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 September 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 September 30, 1995 and December 31, 1994 3
Statements of Operations - For the Three and Nine Months Ended
September 30, 1995 and 1994 4
Statements of Changes in Net Assets - For the Nine Months Ended
September 30, 1995 and 1994 5
Statements of Cash Flows - For the Nine Months Ended
September 30, 1995 and 1994 6
Statement of Changes in Partners' Capital - At September 30, 1995 7
Schedule of Portfolio Investments - September 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 1. Legal Proceedings 45
Item 2. Change in Securities 45
Item 3. Defaults Upon Senior Securities 45
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)
September 30,
1995 December
(Unaudited) 31, 1994
ASSETS:
<S> <C> <C>
Investments - Notes 2,8,9
Portfolio Investments, at fair value
Managed Companies (amortized cost
$252,762 at September 30, 1995 and
$313,930 at December 31, 1994) $234,000 $326,672
Non-Managed Companies (amortized cost
$17,600 at September 30, 1995 and $22,703
at December 31, 1994) 8,783 12,542
Temporary Investments, at amortized cost
(cost $5,216 at September 30, 1995 and
$10,498 at December 31, 1994) 5,234 10,511
Cash (of which $3,145,997 is restricted
at September 30, 1995) - Note 8 3,146 3,442
Accrued Interest Receivable - Note 2 - 1,077
Prepaid Loan Fees - Notes 2,4 1,827 2,299
Prepaid Expenses and Other Receivables - 7
Receivable for Investments Sold 75 1,227
TOTAL ASSETS $253,065 $357,777
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities
Professional and Independent General Partner
Fees Payable $ 170 $ 305
Deferred Interest Income - Note 2 179 773
Total Liabilities 349 1,078
Partners' Capital - Note 2
Managing General Partner 868 1,908
Limited Partners (487,489 Units) 251,848 354,791
Total Partners' Capital 252,716 356,699
TOTAL LIABILITIES AND PARTNERS' CAPITAL $253,065 $ 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 Nine Months Ended
September 30, September 30, September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
INVESTMENT INCOME - NOTE 2,10:
Interest $ 537 $ 1,821 $ 3,503 $ 12,844
Discount 521 70 1,251 416
Dividend and Other Income 168 49 594 3,036
TOTAL INCOME 1,226 1,940 5,348 16,296
EXPENSES:
Investment Advisory Fee - Note 5 691 909 2,197 2,741
Fund Administration Fee - Note 6 410 460 1,259 1,384
Loan Fees - Notes 2,4 188 188 555 587
Independent General Partners' Fees
and Expenses - Note 7 49 107 268 260
Professional Fees 166 178 1,403 584
Insurance Expense 2 3 7 8
Interest Expense - Note 4 - - - 58
TOTAL EXPENSES 1,506 1,845 5,689 5,622
NET INVESTMENT INCOME (LOSS) (280) 95 (341) 10,674
NET REALIZED GAIN ON INVESTMENTS -
NOTE 8 AND SCHEDULE 1 84,715 - 112,849 6,803
NET CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS - NOTE 9
AND SCHEDULE 2
Publicly Traded Securities (59,741) 31,250 (19,709) (62,957)
Non Public Securities (385) (3,445) (10,453) (2,828)
Subtotal (60,126) 27,805 (30,162) (65,785)
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 24,309 $ 27,900 $ 82,346 $(48,308)
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 Nine Months Ended
September 30, September 30,
FROM OPERATIONS: 1995 1994
<S> <C> <C>
Net Investment Income (Loss) $ (341) $ 10,674
Net Realized Gain on Investments 112,849 6,803
Net Change in Unrealized Depreciation
on Investments (30,162) (65,785)
Net Increase (Decrease) In Net
Assets Resulting From Operations 82,346 (48,308)
Cash Distributions to Partners (186,329) (38,137)
Total Decrease (103,983) (86,445)
NET ASSETS:
Beginning of Period 356,699 418,892
End of Period $252,716 $332,447
See the Accompanying Notes to Financial Statements.
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ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Nine Months Ended
September 30, September 30,
1995 1994
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents CASH FLOWS FROM OPERATING
ACTIVITIES:
Interest, Dividends and Discount Income $ 5,826 $ 9,577
Investment Advisory Fee (2,197) (2,741)
Fund Administration Fee (1,259) (1,384)
Professional Fees and Other Expenses (1,530) (517)
Loan Fees and Expenses (100) (48)
Interest Expense - (58)
Independent General Partners' Fees and Expenses (260) (247)
Sale of Temporary Investments, Net 5,281 26,027
Proceeds from Sale of Portfolio Company Investments 180,272 23,467
Purchase of Portfolio Company Investments - (6,344)
Net Cash Provided by Operating Activities 186,033 47,732
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of Borrowings, Net - (9,594)
Cash Distributions to Partners (186,329) (38,137)
Net Cash Applied to Financing Activities (186,329) (47,731)
Net Increase (Decrease) in Cash (296) 1
Cash at Beginning of Period 3,442 -
Cash at End of Period $ 3,146 $ 1
RECONCILIATION OF NET INVESTMENT INCOME (LOSS) TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Investment Income (Loss) $ (341) $ 10,674
Adjustments to Reconcile Net Investment Income (Loss)
to Net Cash Provided by Operating Activities:
Decrease in Investments 71,552 23,470
Decrease in Receivable for Investments Sold 1,152 14,933
(Increase) Decrease in Accrued Interest,
Dividend and Discount Receivables 477 (6,719)
Decrease in Prepaid Expenses 479 546
Decrease in Option Payable - (2,057)
Increase (Decrease) in Professional Fees and
Independent General Partner Fees Payable (135) 82
Net Realized Gain on Investments 112,849 6,803
Total Adjustments 186,374 37,058
Net Cash Provided by Operating Activities $ 186,033 $ 47,732
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
<S> <C> <C> <C>
For the Nine Months Ended
September 30, 1995 - Notes 2,3,4,5
Partners' Capital at January 1, 1995 $ 1,908 $354,791 $356,699
Allocation of Net Investment Loss (3) (338) (341)
Allocation of Net Realized Gain on Investments 1,128 111,721 112,849
Allocation of Net Change in Unrealized Depreciation (302) (29,860) (30,162)
Cash Distributions to Partners (1,863) (184,466) (186,329)
Partners' Capital at September 30, 1995 $ 868 $251,848 $252,716
See the Accompanying Notes to Financial Statements.
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 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)
SEPTEMBER 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 10.24
See the Accompanying Notes to Financial Statements.
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 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 4.03
See the Accompanying Notes to Financial Statements.
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 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. - Notes 5,8,9
11,539 Shares Celebrity, Inc. Common Stock(b)(k) 06/16/92 $ 150 $ 81
(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 5,769 Shares of Common Stock Purchased 06/16/92 $75 Sold
09/19/94 $75 Realized Gain $ 0 5,769 Shares Common Stock
Purchased 06/16/92 $75 Sold 09/19/95 $75 Realized Gain $ 0
Total Realized Gain $ 0 150 81 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)
SEPTEMBER 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 8,9,10,14
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 5.99
See the Accompanying Notes to Financial Statements.
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 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 9,14,16
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 1,997
(61.5% of fully diluted common equity)
38,663 4,615 1.86
See the Accompanying Notes to Financial Statements.
</TABLE>
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 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
53,558.5 Shares General Nutrition Cos., Inc. Common Stock(d)(k) 08/21/89 $ 523 $ 2,437
1,024,590 Shares General Nutrition Cos.,Inc. Common Stock (d)(k) 11/21/91 10,000 46,619
1,373,734 Shares General Nutrition Cos., Inc., Common Stock (d)(k) Various 3,236 62,505
(5.4% of fully diluted common equity) 469,306 Shares Common
Stock Purchased various $ 1,900 Sold Shares various 1993 $
17,154 Realized Gain $ 15,254 433,424 Shares Common Stock
Purchased various $ 1,626 Sold Shares various 1994 $ 12,272
Realized Gain $ 10,646 423,454 Common Stock Purchase
Warrants Purchased Various $ 0 Sold July 19, 1995 $ 12,185
Realized Gain $ 12,185 $29,477 7.5% Convertiable Junior
Subordinated Note Purchased 8/29/89 $ 29,477
Converted to 3,020,212 Shares Common
Stock Various 1995
Sold various 1995 $102,007
Realized Gain $ 72,530
Total Realized Gain $110,615 $13,759 $111,561 44.98
See the Accompanying Notes to Financial Statements.
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 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 $ 3,929
610,553 Shares Health o meter Products, Inc., Common Stock (b)(k) 08/17/94 3,282 2,519
(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 6,448 2.60
See the Accompanying Notes to Financial Statements.
</TABLE>
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 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 $ 25,525
(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 25,525 10.29
See the Accompanying Notes to Financial Statements.
</TABLE>
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 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 $ 12,129
(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)
SEPTEMBER 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 12,129 4.89
See the Accompanying Notes to Financial Statements.
</TABLE>
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 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 $ 23,411
(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 23,411 9.44
TOTAL INVESTMENT IN MANAGED COMPANIES $252,762 $234,000 94.35
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 4,880 741
8,667 Option Shares SFX Broadcasting Co. Common Stock Option(b)(j) 12/16/88 0 0
4,880 741 0.30
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)
SEPTEMBER 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 0.42
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)
SEPTEMBER 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(b)(k) 01/07/88 $ 12,000 $ 6,977
326 Shares Walter Industries, Inc., Common Stock (b)(k) 09/13/95 0 4
(formerly Hillsborough Holdings Corporation)
12,000 6,981 2.81
TOTAL INVESTMENT IN NON-MANAGED COMPANIES $ 17,600 $ 8,783 3.54
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes 70,860 21,932 8.84
Preferred Stock 67,086 27,036 10.90
Common Stock and Warrants 132,416 193,815 78.15
TOTAL MEZZANINE INVESTMENTS $270,362 $242,783 97.89
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
SEPTEMBER 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
TIME DEPOSIT
$276 State Street 2.5% due 10/02/95 09/29/95 $ 276 $ 276
TOTAL TIME DEPOSIT 276 276 .11
COMMERCIAL PAPER
$2,987 AVCO Financial 5.73% due 10/02/95 08/28/95 $ 2,970 $ 2,986
$1,974 Ford Motor Credit Corp. 5.74% due 10/6/95 09/22/95 1,970 1,972
TOTAL INVESTMENT IN COMMERCIAL PAPER 4,940 4,958 2.00
TOTAL TEMPORARY INVESTMENTS $ 5,216 $ 5,234 2.11
TOTAL INVESTMENT PORTFOLIO $275,578 $248,017 100.00%
(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 September 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 $18,207 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
SEPTEMBER 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.
<PAGE>
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 September 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
September 29, 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.
<PAGE>
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 September 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 debt securities, 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 September 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 securities.
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 September
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 September 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.
<PAGE>
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 September 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 loan advisory and loan facility fees of $4,441,580 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 nine months ended September 30, 1995 was
$476,819.
<PAGE>
An annual Loan Administration Fee of $25,000 for the administration of the
credit facility. The amount expensed for the nine months ended September 30,
1995 was $18,621.
An Unused Commitment Fee of 1/2 of 1% per annum of the unused line of
credit. The expense for the nine months ended September 30, 1995 was
$59,267.
For the nine months ended September 30, 1995 and 1994, the Fund has incurred
$555,145 and $586,624, 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 nine months
ended September 30, 1995 and 1994, the Fund paid $2,197,065 and $2,741,152,
respectively, in Investment Advisory Fees to Thomas H. Lee Advisors I. For the
three months ended September 30, 1995 and 1994, the Fund paid $690,976 and
$909,354, 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. For the period from October 19, 1991
to October 19, 1995, 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. Beginning October 19, 1995, the Fund
Administration Fee will change to an annual fee of $300,000 plus out-of-pocket
expenses incurred by the Fund Administrator as described below. The Fund
Administration Fee is calculated and paid quarterly, in advance. For the nine
months ended September 30, 1995 and 1994, the Fund paid $1,259,424 and
$1,383,818, respectively, in Fund Administration Fees. For the three months
ended September 30, 1995 and 1994, the Fund paid $410,498 and $459,633,
respectively, in Fund Administration Fees.
For the period ending October 19, 1995, the Fund's expenses for accounting,
audits, printing, tax preparation and other administrative services
("out-of-pocket expenses") (excluding the costs of bonding and extraordinary
legal expenses) were paid by the Fund Administrator. Beginning October 19, 1995,
in accordance with Partnership Agreement, the Fund Administrator is being
reimbursed by the Fund for 100% of the out-of-pocket expenses incurred.
<PAGE>
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 nine months ended September 30, 1995 and 1994, the Fund incurred
$267,567 and $260,471, respectively, in Independent General Partners' Fees and
Expenses.
8. Investment Transactions
On November 23, 1994, in connection with the financial restructuring of
Chadwick-Miller, Inc. and its holding company, CMI Holding Corp., the Fund's
$5,000,000 14.75% Senior Note was redeemed. The proceeds received were $5
million, however, as of September 30, 1995, $3.1 million is classified as
restricted cash and remains held in escrow until certain leasing consents are
obtained from store landlords.
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.
In connection with a General Nutrition Companies, Inc. public offering of 10
million shares of Common Stock, together with a 15% overallotment option to the
underwriters (the "GNC Offering") on July 19, 1995, 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 the sales totalled $114,192,216 with an original cost of
$29,476,469 resulted in realized gains of $84,715,747 and proceeds were
distributed to the Partners of the Fund in a special distribution on August 14,
1995. Subsequent to the sale, all remaining GNC Convertible Subordinated Notes
held by the Fund were converted into Common Stock.
At September 30, 1995, the Fund had a total of $270,361,232 invested in
Mezzanine Investments representing $252,761,190 Managed and $17,600,042
Non-Managed portfolio investments.
For the nine months ended September 30, 1995, the proceeds and costs from
the sales of investments resulted in net realized gains of $112,848,806. For
additional information, please refer to the Supplemental Schedule of Realized
Gains and Losses (Schedule 1) on page 34.
<PAGE>
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 nine months ended September 30, 1995, the Fund recorded net
unrealized depreciation of $30,162,528 and as of this date, the Fund's
cumulative net unrealized depreciation on investments totalled $27,579,857.
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 for BeefAmerica's Senior Bank Group as security for part of the
Fund's loan to BeefAmerica, Inc.
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.
<PAGE>
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 12 to the Financial Statements). The Fund guaranteed 85.71%
and the Lee Affiliates guaranteed 14.29% of such fees. 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 September 30, 1995, the Fund has
paid legal and other expenses in connection with the Diet Center litigation
pursuant to the aforementioned guarantee totalling $1,257,012.
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 judgment 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
not to seek to recover from plaintiffs the defendants' 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 judgment
in its favor and the Fund pursued an appeal in the Appellate Courts of South
Carolina. On August 21, 1995, the South Carolina Court of Appeals reversed the
summary judgment ruling and rewarded the case for trial. On September 11, 1995,
Deloitte & Touche filed a petition for rehearing with the Court of Appeals which
is pending.
<PAGE>
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. 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 plaintiff's 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. The plaintiff thereafter filed a second amended complaint
on November 3, 1995 raising additional allegations in connection with certain
transactions engaged by the Fund, and that defendants violated the Investment
Company Act of 1940 of the federal securities laws and 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. 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.
<PAGE>
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 II, 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 1995, the Managing General Partner received cash distributions in the
amount of $1,863,310, representing its 1% interest in the Fund.
14. Reserves
In February 1993, the Fund established a $15,055,806 reserve to provide
funds for follow-on investments and to pay expenses. As of September 30, 1995,
the reserve balance was reduced to approximately $3,139,606 due to follow-on
investments in CMI Holding Corp., Diet Center Inc., Duro-Test Corporation,
Health o meter and Petco of $2,250,000, $441,861, $2,617,805, $3,281,722 and
$529, respectively, along with a distribution to partners in the second quarter
of 1993 of $424,264 and a payment of $2,900,018 to First Chicago to pay down the
Fund's loan.
<PAGE>
15. 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 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
basis of the Fund's assets and liabilities versus the amounts reported in the
financial statements. Generally, the tax basis 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 basis 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 October 17, 1995, General Nutrition Companies, Inc. ("GNC") effected a
2-for-1 stock split to the shareholders on record as of September 8, 1995. The
stock split resulted in an additional 2,451,882 shares of GNC Common Stock
bringing the total amount held by the Fund to 4,903,765.
On November 1, 1995, pursuant to an Agreement and Plan of Merger, Duro-Test
Corporation effected a merger pursuant to which Duro-Test (the "surviving
company") was aquired by a third party for approximately $33 million. Proceeds
received by the Fund from this merger were $4,614,585, of which $1,758,974 is
held in escrow for potential indemnification costs of the surviving company, its
shareholders and directors from losses resulting from misrepresentations and
breaches of warranty, in accordance with the Agreement and Plan of Merger. The
Fund will realize a loss on the sale of Duro-Test of $30,739,290.
On November 3, 1995, the Individual General Partners approved the third
quarter 1995 cash distribution totalling $590,917, which consists of $371,285 as
return of capital and $446,115 from net investment income from Temporary
Investments partially offset by a net investment loss of $226,483 from Mezzanine
Investments during the third quarter. The total amount distributed to Limited
Partners was $584,987 or $1.20 per Unit. The Managing General Partner received
$5,930, representing its 1% interest in the Fund. This cash distribution was
paid on November 14, 1995.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
ML-LEE ACQUISITION FUND, L.P.
SUPPLEMENTAL SCHEDULE OF REALIZED GAINS (LOSSES)
FOR THE NINE MONTHS ENDED SEPTEMBER 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
For the Three Months Ended September 30, 1995
General Nutrition Companies, Inc.
Jr. convertible Subordinated Note $ 29,447 29,477 102,007 72,530
Common Stock Purchase Warrants 423,454 - 12,185 12,185
Celebrity, Inc.
Common Stock 5,769 75 75 -
Total for the Three Months Ended September 30, 1995 29,552 114,267 84,715
Total for the Nine Months Ended September 30, 1995 $66,271 $179,120 $112,849
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
ML-LEE ACQUISITION FUND, L.P.
SUPPLEMENTAL SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
FOR THE PERIOD ENDED SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS)
(UNAUDITED)
UNREALIZED UNREALIZED
APPRECIATION APPRECIATION TOTAL TOTAL
(DEPRECIATION) (DEPRECIATION) UNREALIZED UNREALIZED
FOR THE THREE FOR THE NINE APPRECIATION APPRECIATION
MONTHS ENDED MONTHS ENDED (DEPRECIATION) AT (DEPRECIATION) AT
INVESTMENT FAIR SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
SECURITY COST VALUE 1995 1995 1994 1995
<S> <C> <C> <C> <C> <C> <C>
PUBLICLY TRADED/UNDERLYING
SECURITY PUBLICLY TRADED:
Celebrity, Inc.
Common Stock* $ 150 $ 81 $ 37 $ 80 $ (149) $ (69)
General Nutrition Companies, Inc.
Common Stock 13,759 111,561 (51,169) (17,652) 115,454 97,802
Common Stock Purchase Warrants(b) - - (12,758) (10,164) 10,164 -
Health o meter
Common Stock* 4,552 6,448 587 1,075 821 1,896
Petco Animal Supplies
Common Stock(a) 15,846 25,525 2,699 12,946 (3,267) 9,679
Playtex Products, Inc.
Common Stock 3,255 12,129 (1,581) 2,109 6,764 8,873
SFX Broadcasting, Inc.
Common Stock 4,880 741 45 260 (4,399) (4,139)
Stanley Furniture Company
Common Stock 33,522 23,411 3,010 (3,344) (6,767) (10,111)
Walter Industries, Inc.
Common Stock 12,000 6,981 (611) (5,019) - (5,019)
TOTAL NET UNREALIZED APPRECIATION
(DEPRECIATION) FROM PUBLICLY TRADED/
UNDERLYING SECURITIES PUBLICLY TRADED $(59,741) $(19,709) $118,621 $ 98,912
* 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 SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS)
(UNAUDITED)
UNREALIZED UNREALIZED
APPRECIATION APPRECIATION TOTAL TOTAL
(DEPRECIATION) (DEPRECIATION) UNREALIZED UNREALIZED
FOR THE THREE FOR THE NINE APPRECIATION APPRECIATION
MONTHS ENDED MONTHS ENDED (DEPRECIATION) AT (DEPRECIATION) AT
INVESTMENT FAIR SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
SECURITY COST VALUE 1995 1995 1994 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 38,663 4,615 (385) (3,585) (30,463) (34,048)
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 APPRECIATION
(DEPRECIATION) FROM NONPUBLIC
SECURITIES (385) (10,453) (116,039) (126,492)
TOTAL NET UNREALIZED (DEPRECIATION)
APPRECIATION ($60,126) ($ 30,162) $ 2,582 $ (27,580)
* Underlying security publicly traded.
(a) Restricted security.
(b) All Convertible Junior Subordinated Notes have been converted to Common Stock.
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity & Capital Resources
As of September 30, 1995, the Fund had a total of $270,361,232 invested in
Mezzanine Investments. These investments were financed by net offering proceeds
and debt financing. This represents a $66,271,040 decrease versus the total
invested in Mezzanine Investments at December 31, 1994 of $336,632,272. The
decrease in investments 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 nine months ended September 30, 1995, received no additional debt securities
in lieu of cash interest payments ("payment-in-kind"). As of September 30, 1995,
the Fund had in its portfolio $53,920,538 of payment-in-kind debt securities and
$6,819,211 of payment-in-kind equity 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 $3,394,004. As of March 29, 1994, the outstanding term loan was paid
in full. As of September 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 utilized $4 million to support a letter of
credit established by the Fund, leaving the remaining credit facility of
$15,894,240.
<PAGE>
The Fund is now in its eighth year of operation. Because a number of
investments have already been repaid or sold and other portfolio companies are
unable to pay current interest to the Fund, cash dividends and interest 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 $15,055,806 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 $441,861, $2,617,805, $2,250,000, $3,281,722 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, $2,900,018 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 September 30, 1995 was reduced to approximately
$3,139,606. The Fund has invested its remaining $3,139,606 reserve in Temporary
Investments. As of November 14, 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
$114,192,216 with an original cost of $29,476,469, resulting in total realized
gain for the Fund in the amount of $84,715,747. The proceeds from the sales
amounted to $231.90 per Unit and were distributed on August 14, 1995. Subsequent
to the sale, all remaining GNC Convertible Subordinated Notes held by the Fund
were converted into Common Stock. As of September 30, 1995, the Fund held a
total of 2,451,883 shares of GNC Common Stock. On October 17, 1995, GNC effected
a 2-for-1 stock split, bringing the total number of GNC common shares held by
the Fund to 4,903,766.
<PAGE>
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 44% of the Fund's total assets (on a fair value
basis) is represented by this issuer at September 30, 1995. 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, Petco, Playtex, SFX Broadcasting Inc., Walter Industries, 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.
<PAGE>
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 nine months ended September 30, 1995, the Fund had a net investment
loss of $340,338, as compared to net investment income of $10,674,143 for the
same period in 1994. The total investment income earned on investments for the
nine months ended September 30, 1995 was $5,348,099 of which $4,096,646 was
earned from Mezzanine Investments and $1,251,453, was earned from Temporary
Investments. For the same period in 1994, total investment income earned on
investments was $16,296,010 of which $15,877,452 was earned from Mezzanine
Investments and $418,558 was earned from Temporary Investments.
The decrease in the nine months 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 in net investment income
was partially due to higher legal and professional fees and higher legal fees
incurred on behalf of the Independent General Partners'. Additionally, sales and
conversions of income-producing mezzanine investments, offset by lower
Investment Advisory Fees and Fund Administration Fees have also contributed to
the decrease in net investment income. 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 September 30, 1995, the Fund had a net investment
loss from operations of $279,263, as compared to net investment income of
$94,875 for the same period in 1994. The total investment income earned on
investments for the three months ended September 30, 1995 was $1,225,766 of
which $704,947 was earned from Mezzanine Investments and $520,819 was earned
from Temporary Investments. For the same period in 1994, total investment income
earned on investments was $1,940,540 of which $1,869,168 was earned from
Mezzanine Investments and $71,372 was earned from Temporary Investments.
The decrease in the three month ending 1995 net investment income versus the
comparative period in 1994 reflects lower interest income, partially offset by
lower legal and professional fees, Investment Advisory Fees and Fund
Administration Fees.
Major expenses for the period ending September 30, 1995 consisted of legal
and professional fees, Investment Advisory Fees, Fund Administration Fees and
loan fees.
<PAGE>
Professional fees paid by the Fund consist primarily of legal fees incurred
in conjunction with litigation. Professional fees for the nine months ended
September 30, 1995 and 1994 were $1,402,131 and $584,194, 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 September 30, 1995
and 1994, professional fees were $165,587 and $178,400, 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 nine months ended September 30, 1995 was $2,197,065 compared with
$2,741,152 for the nine months ended September 30, 1994. For the three months
ended September 30, 1995 and 1994, the Fund paid $690,976 and $909,354,
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
nine months ended September 30, 1995 was $1,259,424 and is 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 nine months ended September
30, 1994, the Fund Administration Fee was $1,383,818. For the three months ended
September 30, 1995 and 1994, the Fund paid $410,498 and $459,633, respectively,
in Fund Administrative Fees.
Beginning October 19, 1995, the calculation of the Fund Administration Fee
changed to the sum of $300,000 per year plus 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. Out-of-pocket Fund
expenses consist of accounting, audits, printing, tax preparation and other
administrative services.
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 nine
months ended September 30, 1995 and 1994, totalled $555,145 and $586,624,
respectively. The decrease of $32,480 for the nine months ended September 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 September 30, 1995 and 1994 totalled $187,661 and $187,939,
respectively.
<PAGE>
Net Assets
The Fund's net assets decreased by $103,939,551 during the nine months ended
September 30, 1995, due to net realized gains of $112,848,806 offset by net
unrealized depreciation of $30,162,528 a net investment loss of $340,338 and
cash distributions of $186,329,148
The Fund's valuation of the Common Stock of Celebrity, General Nutrition
Companies, Health o meter, Petco, Playtex, SFX Broadcasting, Stanley Furniture
and Walter Industries reflect their closing market price at September 29, 1995.
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.
Unrealized Appreciation and Depreciation and Non-Accrual of Investments
For the nine months ended September 30, 1995, the Fund recorded net
unrealized depreciation of $30,162,528 as compared to a net unrealized
depreciation of $65,785,478 for the same period in 1994. On September 30, 1995,
the Fund's cumulative net unrealized depreciation on investments totalled
$27,579,857.
For the three months ended September 30, 1995, the Fund recorded net
unrealized depreciation of $60,126,558 compared to net unrealized appreciation
of $27,805,497 for the same period in 1994.
<PAGE>
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 September 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 44% of the Fund's total
assets (on a fair value basis) are represented by this issuer at September 30,
1995. 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 nine months ended September 30,
1995 was $112,848,806 compared to a net realized gain of $6,802,953 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.
<PAGE>
Cash Distributions
On November 3, 1995, the Individual General Partners approved the third
quarter 1995 cash distribution totalling $590,917, which consists of $371,285
from return of capital and $446,115 from net investment income from Temporary
Investments partially offset by a net investment loss of $226,483 from Mezzanine
Investments during the third quarter. The total amount distributed to Limited
Partners was $584,987 or $1.20 per Unit. The Managing General Partner received
$5,930, representing its 1% interest in the Fund. This cash distribution was
paid on November 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 LLP 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.
<PAGE>
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 warrants to purchase 423,454
shares were sold 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.
Subsequent to the sale, all remaining GNC Concertible Notes held by the Fund
were converted into Common Stock.
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
sold the warrants at a net price per share of $28.775 (net price per share less
the exercise price per warrant). 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, were distributed to those Limited Partners of the Fund
of record as of the dates of such sales in a special Cash Distribution made on
August 14, 1995.
On November 1, 1995, pursuant to an Agreement and Plan of Merger, Duro-Test
Corporation effected a merger pursuant to which Duro-Test (the "surviving
company") was aquired by a third party for approximately $33 million. Proceeds
received by the Fund from this merger were $4,614,585, of which $1,758,974 is
held in escrow for potential indemnification costs of the surviving company, its
shareholders and directors from losses resulting from misrepresentations and
breaches of warranty, in accordance with the Agreement and Plan of Merger. The
Fund will realize a loss on the sale of Duro-Test of $30,739,290.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule for the third quarter
ended September 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
November, 1995.
ML-LEE ACQUISITION FUND, L.P.
By: Mezzanine Investments, L.P.,
Managing General Partner
By: ML Mezzanine Inc.,
its General Partner
Dated: November 14, 1995 /s/ James V. Caruso
James V. Caruso
Executive Vice President and Director
Dated: November 14, 1995 /s/ Audrey Bommer
Audrey Bommer
Vice President and Treasurer
(Chief Financial 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
November, 1995.
ML-LEE ACQUISITION FUND, L.P.
By: Mezzanine Investments, L.P.,
Managing General Partner
By: ML Mezzanine Inc.,
its General Partner
Dated: November 14, 1995
James V. Caruso
Executive Vice President and Director
Dated: November 14, 1995
Audrey Bommer
Vice President and Treasurer
(Chief Financail Officer)
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary information extracted from the third 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 270,361,231
<INVESTMENTS-AT-VALUE> 242,781,394
<RECEIVABLES> 75,014
<ASSETS-OTHER> 1,828,155
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 253,064,619
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 349,174
<TOTAL-LIABILITIES> 349,174
<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> (27,579,857)
<NET-ASSETS> 252,715,444
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,348,099
<OTHER-INCOME> 0
<EXPENSES-NET> 5,689,779
<NET-INVESTMENT-INCOME> (341,681)
<REALIZED-GAINS-CURRENT> 112,848,806
<APPREC-INCREASE-CURRENT> (30,162,528)
<NET-CHANGE-FROM-OPS> 82,344,597
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (778,476)
<DISTRIBUTIONS-OF-GAINS> 126,425,996
<DISTRIBUTIONS-OTHER> 60,683,497
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (103,984,551)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,197,065
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,689,779
<AVERAGE-NET-ASSETS> 304,707,720
<PER-SHARE-NAV-BEGIN> 727.79
<PER-SHARE-NII> (0.69)
<PER-SHARE-GAIN-APPREC> 167.93
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (378.40)
<RETURNS-OF-CAPITAL> 124.48
<PER-SHARE-NAV-END> 516.62
<EXPENSE-RATIO> 0.012
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
