UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997
Commission File Number 0-15669
ML-LEE ACQUISITION FUND, L.P.
(Exact name of registrant as specified in its Charter)
Delaware 13-3426817
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
World Financial Center
South Tower - 23rd Floor
New York, New York 10080-6123
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:(212) 236-7339
Securities registered pursuant to Section 12(b) of the Act: None
Name of each exchange on which registered: Not Applicable Securities
registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___.
Aggregate market value of voting securities held by non-
affiliates: Not Applicable.
<PAGE>
ML-LEE ACQUISITION FUND, L.P.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Assets, Liabilities and Partners' Capital
as of March 31, 1997 and December 31, 1996
Statements of Operations - For the Three Months Ended
March 31, 1997 and 1996
Statements of Changes in Net Assets - For the Three Months Ended
March 31, 1997 and 1996
Statements of Cash Flows - For the Three Months Ended
March 31, 1997 and 1996
Statement of Changes in Partners' Capital - March 31, 1997
Schedule of Portfolio Investments - March 31, 1997
Notes to Financial Statements
Supplemental Schedule of Realized Gains and Losses - Schedule 1
Supplemental Schedule of Unrealized Appreciation and
Depreciation - Schedule 2
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
<S> <C> <C>
(Unaudited)
March 31, 1997 December 31, 1996
--------------- -----------------
ASSETS:
Investments - Notes 2, 8, 9
Portfolio Investments at fair value
Managed Companies (amortized cost $93,073 at March 31,
1997 and $93,468 at December 31, 1996) $ 86,174 $ 86,067
Non-Managed Companies (amortized cost $9,597 at March 31,
1997 and at December 31, 1996) 5,965 6,183
Temporary Investments, at amortized cost (cost $3,682 at
March 31, 1997 and $4,040 at December 31, 1996) 3,688 4,047
Cash 5 10
Prepaid Loan Fees - Notes 2, 4 858 1,022
Prepaid Expenses and Other Receivables 298 307
--------------- ---------------
TOTAL ASSETS $ 96,988 $ 97,636
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities
Legal and Professional Fees Payable $ 46 $ 122
Reimbursable Administrative Expenses Payable 70 103
Independent General Partner Expenses Payable 42 23
--------------- ---------------
Total Liabilities 158 248
--------------- ---------------
Partners' Capital - Note 2
Managing General Partner 1,311 1,317
Limited Partners (487,489 Units) 95,519 96,071
--------------- ---------------
Total Partners' Capital 96,830 97,388
--------------- ---------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 96,988 $ 97,636
=============== ===============
</TABLE>
See the Accompanying Notes to Financial Statements.
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
For the Three Months Ended
--------------- ---------------
March 31, 1997 March 31, 1996
--------------- ---------------
INVESTMENT INCOME - Notes 2, 8, 10:
Interest $ 295 $ 297
Discount 47 752
Dividend & Other Income 6 167
--------------- ---------------
TOTAL INCOME 348 1,216
--------------- ---------------
EXPENSES:
Investment Advisory Fee - Note 5 297 480
Fund Administration Fee - Note 6 75 74
Loan Fees - Notes 2, 4 172 173
Independent General Partners' Fees and Expenses - Note 7 53 67
Legal and Professional Fees 232 387
Reimbursable Administrative Expenses - Note 6 70 --
Insurance Expense 2 2
--------------- ---------------
TOTAL EXPENSES 901 1,183
--------------- ---------------
NET INVESTMENT INCOME (LOSS) (553) 33
NET REALIZED GAIN (LOSS) ON INVESTMENTS - NOTE 8 AND SCHEDULE 1 361 37,130
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
ON INVESTMENTS - NOTE 9 AND SCHEDULE 2
Publicly Traded Securities 284 (74,396)
Nonpublic Securities -- 69,681
--------------- ---------------
Subtotal 284 (4,715)
--------------- ---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 92 $ 32,448
=============== ===============
See the Accompanying Notes to Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
For the Three Months Ended
--------------- ---------------
March 31, 1997 March 31, 1996
--------------- ---------------
FROM OPERATIONS:
Net Investment Income (Loss) $ (553) $ 33
Net Realized Gain on Investments 361 37,130
Net Change in Unrealized Appreciation (Depreciation) on Investments 284 (4,715)
--------------- ---------------
Net Increase (Decrease) in Net Assets Resulting from Operations 92 32,448
Cash Distributions to Partners (650) (107,129)
--------------- ---------------
Total Decrease (558) (74,681)
NET ASSETS:
Beginning of Period 97,388 254,353
--------------- ---------------
End of Period $ 96,830 $ 179,672
=============== ===============
See the Accompanying Notes to Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
For the Three Months Ended
--------------- ---------------
March 31, 1997 March 31, 1996
--------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest, Dividends and Discount Income $ 356 $ 1,064
Investment Advisory Fee (297) (480)
Fund Administration Fee (75) (74)
Legal and Professional Fees (307) (235)
Loan Fees and Expenses (9) (8)
Independent General Partners' Fees and Expenses (34) (68)
(Purchase) Sale of Temporary Investments, Net 358 1,746
Reimbursable Administrative Expenses (103) (62)
Proceeds from Sale of Portfolio Company Investments 756 102,790
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 645 104,673
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Distributions to Partners (650) (107,129)
--------------- ---------------
NET CASH APPLIED TO FINANCING ACTIVITIES (650) (107,129)
--------------- ---------------
Net Decrease in Cash (5) (2,456)
Cash at Beginning of Period 10 6,054
--------------- ---------------
CASH AT END OF PERIOD $ 5 $ 3,598
=============== ===============
RECONCILIATION OF NET INVESTMENT INCOME (LOSS) TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Investment Income (Loss) $ (553) $ 33
--------------- ---------------
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME (LOSS)
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Decrease in Investments 753 90,030
(Increase) Decrease in Receivable for Investments Sold -- (22,624)
(Increase) Decrease in Accrued Interest, Dividend and Discount Receivables 8 (152)
Decrease in Prepaid Expenses 166 276
Increase (Decrease) in Independent General Partner Fees Payable 19 (1)
Decrease in Reimbursable Administrative Expenses Payable (33) (62)
Increase (Decrease) in Legal and Professional Fees Payable (76) 43
Net Realized Gain on Investments 361 37,130
--------------- ---------------
TOTAL ADJUSTMENTS 1,198 104,640
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 645 $ 104,673
=============== ===============
</TABLE>
See the Accompanying Notes to Financial Statements.
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Managing
General Limited
Partner Partners Total
---------- ---------- ----------
For the Three Months Ended March 31, 1997
Partners' Capital at January 1, 1997 $ 1,317 $ 96,071 $ 97,388
Allocation of Net Investment Loss (6) (547) (553)
Allocation of Net Realized Gain on Investments 4 357 361
Allocation of Net Change in Unrealized Appreciation 3 281 284
Cash Distributions to Partners (7) (643) (650)
---------- ---------- ----------
Partners' Capital at March 31, 1997 $ 1,311 $ 95,519 $ 96,830
========== ========== ==========
</TABLE>
See the Accompanying Notes to Financial Statements.
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1997
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares/Warrants 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 12/31/97(c)(h) 03/31/93 267 267
$276 Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h) 06/30/93 276 276
$286 Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h) 09/30/93 286 286
$293 Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h) 12/31/93 293 293
5,016 Shares Alliance International Group, Cumulative Redeemable Preferred Stock(d) 04/22/91 502 502
110,000 Shares Alliance International Group, Cumulative Preferred Stock(d)(h) 12/31/92 11,000 11,000
250,800 Shares Alliance International Group, Common Stock(d) 12/31/87 1,951 1,951
15,228.43 Warrants Alliance International Group, Common Stock Purchase Warrants(d) 03/28/89 0(i) 0(i)
62,700 Warrants Alliance International Group, Common Stock Purchase Warrants(d) 04/22/91 0 0
657,614.21 Warrants Alliance International Group, Common Stock Purchase Warrants(d) 12/31/92 0 0
50,000 Warrants Alliance International Group, Common Stock Purchase Warrants(d) various 0(i) 0(i)
(52.5% of fully diluted common equity assuming exercise
of warrants)
19,200 Shares Common Stock
Purchased 12/31/87 $149
Sold 01/30/89 - 9,600 Shares $107
Sold 01/02/90 - 9,600 Shares $147 ----------------------------
Realized Gain $105 25,385 25,385 26.49
----------------------------
BEEFAMERICA, INC. (a) (e) - Note 9
$14,000 BAOC Acquisition, Inc. Sr. Preferred Stock 10% due 04/01/01 (c)(g) 09/09/88 14,000 5,800
$10,000 BAOC Acquisition, Inc. Jr. Preferred Stock 4% due 04/01/01 (c)(g) 09/09/88 10,000 4,200
$1,072 15% Sub. Nt.
Purchased 09/9/88 $ 1,072
Redeemed 02/20/92 $ 1,072
Realized Gain $ 0
Preferred Stock
Purchased 09/9/88 $ 2,700
Redeemed 02/20/92 $ 2,700
Realized Gain. $ 0
$41,997 15.5% Sr.Sub Interim Nt
Purchased 09/9/88 $ 20,000
$80,951 15% Sub Nt
Purchased 09/9/88 $ 38,928
Exchanged 03/29/96 for
Cash Proceeds $ 26,000
10% Sr Pref Stk $ 14,000
4% Jr Pref Stk $ 10,000
Realized Loss $ (8,928)
5661.11 Shares Class A Pref. Stk
Purchased 04/10/91 $ 40,050
Value at restructuring 3/29/96 $ 0
Realized Loss $(40,050)
51,000 Shares Common Stk
Purchased various $ 2,000
Value at restructuring 3/29/96 $ 0
Realized Loss $ (2,000) ----------------------------
Total Net Realized Loss $(50,978) 24,000 10,000 10.44
----------------------------
See the Accompanying Notes to Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1997
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares/Warrants Investment Date Cost (f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
CELEBRITY, INC. - Note 9
5,770 Shares Celebrity, Inc. Common Stock(b) 06/16/92 $ 75 $ 20
(0.1% of fully diluted common equity)
5,769 Shares of Common Stock
Purchased 06/16/92 $ 75
Sold 09/29/93 $ 75
Realized Gain $ 0
5,769 Shares of Common Stock
Purchased 06/16/92 $ 75
Sold 09/19/94 $ 75
Realized Gain $ 0
5,769 Shares of Common Stock
Purchased 06/16/92 $ 75
Sold 09/19/95 $ 75
Realized Gain $ 0
5,769 Shares of Common Stock
Purchased 06/16/92 $ 75
Sold 9/21/96 $ 75
Realized Gain $ 0 ---------------------------------
Total Realized Gain $ 0 75 20 0.02
---------------------------------
CHADWICK-MILLER, INC. (a)(e) - Notes 9,10,14
15,406 Warrants CMI Holding Corp., Preferred Stock Purchase Warrants (d) 12/16/88 12,916 -
39,487 Warrants CMI Holding Corp., Common Stock Purchase Warrants (d) Various 3,736 -
(7.5% of fully diluted common equity)
35,161 Shares Common Stock
Purchased 06/30/93 $ 352
Sold 09/03/93 $ 352
Realized Gain $ 0
$5,000,000 Senior Note
Purchased 12/16/88 $ 5,000
Sold 11/23/94 $ 5,000
Realized Gain $ 0
189,996 Shares Preferred Stock
192,933 Shares Common Stock
100,000 Common Stock Warrants
Purchased Various $16,652
Exchanged July 15, 1996
15,406 Preferred Stock Warrants
39,487 Common Stock Warrants $16,652
Realized Gain $ 0 ----------------------------------
Total Realized Gain $ 0 16,652 - 0.00
----------------------------------
See the Accompanying Notes to Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1997
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares/Warrants 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
-------------------------
SIGNATURE BRANDS, INC.
(formerly HEALTH O METER PRODUCTS, INC.) (a) - Note 9
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 (d)(k) 08/17/94 3,282 2,213
(16.5% of fully diluted common equity)
$16,000 14.50% Subordinated Note
Purchased 04/28/88 $16,000
Sold 03/24/92 $16,000
Realized Gain $ 0
187,500 Shares of Common Stock
Purchased 04/28/88 $ 250
Sold 03/30/92 $ 2,441
Realized Gain $ 2,191 -------------------------
Total Realized Gain $ 2,191 4,552 5,666 5.91
-------------------------
See the Accompanying Notes to Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1997
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares/Warrants Investment Date Cost (f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
PLAYTEX PRODUCTS, INC. (a) - Note 9
1,406,204 Shares Playtex Products, Inc., Common Stock(d)(j) 12/28/88 $ 3,255 $15,292
(2.7% of fully diluted common equity)
$19,285 15% Subordinated Notes
Purchased 12/28/88 $19,285
Sold 06/30/89 $19,285
Realized Gain $ 0
3,214,000 Shares Preferred Stock
Purchased 12/28/88 $ 3,214
Sold 06/30/89 $ 3,214
Realized Gain $ 0
2,571,314 Shares Common Stock
Purchased 12/28/88 $ 1,286
Sold 06/30/89 $ 1,286
Realized Gain $ 0
$11,250 15% Subordinated Note
Purchased 12/28/88 $11,250
Sold 09/28/90 $11,275
Realized Gain $ 25
2,571,314 Shares Common Stock
Purchased 12/28/88 $ 1,286
Sold 09/28/90 $10,512
Realized Gain $ 9,226
347,209 Shares Common Stock
Purchased 12/28/88 $ 174
Sold 12/20/91 $ 1,343
Realized Gain $ 1,169
$71,251 15% Subordinated Notes
Purchased 12/28/88 $71,251
Sold 02/01/93 $71,181
Realized Loss $ (70) -------------------------------------
Total Net Realized Gain $10,350 3,255 15,292 15.96
-------------------------------------
STANLEY FURNITURE COMPANY, INC. (a)(e) - Notes 8, 9
1,528,781 Shares Stanley Furniture Co., Inc., Common Stock(d)(h)(j) Various 19,154 29,811
(30.4% of fully diluted common equity)
$2,000 Loan participation
Purchased 03/12/92 $ 2,000
Repaid 04/05/93 $ 2,000
Realized Gain $ 0
1,115,256 Shares Common Stock
Purchased Various $13,973
Sold 11/13/96 $14,664
Sold 12/13/96 $ 2,199
Realized Gain $ 2,890
Purchased Various $ 395
Sold 2/07/97 $ 756
Realized Gain $ 361 -------------------------------------
Total Net Realized Gain $ 3,251 19,154 29,811 31.11
-------------------------------------
-------------------------------------
TOTAL INVESTMENT IN MANAGED COMPANIES $ 93,073 $ 86,174 89.93
=====================================
See the Accompanying Notes to Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1997
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares/Warrants Investment Date Cost (f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
NON-MANAGED COMPANIES
SWO HOLDINGS CORPORATION - Note 9
250,000 Shares SWO Holdings Corp., Common Stock(d) 11/24/87 250 0
1,430 Shares Homeland Holding Corp., Common Stock(d) 08/10/90 440 0
1,506 Warrants Homeland Holding Corp., Common Stock
Purchase Warrants (d) 10/02/96 0 0
$5,000 15.5% Subordinated Notes
Purchased 11/24/87 $5,000
Sold 09/15/88 $5,075
Realized Gain $ 75
-------------------------------
690 0 0.00
-------------------------------
TLC BEATRICE INTERNATIONAL HOLDINGS, INC.
25,500 Shares TLC Beatrice Int'l Holdings., Inc., Common Stock(d) 11/30/87 26 26
$8,500 13% Subordinated Notes
Purchased 11/30/87 $8,500
Sold 08/18/88 $8,500 -------------------------------
Realized Gain $ 0 26 26 0.03
-------------------------------
WALTER INDUSTRIES, INC. - Note 9
435,569 Shares Walter Industries, Inc., Common Stock(b)(j) 01/07/88 8,877 5,935
326 Shares Walter Industries, Inc., Common Stock (b)(j) 09/13/95 0 4
$12,000 17% Note
Purchased 1/7/88 $ 12,000
Exchanged 12/1/95
for $490,000 cash and
435,569 Common Stock and
$2,527 12.19% Senior Note
Realized Gain $ 0
$2,527 12.19% Senior Note
Received 12/1/95 $ 2,527
Sold 12/15/95 $ 2,527
Realized Gain $ 0
Total Realized Gain $ 0 -------------------------------
8,877 5,939 6.19
-------------------------------
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
-------------------------------
TOTAL INVESTMENT IN NON-MANAGED COMPANIES 9,597 5,965 6.22
===============================
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes $ 11,932 $ 11,932 12.45
Preferred Stock 35,502 21,502 22.44
Common Stock and Warrants 55,236 58,705 61.26
-------------------------------
TOTAL MEZZANINE INVESTMENTS $102,670 $ 92,139 96.15
===============================
See the Accompanying Notes to Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1997
(DOLLARS IN THOUSANDS)
Principal Fair % Of
Amount Investment Investment Value Total
Shares/Warrants Investment Date Cost (f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$2,640 Ford Motor Credit Corp., 5.33% due 04/03/97 03/19/97 $ 2,634 $ 2,639
$1,050 American General Corp., 5.63% due 04/08/97 03/27/97 1,048 1,049
-------------------------------
TOTAL INVESTMENT IN COMMERCIAL PAPER 3,682 3,688 3.85
-------------------------------
TOTAL TEMPORARY INVESTMENTS $ 3,682 $ 3,688 3.85
-------------------------------
TOTAL INVESTMENT PORTFOLIO $106,352 $ 95,827 100.00%
===============================
(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 March 31, 1997, 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 $6 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 class of securities.
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
ML-LEE ACQUISITION FUND, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. Organization and Purpose
ML-Lee Acquisition Fund, L.P. (the "Fund") was formed and the Certificate of
Limited Partnership was filed under the Delaware Revised Uniform Limited
Partnership Act on April 1, 1987. The Fund's operations commenced on October 19,
1987.
The Managing General Partner, subject to the supervision of the Individual
General Partners, is responsible for overseeing and monitoring the Fund's
investments. Mezzanine Investments, L.P. (the "Managing General Partner"), is a
limited partnership in which ML Mezzanine Inc., an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc., is the general partner, and Thomas H.
Lee Advisors I (the "Investment Adviser"), an affiliate of Thomas H. Lee, is the
limited partner. The Individual General Partners are Vernon R. Alden, Joseph L.
Bower and Stanley H. Feldberg (the "Independent General Partners") and Thomas H.
Lee.
The Fund has elected to operate as a business development company under the
Investment Company Act of 1940. Its primary investment objective is to provide
current income and long-term capital appreciation by investing in "Mezzanine"
securities consisting primarily of Subordinated Debt and Preferred Stock
combined with an equity participation issued in connection with leveraged
acquisitions or other leveraged transactions which management of the Fund
believes offer significant possibilities for return.
The Fund will terminate upon the liquidation of all Fund investments but no
later than June 15, 1998, subject to the right of the Individual General
Partners to extend the term for up to one additional two-year period and one
additional one-year period if it is in the best interest of the Fund. The Fund
has five years more to liquidate its remaining investments.
2. Significant Accounting Policies
Basis of Accounting
For financial reporting purposes, the records of the Fund are maintained
using the accrual method of accounting. For Federal income tax reporting
purposes, the results of operations are adjusted to reflect statutory
requirements arising from book to tax differences.
Valuation of Investments
Securities for which market quotations are readily available are valued by
reference to such market quotation, using the last trade price (if reported) or
the last bid price for the period. For securities without a readily
ascertainable market value (including securities restricted as to resale for
which a corresponding publicly traded class exists), fair value is determined,
on a quarterly basis, in good faith by the Managing General Partner and the
Investment Adviser with final approval from the Individual General Partners of
the Fund. For privately issued securities in which the Fund typically invests,
the fair value of an investment is its original cost plus accrued value in the
case of original issue discount or deferred pay securities. Such investments
will be revalued if there is an objective basis for doing so at a different
price. Investments will be written down in value if the Managing General Partner
and Investment Adviser believe adverse credit developments of a significant
nature require a write-down of such securities. Investments will be written up
in value only if there has been an arms'-length third party transaction to
justify the increased valuation. Although the Managing General Partner and
Investment Adviser use their best judgment in estimating the fair value of these
investments, there are inherent limitations in any estimation technique.
Therefore, the fair value estimates presented herein are not necessarily
indicative of the amount which the Fund could realize in a current transaction.
Temporary Investments with maturities of less than 60 days are stated at
amortized cost, which approximates market.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of March 31,
1997. Although the Managing General Partner and Investment Adviser are not aware
of any factors not disclosed herein that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued since that time, and 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 March 31, 1997, the current estimated fair value of these
investments may have changed significantly since that point in time.
<PAGE>
Interest Receivable on Investments
Investments generally will be placed on non-accrual status in the event of a
default (after 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 March 31, 1997 and December 31,
1996, the Fund had in its portfolio of investments $1.2 million of
payment-in-kind debt securities. As of March 31, 1997 and December 31, 1996, the
Fund had in its portfolio of investments $6.5 million of payment-in-kind equity
securities.
Investment Transactions
The Fund records investment transactions on the date on which it obtains an
enforceable right to demand the securities or payment therefor. The Fund records
Temporary Investment transactions on the trade date.
Realized gains and losses on investments are determined on the basis of
specific identification for accounting and tax purposes.
Loan Facility and Advisory Fees
Loan Facility and Advisory Fees are being amortized over the life (7 years)
of the Facility commencing in August, 1991.
Partners' Capital
Partners' Capital represents the Fund's equity divided in proportion to the
Partners' Capital Contributions and does not represent the Partners' Capital
Accounts. Profits and losses, as defined in the Partnership Agreement, when
realized, are allocated in accordance with the provisions of the Partnership
Agreement summarized in Note 3.
Interim Financial Statements
The financial information included in this interim report as of March 31,
1997 and for the period then ended has been prepared by management without an
audit by independent certified public accountants. The results for the period
ended March 31, 1997 are not necessarily indicative of the results of the
operations expected for the year and reflect adjustments, all of a normal and
recurring nature, necessary for the fair presentation of the results of the
interim period. In the opinion of Mezzanine Investments, L.P., the Managing
General Partner of the Fund, all necessary adjustments have been made to the
aforementioned financial information for a fair presentation in accordance with
generally accepted accounting principles.
<PAGE>
3. Allocation of Profits and Losses
Pursuant to the Partnership Agreement, all profits from Temporary
Investments generally are allocated 99% to the Limited Partners and 1% to the
Managing General Partner. Profits from Mezzanine Investments are, in general,
allocated as follows:
first, if the capital accounts of any partners have negative balances, to
such partners in proportion to the negative balances in their capital
accounts until the balances of all such capital accounts equal zero,
second, 99% to the Limited Partners and 1% to the Managing General Partner
until the sum allocated to the Limited Partners equals any previous losses
allocated together with a cumulative Priority Return of 10% on the average
daily investments in Mezzanine securities, and any outstanding Compensatory
Payments,
third, 69% to the Limited Partners and 31% to the Managing General Partner
until the Managing General Partner has received 21% of the total profits
allocated,
thereafter, 79% to the Limited Partners and 21% to the Managing General
Partner.
Losses will be allocated in reverse order of profits previously allocated
and thereafter 99% to the Limited Partners and 1% to the Managing General
Partner.
4. Leverage
The Fund entered into an amended credit agreement, dated as of August 13,
1991 (the "Credit Facilities"), with a lending group led by the First National
Bank of Chicago ("First Chicago"), which provided the Fund with a maximum credit
facility of $140 million. The Credit Facilities consisted of a $100 million term
loan and a $40 million secured revolving credit line. In October of 1993, the
Fund amended the credit agreement enabling it to make prepayments of the term
loan at any time and without any corresponding reduction to the revolving line
of credit. As a result of paydowns of the term loan the Fund's outstanding
balance was paid in full as of March 29, 1994 to reduce the Credit Facilities to
$7.5 million, all of which is available at March 31, 1997. The Credit Facilities
will mature on July 31, 1998. In connection with the Credit Facilities, the Fund
has pledged its debt and equity portfolio securities to its lenders.
In connection with the Credit Facilities, the Fund incurred the following
loan fees:
Nonrecurring loan advisory and loan facility fees of $4,441,580 paid to
First Chicago in 1991 in connection with the creation of the credit
facility, which are being amortized over the life of the credit facility.
The amount expensed for the three months ended March 31, 1997 was $157,193.
An annual Loan Administration Fee of $25,000 for the administration of the
credit facility. The amount expensed for the three months ended March 31,
1997 was $6,165.
An Unused Commitment Fee of 1/2 of 1% per annum of the unused line of
credit. The expense for the three months ended March 31, 1997 was $9,271.
For the three months ended March 31, 1997 and 1996, the Fund incurred
$172,629 and $172,656, respectively, in total loan fees.
<PAGE>
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
three months ended March 31, 1997 and 1996, the Fund paid $296,691 and $480,252,
respectively, in Investment Advisory Fees to Thomas H. Lee Advisors I.
6. Fund Administration Fees & Expenses
ML Fund Administrators Inc. (the "Fund Administrator") (an affiliate of the
Managing General Partner) performs the operational and administrative services
necessary for the management of the Fund. Beginning October 19, 1995, the Fund
Administration Fee changed to an annual fee of $300,000 plus out-of-pocket
expenses incurred by the Fund Administrator, as described below. The Fund
Administration Fee is paid quarterly, in advance. For the three months ended
March 31, 1997 and 1996, the Fund paid $75,000 and $74,335, respectively, in
Fund Administration Fees.
Beginning October 19, 1995, in accordance with the Partnership Agreement,
the Fund Administrator is being reimbursed by the Fund for 100% of
administrative expenses incurred.
7. Independent General Partners' Fees
As compensation for services rendered to the Fund, each of the three
Independent General Partners receives $40,000 annually in quarterly
installments, $1,000 for each meeting of the General Partners attended and
$1,000 for each committee meeting attended ($500 if a committee meeting is held
on the same day as a meeting of the General Partners) plus reimbursement for any
legal and out-of-pocket expenses.
For the three months ended March 31, 1997 and 1996, the Fund incurred
$52,945 and $66,705, respectively, in Independent General Partners' Fees and
Expenses.
8. Investment Transactions
During February 1997, the Fund sold 31,515 shares of Stanley Furniture for
$24 per share. The Fund received total proceeds of $756,335 and recognized a
gain of $361,480.
At March 31, 1997, the Fund had a total of $102.7 million invested in
Mezzanine Investments representing $93.1 million Managed and $9.6 million
Non-Managed portfolio investments.
For the three months ended March 31, 1997, the proceeds from the sales of
investments resulted in net realized gains of $361,480. For additional
information, please refer to the Supplemental Schedule of Realized Gains and
Losses - Schedule 1.
Because the Fund primarily invests in high-yield private placement
securities, the risk of loss upon default by an issuer is greater than with
investment grade securities because high-yield securities are generally
unsecured and are often subordinated to other creditors of the issuer. Also,
high-yield issuers usually have higher levels of indebtedness and are more
sensitive to adverse economic conditions.
Although the Fund cannot eliminate its risks associated with its investments
in high-yield securities, it has procedures in place to continually monitor its
risks associated with its investments under a variety of market conditions. Any
potential Fund loss would generally be limited to its investment in the
portfolio company reflected in the portfolio of investments. See Note 11 for
information concerning commitments and guarantees.
Should bankruptcy proceedings commence, either voluntarily or by action of
the court against a portfolio company, the ability of the Fund to liquidate the
position or collect proceeds from the action may be delayed or limited.
<PAGE>
9. Unrealized Appreciation and Depreciation of Investments
For the three months ended March 31, 1997, the Fund recorded net unrealized
appreciation of $284,027. As of March 31, 1997, the Fund's cumulative net
unrealized depreciation on investments totalled $10,530,439.
For additional information, please refer to the Supplemental Schedule of
Unrealized Appreciation and Depreciation - Schedule 2.
10. Non-Accrual of Investments
In accordance with the Fund's Accounting Policy, the following equity
securities have been on non-accrual status since the date indicated:
- BeefAmerica, Inc. on July 1, 1990
- Chadwick Miller on July 1, 1993
11. Commitments and Guarantees
On January 20, 1992, the Fund entered into a commitment to guarantee up to
$150,480 to support an obligation of a subsidiary of Alliance International
Group, Inc. The amount of such guarantee represents the Fund's pro-rata portion
of a $600,000 aggregate additional advance provided by the senior lender of
Alliance.
12. Litigation
On September 7, 1991, the Fund brought suit in the Court of Common Pleas
for the County of Greenville, South Carolina against Deloitte & Touche in
connection with Deloitte & Touche's audit opinions on the financial statements
of Emb-Tex Corporation, formerly an operating subsidiary of a portfolio company
of the Fund. The Fund contends that the value of Emb-Tex Corporation's inventory
and operating income were substantially overstated in its financial statements.
The Fund seeks actual and punitive damages in connection with the loss of its
aggregate $18 million investment. Deloitte & Touche obtained a summary judgment
in its favor and the Fund pursued an appeal in the Appellate Courts of South
Carolina. On August 21, 1995, the South Carolina Court of Appeals reversed the
summary judgment ruling and remanded the case for trial. On September 11, 1995,
Deloitte & Touche filed a petition for rehearing with the Court of Appeals which
was denied. Thereafter, Deloitte & Touche filed a petition for a writ of
Certiorari with South Carolina Supreme Court, which was granted. A decision by
the South Carolina Supreme Court is expected in 1997.
On October 18, 1991, one Limited Partner of the Fund commenced a class
action in the Supreme Court of the State of New York in the County of New York,
on behalf of a class of all Limited Partners of record during 1990 or their
successors in interest, against the Fund's Managing General Partner, ("MGP"),
Individual General Partners, Investment Adviser and certain of their affiliates.
The complaint alleged that the defendants breached the Fund's Partnership
Agreement in 1990 by causing the Fund to pay $7,554,855 in incentive
compensation to the MGP with respect to that year and sought monetary damages in
the amount of $7,554,855, together with interest, and other relief. After trial,
the Court found that the MGP Distributions for the fourth quarter of 1989
through the fourth quarter of 1990 were paid in violation of the Partnership
Agreement and as a result, held the General Partners liable for repayment to the
plaintiff class of $6,627,752 of excessive distributions, plus interest. The
Court's decision dismissed Merrill Lynch & Co., Inc. and MLPF&S because they
were not parties to the Partnership Agreement. On June 13, 1996, the Court
amended its decision, dismissing ML Mezzanine, Inc., the corporate general
partner of the Fund's MGP because it was not a party to the Partnership
Agreement. On July 25, 1996, judgment was entered against remaining Defendants
in the amount of $10,399,505. The remaining Defendants filed a Notice of Appeal
on October 4, 1996. The appeal has been fully briefed, and submitted to the
Court for decision. The Fund may be obligated to indemnity and advance
litigation expenses to one or more of the defendants under the terms and
conditions of various indemnity provisions of the Fund's Partnership Agreement
and separate indemnification agreements. The Fund has advanced litigation
expenses to the indemnified parties based upon amounts which are deemed
reimbursable in accordance with the indemnification provisions and has included
these amounts in Legal and Professional Fees.
<PAGE>
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. In its Order and Opinion dated
December 30, 1996, the court granted in part and denied in part the defendants'
motion to dismiss the second amended complaint holding that a number of new
claims and theories asserted by plaintiffs are dismissed as time-barred.
Plaintiffs have moved for reconsideration of the Court's Order. The plaintiff
seeks an accounting, rescission, rescissory or actual damages and punitive
damages. Plaintiffs have moved to certify the case as a class action. Defendants
have opposed that motion which is currently pending before the Court. The
defendants in this action believe that the claims in the second amended
complaint are without merit. 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. In the opinion of legal counsel, the outcome of this case is
not determinable at this time. The Fund has incurred litigation expenses which
are recorded in professional fees.
On August 2, 1996, an action was commenced against General Nutrition
Companies, Inc. ("GNC"), its officers, directors and certain of its former
shareholders, including the Fund, in the United States District Court for the
Western District of Pennsylvania. Plaintiffs assert that GNC is liable for
violations of Sections 11 and 12(a)(2) of the Securities Act of 1933 and Section
1-501(a) of the Pennsylvania Securities Act, arising out of allegedly false and
misleading statements in the prospectus and registration statement for the
February 7, 1996 public offering of GNC common stock, and for violations of
Section 10 (b) of the Securities Exchange Act of 1934 and negligent
misrepresentation arising out of allegedly false and misleading public
statements during the period from the public offering through May 28, 1996.
Plaintiffs also allege that certain officers, directors and shareholders of GNC,
including the Fund, as well as the underwriters for the public offering, are
liable for certain of such violations of the federal and state securities laws
and/or control person liability in connection therewith, and negligent
misrepresentation. Plaintiffs seek certification of the action as a class action
purportedly on behalf of all persons, other than defendants, who purchased
shares of GNC common stock during the proposed class action period from February
7, 1996 through May 28, 1996. The defendants filed a motion to dismiss the
action in its entirety on December 2, 1996, which motion is still in its
briefing stages. The defendants in this action believe that the claims against
them are without merit. In the opinion of legal council, the outcome of this
case is not determinable at this time.
<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.
In the first quarter of 1997, the Managing General Partner received cash
distributions in the amount of $6,524 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 March 31, 1997, the
reserve balance was reduced to approximately $3.1 million due to follow-on
investments in CMI Holding Corp., Diet Center Inc., Duro-Test Corporation,
Health o meter and Petco. Additionally, $1.4 million of the reserve has been
returned to partners of the Fund and a payment of $2.9 million was made to First
Chicago to pay down the Fund's loan.
15. Income Taxes (Statement of Financial Accounting Standards No. 109)
No provision for income taxes has been made because all income and losses
are allocated to the Fund's partners for inclusion in their respective tax
returns.
Pursuant to Statement of Financial Accounting Standards No. 109 -
Accounting for Income Taxes, the Fund is required to disclose any difference in
the tax basis of the Fund's assets and liabilities versus the amounts reported
in the financial statements. As of December 31, 1996, the tax basis of the
Fund's assets are greater than than the amounts reported in the financial
statements by $1.6 million. This difference is primarily attributable to
unrealized depreciation on investments which has not been recognized for tax
purposes.
16. Subsequent Events
On April 29, 1997, the Individual General Partners approved the first
quarter 1997 cash distribution totalling $285,576, which consists of net
distributable proceeds, after fund expenses, of $252,319 from the sale of
Stanley common stock (of which $386,609 is return of capital) and $33,257 of net
income from temporary investments. The total amount distributed to Limited
Partners was $282,744 or $.58 per Unit. The Managing General Partner received
$2,832, representing its 1% interest in the Fund. This cash distribution was
paid on May 15, 1997.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
ML-LEE ACQUISITION FUND, L.P.
SUPPLEMENTAL SCHEDULE OF REALIZED GAINS AND LOSSES
FOR THE 3 MONTHS ENDED MARCH 31, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Number of Investment Realized
SECURITY Shares/Principal Cost Net Proceeds Gain/(Loss)
- - ------------------------------ ----------------- ------------ ------------ ------------
Stanley Furniture Inc.
Common Stock 31,515 $ 395 $ 756 $ 361
---------- --------- ---------
$ 395 $ 756 $ 361
========== ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
ML-LEE ACQUISITION FUND, L.P.
SUPPLEMENTAL SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
FOR THE PERIOD ENDED MARCH 31, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Unrealized
Appreciation
(Depreciation) Total Unrealized Total Unrealized
for the Appreciation/ Appreciation/
Investment Fair Three Months Ended (Depreciation) at (Depreciation) at
SECURITY Cost Value March 31, 1997 December 31, 1996 March 31, 1997
- - ----------------------------------- ------------ ------- ---------------- ----------------- -----------------
PUBLICLY TRADED SECURITIES
Celebrity
Common Stock* $ 75 $ 20 $ (1) $ (54) $ (55)
Signiture Brands
Common Stock* 4,552 5,666 (2,735) 3,849 1,114
Playtex
Common Stock* 3,255 15,292 4,044 7,993 12,037
Stanley
Common Stock* 19,154 29,811 (805) 11,462 10,657
Walter
Common Stock 8,877 5,938 (219) (2,720) (2,939)
--------- ---------- -----------
TOTAL UNREALIZED APPRECIATION
FROM PUBLICLY TRADED SECURITIES $ 284 $ 20,530 $ 20,814
--------- ---------- -----------
NONPUBLIC SECURITIES:
BeefAmerica Incorporated
Jr. and Sr.Preferred Stock 24,000 10,000 -- $ (14,000) $ (14,000)
Chadwick-Miller, Inc.
Common Stock Purchase Warrants* 3,736 -- -- (3,736) (3,736)
Preferred Stock Purchase Warrants* 12,916 -- -- (12,916) (12,916)
Magellan Health Service
Common Stock Warrants* 4 -- -- (4) (4)
SWO Holdings Corporation
Common Stock* 690 -- -- (690) (690)
--------- --------- -----------
TOTAL UNREALIZED DEPRECIATION FROM
NONPUBLIC SECURITIES $ -- $ (31,346) $ (31,346)
--------- --------- -----------
NET UNREALIZED APPRECIATION \ (DEPRECIATION) $ 284 $ (10,816) $ (10,532)
========= ========= ===========
</TABLE>
* Restricted Security.
See the Accompanying Notes to Financial Statements.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity & Capital Resources
As of March 31, 1997, the Fund had a total of $102.7 million (at cost)
invested in Mezzanine Investments. These investments were financed by net
offering proceeds and debt financing. This represents a $394,854 decrease versus
the total invested in Mezzanine Investments at December 31, 1996 of $103.1
million. The decrease in investments is due to the sale in the first quarter of
1997 of Stanley Furniture. The Fund's Mezzanine Investments consist of
high-yield subordinated debt and/or preferred stock linked with an equity
participation in middle market companies typically issued in private placement
transactions and are usually subject to restrictions on the transfer or sale of
the security, thereby limiting their liquidity.
During the three months ended March 31, 1997, the Fund received no
additional debt securities in lieu of cash interest payments
("payment-in-kind"). As of March 31, 1997, the Fund had in its portfolio $1.1
million of payment-in-kind debt securities and $6.5 million of payment-in-kind
equity securities.
On August 13, 1991, the Fund completed a refinancing of its credit agreement
with a lending group led by The First National Bank of Chicago ("First
Chicago"). The new agreement provided the Fund with a maximum credit facility of
$140 million, consisting of a $100 million term loan and a $40 million revolving
credit line, both maturing on July 31, 1998. The Fund has pledged substantially
all of its securities to secure repayment of this facility. The agreement
generally provided for mandatory prepayments, and a permanent reduction in the
credit facility, equal to the lesser of cost or cash proceeds in the event of
the sale or other cash disposition of Mezzanine Investments.
On October 29, 1993, the Fund amended its Credit Facility 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, the Fund's outstanding term loan was paid in full as
of March 29, 1994. Additionally, the Fund's remaining credit line was further
amended to reduce the commitments thereunder to $7.5 million, which is availavle
to the Fund as of March 31, 1997.
The Fund is now in its tenth year of operation. Because all but one of the
Fund's debt investments were previously sold or redeemed, 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 in American Health Companies, Duro-Test Corp., Chadwick-Miller,
Health o meter and Petco. Approximately $1.4 million of the reserve has been
returned to partners of the Fund. In addition, $2.9 million was utilized from
the reserve to pay down a portion of the First Chicago loan on January 6, 1994.
The Fund's reserve balance as of March 31, 1997 was approximately $3.1 million
which has been invested in temporary investments. As of the last meeting of the
Independent General Partners on February 25, 1997, the Independent General
Partners have approved retention of the reserve at its current level.
<PAGE>
Investment in High-Yield Securities
The Fund invested primarily in subordinated debt and preferred stock
securities ("High-Yield Securities"), generally linked with an equity
participation, issued in conjunction with the Mezzanine financing of privately
structured, friendly leveraged acquisitions, recapitalizations and other
leveraged financings. High-Yield Securities are debt and preferred equity
securities that are unrated or are rated by Standard & Poor's Corporation as BB
or lower and by Moody's Investor Services, Inc. as Ba or lower. Risk of loss
upon default by the issuer is significantly greater with High-Yield Securities
than with investment grade securities because High-Yield Securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Also, these issuers usually have high levels of indebtedness and are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates, than investment grade issuers. Most of these securities are
subject to resale restrictions and have no quoted market price.
Although the Fund cannot eliminate the risks associated with its investments
in High-Yield Securities, it has established risk management policies. The Fund
subjected each prospective investment to rigorous analysis and made only those
investments that were recommended by the Investment Adviser and that met the
Fund's investment guidelines or that had otherwise been approved by the Managing
General Partner and the Independent General Partners. Fund investments were
measured against specified Fund investment and performance guidelines. To limit
the exposure of the Fund's capital in any single issuer, the Fund limits the
amount of its investment in a particular issuer. The Fund's Investment Adviser
also continually monitors portfolio companies in order to minimize the risks
associated with its investments in High-Yield Securities.
Certain issuers of securities held by the Fund (Celebrity, Playtex, Stanley
Furniture and Signiture Brands) 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 Signiture Brands)
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 three 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.
<PAGE>
Results of Operations
Investment Income and Expenses
For the three months ended March 31, 1997, the Fund had a net investment
loss of $552,667 as compared to net investment income of $33,236 for the same
period in 1996. The total investment income earned on investments for the three
months ended March 31, 1997 was $348,206 of which $300,998 was earned from
Mezzanine Investments and $47,208 was earned from Temporary Investments. For the
same period in 1996, total investment income earned on investments was
$1,216,115 of which $463,848 was earned from Mezzanine Investments and $752,267
was earned from Temporary Investments.
The decrease in net investment income for the three months ending March 31,
1997 versus the comparative period in 1996 reflects a decrease in investment
income generated from mezzanine investments which have been sold since March 31,
1996, partially offset by lower Investment Advisory Fees and Legal and
Professional Fees. Short term discount income was substantially greater in the
first quarter of 1996 stemming from the proceeds received from the sale of GNC.
Major expenses for the period ending March 31, 1997 consisted of Investment
Advisory Fees and Legal and Professional Fees.
Legal and Professional fees paid by the Fund consist primarily of legal
fees incurred in conjunction with litigation. Legal and Professional fees for
the three months ended March 31, 1997 and 1996 were $229,495 and $386,824,
respectively. This decrease is attributable to the decrease in litigation
expenses incurred and legal fees required to be advanced by the Fund in
connection with the litigation described in Note 12 to the Financial Statements.
The Investment Adviser and Fund Administrator receive their compensation on
a quarterly basis. Total Investment Advisory Fees paid to the Investment Adviser
for the three months ended March 31, 1997 was $296,691 compared with $480,252
for the three months ended March 31, 1996. The fee is calculated at an annual
rate of 1% of assets under management, subject to certain reductions as
specified in the Fund's Partnership Agreement with a minimum annual payment of
$1,200,000. The decrease in 1997 as compared to 1996 Investment Advisory Fees is
a direct result of sales of investments, returns of capital to partners and
realized losses on investments.
The Fund Administration Fee is $300,000 per year plus all actual
out-of-pocket expenses incurred on behalf of the Fund by the Fund Administrator
(excluding compensation for the executive officers of the Fund Administrator),
but in no event exceeding, in aggregate, the annual amount of $2.0 million.
Out-of-pocket Fund expenses consist of accounting, audits, printing, tax
preparation and other administrative services. The Fund Administration Fee paid
to the Fund Administrator for the three months ended March 31, 1997 and March
31, 1996 was $75,000 and $74,335, respectively.
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
three months ended March 31, 1997 and 1996 totalled $172,629 and $172,656,
respectively.
<PAGE>
Net Assets
The Fund's net assets decreased by $557,169 during the three months ended
March 31, 1997, due to net realized gains of $361,480 and net unrealized
appreciation of $284,027 offset by a net investment loss of $552,667 and cash
distributions of $650,009.
The Fund's valuation of the common Stock of Celebrity, Signiture Brands,
Playtex, Stanley Furniture and Walter Industries reflect their closing market
price at March 31, 1997.
The Health o meter, Playtex and Stanley 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 Signiture Brands and Stanley Furniture under the
Securities and Exchange Commission's Rule 144, and therefore, any resale of
Health o meter or Stanley Furniture securities under Rule 144 is limited by the
volume limitations in that rule. Accordingly, the values referred to in the
financial statements for Health o meter, Playtex and Stanley Furniture
securities held by the Fund do not necessarily represent the prices at which
these securities could currently be sold.
Unrealized Appreciation and Depreciation and Non-Accrual of Investments
For the three months ended March 31, 1997, the Fund recorded net unrealized
appreciation of $284,027 as compared to net unrealized depreciation of
$4,715,698 for the same period in 1996. On March 31, 1997, the Fund's cumulative
net unrealized depreciation on investments totalled $10,530,439.
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 March 31, 1997.
Although the Managing General Partner and Investment Adviser are not aware of
any factors not disclosed herein that would significantly affect the estimated
fair value amounts, such amounts have not been comprehensively revalued since
that time, and the current estimated fair value of these investments may have
changed significantly since that point in time.
For additional information, please refer to the Supplemental Schedule of
Unrealized Appreciation and Depreciation - Schedule 2.
<PAGE>
Realized Gains and Losses
The net realized gain on investments sold for the three months ended March
31, 1997 was $361,480 compared to a net realized gain of $37,129,853 for the
same period in 1996.
For additional information, please refer to the Supplemental Schedule of
Realized Gains and Losses - Schedule 1.
Cash Distributions
On April 29, 1997, the Individual General Partners approved the first
quarter 1997 cash distribution totalling $283,218, which consists of net
distributable proceeds, after fund expenses, of $249,961 from the sale of
Stanley common stock (of which $386,609 is return of capital) and $33,257 of net
income from temporary investments. The total amount distributed to Limited
Partners was $280,386 or $.58 per Unit. The Managing General Partner received
$2,832, representing its 1% interest in the Fund. This cash distribution was
paid on May 15, 1997.
<PAGE>
Part II - Other Information
Items 1 - 5 are herewith omitted as the response to all items is either
none or not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule for the first quarter ended
March 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 15th day of
May, 1997.
ML-LEE ACQUISITION FUND, L.P.
By: Mezzanine Investments, L.P.,
Managing General Partner
By: ML Mezzanine Inc.,
its General Partner
Dated: May 15, 1997 /s/ Audrey Bommer
Audrey Bommer
Vice President and Treasurer
(Chief Financial Officer)
Dated: May 15, 1997 /s/ Roger F. Castoral, Jr.
Roger F. Castoral, Jr.
Assistant Treasurer
(Principal Accounting Officer)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 15th day of
May, 1997.
ML-LEE ACQUISITION FUND, L.P.
By: Mezzanine Investments, L.P.,
Managing General Partner
By: ML Mezzanine Inc.,
its General Partner
Dated: May 15, 1997
Audrey Bommer
Vice President and Treasurer
(Chief Financial Officer)
Dated: May 15, 1997
Roger F. Castoral, Jr.
Assistant Treasurer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary information extracted from the first quarter of
1997 Form 10-Q Balance Sheets and Statements of Operations and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 106,351,259
<INVESTMENTS-AT-VALUE> 95,826,723
<RECEIVABLES> 293,415
<ASSETS-OTHER> 868,196
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 96,988,334
<PAYABLE-FOR-SECURITIES> 0
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<TOTAL-LIABILITIES> 157,664
<SENIOR-EQUITY> 0
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<SHARES-COMMON-STOCK> 487,489
<SHARES-COMMON-PRIOR> 487,489
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<REALIZED-GAINS-CURRENT> 361,480
<APPREC-INCREASE-CURRENT> 284,027
<NET-CHANGE-FROM-OPS> 92,840
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (870,646)
<DISTRIBUTIONS-OF-GAINS> 121,277,058
<DISTRIBUTIONS-OTHER> 57,955,482
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<NET-CHANGE-IN-ASSETS> (557,169)
<ACCUMULATED-NII-PRIOR> 0
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<AVERAGE-NET-ASSETS> 97,109,254
<PER-SHARE-NAV-BEGIN> 197.07
<PER-SHARE-NII> (1.12)
<PER-SHARE-GAIN-APPREC> .58
<PER-SHARE-DIVIDEND> 0
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<AVG-DEBT-PER-SHARE> 0
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