UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
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.
<PAGE>
ML-LEE ACQUISITION FUND, L.P.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Assets, Liabilities and Partners' Capital
as of September 30, 1996 and December 31, 1995
Statements of Operations - For the Three and Nine Months Ended September 30,
1996 and 1995
Statements of Changes in Net Assets - For the Nine Months
Ended September 30, 1996 and 1995
Statements of Cash Flows - For the Nine Months Ended
September 30, 1996 and 1995
Statement of Changes in Partners' Capital - September 30, 1996
Schedule of Portfolio Investments - September 30, 1996
Notes to Financial Statements
Supplemental Schedule of Realized Gains and Losses - Schedule 1
Supplemental Schedule of Unrealized Appreciation and
Depreciation - Schedule 2
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
<S> <C> <C>
September 30, 1996 December 31,
(Unaudited) 1995
--------------- ---------------
ASSETS:
Investments - Notes 2, 8, 9
Portfolio Investments at fair value
Managed Companies (amortized cost $107,441 at September 30,
1996 and $214,099 at December 31, 1995) $ 102,651 $ 229,416
Non-Managed Companies (amortized cost $9,597 at September 30,
1996 and at December 31, 1995) 5,638 6,782
Temporary Investments, at amortized cost (cost $5,030 at
September 30, 1996 and $7,357 at December 31, 1995) 5,038 7,370
Cash (of which $6,049 is restricted at December 31, 1995) - Note 8 - 6,054
Prepaid Loan Fees - Notes 2, 4 1,189 1,661
Prepaid Expenses and Other Receivables 301 116
Receivable for Investments Sold 75 3,377
--------------- ---------------
TOTAL ASSETS $ 114,892 $ 254,776
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities
Legal and Professional Fees Payable $ 286 $ 60
Reimbursable Administrative Expenses Payable 101 171
Independent General Partner Expenses Payable 39 28
Deferred Interest Income - Note 2 - 164
--------------- ---------------
Total Liabilities 426 423
--------------- ---------------
Partners' Capital - Note 2
Managing General Partner - 884
Limited Partners (487,489 Units) 114,466 253,469
--------------- ---------------
Total Partners' Capital 114,466 254,353
--------------- ---------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 114,892 $ 254,776
=============== ===============
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
For the Three Months Ended For the Nine Months Ended
------------------------------- ------------------------------
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
INVESTMENT INCOME - Notes 2, 8, 10:
Interest $ 487 $ 537 $ 1,143 $ 3,503
Discount 72 521 1,316 1,251
Dividend & Other Income - 168 167 594
------------- ------------- ------------- -------------
TOTAL INCOME 559 1,226 2,626 5,348
------------- ------------- ------------- -------------
EXPENSES:
Investment Advisory Fee - Note 5 97 691 1,033 2,197
Fund Administration Fee - Note 6 75 410 224 1,259
Loan Fees - Notes 2, 4 176 188 524 555
Independent General Partners' Fees and Expenses - Note 7 55 49 155 268
Legal and Professional Fees 478 166 1,447 1,403
Reimbursable Administrative Expenses - Note 6 102 - 312 -
Insurance Expense 2 2 6 7
------------- ------------- ------------- -------------
TOTAL EXPENSES 985 1,506 3,701 5,689
------------- ------------- ------------- -------------
NET INVESTMENT LOSS (426) (280) (1,075) (341)
NET REALIZED GAIN (LOSS) ON INVESTMENTS -
NOTE 8 AND SCHEDULE 1 (773) 84,715 60,802 112,849
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
ON INVESTMENTS - NOTE 9 AND SCHEDULE 2
Publicly Traded Securities 15,006 (59,741) (83,350) (19,709)
Nonpublic Securities 879 (385) 62,098 (10,453)
------------- ------------- ------------- -------------
Subtotal 15,885 (60,126) (21,252) (30,162)
------------- ------------- ------------- -------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 14,686 $ 24,309 $ 38,475 $ 82,346
============= ============= ============= =============
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
For the Nine Months Ended
-----------------------------------------
September 30, September 30,
1996 1995
-------------- -------------
FROM OPERATIONS:
Net Investment Loss $ (1,075) $ (341)
Net Realized Gain on Investments 60,802 112,849
Net Change in Unrealized Depreciation on Investments (21,252) (30,162)
-------------- -------------
Net Increase in Net Assets Resulting from Operations 38,475 82,346
Cash Distributions to Partners (178,362) (186,329)
-------------- -------------
Total Decrease (139,887) (103,983)
NET ASSETS:
Beginning of Period 254,353 356,699
-------------- -------------
End of Period $ 114,466 $ 252,716
============== =============
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
For the Nine Months Ended
--------------------------------------
Increase (Decrease) in Cash and Cash Equivalents September 30, September 30,
1996 1995
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest, Dividends and Discount Income $ 2,167 $ 5,826
Investment Advisory Fee (1,033) (2,197)
Fund Administration Fee (224) (1,259)
Legal and Professional Fees (1,123) (1,530)
Loan Fees and Expenses (42) (100)
Independent General Partners' Fees and Expenses (144) (260)
(Purchase) Sale of Temporary Investments, Net 2,327 5,281
Reimbursable Administrative Expenses (381) -
Proceeds from Sale of Portfolio Company Investments 170,761 180,272
------------- -------------
Net Cash Provided by Operating Activities 172,308 186,033
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Distributions to Partners (178,362) (186,329)
------------- -------------
Net Cash Applied to Financing Activities (178,362) (186,329)
------------- -------------
Net Decrease in Cash (6,054) (296)
------------- -------------
Cash at Beginning of Period 6,054 3,442
------------- -------------
Cash at End of Period $ - $ 3,146
============= =============
RECONCILIATION OF NET INVESTMENT INCOME (LOSS) TO NET CASH PROVIDED
BY OPERATING ACTIVITIES
Net Investment Loss $ (1,075) $ (341)
------------- -------------
Adjustments to Reconcile Net Investment Loss
to Net Cash Provided by Operating Activities:
Decrease in Investments 108,984 71,552
Decrease in Receivable for Investments Sold 3,302 1,152
(Increase) Decrease in Accrued Interest,
Dividend and Discount Receivables (460) 477
Decrease in Prepaid Expenses 588 479
Increase (Decrease) in Independent General Partner Fees Payable 11 (8)
Decrease in Reimbursable Administrative Expenses Payable (70) -
Increase (Decrease) in Legal and Professional Fees Payable 226 (127)
Net Realized Gain on Investments 60,802 112,849
------------- -------------
Total Adjustments 173,383 186,374
------------- -------------
Net Cash Provided by Operating Activities $ 172,308 $ 186,033
============= =============
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Managing
General Limited
Partner Partners Total
------------ ------------ -----------
For the Nine Months Ended September 30, 1996
Partners' Capital at January 1, 1996 $ 884 $ 253,469 $ 254,353
Allocation of Net Investment Loss (20) (1,055) (1,075)
Allocation of Net Realized Gain on Investments 1,132 59,670 60,802
Allocation of Net Change in Unrealized Depreciation (212) (21,040) (21,252)
Cash Distributions to Partners (1,784) (176,578) (178,362)
------------ ------------ -----------
Partners' Capital at September 30, 1996 $ - $ 114,466 $ 114,466
============ ============ ===========
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
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
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 (i) 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 (i) 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 22.40
BEEFAMERICA, INC. (a) (e) - Notes 8,9
$14,000 BAOC Acquisition, Inc. Sr. Preferred Stock 10% due 04/01/01 (c)(g) 09/09/88 14,000 5,800
$10,000 BAOC Acquisition, Inc. Jr. Preferred Stock 4% due 04/01/01 (c)(g) 09/09/88 10,000 4,200
$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
$41,997 15.5% Sr.Sub Interim Nt
Purchased 09/9/88 $ 20,000
$80,951 15% Sub Nt
Purchased 09/9/88 $ 38,928
Exchanged 03/29/96 for
Cash Proceeds $ 26,000
10% Sr Pref Stk $ 14,000
4% Jr Pref Stk $ 10,000
Realized Loss $ (8,928)
5661.11 Shares Class A Pref. Stk
Purchased 04/10/91 $ 40,050
Value at restructuring 3/29/96 $ 0
Realized Loss $(40,050)
51,000 Shares Common Stk
Purchased various $ 2,000
Value at restructuring 3/29/96 $ 0
Realized Loss $ (2,000)
Total Net Realized Loss $(50,978) 24,000 10,000 8.82
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
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
5,770 Shares Celebrity, Inc. Common Stock(b)(k) 06/16/92 $ 75 $ 20
(0.2% 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 of Common Stock
Purchased 06/16/92 $ 75
Sold 09/19/95 $ 75
Realized Gain $ 0
5,769 Shares of Common Stock
Purchased 06/16/92 $ 75
Sold 9/21/96 $ 75
Realized Gain $ 0
Total Realized Gain $ 0 75 20 0.02
CHADWICK-MILLER, INC. (a)(e) - Notes 8,9,10
15,406 Warrants CMI Holding Corp., Preferred Stock Purchase Warrants (d) 12/16/88 12,916 1,000
39,487 Warrants CMI Holding Corp., Common Stock Purchase Warrants (d) Various 3,736 -
(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
189,996 Shares Preferred Stock
192,933 Shares Common Stock
100,000 Common Stock Warrants
Purchased Various $16,652
Exchanged July 15, 1996
15,406 Preferred Stock Warrants
39,487 Common Stock Warrants $16,652
Realized Gain $ 0
Total Realized Gain $ 0 16,652 1,000 .88
COLE NATIONAL CORPORATION
567 Warrants Cole National Corporation, Common Stock Purchase Warrants(d) 09/26/90 - -
(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 - - 0.00
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 5,358
610,553 Shares Health o meter Products, Inc., Common Stock (d)(k) 08/17/94 3,282 3,434
(14.7% 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 8,792 7.76
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
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. (a) - Note 9
1,406,204 Shares Playtex Products, Inc., Common Stock(d)(k) 12/28/88 $ 3,255 $12,304
(2.6% 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
$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 12,304 10.86
STANLEY FURNITURE COMPANY, INC. (a)(e) - Note 9,16
2,675,552 Shares Stanley Furniture Co., Inc., Common Stock(d)(h)(k) Various 33,522 45,150
(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 45,150 39.84
TOTAL INVESTMENT IN MANAGED COMPANIES $107,441 $102,651 90.58
</TABLE>
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost (f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
NON-MANAGED COMPANIES
MAGELLAN HEALTH SERVICES, INC.
(formerly CHARTER MEDICAL CORPORATION) - Note 9
40,000 Warrants Charter Medical Corp. Common Stock Purchase Warrants(d) 09/01/88 4 -
$5,000 14% Subordinated Notes
Purchased 09/01/88 $5,000
Sold 12/05/88 $5,000
Realized Gain $ 0 4 - 0.00
SWO HOLDINGS CORPORATION - Note 9
250,000 Shares SWO Holdings Corp., Common Stock(d) 11/24/87 250 -
185,048 Shares Homeland Holding Corp., Common Stock(d) 08/10/90 440 -
$5,000 15.5% Subordinated Notes
Purchased 11/24/87 $5,000
Sold 09/15/88 $5,075
Realized Gain $ 75 690 - 0.00
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 0.02
WALTER INDUSTRIES, INC. - Note 9
435,569 Shares Walter Industries, Inc., Common Stock(b)(k) 01/07/88 8,877 5,608
326 Shares Walter Industries, Inc., Common Stock (b)(k) 09/13/95 - 4
(formerly Hillsborough Holdings Corporation)
$12,000 17% Note
Purchased 1/7/88 $12,000
Exchanged 12/1/95 for
$490,000 cash and
435,569 Common Stock and
$2,527 12.19% Senior Note
Realized Gain $ -
$2,527 12.19% Senior Note
Received 12/1/95 $ 2,527
Sold 12/15/95 $ 2,527
Realized Gain $ -
8,877 5,612 4.95
TOTAL INVESTMENT IN NON-MANAGED COMPANIES $ 9,597 $ 5,638 4.97
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes 11,932 11,932 10.53
Preferred Stock 48,418 22,502 19.86
Common Stock and Warrants 56,688 73,855 65.16
TOTAL MEZZANINE INVESTMENTS $117,038 $108,289 95.55
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
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
$ 999 State Street Repurchase Agreement, 2.75% due 10/01/96 09/30/96 $ 999 $ 999
-------- --------
TOTAL INVESTMENT IN TIME DEPOSITS 999 999 .88
COMMERCIAL PAPER
$ 590 General Electric Credit Corp., 5.42%, due 10/09/96 09/24/96 589 589 .52
$ 3,450 Ford Motor Credit Corp., 5.32% due 10/01/96 09/16/96 3,442 3,450 3.05
-------- -------- ------
TOTAL INVESTMENT IN COMMERCIAL PAPER 4,031 4,039 3.57
-------- -------- ------
TOTAL TEMPORARY INVESTMENTS $ 5,030 $ 5,038 4.45
-------- -------- ------
TOTAL INVESTMENT PORTFOLIO $122,068 $113,327 100.00%
======== ======== ======
(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, 1996, 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 $8 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.
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
ML-LEE ACQUISITION FUND, L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(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.
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. Following
such time periods the Fund will have five additional years 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.
<PAGE>
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of September
30, 1996. 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 last
price available at September 30, 1996, 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 September 30, 1996 and December 31,
1995, the Fund had in its portfolio of investments $1,122,216 of payment-in-kind
debt securities. As of September 30, 1996 and December 31, 1995, the Fund had in
its portfolio of investments $6,485,801 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.
<PAGE>
Interim Financial Statements
The financial information included in this interim report as of September
30, 1996 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, 1996 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 balance of 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 lending group led by the First National Bank of
Chicago ("First Chicago"), which provided the Fund with a maximum credit
facility of $140 million. The Credit Facilities consisted of a $100 million term
loan and a $40 million secured revolving credit line. In October of 1993, the
Fund amended the Credit Facility enabling it to make prepayments of the term
loan at any time and without any corresponding reduction to the revolving line
of credit. The Credit Facility has been further amended to reduce the Credit
Facilities to $7.5 million, all of which is available at September 30, 1996. 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.
<PAGE>
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, 1996 was $478,566.
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,
1996 was $18,725.
An Unused Commitment Fee of 1/2 of 1% per annum of the unused line of
credit. The amount expensed for the nine months ended September 30, 1996 was
$27,056.
For the nine months ended September 30, 1996 and 1995, the Fund incurred
$524,347 and $555,145, respectively, in total loan fees.
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, 1996 and 1995, the Fund paid $1,033,443 and $2,197,065,
respectively, in Investment Advisory Fees to Thomas H. Lee Advisors I. For the
three months ended September 30, 1996 and 1995, the Fund paid $97,146 and
$690,976, respectively, in Investment Advisory Fees.
6. Fund Administration Fees & Expenses
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 received 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. On October 19, 1995, the Fund Administration Fee changed
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 paid quarterly,
in advance. For the nine months ended September 30, 1996 and 1995, the Fund paid
$224,335 and $1,259,424, respectively, in Fund Administration Fees. For the
three months ended September 30, 1996 and 1995, the Fund paid $75,000 and
$410,498, 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. For the period since
October 19, 1995, in accordance with the Partnership Agreement, the Fund
Administrator is being reimbursed by the Fund for 100% of the out-of-pocket
expenses incurred. For the nine months ended September 30, 1996 the Fund
incurred $311,430 in reimbursable out-of-pocket expenses.
<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, 1996 and 1995, the Fund incurred
$154,523 and $267,567, respectively, in Independent General Partners' Fees and
Expenses. For the three months ended September 30, 1996 and 1995, the Fund
incurred $54,502 and $48,913, respectively, in Independent General Partners'
Fees and Expenses.
8. Investment Transactions
On February 7, 1996, the Securities and Exchange Commission declared
effective a Registration Statement filed by GNC in connection with the sale of
17,994,176 shares of GNC Common Stock, including 1,635,834 shares which were
sold pursuant to the underwriters' over-allotment option. Of such shares,
16,358,342 were offered by certain selling shareholders of GNC, including the
Fund and the 1,635,834 subject to the underwriters' over-allotment option were
sold by GNC. The Fund sold its entire remaining investment in GNC for total
proceeds of $101.7 million or $20.7475 per share and realized a gain of $88
million.
On February 22, 1996, the Fund sold its remaining investment in SFX
Broadcasting Inc., consisting of 8,667 shares of common stock purchase warrants,
to Sillerman Communications Management Corporation for net proceeds of $14.50
per share which resulted in a gain of $125,672 to the Fund.
On March 29, 1996, BeefAmerica, Inc. ("BeefAmerica"), entered into an
agreement whereby BeefAmerica sold all of the capital stock of BeefAmerica
Operating Company, Inc.("Opco"), to BAOC Acquisition, Inc. ("BAOC"), a company
owned by the President of Opco and certain other investors. Opco was the sole
operating asset of BeefAmerica. As a result of such sale, the Fund, as chief
creditor of BeefAmerica, received cash proceeds of $26 million, $10 million in
Junior Preferred Stock of BAOC, and $14 million in Senior Preferred Stock of
BAOC, all of which was received on April 1, 1996 in exchange for all
subordinated notes held by the Fund. Although a realized loss of $50.98 million
was recorded, the Fund reversed the unrealized depreciation totaling $90.98
million on the investment that was recorded prior to this transaction. Please
refer to the Supplemental Schedule of Unrealized Appreciation and Depreciation -
Schedule 2.
In connection with the sale of Omega Wire in the first quarter of 1995,
$1,144,086 of proceeds to the Fund from the sale were held in escrow. On April
5, 1996 the Fund received the Omega Escrow Proceeds, plus accrued interest,
totalling $1,205,748
On March 20, 1996, Petco Animal Supplies announced a 3-for-2 stock split
effective April 15, 1996. On April 4, 1996 Petco filed a registration statement
with the Securities and Exchange Commission for an offering of 3,333,333 shares
of Common Stock, which was adjusted to 5 million shares as a result of the stock
split. Of the 5 million post-split shares offered, 2.6 million were offered by
Petco and the remaining shares were offered by certain current stockholders,
including the Fund. The offering was effected on April 30, 1996 and the Fund
sold its entire investment in Petco which consisted of 1,472,622 shares of
Common Stock and received net proceeds from the sale of $40,290,965 or $27.36
per share which were distributed to Limited Partners on June 11, 1996. The Fund
realized a gain of $24,445,187 on the sale.
<PAGE>
In connection with the financial restructuring of Chadwick-Miller, Inc. on
November 23, 1994, and its holding company, CMI Holding Corp., the Fund's $5
million 14.75% Senior Note was redeemed. The net proceeds were $5 million, of
which $3.1 million of such proceeds were classified as restricted cash and held
in escrow. However, an additional financial restructuring of Chadwick Miller was
completed in July 1996 and the Fund received all proceeds held in escrow plus
accrued interest and exchanged all Common and Preferred Stock and Common Stock
Purchase Warrants held for 39,487 Common Stock Purchase Warrants and 15,406
Preferred Stock Purchase Warrants. No gain or loss was recognized on the
transaction.
On November 1, 1995, pursuant to an Agreement and Plan of Merger (the
"Agreement"), Duro-Test Corporation effected a merger pursuant to which
Duro-Test was acquired by a third party for approximately $33 million. Net
proceeds to the Fund were $4.6 million of which $1.7 million was classified as
restricted cash and held in escrow. At June 30, 1996, the Fund reserved
approximately $880,000 of the escrow proceeds to allow for potential
indemnification costs covered in the agreement. On September 30, 1996, the Fund
received escrow proceeds totalling $985,679 resulting in an additional realized
loss of $773,295 on this investment.
At September 30, 1996, the Fund had a total of $117,037,106 invested in
Mezzanine Investments representing $107,440,663 Managed and $9,596,443
Non-Managed portfolio investments. For the nine months ended September 30, 1996,
the proceeds from the sales of investments resulted in net realized gains of
$60,801,746. For additional information, please refer to the Supplemental
Schedule of Realized Gains and Losses - Schedule 1.
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 the risks associated with its
investments in high-yield securities, it has procedures in place to continually
monitor such risks 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, 1996, the Fund recorded net
unrealized depreciation of $21,251,814. As of such date, the Fund's cumulative
net unrealized depreciation on investments totalled $8,748,380. For the three
months ended September 30, 1996, the Fund recorded net unrealized appreciation
of $15,886,767. For additional information, please refer to the Supplemental
Schedule of Unrealized Appreciation and Depreciation - Schedule 2.
10. Non-Accrual of Investments
In accordance with the Fund's Accounting Policy, the following investments
have been on non-accrual status since the date indicated:
- - BeefAmerica on July 1, 1990
- - Chadwick-Miller, Inc. on January 1, 1993.
11. Commitments and Guarantees
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>
12. Litigation
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 remanded the case for trial. On September 11, 1995,
Deloitte & Touche filed a petition for rehearing with the Court of Appeals which
was denied. Thereafter Deloitte & Touche filed a petition for a writ of
Certiorari with South Carolina Supreme Court, which was granted. A decision by
the South Carolina Supreme Court is expected in 1997.
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 alleged 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 and sought monetary damages
in the amount of $7,554,855, together with interest, and other relief. After
trial, the Court found that the MGP Distributions for the fourth quarter of 1989
through the fourth quarter of 1990 were paid in violation of the Partnership
Agreement and as a result, held the General Partners liable for repayment to the
plaintiff class of $6,627,752 of excessive distributions, plus interest. The
Court's decision dismissed Merrill Lynch & Co., Inc. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated, because they were not parties to the Partnership
Agreement. On June 13, 1996, the Court amended its decision, dismissing ML
Mezzanine, Inc., the corporate general partner of the Fund's Managing General
Partner because it was not a party to the Partnership Agreement. On July 25,
1996, judgement was entered against remaining Defendants in the amount of
$10,399,505. The remaining Defendants have filed a Notice of Appeal on October
4, 1996, and expect to have a hearing on their appeal in 1997. The Fund may be
obligated to indemnity 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 Legal and Professional Fees.
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 by the Fund, and alleging that defendants violated the Investment
Company Act of 1940 and Delaware state law. Defendants have moved to dismiss the
second amended complaint, which motion is pending. The plaintiff seeks an
accounting, rescission, rescissory or actual damages and punitive damages.
Plaintiffs have moved to certiify the case as a class action. Defendants have
opposed that motion which is currently pending before the Court. The defendants
in this action believe that the claims in the second amended complaint 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>
On August 2, 1996, an action was commenced against General Nutrition
Companies, Inc. ("GNC"), its officers, directors and certain of its former
shareholders, including the Fund, in the United States District Court for the
Western District of Pennsylvania. Plaintiffs assert that GNC is liable for
violations of Sections 11 and 12(a)(2) of the Securities Act of 1933 and Section
1-501(a) of the Pennsylvania Securities Act, arising out of allegedly false and
misleading statements in the prospectus and registration statement for the
February 7, 1996 public offering of GNC common stock, and for violations of
Section 10 (b) of the Securities Exchange Act of 1934 and negligent
misrepresentation arising out of allegedly false and misleading public
statements during the period from the public offering through May 28, 1996.
Plaintiffs also allege that certain officers, directors and shareholders of GNC,
including the Fund, as well as the underwriters for the public offering, are
liable for certain of such violations of the federal and state securities laws
and/or control person liability in connection therewith, and negligent
misrepresentation. Plaintiffs seek certification of the action as a class action
purportedly on behalf of all persons, other than defendants, who purchased
shares of GNC common stock during the proposed class action period from February
7, 1996 through May 28, 1996. The defendants in this action believe that the
claims against them are without merit. The outcome of this case is not
determinable at this time.
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.
For the three and nine month period ended September 30, 1996, the Fund paid
$233,019 and $381,256, respectively, to the Fund Administrator for reimbursable
out-of-pocket expenses. (Please refer to Note 6 for further information).
For the nine months ending September 30, 1996 and 1995, the Managing
General Partner received cash distributions in the amount of $1,783,628 and
$1,863,310, respectively, representing its 1% interest in the Fund. For the
three months ended September 30, 1996 and 1995, the Managing General Partner
received cash distributions totalling $40,267 and $1,340,575, respectively.
<PAGE>
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, 1996,
the reserve balance was reduced to $3,139,607 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.
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, 1995, the tax basis of the Fund's
assets are less than the amounts reported in the financial statements by
$4,799,251. This difference is primarily attributable to unrealized depreciation
on investments which has not been recognized for tax purposes.
16. Subsequent Events
On November 5, 1996, the Individual General Partners approved the Third
Quarter 1996 cash distribution totalling $709,056, which consists of $1,060,679
as return of capital, $69,390 of net income from temporary investments offset by
a net investment loss of $421,013 from Mezzanine Investments during the third
quarter. The total amount to be distributed to Limited Partners is $701,984 or
$1.44 per Unit. The Managing General Partner will receive $7,072, representing
its 1% interest in the Fund. This cash distribution is expected to be paid on
November 14, 1996.
On October 15, 1996 Stanley Furniture Company, Inc. filed a registration
statement with the Securities and Exchange Commission relating to a proposed
secondary offering of 2.4 million shares of its common stock (plus an additional
358,902 shares subject to the underwriters' over-allotment option,) whereby, the
Fund and certain affiliates of the Thomas H. Lee Company would have sold all of
their shares. The Registration statement was declared effective on November 7,
1996. On November 13, 1996, the offering was amended to an aggregate of
1,150,000 shares, which includes 150,000 shares subject to the underwriters'
over-allotment option. If the underwriters do not exercise the over-allotment
option, Stanley Furniture has agreed to purchase such shares from the selling
shareholders. Pursuant to this offering, the Fund will sell a total of 1,115,256
shares at a gross offering price of $16 per share..
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
ML-LEE ACQUISITION FUND, L.P.
SUPPLEMENTAL SCHEDULE OF REALIZED GAINS AND LOSSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Number Of Investment Realized
SECURITY Shares/Principal Cost Net Proceeds Gain/(Loss)
- --------------------------------------------------- ---------------- ---------- ------------ -----------
FOR THE THREE MONTHS ENDED MARCH 31, 1996
General Nutrition Companies, Inc.
Common Stock 4,903,766 $ 13,759 $ 101,741 $ 87,982
BeefAmerica, Inc.
Subordinated Notes (a) $ 122,948 58,928 26,000 (b) (32,928)
Preferred Stock 5,661.11 40,050 24,000 (16,050)
Common Stock 51,000 2,000 - (2,000)
SFX Broadcasting, Inc.
Common Stock Options 8,667 - 126 126
- --------------------------------------------------- ---------- ------------ -----------
TOTAL FOR THE THREE MONTHS ENDED MARCH 31, 1996 $ 114,737 $ 151,867 $ 37,130
- --------------------------------------------------- ---------- ------------ -----------
FOR THE THREE MONTHS ENDED JUNE 30, 1996
Petco Animal Supplies, Inc.
Common Stock 1,472,622 $ 15,846 $ 40,291 $ 24,445
- --------------------------------------------------- ---------- ------------ -----------
TOTAL FOR THE THREE MONTHS ENDED JUNE 30, 1996 $ 15,846 $ 40,291 $ 24,445
- --------------------------------------------------- ---------- ------------ -----------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
Durotest
Proceeds Held in Escrow 1,759 986 (773)
- --------------------------------------------------- ---------- ------------ -----------
TOTAL FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 1,759 986 (773)
- --------------------------------------------------- ---------- ------------ -----------
TOTAL FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 $ 132,342 $ 193,144 $ 60,802
=================================================== ========== ============ ===========
(a) Includes all BeefAmerica Payment-in-kind Notes.
(b) Net proceeds include cash proceeds of $26 million and $24 million
face amount of Senior and Junior Preferred Stock in BAOC Acquisition, Inc.
(See Note 8 to the Financial Statements)
</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, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Unrealized Unrealized
Appreciation Appreciation
(Depreciation) (Depreciation) Total Unrealized Total Unrealized
for the for the Appreciation/ Appreciation/
Investment Fair 3 Months Ended 9 Months Ended (Depreciation) at (Depreciation) at
SECURITY Cost Value September 30, 1996 September 30, 1996 December 31, 1995 September 30, 1996
- ---------------------------------- --------- -------- ------------------ ------------------ ----------------- ------------------
PUBLICLY TRADED SECURITIES:
Celebrity
Common Stock* $ 75 $ 20 $ 43 $ 29 $ (84) $ (55)
Health o meter
Common Stock* 4,552 8,792 - 3,126 1,114 4,240
Playtex
Common Stock* 3,255 12,304 (879) 1,757 7,292 9,049
Stanley
Common Stock* 33,522 45,150 16,388 23,746 (12,118) 11,628
Walter
Common Stock 8,877 5,611 (546) (110) (3,156) (3,266)
--------- ------------ ---------- ----------
TOTAL UNREALIZED APPRECIATION
(DEPRECIATION) FROM PUBLICLY
TRADED SECURITIES $ 15,006 $ 28,548 $ (6,952) $ 21,596
--------- ------------ ---------- ----------
NONPUBLIC SECURITIES:
BeefAmerica Inc.
Preferred Stock $24,000 $ 10,000 $ - $ (14,000) $ - $ (14,000)
Senior Subordinated Note - - - 10,000 (10,000) -
Subordinated Notes - - - 38,928 (38,928) -
Preferred Stock - - - 40,050 (40,050) -
Common Stock - - - 2,000 (2,000) -
Chadwick-Miller, Inc.
Common Stock* 3,736 - - (1,929) (1,807) (3,736)
Preferred Stock 12,916 1,000 - (11,916) - (11,916)
Magellan Health Service
Common Stock Warrants* 4 - - - (4) (4)
SWO Holdings Corporation
Common Stock* 250 - - (595) 345 (250)
Homeland Holding
Common Stock* 440 - - (440) - (440)
--------- ------------ ---------- -----------
TOTAL UNREALIZED APPRECIATION
(DEPRECIATION) FROM NONPUBLIC SECURITIES $ - $ 62,098 $ (92,444) $ (30,346)
--------- ------------ ---------- -----------
REVERSAL OF UNREALIZED APPRECIATION/
(DEPRECIATION) FOR INVESTMENTS SOLD:
General Nutrition Companies, Inc.
Common Stock - - - (99,028) 99,028 -
Petco
Commom Stock - - - (12,870) 12,870 -
Duro-Test Corporation
Escrow Proceeds - - 879 - - -
--------- ------------ ---------- -----------
TOTAL REVERSAL OF UNREALIZED
APPRECIATION/(DEPRECIATION) $ 879 $ (111,898) $ 111,898 $ -
FOR INVESTMENTS SOLD: --------- ------------ ---------- -----------
TOTAL NET UNREALIZED APPRECIATION
(DEPRECIATION) $ 15,885 $ (21,252) $ 12,502 $ (8,750)
========= ============ ========== ===========
* Restricted securities.
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity & Capital Resources
As of September 30, 1996, the Fund had a total of $117,037,106 invested in
Mezzanine Investments, which includes any payment-in-kind securities received.
These investments were financed by net offering proceeds and debt financing.
This represents a $106,657,440 decrease versus the total invested in Mezzanine
Investments at December 31, 1995 of $223,694,546. 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.
During the nine months ended September 30, 1996, the Fund received no
additional debt securities in lieu of cash interest payments
("payment-in-kind"). As of September 30, 1996 and December 31,1995, the Fund had
in its portfolio $1,122,216 of payment-in-kind debt securities and $6,485,801 of
payment-in-kind equity securities.
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. 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. The Fund's maximum available
credit facility has been reduced to $7.5 million due to loan paydowns from the
sales of Mezzanine Investments and further amendments to the credit agreement.
The Fund is now in its tenth year of operation. Because a number of
investments have already been repaid or sold, 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, net
distributable 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,
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,
1996 was $3,139,607. The Fund has invested its remaining $3,139,607 reserve in
Temporary Investments. As of August 8, 1996, the Independent General Partners
have approved retention of the reserve at its current level.
<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. 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, Playtex, Walter
Industries, Inc., Stanley Furniture and 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
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. 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 nine months ended September 30, 1996 and 1995, the Fund had a net
investment loss of $1,075,273 as compared to a net investment loss of $340,338
for the same period in 1995. The total investment income earned on investments
for the nine months ended September 30, 1996 was $2,626,135 of which $1,309,904
was earned from Mezzanine Investments and $1,316,231 was earned from Temporary
Investments. For the same period in 1995, total investment income earned on
investments was $5,348,099 of which $4,096,646 was earned from Mezzanine
Investments and $1,251,453 was earned from Temporary Investments.
<PAGE>
The increase in the 1996 net investment loss versus the comparative 1995
loss is primarily the result of the decrease in income producing investments
held by the Fund, partially offset by the decrease in expenses.
For the three months ended September 30, 1996 and 1995, the Fund had a net
investment loss of $426,082, as compared to a net investment loss of $279,263
for the same period in 1995. The total investment income earned on investments
for the three months ended September 30, 1996 was $558,942 of which $486,538 was
earned from Mezzanine Investments and $72,404 was earned from Temporary
Investments. For the same period in 1995, total investment income earned on
investments was $1,225,766 of which $704,947 was earned from Mezzanine
Investments and $520,819 was earned from Temporary Investments.
Major expenses for the period ending September 30, 1996 consisted of
Investment Advisory Fees, Legal and Professional Fees, Fund Administration Fees
and Reimbursable Expenses.
Legal and Professional Fees paid by the Fund consist primarily of legal
fees incurred in conjunction with litigation. Legal and Professional Fees for
the nine months ended September 30, 1996 and 1995 were $1,446,985 and
$1,402,131, respectively. For the three months ended September 30, 1996 and
1995, Legal and Professional Fees were $478,484 and $165,587, 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, 1996 was $1,033,443 compared with
$2,197,065 for the nine months ended September 30, 1995. 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 1996 as compared to 1995
Investment Advisory Fees is a direct result of sales of investments, returns of
capital to partners and realized losses on investments. For the three months
ended September 30, 1996 and 1995, Investment Advisory Fees paid to the
Investment Adviser were $97,146 and $690,976, respectively.
The Fund Administration Fees paid to the Fund Administrator for the nine
months ended September 30, 1996 and September 30, 1995 totalled $224,335 and
$1,259,424, respectively. For the nine months ended September 30, 1996, the Fund
Administration Fee 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 three months ended September 30, 1996 and 1995, the Fund Administration
Fee was $75,000 and $410,498, respectively.
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. For the nine months ended September 30, 1996 the Fund
incurred $311,430 in administrative reimbursable out-of-pocket expenses.
Loan fees consist of fees incurred on the unused portion of the Fund's
Credit Facility, loan administration fees, amortization of the loan advisory and
facility fees and various miscellaneous fees. Loan fees for the nine months
ended September 30, 1996 and 1995 totalled $524,347 and $555,145, respectively.
The decrease of $30,798 for the nine months ended September 30, 1996 versus the
same period in 1995 is primarily due to reductions of the Credit Facilities as
described in Note 4 to the Financial Statements. For the three months ended
September 30, 1996 and 1995, Loan fees were $176,564 and $187,661, respectively.
<PAGE>
Net Assets
The Fund's net assets decreased by $139,887,235 during the nine months
ended September 30, 1996, due to net realized gains of $60,801,746 offset by a
net investment loss of $1,075,273, net unrealized depreciation of $21,251,814
and cash distributions of $178,361,894.
The Fund's valuation of the Common Stock of Celebrity, Health o meter,
Playtex, Stanley Furniture and Walter Industries reflect their closing market
price at September 30, 1996.
The Health o meter 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 Health o meter, Playtex and Stanley Furniture securities held by the Fund do
not necessarily represent the prices at which these securities could currently
be sold.
Unrealized Appreciation and Depreciation and Non-Accrual of Investments
For the nine months ended September 30, 1996, the Fund recorded net
unrealized depreciation of $21,251,814 as compared to net unrealized
depreciation of $30,162,528 recorded for the same period in 1995. As of
September 30, 1996, the Fund's cumulative net unrealized depreciation on
investments totalled $8,748,380. The unrealized depreciation recorded during the
nine months ended September 30, 1996 is primarily the result of the reversal of
unrealized appreciation from the sales of GNC and Petco partly offset by the
reversal of unrealized depreciation from the BeefAmerica transaction (described
in Note 8 to the Financial Statements). For the three months ended September 30,
1996 and 1995, the Fund recorded net unrealized appreciation of $15,886,767 as
compared to net unrealized depreciation of $60,126,558 for the same period in
1995.
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.
<PAGE>
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, 1996. Although the Managing General Partner and Investment Adviser are not
aware of any factors not disclosed herein that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued since that time, and the current estimated fair value of these
investments may have changed significantly since that point in time.
For additional information, please refer to the Supplemental Schedule of
Unrealized Appreciation and Depreciation - Schedule 2.
Realized Gains and Losses
The net realized gain on investments for the nine months ended September
30, 1996 was $60,801,746 compared to net realized gains of $112,848,806 for the
same period in 1995. For the three months ended September 30, 1996, the Fund
realized a loss of $773,295 as compared to $84,714,947 in realized gains for the
comparable period in 1995.
For additional information, please refer to the Supplemental Schedule of
Realized Gains and Losses - Schedule 1.
Cash Distributions
On November 5, 1996, the Individual General Partners approved the Third
Quarter 1996 cash distribution totalling $709,056, which consists of $1,060,679
as return of capital, $69,390 of net income from temporary investments offset by
a net investment loss of $421,013 from Mezzanine Investments during the third
quarter. The total amount to be distributed to Limited Partners is $701,984 or
$1.44 per Unit. The Managing General Partner will receive $7,072, representing
its 1% interest in the Fund. This cash distribution is expected to be paid on
November 14, 1996.
On July 29, 1996, the Individual General Partners approved a cash
distribution totalling $4,027,927, which consists of $3,145,727 as return of
capital from the release of escrow proceeds during the third quarter of 1996
related to the sale of Chadwick Miller, $377,115 of net income from temporary
investments and $505,085 of net investment income from Mezzanine Investments
during the second quarter. The total amount distributed to Limited Partners was
$3,987,660 or $8.18 per Unit, of which $6.45 per Unit was distributed to Limited
Partners of record as of July 1, 1996 and $1.73 will be distributed to Limited
Partners of record as of April 1, 1996. The Managing General Partner received
$40,267, representing its 1% interest in the Fund. This cash distribution was
paid on August 14, 1996.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
On August 2, 1996, an action was commenced against General Nutrition
Companies, Inc. ("GNC"), its officers, directors and certain of its former
shareholders, including the Fund, in the United States District Court for the
Western District of Pennsylvania entitled Klein et al. v. General Nutrition
Companies, Inc. et. al., Civil Action No. 96-1455. Plaintiffs assert that GNC is
liable for violations of Sections 11 and 12(a)(2) of the Securities Act of 1933
and Section 1-501(a) of the Pennsylvania Securities Act, arising out of
allegedly false and misleading statements in the prospectus and registration
statement for the February 7, 1996 public offering of GNC common stock, and for
violations of Section 10 (b) of the Securities Exchange Act of 1934 and
negligent misrepresentation arising out of allegedly false and misleading public
statements during the period from the public offering through May 28, 1996.
Plaintiffs also allege that certain officers, directors and shareholders of GNC,
including the Fund, as well as the underwriters for the public offering, are
liable for certain of such violations of the federal and state securities laws
and/or control person liability in connection therewith, and negligent
misrepresentation. Plaintiffs seek certification of the action as a class action
purportedly on behalf of all persons, other than defendants, who purchased
shares of GNC common stock during the proposed class action period from February
7, 1996 through May 28, 1996. The defendants in this action believe that the
claims against them are without merit. The outcome of this case is not
determinable at this time.
Items 2 - 5 are herewith omitted as the response to all items is either none
or not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule for the quarter ended September 30,
1996.
(b) Registrant Filed Forms 8-K with respect to the following: 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, 1996.
ML-LEE ACQUISITION FUND, L.P.
By: Mezzanine Investments, L.P.,
Managing General Partner
By: ML Mezzanine Inc.,
its General Partner
Dated: November 14, 1996 /s/ Audrey Bommer
Audrey Bommer
Vice President and Treasurer
(Chief Financial Officer)
Dated: November 14, 1996 /s/ Roger F. Castoral, Jr.
Roger F. Castoral, Jr.
Vice President and Assistant Treasurer
(Principal 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
November, 1996.
ML-LEE ACQUISITION FUND, L.P.
By: Mezzanine Investments, L.P.,
Managing General Partner
By: ML Mezzanine Inc.,
its General Partner
Dated: November 14, 1996
Audrey Bommer
Vice President and Treasurer
(Chief Financial Officer)
Dated: November 14, 1996
Roger F. Castoral, Jr.
Vice President and Assistant Treasurer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary information extracted from the third quarter
1996 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 122,067,126
<INVESTMENTS-AT-VALUE> 113,327,126
<RECEIVABLES> 374,935
<ASSETS-OTHER> 1,189,807
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 114,891,869
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 425,690
<TOTAL-LIABILITIES> 425,690
<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> (8,748,377)
<NET-ASSETS> 114,466,178
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,462,127
<OTHER-INCOME> 164,008
<EXPENSES-NET> 3,701,408
<NET-INVESTMENT-INCOME> (1,075,273)
<REALIZED-GAINS-CURRENT> 60,801,746
<APPREC-INCREASE-CURRENT> (21,251,814)
<NET-CHANGE-FROM-OPS> 38,474,659
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (870,646)
<DISTRIBUTIONS-OF-GAINS> 121,277,058
<DISTRIBUTIONS-OTHER> 57,955,482
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (139,887,235)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,033,443
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,701,408
<AVERAGE-NET-ASSETS> 184,409,796
<PER-SHARE-NAV-BEGIN> 519.95
<PER-SHARE-NII> (2.16)
<PER-SHARE-GAIN-APPREC> (43.16)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 362.22
<RETURNS-OF-CAPITAL> 117.76
<PER-SHARE-NAV-END> 234.81
<EXPENSE-RATIO> 0.020
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
