UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1995
Commission File Number 0-15669
ML-LEE ACQUISITION FUND, L.P.
(Exact name of registrant as specified in its Governing Instruments)
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 ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in a definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Documents Incorporated by Reference: Pages 15-33, 47-50 of the Prospectus
of the Registrant dated August 12, 1987, filed with the Securities and Exchange
Commission pursuant to Rule 424(b), as supplemented by supplements dated May 12,
1988, May 13, 1988 and May 25, 1988 filed with the Securities and Exchange
Commission pursuant to Rule 497(d), are incorporated by reference in Parts I and
II hereof.
Portions of the definitive Proxy Statement relating to the 1996 Annual
Meeting of Limited Partners of the Registrant are incorporated by reference in
Part III hereof. To be filed with the Commission not later than 120 days after
Registrant's fiscal year end. Aggregate market value of voting securities held
by non-affiliates: Not Applicable.
<PAGE>
Part I
Item l. Business.
Formation
ML-Lee Acquisition Fund, L.P. (the "Fund" or the "Registrant") is a
Delaware limited partnership organized on April 1, 1987. Mezzanine Investments,
L.P. (the "Managing General Partner") and four individuals (the "Individual
General Partners") act as the General Partners of the Fund. The Managing General
Partner is a limited partnership organized under Delaware law by ML Mezzanine
Inc., as sole general partner, and Thomas H. Lee Advisors I (the "Investment
Adviser"), as sole limited partner. ML Mezzanine Inc. is an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc. and an affiliate of Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"). The Investment Adviser is
a Massachusetts business trust controlled by Thomas H. Lee, one of the
Individual General Partners. The other Individual General Partners are Vernon R.
Alden, Joseph L. Bower and Stanley H. Feldberg (the "Independent General
Partners").
The Fund has elected to operate as a business development company under the
Investment Company Act of 1940. Its primary 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
recapitalizations. The Fund considers this activity to constitute a single
industry segment of mezzanine financing investing.
The Fund publicly offered, through MLPF&S, up to 1 million units of limited
partnership interest (the "Units") at $1,000 per Unit. The Units were registered
under the Securities Act of 1933 pursuant to a Registration Statement on Form
N-2 (File No. 33-13394) which was declared effective on August 12, 1987. The
information set forth under the headings "Risk and Other Important Factors",
"Mezzanine Financing" and "Investment Objective and Policies" on pages 15
through 33 and "Conflicts of Interest" on pages 47 through 50 in the prospectus
of the Fund dated August 12, 1987, filed with the Securities and Exchange
Commission pursuant to Rule 424(b) under the Securities Act of 1933, as
supplemented by supplements dated May 12, 1988, May 13, 1988 and May 25, 1988
filed with the Securities and Exchange Commission pursuant to Rule 497(d) (the
"Prospectus"), is incorporated herein by reference.
Mezzanine and Bridge Investments
The Fund commenced operations on October 19, 1987 and completed its
Investment Period on June 15, 1991. As of December 31, 1995, the Fund had
outstanding a total of $223,694,546 invested in Mezzanine Investments,
representing $214,098,103 Managed and $9,596,443 Non-Managed portfolio
investments. As of December 31, 1995, there were no Bridge Investments
outstanding.
REVIEW OF INVESTMENTS IN MANAGED COMPANIES
Celebrity, Inc.
Celebrity, Inc. is a large supplier of high quality artificial floral
products selling primarily to craft store chains and to other retailers and
wholesale florists.
On September 19, 1995, the Fund sold 5,769 shares of Celebrity, Inc. Common
Stock for $75,000. Based upon the closing market price at December 29, 1995, the
Fund has recorded $65,627 of unrealized appreciation on its remaining equity
holding in Celebrity, Inc. for the year ended December 31, 1995. The Fund's
year-end valuation reflects an aggregate unrealized depreciation of $83,829
through 1995.
<PAGE>
Duro-Test Corporation
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. Proceeds
received by the Fund from this merger were $4.6 million of which $1.8 million is
held in escrow in accordance with the Agreement for potential indemnification
costs of the surviving company. The Fund realized a loss on the sale of
Duro-Test of $34 million.
General Nutrition Companies, Inc. ("GNC")
GNC is a nationwide specialty retailer of vitamin and mineral supplements,
personal care, fitness and other health-related products. The Fund's year-end
valuation of GNC reflects unrealized depreciation of $26.6 million for the year
ended December 31, 1995 and an aggregate of $99 million in net unrealized
appreciation through December 31, 1995.
On February 7, 1996 the Securities and Exchange Commission declared
effective a Registration Statement Filed by GNC in connection with the sale of
up to 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
offered by GNC. In connection with the offering the Fund sold its entire
remaining investment in GNC for net proceeds of $101 million or $20.7475 per
share and realized a gain of $87.9 million. These proceeds will be distributed
to Limited Partners on or about March 29, 1996.
In connection the public offering of 20 million shares of GNC Common Stock,
(the "GNC Offering") on July 19, 1995, the Fund sold 6,040,424 shares of common
stock at a net price per share of $16.8875 (all share amounts and prices herein
have been adjusted to reflect a 2-for-1 stock split which occurred on October
17, 1995). The Fund also sold 846,908 common stock purchase warrants at a net
price per warrant of $14.3875 (the net price per share less the $2.50 per
warrant exercise price). Proceeds from the sales totaled over $114 million with
an original cost of $29.5 million and resulted in realized gains of $84.7
million. Following that GNC Offering, the Fund converted all of its remaining
GNC Convertible Subordinated Notes into common stock.
Health o meter Products, Inc. ("Health o meter")
Health o meter is a manufacturer of a comprehensive line of consumer,
medical, office and food service scales and equipment under the Health o meter
and Pelouze brand names, as well as related measuring instruments and personal
care products. Mr. Coffee, a wholly-owned subsidiary of Health o meter and a
manufacturer of automatic drip coffee makers in the United States, offers an
extensive line of automatic drip coffee makers, coffee filters, accessories and
other kitchen counter-top appliances.
As of December 31, 1995, the Fund holds 1,563,053 shares of Health o meter
common stock which represents 15.4% of the outstanding common equity.
Based upon the closing price at December 29, 1995, the Fund recorded
unrealized depreciation of $293,073 on its equity investment in Health o meter
for the year ended December 31, 1995. The Fund's year-end valuation of this
investment reflects an aggregate of approximately $1.1 million in net unrealized
appreciation through December 31, 1995.
Petco Animal Supplies, Inc. ("Petco")
Petco is a specialty retailer of pet food and supplies. Based upon the
closing market price at December 29, 1995, the Fund has recorded unrealized
appreciation of approximately $16.1 million on its equity holding for the year
ended December 31, 1995. The Fund's year end valuation of this investment
reflects an aggregate of approximately $12.9 million in net unrealized
appreciation through December 31, 1995.
On April 27, 1995, the Fund sold 1,009,638 shares of common stock(including
shares sold as a result of the exercise of the underwriters' overallotment
option) to the public in connection with a public offering. The Fund sold 51% of
its equity holdings and received proceeds of $19.9 million which resulted in a
gain of $3.6 million on the sale.
<PAGE>
Playtex Products Inc. ("Playtex")
Playtex manufactures and sells feminine hygiene products, nursery products,
household rubber gloves, toothbrushes, and Jhirmack and LaCoupe haircare
products. Based upon the closing market price at December 29, 1995, the Fund
recorded approximately $528,000 of unrealized depreciation in 1995 on its equity
holdings in Playtex. The Fund's year-end valuation of this investment reflects
an aggregate of approximately $7.3 million of net unrealized appreciation
through December 31, 1995.
Stanley Furniture Company, Inc. ("Stanley Furniture")
Stanley Furniture designs, manufactures and markets furniture and fabric
products. Based upon the closing market price at December 29, 1995, the Fund has
recorded unrealized depreciation of approximately $5.4 million on its equity
holdings in Stanley Furniture for the year ended December 31, 1995. The Fund's
valuation of this investment reflects an aggregate of approximately $12.1
million in net unrealized depreciation through December 31, 1995.
Alliance International Group, Inc. ("Alliance")
Alliance is a producer of light gauge and porcelain enamel on steel for
wiring and building surface and building product applications. As of December
31, 1995, the investment in Alliance is valued at cost.
BeefAmerica, Inc.
BeefAmerica, Inc. is an integrated beef packing company operating slaughter
and fabrication processing facilities in Nebraska. The Fund's year-end valuation
of this investment reflects unrealized depreciation of approximately $91
million. The Fund currently is not accruing interest on this investment. The
Fund had established a total of $8 million in letters of credit for
BeefAmerica's senior lenders. Of the $8 million, $4 million was cancelled in
January 1995 and the remaining $4 million was cancelled on February 28, 1996.
Chadwick-Miller, Inc. ("CMI")
CMI operates full-line retail book stores under the Lauriat's and the Royal
Discount Books names, through its subsidiaries Chadwick-Miller, Inc. and
Lauriat, Inc.
The Fund's year-end valuation of this investment reflects an aggregate of
approximately $1.8 million of unrealized depreciation through December 31, 1995.
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 December 31, 1995, $3.1 million is classified as
restricted cash and remains held in escrow until certain leasing consents are
obtained from store landlords.
Cole National Corporation ("Cole")
Cole was founded in 1944 as a provider of key duplication services. Since
then, Cole has grown as a retailer and as of December 31, 1995, operates three
separate retail subsidiaries: Cole Vision, Things Remembered and Cole Key. The
investment in Cole is valued at cost as of December 31, 1995.
Omega Wire, Inc.
In the first quarter of 1995, the Fund sold its entire investment in Omega
Wire, Inc. and received total proceeds of $41.1 million of which $1.1 million is
being held in escrow at December 31, 1995. The Fund recognized a gain on the
sale of $25.8 million.
REVIEW OF INVESTMENTS IN NON-MANAGED PORTFOLIO COMPANIES
The following is a brief description of companies in the Fund's Non-Managed
Company portfolio:
<PAGE>
Magellan Health Services, Inc. (formerly Charter Medical Corporation)
Magellan Health Services, Inc. is a leading hospital management company in
the United States. The Fund's year-end valuation of this investment reflects
unrealized depreciation of $4,000.
Chiat/Day Advertising
On January 26, 1995, the Fund sold its 14.25% Chiat/Day Acquisition, Inc.
Senior Subordinated Note, plus accrued interest, for $5,390,850, which resulted
in a realized loss of $49,981 to the Fund.
Walter Industries, Inc. (formerly Hillsborough Holdings Corporation)
Walter Industries Inc. offers a diversified line of products and related
services for eight broad business areas including home-building,
mortgage-related financing, and building and industrial products. In March,
1995, the bankruptcy court judge confirmed the reorganization plan for
Hillsborough Holding Corporation, which emerged from bankruptcy as Walter
Industries, Inc. As a result, the Fund exchanged its $12 million principal
amount of Subordinated Debt for $490,000 in cash, 435,569 shares of Common
Stock, and a 12.19% Senior Note in the principal amount of $2,527,000 from
Walter Industries (all of which are considered the "qualified securities").
Subsequent to receiving the qualified securities, the Fund sold the Senior Note
for proceeds of $2.6 million. All cash proceeds received in connection with the
Hillsborough reorganization plan and the sale of the Senior Note have reduced
the cost basis of the remaining investment held by the Fund. Based upon the
closing market price at December 29, 1995, the Fund recorded $2.9 million of net
unrealized appreciation on its equity holdings for the year ended December 31,
1995. This investment reflects an aggregate net unrealized depreciation of $3.2
million through December 31, 1995.
SFX Broadcasting, Inc.
SFX Broadcasting, Inc. was formed to acquire and operate the existing radio
station businesses of Command and Capstar Communication, Inc. Through these
acquisitions, SFX owns several radio stations.
On February 22, 1996, the Fund sold its entire 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 $125,672
or $14.50 per share or a gain of $125,672 to the Fund.
In December, 1995, the Fund sold 26,000 of SFX Broadcasting, Inc. common
stock and received proceeds of $743,875 which resulted in a realized loss of
$4.1 million.
SWO Holdings Corporation
SWO Holdings Corporation is an operator of supermarkets located in
Oklahoma, southern Kansas and Amarillo, Texas.
The Fund's year-end valuation reflects $345,000 of unrealized appreciation
based upon the value of the common stock in the rights offering by SWO Holdings
on August 13, 1990.
TLC Beatrice International Holdings, Inc.
TLC Beatrice International Holdings, Inc. is a U.S.-based international
food business with operations or significant equity interests in several
operating companies. This investment is valued at cost as of December 31, 1995.
Competition
The Fund has completed its investment and reinvestment program and no
longer has to compete for investments. However, a majority of the portfolio
companies are participating in extremely competitive businesses.
<PAGE>
Employees
The Fund has no employees. The Investment Adviser, subject to the
supervision of the Managing General Partner and the Individual General Partners,
manages and controls the Fund's investments. ML Fund Administrators Inc. (the
"Fund Administrator") performs administrative services for the Fund. The Fund
Administrator is a subsidiary of Merrill Lynch & Co., Inc., the parent of
MLPF&S.
Item 2. Properties
The Fund does not own or lease any physical properties.
Item 3. Legal Proceedings
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.
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.
<PAGE>
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 Court found that th MGP Distributions for the fourth
quarter of 1989 through the fourth quarter of 1990 were paid in violation of the
Limite d Partnership Agreement and as a result, held the General Partners and ML
Mezzanine Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated beliable
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, Peirce, Fenner & Smith Incorporated because they were not parties
to the Fund's Limited Partnership Agreemnt. On February 21, 1996, ML Mezzanine
Inc. moved to amend the Court's decision to dimiss it. Defendants are
condidering the impact of the Court's decision on the administration of the
Fund. Defendants time to appeal the decision has not yet expired and defendants
intend to appeal. The Fund filed an 8-K on March 4, 1996 disclosing the Court's
decision.
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. 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.
Item 4. Submission of Matters to a Vote of Security-Holders
No matters were submitted to a vote of the Limited Partners of the Fund
during the fourth quarter of the year ended December 31, 1995.
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
There is no established trading market for the Units. The Partnership
Agreement contains restrictions that are intended to prevent the development of
a public market. Accordingly, accurate information as to the market values of
Units at any given date is not available.
The approximate number of holders of Units as of March 15, 1996 is
37,849. The Managing General Partner also holds a general partner interest in
the Fund.
Effective November 9, 1992, MLPF&S introduced a new limited partnership
secondary service through Merrill Lynch's Limited Partnership Secondary
Transaction Department ("LPSTD"). This service assists Merrill Lynch clients
wishing to buy or sell limited partnership interests, but does not represent an
established trading market for the Units.
Since December 1994, MLPF&S implemented new guidelines for valuing and
reporting limited partnership investments on client account statements. As a
result, the Managing General Partner's estimate is no longer reported on these
statements, although the Managing General Partner may continue to provide its
estimate of net asset value in reports to Unit holders. Pursuant to such MLPF&S
guidelines, estimated values for limited partnership interests originally sold
by MLPF&S (such as Units in the Fund) are provided to MLPF&S by independent
valuation services. Commencing this year, such estimated values will be updated
two times per year. The estimated values will be based on financial and other
information available to the independent services on the prior August 15th for
reporting on December year-end client account statements, and on information
available to the services on March 31st for reporting on June month-end MLPF&S
client account statements. The Managing General Partner's estimate of net asset
value as set forth in the Fund's year-end financial statements reflects the
value of the Fund's underlying assets remaining at fiscal year end, whereas the
value provided by the independent services reflects the estimated value of the
Units themselves based on information that was available on the prior August
15th. MLPF&S clients may contact their Merrill Lynch Financial Consultants or
telephone the number provided to them on their account statements to obtain a
general description of the methodology used by the independent valuation
services to determine their estimated values, provided the independent services
are not market values and Unit holders may not be able to sell their Units or
realize the amounts shown on their MLPF&S statements upon a sale. In addition,
Unit holders may not realize the amount shown on their account statements upon
the liquidation of the Fund over its remaining life. <PAGE>
The Fund distributes Distributable Cash from Investments and
Distributable Capital Proceeds in accordance with the terms of the Partnership
Agreement.
Pursuant to the Partnership Agreement, transfers of Units are
recognized on the first day of the fiscal quarter after which the Managing
General Partner has been duly notified of a transfer pursuant to the Partnership
Agreement. Until a transfer is recognized, the limited partner of record (i.e.
the transferor) will continue to receive all the benefits and burdens of
ownership of Units (including allocations of profit and loss and distributions),
and any transferee will have no rights to distributions on sale proceeds or
distributable cash from investments generated at any time prior to the
recognition of the transfer and assignment.
Accordingly, distributable cash from investments for a quarter and
distributable sale proceeds from sales after transfer or assignment have been
entered into, but before such transfer and assignment is recognized by the
Managing General Partner, will be payable to the transferor and not the
transferee.
Cash Distributions
The Fund has made quarterly distributions, including both Distributable
Cash from Investments and Distributable Capital Proceeds.
As set forth in Item 7. Managemnt's Discussion and Analysis of Financial
Condition and results of Operations - Liquidity and Capital Resources - the
information contained in which is incorporated by reference herein, the Fund's
ability to make future distributions is restricted by the factors described
therin.
<PAGE>
Item 6. Selection Financial Data
For the Years Ended
<TABLE>
<S> <C> <C> <C> <C> <C>
Supplemental Information December 31, 1995 December 31, 1994 December 31, 1993 December 31, 1992 December 31, 1991
Schedule
Selected Financial Data
TOTAL FUND INFORMATION:
Net Investment Income (Loss) $ (1,155,421) $ 9,305,007 $ 125,500 $ 13,891,693 $ 16,246,365
Net Realized Gains (Losses) on
Investments 75,808,138 (37,008,074) 69,148,273 (15,434,983) (26,350,790)
Net Change in Unrealized
Appreciation(Depreciation) on
Investments 9,920,766 9,271,721 91,162,444 16,629,394 (58,552,654)
Cash Distributions to Partners (a) 186,920,065 43,760,745 56,612,752 24,010,059 19,473,314
Net Assets 254,353,413 356,699,995 418,892,086 315,068,621 323,992,576
Cost of Mezzanine Investments 223,694,546 336,632,272 387,857,896 471,148,771 532,663,181
Total Assets 254,776,082 357,777,636 431,723,973 382,150,325 435,135,846
Outstanding Loan Payable -- -- 9,594,004 62,235,603 105,633,246
PER UNIT OF LIMITED PARTNERSHIP
INTEREST:
Investment Income $ 11.68 $ 37.10 $ 21.65 $ 57.75 $ 77.00
Expenses (14.03) (18.20) (21.39) (29.53) (44.00)
------------ ------------ ------------ --------------- --------------
Net Investment Income (Loss) (2.35) 18.90 .26 28.22 33.00
============ ============ ============ =============== ==============
Net Realized Gains (Losses) on
Investments $ 153.95 $ (75.16) $ 140.43 $ (31.35) $ (53.51)
Net Change in Unrealized
Appreciation (Depreciation) 20.15 18.83 185.13 33.77 (118.91)
Cash Distributions (b) (a) 379.60 88.87 114.97 48.76 38.36
Net Asset Value 519.95 727.79 854.10 643.25 661.37
</TABLE>
(a) Includes $60,444,234 or $123.99 per Limited Partnership Unit return of
capital from the sales of GNC, Omega Wire, Petco, Chiat Day and
Celebrity, Inc.
(b) See the Cash Distributions Schedule on pages 15 and 16 for further
information including returns of capital for years prior to 1995.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity & Capital Resources
As of December 31, 1995, the Fund had a total of $223,694,546
(including $1,122,216 of payment-in-kind notes and $6,485,801 of payment-in-kind
equity which excludes Subordinated Notes placed on non-accrual status) invested
in Mezzanine Investments, representing $214,098,103 Managed and $9,596,443
Non-Managed portfolio investments. These investments were financed by net
offering proceeds and debt financing. This represents a $112,937,726 decrease
versus the total at December 31, 1994 of $336,632,272. The decrease in gross
assets is due primarily to sales and redemptions partially offset by the
recognition of prior years' payment-in-kind income relating to Petco Animal
Supplies and the follow-on investments in Health o meter. 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.
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 provides 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. As a result of
paydowns of the term loan and mandatory loan paydowns due to sales of
securities, all of which took place in the first quarter of 1994, the Fund's
outstanding term loan was paid in full as of March 29, 1994. On December 1,
1995, the Fund's Credit Facility was further amended to reduce the commitments
thereunder to $10 million. The Fund had utilized $4 million to support a letter
of credit established for Beef America, Inc., however, the letter of credit was
cancelled February 28, 1996. As of March 15, 1996, the Fund had the entire $10
million credit facility available.
The Fund is now in its ninth year of operation. Because many of the Fund's
debt investments were previously sold or redeemed, and two of the remaining
portfolio companies are unable to pay current interest to the Fund, interest and
other income expected to be received by the Fund may not be sufficient to cover
the Fund's expenses. As a result, 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 payment of obligations of the Fund, or for appropriate
reserves. To fund the anticipated cash flow shortfall in the near future and to
maintain adequate reserves for possible follow-on investments and expenses, the
Fund reserved $15 million of the proceeds received from the Playtex notes sale
in February, 1993. A portion of the reserve was used to make follow-on
investments of $444,861, $2.6 million, $2.25 million, $3.28 million and $529 in
American Health Companies, Duro-Test Corp., Chadwick-Miller, Health o meter and
Petco, respectively, along with a distribution to partners in the second quarter
of 1993 of $424,264. In addition, $2.9 million was utilized from the reserve to
paydown a portion of the First Chicago loan on January 6, 1994. The Fund's
reserve balance as of December 31, 1995 was reduced to approximately $3.1
million which has been invested in temporary investments. As of March 6, 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, Petco, Playtex,
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 Inc., Stanley Furniture and, in part, Health
o meter) were not registered in these offerings, the Fund has the ability under
Rule 144 under the Securities Act of 1933 to sell publicly traded equity
securities held by it for at least two years on the open market, subject to the
volume restrictions set forth in that rule. The Rule 144 volume restrictions
generally are not applicable to equity securities of non-affiliated companies
held by the 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 year ended December 31, 1995, the Fund had net investment loss from
operations of $1,155,421 as compared to a net investment income of $9,305,007
and $125,500 for the same periods in 1994 and 1993, respectively. The total
investment income earned on investments for the year ended December 31, 1995 was
$5,751,535 of which $4,412,491 was earned from Mezzanine Investments and
$1,339,044 was earned from Temporary Investments. For the same period in 1994,
total investment income earned on investments was $18,265,190 of which
$17,764,759 was earned from Mezzanine Investments and $500,431 was earned from
Temporary Investments.
<PAGE>
For the same period in 1993, total investment income earned on investments
was $10,658,679 of which $9,824,113 was earned from Mezzanine Investments and
$834,566 was earned from Temporary Investments.
The decrease in net investment income for the year ended December 31, 1995
versus the comparative period in 1994 reflects the decrease in income producing
securities held by the Fund in 1995, primarily due to the sale of the Omega Wire
subordinated debt and the conversion of all GNC subordinated notes to common
stock. However, this decrease was offset by lower Investment Advisory Fees, Fund
Administration Fees and Legal and Professional fees recorded in 1995.
The increase in net investment income for the year ended December 31, 1994
versus the comparative period in 1993 reflected the recognition of previously
unrecorded interest, dividend and discount income related to Petco (a security
placed on non-accrual status on January 1, 1991) recorded in the first quarter
of 1994. In addition, the increase in net investment income was partially due to
lower interest expense, Investment Advisory Fees, Fund Administration Fees and
Loan fees recorded in 1994.
Major expenses for the period consisted of the Investment Advisory Fee,
Legal and Professional fees and Fund Administration Fees and Expenses.
The Investment Adviser and Fund Administrator receive their compensation on
a quarterly basis. The total Investment Advisory Fee paid to the Investment
Adviser for the year ended December 31, 1995 was $2,770,934, compared with
$3,652,538 for the year ended December 31, 1994 and $4,059,408 for the year
ended December 31, 1993. 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 $1.2 million. This
decrease in 1995 as compared to 1994 and 1993 Investment Advisory Fees is a
direct result of the reductions in outstanding borrowings, sales of investments,
returns of capital to partners and realized losses on investments.
Legal and Professional fees paid by the Fund consist primarily of legal
fees incurred in conjunction with the Fund's litigation. For the years ended
December 31, 1995, 1994 and 1993, legal and professional fees were $1,584,381,
$2,338,418 and $1,679,890, respectively. This decrease is primarily attributable
to the decrease in litigation expenses incurred by the Fund to support its
claims and defending allegations against various parties as well as legal fees
required to be advanced by the Fund in connection with the litigation described
in Note 12 to the Financial Statements.
Total Fund Administration fees paid to the Fund Administrator for the year
ended December 31, 1995 were $1,330,212. For the period ending October 19, 1995,
Fund Administration Fees were calculated at an annual rate of 0.45% of net
offering proceeds reduced by one-half of the sum of returns of capital to
partners and realized losses on investments, with a minimum annual payment of
$400,000. Beginning October 19, 1995, the Fund Administration Fee changed to an
annual fee of $300,000, plus 100% of actual out-of-pocket expenses incurred by
the Fund Administrator, as noted below. For the years ended December 31, 1994
and 1993, the Fund Administration Fee was $1,843,907 and $1,874,739,
respectively. This decrease in Fund Administration Fees reflects adjustments
relating to a return of capital and realized losses recorded in 1995 and the
change in the Fund Administration fee to $300,000 per annum.
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. Total
out-of-pocket expenses incurred by the Fund were $171,150.
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
years ended December 31, 1995, 1994 and 1993 totaled $738,029, $772,593, and
$922,876 respectively. This decrease in 1995 as compared to the 1994 and 1993
loan fees is the result of reductions in the Credit Facility.
<PAGE>
Net Assets
The Fund's net assets decreased by $102,346,582 during the year ended
December 31, 1995 primarily due to net investment loss of $1,155,421 and cash
distributions to partners of $186,920,065 ($61,054,782 of cash distributions
distributed in 1995 was return of capital from the sales of portfolio
investments) offset by additional net unrealized appreciation of $9,920,766, and
net realized gains of $75,808,138.
The Fund's net assets decreased by $62,192,091 during the year ended
December 31, 1994 primarily due to cash distributions to partners of $43,760,745
($4,046,615 of the cash distributions paid were return of capital from the sales
of Mezzanine Investments) and net realized losses of $37,008,074 partially
offset by additional net unrealized appreciation of $9,271,721 and net
investment income of $9,305,007.
The Fund's net assets increased by $103,823,465 during the year ended
December 31, 1993 primarily due to additional net unrealized appreciation of
$91,162,444, net realized gain of $69,148,273 and net investment income of
$125,500 partially offset by cash distributions to partners of $56,612,752
($18,224,991 of the of cash distributions distributed in 1993 was return of
capital from the sales of portfolio investments).
Unrealized Appreciation and Depreciation on Investments
For the year ended December 31, 1995, the Fund recorded net unrealized
appreciation of $9.9 million of which $11.9 million was related to net
unrealized depreciation in market value of publicly traded/underlying publicly
traded securities held by the Fund at December 31, 1995. The Fund's cumulative
net unrealized appreciation on investments at December 31, 1995 totaled $12.5
million. This compares to a net unrealized appreciation of $9.3 million of which
$39.2 million was related to net unrealized appreciation in market value of
publicly traded/underlying publicly traded securities for the same period in
1994. For the year ended December 31, 1993, the Fund recorded net unrealized
appreciation of $91.1 million of which $113.6 million was related to net
appreciation in market value of publicly traded securities.
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 December
31, 1995. Although the Managing General Partner and Investment Adviser are not
aware of any factors not disclosed herein that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued since that time; and the current estimated fair value of these
investments may have changed significantly since that point in time.
The Fund's valuation of the common stock of Celebrity, Inc., GNC, Health o
meter, Petco, Playtex, Stanley Furniture and Walter Industries reflect their
closing market price at December 31, 1995. <PAGE>
The GNC Inc., Health o meter, Petco, Playtex and Stanley Furniture
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's 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 GNC, 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. This has led to
higher values in those equity investments, primarily GNC. Subsequent to December
31, 1995, the Fund sold its remaining investment in GNC and all unrealized
appreciation on the GNC investment was reversed. See Note 16 to the Financial
Statements for further information.
For additional information, please refer to the Supplemental Schedule
of Unrealized Appreciation and Depreciation (Schedule 2 on pages 47-48).
Realized Gains and Losses
Net realized gains on investments for the year ended December 31, 1995
was $75,808,174 compared to a net realized loss of $37,008,074 in 1994 and a net
realized gain of $69,148,273 for 1993.
For additional information, please refer to the Supplemental Schedule
of Realized Gains and Losses (Schedule 1 - page 46).
Cash Distributions
On February 8, 1996, the Individual General Partners approved the fourth
quarter 1995 cash distribution totalling $5,391,914, which consists of
$6,722,994 return of capital from the sale of Mezzanine Investments, and $76,626
of net investment income from Temporary Investments, offset by a net investment
loss of $1,407,706 for Mezzanine Investments. The total amount distributed to
Limited Partners was representing $5,338,005, or $10.95 per Unit. The Managing
General Partner received $53,909 in proportion toits 1% interest in the Fund.
The distributions were made on February 14, 1996.
<PAGE>
<TABLE>
<CAPTION>
Cash Distributions
The following table represents distributions approved by the Individual
General Partners of ML-Lee Acquisition Fund, L.P. since inception (October 19,
1987):
<S> <C> <C> <C> <C> <C>
Total Managing
Distributed Limited Partners General Incentive
Cash* Amount Per Unit** Partner Fee***
Fourth Quarter 1987 $ 2,577,304 $ 2,551,531 $ 6.14 $ 25,773 $ -
First Quarter 1988 6,328,879 6,266,217 14.80 62,662 -
Second Quarter 1988 7,495,858 7,420,899 16.50 74,959 -
Third Quarter 1988 14,228,737 14,086,450 29.45 142,287 -
Fourth Quarter 1988 13,788,416 13,074,454 26.82 137,884 576,078
First Quarter 1989 16,291,215 15,034,161 30.84 162,929 1,094,125
Second Quarter 1989 15,374,977 13,771,564 28.25 153,740 1,449,673
Third Quarter 1989 36,416,661 28,292,735 58.64 364,164 7,759,762
Fourth Quarter 1989 19,252,214 13,284,076 27.25 192,558 5,775,580
First Quarter 1990 10,119,121 7,180,713 14.73 101,197 2,837,211
Second Quarter 1990 5,270,048 3,636,668 7.46 52,690 1,580,690
Third Quarter 1990 12,467,001 9,783,904 20.07 124,649 2,558,448
Fourth Quarter 1990 7,138,368 6,488,478 13.31 71,384 578,506
First Quarter 1991 1,496,932 1,481,967 3.04 14,965 -
Second Quarter 1991 5,298,352 5,245,382 10.76 52,970 -
Third Quarter 1991 5,539,662 5,484,251 11.25 55,411 -
Fourth Quarter 1991 6,829,769 6,761,472 13.87 68,297 -
First Quarter 1992 9,611,889 9,515,786 19.52 96,103 -
Second Quarter 1992 5,997,616 5,937,616 12.18 (a) 60,000 -
Third Quarter 1992 1,570,785 1,555,090 3.19 15,695 -
Fourth Quarter 1992 1,989,335 1,969,456 4.04 19,879 -
First Quarter 1993 18,170,064 17,988,344 36.90 (b) 181,720 -
Second Quarter 1993 5,086,627 5,035,761 10.33 (c) 50,866 -
Third Quarter 1993 31,366,725 31,053,049 63.70 313,676 -
Fourth Quarter 1993 29,052,375 28,761,851 59.00 290,524 -
First Quarter 1994 8,001,724 7,921,696 16.25 (d) 80,028 -
Second Quarter 1994 1,083,292 1,072,476 2.20 (e) 10,816 -
Third Quarter 1994 5,623,355 5,567,124 11.42 (f) 56,231 -
Fourth Quarter 1994 7,602,855 7,526,830 15.44 (g) 76,025 -
First Quarter 1995 44,671,712 44,225,002 90.72 (h) 446,710 -
Second Quarter 1995 19,863,955 19,665,306 40.34 (i) 198,649 -
Special GNC
Distribution on
August 14, 1995 114,190,626 113,048,699 231.90 (j) 1,141,927 -
Third Quarter 1995 590,917 584,987 1.20 5,930 -
Fourth Quarter 1995 5,391,914 5,338,005 10.95 (k) 53,909
------------- ------------- --------- ------------ -----------
Totals $ 495,779,280 $ 466,612,000 $ 962.46 $ 4,957,207 $24,210,073
============= ============= ========= ============ ===========
</TABLE>
<PAGE>
* Distributions are paid no later than 45 days after the end of each
quarter.
** For periods prior to Third Quarter 1988, the amount shown is for the 1st
closing participants only. Subsequent closings' amounts as to such periods
will vary.
*** Incentive distribution payable to the Investment Adviser for exceeding the
cumulative priority return of 10% on Mezzanine Investments to Limited
Partners.
(a) Includes $10.37 per unit return of capital from the sale of Mohawk and
Health o meter Notes.
(b) Includes $36.15 per unit return of capital from the sale of Playtex
Notes.
(c) Includes $0.86 per unit return of capital from the sale of Playtex Notes.
(d) Includes $6.52 per unit return of capital from the sale of GNC Common
Stock and Petco Notes.
(e) Includes $1.22 per unit return of capital from the sale of International
Business Interiors Notes and Warrants.
(f) Includes $0.48 per unit return of capital from the sales of Celebrity
Inc. Common Stock, Stone Savannah River Pulp & Paper Corp. Common Stock
and Healthtrust, Inc. Common Stock Purchase Warrants. The Healthtrust
and Stone Savannah sales occurred in the Fourth Quarter.
(g) Includes $5.04 per unit return of capital from the sales of GNC
Common Stock, Filene's Basement Common Stock, Chadwick Miller
Notes, International Business Interiors Common Stock and Miramar Marine
(h) Includes $41.20 per unit return of capital from sales of Omega Wire
Subordinated Notes and Common Stock, Chiat Day Notes and Hillsborough
Holdings Common Stock.
(i) Includes $17.13 per unit return of capital from the sale of Petco Common
Stock.
(j) Includes $59.60 per unit return of capital from the sale of GNC Common
Stock.
(k) Includes $13.65 per unit return of capital from the sale of Duro-Test
Equity, Walter Industries Notes and SFX Broadcasting Common Stock.
<PAGE>
Item 8. Financial Statements and Supplementary Data
ML-LEE ACQUISITION FUND, L.P.
TABLE OF CONTENTS
Report of Independent Accountants
Statements of Assets, Liabilities and Partners' Capital As of December 31, 1995
and December 31, 1994
Statements of Operations
For the Years Ended December 31, 1995, December 31, 1994 and
December 31, 1993
Statements of Changes in Net Assets
For the Years Ended December 31, 1995, December 31, 1994 and
December 31, 1993
Statements of Cash Flows
For the Years Ended December 31, 1995, December 31, 1994 and
December 31, 1993
Statements of Changes in Partners' Capital
For the Years Ended December 31, 1995, December 31, 1994 and
December 31, 1993
Schedule of Portfolio Investments - December 31, 1995
Notes to Financial Statements
Supplementary Schedule of Realized Gains and Losses (Schedule 1)
Supplementary Schedule of Unrealized Appreciation and Depreciation (Schedule 2)
<PAGE>
Report of Independent Accountants
March 15, 1996
To the General and Limited Partners of
ML-Lee Acquisition Fund L.P.
In our opinion, the accompanying statements of assets, liabilities and
partners' capital, including the schedule of portfolio investments, and the
related statements of operations, of changes in net assets, of cash flows, and
of changes in partners' capital present fairly, in all material respects, the
financial position of ML-Lee Acquisition Fund L.P. (the "Fund") at December 31,
1995 and 1994, and the results of its operations, the changes in its net assets,
its cash flows, and the changes in its partners' capital for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1995 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations were not received, provide a reasonable
basis for the opinion expressed above.
The financial statements include securities, valued at $230,410,487 at
December 31, 1995 (90.6% of net assets), whose values have been estimated by the
Managing General Partner and the Investment Adviser (with the approval of the
Independent General Partners) in the absence of readily ascertainable market
values, as further described in Note 2. We have reviewed the procedures used by
the Managing General Partner and the Investment Adviser in arriving at their
estimate of value and have inspected underlying documentation, and, in the
circumstances, we believe the procedures are reasonable and the documentation
appropriate. However, those estimated values may differ significantly from the
values that would have been used had a ready market for the securities existed,
and the differences could be material to the financial statements.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule of realized gains and
losses (Schedule 1) and the schedule of unrealized appreciation and depreciation
(Schedule 2) are presented for the purpose of additional analysis and are not a
required part of the basic financial statements. These schedules are the
responsibility of the Fund's management. Such schedules have been subjected to
the auditing procedures applied in our audits of the basic financial statements
and, in our opinion, are fairly stated in all material respects when considered
in relation to the basic financial statements taken as a whole.
PRICE WATERHOUSE LLP
New York, New York
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
<S> <C> <C>
December 31, 1995 December 31, 1994
ASSETS:
Investments - Notes 2,8,9
Portfolio Investments at fair value
Managed Companies (cost $214,099 at
December 31, 1995 and $313,930 at
December 31, 1994) $ 229,416 $ 326,672
Non-Managed Companies (cost $9,597 at
December 31, 1995 and $22,703 at
December 31, 1994) 6,782 12,542
Temporary Investments, at amortized cost
(cost $7,357 at December 31, 1995 and
$10,498 at December 31, 1994) 7,370 10,511
Cash (of which $6,049 is restricted at
December 31, 1995, and $3,442 is
restricted at December 31, 1994) 6,054 3,442
Accrued Interest Receivable - Note 2 -- 1,077
Prepaid Loan Fees - Notes 2,4 1,661 2,299
Prepaid Expenses and Other Receivables 116 7
Receivable for Investments Sold 3,377 1,227
------------ -------------
TOTAL ASSETS $ 254,776 $ 357,777
============ =============
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities
Legal and Professional Fees Payable $ 60 $ 284
Reimbursable Administrative Expenses Payable 171 --
Independent General Partner Expenses Payable 28 21
Deferred Interest Income - Note 2 164 773
------------ -------------
Total Liabilities 423 1,078
------------ -------------
Partners' Capital - Note 2
Managing General Partner 884 1,908
Limited Partners (487,489 Units) 253,469 354,791
------------ -------------
Total Partners' Capital 254,353 356,699
------------ -------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 254,776 $ 357,777
============ =============
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
For the Years Ended December 31,
<S> <C> <C> <C>
1995 1994 1993
-------------- ------------- -----------
INVESTMENT INCOME - NOTES 2,8,10:
Interest $ 3,804 $ 14,683 $ 8,640
Discount 1,339 498 830
Dividend and Other Income 609 3,084 1,189
----------- ----------- ---------
TOTAL INCOME 5,752 18,265 10,659
----------- ----------- ---------
EXPENSES:
Investment Advisory Fee - Note 5 2,771 3,652 4,059
Fund Administration Fee - Note 6 1,330 1,844 1,875
Legal and Professional Fees 1,584 2,338 1,680
Loan Fees - Notes 2,4 738 773 923
Independent General Partners' Fees
and Expenses - Note 7 304 285 242
Reimbursable Administrative Expenses
- Note 6 171 -- --
Insurance Expense 9 10 10
Interest Expense - Note 4 -- 58 1,711
Valuation Expenses -- -- 33
----------- ----------- ---------
TOTAL EXPENSES 6,907 8,960 10,533
----------- ----------- ---------
NET INVESTMENT (LOSS) INCOME (1,155) 9,305 126
NET REALIZED GAIN (LOSS) ON
INVESTMENTS - Note 8 and Schedule 1 75,808 (37,008) 69,148
NET CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION) ON
INVESTMENTS- Note 9 and Schedule 2
Publicly Traded Securities (7,571) (39,245) 113,646
Nonpublic Securities 17,492 48,516 (22,484)
----------- ----------- ---------
Subtotal 9,921 9,271 91,162
NET INCREASE (DECREASE) IN NET ASSETS ----------- ----------- ---------
RESULTING FROM OPERATIONS $ 84,574 $ (18,432) $ 160,436
=========== =========== =========
</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)
For the Years Ended December 31,
<S> <C> <C> <C>
1995 1994 1993
--------- --------- ---------
FROM OPERATIONS:
Net Investment Income (Loss) $ (1,155) $ 9,305 $ 126
Net Realized Gain (Loss) on
Investments 75,808 (37,008) 69,148
Net Change in Unrealized Appreciation
(Depreciation) from Investments 9,921 9,271 91,162
--------- --------- ---------
Net Increase (Decrease) in Net Assets
Resulting from Operations 84,574 (18,432) 160,436
Cash Distributions to Partners (186,920) (43,761) (56,613)
--------- --------- ---------
Total Increase (Decrease) (102,346) (62,193) 103,823
NET ASSETS:
Beginning of Period 356,699 418,892 315,069
--------- --------- ---------
End of Year $ 254,353 $ 356,699 $ 418,892
========= ========= =========
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
For the Years Ended December 31,
<S> <C> <C> <C>
1995 1994 1993
--------- --------- ---------
Increase in Cash and Cash Equivalents
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest, Dividends and Discount $ 6,219 $ 11,098 $ 11,393
Income
Investment Advisory Fee (2,771) (3,652) (4,059)
Interest Expense -- (58) (1,711)
Fund Administration Fees (1,330) (1,844) (1,875)
Legal and Professional Fees (1,911) (2,181) (1,818)
Loan Fees and Expenses (116) (73) (285)
Independent General Partners' Fees (296) (294) (224)
and Expenses
Sale of Temporary Investments, Net 3,141 20,643 (30,698)
Proceeds from Sale of Portfolio 186,596 39,502 143,482
--------- -------- ---------
Company Investments
Purchase of Portfolio Company -- (6,344) (4,950)
Investments
--------- --------- ---------
Net Cash Provided by Operating 189,532 56,797 109,255
Activities --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of Borrowings, Net -- (9,594) (52,642)
Cash Distributions to Partners (186,920) (43,761) (56,613)
--------- --------- ---------
Net Cash Applied to Financing (186,920) (53,355) (109,255)
Activities
--------- --------- ---------
Net Increase in Cash 2,612 3,442 --
Cash at Beginning of Period 3,442 -- --
--------- --------- ---------
Cash at End of Period $ 6,054 $ 3,442 $ --
========= ========= =========
RECONCILIATION OF NET INVESTMENT INCOME (LOSS)
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Investment Income(Loss) $ (1,155) $ 9,305 $ 126
--------- --------- ---------
Adjustments to Reconcile Net Investment
Income (Loss) to Net Cash Provided by
Operating Activities:
Decrease in Investments 116,079 79,085 53,694
(Increase) Decrease in Receivable for
Investments Sold (2,150) 13,781 (15,008)
(Increase) Decrease in Accrued
Interest 466 (7,167) 735
and Discount Receivables
Decrease in Prepaid Expenses 530 684 640
Decrease in Option Payable -- (2,057) --
Increase in Independent General
Partner Fees Payable 7 3 6
Increase in Reimbursable
Administrative Expenses Payable 171 -- --
Increase (Decrease) in Legal and
Professional Fees Payable (224) 171 (86)
Net Realized Gain (Loss) on 75,808 (37,008) 69,148
Investments
--------- --------- ---------
Total Adjustments 190,687 47,492 109,129
--------- --------- ---------
Net Cash Provided by Operating $ 189,532 $ 56,797 $ 109,255
Activities ========= ========= =========
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Managing Limited
General Partner Partners Total
---------------- -------------- ------------
For the Years Ended December 31, 1995,
December 31, 1994, and December 31, 1993
Partners' Capital at December 31, 1992 $ 1,492 $ 313,577 $ 315,069
Allocation of Net Investment Income 2 124 126
Allocation of Net Realized Gain on 691 68,457 69,148
Investments
Allocation of Net Change in 911 90,251 91,162
Unrealized Appreciation
Cash Distributions to Partners (566) (56,047) (56,613)
---------- ---------- ----------
Partners' Capital at December 31, 1993 $ 2,530 $ 416,362 $ 418,892
Allocation of Net Investment Income 93 9,212 9,305
Allocation of Net Realized Loss on (370) (36,638) (37,008)
Investments
Allocation of Net Change in 93 9,178 9,271
Unrealized Appreciation
Cash Distributions to Partners (438) (43,323) (43,761)
---------- ---------- ----------
Partners' Capital at December 31, 1994 $ 1,908 $ 354,791 $ 356,699
Allocation of Net Investment Loss (12) (1,143) (1,155)
Allocation of Net Realized Gain on 758 75,050 75,808
Investments
Allocation of Net Change in 99 9,822 9,921
Unrealized Appreciation
Cash Distributions to Partners (1,869) (185,051) (186,920)
---------- ---------- ----------
Partners' Capital at December 31, 1995 $ 884 $ 253,469 $ 254,353
========== ========== ==========
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 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
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) (l)
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 10.42
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 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 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)(l)
$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 4.10
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost (f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
CELEBRITY, INC. - Note 9
11,539 Shares Celebrity, Inc. Common Stock(b)(k) 06/16/92 $ 150 $ 66
(0.2% of fully diluted common equity)(l)
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 66 0.03
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 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)(g) 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)(l)
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 6.09
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 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
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 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
107,118 Shares General Nutrition Cos., Inc. Common Stock(d)(k)(m) 08/21/89 $ 523 $ 2,464
2,049,180 Shares General Nutrition Cos.,Inc. Common Stock (d)(k)(m) 11/21/91 10,000 47,131
2,747,468 Shares General Nutrition Cos., Inc., Common Stock (d)(k) Various 3,236 63,192
(5.3% of fully diluted common equity)(l)
938,612 Common Stock
Purchased various $ 1,900
Sold Shares various 1993 $17,154
Realized Gain $15,254
866,842 Common Stock
Purchased various $ 1,626
Sold Shares various 1994 $12,272
Realized Gain $10,646
846,908 Common Stock Purchase Warrants
Purchased Various $ 0
Sold July 19, 1995 $12,185
Realized Gain $12,185
$29,477 7.5% Junior Convertible
Subordinated Note
Purchased 8/29/89 $ 29,477
Converted to 6,040,424 Shares Common
Stock Various 1995
Sold July 19, 1995 $102,007
Realized Gain $ 72,530
Total Realized Gain $110,615 $13,759 $112,787 46.31
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 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 $ 3,453
610,553 Shares Health o meter Products, Inc., Common Stock (b)(k) 08/17/94 3,282 2,213
(14.7% of fully diluted common equity)(l)
$16,000 14.50% Subordinated Note
Purchased 04/28/88 $16,000
Sold 03/24/92 $16,000
Realized Gain $ 0
187,500 Shares of Common Stock
Purchased 04/28/88 $ 250
Sold 03/30/92 $ 2,441
Realized Gain $ 2,191
Total Realized Gain $ 2,191 4,552 5,666 2.33
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 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 $ 28,716
(11.0% of fully diluted common equity)(l)
$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 28,716 11.79
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 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 $ 10,547
(2.6% of fully diluted common equity)(l)
$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 10,547 4.33
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 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 $ 21,404
(50.2% of fully diluted common equity)(l)
$2,000 Loan participation
Purchased 03/12/92 $2,000
Repaid 04/05/93 $2,000
Realized Gain $ 0 33,522 21,404 8.79
TOTAL INVESTMENT IN MANAGED COMPANIES $214,099 $229,416 94.19
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 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 8,9,16
8,667 Option Shares SFX Broadcasting Co. Common Stock Option(b)(j) 10/07/93 0 0
26,000 shares of Common Stock
Purchased 12/16/88 $ 4,880
Sold various December 1995 $ 744
Realized Loss $ (4,136)
0 0 0.00
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 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>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 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 8,9
435,569 Shares Walter Industries, Inc., Common Stock(d)(k) 01/07/88 $ 8,877 $ 5,717
326 Shares Walter Industries, Inc., Common Stock (d)(k) 09/13/95 0 4
(formerly Hillsborough Holdings Corporation)
$12,000 17% Note
Purchased 1/7/88 $ 12,000
Exchanged 12/1/95 for $490,000
cash 435,569
common stock $ 2,527
12.19% Senior Note
Realized Gain $ 0
$2,527 12.19% Senior Note
Received 12/1/95 $ 2,527
Sold 12/15/95 $ 2,527
Realized Gain $ 0
8,877 5,721 2.35
TOTAL INVESTMENT IN NON-MANAGED COMPANIES $ 9,597 $ 6,782 2.78
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes 70,861 21,932 9.00
Preferred Stock 64,468 24,418 10.03
Common Stock and Warrants 88,367 189,848 77.94
TOTAL MEZZANINE INVESTMENTS $223,696 $236,198 96.97
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount/ Investment Investment Value Total
Shares Investment Date Cost (f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$2,920 Prudential Funding Corp., 5.77% due 01/05/96 12/06/95 $ 2,906 $ 2,918
$4,454 Ford Motor Credit Corp. 5.75% due 01/02/96 12/29/95 4,451 4,452
TOTAL INVESTMENT IN COMMERCIAL PAPER 7,357 7,370 3.03
TOTAL TEMPORARY INVESTMENTS $ 7,357 $ 7,370 3.03
TOTAL INVESTMENT PORTFOLIO $231,053 $243,568 100.00%
(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 December 31, 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.
(l) Percentages of Common Equity ownership have not been audited by Price
Waterhouse LLP.
(m) All remaining convertable subordinated notes weere converted to common
stock subsequent to July 19, 1995.
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
ML-LEE ACQUISITION FUND, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
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.
Mezzanine Investments, L.P. (the "Managing General Partner"), subject to
the supervision of the Individual General Partners, is responsible for
overseeing and monitoring the Fund's investments. 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 an additional five 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. The preparation of financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts and
disclosures in the financial statements. Actual reported results could vary from
these estimates.
Valuation of Investments
Securities for which market quotations are readily available are valued by
reference to such market quotation, using the last trade price (if reported) or
the last bid price for the period. For securities without a readily
ascertainable market value (including securities restricted as to resale for
which a corresponding publicly traded class exists), fair value is determined,
on a quarterly basis, in good faith by the Managing General Partner and the
Investment Adviser with final approval from the Individual General Partners of
the 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.
Future events will also affect the estimates of fair value and the effect of
such events on the estimates of fair value could be material.
<PAGE>
Temporary Investments with maturities of less than 60 days are stated
at amortized cost, which approximates market.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of December
31, 1995. Although the Managing General Partner and Investment Adviser are not
aware of any factors not disclosed herein that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued since that time; and 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 December 31, 1995, the current estimated fair value of these
investments may have changed significantly since that point in time.
Interest Receivable on Investments
Investments generally will be placed on non-accrual status in the event
of a default (after 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 December 31, 1995 and
December 31, 1994, the Fund has in its portfolio of investments $1,122,216 and
$4,098,017, respectively, of payment-in-kind notes, which excludes subordinated
notes placed on non-accrual status. As of December 31, 1995 and December 31,
1994, the Fund has in its portfolio of investments $6,485,801 and $13,801,666,
respectively, of payment-in-kind equity.
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 by the Partners'
Capital Contributions and does not represent the Partners' Capital Accounts.
Profits and losses, when realized, will be allocated in accordance with the
provisions of the Partnership Agreement summarized in Note 3.
<PAGE>
3. Allocation of Profits and Losses
Pursuant to the Partnership Agreement, all profits from Temporary
Investments generally will be allocated 99% to the Limited Partners and 1% to
the Managing General Partner. Profits from Mezzanine Investments will, in
general, be allocated as follows:
first, if the capital accounts of any partners have negative balances,
to such partners in proportion to the negative balances in their
capital accounts until the balances of all such capital accounts equal
zero,
second, 99% 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 an amended and restated a credit agreement, dated
August 13, 1991, 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 Facility consisted of a $100 million term loan and a $40
million revolving line of credit. In October of 1993, the Fund amended the
credit agreement enabling it to make prepayments of the term loan at any time
and without any corresponding reduction to the revolving line of credit. On
December 1, 1995, the credit agreement was further amended to reduce the Credit
Facility to $10 million. The amount available at December 31, 1995 under the
Credit Facility was $6 million, due to a $4 million letter of credit
attributable to the investment in BeefAmerica, Inc. This letter of credit was
cancelled on February 28, 1996, bringing the total facility available to the
Fund back to $10 million. The Credit Facility 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%. For the years ended December 31, 1994 and
1993, the Fund incurred $57,756, and $1,710,606 respectively, in interest
expense. The Fund did not incur any interest expense in 1995. In connection with
the Credit Facility, the Fund has pledged its debt and equity portfolio
securities to its lenders.
<PAGE>
With respect to the Credit Facility, 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 total amortization during the twelve months ended 1995
was $619,605
An annual Loan Administration Fee of $25,000 for the administration of
the Credit Facility.
Unused Commitment Fees of $75,179, which are equal to 1/2 of 1% per
annum of the unused line of credit.
For the years ended December 31, 1995, 1994 and 1993, the Fund has
incurred $738,029, $772,593 and $922,876, respectively, in loan fees.
For additional information relating to leverage 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 $1.2 million. The
Investment Advisory Fee is calculated and paid quarterly, in advance. For the
years ended December 31, 1995, 1994 and 1993, the Fund paid $2,770,934,
$3,652,538, and $4,059,408 respectively, in Investment Advisory Fees to Thomas
H. Lee Advisors I.
6. Fund Administration Fee and 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. As compensation for its
services, the Fund Administrator is entitled to receive from the Fund an annual
amount equal to the greater of $400,000 or 0.45% of the Net Proceeds Available
for Investments subject to certain reductions as specified in the Fund's
Partnership Agreement. Beginning October 19, 1995, the Fund Administration Fee
changed to an annual amount equal to $300,000 plus out-of-pocket expenses
incurred by the Fund Administrator as discussed below. The Fund Administration
Fee is calculated and paid quarterly, in advance. For the years ended December
31, 1995, 1994, and 1993, the Fund paid $1,330,212, $1,843,907, and $1,874,739
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. Total
out-of-pocket expenses incurred by the Fund were $171,150.
<PAGE>
7. Independent General Partners' Fees and Expenses
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. Compensation for the Independent General
Partners is reviewed annually by the Individual General Partners.
For the years ended December 31, 1995, 1994 and 1993, the Fund incurred
$303,527, $284,682, and $242,459, 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 December 31, 1995, $3.1 million is classified as
restricted cash and remains held in escrow until certain leasing consents are
obtained from store landlords.
On January 26, 1995, the Fund sold its 14.25% Chiat/Day Acquisition, Inc.
Senior Subordinated Note, plus accrued interest, for $5,390,850, which resulted
in a realized loss of $49,981 to the Fund.
In March, 1995, a bankruptcy court judge confirmed the reorganization plan
for Hillsborough Holding Corporation, which emerged from bankruptcy as Walter
Industries, Inc. As a result, the Fund exchanged its $12 million principal
amount of Subordinated Debt for $490,000 in cash, 435,569 shares of Common
Stock, and a 12.19% Senior Note in the principal amount of $2,527,000 from
Walter Industries (all of which are considered the "qualified securities").
Subsequent to receiving the qualified securities, the Fund sold the 12.19%
Senior Note for proceeds of $2.6 million. All cash proceeds received in
connection with the Hillsborough reorganization plan and the sale of the Senior
Note have reduced the cost basis of the remaining investment held by the Fund.
In the first quarter of 1995, the Fund sold its entire investment in
Omega Wire, Inc. and received total proceeds of $41.1 million of which $1.1
million is being held in escrow at December 31, 1995. The Fund recognized a gain
of the sale of $25.8 million.
On April 27, 1995, Petco completed a public offering of approximately 3.6
million shares of Common Stock (the "Petco Offering") at a net price of $19.71
per share. 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 such stock.
In connection with the public offering of 20 million shares of GNC Common
Stock, together with a 15% overallotment option to the underwriters on July 19,
1995, the Fund sold 6,040,424 shares of common stock at a net price per share of
$16.8875 (all share amounts and prices herein have been adjusted to reflect a
2-for-1 stock split which occurred on October 17, 1995). The Fund also sold
846,908 common stock purchase warrants at a net price per warrant of $14.3875
(the net price per share less the $2.50 per warrant exercise price). Proceeds
from the sales totaled over $114 million with an original cost of $29.5 million
and resulted in realized gains of $84.7 million. Following that GNC offering,
the Fund converted all of its remaining GNC Convertible Subordinated Notes into
Common Stock. On February 7, 1996, GNC effected an additional public offering
pursuant to which the Fund sold its entire remaining investment in GNC. See Note
16 for further information.
<PAGE>
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. Proceeds received
by the Fund from this merger were $4.6 million of which $1,758,974 is being held
in escrow in accordance with the Agreement for potential indemnification costs.
The Fund realized a loss on the investment of $34,048,501.
In December, 1995, the Fund sold its common stock investment in SFX
Broadcasting, Inc. and received proceeds of $743,875 resulting in a realized
loss of $4,136,253.
For the year ended December 31, 1995, the net proceeds from the sales of
Mezzanine Investments aggregated $187,601,779. This resulted in a net realized
gain of $75,808,174 from investments during the year ended December 31, 1995.
For additional information, please refer to the Supplemental Schedule of
Realized Gains and Losses (Schedule 1 - page 46).
At December 31, 1995, the Fund had a total of $223,694,546 (including
$1,122,216 of payment-in-kind notes and $6,485,801 of payment-in-kind equity
which excludes subordinated notes placed on non-accrual status) invested in
Mezzanine Investments, representing $214,098,103 Managed and $9,596,443
Non-Managed portfolio investments.
The Fund invests primarily in high-yield private placement securities,
and therefore, 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 monitor
continually the 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
its position or collect proceeds may be delayed or limited.
9. Unrealized Appreciation and Depreciation of Investments
For the year ended December 31, 1995, the Fund recorded net unrealized
appreciation of $9,920,766 of which $11.9 million was related to net
depreciation in market value of publicly traded/underlying publicly traded
securities still held by the Fund at December 31, 1995. The Fund's cumulative
net unrealized depreciation on investments at December 31, 1995 totaled $12.5
million. This compares to a net unrealized appreciation of $9,271,721 of which
$39,243,395 was related to net depreciation in market value of publicly
traded/underlying publicly traded securities at December 31, 1994. For the year
ended December 31, 1994, the Fund recorded net unrealized appreciation of
$91,162,444 of which $113,645,986 was related to net appreciation in market
value of publicly traded securities. The changes in appreciation and
depreciation were attributed primarily to the fluctuation in market value of
GNC Common Stock.
For additional information, please refer to the Supplemental Schedule
of Unrealized Appreciation and Depreciation (Schedule 2 on pages 47-48).
<PAGE>
10. Non-Accrual of Investments
In accordance with the Fund's Accounting Policy, the following
securities have been on non-accrual status since the date indicated:
- BeefAmerica, Inc. on July 1, 1990.
- Chadwick-Miller, Inc. on January 1, 1993.
11. Commitments and Guarantees
On October 12, 1989, the Fund established a $4 million standby letter
of credit issued to Citibank as security for part of its loan to BeefAmerica,
Inc. On February 28, 1996, this letter of credit was cancelled.
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.
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 remanded 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.
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.
Please see Note 16 for further information.
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. 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 $1,869,241 representing its 1% interest in the Fund.
14. Reserves
In February 1993, the Fund established a $15 million reserve to provide
funds for follow-on investments and to pay expenses. As of December 31, 1995,
the reserve balance was reduced to approximately $3.1 million due to follow-on
investments in CMI Holding Corp., Diet Center Inc., Duro-Test, Health o meter
and Petco of $2.3 million, $444,861, $2.6 million, $3.3 million and $529,
respectively, along with a distribution to partners in the second quarter of
1993 of $424,264 and a payment of $2.9 million to First Chicago to pay down the
Fund's loan.
15. Income Taxes (Statement of Financial Accounting Standards No. 109)
No provision for income taxes has been made because all income and losses
are allocated to the Fund's partners for inclusion in their respective tax
returns.
Pursuant to the Statement of Financial Accounting Standards No. 109
Accounting for Income Taxes, the 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
appreciation and depreciation recorded on investments which has not been
recognized for tax purposes.
<PAGE>
16. Subsequent Events
As discussed in Note 12, one Limited Partner in the Fund, brought as a
class action suit against Mezzanine Investments, L.P., the Fund's Managing
General Partner (the "MGP"); ML Mezzanine Inc., the MGP's general partner; the
Fund's four Individual General Partners; and Merrill Lynch & Co., Inc. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, affiliates of ML Mezzanine
Inc., claiming that defendants had breached the Fund's Amended and Restated
Agreement of Limited Partnership (the "Limited Partnership Agreement") by
incorrectly computing the priority return to Limited Partners under the Fund's
Limited Partnership Agreement and improperly paying incentive distributions
("MGP Distributions") to the Fund's MGP.
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 Limited
Partnership Agreement and as a result, held the General Partners and ML
Mezzanine Inc. 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 Fund's Limited Partnership Agreement. On February
21, 1996, ML Mezzanine Inc. moved to amend the Court's decision to dismiss it.
Defendants' are considering the impact of the Court's decision on the
administration of the Fund. Defendants' time to appeal the decision has not yet
expired and defendants intend to appeal. The Fund filed a form 8-K on March 4,
1996 disclosing the Court's decision.
On February 7, 1996, the Securities and Exchange Commission declared
effective a Registration Statement Filed by GNC in connection with the sale of
up to 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
offered by GNC. The Fund sold its entire remaining investment in GNC for total
proceeds of $101 million or $20.7475 per share and realized a gain of $87.9
million. These proceeds will be distributed to Limited Partners on or about
March 29, 1996.
On February 8, 1996, the Individual General Partners approved the fourth
quarter 1995 cash distribution totalling $5,391,914 which consists of $6,722,994
return of capital from the sale of Mezzanine Investments and $76,626 of net
investment income from Temporary Investments, offset by a net investment loss of
$1,407,706 for Mezzanine Investments. The total amount distributed to Limited
Partners was $5,338,005, or $10.95 per Unit. The Managing General Partner
received $53,909 in proportion to its 1% interest in the Fund. The distributions
were made on February 14, 1996.
On February 22, 1996, the Fund sold its entire 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.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
ML-LEE ACQUISITION FUND, L.P.
SUPPLEMENTARY SCHEDULE OF REALIZED GAINS (LOSSES)
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
SECURITY Number of Investment Proceeds Gain/(Loss)
Shares/Principal Cost
Chiat/Day, Inc. Advertising
Sr. Subordinated Note $ 5,000 $ 5,000 $ 4,950 $ (50)
Hillsborough Holdings Corporation
Common Stock 20,568 103 17 (86)
Omega Wire, Inc.
Sr. Subordinated Note $ 15,000 15,000 15,900 900
Common Stock 80,000 320 25,227 24,907
Petco Animal Supplies Inc.
Common Stock 1,009,638 16,296 19,903 3,607
General Nutrition Companies, Inc.
Jr. Convertible Subordinated Note $ 29,477 29,477 102,007 72,530
Common Stock Purchase Warrants 423,454 -- 12,185 12,185
Celebrity, Inc.
Common Stock 5,769 75 75 --
Duro-Test Corporation
Preferred Stock 26,178 2,618 2,618 --
Common Stock 6,153,420 36,045 1,996 (34,049)
SFX Broadcasting, Inc.
Common Stock 26,000 4,880 744 (4,136)
Total for the Twelve Months ended --------- --------- ---------
December 31, 1995 $ 109,814 $ 185,622 $ 75,808
========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
ML-LEE ACQUISITION FUND, L.P.
SUPPLEMENTARY SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
FOR THE PERIOD ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Unrealized
Appreciation Unrealized Appreciation (Depreciation) for
(Depreciation)
Investment Fair December 31 December 31 December 31 December 31 December 31 December 31,
SECURITY Cost Value 1995 1995 1994 1993 1992 1991 & Prior
- ----------------------------------- -------- -------- -------- -------- ------- -------- -------- --------
PUBLICLY TRADED/UNDERLYING
SECURITY PUBLICLY TRADED:
Celebrity, Inc.
Common Stock* $ 150 $ 66 $ (84) $ 65 $ 47 $ (188) $ (8) $ --
General Nutrition Companies, Inc.
Common Stock 13,759 112,787 99,028 (16,426) (7,993) 123,447 -- --
Warrants -- -- -- (10,163) 212 9,951
Health o meter
Common Stock* 4,552 5,666 1,114 293 (5,291) -- 6,112 --
Petco Animal Supplies, Inc.
Common Stock 15,846 28,716 12,870 16,137 (3,267) -- -- --
Playtex Products, Inc.
Common Stock 3,255 10,547 7,292 528 (10,319) (4,466) -- 21,549
Stanley Furniture Company
Preferred Stock -- -- -- 13,000 (13,000)
Common Stock 33,522 21,404 (12,118) (5,351) (9,030) 15,263 (9,400) (3,600)
Walter Industries, Inc.
Subordinated Note -- -- -- 6,000 -- -- -- (6,000)
Common Stock 8,877 5,721 (3,156) (3,053) -- -- -- (103)
------- ------- -------- -------- -------- --------
TOTAL UNREALIZED APPRECIATION
(DEPRECIATION) FROM PUBLICLY
TRADED/UNDERLYING SECURITIES
PUBLICLY TRADED $ 104,946 $ (11,970) $(35,641) $ 144,007 $ 9,704 $ (1,154)
--------- --------- -------- --------- ------- --------
NONPUBLIC SECURITIES:
BeefAmerica Inc.
Senior Subordinated Note $ 20,000 $ 10,000 $(10,000) -- -- $ (10,000) -- $ --
Subordinated Notes 38,928 -- (38,928) -- -- (20,000) (18,928) --
Preferred Stock 40,050 -- (40,050) -- -- -- (50) (40,000)
Common Stock 2,000 -- (2,000) -- -- -- -- (2,000)
Chadwick-Miller, Inc.
Common Stock 16,652 14,845 (1,807) -- -- (1,807) -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
ML-LEE ACQUISITION FUND, L.P.
SUPPLEMENTARY SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
FOR THE PERIOD ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Unrealized
Appreciation Unrealized Appreciation (Depreciation) for
(Depreciation)
Investment Fair December 31, December 31, December 31, December 31, December 31, December 31,
SECURITY Cost Value 1995 1995 1994 1993 1992 1991 & Prior
- -------------------------------- -------- ------- -------- -------- -------- -------- -------- --------
NONPUBLIC SECURITIES (continued):
Magellan Health Service
Common Stock Warrants $ 4 $ -- $ (4) $ -- $ -- $ -- $ (4) $ --
SWO Holdings Corporation
Common Stock 250 595 345 -- -- -- -- 345
-------- -------- -------- ------- -------- --------
TOTAL UNREALIZED APPRECIATION
(DEPRECIATION) FROM
NONPUBLIC SECURITIES $(92,444) $ -- $ -- $(31,807) $(18,982) $(41,655)
-------- -------- -------- -------- -------- --------
Unrealized Appreciation/(Depreciation)
for Investments Sold:
Sold in 1995:
Omega Wire, Inc. -- -- -- (12,971) -- -- -- 12,971
SFX Broadcasting, Inc. -- -- -- 4,399 143 (4,542) -- --
Duro-Test Corporation -- -- -- 30,463 (3,711) -- (5,000) (21,752)
Sold Prior to 1995
Various -- -- 48,480 (16,496) 30,907 (62,891)
Total Unrealized Appreciation/
-------- -------- -------- -------- -------- ---------
(Depreciation) for Investments Sold -- $ 21,891 $ 44,912 $(21,038) $ 25,907 $ (71,672)
Net Unrealized Appreciation (Depreciation) $ 12,502 $ 9,921 $ 9,271 $91,162 $ 16,629 $(114,481)
========= ======== ======== ======= ======== =========
* Underlying security publicly traded.
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Fund
The information set forth under the caption "Election of General
Partners" in the Fund's definitive proxy statement in connection with the 1996
Annual Meeting of Limited Partners to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934
(the "Proxy Statement") is incorporated herein by reference.
Individual General Partners
The Individual General Partners provide overall guidance and
supervision with respect to the operations of the Fund and will perform the
various duties imposed on the directors of business development companies by the
Investment Company Act.
The information set forth under the caption "Election of General
Partners - Individual General Partners" in the Proxy Statement is incorporated
herein by reference.
The Investment Adviser
The Investment Adviser, pursuant to an investment management agreement
among the Investment Adviser, the Thomas H. Lee Company and the Fund dated
September 14, 1987, as amended, is responsible for the identification,
management and liquidation of Mezzanine Investments for the Fund.
The information set forth under the caption "The Management Agreement"
in the Proxy Statement is incorporated herein by reference.
The Managing General Partner
The Managing General Partner is a limited partnership in which ML
Mezzanine Inc. is the sole general partner and Thomas H. Lee Advisors I is the
limited partner. The Managing General Partner is responsible for the supervision
of the Fund's investments.
The information set forth under the caption "Election of General
Partners - Managing General Partner - Information concerning the Managing
General Partner" in the Proxy Statement is incorporated herein by reference.
The Fund Administrator
The Fund Administrator, provides administrative services necessary for
the operations of the Fund pursuant to an Administrative Services Agreement
between the Fund and the Fund Administrator, dated June 30, 1989.
The information set forth under the caption "Election of General
Partners - Managing General Partner - Information concerning the Fund
Administrator" in the Proxy Statement is incorporated herein by reference.
<PAGE>
Item 11. Executive Compensation
The information with respect to compensation of the Individual General
Partners set forth under the caption "Election of General Partners - Individual
General Partners -- Compensation" in the Proxy Statement is incorporated herein
by reference.
The information with respect to the allocation and distribution of the
Fund's profits and losses to the Managing General Partner set forth under the
caption "Election of General Partners - Managing General Partner --
Distributions" in the Proxy Statement is incorporated herein by reference.
The information with respect to the Fund Administration Fee payable to
the Fund Administrator set forth under the caption "Election of General Partners
Managing General Partner -- The Fund Administrator Fee" in the Proxy Statement
is incorporated herein by reference.
The information with respect to the Management Fee payable to the
Investment Advisor (and distributions from the Managing General Partner) set
forth under the caption "The Management Agreement - Terms of the Management
Agreement -- Management Fee" in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information concerning the security ownership of the Individual
General Partners set forth under the caption "Individual General Partners" and
certain Limited Partners under the caption "Introduction" in the Proxy Statement
is incorporated herein by reference.
There exists no arrangement known to the Fund, the operation of which
may at a subsequent date result in a change of control of the Fund.
Item 13. Certain Relationships and Related Transactions
The information set forth under the captions "Certain Transactions",
"Election of General Partners -- Managing General Partner" and "The Management
Agreement" in the Proxy Statement is incorporated herein by reference.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits
Financial Statements and Financial Statement Schedules
See Item 8. "Financial Statements and Supplementary Data-Table of Contents"
<TABLE>
Exhibits
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporated by reference to Exhibit
Limited Partnership, dated as of July 3.1 to Registrant's Annual Report on
8, 1987. Form 10-K for the year ended December
31, 1987.
3.2.1 Amended and Restated Agreement of Incorporated by reference to Exhibit
Limited Partnership, dated October 19, 3.2 to Registrant's Annual Report on
1987 as amended by Amendment No. 1, Form 10-K for the year ended December
dated as of November 23, 1987, 31, 1987.
Amendment
No. 2 dated as of December 2, 1987.
3.2.2 Amendment No. 3, dated May 12, 1988 Incorporated by reference to Exhibit
3.2.3 and Amendment No. 4, dated November 3.2.2 and Exhibit 3.2.3, respectively,
15, 1988 to Registrant's Annual Report on Form
10-K for the year ended December 31,
1988.
3.2.4 Amendment No. 5, dated May 5, 1989 and Incorporated by reference to Exhibit
Amendment No. 6, dated June 30, 1989. 3.2.4 to Registrant's Annual Report on
Form 10-K for the year ended
December 31, 1989.
10.1.1 Management Agreement, dated September Incorporated by reference to Exhibit
14, 1987 by and between Registrant, 10.1.1 to Registrant's Annual Report on
Thomas H. Lee Advisors, Inc. and Form 10-K for the year ended December
Thomas H. Lee 31, 1987.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
10.1.2 Amendment to Management Agreement, Incorporated by reference to Exhibit
dated March 18, 1988. 10.1.2 to Registrant's Annual Report on
Form 10-K for the year ended
December 31, 1987.
10.1.3 Notification of Transfer of Limited Incorporated by reference to Exhibit
Partnership Interest, dated December 10.1.3 to Registrant's Annual Report on
29, 1988, given by Thomas H. Lee Form 10-K for the year ended December
Advisors, Inc., as Transferor and 31, 1988.
Thomas H. Lee Advisors I, as
Transferee, to Mezzanine Investments,
L.P.
10.1.4 Waiver, Acknowledgment and Consent, Incorporated by reference to Exhibit
dated December 29, 1988, of ML 10.1.4 to Registrant's Annual Report on
Mezzanine Inc. Form 10-K for the year ended December
31, 1988.
10.1.5 Instrument of Assignment and Incorporated by reference to Exhibit
Assumption of Management Agreement, 10.1.5 to Registrant's Annual Report on
dated as of December 29, 1988, among Form 10-K for the year ended December
Registrant, Thomas H. Lee Advisors I 31, 1988.
and Thomas H. Lee Company.
10.2 Demand Note, dated September 9, Incorporated by reference to
1988, given by Registrant, Exhibit 10.2 to Registrant's
as Borrower, to The First National Current Report on Form 8-K
Bank of Chicago, as Payee. filed with the Commission on
September 27, 1988.
10.3.1 Third Amended Restated Pledge Incorporated by reference to Exhibit
Agreement, dated August 13, 1991, 10.3.1 to Registrant's Current Report on
between the Registrant and the First Form 8-K filed with the Commission on
National Bank of Chicago, as agent for August 26, 1991.
the Lenders.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
10.3.2 Amended Restated Custodian Contract, Incorporated by reference to Exhibit
dated August 13, 1991, between the 10.3.2 to Registrant's current report
Registrant and State Street Bank. Form 8-K filed with the Commission
on August 26, 1991.
10.4.1 Amended and Restated Credit Agreement, Incorporated by reference to Exhibit
dated August 13, 1991, between the 10.4.1 to Registrant's on Form 8-K filed
Registrant, certain listed financial with the Commission on August 26, 1991.
instructions and the First National
Bank of Chicago, as Agent.
10.4.2 Amendment No. 1 to Credit Agreement, Incorporated by reference to Exhibit
dated February 8, 1993, among the 10.4.2 to Registrant's Annual Report on
Registrant, certain listed financial Form 10-K for the year ended December
institutions and the First National 31, 1992.
Bank of Chicago, as Agent.
10.4.3 Amendment No. 2 to Credit Agreement, Incorporated by reference to Exhibit
dated February 9, 1993, among the 10.4.3 to Registrant's Annual Report on
Registrant, certain listed financial Form 10-K for the year ended December
institutions and the First National 31, 1992.
Bank of Chicago, as Agent.
10.4.4 Amendment No. 3 to Credit Agreement, Incorporated by reference to Exhibit
dated May 21, 1993 among the 10.4.4 to Registrant's Annual Report on
Registrant, certain listed financial Form 10-K for the year ended December
institutions and the First National 31, 1993.
Bank of Chicago, as Agent.
10.4.5 Amendment No. 4 to Credit Agreement, Incorporated by reference to Exhibit
dated October 29, 1993 among the 10.4.5 to Registrant's Annual Report on
Registrant, certain listed financial Form 10-K for the year ended December
institutions and the First National 31, 1993.
Bank of Chicago, as Agent.
10.4.6 Amendment No. 5 to Credit Agreement, Incorporated by reference to Exhibit
dated February 14, 1994 among the 10.4.6 to Registrant's Annual Report on
Registrant certain listed financial Form 10-K for the year ended December
institutions and the First National 31, 1994.
Bank of Chicago, as Agent.
10.4.7 Fee Letter dated February 7, 1994 Incorporated by reference to Exhibit
among the Registrant and the First 10.4.7 to Registrant's Annual Report on
National Bank of Chicago, as Agent. Form 10-K for the year ended December
31, 1994.
10.4.8 Amendment No. 6 to Credit Agreement, Filed herewith.
dated December 1, 1995 among the
Registrant, and the First National
Bank of Chicago, as Agent.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
10.5 Administrative Services Agreement, Incorporated by reference to Exhibit
dated June 30, 1989, by and between 10.5 to Registrant's Annual Report on
Registrant and ML Fund Administrators Form 10-K for the year ended December
Inc. 31, 1987.
99 Pages 15 through 57 of Prospectus dated Incorporated by reference to
August 12, 1987, filed pursuant to Rule Exhibit 99 to Registrant's Annual
424(b) under the Securities Act of 1933. Report on Form 10-K for the year
ended December 31, 1987.
27 Financial Data Schedule for the year Filed Herewith.
ended December 31, 1995.
(b) - Registrant Filed Forms 8-K with
respect to the following:
1) Sale of Common Stock in
General Nutrition Company Filed February 15, 1996.
2) Court's Decision in Winston
v. Mezzanine Investments, L.P. Filed March 4, 1996.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on this 27th day of March 1996.
ML-LEE ACQUISITION FUND, L.P.
By: Mezzanine Investments, L.P.
Managing General Partner
By: ML Mezzanine Inc.
its General Partner
/s/ Kevin K. Albert
--------------------------------
Dated: March 27, 1996 Kevin K. Albert
President, ML Mezzanine, Inc.
a General Partner of Mezzanine
Investments, L.P., the Managing
General Partner
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities indicated on the 27th day of March, 1996.
Signature Title
/s/ Kevin K. Albert ML Mezzanine Inc.
Kevin K. Albert President and Director
(Principal Executive Officer of Registrant)
/s/ Vernon R. Alden Individual General Partner
Vernon R. Alden ML-Lee Acquisition Fund, L.P.
/s/ Audrey L. Bommer ML Mezzanine Inc.
Audrey L. Bommer Vice President and Treasurer
(Principal Financial Officer of Registrant)
/s/ Joseph L. Bower Individual General Partner
Joseph L. Bower ML-Lee Acquisition Fund, L.P.
/s/ Roger F. Castoral, Jr. ML Mezzanine Inc.
Roger F. Castoral, Jr. Assistant Treasurer
(Principal Accounting Officer of Registrant)
/s/ Stanley H. Feldberg Individual General Partner
Stanley H. Feldberg ML-Lee Acquisition Fund, L.P.
/s/ Thomas H. Lee Individual General Partner
Thomas H. Lee ML-Lee Acquisition Fund, L.P.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on this 27th day of March 1996.
ML-LEE ACQUISITION FUND, L.P.
By: Mezzanine Investments, L.P.
Managing General Partner
By: ML Mezzanine Inc.
its General Partner
Dated: March 27, 1996 --------------------------------
Kevin K. Albert
President, ML Mezzanine, Inc.
a General Partner of Mezzanine
Investments, L.P., the Managing
General Partner
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities indicated on the 27th day of March, 1996.
Signature Title
______________________ ML Mezzanine Inc.
Kevin K. Albert President and Director
(Principal Executive Officer of Registrant)
______________________ Individual General Partner
Vernon R. Alden ML-Lee Acquisition Fund, L.P.
______________________ ML Mezzanine Inc.
Audrey Bommer Vice President and Treasurer
(Principal Financial Officer of Registrant)
______________________ Individual General Partner
Joseph L. Bower ML-Lee Acquisition Fund, L.P.
______________________ ML Mezzanine Inc.
Roger F. Castoral, Jr. Assistant Treasurer
(Principal Accounting Officer of Registrant)
______________________ Individual General Partner
Stanley H. Feldberg ML-Lee Acquisition Fund, L.P.
______________________ Individual General Partner
Thomas H. Lee ML-Lee Acquisition Fund, L.P.
EXIBIT 10.4.8
WAIVER AND AMENDMENT NO. 6 TO CREDIT AGREEMENT
This Waiver and Amendment No. 6 to Credit Agreement ("Amendment 6") is
dated as of December 1, 1995 and is made by and among ML-Lee Acquisition Fund,
L.P., a Delaware limited partnership (the "Company"), each of the undersigned
Lenders and The First National Bank of Chicago, individually and as agent for
the Lenders.
R E C I T A L S
A. The parties hereto are party to a certain Credit Agreement dated as
of August 13, 1991 (as amended, the "Credit Agreement"). Each capitalized term
used but not otherwise defined herein shall have the meaning ascribed to such
term in the Credit Agreement.
B. The parties hereto desire to further amend the Credit Agreement.
NOW, THEREFORE, in consideration of the mutual execution hereof and
other good and valuable consideration, the Agent, the Lenders signatory hereto
and the Company agree as follows:
1. Amendments. On the Effective Date (as defined below), the Credit
Agreement shall be amended as follows:
A. The definition of Collateral Coverage Test set fourth in Article 1
of the Credit Agreement shall be deleted in its entirety and the following shall
be inserted in substitution therefor:
"Collateral Coverage Test" means, on any date of
determination, that the ratio of (a) Appraised Value of the Eligible
Assets to (b) the outstanding balance of the Obligations exceeds 5.0 to
1.0.
B. The definition of Total Interest Expense set forth in Article 1 of
the Credit Agreement shall be deleted in its entirety and the following shall be
inserted in substitution therefor:
"Total Interest Expense" means, with respect to any fiscal
quarter of the Company, the aggregate amount of all interest expenses
paid or payable by the Company during or with respect to such fiscal
quarter, as determined in accordance with Agreement Accounting
Principles.
C. Section 6.18 shall be deleted in its entirety and the following shall be
inserted in substitution therefor:
6.18. Asset Coverage. The Company shall (a) not permit the
asset coverage for all borrowings of the Company, after giving effect
to the borrowing of the full amount of the Aggregate Commitment, to be
less than the minimum amount required under applicable federal and
state laws and regulations promulgated thereunder (including, without
limitation, Regulation U, Regulation G and Regulation X of the Board of
Governors of the Federal Reserve System) or under any authorization of
any state administrator regarding the sale of partnership interests in
the Company, and (b) maintain at all times a ratio of (I) aggregate
Value of all of the Company's Eligible Assets, to (ii) the outstanding
principal balance of the obligations, of greater than or equal to 4.0
to 1.0.
D. The text of Section 6.19 shall be deleted in its entirety and the phrase
"Intentionally Omitted" shall be inserted in substitution therefor.
E. Notwithstanding anything to the contrary contained in the Credit
Agreement, the Agent, the Lenders and the Company hereby agree that, from and
after December 1, 1995, the Revolving Loan Commitment of all Revolving Loan
Lenders shall be reduced to Ten Million Dollars ($10,000,000) in the aggregate.
<PAGE>
2. Waiver. The Agent and the Lenders hereby waive, effective
as of September 30, 1995, all Defaults or Unmatured Defaults existing under the
Credit Agreement or the other Loan Documents as of the date hereof as a result
of the Company's failure, as of September 30, 1995, to comply with the
provisions of Section 6.19 of the Credit Agreement (prior to the effectiveness
of the Amendment No. 6) requiring that at least fifty percent (50%) of the
Appraised Value of the Pledged Collateral be comprised of the Appraised Value of
subordinated notes, cash and Cash Equivalents; provided, however, that this
waiver shall not be construed as a continuing waiver of compliance with any of
the other terms of the Credit Agreement or any other Loan Document and nothing
contained herein shall be deemed to constitute a waiver of any other term or
condition contained in the Credit Agreement or any other Loan Document.
3. Representations and Warranties. The Company represents and
warrants that: (a) the execution, delivery and performance by it of this
Amendment No. 6 has been duly authorized by all necessary partnership action and
that this Amendment No. 6 is a legal, valid and binding obligation of the
Company enforceable against it in accordance with its terms, except as the
enforcement thereof may be subject to (I) the effect of any applicable
bankruptcy, insolvency, reorganization, moratorium or similar law affecting
creditors' rights generally, and (ii) general principles of equity (regardless
of whether such enforcement is sought in a proceeding in equity or at law); and
(b) after giving effect to the execution of Amendment No. 6, no Default or
Unmatured Default has occurred and is continuing.
4. Conditions. This Amendment No. 6 shall become effective only upon
receipt by the Agent (with sufficient copies for the Lenders) of the following,
each in form and substance satisfactory to the Agent, and after the following
conditions shall have been satisfied:
A. Amendment No. 6 executed by the Agent, each of the Required Lenders and
the Company.
B. Partnership resolutions adopted by Mezzanine and the
Individual General Partners (as defined in the Partnership Agreement)
of the Company, authorizing the execution and delivery of this
Amendment No. 6 by ML Mezzanine on behalf of Mezzanine on behalf of the
Company, certified by a duly authorized officer of ML Mezzanine.
C. Receipt of such other documents as the Agent, any Lender or its counsel
may have reasonably requested.
The date upon which all of the above conditions have been satisfied is the
"Effective Date." Upon the occurrence of the Effective Date, this Amendment No.
6 shall be deemed to have become effective as of the date first written above.
5. Failure of Conditions. In the event that the Effective Date
shall not have occurred on or before December 31, 1995, then (a) this Amendment
No. 6 shall be of no further force or effect, and (b) the Credit Agreement, the
Exhibits and Schedules thereto and the Notes, and all rights and remedies of the
Agent and the Lenders in respect thereof shall be unaltered and unaffected as if
this Amendment No. 6 had never been entered into.
6. Effect of Amendment. Upon execution of this Amendment No. 6
and the occurrence of the Effective Date, each reference in the Credit Agreement
to "this Agreement," "hereunder," "hereof," "herein," or words of like import,
and each reference to the Credit Agreement in any of the other Loan Documents
shall mean and be reference to the Credit Agreement as amended hereby. Except as
specifically set forth above, the Credit Agreement, the Exhibits and Schedules
thereto and the Notes shall remain unaltered and in full force and effect and
the respective terms, conditions or covenants thereof are hereby in all respects
ratified and confirmed.
7. Counterparts. This Amendment No. 6 may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed to be an original and all
of which taken together shall constitute one instrument.
<PAGE>
8. Governing Law. This Amendment No. 6 shall be governed by and construed
in accordance with the internal laws (and not the law of conflicts) of the State
of Illinois, but giving effect to federal laws applicable to national banks.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment No. 6 to be executed by their duly authorized representatives as of
the date first written above.
ML-LEE ACQUISITION FUND, L.P.
By: MEZZANINE INVESTMENTS, L.P.,
its Managing General Partner
By: ML MEZZANINE, INC.,
its General Partner
By: /s/____Audrey L. Bommer_____
Title: __________________________
THE FIRST NATIONAL BANK OF
CHICAGO, Individually and as Agent
By: /s/_________________________
Title: __________________________
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
the 1995 Form 10-K Balance Sheet and Statements of Operations and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 231,051,660
<INVESTMENTS-AT-VALUE> 243,568,195
<RECEIVABLES> 3,485,726
<ASSETS-OTHER> 7,722,161
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 254,776,082
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 422,669
<TOTAL-LIABILITIES> 422,669
<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> 12,503,437
<NET-ASSETS> 254,353,413
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,142,623
<OTHER-INCOME> 608,912
<EXPENSES-NET> 6,906,956
<NET-INVESTMENT-INCOME> (1,155,421)
<REALIZED-GAINS-CURRENT> 75,808,138
<APPREC-INCREASE-CURRENT> 9,920,766
<NET-CHANGE-FROM-OPS> 84,573,483
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (556,722)
<DISTRIBUTIONS-OF-GAINS> 126,423,304
<DISTRIBUTIONS-OTHER> 61,053,482
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (102,346,582)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,770,934
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,906,956
<AVERAGE-NET-ASSETS> 305,526,704
<PER-SHARE-NAV-BEGIN> 727.79
<PER-SHARE-NII> (2.35)
<PER-SHARE-GAIN-APPREC> 20.15
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 379.60
<RETURNS-OF-CAPITAL> 123.99
<PER-SHARE-NAV-END> 519.95
<EXPENSE-RATIO> 0.023
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
