These
actions, alleging that the defendants in the action made material
misrepresentations or omitted material information in the offering materials for
the Funds concerning the investment purposes of the Funds, were consolidated by
the court on March 31, 1992, and a consolidated complaint was filed by the
plaintiffs on May 14, 1992. In April 1993, plaintiffs filed an amended
complaint, adding claims that certain transactions by the Funds were prohibited
by the federal securities laws applicable to the Funds and their affiliates
under the Investment Company Act of 1940, as amended. The amended complaint also
named the Funds' counsel as a defendant. Defendants moved to dismiss the amended
complaint, and, by Opinion and Order dated March 31, 1994, the Court granted in
part and denied in part the motions to dismiss. Additionally, by its March 31,
1994 Opinion and Order, the Court certified the case as a class action, and
ordered plaintiffs to replead by filing a new complaint reflecting the Court's
rulings. On April 15, 1994, plaintiffs served and filed a new complaint, which
defendants moved to strike for not conforming to the court's ruling. On August
3, 1994, the Court granted defendants' motion to strike the new complaint.
Plaintiffs thereafter filed a revised second amended complaint dated September
26, 1994. Factual discovery in this litigation has concluded. Expert discovery
is currently set to conclude in early 1996. The defendants in this action
believe that the remaining claims are without merit, although whether or not the
plaintiffs prevail, the Funds may be obligated to indemnify and advance
litigation expenses to certain of the defendants under the terms and conditions
of various indemnity provisions in the Funds' Partnership Agreements and
separate indemnification agreements, and the amount of such indemnification and
expenses could be material. 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 professional fees.
The outcome of this case is not determinable at this time.
On August 9, 1994, the same two Limited Partners as noted in the preceding
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. The defendants have filed papers in opposition to the
motion for partial summary judgment on January 10, 1995. On August 4, 1995,
plaintiffs filed an amended complaint alleging additional violations of the
Investment Company Act of 1940 and common law arising out of the secondary
offering. The plaintiffs moved for summary judgment on certain of these claims.
On October 13, 1995, the defendants in this litigation each filed briefs in
opposition to plaintiffs motion. Because the defendants in this action believe
that the claims are without merit, each defendant also filed a separate motion
to dismiss, although whether or not the plaintiffs prevail, the Funds may be
obligated to indemnify and advance litigation expenses to certain of the
defendants under the terms and conditions of various indemnity provisions in the
Funds' Partnership Agreements and separate indemnification agreements. The
outcome of this case is not determinable at this time.
<PAGE>
On November 2, 3 and 4, 1994, stockholders of Snapple Beverage Corp.
commenced approximately twenty putative class actions in the Delaware Chancery
Court, purportedly on behalf of all public stockholders of Snapple, against
Snapple, the Funds, Thomas H. Lee Equity Partners, L.P., and some or all of
Snapple's directors. Since then, the plaintiffs have filed a Consolidated
Amended Complaint against Snapple, the Funds, Thomas H. Lee Equity Partners,
L.P., some or all of Snapple's directors and Quaker Oats. The complaint alleges
that the sale of Snapple to Quaker Oats was at an unfair price and in violation
of the defendants' fiduciary duties to public stockholders. The plaintiffs
sought an injunction against the merger transaction, an accounting for any
damages suffered by the public stockholders, and attorneys' fees and related
expenses. The Court on November 15, 1994, denied plaintiffs application to take
expedited discovery and request to schedule a preliminary injunction hearing.
The defendants in these actions believe that the claims are without merit,
although whether or not the plaintiffs prevail, the Funds may be obligated to
indemnify and advance litigation expenses to certain of the defendants under the
terms and conditions of various indemnity provisions in the Funds' Partnership
Agreements and separate indemnification agreements. The outcome of this case is
not determinable at this time.
On November 27, 1995, one Limited Partner from Fund II and one Limited
Partner from the Retirement Fund filed a putative class action in the United
States District Court for the District of Delaware, purportedly on behalf on
behalf of all persons or entities who owned Units in the Funds between April 5,
1991 and November 27, 1995, against the Funds, the Managing General Partner, the
Individual General Partners, the Investment Adviser to the Funds, and certain
named affiliates of such persons. The complaint contends that the Funds
improperly advanced legal fees and litigation costs to the defendants in
connection with three previously filed lawsuits. The plaintiffs are seeking an
accounting, rescissory or actual damages, punitive damages, plaintiffs'
litigation costs and attorneys fees, pre-judgment and post-judgment interest,
and an injunction barring the defendants from further indemnifying themselves.
The defendants in this action believe that the claims are without merit and have
moved to dismiss the case. Although the defendants believe the advancement of
legal fees and litigation costs was properly made pursuant to indemnification
agreements signed by the defendants, the outcome of this case is not
determinable at this time.
12. Commitments
On August 18, 1993, Fund II established a letter of credit from Banque
Nationale de Paris in favor of FLA. Orthopedics, a Non-Managed portfolio
company. Fund II posted as collateral a $605,200 Banque Nationale de Paris
certificate of deposit which pays an annual interest rate of 3.875%. If the
commitment is drawn upon, Fund II will receive additional subordinated notes and
equity of FLA. Orthopedics. The letter of credit will expire on May 1, 1996.
13. Income Taxes (Statement of Financial Accounting Standards No. 109)
No provision for income taxes has been made because all income and losses
are allocated to 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. Generally, the tax basis of Fund II's assets
approximate the amortized cost amounts reported in the financial statements.
This amount is computed annually and as of December 31, 1995, the tax basis of
Fund II's assets are less than the amounts reported in the financial statements
by $2,5133,719. This difference is primarily attributable to unrealized
depreciation and appreciation on investments which has not been recognized for
tax purposes.
<PAGE>
14. Subsequent Events
On February 8, 1996, the Individual General Partners approved the fourth
quarter 1995 cash distribution totalling $333,445 which represents net
investment income of $165,100 from Mezzanine Investments and $168,345 from
Temporary Investments. The total amount distributed to Limited Partners was
$332,618 or $1.50 per Unit, which was paid on February 14, 1996. The Managing
General Partner received a total of $752, with respect to its interest in Fund
II. Thomas H. Lee, as an Individual General Partner, received $75 with respect
to his interest in Fund II.
On February 14, 1996, Ghirardelli Holdings Corporation ("Ghirardelli"),
Ghirardelli Chocolate Company, and all of the equityholders of Ghirardelli,
including the Funds and certain Lee Affiliates, executed a Stock Purchase
Agreement pursuant to which (i) the equityholders agreed to sell all of their
shares and options to Ghirardelli and (ii) HMTF/CH Acquisition Company (the
"Buyer") agreed to purchase new shares of Ghirardelli. The closing is scheduled
for the later to occur of (x) the 10th day after the first closing of the
Buyer's parent's equity fund, and (y)the date upon which the last of any
approvals and consents necessary to the transaction are obtained. The price per
share for the stock of Ghirardelli is $5.88854;; provided that if the closing
occurs after March 31, 1996, the purchase price shall bear interest at an annual
rate of 9% for the period April 1, 1996 through the closing. If the transaction
occurs, Fund II will sell 540,892 shares for proceeds of approximately $3.2
million. In addition, the Buyer will (i) repay all of Ghirardelli's Subordinated
Notes held by the Funds, including all interest and all prepayment penalties
thereon and (ii) pay the redemption price, including the redemption premium, on
all outstanding Series A Preferred Stock of Ghirardelli held by Fund II. As part
of the transaction, each stockholder is required to allocate approximately 3.5%
of the proceeds received on account from the sale of the equity of Ghirardelli
to an escrow account to be held for a period of one year from the closing. As
such, Fund II will escrow $114,730 of the proceeds.
On March 22, 1996 by means of merger of Lee-CST Holding Corp. with an
unaffiliated third party. As a result, Fund II sold its entire investment in CST
Office Products ("CST") for total proceeds of $26.5 million. Fund II received
$21.1 million for the $6,355,000 principal amount 12% senior subordinated note,
the $6,355,000 principal amount 18% junior subordinated note, approximately $7.5
million in principal amount of 15% payment in kind subordinated notes issued
with respect thereto, plus all accrued interest on these notes. Additionally,
Fund II received $2.6 million, or $16 per share, for its common stock held and
$2.8 million, or $15.99 per share, for its common stock purchase warrants. The
total proceeds to Fund II resulted in a realized gain of $4.3 million and
additional interest income of $7.2 million from the proceeds received for the
payment in kind subordinated notes that were previously classified as
non-accrual.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
ML-LEE ACQUISITION FUND II, L.P.
SUPPLEMENTARY SCHEDULE OF REALIZED GAINS AND LOSSES
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
PAR VALUE/ INVESTMENT NET REALIZED
SECURITY NUMBER SHARES COST PROCEEDS GAIN (LOSS)
- ---------------------------------------------------- ----------------- ----------------- ----------------- -----------------
EquiCredit Corp.
Common Stock 227,437 $ 596 $ 7,278 $ 6,682
Petco Animal Supplies
Common Stock 120,143 1,969 2,368 399
Sun Pharmaceuticals Corp.
Subordinated Note $ 8,318 8,318 8,318 -
Common Stock Purchase Warrants
(Banana Boat Holding Corp.) 7,445 - 1,292 1,292
----------------- ----------------- -----------------
Total $ 10,883 $ 19,256 $ 8,373
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
SUPPLEMENTARY SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
ML-LEE ACQUISITION FUND II, L.P
FOR THE PERIOD ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Unrealized
Appreciation
(Depreciation)
Investment Fair at December 31, Unrealized Appreciation (Depreciation) for
SECURITY Cost Value 1995 1995 1994 1993 1992 1991 1990 & Prior
- ---------------------- ------------------- ---------------------------------------------------------------------------------
PUBLICLY TRADED/UNDERLYING
SECURITY PUBLICLY TRADED:
First Alert, Inc.
Common Stock* $ 3,320 $17,754 $ 14,434 $ (12,351) $ 26,785 $ - $ - $ - $ -
Hills Stores Company
Common Stock 34,776 5,145 (29,631) (5,722) 189 (24,098) - - -
Petco Animal
Supplies, Inc.
Common Stock* 1,915 3,417 1,502 1,951 (449) - - - -
Playtex Products,
Inc.
Common Stock* 5,299 2,578 (2,721) 129 (2,522) (1,092) - 764 -
Stanley Furniture
Common Stock* 291 185 (106) (46) (78) 18 - - -
---------------------------------------------------------------------------------
TOTAL UNREALIZED
APPRECIATION
(DEPRECIATION)
FROM PUBLICLY
TRADED SECURITIES $ (16,522) $ (16,039) $ 23,925 $ (25,172) $ - $ 764 $ -
---------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
SUPPLEMENTARY SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
ML-LEE ACQUISITION FUND II, L.P
FOR THE PERIOD ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total
Unrealized
Appreciation Unrealized Appreciation (Depreciation)
Investment Fair (Depreciation) 1990 &
SECURITY Cost Value for 1995 1995 1994 1993 1992 1991 Prior
- ------------------------------------------------ --------------------------------------------------------------------------
NON PUBLIC SECURITIES:
Fitz and Floyd/Sylvestri
Common Stock* $ $ - $ (20) $ - $ (20) $ - $ $ - $ -
20 -
Adjusted Rate Senior Notes* 12,680 9,658 (3,025) (3,025) - - - - -
FLA. Orthopedics, Inc.
Common Stock* 1,513 - (1,513) - (1,513) - - - -
Subordinated Note* 4,842 - (4,842) (4,842) - - - - -
Stablex Canada Inc.
Subordinated Note* 6,631 5,029 (1,602) - (1,602) - - - -
--------------------------------------------------------------------------
TOTAL UNREALIZED APPRECIATION
(DEPRECIATION) FROM NON
PUBLIC $ (11,002) $ (7,867) $(3,135) $ - $ - $ -
SECURITIES
--------------------------------------------------------------------------
UNREALIZED APPRECIATION
(DEPRECIATION) FOR
INVESTMENTS SOLD
Sold in 1995
EquiCredit Corp.
Common Stock - (6,654) 2,644 4,010
Sold Prior to 1995
Various - - (123,788) 101,748 38,881 (278) (16,563)
--------------------------------------------------------------------------
Total Unrealized
Appreciation/
(Depreciation) for $ - $ (6,654) $(121,144) $ 105,758 $ 38,881 $ (278) $ (16,563)
Investments sold:
--------------------------------------------------------------------------
NET UNREALIZED APPRECIATION
(DEPRECIATION) $ (27,524) $(30,560) $(100,354) $ 80,586 $ 38,881 $ 486 $ (16,563)
==========================================================================
</TABLE>
Restricted Security
<PAGE>
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Fund II
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 Fund II's investment in 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 73, is a director of Augat Inc., Colgate - Palmolive
Company, Digital Equipment Corporation, Intermet Corporation, and Sonesta
International Hotels Corporation. Mr. Alden also serves as Chairman of the Japan
Society of Boston, Trustee Emeritus of the Boston Symphony Orchestra and the
Boston Museum of Science and Honorary Counsel General of the Royal Kingdom of
Thailand. Mr. Alden has also served as an Individual General Partner of ML-Lee
Acquisition Fund, L.P. ("Fund I") since its inception in 1987.
Mr. Bower, age 57, is the Donald Kirk David Professor of Business
Administration, Chairman of the Doctoral Programs and Director of Research at
the Harvard University Graduate School of Business Administration. He has served
as a faculty member of the University since 1963. Mr. Bower is also a director
of Anika Research, Inc., Brown Group, Inc., New America High Income Fund,
Sonesta International Hotels Corporation and The Lincoln Foundation. Mr. Bower
serves as trustee of the DeCordova & Dana Museum and Park and the New England
Conservatory of Music. Mr. Bower has also served as an Individual General
Partner of Fund I since its inception in 1987.
Mr. Feldberg, age 71, is director of The TJX Companies, Inc., and Waban
Inc. He also serves as a Trustee of Brandeis University. Mr. Feldberg has also
served as an Individual General Partner of Fund I since its inception in 1987.
<PAGE>
Mr. Lee, age 52, founded the Thomas H. Lee Company in 1974 and since that
time has served as its Chief Executive Officer. Mr. Lee also is Chairman and a
Trustee of Thomas H. Lee Advisors I and Thomas H. Lee Advisors II, L.P., the
respective investment advisers to Fund I and the Funds, and is Individual
General Partner of THL Equity Advisors Limited Partnership, the investment
adviser to Thomas H. Lee Equity Partners, L.P. which participates in equity or
equity-related investments of certain companies acquired by the respective
funds. In addition, Mr. Lee has also served as an Individual General Partner of
Fund I since its inception in 1987.
From 1966 through 1974, Mr. Lee was with First National Bank of Boston
where he directed the bank's high technology lending group from 1968 to 1974 and
became a Vice President in 1973. Prior to 1966, Mr. Lee was a Securities Analyst
in the institutional research department of L.F. Rothschild in New York. Mr. Lee
serves as a director of Autotote Corporation, J. Baker, Inc., Finlay Fine
Jewelry Corporation, General Nutrition Companies, Inc., Health o meter Products,
Inc. and Playtex Products Inc. Mr. Lee was Chairman of Hills Department Stores,
Inc. and Hills Stores Company from 1990 to 1993. In February 1991, Hills
Department Stores, Inc. and Hills Stores Company filed for protection under
Chapter 11 of the Federal Bankruptcy Code.
Mr. Lee is a trustee of Brandeis University (Vice Chairman), Museum of Fine
Arts (Boston), the Wang Center for the Performing Arts, Boston's Beth Israel
Hospital (Treasurer) and the Whitney Muuseum of American Art. Mr. Lee is also an
overseer of Boston Symphony Orchestra and New England Conservatory of Music, a
member of the Dean's Council and an Executive Committee Member of the Committee
on University Resources at Harvard University and a member of the Corporation of
Belmont Hill School.
The Investment Adviser
The Investment Adviser, pursuant to an investment management agreement
among the Investment Adviser, the Thomas H. Lee Company and Fund II dated
November 10, 1989, is responsible for the identification, management and
liquidation of Mezzanine Investments and Bridge Investments for Fund II. The
Investment Adviser received an Investment Advisory Fee in compensation for these
services outlined in Note 8 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.
<PAGE>
John W. Childs, age 54, is the founder of J.W. Childs Associates, L.P. Mr.
Childs, was a Senior Managing Director of the Thomas H. Lee Company ("Lee
Company"), from 1987 to 1995. For the 17 years prior to joining the company, Mr.
Childs was with the Prudential Insurance Company of America where he was most
recently Senior Managing Director in charge of the Capital Markets Group. In
that position he was responsible for Prudential's approximately $77 billion
fixed income portfolio, including all of the Capital Markets Group's investments
in leveraged acquisitions. Mr. Child's past positions at Prudential include,
from 1982 to 1984, Senior Vice President of PruCaptial, Inc., a Prudential
subsidiary; from 1981 to 1982, Vice President, responsible for private
placements of the Capital Markets Group; and from 1980 to 1981, Vice President
in Corporate Finance of the Capital Markets Group. Mr. Childs serves as
President and Trustee of Thomas H. Lee Advisors I ("Advisors I"), the investment
advisor to Fund I. Mr. Childs is a director of General Nutrition Companies, Inc.
and Health o meter Products, Inc. Mr. Childs also serves as Chairman of the Jane
Coffin Childs Fund for medical research.
Mr. Shepherd, age 66, has been engaged as a consultant to the Thomas H. Lee
Company since 1986 and is currently a Managing Director. Mr. Shepherd is
currently a director of General Nutrition Companies, Inc. and Health o meter
Products, Inc. He is Executive Vice President of Thomas H. Lee Advisors I and
T.H. Lee Mezzanine II. Previously, Mr. Shepherd was Chairman of Amerace
Corporation from 1986 to 1988 and President of GTE (Sylvania) Lighting Products
Group from 1983 to 1986. Mr. Shepherd served as President of North American
Philips Commercial Electronics Corporation from 1981 to 1983 and from 1979 to
1981, he served as Senior Vice President and general manager of GTE
Entertainment Products Group.
Mr. Harkins, age 56, has been a Managing Director of the Lee Company since
1986 and the Chairman of National Dentex Corporation since 1983. He served as
President of Massachusetts Capital Corporation and Masscap Investment Company,
Inc. from 1976 to 1983, and as President of First American Investment Company,
Inc. from 1982 to 1983. Mr. Harkins is a Senior Vice President and Trustee of
Advisor I. He also is a director of Kevlin Microwave Corp., National Dentex
Corporation, Stanley Furniture Corp. and First Alert, Inc.
Mr. Boll, age 40, has served as a Managing Director of the Lee Company
since 1991. From 1986 to 1991 he served as a Vice President of the Lee Company.
Prior to joining the Lee Company, he worked as a consultant with The Boston
Consulting Group from 1984 to 1986, and was Assistant Vice President of the
Energy and Minerals Division of Chemical Bank from 1977 to 1982. Mr. Boll is a
Vice President of Advisors I and a director of Stanley Furniture Corp. and Petco
Animal Supplies, Inc. and Big V Supermarkets, Inc.
Mr. Schoen, age 37, has served as a Managing Director of the Lee Company
since 1991. From 1986 to 1990 he served as a Vice President of the Lee Company.
Prior to joining the Lee Company he was an Associate in the Private Finance
Department of Goldman, Sachs & Co. from 1984 to 1986. Mr. Schoen is a Vice
President of Advisors I. Mr. Schoen is also a Director of First Alert, Inc.,
Healthometer Products, Inc. and LaSalle Reinsurance LTD.
Ms. Masler, age 42, has been Treasurer of the Lee Company since 1984. From
1981 to 1984 she was employed by Paine Webber Properties Incorporated and prior
to that she was a Senior Auditor with Touche Ross & Co. Ms. Masler is also
Treasurer and Clerk of Advisors I.
<PAGE>
The Managing General Partner
The Managing General Partner is a limited partnership in which ML Mezzanine
II Inc. is the sole general partner and the Investment Adviser is the limited
partner. The Managing General Partner is responsible for the supervision of Fund
II's investments.
The executive officers of ML Mezzanine II Inc. are as follows:
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 Bommer Vice President, Treasurer
Roger F. Castoral, Jr. Assistant Treasurer
Kevin Albert, age 43, a Vice President and a Managing Director of Merrill
Lynch Investment Banking Group ("ML Investment Banking") joined Merrill Lynch in
1981. Mr. Albert is the manager of the Equity Private Placement Group of ML
Investment Banking and is involved in structuring, marketing and closing a
diversified array of private equity financings including common stock, preferred
stock, limited partnership interests and other equity-related securities. Mr.
Albert is also a director of ML Media Management Inc. ("ML Media"), an affiliate
of the Managing General Partner and a joint venture of Media Management
Partners, the general partner of ML Media Partners, L.P.; a director of ML Film
Entertainment Inc. ("ML Film"), an affiliate of the Managing General Partner and
the managing general partner of the general partners of Delphi Film Associates
III, IV, V and ML Delphi Premier Partners, L.P.; a director of ML Opportunity
Management Inc. ("ML Opportunity"), an affiliate of the General Partner and a
joint venture in Media Opportunity Management Partners, the general partner of
ML Media Opportunity Partners, L.P.; a director of MLL Antiquities Inc. ("MLL
Antiquities"), an affiliate of the Managing General Partner and the
administrative general partner of The Athena Fund II, L.P.; ML Mezzanine Inc.
("ML Mezzanine"), an affiliate of the General Partner and the sole general
partner of the managing general partner of ML-Lee Acquisition Fund, L.P.; a
director of Merrill Lynch Venture Capital Inc. ("ML Venture"), an affiliate of
the Managing General Partner and the general partner of the managing general
partner of ML Venture Partners I, L.P. ("Venture I"), ML Venture Partners II,
L.P. ("Venture II"), and ML Oklahoma Venture Partners Limited Partnership; a
director of Merrill Lynch R&D Management Inc. ("ML R&D"), an affiliate of the
general partner and the general partner of the General Partner of ML Technology
Ventures, L.P.; and a director of MLL Collectibles Inc. ("MLL Collectibles"), an
affiliate of the General Partner and the administrative general partner of The
NFA World Coin Fund, L.P. Mr. Albert also serves as an independent general
partner of Venture I and Venture II.
<PAGE>
Robert Aufenanger, age 42, a Vice President of Merrill Lynch & Co.
Corporate Strategy Credit and Research and a Director of the Partnership
Management Department, joined Merrill Lynch in 1980. Mr. Aufenanger is
responsible for the ongoing management of the operations of the equipment and
project related limited partnerships for which subsidiaries of ML Leasing
Equipment Corp., an affiliate of Merrill Lynch, are general partners. Mr.
Aufenanger is also a director of, ML Media, ML Film, ML Opportunity, MLL
Antiquities, ML Mezzanine, ML Venture, ML R&D and MLL Collectibles. Mr.
Aufenanger is an executive officer of Mid-Miami Diagnostics Inc. ("Mid-Miami
Inc."). On October 28, 1994, both Mid-Miami Inc. and Mid-Miami Diagnostics,
L.P., a limited partnership of which Mid Miami, Inc. is the general partner,
filed voluntary petitions for protection form creditors under Chapter 7 of the
United States Bankruptcy Code in the United States Bankruptcy Court for the
Southern District of New York.
James V. Caruso, age 44, a Director in the Investment Banking Group of
Merrill Lynch, joined Merrill Lynch in 1975. Since June 1992, Mr. Caruso has
served as Manager of Merrill Lynch's Partnership Analysis & Management
Department, which is responsible for accounting and the ongoing administration
and operations of more than 150 investment limited partnership as well as the
Merrill Lynch affiliated entities that manage or administer such partnerships.
He serves as a director of ML Mezzanine Inc., ML Energy Investments, Inc.,
KECALP Inc., an affiliate of the MGP and the general partner.
Rosalie Y. Goldberg, age 58, serves as Vice President of Merrill Lynch
Private Client, Manager of the Special Investments Group, and Director of ML
Mezzanine, Inc. and Director of MLL Antiquities and MLL Collectibles. Ms.
Goldberg joined Merrill Lynch & Co. in 1975.
Audrey Bommer, age 29, joined ML Investment Banking in 1994 and serves as
Treasurer and Chief Financial Officer to the Funds. Ms. Bommer, manages all
accounting, financial reporting and administrative functions in the Merrill
Lynch Partnership Analysis and Management Department. She also serves as Vice
President and Treasurer of ML Mezzanine, Inc.
Roger F. Castoral, Jr., age 28, joined Merrill Lynch Investment Banking in
1995 and serves as Assistant Treasurer and controller to the funds. Mr. Castoral
is responsible for financial reporting and fund accounting in the Merrill Lynch
Partnership Analysis and Management Department and is Assistant Treasurer of ML
Mezzanine II, Inc..
The Fund Administrator
ML Fund Administrators Inc., a Delaware corporation and a subsidiary of
Merrill Lynch & Co., Inc., is responsible for the provision of administrative
services necessary for the operation of the Funds. The Fund Administrator
receives Fund Administration Fees in compensation 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.
<PAGE>
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 each $34,173, for their services in 1995 as Independent General
Partners.
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 $4,968,705 with respect to 1995,
including Incentive Fees of $4,909,422 that it distributed, $4,663,951 to the
Investment Adviser and $245,471 to ML Mezzanine II Inc.
The information with respect to the Management Fee payable to the
Investment Adviser (and distributions from the Managing General Partner) set
forth under the caption "Management Arrangements - Description of the Advisory
Agreement" in the Prospectus pages 74 - 75 is incorporated herein by reference.
Pursuant to the Investment Advisory Agreement, Fund II paid the Investment
Adviser $1,536,560 with respect to 1995.
The information with respect to the Fund Administration Fees and
Expenses payable to the Fund Administrator set forth under the caption
"Management Arrangements - The Fund Administrator" in the Prospectus pages 72 -
73 is incorporated herein by reference. Pursuant to the Administration Service
Agreement, Fund II paid the Fund Administrator a total of $954,937 in 1995.
<PAGE>
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
Schedules 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 of Beneficial Beneficial Fund Beneficially Owned
Owner Ownership at March 15, 1996
Yale University 20,954 9.5%
Investment Office
230 Prospect Street
New Haven, CT 06511
Farallon Capital Partners, L.P. 19,162(1) 8.6%
Farallon Capital Management,Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Tinicum Partners, L.P. 19,162(1) 8.6%
Farallon Capital Management,Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Thomas F. Steyer 19,162(1) 8.6%
Farallon Capital Management,Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Fleur E. Fairman 19,162(1) 8.6%
Farallon Capital Management,Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
David I. Cohen 19,162(1) 8.6%
Farallon Capital Management,Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Joseph F. Downes 19,162(1) 8.6%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Jason M. Fish 19.162(1) 8.6%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
William F. Mellin 19.162(1) 8.6%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Meridee A. Moore 19.162(1) 8.6%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
Eric M. Ruttenberg 19,162(1) 8.6%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
<PAGE>
(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
19,162 Units of limited partnership interest beneficially owned at March
15, 1996 as a result of the direct ownership by FCP of 14,553 such Units
and as a result of the direct ownership by Tinicum of 4,619 such Units.
FCP and Tinicum, however, consider their beneficial interest to be
limited to their direct ownership. In addition, by reason of Rule 13d-3
under the 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 by FCP and Tinicum.
Amount of
Name of Beneficial Percent of Units of
- ------------------------------------ Ownership Class
Beneficial Owner
Vernon R. Alden 50 Units *
Joseph L. Bower None *
Stanley H. Feldberg 25 Units *
Thomas H. Lee None *
General Partners 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. Certain Relationships and Related Transactions
Fund II's investments generally are made as co-investments with the
Retirement Fund. 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 ten Managed Companies held by
the Funds at December 31, 1995, eight paid management fees to Thomas H. Lee
Company ranging from $120,000 to $270,000 for the fiscal year ended December 31,
1995. In addition, certain of the Managed Companies have contractual or other
relationships pursuant to which they do business with one another.
<PAGE>
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, economic forecasting and pension plan
services, and receives in consideration therewith various fees, commissions and
reimbursements. The aggregate revenue received by MLPF&S and its affiliates
during 1995 for providing such services to Managed Companies in which the Funds
have a material interest (other than those specifically set forth below) was not
in excess of $100,000. Furthermore, MLPF&S and its affiliates or investment
companies advised by affiliates of MLPF&S may, from time to time, purchase or
sell securities issued by portfolio companies of the Funds in connection with
their ordinary investment operations.
During 1995, the Fund II paid Managing General Partner distributions
totalling $4,968,705, (which includes $4,909,422 of incentive fees and $59,283
with respect to its interest in Fund II). Of this incentive fee amount, 95% or
$4,633,951 was paid to the Investment Advisor and the remaining 5% totalling
$275,471 was paid to ML Mezzanine II Inc. As of December 31, 1995, the Managing
General Partner has earned $16,934,602 in Incentive Fees of which $2,433,083 was
deferred in payment to the Managing General Partner as a Deferred Distribution
Amount in accordance with the Partnership Agreement. To the extent not payable
to the Managing General Partner, this Deferred Distribution Amount was
distributed to the Partners pro-rata in accordance with their capital
contributions, and certain amounts otherwise later payable to Limited Partners
from distributable cash from operations would instead be payable to the Managing
General Partner until the Deferred Distribution Amount is paid in full.
CST Office Products, Inc.
On March 22, 1996 Fund II sold its entire investment in CST Office
Products, Inc. See Note 14 to the Financial Statements for further information.
As of December 31, 1995, Fund II the Retirement Fund and the Lee Affiliates
owned 22.3%, 11.9% and 65.8%, respectively, of the common equiity of CST on a
fully diluted basis.
EquiCredit
On January 27, 1995, Fund II sold its entire investment in Equicredit,
consisting of 227,437 shares of Common Stock, realizing a gain of $6,682,098 on
an original investment of $595,886.
Prior to the sale of EquiCredit, Fund II, the Retirement Fund and the Lee
Affiliates held 2.2%, 2.6%, and 10.7%, respectively, of the common equity of
Equicredit on a fully diluted basis.
First Alert
As of December 31, 1995, Fund II, the Retirement Fund and the Lee
Affiliates hold 2,058,474, 2,281,524 and 10,102,268 shares, respectively, of
First Alert common stock, representing 8.1%, 8.9%, and 39.6%, respectively, of
its common equity.
David V. Harkins, Scott A. Schoen and Anthony J. DiNovi, officers of the
Investment Adviser to the Funds, serve as directors of First Alert.
Ghirardelli
On May 12, 1995, Fund II made a follow-on investment in Ghirardelli
Holdings Corp. for a total of $1,635,200. Fund II received 14,016 shares of
Series A Preferred Stock for $1,401,600 and 73,692 additional shares of Common
Stock for $233,600.
As of December 31, 1995 Fund II and the Retirement Fund hold 540,892 and
616,839 and 3,476,250 shares, respectively, of Ghirardelli's common which
represents 9.3% and 10.6% and 59.8%, respectively, on a fully diluted basis.
On February 14, 1996, Ghirardelli Holdings Corporation ("Ghirardelli"),
Ghirardelli Chocolate Company, and all of the equityholders of Ghirardelli,
including the Funds and certain Lee Affiliates, executed a Stock Purchase
Agreement. Please see Note 14 to the Financial Statements for further
information.
<PAGE>
Petco Animal Supplies, Inc.
On April 27, 1995, Petco Animal Supplies, Inc. ("Petco") completed a public
offering of approximately 3.6 million shares of Common Stock (the "Petco
Offering") at a net price of $19.71 per share. Of the shares sold, approximately
2.4 million shares were offered by Petco and approximately 1.2 million were
offered by certain existing shareholders, including Fund II. As part of the
Petco Offering, Fund II sold 120,143 shares (including shares sold as a result
of the exercise of the underwriters' overallotment option) representing 51% of
its Petco holdings. Fund II received proceeds of $2.4 million and realized a
gain of $398,815 on the sale of the equity.
As of December 31, 1995, Fund II and the Retirement Fund, hold 116,825 and
62,379 shares of Petco common stock, respectively. In addition, Fund I holds
981,748 shares of Petco common stock, and the Lee Affiliates, in the aggregate,
hold 10,764 shares of Petco common stock. As of such date, Fund I, Fund II, the
Retirement Fund and the Lee Affiliates, respectively, hold 11.0%, 1.3%, .7% and
.1% of the common equity of Petco.
C. Hunter Boll, an officer of the Investment Adviser to Fund I, Fund II and
Fund II, serves as a director of Petco.
Playtex Products, Inc.
On October 17, 1995 Playtex Products, Inc. and Banana Boat Holding Corp.
entered into an Agreement and Plan of Merger (the "Agreement") pursuant to which
Playtex agreed to acquire all of the outstanding equity of Banana Boat that it
did not already own. In accordance with the Agreement, the 12.5% Subordinated
Note held by Fund II, plus all accrued interest, was paid in full by Playtex
upon consummation of the merger. Additionally, Fund II received net proceeds of
$173.55 per share for each of the 7,444.5 Common Stock Purchase Warrants that
were exercised pursuant to the Agreement. Fund II received total proceeds of
$9.7 million which resulted in a gain of $1.3 million.
On June 6, 1995, Playtex sold 20,000,000 of newly issued Common Stock, or
approximately 40% of its outstanding equity, to an investment group led by Haas
Wheat Harrison Inc. for $9.00 per share, or $180 million (the "Haas
Investment"). None of Playtex's existing shareholders, including the Retirement
Fund or the Lee Affiliates, sold any of their stock in connection with the Haas
Investment. An affiliate of Merrill Lynch & Co., Inc. has approximately 4%
capital interest as a limited partner, in the limited partnership that made the
Haas Investment.
As of December 31, 1995, Fund II holds 343,726 shares of common stock of
Playtex and the Retirement Fund holds 183,560 shares of Playtex common stock. In
addition, Fund I holds 1,406,204 shares of Playtex common stock and the Lee
Affiliates hold 2,249,288 shares. Fund II, Retirement Fund, Fund I and the other
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.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits
Financial Statements and Financial Statement Schedules
Exhibits
3.1 Amended and Restated Certificate of Incorporated by reference
Limited Partnership, dated as of to Exhibit 1.2 to
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 November to Exhibit 3.2. to
10, 1989 Amendment No. 1, dated registrant's Annual Report
January 30, 1990. of Form 10-K for the year
ending December 31, 1989.
10.1 Investment Advisory Agreement, dated Incorporated by reference
November 10, 1989 by and between to Exhibit 10.1 to
Registrant, Thomas H. Lee Advisors registrant's Annual Report
II, L.P. and Thomas H. Lee Company. of Form 10-K for the year
ended December 31, 1991.
10.2 Custodian Agreement, dated November Incorporated by reference
10, 1989, by and between Registrant to Exhibit 10.2 to
and State Street Bank and Trust registrant's Annual Report
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 year Filed herewith.
ended December 31 1995.
28 Pages 21-91 of the Prospectus dated Incorporated by reference
September 6,1989, filed pursuant to to Exhibit 28 to
Rule 497(b) under the Securities Act registrant's Annual Report
of 1933. of Form 10-K for the year
ended December 31, 1991.
(b) Forms 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 29th day of March,
1996.
ML-LEE ACQUISITION FUND II, L.P.
By: Mezzanine Investments II, L.P.
Managing General Partner
By: ML Mezzanine II Inc.
its General Partner
/s/ Kevin K. Albert
Dated: March 29, 1996 Kevin K. Albert
President, ML Mezzanine II Inc.
a General Partner of Mezzanine
Investments II, L.P., the Managing
General Partner
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities indicated on the 29th day of March, 1996.
Signature Title
/s/ Kevin K. Albert ML Mezzanine II Inc.
Kevin K. Albert President and Director
(Principal Executive Officer of Registrant)
/s/ Vernon R. Alden Individual General Partner
Vernon R. Alden ML-Lee Acquisition Fund 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 II, L.P.
/s/ Roger F. Castoral, Jr. ML Mezzanine II Inc.
Roger F. Castoral, Jr. Assistant Treasurer
(Principal Accounting Officer of
Registrant)
/s/ Stanley H. Feldberg General Partner
Stanley H. Feldberg ML-Lee Acquisition Fund II, L.P.
/s/ Thomas H. Lee Individual General Partner
Thomas H. Lee ML-Lee Acquisition Fund II, L.P.
<PAGE>
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 II, L.P.
By: Mezzanine Investments II, L.P.
Managing General Partner
By: ML Mezzanine II Inc.
its General Partner
Dated: March 29, 1996 Kevin K. Albert
President, ML Mezzanine II Inc.
a General Partner of Mezzanine
Investments II, L.P., the Managing
General Partner
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities indicated on the 29th day of March, 1996.
Signature Title
____________________ ML Mezzanine II Inc.
Kevin K. Albert President and Director
(Principal Executive Officer of Registrant)
____________________ Individual General Partner
Vernon R. Alden ML-Lee Acquisition Fund 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 II, L.P.
____________________ ML Mezzanine II Inc.
Roger F. Castoral, Jr. Assistant Treasurer
(Principal Accounting Officer of Registrant)
____________________ Individual General Partner
Stanley H. Feldberg ML-Lee Acquisition Fund II, L.P.
____________________ Individual General Partner
Thomas H. Lee ML-Lee Acquisition Fund II, L.P.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the
1995 Form 10-K Balance Sheets and Statements of Operations and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
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<NET-CHANGE-FROM-OPS> (18,039,561)
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</TABLE>
