UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
Commission File Number 0-17382
ML-LEE ACQUISITION FUND(RETIREMENT ACCOUNTS) II, L.P.
(Exact name of registrant as specified in its Governing Instruments)
Delaware 04-3028397
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
World Financial Center
South Tower - 23rd Floor
New York, New York 10080-6123
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (212) 236-7339
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in a definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of voting securities held by non-affiliates: Not
Applicable.
Documents Incorporated by Reference: Portions of the Prospectus of the
Registrant dated September 6, 1989, filed with the Securities and Exchange
Commission pursuant to Rule 497(b), are incorporated by reference in Parts I, II
and III hereof.
<PAGE>
Part I
Item l. Business
Formation
ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. (the "Retirement
Fund") (formerly T.H. Lee Acquisition Fund (Retirement Accounts) II, L.P.) was
formed along with ML-Lee Acquisition Fund II, L.P. ("Fund II"); collectively
referred to as the "Funds") and the Certificates of Limited Partnership were
filed under the Delaware Revised Uniform Limited Partnership Act on September
23, 1988. The Funds' operations commenced on November 10, 1989.
Mezzanine Investments II, L.P. (the "Managing General Partner"), subject to
the supervision of the Individual General Partners, is responsible for
overseeing and monitoring the Retirement Fund's investments. The Managing
General Partner is a Delaware limited partnership in which ML Mezzanine II Inc.
is the general partner and Thomas H. Lee Advisors II, L.P. (the "Investment
Adviser" to the Funds) is the limited partner. The Individual General Partners
are Vernon R. Alden, Joseph L. Bower and Stanley H. Feldberg (the "Independent
General Partners") and Thomas H. Lee. ML Fund Administrators Inc. (the "Fund
Administrator") is an indirect wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. and is responsible for the day-to-day administrative services necessary for
the operations of the Retirement Fund.
The Retirement Fund elected to operate as a business development company
under the Investment Company Act of 1940 as amended("Investment Company Act").
The Retirement Fund's primary investment objective is to provide current income
and capital appreciation potential by investing in privately structured,
friendly leveraged buyouts and other leveraged transactions. The Retirement Fund
pursued this objective by investing primarily in subordinated debt and related
equity securities issued in conjunction with the "mezzanine financing" of
friendly leveraged buyout transactions, leveraged acquisitions and leveraged
recapitalizations. The Retirement Fund may also invest in "bridge investments"
if it is believed that such investments would facilitate the consummation of a
mezzanine financing. The Retirement Fund considers this activity to constitute a
single industry segment of mezzanine financing investing.
The Retirement Fund invested substantially all of its net proceeds in
Mezzanine Investments consisting of high-yield subordinated debt and/or
preferred stock linked with an equity participation of middle market companies
in connection with friendly leveraged acquisitions, recapitalizations and other
leveraged financings. The Retirement Fund's Mezzanine Investments typically were
issued in private placement transactions which are generally subject to certain
restrictions on sales thereby limiting their liquidity. The Retirement Fund was
fully invested as of December 20, 1992, which was within 36 months from the date
of the final closing (after including the reserve for follow-on investments and
exclusive of amounts available for reinvestment). The reinvestment period for
various amounts of capital proceeds received during the last twelve months of
the Retirement Fund's investment period terminated at various times through
December 18, 1993.
The Funds together offered an aggregate of 1 million units of limited
partnership interest ("Units") at $1,000 per Unit with the Securities and
Exchange Commission pursuant to a Registration Statement on Form N-2 (File No.
33-25816), effective September 6, 1989. The information set forth under the
heading "Risk and Other Important Factors", "Estimated Use of Proceeds",
"Mezzanine Financing" and "Investment Objectives and Policies" on pages 21
through 46 and "Conflicts of Interest" on pages 79 through 82 in the Prospectus
of the Retirement Fund dated September 6, 1989, filed with the Securities and
Exchange Commission pursuant to Rule 497(b) under the Securities Act of 1933
(the "Prospectus"), is incorporated herein by reference.
The offering of Units commenced on September 6, 1989. On November 10 and
December 20, 1989, the Retirement Fund had its first and second closings
respectively, at which time the Managing General Partner admitted additional
Limited Partners to the Retirement Fund representing 177,515 Units of limited
partnership interest. The additional Limited Partners' total capital
contributions were $164,201,375, which excludes discounts allowed of $1,447,740
and is net of sales commissions and advisory fees of $11,865,885. The Managing
General Partner's aggregate contribution was $500,000. Thomas H. Lee, as an
Individual General Partner, contributed $50,000. For their services as selling
agent, the Retirement Fund paid sales commissions to Merrill Lynch, Pierce,
Fenner and Smith Incorporated ("MLPF&S") in the amount of $9,492,708 (exclusive
of discounts of $1,158,192). In addition, the Retirement Fund paid a financial
advisory fee to MLPF&S in the amount of $2,373,177 (exclusive of discounts of
$289,548).
<PAGE>
Mezzanine and Bridge Investments
At December 31, 1997, the Retirement Fund had outstanding a total of $28.3
million invested in Mezzanine Investments representing $21.5 million Managed and
$6.8 million Non-Managed portfolio investments. At December 31, 1997, there
were no Bridge Investments outstanding for the Funds. The Funds co-invest in all
Mezzanine and Bridge Investments, allocating such investments in proportion to
their capital available for investment.
The Retirement Fund's reinvestment period ended on December 18, 1993 and,
accordingly, no new investments were made after that date other than the funding
of investments which were committed to prior to that date.
REVIEW OF INVESTMENTS IN MANAGED COMPANIES
------------------------------------------
The following is a brief description of the companies in the Retirement
Fund's Managed Company portfolio during the year ended December 31, 1997:
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,
1997.
On March 19, 1998 the Retirement Fund and Affiliates of the Thomas H. Lee
Company sold their remaining holdings in Anchor. Pursuant to this transaction
the Retirement Fund sold 219,323 shares of Anchor Common Stock for approximately
$877,292 ($4.00 per share) and recognized a gain of $132,013.
On April 2, 1997, Anchor completed a recapitalization pursuant to which
Anchor issued $100,000,000 aggregate principal amount of Senior Notes due 2004
and entered into a new credit facility (the "Recapitalization"). As part of the
Recapitalization, Anchor repaid substantially all of its outstanding debt,
including all accrued interest and any premiums in connection therewith. As a
result, Anchor repaid the Senior Subordinated Note and Junior Subordinated Note
held by the Retirement Fund, together with all accrued interest and prepayment
premiums for an aggregate of $7,775,731.
Immediately prior to the Recapitalization, the Retirement Fund owned 87,033
shares of the common stock of Anchor Holdings, Inc., the parent of Anchor.
Immediately after the consummation of the Recapitalization, the Retirement Fund
exercised its warrants to purchase common stock (at an exercise price of $9.50
per share) and acquired an additional 132,290 shares of common stock, bringing
its total holdings of common stock to 219,323 shares. In connection with the
Recapitalization, Holdings paid a dividend to all holders of Holdings common
stock of record as of April 2, 1997, in the amount of $19.02 per share (the
"Anchor Dividend") . As a result of such dividend, the Retirement Fund received
$4.2 million, of which approximately 32% or $1.3 million was returned to
partners as a return of captial.
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, 1997.
Cinnabon International, Inc. ("Cinnabon") (formerly Restaurants Unlimited)
-------------------------------------------------------------------------
Cinnabon operates and franchises a national chain of specialty cinnamon
roll bakeries in more than 250 locations, operating under the Cinnabon World
Famous Cinnamon Rolls brand name. The investment in Cinnabon is valued at cost
at December 31, 1997.
<PAGE>
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, 1997.
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. As of Decemmber 31, 1997 the Retirement Fund owned 2,281,524 shares of
First Alert common stock.
On February 28, 1998, First Alert and Sunbeam Corporation ("Sunbeam")
executed a definitive merger agreement whereby Sunbeam will acquire all of the
outstanding shares of First Alert Common Stock for approximately $175 million
($5.25 per share) by means of a tender offer (the "Tender Offer"), and assume
all of the debt of First Alert. Pursuant to the Tender Offer, which was executed
on March 6, 1998, the Retirement Fund tendered all of its shares of First Alert
Common Stock and expects to receive proceeds of approximately $11.98 million.
The per Unit amount to be distributed to the Retirement Fund's Limited Partners
from this transaction is not determinable at this time. Any distribution of
these net Distributable Capital Proceeds after the payment of expenses and the
establishment of reserves, as provided for in the Retirement Fund's Partnership
Agreement, will be distributed to Limited Partners of record as of the date of
the expiration of this Tender Offer, which is scheduled to be on April 2, 1998,
unless the Tender Offer is extended.
The closing market price at December 31, 1997 reflects unrealized
depreciation of $2.8 million for the year ended December 31, 1997, bringing the
aggregate net unrealized appreciation through December 31, 1997 to $1.2 million.
Hills Stores Company ("Hills")
-----------------------------
Hills is an operator of discount department stores in the Northeast and
Midwest and offers a broad selection of merchandise at everyday low prices,
targeted primarily at the female shopper. The closing market price of this
investment reflects unrealized depreciation of approximately $800,000 on this
investment for the year ended December 31, 1997 bringing the aggregate net
unrealized depreciation to approximately $17.7 million through December 31,
1997.
Playtex Products, Inc. ("Playtex")
---------------------------------
Playtex manufactures and sells feminine hygiene and nursery products,
household rubber gloves, toothbrushes and Jhirmack and LaCoupe haircare
products. The Retirement Fund's year-end valuation of this investment reflects
approximately $414,000 of unrealized appreciation recorded for the year ended
December 31, 1997 and $948,000 of cumulative net unrealized depreciation through
December 31, 1997.
Stanley Furniture Company, Inc. ("Stanley")
-------------------------------------------
Stanley designs, manufactures and markets furniture and fabric products.
During February 1997, the Retirement Fund sold 218 shares of Stanley
Furniture for $24 per share and received total proceeds of $5,232 and recognized
a gain of $2,488. On June 30, 1997, the Retirement Fund entered into a stock
purchase agreement with Stanley whereby the Retirement Fund sold 5,032 shares of
Stanley Furniture for $20 per share. The Retirement Fund received total proceeds
of $100,640 and recognized a gain of $37,321. On November 18, 1997, the
Retirement Fund sold 2,722 shares of Stanley Furniture for approximately $25 per
share and received total proceeds of $69,300 and recognized a gain of $34,419.
On January 6, 1998 the Retirement Fund sold its remaining holdings of
common stock in Stanley. The common stock was sold pursuant to a Form S-3
Registration Statement, which was filed by Stanley on December 22, 1997 and
declared effective by the Securities and Exchange Commission on December 23,
1997. In connection with the sale, the Retirement Fund sold its remaining 2,773
shares of common stock and received net proceeds of $74,871 or $27 per share.
Based upon the closing bid price at December 31, 1997, the Retirement
Fund's valuation of Stanley reflects an aggregate of approximately $38,000 in
net unrealized depreciation at December 31, 1997 bringing the aggregate net
unrealized appreciation to $41,000 through December 31, 1997.
<PAGE>
REVIEW OF INVESTMENTS IN NON-MANAGED COMPANIES
----------------------------------------------
The following is a brief description of the companies in the Retirement
Fund's Non-Managed Company portfolio during the year ended December 31, 1997:
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
Retirement Fund's investment in BioLease Common Stock was written down to zero,
and the Subordinated Notes were written down to approximately 50% of par value
during the year ending December 31, 1997. These writedowns resulted in total net
unrealized depreciation of $269,000 through December 31, 1997.
Fitz and Floyd Corporation
--------------------------
On April 11, 1997 the Bankruptcy Court confirmed a plan of Reorganization
for Fitz & Floyd. As a result, on April 14, 1997, a follow-on investment of $1.6
million was made in Fitz and Floyd and the Retirement Fund received a $1.6
million 12% subordinated note. Additionally, the Retirement Fund exchanged the
$8.2 million adjustable notes, which the Retirement Fund previously held, for
Series A Preferred Stock and Class A Common Stock in Fitz and Floyd. No gain or
loss was recorded on the transaction.
Fitz & Floyd is the maker of fine china dinnerware and ceramic giftware
whose products are retailed through leading specialty and department stores and
catalogs throughout the U.S. and Canada.
FLA. Orthopedics, Inc.
---------------------
The Retirement Fund has valued its remaining investment in FLA.
Orthopedics, Inc. at zero, which resulted in cumulative unrealized depreciation
of $987,000 through December 31, 1997.
Soretox
-------
Soretox, through its wholly-owned subsidiary Stablex Canada Inc., is an
inorganic hazardous waste management company operating in Eastern Canada and the
Northeastern United States. The Retirement Fund is currently not accruing
interest on this investment and wrote down the investment in the Stablex Jr.
Subordinated Note to zero during the year ended December 31, 1997. The
Retirement Fund's valuation reflects total unrealized depreciation of
approximately $4.6 million through December 31, 1997.
Competition
The Retirement Fund has completed its investment period and its
reinvestment program and, therefore, will no longer have to compete for
investments. A majority of the portfolio companies are participating in
extremely competitive businesses.
Employees
The Retirement Fund has no employees. The Investment Adviser, subject to
the supervision of the Managing General Partner and the Individual General
Partners, manages and controls the Retirement Fund's investments. The Managing
General Partner is responsible for managing the Temporary Investments of the
Retirement Fund. The Fund Administrator performs administrative services for the
Retirement Fund. The Fund Administrator is a subsidiary of Merrill Lynch & Co.
Inc., the parent of MLPF&S.
Item 2. Properties
The Retirement Fund does not own or lease any physical properties.
<PAGE>
Item 3. Legal Proceedings
On February 3, 1992 and February 5, 1992, respectively, one Limited Partner
from the Retirement Fund and one Limited Partner from Fund II each commenced
class actions in the US District Court for the District of Delaware, purportedly
on behalf of all persons who purchased limited partnership interests in the
Funds between November 10, 1989 and January 5, 1990, against the Funds, the
Managing General Partner, the Individual General Partners, the Investment
Adviser to the Funds and certain named affiliates of such persons. These
actions, alleging that the defendants made material misrepresentations or
omitted material information in the offering materials for the Funds concerning
the investment purposes of the Funds, were consolidated by the court on March
31, 1992, and a consolidated complaint was filed by the plaintiffs on May 14,
1992. In April 1993, plaintiffs filed an amended complaint, adding claims that
certain transactions by the Funds were prohibited by the federal securities laws
applicable to the Funds and their affiliates under the Investment Company Act of
1940, as amended. The amended complaint also named the Funds' counsel as a
defendant. Defendants moved to dismiss the amended complaint, and, by Opinion
and Order dated March 31, 1994, the court granted in part and denied in part the
motions to dismiss. Additionally, by its March 31, 1994 Opinion and Order, the
Court certified the case as a class action, and ordered plaintiffs to replead by
filing a new complaint reflecting the Court's rulings. On April 15, 1994,
plaintiffs served and filed a new complaint, which defendants moved to strike
for not conforming to the Court's ruling. On August 3, 1994, the Court granted
defendants' motion to strike the new complaint. Plaintiffs thereafter filed a
revised second amended complaint dated September 26, 1994. Factual discovery in
this litigation has concluded, although plaintiffs' have made application to the
Court for permission to conduct additional fact discovery. The parties have
conducted expert discovery, the conclusion of which is subject to the Courts'
decision on a pending motion. The defendants in this action believe that the
remaining claims are without merit, although whether or not the plaintiffs
prevail, the Funds may be obligated to indemnify and advance litigation expenses
to certain of the defendants under the terms and conditions of various indemnity
provisions in the Funds' Partnership Agreements and separate indemnification
agreements, and the amount of such indemnification and expenses could be
material. The Retirement Fund has advanced amounts to the indemnified parties
based upon amounts which are deemed reimbursable in accordance with the
indemnification provisions and has included these amounts in Legal and
Professional Fees. In the opinion of legal counsel, the outcome of this case is
not determinable at this time.
On August 9, 1994, the same two Limited Partners as noted in the preceding
paragraphs commenced another putative class action in the US District Court for
the District of Delaware, purportedly on behalf of all persons who owned limited
partnership interests in the Funds on November 4, 1993, against the Funds, the
Managing General Partners, the Individual General Partners, the Investment
Adviser to the Funds and certain named affiliates of such persons. Plaintiffs
allege that the defendants violated certain provisions of the Investment Company
Act of 1940 and the common law in connection with the sale by certain of the
defendants of shares of common stock of Snapple Beverage Corp. in a November
1993 secondary offering and seek actual and punitive damages and an accounting
in connection therewith. Defendants' motion to dismiss this complaint was denied
on December 29, 1995. On August 4, 1995, while defendants' motion to dismiss the
original complaint was pending, plaintiffs filed an amended complaint alleging
additional violations of the Investment Company Act of 1940 and common law
arising out of the secondary offering. The plaintiffs moved for summary judgment
on certain of these claims. On October 13, 1995, the defendants in this
litigation each filed briefs in opposition to plaintiffs' motion and moved to
dismiss the amended complaint. By an Opinion dated March 30, 1996, the
defendants Court denied plaintiffs' motion for partial summary judgment. By
order of the same date, and without opposition by defendants, the Court
certified the case as a class action. Defendants also filed separate motions to
dismiss, which the Court denied by an order dated June 30, 1996. The parties are
now engaged in discovery. Whether or not the plaintiffs prevail, the Funds may
be obligated to indemnify and advance litigation expenses to certain of the
defendants under the terms and conditions of various indemnity provisions in the
Funds' Partnership Agreements and separate indemnification agreements. In the
opinion of legal counsel, the outcome of this case is not determinable at this
time.
<PAGE>
On November 27, 1995, one Limited Partner from the Retirement Fund and one
Limited Partner from Fund II filed a putative class action in the United States
District Court for the District of Delaware, purportedly on behalf of all
persons or entities who owned Units in the Funds between April 5, 1991 and
November 27, 1995, against the Funds, the Managing General Partner, the
Individual General Partners, the Investment Adviser to the Funds, and certain
named affiliates of such persons. The complaint contends that the Funds
improperly advanced legal fees and litigation costs to the defendants in
connection with three previously filed lawsuits. The plaintiffs are seeking an
accounting, rescissory or actual damages, punitive damages, plaintiffs'
litigation costs and attorneys fees, pre-judgment and post-judgment interest,
and an injunction barring the defendants from further indemnifying themselves.
The defendants in this action believe that the claims are without merit and have
moved to dismiss the case. On December 18, 1996, the Court denied the
defendants' motion to dismiss. Although the defendants believe the advancement
of legal fees and litigation costs was properly made pursuant to indemnification
agreements signed by the defendants, in the opinion of legal counsel, the
outcome of this case is not determinable at this time.
Item 4. Submission of Matters to a Vote of Security-Holders
No matters were submitted to a vote of the Limited Partners of the
Retirement Fund during the fourth quarter of the year ended December 31, 1997.
<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 Unit holders as of January 1, 1998, the last
effective date of transfer (as described below), was 19,109. The Managing
General Partner and Thomas H. Lee as an Individual General Partner also hold
general partner interests.
Effective November 9, 1992, MLPF&S introduced a new limited partnership
secondary service through Merrill Lynch's Limited Partnership Secondary
Transaction Department ("LPSTD"). This service assists Merrill Lynch clients
wishing to buy or sell limited partnership interests, but does not represent an
established trading market for the Units.
MLPF&S provides estimated values of limited partnerships and other direct
investments reported on client account statements and no longer reports the
general partner's estimate of limited partnership net asset value to Unit
holders. Pursuant to MLPF&S guidelines, estimated values for limited partnership
interests originally sold by MLPF&S (such as the Retirement Fund's Units) are
provided by independent valuation services. MLPF&S clients may contact their
MLPF&S Financial Consultants or telephone the number provided to them on their
account statements to obtain a general description of the methodology used by
the independent valuation services to determine their estimates of value. The
estimated values provided by the independent services and the Retirement Fund's
current net asset value as estimated by the general partner are not market
values and Unit holders may not be able to sell their Units or realize either
amount upon a sale of their Units. In addition, Unit holders may not realize the
independent estimated value or the Retirement Fund's current net asset value
upon the liquidation of the Retirement Fund's assets over its remaining life.
The Retirement Fund distributes Distributable Cash from Investments and
Distributable Capital Proceeds in accordance with the terms of the Partnership
Agreement.
Pursuant to the Partnership Agreement, transfers of Units are recognized on
the first day of the fiscal quarter after which the Managing General Partner has
been duly notified of a transfer pursuant to the Partnership Agreement. Until a
transfer is recognized, the limited partner of record (i.e. the transferor) will
continue to receive all the benefits and burdens of ownership of Units
(including allocations of profit and loss and distributions), and any transferee
will have no rights to distributions of sale proceeds generated at any time
prior to the recognition of the transfer and assignment.
Accordingly, Distributable Cash from Investments for a quarter and
Distributable Capital Proceeds from sales after transfer or assignment have been
entered into, but before such transfer and assignment is recognized by the
Managing General Partner, will be payable to the transferor and not the
transferee.
Cash Distributions
The Retirement Fund has made quarterly distributions including both
Distributable Cash from Investments and Distributable Capital Proceeds. The
Retirement Fund's ability to make future cash distributions is restricted. See
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources - the information contained,
which is incorporated herein by reference.
<PAGE>
<TABLE>
<CAPTION>
Item 6. Selected Financial Data
Supplemental Information Schedule
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
TOTAL FUND INFORMATION: 1997 1996 1995 1994 1993
----------- ------------ ------------ ------------- -------------
Net Investment Income $ 4,275,516 $ 5,516,846 $ 3,071,361 $ 5,571,207 $ 4,904,017
Net Realized Gain on Investments 74,228 4,755,563 9,262,616 74,326,557 15,978,135
Net Change in (Depreciation)
Appreciation on Investments (6,285,381) (14,768,911) (28,395,532) (114,349,601) 94,671,310
Cash Distributions to Partners (a) 14,242,934 34,722,409 29,053,844 110,407,812 42,359,885
Net Assets 33,078,550 49,257,119 88,476,031 133,591,430 278,451,079
Cost of Mezzanine Investments 57,865,408 63,818,387 88,353,161 96,897,659 105,516,167
Total Assets 33,261,494 49,627,131 89,303,296 134,369,173 279,629,574
PER UNIT OF LIMITED PARTNERSHIP INTEREST:
Investment Income $ 31.03 $ 35.32 $ 30.42 $ 47.26 $ 51.37
Expenses (7.99) (15.56) (18.88) (21.99) (25.62)
----------- ----------- ------------ ------------ ------------
Net Investment Income $ 23.04 $ 19.76 $ 11.54 $ 25.27 $ 25.75
----------- ----------- ------------ ------------ ------------
Net Realized Gains on Sales of Investments .42 21.99 43.12 302.22 81.82
Net Change in Unrealized (Depreciation)
Appreciation on Investments (35.30) (82.94) (159.46) (642.18) 531.67
Cash Distributions (a) 65.96 166.55 140.82 526.12 237.89
Cumulative Cash Distributions 1,325.22 1,259.26 (b) 1,092.71 (b) 951.89 425.77
Net Asset Value 185.13 $ 262.93 $ 470.67 $ 713.90 $ 1,554.72
(a) Includes $9,724,272 or $54.78 per limited partnership Unit return of
capital from the sale of portfolio investments during 1997.
(b) Certain amounts from prior quarters have been restated to reflect
adjustments made in 1997. See Notes 10 and 13 to the Financial Statements
for further information.
See Cash Distributions Schedule for additional information, including return of capital.
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity & Capital Resources
Capital contributions from the Limited Partners and the General Partners
totaled $178,065,000 in the public offering of ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P. (the "Retirement Fund"), the final closing for
which was held on December 20, 1989.
At December 31, 1997, the Retirement Fund had outstanding a total (at cost)
of $57.9 million invested in Mezzanine Investments representing $39.0 million
Managed and $18.9 million Non-Managed portfolio investments. The remaining
proceeds were invested in Temporary Investments primarily comprised of
commercial paper with maturities of less than one month.
The Retirement Fund invested substantially all of its net proceeds in
Mezzanine Investments consisting of high-yield subordinated debt and/or
preferred stock linked with an equity participation of middle market companies
in connection with friendly leveraged acquisitions, recapitalizations and other
leveraged financings. The Retirement Fund's Mezzanine Investments typically were
issued in private placement transactions which are generally subject to certain
restrictions on sales thereby limiting their liquidity. The Retirement Fund was
fully invested as of December 20, 1992, which was within 36 months from the date
of the final closing (after including the reserve for follow-on investments and
exclusive of amounts available for reinvestment). The reinvestment period for
various amounts of capital proceeds received during the last twelve months of
the Retirement Fund's investment period terminated at various times through
December 18, 1993.
As provided by the Partnership Agreement, the Managing General Partner of
the Retirement Fund is entitled to receive incentive distributions ("MGP
Distributions"), after Limited Partners have received their Priority Return of
10% per annum. The Managing General Partner is required to defer a portion of
any MGP Distribution earned from the sale of portfolio investments in excess of
20% of realized capital gains, net realized capital losses and unrealized
depreciation, in accordance with the Partnership Agreement (the "Deferred
Distribution Amount"). Any Deferred Distribution Amount is distributable to the
Partners pro-rata in accordance with their capital contributions, and certain
amounts otherwise later payable to Limited Partners from Distributable Cash from
operations are instead payable to the Managing General Partner until the
Deferred Distribution Amount is paid in full. As of December 31, 1997 there is
no outstanding Deferred Distribution Amount.
On August 6, 1991, the Independent General Partners approved a reserve for
follow-on investments of $20.0 million for the Retirement Fund. As of March 19,
1998, the reserve balance was reduced to $3.4 million due to follow-on
investments in Petco Animal Supplies, FFSC, Inc., Fine Clothing, Inc., Hills and
Ghirardelli. Additionally, $7.7 million of the reserve had been returned to the
partners. The level of the reserve was based upon an analysis of potential
Follow-On Investments in specific portfolio companies that may become necessary
to protect or enhance the Retirement Fund's existing investment.
The Managing General Partner has established a reserve for future
Retirement Fund expenses of $500,000 from proceeds received from the sale of
Anchor Advanced Products on April 2, 1997.
All net proceeds from the sale of Mezzanine Investments received by the
Retirement Fund in the future will be distributed to its partners unless applied
to or set aside for expenses or follow-on investments.
<PAGE>
The proportion of distributions provided by net investment income has
decreased significantly from prior years due primarily to increased sales and
redemptions of Mezzanine Investments and a resulting decrease in investment
income as those holdings cease to generate interest income. It is expected that
the majority of future cash distributions to Limited Partners will almost
entirely be derived from recovered capital and gains from asset sales, 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
and Mezzanine Investments, which are estimated to be less than one dollar per
Limited Partnership Unit each quarter for the next few years. Distributions
therefore are expected to vary significantly in amount and may not be made in
every quarter.
Investment in High-Yield Securities
The Retirement Fund invested primarily in subordinated debt and preferred
stock securities ("High-Yield Securities"), generally linked with an equity
participation, issued in conjunction with the mezzanine financing of privately
structured, friendly leveraged acquisitions, recapitalizations and other
leveraged financings. High-Yield Securities are debt and preferred equity
securities that are unrated or are rated by Standard & Poor's Corporation as BB
or lower and by Moody's Investor Services, Inc. as Ba or lower. Risk of loss
upon default by the issuer is significantly greater with High-Yield Securities
than with investment grade securities because High-Yield Securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Also, these issuers usually have high levels of indebtedness and are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates, than investment grade issuers. Most of these securities are
subject to resale restrictions and generally there is no quoted market for such
securities.
Although the Retirement Fund cannot eliminate the risks associated with its
investments in High-Yield Securities, it has established risk management
policies. The Retirement Fund subjected each prospective investment to rigorous
analysis and made only those investments that were recommended by the Investment
Adviser and that met the Retirement Fund's investment guidelines or that had
otherwise been approved by the Managing General Partner and the Independent
General Partners. The Retirement Fund's investments were measured against
specified Retirement Fund investment and performance guidelines. To limit the
exposure of the Retirement Fund's capital in any single issuer, the Retirement
Fund limited the amount of its investment in a particular issuer. The Retirement
Fund's Investment Adviser also continually monitors portfolio companies in order
to minimize the risks associated with its investments in High-Yield Securities.
Certain issuers of Securities held by the Retirement Fund (First Alert,
Hills and Playtex) have registered their equity securities in public offerings.
Although the equity securities of the same class presently held by the
Retirement Fund were not registered in these offerings, the Retirement Fund has
the ability under Rule 144 under the Securities Act of 1933 to sell publicly
traded equity securities held by it for at least two years on the open market,
subject to the volume restrictions set forth in that rule. The Rule 144 volume
restrictions generally are not applicable to equity securities of non-affiliated
companies held by the Retirement Fund for at least three years. In certain
cases, the Retirement Fund has agreed not to make any sales of equity securities
for a specified hold-back period following a public offering.
The Investment Adviser reviews each portfolio company's financial
statements quarterly. In addition, the Investment Adviser routinely reviews and
discusses financial and operating results with the company's management and
where appropriate, attends board of director meetings. In some cases,
representatives of the Investment Adviser, acting on behalf of the Funds (and
affiliated investors where applicable), serve as one or more of the directors on
the boards of portfolio companies. The Retirement Fund may, from time to time,
make follow-on investments to the extent necessary to protect or enhance its
existing investments.
<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, 1997, the Retirement Fund had investment
income of $5.7 million as compared to $8.3 million for the same period in 1996
and $6.4 million for the same period in 1995. The decrease in investment income
from 1996 to 1997 is due primarily to the recognition of interest income from
payment-in-kind securities related to the sale of CST Office Products, Inc. in
March of 1996.
Major expenses for the period consisted of Investment Advisory Fees and
Fund Administration Fees and Reimbursable Administrative Expenses.
The Investment Adviser and Fund Administrator both receive their
compensation on a quarterly basis. The total Investment Advisory Fees paid to
the Investment Adviser by the Retirement Fund for the years ended December 31,
1997, 1996 and 1995 was $621,386, $807,939 and $1.1 million, respectively, and
were calculated at an annual rate of 1.0% of assets under management (net
offering proceeds reduced by cumulative capital reductions and realized losses),
with a minimum annual amount of $1,200,000 for Fund II and the Retirement Fund
on a combined basis. These decreases in Investment Advisory Fees are a direct
result of the sales of investments, returns of capital to Partners and realized
losses on investments.
Beginning in November of 1997, the Fund Administration Fee changed to an
annual amount of $400,000 for the Retirement Fund and Fund II on a combined
basis, plus 100% of all reimbursable expenses (as defined below) incurred by the
Fund. Actual out-of-pocket expenses ("reimbursable expenses") primarily consist
of printing, audit, tax preparation and custodian fees. For the years ended
December 31, 1997, 1996 and 1995, the Retirement Fund incurred $113,219,
$110,370 and $100,721, respectively, in reimbursable expenses.
The Fund Administration Fees paid to the Fund Administrator for the years
ended December 31, 1997, 1996 and 1995 were $458,168, $544,478 and $602,002,
respectively. For the years ended December 31, 1996 and 1995, Fund
Administrative Fees were calculated at an annual rate of 0.45% of the excess of
net offering proceeds, less 50% of capital reductions and realized losses. These
decreases in Fund Administration Fees were a direct result of sales of
investments, returns of capital distributed to partners and realized losses on
investments.
Pursuant to the administrative services agreement between the Retirement
Fund and the Fund Administrator, for the period ending November 10, 1997, a
portion of the actual out-of-pocket expenses incurred in connection with the
administration of the Retirement Fund was reimbursable to the Fund
Administrator.
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, 1997, 1996 and 1995 were
$135,998, $1.1 million and $1.4 million, respectively. These expenses are
attributable to legal fees incurred and advanced on behalf of indemnified
defendants as well as fees incurred directly by the Retirement Fund in
connection with the aforementioned litigation proceedings.
For the year ended December 31, 1997, the Retirement Fund had net
investment income of $4.3 million, as compared to $5.5 million for the same
period in 1996 and $5.6 million for the same period in 1995. The decrease in net
investment income from 1996 to 1997 is the result of additional payment-in-kind
interest income recorded upon the sale of CST in the first quarter of 1996
offset by Fees and Investment Fees recorded in 1996. The decrease in 1996 as
compared to 1995 net investment income is primarily attributable to a decrease
in income from Mezzanine Investments and Temporary Investments partially offset
by lower expenses, primarily Legal and Professional Fees.
Net Assets
The Retirement Fund's net assets decreased by $16.2 million during the year
ended December 31, 1997, due to the payment of cash distributions to partners of
$14.2 million ($10.8 million of the cash distributions paid was return of
capital from the sales of portfolio investments) and net unrealized depreciation
of $6.3 million, partially offset by net investment income of $4.3 million and
realized gains of $74,228 from the sale of Mezzanine Investments.
<PAGE>
Unrealized Appreciation and Depreciation on Investments
For the year ended December 31, 1997, the Retirement Fund recorded net
unrealized depreciation of $6.3 million of which $3.3 million was related to net
unrealized depreciation in market value of publicly traded securities held as of
December 31, 1997. This compares to a net unrealized depreciation of $14.8
million for the same period in 1996 of which $12.8 million was related to net
unrealized depreciation in market value of publicly traded securities. The
Retirement Fund's cumulative net unrealized depreciation as of December 31, 1997
totaled $29.5 million.
The Retirement Fund's valuation of the common stock of First Alert, Hills,
Playtex and Stanley Furniture reflect their closing market prices at December
31, 1997.
The Managing General Partner and the Investment Adviser review the
valuation of the Retirement Fund's portfolio investments that do not have a
readily ascertainable market value on a quarterly basis with final approval from
the Individual General Partners. Portfolio investments are valued at original
cost plus accrued value in the case of original issue discount or deferred pay
securities. Such investments will be revalued if there is an objective basis for
doing so at a different price. Investments will be written down in value if the
Managing General Partner and Investment 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.
Appoximately 30% of the Retirement Fund's investments (at cost) are
invested in private placement securities for which there are no ascertainable
market values. Although the Managing General Partner and Investment Adviser use
their best judgment in estimating the fair value of these investments, there are
inherent limitations in any estimation technique. Therefore, the fair value
estimates presented herein are not necessarily indicative of the amount which
the Retirement Fund could realize in a current transaction.
The First Alert, Hills, Playtex and Stanley Furniture securities held by
the Retirement Fund are restricted securities under the SEC's Rule 144 and can
only be sold under that rule in a registered public offering or pursuant to an
exemption from the registration requirement. In addition, resale in some cases
is restricted by lockup or other agreements. The Retirement Fund may be
considered an affiliate of First Alert and Stanley Furniture pursuant to Rule
144 under the Securities Act of 1993 and, therefore, any resale of securities of
those companies under Rule 144 is limited by the volume limitations in that
rule. Accordingly, the values referred to in the financial statements for the
remaining First Alert, Hills, Playtex and Stanley Furniture securities held by
the Retirement Fund do not necessarily represent the prices at which these
securities could currently be sold.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of December
31, 1997. Although the Managing General Partner and Investment Adviser are not
aware of any factors not disclosed herein that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued since that time, and the current estimated fair value of these
investments may have changed significantly since that point in time.
For additional information, please refer to Supplemental Schedule of
Unrealized Appreciation and Depreciation - Schedule 2.
Realized Gains and Losses
For the year ended December 31, 1997, the Retirement Fund had net realized
gains from investments of $74,228 as compared to $4.8 million and $9.2 million
for the same periods in 1996 and 1995, respectively.
For additional information, please refer to Supplemental Schedule of
Realized Gains and Losses - Schedule 1.
<PAGE>
Cash Distributions
On February 2, 1998, the Individual General Partners approved the fourth
quarter 1997 cash distribution which represents net investment income of
$132,526 from Mezzanine Investments, net investment income of $20,113 from
Temporary Investments and Net Distributable Capital proceeds from the sale of
Stanley Furniture of $69,300 (which includes a return of capital of $34,881).
The total amount distributed to Limited Partners was $182,648 or $1.02 per Unit,
which was paid on February 13, 1998. The Managing General Partner received a
total of $514 with respect to its interest in the Retirement Fund and $40,308 in
MGP Distributions. Thomas H. Lee, as an Individual General Partner, received $51
with respect to his interest in the Retirement Fund.
Additionally, on February 2, 1998, the Independent General Partners
approved a cash distribution to Limited Partners consisting of a repayment by
the Managing General Partner of $424,261 representing an overpayment of an MGP
distribution with respect to a transaction effected during the quarter ending
December 31, 1995 and to pay the Retirement Fund Limited Partners interest on
such amount. This distribution totaling $2.70 per Unit was distributed on
Febuary 13, 1998, to Limited Partners of record at December 31, 1997.
Because most of the Retirement Fund's debt holdings were previously sold or
redeemed, remaining portfolio interest income expected to be received by the
Retirement Fund may not be sufficient to cover the Retirement Fund's expenses in
the future. As a result, any interest income received will be used to pay the
Retirement Fund expenses and may not be available for distribution. The majority
of future cash distributions to Limited Partners will be derived from recovered
capital and gains, from asset sales, if any, which are dependent upon future
market conditions and therefore are inherently unpredictable. Cash
distributions, therefore, are likely to vary significantly in amount and may not
be made in every quarter.
Should Limited Partners decide to sell their Units, any such sale will be
recorded on the books and records of the Retirement Fund quarterly, only upon
the satisfactory completion and acceptance of the Retirement Fund's transfer
documents. There can be no assurances that such transfer will be effected before
any specified date. Additionally, pursuant to the Partnership Agreement, until a
transfer is recognized, the Limited Partner of record (i.e. the transferor) is
entitled to receive all the benefits and burdens of ownership of Units, and any
transferee has no rights to distributions of sale proceeds generated at any time
prior to the recognition of the transfer and assignment. Accordingly,
Distributable Cash from Investments for a quarter and Distributable Capital
Proceeds from sales after transfer or assignment have been entered into, but
before such transfer and assignment is recognized, would be payable to the
transferor and not the transferee.
<PAGE>
<TABLE>
<CAPTION>
Cash Distributions
The following table represents distributions approved by the Individual
General Partners of ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. since
inception (November 10, 1989):
<S> <C> <C> <C> <C> <C> <C> <C>
Total Limited Per Unit Managing Individual
Distributed Partners Return of General Incentive General
Cash Amount Per Unit Capital Partner Fee (b) Partner
----------- ---------- -------- --------- --------- --------- ----------
Fourth Quarter 1989 $ 1,049,749 $ 1,046,507 $ 6.59 $ - $ 2,947 $ - $ 295
First Quarter 1990 2,906,023 2,897,045 16.32 - 8,162 816
Second Quarter 1990 3,586,751 3,479,294 19.60 - 10,073 96,377 1,007
Third Quarter 1990 2,735,077 2,726,630 15.36 - 7,679 - 768
Fourth Quarter 1990 4,076,832 3,891,129 21.92 - 11,446 173,112 1,145
First Quarter 1991 2,297,038 2,289,944 12.90 - 6,449 - 645
Second Quarter 1991 2,919,747 2,910,729 16.90 - 8,198 - 820
Third Quarter 1991 2,327,308 2,320,120 13.07 - 6,535 - 653
Fourth Quarter 1991 2,646,044 2,637,873 14.86 - 7,428 - 743
First Quarter 1992 3,055,858 3,046,157 17.16 - 8,843 - 858
Second Quarter 1992 3,272,572 3,262,726 18.38 - 8,927 - 919
Third Quarter 1992 2,638,921 2,630,772 14.82 - 7,408 - 741
Fourth Quarter 1992 2,897,119 2,888,169 16.27 - 8,136 - 814
Snapple Distribution
on 4/13/93 12,786,849 12,747,352 71.81 71.81 35,906 - 3,591
First Quarter 1993 19,889,862 19,828,426 111.70 97.16 55,851 - 5,585
Second Quarter 1993 1,230,430 1,226,629 6.91 3.49 3,455 - 346
Third Quarter 1993 5,555,625 5,538,468 31.20 1.89 15,597 - 1,560
Fourth Quarter 1993 13,364,699 11,905,931 67.07 - 38,388 1,416,541 3,839
First Quarter 1994 14,934,550 14,117,768 79.53 72.50 41,938 770,650 4,194
Second Quarter 1994 3,184,138 2,792,311 15.73 10.00 8,941 381,992 894
Third Quarter 1994 810,197 807,693 4.55 2.79 2,276 - 228
Snapple Distribution
on 12/15/94 78,114,228 63,770,489 359.24 13.81 237,847 14,082,107 23,785
Fourth Quarter 1994 279,288 221,894 1.25 - 627 56,704 63
EquiCredit Distribution
on 2/14/95 8,303,171 6,860,956 38.65 3.82 24,411 1,415,363 2,441
First Quarter 1995 5,893,413 4,899,415 27.60 26.48 13,801 978,817 1,380
Second Quarter 1995 2,077,699 1,352,664 7.62 .38 4,820 719,733 482
Third Quarter 1995 1,890,622 1,088,166 6.13 5.61 3,069 799,080 307
Sun Pharmaceuticals
Distribution on
12/11/95 10,609,652 10,574,568(c) 59.57 51.57 28,591 - (c) 2,859
Fourth Quarter 1995 19,587 19,527 .11 - 55 - 5
CST Distribution on
5/3/96 13,796,491 9,773,975(c) 55.06 42.04 27,529 3,995,868 (c) 2,753
First Quarter 1996 765,250 76,331 .43 - 217 688,680 22
Ghirardelli
Distribution on
5/3/96 10,731,976 10,698,829 60.27 46.38 30,134 - 3,013
Second Quarter 1996 9,302,264 8,889,952 50.08 26.52 25,043 384,765 2,504
Third Quarter 1996 106,839 106,509 .60 - 300 - 30
Fourth Quarter 1996 1,361,776 1,175,149 6.62 6.17 3,310 182,986 331
First Quarter 1997 268,515 55,030 .31 .01 157 213,312 16
Anchor Distribution
on 5/15/97 10,162,056 7,821,311 44.06 44.04 22,029 2,316,514 2,203
Second Quarter 1997 1,783,647 1,586,984 8.94 5.11 4,471 191,744 447
Third Quarter 1997 1,091,201 1,070,415 6.03 5.62 3,015 17,469 301
Fourth Quarter 1997 221,938 181,065 1.02 .19 514 40,308 51
------------ ------------ --------- --------- --------- ----------- ---------
Totals $264,945,004 $235,214,902 $1,326.24 $ 537.39 $ 734,523 $28,922,122 $ 73,454
============ ============ ========= ========= ========= =========== =========
(a) Distributions are paid no later than 45 days after the end of each quarter.
(b) MGP Distributions to the Managing General Partner are the result of Limited Partners achieving
cumulative Priority Returns on Mezzanine Investments in accordance with the Partnership Agreement.
(c) Certain amounts from prior quarters have been restated to reflect adjustments made in 1997.
See Notes 10 and 13 to the Financial Statements for further information.
</TABLE>
<PAGE>
Item 8. Financial Statements and Supplementary Data
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
TABLE OF CONTENTS
Report of Independent Accountants
Statements of Assets, Liabilities and Partners' Capital
As of December 31, 1997 and December 31, 1996
Statements of Operations
For the Years Ended December 31, 1997, 1996 and 1995
Statements of Changes in Net Assets
For the Years Ended December 31, 1997, 1996 and 1995
Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
Statements of Changes in Partners' Capital
For the Years Ended December 31, 1997, 1996 and 1995
Schedule of Portfolio Investments - December 31, 1997
Notes to Financial Statements
Supplementary Schedule of Realized Gains and Losses - Schedule 1
Supplementary Schedule of Unrealized Appreciation and Depreciation - Schedule 2
<PAGE>
Report of Independent Accountants
To the General and Limited Partners of ML-Lee Acquisition Fund (Retirement
Accounts) II, L.P.
In our opinion, the accompanying statements of assets, liabilities and
partners' capital, including the schedule of portfolio investments, and the
related statements of operations, of changes in net assets, of cash flows, and
of changes in partners' capital present fairly, in all material respects, the
financial position of ML-Lee Acquisition Fund (Retirement Accounts) II, L.P.
(the "Fund") at December 31, 1997 and 1996, and the results of its operations,
the changes in its net assets, its cash flows, and the changes in its partners'
capital for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1997 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations were not received, provide a reasonable
basis for the opinion expressed above.
The financial statements include securities, valued at $28,310,000 at
December 31, 1997 (85.6% of net assets), whose values have been estimated by the
Managing General Partner and the Investment Adviser (with the approval of the
Independent General Partners) in the absence of readily ascertainable market
values, as further described in Note 2. Those estimated values may differ
significantly from the values that would have been used had a ready market for
the securities existed, and the differences could be material to the financial
statements.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule of realized gains and
losses (Schedule 1) and the schedule of unrealized appreciation and depreciation
(Schedule 2) are presented for the purpose of additional analysis and are not a
required part of the basic financial statements. These schedules are the
responsibility of the Fund's management. Such schedules have been subjected to
the auditing procedures applied in our audits of the basic financial statements
and, in our opinion, are fairly stated in all material respects when considered
in relation to the basic financial statements taken as a whole.
PRICE WATERHOUSE LLP
New York, New York
March 19, 1998
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
<S> <C> <C>
December 31, December 31,
1997 1996
------------ ------------
ASSETS:
Investments - Notes 2,4,5
Portfolio Investments at fair value
Managed Companies (amortized cost $38,972
at December 31, 1997 and $46,467 at December 31, 1996) $ 21,533 $ 32,302
Non-Managed Companies (amortized cost $18,894
at December 31, 1997 and $17,353 at December 31, 1996) 6,777 8,244
Temporary Investments, at amortized cost (cost $4,204
at December 31, 1997 and $8,390 at December 31, 1996) 4,222 8,405
Cash (of which $131 is restricted at December 31, 1996) 161 141
Accrued Interest Receivables - Note 2 141 531
Due from Affiliate - Note 10 424 --
Prepaid Expenses 4 4
------------ ------------
TOTAL ASSETS $ 33,262 $ 49,627
============ ============
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities
Legal and Professional Fees Payable $ 80 $ 119
Reimbursable Administrative Expenses Payable - Note 8 9 35
Independent General Partners' Fees Payable - Note 9 10 28
Deferred Interest Income - Note 2 85 188
------------ ------------
Total Liabilities 184 370
------------ ------------
Partners' Capital - Note 2
Individual General Partner 14 18
Managing General Partner 202 2,566
Limited Partners (177,515 Units) 32,862 46,673
------------ ------------
Total Partners' Capital 33,078 49,257
------------ ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 33,262 $ 49,627
============ ============
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
For the Years Ended December 31,
--------- --------- ---------
1997 1996 1995
--------- --------- ---------
INVESTMENT INCOME - Notes 2,4,6:
Interest $ 2,456 $ 7,557 $ 5,530
Discount & Dividends 3,242 730 903
--------- --------- ---------
TOTAL INCOME 5,698 8,287 6,433
--------- --------- ---------
EXPENSES:
Investment Advisory Fee - Note 7 622 808 1,064
Fund Administration Fee - Note 8 458 544 602
Reimbursable Administrative Expenses-Note 8 113 110 101
Legal and Professional Fees 136 1,125 1,389
Independent General Partners' Fees and Expenses - Note 9 90 179 201
Insurance Expense 4 4 5
--------- --------- ---------
TOTAL EXPENSES 1,423 2,770 3,362
--------- --------- ---------
NET INVESTMENT INCOME 4,275 5,517 3,071
--------- --------- ---------
Net Realized Gain on Investments - Note 4 and Schedule 1 74 4,756 9,263
--------- --------- ---------
Net Change in Unrealized Depreciation
from Investments Note 5 and Schedule 2:
Publicly Traded Securities (3,275) (13,603) (23,262)
Nonpublic Securities (3,010) (1,166) (5,133)
--------- --------- ---------
SUBTOTAL (6,285) (14,769) (28,395)
--------- --------- ---------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS (1,936) (4,496) (16,061)
Less: Earned MGP Distributions to Managing General Partner (318) (2,566) (2,592)
--------- --------- ---------
NET INCREASE (DECREASE) AVAILABLE FOR PRO-RATA
DISTRIBUTION TO ALL PARTNERS $ (2,254) $ (7,062) $ (18,653)
========= ========= =========
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
For the Years Ended December 31,
---------- ---------- ----------
1997 1996 1995
---------- ---------- ----------
FROM OPERATIONS:
Net Investment Income $ 4,275 $ 5,517 3,071
Net Realized Gain on Investments 74 4,756 9,263
Net Change in Unrealized Depreciation from Investments (6,285) (14,769) (28,395)
---------- ---------- ----------
Net Increase (Decrease) in Net Assets Resulting from Operations (1,936) (4,496) (16,061)
Cash Distributions to Partners (14,243) (34,723) (29,054)
---------- ---------- ----------
Total Increase (Decrease) $ (16,179) $ (39,219) $ (45,115)
NET ASSETS:
Beginning of Year 49,257 88,476 133,591
---------- ---------- ----------
End of Period $ 33,078 $ 49,257 $ 88,476
========== ========== ==========
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
For the Years Ended December 31,
---------- ---------- ----------
1997 1996 1995
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest, Dividends and Discount Income $ 5,975 $ 8,856 5,763
Fund Administration Fee (458) (544) (602)
Investment Advisory Fee (622) (808) (1,064)
Independent General Partners' Fees and Expenses (108) (196) (218)
(Purchase) Sale of Temporary Investments, Net 4,186 (188) 8,127
Purchase of Portfolio Company Investments (1,580) -- (1,865)
Proceeds from Sales of Portfolio Company Investments 7,608 29,185 20,176
Reimbursable Administrative Expense (139) (121) (125)
Legal and Professional Fees (175) (1,321) (1,138)
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,687 34,863 29,054
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Distributions to Partners (14,667) (34,723) (29,054)
---------- ---------- ----------
NET CASH APPLIED TO FINANCING ACTIVITIES (14,667) (34,723) (29,054)
---------- ---------- ----------
Net Increase in Cash 20 140 --
Cash at Beginning of Period 141 1 1
---------- ---------- ----------
CASH AT END OF PERIOD $ 161 $ 141 $ 1
========== ========== ==========
RECONCILIATION OF NET INVESTMENT INCOME
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Investment Income $ 4,275 $ 5,517 $ 3,071
---------- ---------- ----------
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME (LOSS)
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
(Increase) Decrease in Investments 10,144 24,342 17,176
(Increase) Decrease in Accrued Interest Receivables 277 468 (670)
Increase (Decrease) in Legal and Professional Fees Payable (39) (192) 255
Increase (Decrease) in Reimbursable Administrative Expenses Payable (26) (11) (24)
Increase (Decrease) in Independent General Partners' Fees Payable (18) (17) (17)
Net Realized Gains on Sales of Investments 74 4,756 9,263
---------- ---------- ----------
TOTAL ADJUSTMENTS 10,412 29,346 25,983
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 14,687 $ 34,863 $ 29,054
========== ========== ==========
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) 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 Twelve Months Ended December 31, 1995
Partners' Capital at January 1, 1995 $ 40 $ 6,824 $ 126,727 133,591
Allocation of Net Investment Income 1 1,021 2,049 3,071
Allocation of Net Realized Gain on Investments 3 1,605 7,655 9,263
Allocation of Net Change in Unrealized
Depreciation From Investments (8) (80) (28,307) (28,395)
Cash Distributions to Partners (8) (4,473) (24,573) (29,054)
---------- ---------- ---------- ----------
Partners' Capital at December 31, 1995 $ 28 $ 4,897 $ 83,551 $ 88,476
========== ========== ========== ==========
For the Twelve Months Ended December 31, 1996
Partners' Capital at January 1, 1996 $ 28 $ 4,897 $ 83,551 $ 88,476
Allocation of Net Investment Income 2 2,007 3,508 5,517
Allocation of Net Realized Gain on Investments 1 852 3,903 4,756
Allocation of Net Change in Unrealized
Depreciation From Investments (4) (41) (14,724) (14,769)
Cash Distributions to Partners (9) (5,149) (29,565) (34,723)
---------- ---------- ---------- ----------
Partners' Capital at December 31, 1996 $ 18 $ 2,566 $ 46,673 $ 49,257
========== ========== ========== ==========
For the Twelve Months Ended December 31, 1997
Partners' Capital at January 1, 1997 $ 18 $ 2,566 $ 46,673 $ 49,257
Allocation of Net Investment Income 1 184 4,090 4,275
Allocation of Net Realized Gain on Investments -- -- 74 74
Allocation of Net Change in Unrealized
Depreciation From Investments (2) (17) (6,266) (6,285)
Cash Distributions to Partners (3) (2,531) (11,709) (14,243)
---------- ---------- ---------- ----------
Partners' Capital at December 31, 1997 $ 14 $ 202 $ 32,862 $ 33,078
========== ========== ========== ==========
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
Fair % Of
Principal Investment Investment Value Total
Amount/Shares Investment Date Cost(e) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
MEZZANINE INVESTMENTS
MANAGED COMPANIES
ANCHOR ADVANCED PRODUCTS, INC. (b) - Notes 4, 13
219,323 Shares Anchor Holdings, Inc., Common Stock (d) 04/30/90 $ 745 $ 745
$3,133 11.67% Sr. Sub. Note
$4,178 17.50% Jr. Sub. Note
Purchased 4/30/90 $ 7,311
Repaid 4/2/97 $ 7,311
Realized Gain $ 0
87,033 Shares Common Stock
Purchased 4/30/90 $ 827
Exercised 132,290 Warrants 4/2/97 $ 1,256
Return of Capital Proceeds from the
Anchor Dividend $(1,338)
Cost Basis of Equity $ 745 ------------------------------
745 745 2.29
------------------------------
BIG V SUPERMARKETS, INC. (b)
$6,963 Big V Supermarkets, Inc., Sr. Sub. Nt. 14.14% due 03/15/01(c) 12/27/90 6,963 6,963
62,667 Shares Big V Holding Corp., Inc., Common Stock(d) 12/27/90 2,193 2,193
(8.8% of fully diluted common equity) (h) ------------------------------
9,156 9,156 28.14
------------------------------
CINNABON INTERNATIONAL, INC.
(formerly Restaurants Unlimited)
$3,956 Cinnabon, 11% Sub. Nt. due 06/30/02(c) 06/03/94 3,956 3,956
256,083 Warrants Cinnabon, Common Stock Warrants(d) 06/03/94 - -
(1.4% of fully diluted common equity)(h) ------------------------------
3,956 3,956 12.16
------------------------------
COLE NATIONAL CORPORATION
7,032 Warrants Cole National Corporation, Common Stock Purchase Warrants(d) 09/26/90 - -
(0.0% of fully diluted common equity assuming exercise of
warrants) (h)
$744 13% Sr. Secured Bridge Note
Purchased 09/25/90 $744
Repaid 11/15/90 $744
Realized Gain $ 0 ------------------------------
- - 0.00
------------------------------
FIRST ALERT, INC.(b) - Notes 5, 13
2,281,524 Shares First Alert, Inc., Common Stock(a)(d) 07/31/92 3,679 4,849
(8.9% of fully diluted common equity)(h)
$11,302 12.5% Subordinated Note
Purchased 07/31/92 $11,302
Repaid 03/28/94 $11,302
Realized Gain $ 0 ------------------------------
3,679 4,849 14.91
------------------------------
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
Fair % Of
Principal Investment Investment Value Total
Amount/Shares Investment Date Cost(e) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
HILLS STORES COMPANY - Note 5
244,818 Shares Hills Stores Company, Common Stock(a)(d) 04/03/90 $16,153 $ 765
33,427 Shares Hills Stores Company, Common Stock(a)(d) 08/21/95 2,418 104
(2.5% of fully diluted common equity) (h) ------------------------------
18,571 869 2.68
------------------------------
PLAYTEX PRODUCTS, INC.(b) - Note 5
183,560 Shares Playtex Products, Inc., Common Stock(a)(d) 03/29/90 2,829 1,881
(0.3% of fully diluted common equity)(h)
$3,916 15% Subordinated Note
Purchased 03/29/90 $3,916
Sold 09/28/90 $3,925
Realized Gain $ 9
45,323 Shares Common Stock
Purchased 03/29/90 $ 151
Sold 12/20/91 $ 175
Realized Gain $ 24
$3,916 15% Subordinated Note
Purchased 03/29/90 $3,916
Sold 02/01/93 $3,912
Realized Loss $ (4)
Total Net Realized Gain $ 29 ------------------------------
2,829 1,881 5.78
------------------------------
STANLEY FURNITURE COMPANY, INC. (b) - Notes 4,5, 13
2,773 Shares Stanley Furniture Company, Inc., Common Stock(a)(d) 06/30/91 36 77
(0.3% of fully diluted common equity)(h)
7,716 Shares Common Stock
Purchased 6/30/91 $ 97
Sold 6,710 Shares 11/13/96 $ 102
Sold 1,006 Shares 12/13/96 $ 15
Realized Gain $ 20
Purchased 218 Shares 6/30/91 $ 3
Sold 2/07/97 $ 5
Realized Gain $ 2
Purchased 5,032 Shares 6/30/91 $ 64
Sold 6/30/97 $ 101
Realized Gain $ 37
Purchased 2,772 shares 6/30/91 $ 35
Sold 11/18/97 $ 69
Realized Gain $ 34
Total Net Realized Gain $ 93 ------------------------------
36 77 0.24
------------------------------
TOTAL INVESTMENT IN MANAGED COMPANIES $38,972 $21,533 66.20
==============================
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
Fair % Of
Principal Investment Investment Value Total
Amount/Shares Investment Date Cost(e) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
NON-MANAGED COMPANIES
BIOLEASE, INC. - Note 5
$513 Biolease, Inc., 13% Sub. Nt. due 06/06/04(c) 06/08/94 $ 443 $ 257
63.20 Shares Biolease, Inc., Common Stock(d) 06/08/94 62 -
6,554 Warrants Biotransplant, Inc., Common Stock Purchase Warrants(d) 06/08/94 9 9
-----------------------------
514 266 .82
-----------------------------
FITZ AND FLOYD - Notes 4,5
$1,580 Fitz and Floyd, 12% Sub. Nt. due 4/15/04(c) 04/11/97 1,580 1,580
5,530 Shares Fitz and Floyd, Series A Preferred Stock(d) 04/11/97 8,248 1,976
1,661,663 Shares Common Stock
Purchased Various $ 13
Surrendered May 1996 $ 0
Realized loss $ (13)
$6,719 Sr. Sub. Note
$1,581 Sr. Sub. Note
Purchased Various $8,248
Exchanged 4/11/97
6,530 Series A Preferred Stock and
33,575 Shares common Stock $8,248
Realized Gain $ 0
Total Realized Loss $ (13) -----------------------------
9,828 3,556 10.93
-----------------------------
FLA. ORTHOPEDICS, INC - Notes 5,6
12,634 Shares FLA. Holdings, Inc. Series B Preferred Stock (d) 08/02/93 987 -
2,493 Warrants FLA. Holdings, Inc. Common Stock Purchase Warrants(d) 08/02/93 - -
$3,158 12.5% Subordinated Note
Purchased 08/02/93 $ 3,158
Surrendered 08/16/96 $ 0
Realized Loss $(3,158)
78,960 Common Stock
Purchased 08/02/93 $ 987
Exchanged 08/02/96
2,493 Series B Preferred Stock $ 987
Realized Gain $ 0
Total Realized Loss $(3,158) -----------------------------
987 - 0.00
-----------------------------
SORETOX - Notes 5,6
$3,997 Stablex Canada, Inc., Sr. Sub. Nt. 10% due 06/30/07(c)(f)(g) 06/29/95 3,997 2,955
$3,568 Stablex Canada, Inc., Jr. Sub. Nt. 11% due 06/30/09(c)(f)(g) 06/29/95 3,568 -
2,286 Warrants Seaway TLC, Inc. Common Stock Purchase Warrants 06/29/95 - -
-----------------------------
7,565 2,955 9.08
-----------------------------
TOTAL INVESTMENT IN NON-MANAGED COMPANIES $18,894 $ 6,777 20.83
=============================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
Fair % Of
Principal Investment Investment Value Total
Amount/Shares Investment Date Cost(e) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes Various $20,507 $ 15,711 48.29
Preferred Stock, Common Stock, Warrants and Stock Rights Various 37,359 12,599 38.73
-----------------------------
TOTAL MEZZANINE INVESTMENTS $57,866 $ 28,310 87.02
=============================
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$ 3,881 General Electic 5.81% due 1/05/98 12/04/97 3,861 3,878
$ 344 Clipper Receivables 5.97% due 1/02/98 12/18/97 343 344
-----------------------------
TOTAL INVESTMENT IN COMMERCIAL PAPER 4,204 4,222 12.98
-----------------------------
TOTAL TEMPORARY INVESTMENTS $ 4,204 $ 4,222 12.98
-----------------------------
TOTAL INVESTMENT PORTFOLIO $62,070 $ 32,532 100.00%
=============================
(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 $22 for Mezzanine Investments
and $18 for Temporary Investments.
(f) Inclusive of receipt of payment-in-kind securities.
(g) Non-accrual investment status.
(h) 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 (RETIREMENT ACCOUNTS) II, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. Organization and Purpose
ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. (the "Retirement
Fund") (formerly T.H. Lee Acquisition Fund (Retirement Accounts) II, L.P.) was
formed along with ML-Lee Acquisition Fund II, L.P. ("Fund II"; collectively
referred to as the "Funds") and the Certificates of Limited Partnership were
filed under the Delaware Revised Uniform Limited Partnership Act on September
23, 1988. The Funds' operations commenced on November 10, 1989.
Mezzanine Investments II, L.P. (the "Managing General Partner"), subject to
the supervision of the Individual General Partners, is responsible for
overseeing and monitoring the Retirement Fund's investments. The Managing
General Partner is a Delaware limited partnership in which ML Mezzanine II Inc.
is the general partner and Thomas H. Lee Advisors II, L.P., the Investment
Adviser to the Funds, is the limited partner. The Individual General Partners
are Vernon R. Alden, Joseph L. Bower and Stanley H. Feldberg (the "Independent
General Partners") and Thomas H. Lee.
The Retirement Fund elected to operate as a business development company
under the Investment Company Act of 1940. The Retirement Fund's primary
investment objective is to provide current income and capital appreciation
potential by investing in privately-structured, friendly leveraged buyouts and
other leveraged transactions. The Retirement Fund pursues this objective by
investing primarily in subordinated debt and related equity securities issued in
conjunction with the "mezzanine financing" of friendly leveraged buyout
transactions, leveraged acquisitions and leveraged recapitalizations. The
Retirement Fund may also invest in "bridge investments" if it is believed that
such investments would facilitate the consummation of a mezzanine financing.
As described in the Prospectus, the Retirement Fund will terminate no later
than December 20, 1999, subject to the right of the Individual General Partners
to extend the term for up to one additional two-year period and one additional
one-year period if it is in the best interest of the Retirement Fund. The
Retirement Fund will then have five additional years to liquidate its remaining
investments.
2. Significant Accounting Policies
Basis of Accounting
For financial reporting purposes, the records of the Retirement Fund are
maintained using the accrual method of accounting. For federal income tax
reporting purposes, the results of operations are adjusted to reflect statutory
requirements arising from book to tax differences. The preparation of financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts and
disclosures in the financial statements. Actual reported results could vary from
these estimates.
Valuation of Investments
Securities for which market quotations are readily available are valued by
reference to such market quotation using the last trade price (if reported) or
the last bid price for the period. For securities without a readily
ascertainable market value (including securities restricted as to resale for
which a corresponding publicly traded class exists), fair value is determined,
on a quarterly basis, in good faith by the Managing General Partner and the
Investment Adviser with final approval from the Individual General Partners of
the Retirement Fund. For privately issued securities in which the Retirement
Fund typically invests, the fair value of an investment is its original cost
plus accrued value in the case of original issue discount or deferred pay
securities. Such investments will be revalued if there is an objective basis for
doing so at a different price. Investments will be written down in value if the
Managing General Partner and Investment Adviser believe adverse credit
developments of a significant nature require a write-down of such securities.
Investments will be written up in value only if there has been an arms'-length
third party transaction to justify the increased valuation. Although the
Managing General Partner and Investment Adviser use their best judgment in
estimating the fair value of these investments, there are inherent limitations
in any estimation technique. Therefore, the fair value estimates presented
herein are not necessarily indicative of the amount which the Retirement Fund
could realize in a current transaction. Future confirming events will also
affect the estimates of fair value and the effect of such events on the
estimates of fair value could be material.
Temporary Investments with maturities of less than 60 days are stated at
amortized cost, which approximates market.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of December
31, 1997. Although the Managing General Partner and Investment Adviser are not
aware of any factors not disclosed herein that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued since that time, and because investments of companies whose equity is
publicly traded are valued at the last price at December 31, 1997, the current
estimated fair value of these investments may have changed significantly since
that point in time.
<PAGE>
Interest Receivable on Investments
Investments generally will be placed on non-accrual status in the event of
a default (after the applicable grace period expires) or if the Investment
Adviser and the Managing General Partner determine that there is no reasonable
assurance of collecting interest.
Payment-In-Kind Securities
All payment-in-kind securities received in lieu of cash interest payments
by the Retirement Fund's portfolio companies are recorded at face value (which
approximates accrued interest), unless the Investment Adviser and the Managing
General Partner determine that there is no reasonable assurance of collecting
the full principal amounts of such securities. As of December 31, 1997 and
December 31, 1996, the Retirement Fund has in its portfolio of investments
$504,150 of payment-in-kind notes which excludes $2.0 million and $1.3 million,
respectively, of payment-in-kind notes received from notes placed on non-accrual
status. As of December 31, 1997 and December 31, 1996, the Retirement Fund has
in its portfolio of investments $14,640 of payment-in-kind equity securities.
Investment Transactions
The Retirement Fund records investment transactions on the date on which it
obtains an enforceable right to demand the securities or payment therefor. The
Retirement Fund records Temporary Investment transactions on the trade date.
Realized gains and losses on investments are determined on the basis of
specific identification for accounting and tax purposes.
Sales and Marketing Expenses, Offering Expenses and Sales Commissions
Sales commissions and selling discounts were allocated to the specific
Partners' accounts in which they were applied. Sales and marketing expenses and
offering expenses were allocated between the Funds in proportion to the number
of Units issued by each Fund and to the Partners in proportion to their capital
contributions.
Deferred Interest Income
All fees received by the Retirement Fund upon the funding of Mezzanine or
Bridge Investments are treated as deferred interest income and amortized over
the maturity of such investments.
Partners' Capital
Partners' Capital represents the Retirement Fund's equity divided in
proportion to the Partners' Capital Contributions and does not represent the
Partners' Capital Accounts. Profits and losses, as defined in the Partnership
Agreement, when realized, are allocated in accordance with the provisions of the
Partnership Agreement summarized in Note 3.
3. Allocations of Profits and Losses
Pursuant to the Partnership Agreement, all profits from Temporary
Investments generally will be allocated 99.69% to the Limited Partners, 0.28% to
the Managing General Partner and 0.03% to the Individual General Partner.
Profits from Mezzanine Investments will, in general, be allocated as follows:
first, if the capital accounts of any partners have negative balances,
to such partners in proportion to the negative balances in their capital
accounts until the balances of all such capital accounts equal zero,
second, 99.69% to the Limited Partners, 0.28% to the Managing General
Partner and 0.03% to the Individual General Partner until the sum
allocated to the Limited Partners equals any previous losses allocated
together with a cumulative Priority Return of 10% on the average daily
amount in Mezzanine Investments, and any outstanding Compensatory
Payments,
third, 69.69% to the Limited Partners, 30.281% to the Managing General
Partner and .029% to the Individual General Partner until the Managing
General Partner has received 20.281% of the total profits allocated,
thereafter, 79.69% to the Limited Partners, 20.281% to the Managing
General Partner and 0.029% to the Individual General Partner.
Losses will be allocated in reverse order of profits previously
allocated and thereafter 99.69% to the Limited Partners, 0.28% to the
Managing General Partner and 0.03% to the Individual General Partner.
<PAGE>
4. Investment Transactions
During February 1997, the Retirement Fund sold 218 shares of Stanley
Furniture for $24 per share and received total proceeds of $5,232 and recognized
a gain of $2,488. On June 30, 1997, the Retirement Fund entered into a stock
purchase agreement with Stanley whereby the Retirement Fund sold 5,032 shares of
Stanley Furniture for $20 per share. The Retirement Fund received total proceeds
of $100,640 and recognized a gain of $37,321. On November 18, 1997, the
Retirement Fund sold 2,772 shares of Stanley Common Stock for $25 per share. The
Retirement Fund received total proceeds of $69,300 and recognized a gain of
$34,419.
On April 2, 1997, Anchor completed a recapitalization pursuant to which
Anchor issued $100,000,000 aggregate principal amount of Senior Notes due 2004
and entered into a new credit facility (the "Recapitalization"). As part of the
Recapitalization, Anchor repaid substantially all of its outstanding debt,
including all accrued interest and any premiums in connection therewith. As a
result, Anchor repaid the Senior Subordinated Note and Junior Subordinated Note
held by the Retirement Fund, together with all accrued interest and prepayment
premiums for an aggregate of $7,752,731.
Immediately prior to the Recapitalization, the Retirement Fund owned 87,033
shares of the common stock of Anchor Holdings, Inc., the parent of Anchor.
Immediately after the consummation of the Recapitalization, the Retirement Fund
exercised its warrants to purchase common stock (at an exercise price of $9.50
per share) and acquired an additional 132,290 shares of common stock, bringing
its total holdings of common stock to 219,323 shares. In connection with the
Recapitalization, Holdings paid a dividend to all holders of Holdings common
stock of record as of April 2, 1997, in the amount of $19.02 per share (the
"Anchor Dividend") . As a result of such dividend, the Retirement Fund received
$4.2 million, of which approximately 32% or $1.3 million was returned to
partners as a return of captial.
On April 11, 1997 the Bankruptcy Court confirmed a plan of Reorganization
for Fitz & Floyd. As a result, on April 14, 1997, a follow-on investment of $1.6
million was made in Fitz and Floyd and Fund II received a $1.6 million 12%
subordinated note. Additionally, the Retirement Fund exchanged the $8.2 million
adjustable notes, which the Retirement Fund previously held, for Series A
Preferred Stock and Class A Common Stock in Fitz and Floyd. No gain or loss was
recorded on the trasaction.
On August 6, 1991, the Independent General Partners approved a reserve for
follow-on investments of $20.0 million for the Retirement Fund. As of November
14, 1997, the remaining reserve balance was $3.3 million due to follow-on
investments in Petco Animal Supplies, Fitz and Floyd, Fine Clothing, Inc., Hills
Stores, Ghirardelli Holdings and Anchor Advanced Products. Additionally, $7.7
million of the reserve has been returned to the partners. The level of the
reserve was based upon an analysis of potential follow-on investments in
specific portfolio companies that may become necessary to protect or enhance the
Retirement Fund's existing investment.
The Managing General Partner has established a reserve for future
Retirement Fund expenses of $500,000 from proceeds received from the sale of
Anchor Advanced Products on April 2, 1997.
Because the Retirement Fund primarily invested in high-yield private
placement securities, the risk of loss upon default by an issuer is greater than
with investment grade securities because high-yield securities are generally
unsecured and are often subordinated to other creditors of the issuer. Also,
high-yield issuers usually have higher levels of indebtedness and are more
sensitive to adverse economic conditions.
Although the Retirement Fund cannot eliminate the risks associated with its
investments in high-yield securities, it has procedures in place to continually
monitor the risks associated with its investments under a variety of market
conditions. Any potential Retirement Fund loss would generally be limited to its
investment in the portfolio company as reflected in the portfolio of
investments.
Should bankruptcy proceedings commence, either voluntarily or by action of
the court against a portfolio company, the ability of the Retirement Fund to
liquidate the position or collect proceeds from the action may be delayed or
limited.
<PAGE>
5. Unrealized Appreciation and Depreciation of Investments
The Retirement Fund's valuation of the Common Stock of First Alert, Hills,
Playtex and Stanley Furniture reflects their closing market prices at December
31, 1997.
For information, please refer to the Supplemental Schedule of Unrealized
Appreciation and Depreciation - Schedule 2.
6. Non-Accrual of Investments
In accordance with the Retirement Fund's Accounting Policy, the following
securities have been on non-accrual status since the date indicated:
- Florida Orthopedics on January 1, 1995.
- Stablex Canada, Inc. on June 29, 1995.
7. Investment Advisory Fee
The Investment Adviser provides the identification, management and
liquidation of portfolio investments for the Funds. As compensation for services
rendered to the Funds, the Investment Adviser receives a quarterly fee at the
annual rate of 1% of assets under management (net offering proceeds reduced by
cumulative capital reductions and realized losses), with a minimum annual fee of
$1.2 million for Fund II and the Retirement Fund on a combined basis. The
Investment Advisory Fee is calculated and paid quarterly in advance. In
addition, the Investment Adviser receives 95% of the benefit of any MGP
Distributions paid to the Managing General Partner (see Note 10). For the years
ended December 31, 1997, 1996 and 1995, the Retirement Fund paid $621,386,
$807,939 and $1.1 million, respectively, in Investment Advisory Fees to Thomas
H. Lee Advisors II, L.P.
8. Fund Administration Fees and Expenses
As compensation for its services, ML Fund Administrators Inc. (the "Fund
Administrator"; an affiliate of the Managing General Partner), is entitled to
receive from the Funds an Administration Fee and reimbursement for certain
expenses incurred by the Fund Administrator on behalf of the Funds. Actual
out-of-pocket expenses ("reimbursable expenses") primarily consist of printing,
audit, tax preparation and custodian fees. For the years ended December 31,
1997, 1996 and 1995, the Retirement Fund incurred $113,219, $110,370 and
$100,721, respectively, in reimbursable expenses.
Beginning in November of 1997, the Fund Administration Fee changed to an
annual amount of $400,000 for the Retirement Fund and Fund II on a combined
basis, plus 100% of all reimbursable expenses incurred by the Funds. The Fund
Administration Fee is calculated and paid quarterly, in advance, by each Fund.
For the years ended December 31, 1997, 1996 and 1995, the Retirement Fund paid
$458,168, $544,478 and $602,002, respectively, in Fund Administration Fees.
For the period ending November 1997, the Fund Administration Fee was
calculated at an annual amount of the greater of $500,000 or 0.45% of the excess
of net offering proceeds less 50% of capital reductions and realized losses.
In addition, ML Mezzanine II Inc., an affiliate of the Fund Administrator
and of Merrill Lynch & Co. Inc., receives 5% of the benefit of any MGP
Distributions paid to the Managing General Partner (see Note 10).
<PAGE>
9. Independent General Partners' Fees and Expenses
As compensation for their services, each Independent General Partner will
receive a combined annual fee of $40,000 (payable quarterly) from the Funds in
addition to a $1,000 fee for each meeting attended ($500 if a meeting is held on
the same day as a committee meeting of the General Partners) plus reimbursement
for any out-of-pocket expenses incurred. Fees and expenses are allocated between
the Funds in proportion to the number of Units issued by each fund. Compensation
for each of the Independent General Partners is reviewed annually. For the years
ended December 31, 1997, 1996 and 1995, the Retirement Fund incurred $89,810,
$179,150 and $201,406, respectively, in Independent General Partners' Fees and
Expenses.
10. Related Party Transactions
The Retirement Fund's investments generally are made as co-investments with
Fund II. In addition, certain of the Mezzanine Investments and Bridge
Investments which were made by the Retirement Fund involve co-investments with
entities affiliated with the Investment Adviser. Such co-investments are
generally prohibited absent exemptive relief from the Securities and Exchange
Commission (the "Commission"). As a result of these affiliations and the
Retirement Fund's expectation of engaging in such co-investments, the Funds
together with ML-Lee Acquisition Fund, L.P., sought an exemptive order from the
Commission allowing such co-investments, which was received on September 1,
1989. The Retirement Fund's co-investments in Managed Companies, and in certain
cases its co-investments in Non-Managed Companies, typically involve the entry
by the Funds and other equity security holders into stockholders' agreements.
While the provisions of such stockholders' agreements vary, such agreements may
include provisions as to corporate governance, registration rights, rights of
first offer or first refusal, rights to participate in sales of securities to
third parties, rights of majority stockholders to compel minority stockholders
to participate in sales of securities to third parties, transfer restrictions,
and preemptive rights.
Thomas H. Lee Company, a sole proprietorship owned by Thomas H. Lee, an
Individual General Partner of the Retirement Fund and an affiliate of the
Investment Adviser, typically performs certain management services for Managed
Companies and receives management fees in connection therewith, usually pursuant
to written agreements with such companies. In addition, certain of the portfolio
companies have contractual or other relationships pursuant to which they do
business with one another.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") is an
affiliate of the Managing General Partner. MLPF&S and certain of its affiliates,
in the ordinary course of their business, perform various financial services for
various portfolio companies of the Funds, which may include investment banking
services, broker/dealer services and economic forecasting, and receive in
consideration therewith various fees, commissions and reimbursements.
Furthermore, MLPF&S and its affiliates or investment companies advised by
affiliates of MLPF&S may, from time to time, purchase or sell securities issued
by portfolio companies of the Funds in connection with its ordinary investment
operations.
As provided by the Partnership Agreement, the Managing General Partner of
the Retirement Fund is entitled to receive incentive distributions "MGP
Distributions", after Limited Partners have received their Priority Return of
10% per annum. The Managing General Partner is required to defer a portion of
any MGP Distribution earned from the sale of portfolio investments in excess of
20% of realized capital gains, net realized capital losses and unrealized
depreciation, in accordance with the Partnership Agreement (the "Deferred
Distribution Amount"). Any Deferred Distribution Amount is distributable to the
Partners pro-rata in accordance with their capital contributions, and certain
amounts otherwise later payable to Limited Partners from Distributable Cash from
operations are instead payable to the Managing General Partner until any
Deferred Distribution Amount is paid in full.
During 1997, Fund II paid the Individual General Partner distributions
totaling $3,298 and Managing General Partner distributions totaling $2,955,007
(which includes $2,922,025 of MGP Distributions). As of December 31, 1997, the
Managing General Partner has earned a total of $28.9 million in MGP
Distributions, none of which is deferred in payment to the Managing General
Partner as a Deferred Distribution amount (the "Deferred Distribution",) at this
time, in accordance with the Partnership Agreement. To the extent not payable to
the Managing General Partner, any Deferred Distribution is distributed to the
Partners pro-rata in accordance with their capital contributions, and certain
amounts otherwise later payable to Partners from distributable cash from
operations would instead be payable solely to the Managing General Partner until
the Deferred Distribution amount is paid in full.
The Retirement Fund has recorded a receivable of $424,261 or $2.39 per Unit
which represents an amount due from the Managing General Partner at December 31,
1997. This amount is a correction of an MGP Distribution made on December 11,
1995, with respect to a trasaction effected at that time.
The Managing General Partner has repaid the amount to the Retirement Fund,
plus interest, all of which was distributed to Limited Partners along with the
fourth quarter distribution made on February 13, 1998 to Limited Partners of
record as of December 31, 1997. See Note 13 for further information.
<PAGE>
11. Litigation
On February 3, 1992 and February 5, 1992, respectively, one Limited Partner
from the Retirement Fund and one Limited Partner from Fund II each commenced
class actions in the US District Court for the District of Delaware, purportedly
on behalf of all persons who purchased limited partnership interests in the
Funds between November 10, 1989 and January 5, 1990, against the Funds, the
Managing General Partner, the Individual General Partners, the Investment
Adviser to the Funds and certain named affiliates of such persons. These
actions, alleging that the defendants made material misrepresentations or
omitted material information in the offering materials for the Funds concerning
the investment purposes of the Funds, were consolidated by the court on March
31, 1992, and a consolidated complaint was filed by the plaintiffs on May 14,
1992. In April 1993, plaintiffs filed an amended complaint, adding claims that
certain transactions by the Funds were prohibited by the federal securities laws
applicable to the Funds and their affiliates under the Investment Company Act of
1940, as amended. The amended complaint also named the Funds' counsel as a
defendant. Defendants moved to dismiss the amended complaint, and, by Opinion
and Order dated March 31, 1994, the court granted in part and denied in part the
motions to dismiss. Additionally, by its March 31, 1994 Opinion and Order, the
Court certified the case as a class action, and ordered plaintiffs to replead by
filing a new complaint reflecting the Court's rulings. On April 15, 1994,
plaintiffs served and filed a new complaint, which defendants moved to strike
for not conforming to the Court's ruling. On August 3, 1994, the Court granted
defendants' motion to strike the new complaint. Plaintiffs thereafter filed a
revised second amended complaint dated September 26, 1994. Factual discovery in
this litigation has concluded, although plaintiffs' have made application to the
Court for permission to conduct additional fact discovery. The parties have
conducted expert discovery, the conclusion of which is subject to the Courts'
decision on a pending motion. The defendants in this action believe that the
remaining claims are without merit, although whether or not the plaintiffs
prevail, the Funds may be obligated to indemnify and advance litigation expenses
to certain of the defendants under the terms and conditions of various indemnity
provisions in the Funds' Partnership Agreements and separate indemnification
agreements, and the amount of such indemnification and expenses could be
material. The Retirement Fund has advanced amounts to the indemnified parties
based upon amounts which are deemed reimbursable in accordance with the
indemnification provisions and has included these amounts in Legal and
Professional Fees. In the opinion of legal counsel, the outcome of this case is
not determinable at this time.
On August 9, 1994, the same two Limited Partners as noted in the preceding
paragraphs commenced another putative class action in the US District Court for
the District of Delaware, purportedly on behalf of all persons who owned limited
partnership interests in the Funds on November 4, 1993, against the Funds, the
Managing General Partners, the Individual General Partners, the Investment
Adviser to the Funds and certain named affiliates of such persons. Plaintiffs
allege that the defendants violated certain provisions of the Investment Company
Act of 1940 and the common law in connection with the sale by certain of the
defendants of shares of common stock of Snapple Beverage Corp. in a November
1993 secondary offering and seek actual and punitive damages and an accounting
in connection therewith. Defendants' motion to dismiss this complaint was denied
on December 29, 1995. On August 4, 1995, while defendants' motion to dismiss the
original complaint was pending, plaintiffs filed an amended complaint alleging
additional violations of the Investment Company Act of 1940 and common law
arising out of the secondary offering. The plaintiffs moved for summary judgment
on certain of these claims. On October 13, 1995, the defendants in this
litigation each filed briefs in opposition to plaintiffs' motion and moved to
dismiss the amended complaint. By an Opinion dated March 30, 1996, the
defendants Court denied plaintiffs' motion for partial summary judgment. By
order of the same date, and without opposition by defendants, the Court
certified the case as a class action. Defendants also filed separate motions to
dismiss, which the Court denied by an order dated June 30, 1996. The parties are
now engaged in discovery. Whether or not the plaintiffs prevail, the Funds may
be obligated to indemnify and advance litigation expenses to certain of the
defendants under the terms and conditions of various indemnity provisions in the
Funds' Partnership Agreements and separate indemnification agreements. In the
opinion of legal counsel, the outcome of this case is not determinable at this
time.
<PAGE>
On November 27, 1995, one Limited Partner from the Retirement Fund and one
Limited Partner from Fund II filed a putative class action in the United States
District Court for the District of Delaware, purportedly on behalf of all
persons or entities who owned Units in the Funds between April 5, 1991 and
November 27, 1995, against the Funds, the Managing General Partner, the
Individual General Partners, the Investment Adviser to the Funds, and certain
named affiliates of such persons. The complaint contends that the Funds
improperly advanced legal fees and litigation costs to the defendants in
connection with three previously filed lawsuits. The plaintiffs are seeking an
accounting, rescissory or actual damages, punitive damages, plaintiffs'
litigation costs and attorneys fees, pre-judgment and post-judgment interest,
and an injunction barring the defendants from further indemnifying themselves.
The defendants in this action believe that the claims are without merit and have
moved to dismiss the case. On December 18, 1996, the Court denied the
defendants' motion to dismiss. Although the defendants believe the advancement
of legal fees and litigation costs was properly made pursuant to indemnification
agreements signed by the defendants, in the opinion of legal counsel, the
outcome of this case is not determinable at this time.
12. Income Taxes (Statement of Financial Accounting Standards No. 109)
No provision for income taxes has been made because all income and losses
are allocated to the Retirement Fund's partners for inclusion in their
respective tax returns.
Pursuant to the Statement of Financial Accounting Standards No. 109
Accounting for Income Taxes, the Retirement Fund is required to disclose any
difference in the tax basis of the Retirement Fund's assets and liabilities
versus the amounts reported in the financial statements. As of December 31,
1997, the tax basis of the Retirement Fund's assets are greater than the amounts
reported in the financial statements by $25.7 million. This difference is
primarily attributable to net unrealized depreciation and appreciation on
investments which has not been recognized for tax purposes.
13. Subsequent Events
On February 2, 1998, the Individual General Partners approved the fourth
quarter 1997 cash distribution which represents net investment income of
$132,526 from Mezzanine Investments, net investment income of 20,113 from
Temporary Investments and Net Distributable Capital proceeds from the sale of
Stanley Furniture of $69,300 (which includes a return of capital of $34,881).
The total amount distributed to Limited Partners was $182,648 or $1.02 per Unit,
which was paid on February 13, 1998. The Managing General Partner received a
total of $514 with respect to its interest in the Retirement Fund and $40,308 in
MGP Distributions. Thomas H. Lee, as an Individual General Partner, received $51
with respect to his interest in the Retirement Fund.
Additionally, on February 2, 1998, the Independent General Partners
approved a cash distribution to Limited Partners consisting of a repayment by
the Managing General Partner of $424,261 representing an overpayment of an MGP
distribution with respect to a transaction effected during the quarter ending
December 31, 1995 and to pay the Retirement Fund Limited Partners interest on
such amount. This distribution totaling $2.70 per Unit was distributed on
Febuary 13, 1998, to Limited Partners of record at December 31, 1997.
On January 6, 1998 the Retirement Fund sold its remaining holdings of
common stock in Stanley. The common stock was sold pursuant to Form S-3
Registration Statement, which was filed by Stanley on December 22, 1997 and
declared effective by the Securities and Exchange Commissionn on December 23,
1997. In connection with the sale, the Retirement Fund sold its remaining 2,773
shares of common stock and received net proceeds of $74,841 or $27 per share.
On February 28, 1998, First Alert and Sunbeam Corporation ("Sunbeam")
executed a definitive merger agreement whereby Sunbeam will acquire all of the
outstanding shares of First Alert Common Stock for approximately $175 million
($5.25 per share) by means of a tender offer (the "Tender Offer"), and assume
all of the debt of First Alert. Pursuant to the Tender Offer, which was executed
on March 6, 1998, the Retirement Fund tendered all of its shares of First Alert
Common Stock and expects to receive proceeds of approximately $11.98 million.
The per Unit amount to be distributed to the Retirement Fund's Limited Partners
from this transaction is not determinable at this time. Any distribution of
these net Distributable Capital Proceeds after the payment of expenses and the
establishment of reserves, as provided for in the Retirement Fund's Partnership
Agreement, will be distributed to Limited Partners of record as of the date of
the expiration of this Tender Offer, which is scheduled to be on April 2, 1998,
unless the Tender Offer is extended.
On March 19, 1998 the Retirement Fund and Affiliates of the Thomas H. Lee
Company sold their remaining holdings in Anchor. Pursuant to this transaction
the Retirement Fund sold 219,323 shares of Anchor Common Stock for approximately
$877,292 ($4.00 per share) and recognized a gain of $132,013.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
ML-LEE ACQUISITION FUND (RETIREMENT ACCOUNTS) II, L.P.
SUPPLEMENTARY SCHEDULE OF REALIZED GAINS AND LOSSES
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Principal Amount/ Investment Realized
SECURITY Number of Shares Cost Net Proceeds Gain(Loss)
---------------- ---------------- ---------------- ----------------
Stanley Furniture Company Inc.
Common Stock 218 $ 3 $ 5 $ 2
Stanley Furniture Company Inc.
Common Stock 5,032 63 101 38
Stanley Furniture Company Inc.
Common Stock 2,772 35 69 34
----------- ----------- -----------
TOTAL REALIZED GAIN $ 101 $ 175 $ 74
=========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
SUPPLEMENTARY SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
ML-LEE ACQUISITION (RETIREMENT ACCOUNTS) II, L.P.
FOR THE PERIOD ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Unrealized
Appreciation/ Unrealized Appreciation/ (Depreciation) For
Investment Fair (Depreciation) 1992
SECURITY Cost Value Dec. 31, 1997 1997 1996 1995 1994 1993 & PRIOR
- ----------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
PUBLICLY TRADED SECURITIES:
First Alert, Inc.
Common Stock * $ 3,679 $ 4,849 $ 1,170 $ (2,851) $ (11,977) $ (13,689) $ 29,687 $ -- $ --
Hills Stores Company
Common Stock * 18,571 869 (17,702) (800) (1,079) (3,055) 101 (12,869) --
Playtex Products, Inc.
Common Stock * 2,829 1,881 (948) 414 91 69 (1,347) (583) 408
Stanley Furniture
Common Stock * 36 77 41 (38) 164 (37) (63) 15 --
--------- --------- --------- --------- -------- -------- -------
TOTAL UNREALIZED APPRECIATION
(DEPRECIATION) FROM PUBLICLY $ (17,439) $ (3,275) $ (12,801) $ (16,712) $ 28,378 $(13,437) $ 408
TRADED SECURITIES --------- --------- --------- --------- -------- -------- -------
NON PUBLIC SECURITIES:
Fitz and Floyd
Preferred Stock * $ 8,248 $ 1,976 $ (6,272) $ 41 $ (4,324) $ (1,975) $ (13) $ -- $ --
Biolease
Common Stock* 62 -- (62) (62) -- -- -- -- --
Subordinated Notes* 464 257 (207) (207) -- -- -- -- --
FLA. Orthopedics, Inc.
Preferred Stock* 987 -- (987) -- -- -- (987) -- --
Subordinated Note -- -- -- -- 3,158 (3,158) -- -- --
Soretox
Subordinated Notes* 7,565 2,955 (4,610) (2,782) -- -- (1,828) -- --
-------- --------- --------- --------- --------- -------- -------
TOTAL UNREALIZED DEPRECIATION
FROM NON PUBLIC SECURITIES $(12,137) $ (3,010) $ (1,166) $ (5,133) $ (2,828) $ -- $ --
-------- --------- --------- --------- --------- -------- -------
Reversal of Unrealized Appreciation/
(Depreciation) for Investments
Sold prior to 1997 -- -- (802) (6,550) (139,900) 108,108 39,144
-------- --------- --------- --------- --------- -------- -------
NET UNREALIZED APPRECIATION
(DEPRECIATION) $ (29,576) $ (6,285) $ (14,769) $ (28,395) $(114,350) $ 94,671 $39,552
========= ======== ========= ========= ========= ======== =======
</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
The five General Partners of the Retirement Fund are responsible for the
management and administration of the Retirement Fund and have the same positions
and responsibilities with respect to Fund II. The General Partners of Fund II
and the Fund II consist of four Individual General Partners: Vernon R. Alden,
Joseph L. Bower, Stanley H. Feldberg (the "Independent General Partners"),
Thomas H. Lee and Mezzanine Investments II, L.P., the Managing General Partner.
Pursuant to exemptive orders issued by the Securities and Exchange Commission,
each Independent General Partner is not an "interested person" of the Retirement
Fund as such term is defined in the Investment Company Act of 1940.
Individual General Partners
The Individual General Partners provide overall guidance and supervision
with respect to the operations of the Retirement Fund and perform the various
duties imposed on the directors of business development companies by the
Investment Company Act of 1940. The Individual General Partners supervise the
Managing General Partner and must, with respect to any Mezzanine Investment
transactions, either certify that it meets the Retirement Fund investment
guidelines or specifically approve it as a non-Guideline Investment or Bridge
Investment. The Retirement Fund's investment and reinvestment period expired in
December, 1993, and the only investments now permitted are Follow On Investments
in existing portfolio companies. In addition, if a Portfolio Company's
performance is in default of a material provision of a lending agreement or has
a ratio of operating cash flow to current cash fixed charges for its four most
recent fiscal quarters of less than or equal to 1.1 to 1, the Independent
General Partners are required to approve any changes in the terms of or sale of
such Portfolio Company.
Messrs. Alden, Bower, Feldberg and Lee have served as Individual General
Partners of the Retirement Fund and Fund II since 1989. Each Individual General
Partner shall hold office until his removal or withdrawal pursuant to the
provisions of the Retirement Fund's Partnership Agreement.
Mr. Alden, age 75, Individual General Partner of the Retirement Fund,
ML-Lee Acquisition Fund, L.P. ("Lee I") and Fund II; and together with the Fund
II, the "New Funds"; and together with Lee I, the "Funds"). Director of Digital
Equipment Corporation, Intermet Corporation and Sonesta International Hotels
Corporation. Chairman of the Japan Society of Boston, Trustee Emeritus of the
Boston Symphony Orchestra and the Boston Museum of Science and Honorary Consul
General of the Royal Kingdom of Thailand.
Mr. Bower, age 59, Individual General Partner of the Funds. Donald Kirk
David Professor of Business Administration. Harvard University Graduate School
of Business Administration. Faculty member since 1963. Director of Anika
Research, Inc., Brown Group, Inc., New America High Income Fund, Sonesta
International Hotels Corporation and The Lincoln Foundation. Trustee of the
DeCordova & Dana Museum and Park and the New England Conservatory of Music.
Mr. Feldberg, age 73, Individual General Partner of the Funds. Director of
Waban Inc. Trustee of Brandeis University.
<PAGE>
Mr. Lee, age 54, Individual General Partner of the Funds. Chairman of the
Investment Adviser of the Funds since 1987; Chairman of the Administrative
General Partner of the Investment Adviser to the new Funds since 1989; Chairman
of the Administrative General Partner of Thomas H. Lee Equity Partners L.P.
since 1989. Chairman of the Administrative General Partner of Thomas H. Lee
Equity Fund III, L.P. since 1996. Founder of the Thomas H. Lee Company (the "Lee
Company") and its President since 1974. Director of Autotote Corporation, Finlay
Enterprises Inc., First Security Services Corporation, First Security Services
Corporation, Signature Brands USA, Livent, Inc., Miller Import Corporation
Playtex Products, Inc., Sondik Supply Corporation and Vail Resorts, Inc. Trustee
of Brandeis University (Vice Chairman), Museum of Fine Arts (Boston), the Wang
Center for the Performing Arts, Boston's Beth Israel Hospital (Treasurer), NYU
Medical Center and the Whitney Museum of American Art. Overseer of Boston
Symphony Orchestra and New England Conservatory of Music, Member of the Dean's
Council, Faculty of Arts and Sciences and an Executive Committee Member of the
Committee on University and an Executive Committee Member of the Committee on
University Resources at Harvard University; Member of the Corporation of Belmont
Hill School.
The Investment Adviser
The Investment Adviser, pursuant to an investment management agreement
among the Investment Adviser, the Thomas H. Lee Company and the Retirement Fund
dated November 10, 1989, is responsible for the identification, management and
liquidation of Mezzanine Investments and Bridge Investments for the Retirement
Fund. The Investment Adviser received an Investment Advisory Fee in compensation
for these services outlined in Note 7 to the Financial Statements.
Certain officers of the Lee Company have been designated as trustees and
executive officers of T. H. Lee Mezzanine II, the administrative general partner
of the Investment Adviser.
Title
Thomas H. Lee Chairman, Trustee
John W. Childs President, Trustee
Thomas R. Shepherd Executive Vice President
David V. Harkins Senior Vice President, Trustee
C. Hunter Boll Vice President
Scott A. Schoen Vice President
Wendy L. Masler Treasurer, Clerk
Information concerning Mr. Lee is set forth above.
John W. Childs, age 56, is the founder of J.W. Childs Associates, L.P. Mr.
Childs, was Managing Director of the Thomas H. Lee Company ("Lee Company"), from
1987 to 1995. Mr. Childs also serves as President and Trustee of Thomas H. Lee
Advisors I ("Advisors I"), the investment advisor to Fund I.
Mr. Shepherd, age 68, is a Managing Director of the Thomas H. Lee Company
since 1986. Mr. Shepherd is currently a director of General Nutrition Companies,
Inc., Signature Brands USA Inc. and Rayovac Corporation. He is Executive Vice
President of Thomas H. Lee Advisors I and T.H. Lee Mezzanine II.
Mr. Harkins, age 57, has been a Managing Director of the Lee Company since
1986 and the Chairman of National Dentex Corporation since 1983. Mr. Harkins is
a Senior Vice President and Trustee of Advisors I. He also is a director of
National Dentex Corporation, Stanley Furniture Corp. and First Alert, Inc.
Mr. Boll, age 42, has served as a Managing Director of the Lee Company
since 1991. From 1986 to 1991 he served as a Vice President of the Lee Company.
Mr. Schoen, age 39, has served as a Managing Director of the Lee Company
since 1991. From 1986 to 1990 he served as a Vice President of the Lee Company.
Mr. Schoen is a Vice President of Advisors I. Mr. Schoen is also a Director of
First Alert, Inc., Signature Brands USA Inc. Rayovac Corporation, Syratech
Corporation and Anchor Advanced Products, Inc.
Ms. Masler, age 44, has been Treasurer of the Lee Company since 1984. Ms.
Masler is also Treasurer and Clerk of Advisors I.
<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 the Retirement Fund's investments.
The executive officers of ML Mezzanine II Inc. are as follows:
Title
Kevin K. Albert Chairman and President
Robert Aufenanger Executive Vice President, Director
James V. Caruso Executive Vice President, Director
Rosalie Y. Goldberg Vice President, Director
Audrey L. Bommer Vice President, Treasurer
Roger F. Castoral, Jr. Vice President, Assistant Treasurer
Kevin Albert, age 45, a Vice President and a Managing Director of Merrill
Lynch Investment Banking Group ("ML Investment Banking") joined Merrill Lynch in
1981. Mr. Albert works in the Equity Private Placement Group and is involved in
structuring and placing a diversified array of private equity financings
including common stock, preferred stock, limited partnership interests and other
equity-related securities. Mr. Albert is also a director of ML Media Management
Inc. ("ML Media"), an affiliate of the managing general partner and a joint
venturer of Media Managemnt Partners, the general partner of ML Media Partners,
L.P.; a director of ML Film Entertainment Inc. ("ML Film"), an affiliate of the
managing general partner of the general partner of ML Delphi Premier Partners,
L.P.; a director of ML Opportunity Management Inc. ("ML Opportunity"), a joint
venturer in Media Opportunity Management Partners, the general partner of ML
Media Opportunity Partners, L.P.; a director of ML Mezzanine Inc. ("ML
Mezzanine"), a director of Merrill Lynch Venture Capital Inc. ("ML Venture"), an
affiliate of the managing general partner and general partner of the managing
general partner of ML Venture Partners I, L.P. ("Venture I"), ML Venture
Partners II, L.P. ("Venture II"), and ML Oklahoma Venture Partners Limited
Partnership; a director of Merrill Lynch R&D Management Inc. ("ML R&D"), the
general partner of the general partner of ML Technology Ventures, L.P. Mr.
Albert also serves as an independent general partner of Venture I and Venture
II.
Robert Aufenanger, age 44, a Vice President of Merrill Lynch & Co.
Corporate Credit and a Director of the Partnership Management Department, joined
Merrill Lynch in 1980. Mr. Aufenanger is responsible for the ongoing management
of the operations of the equipment, real estate and project related limited
partnerships for which subsidiaries of ML Leasing Equipment Corp., and Merrill
Lynch, Hubbard Inc., affiliates of Merrill Lynch, are general partners. Mr.
Aufenanger is also a director of ML Opportunity Management Inc., MLH Real Estate
Inc., ML Film, ML Venture, ML R&D, ML Mezzanine, and ML Media.
<PAGE>
James V. Caruso, age 46, a Director in the Investment Banking Group of
Merrill Lynch & Co joined Merrill Lynch in 1975. Since June 1992, Mr. Caruso has
served as Manager of Merrill Lynch's Partnership Analysis & Finance Department,
which is responsible for accounting and the ongoing administration and
operations of more than 150 investment limited partnership as well as the
Merrill Lynch affiliated entities that manage or administer such partnerships.
He serves as a director of ML Mezzanine, and KECALP Inc., an affiliate of the
MGP and general partner.
Rosalie Y. Goldberg, age 60, serves as Vice President of Merrill Lynch
Private Client, Manager of the Special Investments Group, Vice President and
Director of ML Mezzanine Inc. and Director of MLL Antiquities and MLL
Collectibles. Ms. Goldberg joined Merrill Lynch & Co. in 1975.
Audrey L. Bommer, age 31, serves as Vice President in the Investment
Banking Group of ML & Co. and joined the firm in 1994. She serves as Vice
President and Treasurer of ML Mezzanine Inc. and ML Mezzanine II, Inc. Ms.
Bommer manages all accounting, financial reporting and administrative functions
in the Merrill Lynch Partnership Analysis and Finance Department.
Roger F. Castoral, Jr., age 30, joined Merrill Lynch Investment Banking in
1995 and serves as Vice President, Assistant Treasurer and controller to the
funds. Mr. Castoral is responsible for financial reporting and fund accounting
in the Merrill Lynch Partnership Analysis and Finance Department and serves as
Vice President and Assistant Treasurer of ML-Mezzanine.
The Fund Administrator
ML Fund Administrators Inc., a Delaware corporation and a subsidiary of
Merrill Lynch & Co., Inc., is responsible for the provision of administrative
services necessary for the operation of the Funds. The Fund Administrator
receives Fund Administration Fees as compensation for these services as outlined
in Note 8 to the Financial Statements.
The Fund Administrator is responsible for the day-to-day administrative
affairs of the Funds and for the management of the accounts of Limited Partners.
The Fund Administrator also provides the Funds, at the Fund Administrator's
expense, with office space, facilities, equipment and personnel necessary to
carry out its obligations under the Administrative Services Agreement.
Item 11. Executive Compensation
The information with respect to compensation of the Individual General
Partners set forth under the caption "Management Arrangements - the Individual
General Partners" in the Prospectus pages 73 - 74 is incorporated herein by
reference. The Retirement Fund paid Independent General Partners, Mr. Alden, Mr.
Bower and Mr. Feldberg $62,691, collectively for their services as Independent
General Partners in 1997.
The information with respect to the allocation and distribution of the
Retirement Fund's profits and losses to the Managing General Partner set forth
under the caption "Distributions and Allocations - Allocations of Profits and
Losses" in the Prospectus pages 86 - 87 is incorporated herein by reference. The
Managing General Partner received distributions of $2,955,007 with respect to
1997, including incentive distributions of $2,922,025 that it distributed,
$2,775,924 to the Investment Adviser and $146,101 to ML Mezzanine II Inc.
The information with respect to the Investment Advisory Fee payable to the
Investment Adviser (and distributions from the Managing General Partner) set
forth under the caption "Management Arrangements - Description of the Advisory
Agreement" in the Prospectus pages 74 - 75 is incorporated herein by reference.
Pursuant to the Investment Advisory Agreement, the Retirement Fund paid the
Investment Adviser $621,386 with respect to 1997.
The information with respect to the Fund Administration Fees and Expenses
payable to the Fund Administrator set forth under the caption "Management
Arrangements - The Fund Administrator" in the Prospectus pages 72 - 73 is
incorporated herein by reference. Pursuant to the Administrative Services
Agreement, the Retirement Fund paid the Fund Administrator a total of $458,168
in 1997.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of January 1, 1998, the Common Fund, which owns 21,448 Units of the
outstanding Units of limited partnership interest, or 12.08% of the Retirement
Fund, is the only entity known to the management of the Retirement Fund which
may be deemed to be a beneficial owner of more than five percent of the
outstanding units of the Retirement Fund. The Common Fund is located at 363 Reef
Road, P.O. Box 940, Fairfield, CT 06430. Mr. Bower owns 11 units of the
Retirement Fund.
There exists no arrangement known to the Retirement Fund, the execution of
which may at a subsequent date, result in a change of control of the Retirement
Fund.
Item 13. Certain Relationships and Related Transactions
The Retirement Fund's investments generally are made as co-investments with
Fund II. In addition, certain of the Mezzanine Investments and Bridge
Investments which were made by the Retirement Fund may involve co-investments
with entities affiliated with the Investment Adviser. Such co-investments are
generally prohibited absent exemptive relief from the Securities and Exchange
Commission (the "Commission"). As a result of these affiliations and the
Retirement Fund's expectation of engaging in such co-investments, the Retirement
Fund together with Fund II and Fund I, sought an exemptive order from the
Commission allowing such co-investments, which was received on September 1,
1989. The Retirement Fund's co-investments in Managed Companies, and in certain
cases its co-investments in Non-Managed Companies, typically involve the entry
by the Funds and other equity security holders into stockholders' agreements.
While the provisions of such stockholders' agreements vary, such agreements may
include provisions as to corporate governance, registration rights, rights of
first offer or first refusal, rights to participate in sales of securities to
third parties, rights of majority stockholders to compel minority stockholders
to participate in sales of securities to third parties, transfer restrictions,
and preemptive rights.
Thomas H. Lee Company, a sole proprietorship owned by Thomas H. Lee, an
Individual General Partner of the Retirement Fund's and an affiliate of the
Investment Adviser, typically performs certain management services for Managed
Companies and receives management fees in connection therewith usually pursuant
to written agreements with such companies. Of the total of eight Managed
Companies held by the Funds at December 31, 1997, 5 paid management fees to
Thomas H. Lee Company ranging from $110,000 to $180,000 for the fiscal year
ended December 31, 1997. In addition, certain of the Managed Companies may have
contractual or other relationships pursuant to which they do business with one
another.
<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 and economic forecasting, and pension plan
services and receives in consideration therewith various fees, commissions and
reimbursements. The aggregate revenue received by MLPF&S and its affiliates
during 1997 for providing such services to Managed Companies in which the Funds
have a material interest was not in excess of $100,000. Furthermore, MLPF&S and
its affiliates or investment companies advised by affiliates of MLPF&S may, from
time to time, purchase or sell securities issued by portfolio companies of the
Funds in connection with their ordinary investment operations.
During 1997, the Retirement Fund paid Managing General Partner
distributions totaling $2,955,007 (which included $2,922,025 of MGP
Distributions and $32,982 with respect to its interest in the Retirement Fund).
Of this MGP Distribution amount, 95% or $2,775,924 was paid to the Investment
Adviser and the remaining 5% totalling $146,101 was paid to ML Mezzanine II Inc.
The Managing General Partner has earned $28.9 million in MGP Distributions, none
of which was deferred in payment at December 31, 1997, as a Deferred
Distribution Amount in accordance with the Partnership Agreement. To the extent
not payable to the Managing General Partner, any Deferred Distribution Amount is
distributable to the Partners pro-rata in accordance with their capital
contributions, and certain amounts otherwise later payable to Limited Partners
from distributable cash from operations will instead be payable to the Managing
General Partner until the Deferred Distribution Amount is paid in full.
Anchor Products
On March 19, 1998 the Retirement Fund and Affiliates of the Thomas H. Lee
Company sold their remaining holdings in Anchor. Pursuant to this transaction
the Retirement Fund sold 219,323 shares of Anchor Common Stock for approximately
$877,292 ($4.00 per share) and recognized a gain of $132,013.
On April 2, 1997, Anchor completed a recapitalization pursuant to which
Anchor issued $100,000,000 aggregate principal amount of Senior Notes due 2004
and entered into a new credit facility (the "Recapitalization"). As part of the
Recapitalization, Anchor repaid substantially all of its outstanding debt,
including all accrued interest and any premiums in connection therewith. As a
result, Anchor repaid the Senior Subordinated Note and Junior Subordinated Note
held by the Retirement Fund, together with all accrued interest and prepayment
premiums for an aggregate of $7,752,731.
Immediately prior to the Recapitalization, the Retirement Fund owned 87,033
shares of the common stock of Anchor Holdings, Inc., the parent of Anchor.
Immediately after the consummation of the Recapitalization, the Retirement Fund
exercised its warrants to purchase common stock (at an exercise price of $9.50
per share) and acquired an additional 132,290 shares of common stock, bringing
its total holdings of common stock to 219,323 shares. In connection with the
Recapitalization, Holdings paid a dividend to all holders of Holdings common
stock of record as of April 2, 1997, in the amount of $19.02 per share (the
"Anchor Dividend") . As a result of such dividend, the Retirement Fund received
$4.2 million, of which approximately 32% or $1.3 million was returned to
partners as a return of captial.
First Alert
On February 28, 1998, First Alert and Sunbeam Corporation ("Sunbeam")
executed a definitive merger agreement whereby Sunbeam will acquire all of the
outstanding shares of First Alert Common Stock for approximately $175 million
($5.25 per share) by means of a tender offer (the "Tender Offer"), and assume
all of the debt of First Alert. Pursuant to the Tender Offer, which was executed
on March 6, 1998, the Retirement Fund tendered all of its shares of First Alert
Common Stock and expects to receive proceeds of approximately $11.98 million.
The per Unit amount to be distributed to the Retirement Fund's Limited Partners
from this transaction is not determinable at this time. Any distribution of
these net Distributable Capital Proceeds after the payment of expenses and the
establishment of reserves, as provided for in the Retirement Fund's Partnership
Agreement, will be distributed to Limited Partners of record as of the date of
the expiration of this Tender Offer, which is scheduled to be on April 2, 1998,
unless the Tender Offer is extended.
As of December 31, 1997, the Retirement Fund, Fund II, and the Lee
Affiliates held 2,281,524, 2,058,474 and 10,081,808 shares, respectively, of
First Alert common stock, representing 8.9%, 8.1% and 39.5% respectively, of its
common equity.
David V. Harkins, Scott A. Schoen and Anthony J. DiNovi, officers of the
Investment Adviser to the Funds, serve as directors of First Alert.
Playtex Products, Inc.
As of December 31, 1997, the Retirement Fund, Fund II, Fund I and the Lee
Affiliates held 183,560, 343,726, 1,406,204 and 2,249,307 shares of Playtex
Products common stock, respectively. Fund II, the Retirement Fund, Fund I and
the Lee Affiliates own, respectively, .3%,.6%, 2.6% and 4.2% of the common
equity of Playtex.
Thomas H. Lee, who is an Individual General Partner of the Funds and an
officer of the Investment Adviser, serves as a director of Playtex.
<PAGE>
Stanley Furniture Company, Inc.
On January 6, 1998 the Retirement Fund and affiliates of the Thomas H Lee
Company including Fund II and Fund I, (the "Lee Affiliates", and together with
the Fund, the ("Selling Stockholders") sold their remaining holdings of common
stock in Stanley Furniture. The common stock of each of the Selling Stockholders
was sold pursuant to a Form S-3 Registration Statement, which was filed by
Stanley on December 22, 1997 and declared effective by the Securities and
Exchange Commission on December 23, 1997. In connection with the sale, the Fund
II sold its remaining 2,773 shares of common stock and received net proceeds of
$74,871 million or $27 per share.
During February 1997, the Retirement Fund sold 218 shares of Stanley
Furniture for $24 per share and received total proceeds of $5,232 and recognized
a gain of $2,488. On June 30, 1997, the Retirement Fund entered into a stock
purchase agreement with Stanley whereby the Retirement Fund sold 5,032 shares of
Stanley Furniture for $20 per share. The Retirement Fund received total proceeds
of $100,640 and recognized a gain of $37,321. In November 1997, the Retirement
Fund sold 2,722 shares of Stanley Furniture for approximately $25.50 per share
and received total proceeds of $69,300 and recognized a gain of $34,419.
As of December 31, 1997, the Retirement Fund, Fund II, Fund I and the Lee
Affiliates held 2,773, 3,461, 400,719 and 6,248 shares, respectively, of Stanley
Furniture, representing .3%, .3%, 16% and .4% of the common equity.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits
Exhibits
3.1 Amended and Restated Certificate Incorporated by reference
of Limited Partnership, dated as to Exhibit 3.1 to
of August 25, 1989 registrant's Registration
Statement on Form N-2
number 33-25816.
3.2 Amended and Restated Agreement of Incorporated by reference
Limited Partnership, dated to Exhibit 3.2. to
November 10, 1989 Amendment No. 1, registrant's Annual Report
dated January 30, 1990. of Form 10-K for the year
ending December 31, 1989.
10.1 Investment Advisory Agreement, Incorporated by reference
dated November 10, 1989 by and to Exhibit 10.1 to
between Registrant, Thomas H. Lee registrant's Annual Report
Advisors II, L.P. and Thomas H. of Form 10-K for the year
Lee Company. ended December 31, 1991.
10.2 Custodian Agreement, dated Incorporated by reference
November 10, 1989, by and between to Exhibit 10.2 to
Registrant and State Street Bank registrant's Annual Report
and Trust Company. of Form 10-K for the year
ended December 31, 1991.
10.3 Administrative Services Agreement, Incorporated by reference
dated November 10, 1989 by and to Exhibit 10.3 to
between Registrant and ML Fund registrant's Annual Report
Administrators Inc. of Form 10-K for the year
ended December 31, 1991.
27 Financial Data Schedule for the Filed Herewith.
year ended December 31, 1997
28 Pages 21-91 of the Prospectus Incorporated by reference
dated September 6,1989, filed to Exhibit 28 to
pursuant to Rule 497(b) under the registrant's Annual Report
Securities Act of 1933. of Form 10-K for the year
ended December 31, 1991.
(b) Forms 8-K
None.
<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 30th day of March,
1998.
ML-LEE ACQUISITION FUND
(RETIREMENT ACCOUNTS) II, L.P.
By: Mezzanine Investments II, L.P.
Managing General Partner
By: ML Mezzanine II Inc.,
its General Partner
/s/ Kevin K. Albert
Dated: March 30, 1998 Kevin K. Albert
President, ML Mezzanine II Inc.,
General Partner of Mezzanine
Investments II, L.P., the Managing
General Partner
<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 30th day of March, 1998.
Signature Title
/s/ Kevin K. Albert ML Mezzanine II Inc.
Kevin K. Albert President and Director
(Principal Executive Officer of Registrant)
/s/ Vernon R. Alden Individual General Partner
Vernon R. Alden ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.
/s/ Audrey Bommer ML Mezzanine II Inc.
Audrey Bommer Vice President and Treasurer
(Principal Financial Officer of Registrant)
/s/ Joseph L. Bower Individual General Partner
Joseph L. Bower ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.
/s/ Roger F. Castoral, Jr. ML Mezzanine II Inc.
Roger F. Castoral, Jr. Vice President and Assistant Treasurer
(Principal Accounting Officer of Registrant)
/s/ Stanley H. Feldberg Individual General Partner
Stanley H. Feldberg ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.
/s/ Thomas H. Lee Individual General Partner
Thomas H. Lee ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.
<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
(RETIREMENT ACCOUNTS) II, L.P.
By: Mezzanine Investments II, L.P.
Managing General Partner
By: ML Mezzanine II Inc.,
its General Partner
Dated: March 30, 1998 Kevin K. Albert
President, ML Mezzanine II Inc.,
General Partner of Mezzanine
Investments II, L.P., the Managing
General Partner
<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 30th day of March, 1998.
Signature Title
_____________________ ML Mezzanine II, Inc.
Kevin K. Albert President and Director
(Principal Executive Officer of Registrant)
_____________________ Individual General Partner
Vernon R. Alden ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.
_____________________ ML Mezzanine II Inc.
Audrey Bommer Vice President and Treasurer
(Principal Financial Officer of Registrant)
______________________ Individual General Partner
Joseph L. Bower ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.
_____________________ ML Mezzanine II Inc.
Roger F. Castoral, Jr. Vice President and Assistant Treasurer
(Principal Accounting Officer of Registrant)
_____________________ Individual General Partner
Stanley H. Feldberg ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.
_____________________ Individual General Partner
Thomas H. Lee ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the
1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 62,069,509
<INVESTMENTS-AT-VALUE> 32,532,763
<RECEIVABLES> 564,379
<ASSETS-OTHER> 164,352
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 32,261,494
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 182,939
<TOTAL-LIABILITIES> 182,939
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 177,515
<SHARES-COMMON-PRIOR> 177,515
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<ACCUM-APPREC-OR-DEPREC> (29,576,724)
<NET-ASSETS> 33,078,555
<DIVIDEND-INCOME> 2,833,233
<INTEREST-INCOME> 2,761,409
<OTHER-INCOME> 103,705
<EXPENSES-NET> 1,422,831
<NET-INVESTMENT-INCOME> 4,275,516
<REALIZED-GAINS-CURRENT> 74,228
<APPREC-INCREASE-CURRENT> (6,285,381)
<NET-CHANGE-FROM-OPS> (1,935,636)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,629,827
<DISTRIBUTIONS-OF-GAINS> 185,423
<DISTRIBUTIONS-OTHER> 10,427,683
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 16,178,570
<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 621,386
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,422,831
<AVERAGE-NET-ASSETS> 41,167,835
<PER-SHARE-NAV-BEGIN> 262.93
<PER-SHARE-NII> 23.04
<PER-SHARE-GAIN-APPREC> 34.88
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<EXPENSE-RATIO> 0.035
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
