UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Period Ended June 30, 1995
Commission File Number 0-15669
ML-LEE ACQUISITION FUND, L.P.
(Exact name of registrant as specified in its Charter)
Delaware 13-3426817
(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: None
Name of each exchange on which registered: 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 ___.
Aggregate market value of voting securities held by non-
affiliates: Not Applicable.
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ML-LEE ACQUISITION FUND, L.P.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Statements of Assets, Liabilities and Partners'
Capital as of June 30, 1995 and December 31, 1994 3
Statements of Operations - For the Three and Six
Months Ended June 30, 1995 and 1994 4
Statements of Changes in Net Assets - For the Six
Months Ended June 30, 1995 and 1994 5
Statements of Cash Flows - For the Six Months Ended
June 30, 1995 and 1994 6
Statement of Changes in Partner's Capital -
At June 30, 1995 7
Schedule of Portfolio Investments - June 30, 1995 8
Notes to Financial Statements 23
Supplemental Schedule of Realized Gains and Losses
- (Schedule 1) 34
Supplemental Schedule of Unrealized Appreciation
and Depreciation - (Schedule 2) 35
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 37
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 45
Item 5. Other Information 45
Item 6. Exhibits and Reports on Form 8-K 46
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ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
June 30,
1995 December
(Unaudited) 31, 1994
ASSETS:
<S> <C> <C>
Investments - Notes 2,8,9
Portfolio Investments, at fair value
Managed Companies (amortized cost
$282,314 at June 30, 1995 and
$313,930 at December 31, 1994) $323,111 $ 326,672
Non-Managed Companies (amortized cost
$17,600 at June 30, 1995 and $22,703
at December 31, 1994) 9,349 12,542
Temporary Investments, at amortized cost
(cost $24,562 at June 30, 1995 and
$10,498 at December 31, 1994) 24,646 10,511
Cash (of which $3,441,997 is restricted
at June 30, 1995) - Note 8 3,443 3,442
Accrued Interest Receivable - Note 2 366 1,077
Prepaid Loan Fees - Notes 2,4 1,969 2,299
Prepaid Expenses and Other Receivables 3 7
Receivable for Investments Sold - 1,227
TOTAL ASSETS $362,887 $ 357,777
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities
Accounts Payable and Accrued Expenses $ 78 $ 305
Deferred Interest Income - Note 2 348 773
Total Liabilities 426 1,078
Partners' Capital - Note 2
Managing General Partner 1,965 1,908
Limited Partners (487,489 Units) 360,496 354,791
Total Partners' Capital 362,461 356,699
TOTAL LIABILITIES AND PARTNERS' CAPITAL $362,887 $ 357,777
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See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Three Months Ended For the Six Months Ended
June 30, June 30, June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
INVESTMENT INCOME - NOTE 2,8,10:
Interest $1,061 $ 292 $3,392 $ 11,142
Discount 574 130 731 346
Dividends - - - 2,868
TOTAL INCOME 1,635 422 4,123 14,356
EXPENSES:
Investment Advisory Fee - Note 5 765 907 1,506 1,832
Fund Administration Fee - Note 6 427 462 849 924
Loan Fees - Notes 2,4 185 200 367 399
Independent General Partners' Fees
and Expenses - Note 7 120 32 219 153
Professional Fees 38 206 1,238 406
Insurance Expense 3 3 5 5
Interest Expense - Note 4 - - - 58
TOTAL EXPENSES 1,538 1,810 4,184 3,777
NET INVESTMENT INCOME (LOSS) 97 (1,388) (61) 10,579
NET REALIZED GAIN (LOSS) ON
INVESTMENTS - NOTE 8 AND SCHEDULE 1 3,607 (2) 28,134 6,803
NET CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS - NOTE 9
AND SCHEDULE 2
Publicly Traded Securities 46,477 (58,809) 40,032 (94,207)
Non Public Securities (3,200) 603 (10,068) 617
Subtotal 43,277 (58,206) 29,964 (93,590)
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $46,981 $(59,596) $ 58,037 $(76,208)
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Six Months Ended
June 30, June 30,
FROM OPERATIONS: 1995 1994
<S> <C> <C>
Net Investment Income (Loss) $ (61) $ 10,579
Net Realized Gain on Investments 28,134 6,803
Net Change in Unrealized Appreciation
(Depreciation) on Investments 29,964 (93,590)
Net Increase (Decrease) In Net
Assets Resulting From Operations 58,037 (76,208)
Cash Distributions to Partners (52,275) (37,054)
Total Increase (Decrease) 5,762 (113,262)
NET ASSETS:
Beginning of Period 356,699 418,892
End of Period $ 362,461 $ 305,630
See the Accompanying Notes to Financial Statements.
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Six Months Ended
June 30, June 30,
1995 1994
<S> <C> <C>
Increase in Cash and Cash Equivalents
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest, Dividends and Discount Income $ 4,336 $ 7,849
Investment Advisory Fee (1,506) (1,832)
Interest Expense - (58)
Fund Administration Fee (849) (924)
Professional Fees and Other Expenses (1,445) (423)
Loan Fees and Expenses (54) (32)
Independent General Partners' Fees and Expenses (222) (177)
(Purchase) Sale of Temporary Investments, Net (14,064) 21,423
Proceeds from Sale of Portfolio Company Investments 66,080 23,467
Purchase of Portfolio Company Investments - (2,644)
Net Cash Provided by Operating Activities 52,276 46,649
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of Borrowings, Net - (9,594)
Cash Distributions to Partners (52,275) (37,054)
Net Cash Applied to Financing Activities (52,275) (46,648)
Net Increase in Cash 1 1
Cash at Beginning of Period 3,442 -
Cash at End of Period $ 3,443 $ 1
RECONCILIATION OF NET INVESTMENT INCOME (LOSS) TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Investment Income (Loss) $ (61) $ 10,579
Adjustments to Reconcile Net Investment Income (Loss)
to Net Cash Provided by Operating Activities:
Decrease in Investments 22,655 22,493
Decrease in Receivable for Investments Sold 1,227 15,008
(Increase) Decrease in Accrued Interest,
Dividend and Discount Receivables 214 (6,507)
Decrease in Prepaid Expenses 333 371
Decrease in Option Payable - (2,057)
Decrease in Professional Fees and Other Expenses Payable (226) (41)
Net Realized Gain on Investments 28,134 6,803
Total Adjustments 52,337 36,070
Net Cash Provided by Operating Activities $ 52,276 $ 46,649
See the Accompanying Notes to Financial Statements.
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
Managing
General Limited
Partner Partners Total
For the Six Months Ended June 30, 1995
Notes 3,8,9
<S> <C> <C> <C>
Partners' Capital at January 1, 1995 $1,908 $354,791 $356,699
Allocation of Net Investment Loss (1) (60) (61)
Allocation of Net Realized Gain on
Investments 281 27,853 28,134
Allocation of Net Change in Unrealized
Depreciation 300 29,664 29,964
Cash Distributions to Partners (523) (51,752) (52,275)
Partners' Capital at June 30, 1995 $1,965 $360,496 $362,461
See the Accompanying Notes to Financial Statements.
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares Investment Date Cost (f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
MEZZANINE INVESTMENTS
MANAGED COMPANIES
ALLIANCE INTERNATIONAL GROUP, INC. (a)(e) - Note 11
$10,810 Alliance International Group, Sub. Note 10% due 12/31/97(c) 12/31/87 $10,810 $10,810
$267 Alliance International Group, Def. Int. Note 10% due 03/30/97(c)(h) 03/31/93 267 267
$276 Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h) 06/30/93 276 276
$286 Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h) 09/30/93 286 286
$293 Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h) 12/31/93 293 293
5,016 Shares Alliance International Group, Cumulative Redeemable Preferred Stock(d) 04/22/91 502 502
110,000 Shares Alliance International Group, Cumulative Preferred Stock(d)(h) 12/31/92 11,000 11,000
See the Accompanying Notes to Financial Statements.
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares Investment Date Cost (f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
250,800 Shares Alliance International Group, Common Stock(d) 12/31/87 1,951 1,951
15,228.43 Warrants Alliance International Group, Common Stock Purchase Warrants(d) 03/28/89 0 0(i)
62,700 Warrants Alliance International Group, Common Stock Purchase Warrants(d) 04/22/91 0 0
657,614.21 Warrants Alliance International Group, Common Stock Purchase Warrants(d) 12/31/92 0 0
50,000 Warrants Alliance International Group, Common Stock Purchase Warrants(d) various 0 0(i)
(52.5% of fully diluted common equity assuming exercise
of warrants)
19,200 Shares Common Stock
Purchased 12/31/87 $149
Sold 01/30/89-9,600 Shares $107
Sold 01/02/90-9,600 Shares $147
Realized Gain $105 25,385 25,385 7.11
See the Accompanying Notes to Financial Statements.
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares Investment Date Cost (f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
BEEFAMERICA, INC. (a) (e) - Notes 4,9,10,11
$41,997 BeefAmerica, Inc., Sr. Sub. Interim Note 15.5% due 09/30/98(c)(g)(h) 09/09/88 $20,000 $10,000
$80,951 BeefAmerica, Inc., Sub. Note 15% due 09/30/98 (c)(g)(h) 09/09/88 38,928 0
5,661.11 Shares BeefAmerica, Inc., Class A Redeemable Preferred Stock(d) 04/10/91 40,050 0
51,000 Shares BeefAmerica, Inc., Common Stock (d) various 2,000 0
1 Warrant BeefAmerica, Inc., Common Stock Purchase Warrant(d) 09/09/88 0 0(i)
(59% of fully diluted common equity assuming exercise of warrants)
$1,072 15% Sub. Nt.
Purchased 09/9/88 $1,072
Redeemed 02/20/92 $1,072
Realized Gain $ 0
Preferred Stock
Purchased 09/9/88 $2,700
Redeemed 02/20/92 $2,700
Realized Gain. $ 0
Total Realized Gain $ 0 100,978 10,000 2.80
See the Accompanying Notes to Financial Statements.
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares Investment Date Cost (f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
CELEBRITY, INC. - Note 9
17,308 Shares Celebrity, Inc. Common Stock(b)(k) 06/16/92 $ 225 $ 119
(0.3% of fully diluted common equity)
5,769 Shares of Common Stock
Purchased 06/16/92 $75
Sold 09/29/93 $75
Realized Gain $ 0(i)
5,769 Shares of Common Stock
Purchased 06/16/92 $75
Sold 09/19/94 $75
Realized Gain $ 0(i)
Total Realized Gain $ 0 225 119 0.03
See the Accompanying Notes to Financial Statements.
</TABLE>
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares Investment Date Cost (f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
CHADWICK-MILLER, INC. (a)(e) - Notes 9,10,14
189,996 Shares CMI Holding Corp., Preferred Stock[a] (d) 12/16/88 $ 12,916 $ 12,916
192,933 Shares CMI Holding Corp., Common Stock (d) Various 3,736 1,929
100,000 Warrants CMI Holding Corp., Common Stock Warrants (d) Various 0 0
(63.6% of fully diluted common equity)
35,161 Shares Common Stock
Purchased 06/30/93 $ 352
Sold 09/03/93 $ 352
Realized Gain $ 0
$5,000,000 Senior Note
Purchased 12/16/88 $5,000
Sold 11/23/94 $5,000
Realized Gain $ 0
Total Realized Gain $ 0 16,652 14,845 4.16
See the Accompanying Notes to Financial Statements.
</TABLE>
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares Investment Date Cost (f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
COLE NATIONAL CORPORATION
567 Warrants Cole National Corporation, Common Stock Purchase Warrants(d) 09/26/90 $ 0 $ 0
(0.0% of fully diluted common equity assuming exercise
of warrants)
$589 Senior Bridge Note
Purchased 09/25/90 $589
Sold 11/15/90 $589
Realized Gain $ 0 0 0 0.00
DURO-TEST CORPORATION (a)(e) - Notes 9,14
26,178.05 Shares Duro-Test Corp., Preferred Stock Series A (d)(h) 05/12/94 2,618 2,618
6,153,420 Shares Duro-Test Holding Corp., Common Stock (d) Various 36,045 2,382
(61.5% of fully diluted common equity)
38,663 5,000 1.40
See the Accompanying Notes to Financial Statements.
</TABLE>
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares Investment Date Cost (f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
GENERAL NUTRITION COMPANIES, INC. (a) Notes 8,9,16
$30,000 General Nutrition Cos., Inc., Jr.Convertible Sub Nt. 7.5%
due 08/15/01 (c)(j)(convertible into 3,073,770.50 shares
of General Nutrition Cos. Common Stock) 08/21/89 $30,000 $ 107,966
$10,000 General Nutrition Cos.,Inc., Jr. Convertible Sub Nt. 7.5%
due 08/15/01 (c)(j)(convertible into 1,024,590.16 shares
of General Nutrition Cos. Common Stock) 11/21/91 10,000 35,989
1,373,734 Shares General Nutrition Cos., Inc., Common Stock (d)(k) Various 3,236 48,252
423,454 Warrants General Nutrition Cos., Inc., Common Stock Purchase Warrants (d)(j) Various 0 12,757
(13% of fully diluted common equity assuming exercise of warrants)
469,306 Shares Common Stock
Purchased various $ 1,900
Sold 469,306 Shares various 1993 $17,154
Realized Gain $15,254
433,424 Shares Common Stock
Purchased various $ 1,626
Sold 433,424 Shares various 1994 $12,272
Realized Gain $10,646
Total Realized Gain $25,900 43,236 204,964 57.39
See the Accompanying Notes to Financial Statements.
</TABLE>
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares Investment Date Cost (f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
HEALTH O METER PRODUCTS, INC. (a) Notes 9,14
952,500 Shares Health o meter Products, Inc., Common Stock (d)(k) 04/28/88 $ 1,270 $ 3,572
610,553 Shares Health o meter Products, Inc., Common Stock (b)(k) 08/17/94 3,282 2,289
(15.4% of fully diluted common equity)
$16,000 14.50% Subordinated Note
Purchased 04/28/88 $16,000
Sold 03/24/92 $16,000
Realized Gain $ 0
187,500 Shares of Common Stock
Purchased 04/28/88 $ 250
Sold 03/30/92 $ 2,441
Realized Gain $ 2,191
Total Realized Gain $ 2,191 4,552 5,861 1.64
See the Accompanying Notes to Financial Statements.
</TABLE>
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares Investment Date Cost (f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
PETCO ANIMAL SUPPLIES, INC. (a)(e) - Notes 8,9,14
981,748 Shares Petco Animal Supplies, Inc. Common Stock(d)(k) Various $15,846 $ 22,826
(10.96% of fully diluted common equity)
$269 14% Sr. Bridge Note
Purchased 11/19/90 $ 269
Repaid 04/19/91 $ 269
Realized Gain $ 0
$98 14% Sr. Bridge Note
Purchased 11/28/90 $ 98
Repaid 04/19/91 $ 98
Realized Gain $ 0
$2,397 12.65% Sr. Sub. Note
Purchased various $ 2,397
Repaid 03/27/94 $ 2,397
Realized Gain $ 0
1,009,638 Shares Common Stock
Purchased various $16,296
Sold 1,009,638 Shares various 1995 $19,902
Realized Gain $ 3,606
Total Realized Gain $ 3,606 15,846 22,826 6.40
See the Accompanying Notes to Financial Statements.
</TABLE>
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares Investment Date Cost (f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
PLAYTEX PRODUCTS, INC. (d) (k) - Note 9
1,406,204 Shares Playtex Products, Inc., Common Stock(d)(k) 12/28/88 $ 3,255 $ 13,710
(2.8% of fully diluted common equity)
$19,285 15% Subordinated Notes
Purchased 12/28/88 $19,285
Sold 06/30/89 $19,285
Realized Gain $ 0
3,214,000 Shares Preferred Stock
Purchased 12/28/88 $ 3,214
Sold 06/30/89 $ 3,214
Realized Gain $ 0
2,571,314 Shares Common Stock
Purchased 12/28/88 $ 1,286
Sold 06/30/89 $ 1,286
Realized Gain $ 0
See the Accompanying Notes to Financial Statements.
</TABLE>
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares Investment Date Cost (f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
$11,250 15% Subordinated Note
Purchased 12/28/88 $11,250
Sold 09/28/90 $11,275
Realized Gain $ 25
2,571,314 Shares Common Stock
Purchased 12/28/88 $ 1,286
Sold 09/28/90 $10,512
Realized Gain $ 9,226
347,209 Shares Common Stock
Purchased 12/28/88 $ 174
Sold 12/20/91 $ 1,343
Realized Gain $ 1,169
$71,251 15% Subordinated Notes
Purchased 12/28/88 $71,251
Sold 02/01/93 $71,181
Realized Loss $ (70)
Total Net Realized Gain $10,350 3,255 13,710 3.83
See the Accompanying Notes to Financial Statements.
</TABLE>
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares Investment Date Cost (f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
STANLEY FURNITURE COMPANY, INC. (a)(e) - Note 9
2,675,552 Shares Stanley Furniture Co., Inc., Common Stock(b)(h)(k) Various $ 33,522 $ 20,401
(50.2% of fully diluted common equity)
$2,000 Loan participation
Purchased 03/12/92 $2,000
Repaid 04/05/93 $2,000
Realized Gain $ 0 33,522 20,401 5.71
TOTAL INVESTMENT IN MANAGED COMPANIES $282,314 $323,111 90.47
NON-MANAGED COMPANIES
CHARTER MEDICAL CORPORATION - Note 9
40,000 Warrants Charter Medical Corp. Common Stock Purchase Warrants(d) 09/01/88 $ 4 $ 0
$5,000 14% Subordinated Notes
Purchased 09/01/88 $5,000
Sold 12/05/88 $5,000
Realized Gain $ 0 4 0 0.00
SFX BROADCASTING, INC. - Note 9
26,000 Shares SFX Broadcasting Co. Common Stock(b)(k) 12/16/88 4,880 696
8,667 Option Shares SFX Broadcasting Co. Common Stock Option(b)(j) 12/16/88 0 0
4,880 696 0.19
See the Accompanying Notes to Financial Statements.
</TABLE
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</TABLE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares Investment Date Cost (f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
SWO HOLDINGS CORPORATION - Note 9
250,000 Shares SWO Holdings Corp., Common Stock(d) 11/24/87 $ 250 $ 595
185,048 Shares Homeland Holding Corp., Common Stock(d) 08/10/90 440 440
$5,000 15.5% Subordinated Notes
Purchased 11/24/87 $5,000
Sold 09/15/88 $5,075
Realized Gain $ 75 690 1,035 0.29
TLC BEATRICE INTERNATIONAL HOLDINGS, INC.
25,500 Shares TLC Beatrice Int'l Holdings., Inc., Common Stock(d) 11/30/87 26 26
$8,500 13% Subordinated Notes
Purchased 11/30/87 $8,500
Sold 08/18/88 $8,500
Realized Gain $ 0 26 26 0.01
See the Accompanying Notes to Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares Investment Date Cost (f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
WALTER INDUSTRIES, INC. - Note 9
547,200 Shares Walter Industries, Inc., Common Stock(d)(k) 01/07/88 $ 12,000 $ 7,592
(formerly Hillsborough Holdings Corporation)
12,000 7,592 2.14
TOTAL INVESTMENT IN NON-MANAGED COMPANIES $ 17,600 $ 9,349 2.63
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes $110,860 $165,887 46.46
Preferred Stock 67,086 27,036 7.57
Common Stock and Warrants 121,968 139,537 39.07
TOTAL MEZZANINE INVESTMENTS $299,914 $332,460 93.10
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
JUNE 30, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares Investment Date Cost (f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$ 1,823 General Electric Capital Corp., 5.85% due 07/03/95 06/06/95 $ 1,815 $ 1,822
$ 7,300 BMW U.S. Capital Corp., 5.85% due 08/02/95 06/07/95 7,234 7,261
$10,940 Mid-South Capital Corp., 5.95% due 07/07/95 06/07/95 10,886 10,927
$ 4,374 General Electric Capital Corp., 5.95% due 08/02/95 06/19/95 4,342 4,350
$ 287 General Electric Capital Corp., 5.93% due 08/02/95 06/26/95 285 286
TOTAL INVESTMENT IN COMMERCIAL PAPER $ 24,562 $ 24,646 6.90
TOTAL TEMPORARY INVESTMENTS $ 24,562 $ 24,646 6.90
TOTAL INVESTMENT PORTFOLIO $324,476 $357,106 100%
(a) Represents investments in Affiliates as defined in the Investment Company Act of 1940.
(b) Non-income producing security.
(c) Restricted security.
(d) Restricted non-income producing security.
(e) Issuers of which the Fund, as of June 30, 1995, owned more than 25% of the voting securities and which therefore were
presumed to be controlled by the Fund under the Investment Company Act of 1940 as of such date.
(f) Represents original cost and excludes accretion of discount of $0 for Mezzanine Investments and $84 for Temporary Investments.
(g) Non-accrual investment status.
(h) Inclusive of receipt of payment-in-kind securities.
(i) Represents an amount of less than one thousand dollars.
(j) Publicly traded underlying class of securities.
(k) Publicly traded class of securities.
See the Accompanying Notes to Financial Statements.
</TABLE
<PAGE>
ML-LEE ACQUISITION FUND, L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995
(UNAUDITED)
1. Organization and Purpose
ML-Lee Acquisition Fund, L.P. (the "Fund") was formed and the
Certificate of Limited Partnership was filed under the Delaware Revised
Uniform Limited Partnership Act on April 1, 1987. The Fund's operations
commenced on October 19, 1987.
The Managing General Partner, subject to the supervision of the
Individual General Partners, is responsible for overseeing and
monitoring the Fund's investments. Mezzanine Investments, L.P. (the
"Managing General Partner"), is a limited partnership in which ML
Mezzanine Inc., an indirect wholly-owned subsidiary of Merrill Lynch &
Co., Inc., is the general partner, and Thomas H. Lee Advisors I (the
"Investment Adviser"), an affiliate of Thomas H. Lee, 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 Fund has elected to operate as a business development company
under the Investment Company Act of 1940. Its primary investment
objective is to provide current income and long-term capital
appreciation by investing in "Mezzanine" securities consisting primarily
of Subordinated Debt and Preferred Stock combined with an equity
participation issued in connection with leveraged acquisitions or other
leveraged transactions which management of the Fund believes offer
significant possibilities for return.
As stated in the Prospectus, the Fund will terminate upon the
liquidation of all Fund investments but no later than June 15, 1998,
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 Fund. The Fund has
five years more to liquidate its remaining investments.
2. Significant Accounting Policies
Basis of Accounting
For financial reporting purposes, the records of the 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.
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 Fund. For
privately issued securities in which the 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 Fund could realize in a current
transaction.
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
June 30, 1995. Although the Managing General Partner and Investment
Adviser are not aware of any factors not disclosed herein that would
significantly affect the estimated fair value amounts, such amounts have
not been comprehensively revalued since that time and especially in
light of the fact that the portfolio investments of companies whose
equity is publicly traded are valued at the trading price at June 30,
1995, the current estimated fair value of these investments may have
changed significantly since that point in time.
Interest Receivable on Investments
Investments generally will be placed on non-accrual status in the
event of a default (after 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 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 June 30, 1995 and December 31, 1994, the Fund had in its portfolio
of investments $1,122,216 and $4,098,017, respectively, of payment-in-
kind notes, which excludes $80,538,137 and $81,267,344, respectively, of
payment-in-kind securities received from notes placed on non-accrual
status. As of June 30, 1995 and December 31, 1994, the Fund had in its
portfolio of investments $9,795,012 and $16,608,872, respectively, of
payment-in-kind equity (from Alliance, CMI Holding Corp., Duro-Test,
Petco and Stanley Furniture).
Investment Transactions
The Fund records investment transactions on the date on which it
obtains an enforceable right to demand the securities or payment
therefor. The 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.
Deferred Interest Income
All fees received by the Fund upon the funding of Mezzanine or Bridge
Investments are treated as deferred interest income and amortized over
the maturity of such investments.
Loan Facility and Advisory Fees
Loan Facility and Advisory Fees are being amortized over the life (7
years) of the Facility commencing in August, 1991.
Partners' Capital
Partners' Capital represents the Fund's equity divided in proportion
to the Partners' Capital Contributions and does not represent the
Partners' Capital Accounts. Profits and losses, when realized, are
allocated in accordance with the provisions of the Partnership Agreement
summarized in Note 3.
Interim Financial Statements
The financial information included in this interim report as of June
30, 1995 and for the period then ended has been prepared by management
without an audit by independent certified public accountants. The
results for the period ended June 30, 1995 are not necessarily
indicative of the results of the operations expected for the year and
reflect adjustments, all of a normal and recurring nature, necessary for
the fair presentation of the results of the interim period. In the
opinion of Mezzanine Investments, L.P., the Managing General Partner of
the Fund, all necessary adjustments have been made to the aforementioned
financial information for a fair presentation in accordance with
generally accepted accounting principles.
3. Allocation of Profits and Losses
Pursuant to the Partnership Agreement, all profits from Temporary
Investments generally are allocated 99% to the Limited Partners and 1%
to the Managing General Partner. Profits from Mezzanine Investments
are, in general, 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% to the Limited Partners and 1% to the Managing
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
investments in mezzanine securities, and any outstanding
Compensatory Payments,
third, 69% to the Limited Partners and 31% to the Managing
General Partner until the Managing General Partner has
received 21% of the total profits allocated,
thereafter, 79% to the Limited Partners and 21% to the
Managing General Partner.
Losses will be allocated in reverse order of profits
previously allocated and thereafter 99% to the Limited Partners
and 1% to the Managing General Partner.
4. Leverage
The Fund entered into a credit agreement, dated as of August 13, 1991
(the "Credit Facilities"), with a maximum credit facility of $140
million with a lending group led by the First National Bank of Chicago
("First Chicago"). The Credit Facilities consisted of a $100 million
secured term loan and a $40 million secured revolving credit line. As
of June 30, 1995, the maximum availability under the Credit Facilities
was reduced to $19,894,240 due to the sales of pledged securities. The
Available Credit Facilities has been further reduced by a $4 million
letter of credit in connection with the investment in BeefAmerica, Inc.
The Credit Facilities will mature on July 31, 1998. Loan advances bear
interest at a floating rate equal to the greater of prime plus 1% or the
federal funds rate plus 1.5%. The Fund paid down the term loan during
the first quarter of 1994. In connection with the Credit Facilities,
the Fund has pledged its debt and equity portfolio securities to its
lenders.
In connection with the Credit Facilities, the Fund incurred the
following loan fees:
Nonrecurring fees of $4,421,309 paid to First Chicago in 1991
in connection with the creation of the credit facility, which
are being amortized over the life of the credit
facility. The amount expensed for the six months ended June
30, 1995 was $307,301.
An annual Loan Administration Fee of $25,000 for the
administration of the credit facility. The amount expensed
for the six months ended June 30, 1995 was $12,397.
An Unused Commitment Fee of 1/2 of 1% per annum of the unused
line of credit. The expense for the six months ended June 30, 1995
was $38,516.
For the six months ended June 30, 1995 and 1994, the Fund has
incurred $367,484 and $398,685, respectively, in total loan fees.
For additional information, see Note 11.
5. Investment Advisory Fee
The Investment Adviser provides for the identification, management
and liquidation of investments for the Fund. As compensation for
services rendered to the Fund, 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, plus
outstanding bank borrowing as specified in the Fund's Partnership
Agreement), with a minimum annual fee of $1,200,000. The Investment
Advisory Fee is calculated and paid quarterly, in advance. For the six
months ended June 30, 1995 and 1994, the Fund paid $1,506,089 and
$1,831,798, respectively, in Investment Advisory Fees to Thomas H. Lee
Advisors I. For the three months ended June 30, 1995 and 1994, the Fund
paid $764,678 and $906,667, respectively, in Investment Advisory Fees.
6. Fund Administration Fee
ML Fund Administrators Inc. (the "Fund Administrator") (an affiliate
of the Managing General Partner) performs the operational and
administrative services necessary for the management of the Fund. As
compensation for its services, the Fund Administrator is entitled to
receive from the Fund an annual amount equal to the greater of $400,000
or 0.45% of the Net Proceeds Available for Investments subject to
certain reductions as specified in the Fund's Partnership Agreement.
The Fund Administration Fee is calculated and paid quarterly, in
advance. For the six months ended June 30, 1995 and 1994, the Fund paid
$848,926 and $924,185, respectively, in Fund Administration Fees. For
the three months ended June 30, 1995 and 1994, the Fund paid $427,080
and $462,424, respectively, in Fund Administration Fees.
All of the Fund's expenses for accounting, audits, printing, tax
preparation and other administrative services (excluding the costs of
bonding and extraordinary legal expenses) are paid by the Fund
Administrator from its fees.
7. Independent General Partners' Fees
As compensation for services rendered to the Fund, each of the three
Independent General Partners receives $40,000 annually in quarterly
installments, $1,000 for each meeting of the General Partners attended
and $1,000 for each committee meeting attended ($500 if a committee
meeting is held on the same day as a meeting of the General Partners)
plus reimbursement for any legal and out-of-pocket expenses.
For the six months ended June 30, 1995 and 1994, the Fund incurred
$218,654 and $152,777, respectively, in Independent General Partners'
Fees and Expenses.
8. Investment Transactions
On April 27, 1995 Petco Animal Supplies, Inc. ("Petco") completed a
public offering of approximately 3.6 million shares of common stock (the
"Petco Offering") at a net price of $19.71 per share. Of the shares
sold, approximately 2.4 million shares were offered by Petco and
approximately 1.2 million were offered by certain existing shareholders,
including the Fund. As part of the Petco Offering, the Fund sold
1,009,638 shares (including shares sold as a result of the exercise of
the underwriters' overallotment option on May 26, 1995), representing
51% percent of its Petco holdings. The Fund received proceeds of
$19,902,489 and realized a gain of $3,606,557 on the sale of the equity.
At June 30, 1995, the Fund had a total of $299,913,500 invested in
Mezzanine Investments (including $10,917,229 of payment-in-kind
securities, which excludes $80,538,137 of payment-in-kind securities
received from notes placed on non-accrual status), representing
$282,313,458 Managed and $17,600,042 Non-Managed portfolio investments.
For the six months ended June 30, 1995, the proceeds and costs from
the sales of investments other than Temporary Investments aggregated
$64,852,632 and $36,718,772, respectively, which resulted in net
realized gains of $28,133,860. For additional information, please refer
to the Supplemental Schedule of Realized Gains and Losses (Schedule 1)
on page 34.
Because the Fund primarily invests in high-yield private placement
securities, the risk of loss upon default by an issuer is greater than
with investment grade securities because high-yield securities are
generally unsecured and are often subordinated to other creditors of the
issuer. Also, high-yield issuers usually have higher levels of
indebtedness and are more sensitive to adverse economic conditions.
Although the Fund cannot eliminate its risks associated with its
investments in high-yield securities, it has procedures in place to
continually monitor its risks associated with its investments under a
variety of market conditions. Any potential Fund loss would generally
be limited to its investment in the portfolio company reflected in the
portfolio of investments. See Note 11 for information concerning
commitments and guarantees.
Should bankruptcy proceedings commence, either voluntarily or by
action of the court against a portfolio company, the ability of the Fund
to liquidate the position or collect proceeds from the action may be
delayed or limited.
9. Unrealized Appreciation and Depreciation of Investments
For the six months ended June 30, 1995, the Fund recorded net
unrealized appreciation of $29,964,030 and as of this date, the Fund's
cumulative net unrealized appreciation on investments totalled
$32,546,699.
For the three months ended June 30, 1994, the Fund recorded net
unrealized appreciation of $43,279,048.
For additional information, please refer to the Supplemental Schedule
of Unrealized Appreciation and Depreciation (Schedule 2) on pages 35-36.
10. Non-Accrual of Investments
In accordance with the Fund's Accounting Policy, the following notes
have been on non-accrual status since the date indicated:
- BeefAmerica Incorporated on July 1, 1990.
- Chadwick-Miller, Inc. on January 1, 1993.
11. Commitments and Guarantees
On October 12, 1989, the Fund established a $4 million standby letter
of credit issued to Citibank as security for part of its loan to
BeefAmerica, Inc. On January 31, 1993, the Fund established an
additional $4 million as security, which increased the amount of the
standby letters of credit for BeefAmerica's Senior Bank Group to $8
million. On January 12, 1995, the $4 million letter of credit issued in
1993 was cancelled leaving only a $4 million standby letter of credit
established by the Fund.
On January 20, 1992, the Fund entered into a commitment to guarantee
up to $150,480 to support an obligation of a subsidiary of Alliance
International Group, Inc. The amount of such guarantee represents the
Fund's pro-rata portion of a $600,000 aggregate additional advance
provided by the senior lender of Alliance.
On April 13, 1994, the Fund and the Lee Affiliates agreed to
severally guarantee ultimate payment to Diet Center's legal counsel for
all past and ongoing legal services rendered in connection with the Diet
Center franchise litigation (see Note 13 to the Financial Statements).
The Fund guaranteed 85.71% and the Lee Affiliates guaranteed 14.29% of
such fees. On December 8, 1994, Diet Center's Senior Bank Lender
foreclosed on Diet Center's assets, terminating the Fund's guarantee. In
addition, from June 28 to December 8, 1994, the Fund guaranteed the
payment of certain other expenses in connection with such litigation and
the Lee Affiliates entered into similar agreements in proportion to
their equity. As of June 30, 1995, the Fund has paid legal and expert
witness fees in connection with the Diet Center litigation pursuant to
the aforementioned guarantee totalling $1,123,769.
12. Litigation
On March 9, 1989, a number of franchisees of Diet Center, Inc.
initiated a suit in San Francisco Superior Court challenging Diet
Center's 50 cent increase in the Continuing License Fee which is paid by
all franchisees on a per dieter, per day basis. Plaintiffs alleged that
all defendants (including the Fund, its Investment Adviser and Thomas H.
Lee) conspired to finance the leveraged buy-out of Diet Center's
corporate parent, American Health Companies Inc., by wrongfully
increasing the License Fee. Plaintiffs subsequently filed an amended
fraudulent conveyance count. On January 27, 1995 Judge Baxter of the
San Francisco Supreme Court issued a written opinion after trial in
which she ruled in favor of all defendants (including, the Fund, its
Investment Adviser and Thomas H. Lee) on plaintiffs' allegation that the
leveraged buy-out of American Health Companies, Inc. was a
constructively fraudulent conveyance. The Court had previously granted
summary judgement to the Fund, the Thomas H. Lee Company and Thomas H.
Lee on plaintiffs' other allegations against those defendants. On May
1, 1995, the parties entered into a "Settlement Agreement" pursuant to
which the plaintiffs withdrew their appeals and the defendants,
including the Fund, agreed to assume all of their costs incurred in
connection with the litigation. This settlement agreement became
effective June 1, 1995.
On September 7, 1991, the Fund brought suit in the Court of Common
Pleas for the County of Greenville, South Carolina against Deloitte &
Touche in connection with Deloitte & Touche's audit opinions on the
financial statements of Emb-Tex Corporation, formerly an operating
subsidiary of a portfolio company of the Fund. The Fund contends that
the value of Emb-Tex Corporation's inventory and operating income were
substantially overstated in its financial statements. The Fund seeks
actual and punitive damages in connection with the loss of its aggregate
$18 million investment. Deloitte & Touche obtained a summary judgement
in its favor and the Fund pursued an appeal in the Appellate Courts of
South Carolina. The appeal was argued in the Appellate Court of South
Carolina in April 1995, and the Court has not yet rendered an opinion.
On October 18, 1991, one Limited Partner of the Fund commenced a
class action in the Supreme Court of the State of New York in the County
of New York, on behalf of a class of all Limited Partners of record
during 1990 or their successors in interest, against the Fund's Managing
General Partner, Individual General Partners, Investment Adviser and
certain of their affiliates. The complaint alleges that the defendants
breached the Fund's Partnership Agreement in 1990 by causing the Fund to
pay $7,554,855 in incentive compensation to the Managing General Partner
with respect to that year. The complaint seeks monetary damages in the
amount of $7,554,855, together with interest, and other relief. The
defendants believe that the claim is without merit and sought to have it
dismissed. The court denied the defendants' motion for summary
judgment, and the defendants filed an interlocutory appeal to the New
York Supreme Court, Appellate Division, which was denied. Thereafter,
defendants moved to decertify the class and that motion was denied. A
trial was held in late January, 1995. Whether or not the plaintiff
prevails, the Fund may be obligated to indemnify and advance litigation
expenses to one or more of the defendants under the terms and conditions
of various indemnity provisions of the Fund's Partnership Agreement and
separate indemnification agreements. The Fund has advanced litigation
expenses to the indemnified parties based upon amounts which are deemed
reimbursable in accordance with the indemnification provisions and has
included these amounts in professional fees. The final outcome of this
case is not determinable at this time.
On October 14, 1993, a Limited Partner commenced a putative class
action in the U.S. District Court for the District of Delaware,
purportedly on behalf of all persons who purchased limited partnership
interests in the Fund between August 12, 1987 and the date of filing of
the complaint, against the Fund, the Managing General Partner, the
Individual General Partners, the Investment Adviser to the Fund and
certain named affiliates of such persons. As amended, the complaint
alleges that the defendants operated the Fund, and caused it to make
certain investments, for the benefit of some or all of the defendants at
the expense of the Fund's Limited Partners in breach of defendants'
fiduciary and contractual duties to the Limited Partners, thereby
violating federal securities laws applicable to the Fund and its
affiliates under the Investment Company Act of 1940, as amended, as well
as Delaware state law. The plaintiff seeks an accounting, rescission,
rescissory or actual damages and punitive damages. The defendants in
this action believe that the claims are without merit and have moved to
dismiss them. By Order dated September 30, 1994 and Opinion dated
October 14, 1994, the court granted in part and denied in part
defendants' motion to dismiss the amended complaint, dismissing
plaintiffs' claims with respect to several investments as time-barred
and dismissing all claims for aiding and abetting liability under the
Investment Company Act of 1940. Whether or not the plaintiff prevails
on any remaining claims, the Fund 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 Fund's Partnership
Agreement and separate indemnification agreements, and the amounts of
such indemnification and expenses could be material. The outcome of
this case is not determinable at this time. The Fund has incurred
litigation expenses which are recorded in professional fees.
13. Related Party Transactions
Certain of the Mezzanine Investments and Bridge Investments which
were made by the 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 Fund's expectation of engaging in such co-investments, the Fund
sought an exemptive order from the Commission allowing such co-
investment, which was received on September 23, 1987. An additional
exemptive order allowing co-investment with ML-Lee Acquisition Fund,
L.P. ("Fund II") and ML-Lee Acquisition Fund (Retirement Accounts) II,
L.P. ("Retirement Fund") was received from the Commission on September
1, 1989. The Fund's investments in Managed Companies, and in certain
cases its investments in Non-Managed Companies, typically involve the
entry by the Fund and other equity security holders into stockholders'
agreements. While the provisions of such stockholders' agreements vary,
such agreements may include provisions as to corporate governance,
registration rights, rights of first offer or first refusal, rights to
participate in sales of securities to third parties, rights of majority
stockholders to compel minority stockholders to participate in sales of
securities to third parties, transfer restrictions and preemptive
rights.
Thomas H. Lee Company, a sole proprietorship owned by Thomas H. Lee,
an Individual General Partner of the 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 Fund, 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 Fund in connection with their ordinary investment
operations.
During the three months ended June 30, 1995, the Managing General
Partner received a first quarter 1995 cash distribution in the amount of
$446,710, representing its 1% interest in the Fund. This cash
distribution was paid on May 15, 1995. During the six months ended June
30 ,1995, the Managing General Partner received cash distributions
totalling $522,735, representing its 1% interest in the Fund.
14. Reserves
In February 1993, the Fund established a $15 million reserve to
provide funds for follow-on investments and to pay expenses. As of
December 31, 1994, the reserve balance was reduced to approximately $3.1
million due to follow-on investments in CMI Holding Corp., Diet Center
Inc., Duro-Test Corporation, Health o meter and Petco of $2.25 million,
$444,861, $2.6 million, $3.28 million and $529, respectively, along with
a distribution to partners in the second quarter of 1993 of $424,264 and
a payment of $2.9 million to First Chicago to pay down the Fund's loan.
15. Income Taxes (Statement of Financial Accounting Standards
No. 109)
No provision for income taxes has been made since all income and
losses are allocated to the Fund's partners for inclusion in their
respective tax returns.
Pursuant to Statement of Financial Accounting Standards No. 109 -
Accounting for Income Taxes, the Fund is required to disclose any
difference in the tax bases of the Fund's assets and liabilities versus
the amounts reported in the financial statements. Generally, the tax
bases of the Fund's assets approximate the amortized cost amounts
reported in the financial statements. This amount is computed annually
and as of December 31, 1994, the tax bases of the Fund's assets are
greater than the amounts reported in the financial statements by
$21,040,094. This difference is primarily attributable to unrealized
depreciation on investments which has not been recognized for tax
purposes.
16. Subsequent Events
On June 26, 1995 General Nutrition Companies, Inc. filed a
registration statement in connection with a public offering of 10
million shares of common stock, together with a 15% overallotment option
to the underwriters(the "GNC Offering"), all of which were being offered
by affiliates of the Thomas H. Lee Company, including the Fund. The GNC
Offering was declared effective on July 19, 1995 and the Fund sold
3,020,212 shares of common stock (including the underwriters'
overallotment option of 449,174 shares exercised on August 1, 1995) at a
net price per share of $33.775. The Fund also sold 423,454 common stock
purchase warrants at a net price per warrant of $28.775 (the net price
per share less the $5 per warrant exercise price). Proceeds from both
sales totalled $114,192,521 with an original cost of $29,476,469,
resulting in total realized gain for the Fund in the amount of
$84,715,266.
On August 3, 1995, the Individual General Partners approved the
second quarter 1995 cash distribution totalling $19,863,955, which
consists of $11,467,097 from capital gains from sales of securities,
$8,435,392 from return of capital and $409,222 from net investment
income from Temporary Investments partially offset by a net investment
loss of $447,756 from Mezzanine Investments during the second quarter.
The total amount distributed to Limited Partners was $19,665,306 or
$40.34 per unit. The Managing General Partner will receive $198,649,
representing its 1% interest in the Fund. This cash distribution will
be paid on August 14, 1995.
On August 3, 1995, the Individual General Partners approved a special
cash distribution totalling $114,190,626, which consists of $84,714,157
from capital gains and $29,476,469 from return of capital from the July
19 and August 1, 1995 sales of General Nutrition Companies common stock.
The total amount distributed to Limited Partners was $113,048,699 or
$231.90 per unit. The Managing General Partner will receive $1,141,927,
representing its 1% interest in the Fund. This cash distribution will
be paid on August 14, 1995.
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE 1
ML-LEE ACQUISITION FUND, L.P.
SUPPLEMENTAL SCHEDULE OF REALIZED GAINS (LOSSES)
FOR THE QUARTER ENDED JUNE 30, 1995
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NUMBER
OF REALIZED
SECURITY SHARES/ ORIGINAL NET GAIN/
PRINCIPAL COST PROCEEDS (LOSS)
<S> <C> <C> <C> <C>
For the Three Months Ended March 31, 1995
Chiat/Day, Inc. Advertising
Sr. Subordinated Note $ 5,000 $ 5,000 $ 4,950 $ (50)
Hillsborough Holdings Corporation
Common Stock 20,658 103 17 (86)
Omega Wire, Inc.
Sr. Subordinated Note $ 15,000 15,000 15,900 900
Common Stock 80,000 320 24,083 23,763
Total for the Three Months ended March 31, 1995 $20,423 $44,950 $24,527
For the Three Months Ended June 30, 1995
Petco Animal Supplies Inc.
Common Stock 1,009,638 $16,296 $19,903 $ 3,607
Total for the Three Months ended June 30, 1995 $16,296 $19,903 $ 3,607
Total for the Six Months ended June 30, 1995 $36,719 $64,853 $28,134
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
ML-LEE ACQUISITION FUND, L.P.
SUPPLEMENTAL SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
FOR THE PERIOD ENDED JUNE 30, 1995
(DOLLARS IN THOUSANDS)
(UNAUDITED)
UNREALIZED UNREALIZED
APPRECIATION APPRECIATION TOTAL TOTAL
(DEPRECIATION) (DEPRECIATION) UNREALIZED UNREALIZED
FOR THE THREE FOR THE SIX APPRECIATION APPRECIATION
SECURITY INVESTMENT FAIR MONTHS ENDED MONTHS ENDED (DEPRECIATION) AT (DEPRECIATION) AT
COST VALUE JUNE 30, 1995 JUNE 30, 1995 DECEMBER 31, 1994 JUNE 30, 1995
<S> <C> <C> <C> <C> <C> <C>
PUBLICLY TRADED/UNDERLYING
SECURITY PUBLICLY TRADED:
Celebrity, Inc.
Common Stock* $ 225 $ 119 $ 6 $ 43 $ (149) $ (106)
General Nutrition Companies, Inc.
Convertible Subordinated Notes* 40,000 143,955 30,226 25,103 78,852 103,955
Common Stock 3,236 48,252 10,131 8,414 36,602 45,016
Warrants - 12,757 3,123 2,594 10,163 12,757
Health o meter
Common Stock* 4,552 5,861 195 488 821 1,309
Petco Animal Supplies
Common Stock(a) 15,846 22,826 (2,697) 10,247 (3,267) 6,980
Playtex Products, Inc.
Common Stock 3,255 13,709 2,459 3,690 6,764 10,454
SFX Broadcasting, Inc.
Common Stock 4,880 696 104 215 (4,399) (4,184)
Stanley Furniture Company
Common Stock 33,522 20,401 1,338 (6,354) (6,767) (13,121)
Walter Industries, Inc.
Common Stock 12,000 7,592 1,592 (4,408) - (4,408)
TOTAL NET UNREALIZED APPRECIATION
FROM PUBLICLY TRADED/UNDERLYING
SECURITIES PUBLICLY TRADED $46,477 $40,032 $118,620 $158,652
* Underlying security publicly traded.
(a) Restricted security.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
ML-LEE ACQUISITION FUND, L.P.
SUPPLEMENTAL SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
FOR THE PERIOD ENDED JUNE 30, 1995
(DOLLARS IN THOUSANDS)
(UNAUDITED)
UNREALIZED UNREALIZED
APPRECIATION APPRECIATION TOTAL TOTAL
(DEPRECIATION) (DEPRECIATION) UNREALIZED UNREALIZED
FOR THE THREE FOR THE SIX APPRECIATION APPRECIATION
SECURITY INVESTMENT FAIR MONTHS ENDED MONTHS ENDED (DEPRECIATION) AT (DEPRECIATION) AT
COST VALUE JUNE 30, 1995 JUNE 30, 1995 DECEMBER 31, 1994 JUNE 30, 1995
<S> <C> <C> <C> <C> <C> <C>
NONPUBLIC SECURITIES:
BeefAmerica Inc.
Senior Subordinated Note $20,000 $10,000 $ - $ - $ (10,000) $ (10,000)
Subordinated Notes 38,928 - - - (38,928) (38,928)
Preferred Stock 40,050 - - - (40,050) (40,050)
Common Stock 2,000 - - - (2,000) (2,000)
Chadwick-Miller, Inc.
Common Stock 3,736 1,929 - - (1,807) (1,807)
Charter Medical Corporation
Common Stock Warrants 4 - - - (4) (4)
Duro-Test Corporation
Common Stock 36,045 2,382 (3,200) (3,200) (30,463) (33,663)
Hillsborough Holdings Corporation
Subordinated Note - - - 6,000 (6,000) -
Common Stock - - - 103 (103) -
Omega Wire, Inc.
Common Stock - - - (12,971) 12,971 -
SWO Holdings Corporation
Common Stock 250 595 - - 345 345
TOTAL NET UNREALIZED DEPRECIATION
FROM NONPUBLIC SECURITIES (3,200) (10,068) (116,039) (126,107)
TOTAL NET UNREALIZED APPRECIATION $43,277 $ 29,964 $ 2,581 $ 32,545
* Underlying security publicly traded.
(a) Restricted security.
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity & Capital Resources
As of June 30, 1995, the Fund had a total of $299,913,500 (including
$1,122,216 of payment-in-kind notes and $9,795,012 of payment-in-kind
equity, which excludes $80,538,137 of payment-in-kind securities
received from notes placed on non-accrual status) invested in Mezzanine
Investments, representing $282,313,458 Managed and $17,600,042 Non-
Managed portfolio investments. These investments were financed by net
offering proceeds and debt financing. This represents a $36,718,772
decrease versus the total at December 31, 1994 of $336,632,272. The
decrease in gross assets is due primarily to the sales and redemptions
of Portfolio Investments. The Fund's Mezzanine Investments consist of
high-yield subordinated debt and/or preferred stock linked with an
equity participation in middle market companies typically issued in
private placement transactions and are usually subject to restrictions
on the transfer or sale of the security, thereby limiting their
liquidity.
Excluding subordinated notes placed on non-accrual status, the Fund
during the six months ended June 30, 1995, received no additional debt
securities in lieu of cash interest payments ("payment-in-kind") as
provided in certain of its subordinated note investments. As of June 30,
1995, the Fund has in its portfolio investments $10,917,229 of payment-
in-kind securities which excludes $80,538,137 of payment-in-kind
securities received from notes placed on non-accrual status.
On August 13, 1991, the Fund completed a refinancing of its credit
agreement with a lending group led by The First National Bank of Chicago
("First Chicago"). The new agreement provided the Fund with a maximum
credit facility of $140 million, consisting of a $100 million term loan
and a $40 million revolving credit line, both maturing on July 31, 1998.
The Fund has pledged substantially all of its securities to secure
repayment of this facility. The agreement generally provided for
mandatory prepayments, and a permanent reduction in the credit facility,
equal to the lesser of cost or cash proceeds in the event of the sale or
other cash disposition of Mezzanine Investments.
On October 29, 1993, the Fund entered into an amendment to its credit
agreement enabling the Fund to make prepayments of the term loan at any
time and without any corresponding reduction to the revolving credit
line. On January 6, 1994, the Fund paid down its term loan by $6.2
million ($3.3 million of this amount was set aside from fourth quarter
1993 gains and $2.9 million was utilized from the Fund's reserve). In
addition, due to sales of securities, the Fund made a series of
mandatory loan paydowns in the first quarter of 1994, aggregating to
$3,394,004. As of March 29, 1994, the outstanding term loan was paid in
full. As of June 30, 1995, the Fund's maximum credit facility had been
reduced to $19,894,240 due to loan paydowns from the sales of Mezzanine
Investments. Of this amount the Fund had utilized $4 million to support
a letter of credit established by the Fund, leaving the remaining credit
facility of $15,894,240.
The Fund is now in its eighth year of operation. Because a number of
investments have already been repaid or sold and a number of other
portfolio companies are unable to pay current interest to the Fund, cash
dividends, interest and other income expected to be received by the Fund
in the near future might not cover the Fund's expenses. Distribution
from operations in the future, if any, will therefore be minimal.
Future cash distributions to Limited Partners will be mostly derived
from capital proceeds and gains resulting from sales of securities. The
amount and timing of asset sales are dependent on future market
conditions and therefore are inherently unpredictable. Generally, the
proceeds generated from the sale of the Fund's investments will be
distributed to partners only after application of the original cost of
the investments, and in some cases an additional amount, to repay the
Funds' outstanding loan if any, or to replenish the Fund's reserve. To
fund the anticipated cash flow shortfall in the near future and to
maintain adequate reserves for possible follow-on investments, the Fund
had reserved $15 million of the proceeds received from the Playtex notes
sale in February, 1993. A portion of the reserve was used to make
follow-on investments of $444,861, $2.6 million, $2.25 million, $3.28
million and $529 in Diet Center, Duro-Test Corp., Chadwick-Miller,
Health o meter and Petco, respectively, along with a distribution to
partners in the second quarter of 1993 of $424,264. In addition, $2.9
million was utilized from the reserve to paydown a portion of the First
Chicago loan on January 6, 1994. The Fund's reserve balance as of June
30, 1995 was reduced to approximately $3.1 million. The Fund has
invested its remaining $3.1 million reserve in Temporary Investments.
As of June 27, 1995, the Independent General Partners have approved
retention of the reserve at its current level.
On June 26, 1995 General Nutrition Companies, Inc. filed a
registration statement in connection with a public offering of 10
million shares of common stock, together with a 15% overallotment option
to the underwriters (the "GNC Offering"), all of which were being offered
by affiliates of the Thomas H. Lee Company, including the Fund. The GNC
Offering was declared effective on July 19, 1995 and the Fund sold
3,020,212 shares of common stock (including the underwriters
overallotment option of 449,174 shares that was exercised on August 1,
1995) at a net price per share of $33.775. The Fund also sold 423,454
common stock purchase warrants at a net price per warrant of $28.775
(the net price per share less the $5 per warrant exercise price).
Proceeds from both sales totalled $114,192,521 with an original cost of
$29,476,469, resulting in total realized gain for the Fund in the amount
of $84,715,266. The proceeds from the sales amounted to $231.90 per unit
and will be distributed along with the second quarter cash distribution
on August 14, 1995.
Investment in High-Yield Securities
The Fund invests primarily in subordinated debt and preferred stock
securities ("High-Yield Securities"), generally linked with an equity
participation, issued in conjunction with the mezzanine financing of
privately structured, friendly leveraged acquisitions, recapitalizations
and other leveraged financings. High-Yield Securities are debt and
preferred equity securities that are unrated or are rated by Standard &
Poor's Corporation as BB or lower and by Moody's Investor Services, Inc.
as Ba or lower. Risk of loss upon default by the issuer is
significantly greater with High-Yield Securities than with investment
grade securities because High-Yield Securities are generally unsecured
and are often subordinated to other creditors of the issuer. Also,
these issuers usually have high levels of indebtedness and are more
sensitive to adverse economic conditions, such as recession or
increasing interest rates, than investment grade issuers. Most of these
securities are subject to resale restrictions and have no quoted market
price.
Although the Fund cannot eliminate the risks associated with its
investments in High-Yield Securities, it has established risk management
policies. The Fund subjected each prospective investment to rigorous
analysis and made only those investments that were recommended by the
Investment Adviser and that met the Fund's investment guidelines or that
had otherwise been approved by the Managing General Partner and the
Independent General Partners. Fund investments were measured against
specified Fund investment and performance guidelines. To limit the
exposure of the Fund's capital in any single issuer, the Fund limits the
amount of its investment in a particular issuer. However, due to the
substantial increase in the fair value of the Fund's investment
securities of General Nutrition Companies, Inc., over 56% of the Fund's
total assets (on a fair value basis) was represented by this issuer at
June 30, 1995. Subsequent to June 30, 1995, the Fund sold 58% of its
total GNC holdings (see Note 16 to the Financial Statements). After
adjusting for this sale, GNC will represent approximately 34% of the
Fund's assets. Future results will be significantly affected by changes
in the market value of General Nutrition Companies' Common Stock. The
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 Fund (Celebrity, General
Nutrition Companies, Healthtrust, Petco, Playtex, SFX Broadcasting Inc.,
Stanley Furniture and in part, Health o meter) have registered their
equity securities in public offerings. Although the equity securities
of the same class presently held by the Fund (except Celebrity, Stanley
Furniture and in part, Health o meter) were not registered in these
offerings, the Fund has the ability under Rule 144 of 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 Fund for at least three years (currently, SFX Broadcasting). The
Fund in certain cases 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 Fund (and affiliated investors where applicable), serve as
one or more of the directors on the boards of portfolio companies. The
Fund may, from time to time, make follow-on investments to the extent
necessary to protect or enhance its existing investments.
Results of Operations
Investment Income and Expenses
For the six months ended June 30, 1995, the Fund had a net investment
loss of $61,075, as compared to net investment income of $10,579,268 for
the same period in 1994. The total investment income earned on
investments for the six months ended June 30, 1995 was $4,122,333 of
which $3,390,074 was earned from Mezzanine Investments and $732,259, was
earned from Temporary Investments. For the same period in 1994, total
investment income earned on investments was $14,355,470 of which
$14,008,284 was earned from Mezzanine Investments and $347,186 was
earned from Temporary Investments.
The decrease in the six month ending 1995 net investment income
versus the comparative period in 1994 reflects the 1994 recognition of
prior year's income from Petco Animal Supplies. In addition, this
decrease was partially due to higher professional fees including higher
legal fees incurred on behalf of the Independent General Partners' and
additional sales of income-producing mezzanine investments, offset by
lower Investment Advisory Fees, Fund Administration Fees and interest
expense. The gradual economic recovery and the higher level of consumer
and business confidence has improved the sales and profit levels of some
of the Fund's portfolio companies. As long as these business and
economic conditions improve, they should continue to improve the Fund's
performance.
For the three months ended June 30, 1995, the Fund had a net
investment income from operations of $97,311, as compared to a net
investment loss of $1,387,485 for the same period in 1994. The total
investment income earned on investments for the three months ended June
30, 1995 was $1,634,052 of which $1,060,255 was earned from Mezzanine
Investments and $573,797 was earned from Temporary Investments. For the
same period in 1994, total investment income earned on investments was
$421,210 of which $290,627 was earned from Mezzanine Investments and
$130,583 was earned from Temporary Investments.
The increase in the three month ending 1995 net investment income
versus the comparative period in 1994 reflects lower professional fees,
lower Investment Advisory Fees, lower Fund Administration Fees and an
increase in interest income.
Major expenses for the period ending June 30, 1995 consisted of
professional fees, Investment Advisory Fees, Fund Administration Fees
and loan fees.
Professional fees paid by the Fund consist primarily of legal fees
incurred in conjunction with litigation. Professional fees for the six
months ended June 30, 1995 and 1994 were $1,237,544 and $405,794,
respectively. This increase is attributable to litigation expenses
incurred and legal fees required to be advanced by the Fund in
connection with the litigation described in Note 12 to the Financial
Statements. For the three months ended June 30, 1995 and 1994,
professional fees were $37,449 and $205,268, respectively.
The Investment Adviser and Fund Administrator receive their
compensation on a quarterly basis. Total Investment Advisory Fees paid
to the Investment Adviser for the six months ended June 30, 1995 was
$1,506,089 compared with $1,831,798 for the six months ended June 30,
1994. For the three months ended June 30, 1995 and 1994, the Fund paid
$764,678 and $906,667, respectively, in Investment Advisory Fees. The
fee is calculated at an annual rate of 1% of assets under management,
subject to certain reductions as specified in the Fund's Partnership
Agreement with a minimum annual payment of $1,200,000. The decrease in
1995 as compared to 1994 Investment Advisory Fee is a direct result of
the reductions in outstanding borrowings, sales of investments, returns
of capital to partners and realized losses on investments.
The total Fund Administration Fee paid to the Fund Administrator for
the six months ended June 30, 1995 was $848,926 and was calculated at an
annual rate of 0.45% of net offering proceeds reduced by one-half of the
realized loss and distributions of capital. For the six months ended
June 30, 1994, the Fund Administration Fee was $924,185. For the three
months ended June 30, 1995 and 1994, the Fund paid $427,080 and
$462,424, respectively, in Fund Administrative Fees.
All fund expenses for accounting, audits, printing, tax preparation
and other administrative services (excluding the costs of bonding and
extraordinary legal expenses) are paid by the Fund Administrator from
its fees.
On October 19, 1995, the calculation of the Fund Administration Fee
will change to the sum of $300,000 per year and all actual out-of-pocket
expenses incurred on behalf of the Fund by the Fund Administrator
(excluding compensation for the executive officers of the Fund
Administrator), but in no event exceeding, in aggregate, the annual
amount of $2.0 million.
Loan fees consist of fees on the unused portion of the Fund's
facility, loan administration fees, amortization of the loan advisory
and facility fees and various miscellaneous fees attributable to the
facility. Loan fees for the six months ended June 30, 1995 and 1994,
totalled $367,484 and $398,685, respectively. The decrease of $31,201
for the six months ended June 30, 1995 versus the same period in 1994 is
primarily due to reductions of the Credit Facilities as described in
Note 4 to the Financial Statements. Loan Fees for the three months
ended June 30, 1995 and 1994 totalled $185,261 and $200,076,
respectively.
Net Assets
The Fund's net assets increased by $5,762,247 during the quarter
ended June 30, 1995, due to net realized gains of $28,133,859 and
additional net unrealized appreciation of $29,964,030, offset by cash
distributions of $52,274,567 and a net investment loss of $61,075.
The Fund's valuation of the Common Stock of Celebrity, General
Nutrition Companies, Health o meter, Petco, Playtex, SFX Broadcasting
and Stanley Furniture reflect their closing market price at June 30,
1995. Prior to the sale on July 19, 1995, General Nutrition Companies,
Inc. Warrants were valued at the common stock's closing market price
less the Fund's warrant exercise price and the General Nutrition
Companies, Inc. convertible notes were valued at the common stock
closing market price as adjusted by the conversion rate.
The General Nutrition Companies Inc., Health o meter (in part), Petco
and Playtex securities held by the Fund are restricted securities under
the Securities and Exchange Commission'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 Fund may be
considered an affiliate of Health o meter and Stanley Furniture under
the Securities and Exchange Commission's Rule 144, and therefore, any
resale of Health o meter or Stanley Furniture securities under Rule 144
is limited by the volume limitations in that rule. Accordingly, the
values referred to in the financial statements for the remaining General
Nutrition Companies, Inc., Health o meter, Petco, Playtex and Stanley
Furniture securities held by the Fund do not necessarily represent the
prices at which these securities could currently be sold.
As overall economic, market and business conditions improve, the
sales and profit levels of some of the Fund's companies have increased,
resulting in higher valuations for some of the Fund's equity
investments, primarily General Nutrition Companies, Inc. and to a lesser
extent Petco Animal Supplies.
The Fund's net assets decreased by $113,262,798 during the six months
ended June 30, 1994, primarily due to additional net unrealized
depreciation of $93,590,975 and cash distributions to partners of
$37,054,099 partially offset by net investment income of $10,579,268 and
realized gain of $6,803,008.
Unrealized Appreciation and Depreciation and Non-Accrual of
Investments
For the six months ended June 30, 1995, the Fund recorded net
unrealized appreciation of $29,964,030 as compared to a net unrealized
depreciation of $93,590,975 for the same period in 1994. On June 30,
1995, the Fund's cumulative net unrealized appreciation on investments
totalled $32,546,699.
For the three months ended June 30, 1995, the Fund recorded net
unrealized appreciation of $43,279,048 compared to net unrealized
depreciation of $58,207,131 for the same period in 1994.
The Managing General Partner and Investment Adviser review the
valuation of the 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.
A majority of the Fund's assets (at cost) are invested in private
placement securities for which there are no ascertainable market values.
Although the Managing General Partner and Investment Adviser use their
best judgment in estimating the fair value of these investments, there
are inherent limitations in any estimation technique. Therefore, the
fair value estimates presented herein are not necessarily indicative of
the amount which the Fund could realize in a current transaction.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of
June 30, 1995. Although the Managing General Partner and Investment
Adviser are not aware of any factors not disclosed herein that would
significantly affect the estimated fair value amounts, such amounts have
not been comprehensively revalued since that time, and the current
estimated fair value of these investments may have changed significantly
since that point in time.
Due to the substantial increase in the fair value of the Fund's
investment securities of General Nutrition Companies, Inc., over 56% of
the Fund's total assets (on a fair value basis) was represented by this
issuer at June 30, 1995. Subsequent to June 30, 1995, the Fund sold 58%
of its total GNC holdings (see Note 16 to the Financial Statements).
After adjusting for this sale, GNC will represent approximately 34% of
the Fund's assets. Future results will be significantly affected by
changes in the market value of General Nutrition Companies' Common
Stock.
For additional information, please refer to the Supplemental Schedule
of Unrealized Appreciation and Depreciation (Schedule 2) on pages 35 -
36.
Realized Gains and Losses
The net realized gain on investments for the six months ended June
30, 1995 was $28,133,859 compared to a net realized gain of $6,803,008
for the same period in 1994.
For additional information, please refer to the Supplemental Schedule
of Realized Gains and Losses (Schedule 1) on page 34.
Cash Distributions
On August 3, 1995, the Individual General Partners approved the
second quarter 1995 cash distribution totalling $19,863,955, which
consists of $11,467,097 from capital gains from sales of securities,
$8,435,392 from return of capital and $409,222 from net investment
income from Temporary Investments partially offset by a net investment
loss of $447,756 from Mezzanine Investments during the second quarter.
The total amount distributed to Limited Partners was $19,665,306 or
$40.34 per unit. The Managing General Partner will receive $198,649,
representing its 1% interest in the Fund. This cash distribution will
be paid on August 14, 1995.
On August 3, 1995, the Individual General Partners approved a special
cash distribution totalling $114,190,626, which consists of $84,714,157
from capital gains and $29,476,469 from return of capital from the July
19 and August 1,1995 sale of General Nutrition Companies common stock.
The total amount distributed to Limited Partners was $113,048,699 or
$231.90 per unit. The Managing General Partner will receive $1,141,927,
representing its 1% interest in the Fund. This cash distribution will
be paid on August 14, 1995.
<PAGE>
Part II - Other Information
Items 1 - 3 are herewith omitted as the response to all items is
either none or not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The 1995 Annual Meeting of the Limited Partner was held on June 27,
1995. The results of the proposals were as follows:
Number of Number of Number of
Proposition Affirmative Votes Opposed Votes Withheld Votes
1. Election of the
Individual General
Partners
Vernon R. Alden 248,692 14,942
Joseph L. Bower 249,081 14,553
Stanley H. Feldberg 248,748 14,886
Thomas H. Lee 248,619 15,015
2. Election of the
Managing General
Partner to serve for
the ensuing year and
to approve the
continuance of its
compensation as set
forth in the
Partnership Agreement 247,747 15,887 0
3. Ratification of
the selection of
Price Waterhouse as
Independent Certified
Public Accountants of
the Fund for its
fiscal year ending
December 31, 1995 252,526 4,120 6,988
ITEM 5. OTHER INFORMATION
On June 26, 1995, General Nutrition Companies, Inc., a Delaware
Corporation ("GNC" or the "Company"), a Portfolio Company in ML-Lee
Acquisition Fund, L.P. (the "Fund"), filed a Registration Statement on
Form S-3 with the Securities and Exchange Commission (File No. 33-93954)
for the registration of up to 11,500,000 shares of the Company's Common
Stock including 1,500,000 shares of the Company's Common Stock which may
be sold pursuant to the Underwriters' over-allotment option. All the
shares were offered by certain Selling Shareholders of the Company,
including the Fund.
The Registration Statement was declared effective on July 19, 1995,
and the Fund sold an aggregate of 2,994,492 shares of GNC Common Stock
at the initial closing, of which 2,571,038 shares were issued upon
conversion of the Fund's convertible subordinated promissory notes and
423,454 shares were transferred to the Underwriters who, in turn,
exercised such Warrants and sold the underlying shares to the public.
In addition, the Underwriters' over-allotment option was exercised on
August 1, 1995 and the Fund sold an additional 449,174 shares of GNC
Common Stock, all of such shares being issued upon conversion of the
Fund's convertible subordinated promissory notes.
All of the shares were sold at a net price of $33.775 per share
($35.00 per share less underwriting discounts and commissions of $1.225
per share). The Fund received total proceeds of $114,192,521, of which
$102,007,632 was for the sale of the 3,020,212 shares of Common Stock
issued upon conversion of the Subordinated Notes, and $12,184,889 was
for the sale of the shares underlying the warrants (net of the warrant
exercise price of $5.00 per share). These cash proceeds, equal to
approximately $231.90 per $1,000 Unit, will be distributed to those
Limited Partners of the Fund of record as of the dates of such sales in
a special Cash Distribution, to be made on August 14, 1995.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule for the second quarter ended
June 30, 1995.
(b) Reports on Form 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 this 14th day of August, 1995.
ML-LEE ACQUISITION FUND, L.P.
By: Mezzanine Investments, L.P.,
Managing General Partner
By: ML Mezzanine Inc.,
its General Partner
Dated: August 14, 1995 /s/ James V. Caruso
James V. Caruso
Executive Vice President and Director
Dated: August 14, 1995 /s/ Audrey Bommer
Audrey Bommer
Vice President and Assistant
Treasurer (Chief Accounting Officer)
<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 this 14th day of August, 1995.
ML-LEE ACQUISITION FUND, L.P.
By: Mezzanine Investments, L.P.,
Managing General Partner
By: ML Mezzanine Inc.,
its General Partner
Dated: August 14, 1995
James V. Caruso
Executive Vice President and Director
Dated: August 14, 1995
Audrey Bommer
Vice President and Assistant
Treasurer (Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary information extracted from the second
quarter of 1995 Form 10-Q Balance Sheets and Statements of Operations
and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 324,559,390
<INVESTMENTS-AT-VALUE> 357,106,089
<RECEIVABLES> 366,667
<ASSETS-OTHER> 1,972,460
<OTHER-ITEMS-ASSETS> 3,442,767
<TOTAL-ASSETS> 364,887,983
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 425,741
<TOTAL-LIABILITIES> 425,741
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 487,489
<SHARES-COMMON-PRIOR> 487,489
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 32,546,701
<NET-ASSETS> 362,462,242
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,122,333
<OTHER-INCOME> 0
<EXPENSES-NET> 4,183,408
<NET-INVESTMENT-INCOME> (61,075)
<REALIZED-GAINS-CURRENT> 28,133,859
<APPREC-INCREASE-CURRENT> 29,964,030
<NET-CHANGE-FROM-OPS> 58,036,814
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 29,502,930
<DISTRIBUTIONS-OTHER> 22,771,637
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 5,762,247
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,506,089
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,183,408
<AVERAGE-NET-ASSETS> 359,581,119
<PER-SHARE-NAV-BEGIN> 727.79
<PER-SHARE-NII> (0.12)
<PER-SHARE-GAIN-APPREC> 117.99
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 59.92
<RETURNS-OF-CAPITAL> 46.24
<PER-SHARE-NAV-END> 739.50
<EXPENSE-RATIO> 0.012
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
