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, 1996
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 1997 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, 1996, the Fund had
outstanding a total of $103.1 million invested in Mezzanine Investments,
representing (at cost) $93.5 million Managed and $9.6 million Non-Managed
portfolio investments. As of December 31, 1996, there were no Bridge Investments
outstanding.
REVIEW OF INVESTMENTS SOLD DURING 1996
General Nutrition Companies, Inc. ("GNC")
GNC is a nationwide specialty retailer of vitamin and mineral supplements,
personal care, fitness and other health-related products.
On February 7, 1996 the Securities and Exchange Commission declared
effective a Registration Statement filed by GNC in connection with the offering
of up to 17,994,176 shares of GNC Common Stock, including 1,635,834 shares which
were offered pursuant to the underwriters' over-allotment option. Of such
shares, 16,358,342 were sold by certain selling shareholders of GNC, including
the Fund, and the 1,635,834 shares subject to the underwriters' over-allotment
option were sold by GNC. In connection with the offering, the Fund sold its
entire remaining investment in GNC consisting of 4,903,766 shares of common
stock for net proceeds of $101.7 million and realized a gain of $87.9 million.
These net distributable proceeds of $206.61 per Unit were distributed on March
29, 1996 to Limited Partners of record as of the date of such sale.
<PAGE>
Petco Animal Supplies, Inc. ("Petco")
On April 4, 1996 Petco filed a registration statement with the Securities
and Exchange Commission for an offering of 5 million shares of Common Stock. Of
the 5 million shares offered, 2.6 million were offered by Petco and the
remaining shares were offered by certain current stockholders, including the
Fund. The offering was effected on April 30, 1996 and the Fund sold its entire
investment in Petco which consisted of 1,472,622 shares of Common Stock and
received net proceeds from the sale of $40,290,965 or $27.36 per share. Net
distributable proceeds of $81.82 per Unit were distributed on June 11, 1996, to
Limited Partners of record as of the date of such sale. The Fund realized a gain
of $24,445,187 on the sale.
SFX Broadcasting, Inc.
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,
for net proceeds of $125,672 or $14.50 per share. The Fund recognized a gain of
$125,672 on the transaction.
REVIEW OF INVESTMENTS IN MANAGED COMPANIES
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, 1996, the investment in Alliance is valued at cost.
BeefAmerica, Inc. ("BeefAmerica")
BeefAmerica is an integrated beef packing company operating slaughter and
fabrication processing facilities in Nebraska. On March 29, 1996, BeefAmerica,
entered into an agreement whereby BeefAmerica sold all of the capital stock of
BeefAmerica Operating Company, Inc. ("Opco"), to BAOC Acquisition, Inc.
("BAOC"), a company owned by the President of Opco and certain other investors.
Opco was the sole operating asset of BeefAmerica. As a result of such sale, the
Fund, as chief creditor of BeefAmerica, received cash proceeds of $26 million,
$10 million in Junior Preferred Stock of BAOC, and $14 million in Senior
Preferred Stock of BAOC, in exchange for all subordinated notes held by the
Fund. Although a realized loss of $50.98 million was recorded, the Fund reversed
the unrealized depreciation totaling $90.98 million on the investment that was
recorded in prior years. As a result, the Fund's year-end valuation of this
investment (including the reversal of unrealized depreciation from the sale of
the securities) for the year ended December 31, 1996 reflects total net
unrealized appreciation of approximately $76.9 million, bringing the aggregate
net unrealized depreciation to approximately $14 million through December 31,
1996.
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 21, 1996, the Fund sold 5,769 shares of Celebrity, Inc. Common
Stock for $75,000. Based upon the closing market price at December 31, 1996, the
Fund has recorded $30,000 of unrealized appreciation on its remaining equity
holding in Celebrity, Inc. for the year ended December 31, 1996. The Fund's
year-end valuation reflects an aggregate net unrealized depreciation of $54,000
through 1996.
Chadwick-Miller, Inc. ("CMI")
CMI operates full-line retail book stores under the Encore, Lauriat and the
Royal Discount Books names.
In connection with the financial restructuring on November 23, 1994, of CMI
and its holding company, CMI Holding Corp., the Fund's $5 million 14.75% Senior
Note was redeemed. The net proceeds were $5 million, of which $3.1 million of
such proceeds were classified as restricted cash and held in escrow. In
connection with an additional financial restructuring of Chadwick Miller in July
1996, the Fund received all proceeds held in escrow plus accrued interest and
exchanged all Common and Preferred Stock and Common Stock Purchase Warrants held
for 39,487 new Common Stock Purchase Warrants and 15,406 Preferred Stock
Purchase Warrants. No gain or loss was recognized on the transaction. The Fund's
year-end valuation of this investment reflects net unrealized depreciation of
$14.8 million for the year ended December 31, 1996, bringing the aggregate net
unrealized depreciation to approximately $16.6 million through December 31,
1996.
<PAGE>
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, 1996, operates three
separate retail subsidiaries: Cole Vision, Things Remembered and Cole Key. The
investment in Cole is valued at cost as of December 31, 1996.
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 and tea 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, 1996, the Fund holds 1,563,053 shares of Health o meter
common stock which represents 14.7% of the outstanding common equity.
Based upon the closing price at December 31, 1996, the Fund recorded net
unrealized appreciation of $2.7 million on its equity investment in Health o
meter for the year ended December 31, 1996. The Fund's year-end valuation of
this investment reflects an aggregate of approximately $3.8 million in net
unrealized appreciation through December 31, 1996.
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 31, 1996, the Fund
recorded approximately $701,000 of net unrealized appreciation in 1996 on its
equity holdings in Playtex. The Fund's year-end valuation of this investment
reflects an aggregate of approximately $8.0 million of net unrealized
appreciation through December 31, 1996.
Stanley Furniture Company, Inc. ("Stanley Furniture")
Stanley Furniture designs, manufactures and markets furniture products. On
November 13, 1996, Stanley Furniture completed a public offering of 1,000,000
shares of its common stock at a price of $16 per share. These shares were sold
by the Fund and certain affliates of the Thomas H. Lee Company. Following the
offering, Stanley purchased a total of 150,000 shares from the selling
stockholders including the Fund at the same price per share. Pursuant to these
transactions, the Fund sold a total of 1,115,256 shares of its Stanley common
stock for $16.9 million or $15.12 per share. The Fund recognized a gain of $2.8
million on the transaction. Net distributable proceeds of $34.24 per Unit were
distributed on December 23, 1996 to Limited Partners of record as of the dates
of such sales.
Based upon the closing market price at December 31, 1996, the Fund has
recorded net unrealized appreciation for 1996 of approximately $23.6 million on
its remaining equity holdings in Stanley Furniture. The Fund's year-end
valuation of this investment reflects an aggregate of approximately $11.5
million net unrealized appreciation through December 31, 1996.
During February 1997, the Fund sold an additional 31,515 shares of Stanley
Common Stock pursuant to the provisions of Rule 144 under the Securities Act of
1933, as amended. Total proceeds from the sale were approximately $756,335. As
of March 20, 1997, the Fund continues to hold 1,528,781 shares of Stanley Common
Stock.
<PAGE>
REVIEW OF INVESTMENTS IN NON-MANAGED PORTFOLIO COMPANIES
The following is a brief description of companies in the Fund's Non-Managed
Company portfolio:
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.
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. Based upon the closing market price at December 31, 1996, the
Fund recorded $436,000 of net unrealized appreciation on its equity holdings for
the year ended December 31, 1996. This investment reflects an aggregate net
unrealized depreciation of $2.7 million through December 31, 1996.
SWO Holdings Corporation
SWO Holdings Corporation is an operator of supermarkets located in
Oklahoma, southern Kansas and Amarillo, Texas. On October 2, 1996, pursuant to a
Joint Plan of Reorganization of Homeland Holding Corporation ("Homeland
Holding") effective June 13, 1996, the Fund exchanged the 185,048 shares of
Homeland Holding common stock and received 1,430 shares of new Homeland Holding
common stock and 1,506 common stock purchase warrants. No gain or loss was
recognized on the transaction. The Fund's valuation reflects $1.0 million of net
unrealized depreciation for the year ended December 31, 1996, bringing the net
aggregate unrealized depreciation to $690,000 through December 31, 1996.
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, 1996.
Competition
The Fund has completed its investment period 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 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 have filed a Notice of
Appeal on October 4, 1996, and expect to have a hearing on their appeal in 1997.
The Fund may be obligated to indemnity and advance litigation expenses to one or
more of the defendants under the terms and conditions of various indemnity
provisions of the Fund's Partnership Agreement and separate indemnification
agreements. The Fund has advanced litigation expenses to the indemnified parties
based upon amounts which are deemed reimbursable in accordance with the
indemnification provisions and has included these amounts in Legal and
Professional Fees.
<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 defandants'
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 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. In the opinion of legal council,
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.
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, 1996.
<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 Unit holders as of January 1, 1997, the last
effective date of transfer (as described below), was 36,542. 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.
Beginning with the December 1994 client account statements, MLPF&S
implemented new guidelines for providing estimated values of limited
partnerships and other direct investments reported on client account statements.
As a result, MLPF&S no longer reports the general partner's estimate of limited
partnership net asset value to Unit holders. Pursuant to such MLPF&S guidelines,
estimated values for limited partnership interests originally sold by MLPF&S
(such as the Fund's Units) will be provided two times per year to MLPF&S by
independent services. These 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 month-end
account statements through May of the following year, and on information
available to the services on March 31st for reporting on June through November
MLPF&S client account statements of the same year. MLPF&S clients may contact
their MLPF&S 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 estimates of value. The
estimated values provided by the independent services and the Fund's current net
asset value as estimated by the general partner are not market values and Unit
holders may not be able to sell their Units or realize either amount upon a sale
of their Units. In addition, Unit holders may not realize the independent
estimated value or the Fund's current net asset value upon the liquidation of
the Fund's assets over its remaining life.
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 Capital 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. The Fund's ability to
make future distributions is restricted.
As set forth in Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources - the
information contained is incorporated herein by reference.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Item 6. Selected Financial Data
For the Years Ended
Supplemental Information December 31, 1996 December 31, 1995 December 31, 1994 December 31, 1993 December 31, 1992
Schedule
Selected Financial Data
TOTAL FUND INFORMATION:
Net Investment Income (Loss) $ (1,411,814) $ (1,155,421) $ 9,305,007 $ 125,500 $ 13,891,693
Net Realized Gains (Losses) on
Investments 63,695,316 75,808,138 (37,008,074) 69,148,273 (15,434,983)
Net Change in Unrealized
Appreciation(Depreciation) on
Investments (23,317,903) 9,920,766 9,271,721 91,162,444 16,629,394
Cash Distributions to Partners (a) 195,931,182 186,920,065 43,760,745 56,612,752 24,010,059
Net Assets 97,387,831 254,353,413 356,699,995 418,892,086 315,068,621
Cost of Mezzanine Investments 103,063,947 223,694,546 336,632,272 387,857,896 471,148,771
Total Assets 97,635,860 254,776,082 357,777,636 431,723,973 382,150,325
Outstanding Loan Payable -- -- -- 9,594,004 62,235,603
PER UNIT OF LIMITED PARTNERSHIP
INTEREST:
Investment Income $ 6.21 $ 11.68 $ 37.10 $ 21.65 $ 57.75
Expenses (9.08) (14.03) (18.20) (21.39) (29.53)
------------ ------------ ------------ ------------ ----------------
Net Investment Income (Loss) (2.87) (2.35) 18.90 .26 28.22
============ ============ ============ ============ ================
Net Realized Gains (Losses) on
Investments $ 129.35 $ 153.95 $ (75.16) $ 140.43 $ (31.35)
Net Change in Unrealized
Appreciation (Depreciation) (51.46) 20.15 18.83 185.13 33.77
Cash Distributions (a) 397.90 379.60 88.87 114.97 48.76
Net Asset Value 197.07 519.95 727.79 854.10 643.25
</TABLE>
(a) Includes $72,697,537 or $147.70 per Limited Partnership Unit return of
capital from the sales of Mezzanine Investments
See the Cash Distributions Schedule for further information.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity & Capital Resources
As of December 31, 1996, the Fund had a total of (at cost) $103,063,947
(including $1,122,216 of payment-in-kind notes and $6,485,801 of payment-in-kind
equity) invested in Mezzanine Investments, representing $93,467,506 Managed and
$9,596,443 Non-Managed portfolio investments. These investments were financed by
net offering proceeds and debt financing. This represents a $120 million
decrease versus the total at December 31, 1995 of $223,694,546. The decrease in
gross assets is due to sales and redemptions of the Fund's investments during
1996. 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. The Fund's remaining Mezzanine Investments currently
consist of common and preferred equity.
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 of $140 million,
consisting of a $100 million term loan and a $40 million revolving credit line,
both maturing on July 31, 1998 (the Credit Facility). The Fund had pledged
substantially all of its securities to secure repayment of the Credit 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 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. As of March 31,
1997, the Fund had the entire $7.5 million credit line available.
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, along with a distribution to partners in the second
quarter of 1993 of $424,264 and the first quarter of 1997 of $1 million. 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 20, 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 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 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
The total investment income earned on investments for the year ended
December 31, 1996 was $3,061,608, of which $1,611,001 was earned from Mezzanine
Investments and $1,450,607 was earned from Temporary Investments. For the same
period in 1995, total investment income earned on investments was $5,751,535, of
which $4,412,491 was earned from Mezzanine Investments and $1,339,044 was earned
from Temporary Investments.
<PAGE>
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.
For the year ended December 31, 1996, the Fund had net investment loss from
operations of $1,411,814 as compared to a net investment loss of $1,155,421 and
net investment income of $9,305,007 for the same periods in 1995 and 1994,
respectively. The decrease in net investment income for the year ended December
31, 1996 compared to the year ended December 31, 1995 is the result of the
decrease in interest income generated from debt investments held by the Fund at
December 31, 1996. During the twelve month period ending December 31, 1996 the
Fund held one security that generated interest income. However, the reduction in
interest income during 1996 was partially offset by a reduction of Fund
expenses; primarily Investment Advisory Fees and Fund Administration Fees and
Expenses.
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.
Major expenses for the period consisted of the Legal and Professional Fees
Investment Advisory Fee, and Fund Administration Fees and Reimbursable
Administrative 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, 1996 was $1,282,991, compared with
$2,770,934 for the year ended December 31, 1995 and $3,652,538 for the year
ended December 31, 1994. 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 1996 as compared to 1995 and 1994 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, 1996, 1995 and 1994, legal and professional fees were $1,559,223,
$1,584,381 and $2,338,418, 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, 1996, 1995 and 1994 were $299,335, $1,330,212 and $1,843,910,
respectively. 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 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. 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.
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
$414,544 for the year ended December 31, 1996. For the period ending October 19,
1995, the Fund's expenses for accounting, audit, 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.
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, 1996, 1995 and 1994 totaled $701,021, $738,029, and
$772,593, respectively. This decrease in 1996 as compared to the 1995 and 1994
loan fees is the result of reductions in the Credit Facility.
<PAGE>
Net Assets
The Fund's net assets decreased by $156,965,582 during the year ended
December 31, 1996 due to net investment loss of $1,411,814 and cash
distributions to partners of $195,931,182 ($72,697,537 of cash distributions
distributed in 1996 was return of capital from the sales of portfolio
investments) and additional net unrealized depreciation of $23,317,903, offset
by net realized gains of $63,695,316.
The Fund's net assets decreased by $102,346,582 during the year ended
December 31, 1995 due to cash distributions to partners of $186,920,065
($61,054,782 of the cash distributions paid were return of capital from the
sales of Mezzanine Investments) and net realized losses of $1,155,421 partially
offset by additional net unrealized appreciation of $9,920,766 and net realized
gains of $75,808,138.
The Fund's net assets increased by $62,192,091 during the year ended
December 31, 1994 due to additional net unrealized appreciation of $9,271,721,
net realized losses of $37,008,074 and net investment income of $9,305,007
partially offset by cash distributions to partners of $43,760,745 ($4,046,615 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, 1996, the Fund recorded total net
unrealized depreciation of $23.3 million, of which $111.9 million was a reversal
of net unrealized appreciation for investments sold during 1996. Approximately
$27.5 million recorded in 1996 related to net unrealized appreciation recorded
in the market value of publicly traded securities held by the Fund at December
31, 1996. This compares to a 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. For the year ended December 31, 1994, the Fund recorded net
unrealized appreciation of $9.3 million of which $39.2 million was related to
net depreciation in market value of publicly traded securities. The Fund's
cumulative net unrealized depreciation on investments at December 31, 1996
totaled $10.8 million.
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.
Approximately 62% of the Fund's investments (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, 1996. Although the Managing General Partner and Investment Adviser are not
aware of any factors not disclosed herein that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued since that time; and the current estimated fair value of these
investments may have changed significantly since that point in time.
The Fund's valuation of the common stock of Celebrity, Inc., Health o
meter, Playtex, Stanley Furniture and Walter Industries reflect their closing
market price at December 31, 1996.
<PAGE>
The Health o meter, 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 pursuant to
Rule 144, under the securities act of 1933 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 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.
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.
For additional information, please refer to the Supplemental Schedule
of Unrealized Appreciation and Depreciation (Schedule 2).
Realized Gains and Losses
Net realized gains on investments for the year ended December 31, 1996 were
$63,695,316 compared to a net realized gain of $75,808,174 in 1995 and a net
realized loss of $37,008,074 for 1994.
For additional information, please refer to the Supplemental Schedule
of Realized Gains and Losses (Schedule 1).
Cash Distributions
On February 3, 1997, the Individual General Partners approved the fourth
quarter 1996 cash distribution totaling $650,009, which consisted of $92,310 of
net investment income from Temporary Investments, $4,058 return of capital from
the sale of Mezzanine Investments, $1 million return of the Reserve for
Follow-On-Investments, which was reduced to pay Fund expenses of $446,359. The
total amount distributed to Limited Partners was $643,485, or $1.32 per Unit.
The Managing General Partner received $6,524 in proportion to its 1% interest in
the Fund. The distributions were made on February 14, 1997.
<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> <C>
Total Total Distributed to Per Unit Managing
Distributed Limited Partners Return of General Incentive
Cash Amount Per Unit* Capital** 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 10.37 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 36.15 181,720 -
Second Quarter 1993 5,086,627 5,035,761 10.33 .86 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 6.52 80,028 -
Second Quarter 1994 1,083,292 1,072,476 2.20 1.22 10,816 -
Third Quarter 1994 5,623,355 5,567,124 11.42 .48 56,231 -
Fourth Quarter 1994 7,602,855 7,526,830 15.44 5.04 76,025 -
First Quarter 1995 44,671,712 44,225,002 90.72 41.20 446,710 -
Second Quarter 1995 19,863,955 19,665,306 40.34 17.13 198,649 -
GNC Distribution on
August 14, 1995 114,190,626 113,048,699 231.90 59.86 1,141,927 -
Third Quarter 1995 590,917 584,987 1.20 .75 5,930 -
Fourth Quarter 1995 5,391,914 5,338,005 10.95 (a) 13.66 53,909 -
First Quarter 1996 26,916,067 26,646,919 54.66 53.06 269,148 -
GNC Distribution on
March 29, 1996 101,737,501 100,720,102 206.61 27.94 1,017,399 -
Petco Distribution on
June 11, 1996 40,289,255 39,886,350 81.82 16.66 402,905 -
Second Quarter 1996 4,027,927 3,987,660 8.18 6.45 40,267 -
Third Quarter 1996 709,056 701,984 1.44 (a) 2.15 7,072 -
Stanley Distribution
on December 23, 1996 16,860,231 16,691,623 34.24 27.78 168,608 -
Fourth Quarter 1996 650,009 643,485 1.32 (a) 2.04 6,524 -
------------- ------------- --------- --------- ------------ -----------
Totals $ 686,969,326 $ 655,890,123 $1,350.73 $ 329.32 $ 6,869,130 $24,210,073
============= ============= ========= ========= ============ ===========
* For periods prior to Third Quarter 1988, the amounts shown are for the 1st
closing participants only. Subsequent closings' amounts as to such periods
will vary.
** The Per Unit Return of Capital figures are included in the total Per Unit
Distribution amount in the previous column.
*** Incentive distributions paid to the Managing General Partner for exceeding
the cumulative Priority Return on Mezzanine Investments to Limited Partners.
(a) Per Unit Return of Capital amounts reported, for the fourth quarter 1995,
the second quarter 1996 and the fourth quarter 1996, respectively, were
reduced by $2.71 per Unit, $.71 per Unit and $.72 per Unit, respectively, to pay
Fund expenses during such quarters.
</TABLE>
<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, 1996 and December 31, 1995
Statements of Operations
For the Years Ended December 31, 1996, 1995 and 1994
Statements of Changes in Net Assets
For the Years Ended December 31, 1996, 1995 and 1994
Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
Statements of Changes in Partners' Capital
For the Years Ended December 31, 1996, 1995 and 1994
Schedule of Portfolio Investments - December 31, 1996
Notes to Financial Statements
Supplementary Schedule of Realized Gains and Losses (Schedule 1)
Supplementary Schedule of Unrealized Appreciation and Depreciation (Schedule 2)
PART III - OTHER INFORMATION
Item 10. Directors and Executive Officers of the Registrant
Item 14. Exhibits Financial Statement Schedules and Reports on Form 8-K.
<PAGE>
Report of Independent Accountants
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,
1996 and 1995, 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, 1996, 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, 1996 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 $92,228,926 at
December 31, 1996 (94.7% 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
March 20, 1997
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
<S> <C> <C>
December 31, 1996 December 31, 1995
----------------- -----------------
ASSETS:
Investments - Notes 2, 8, 9
Portfolio Investments at fair value
Managed Companies (amortized cost $93,468
at December 31, 1996 and $214,099 at December 31, 1995) $ 86,067 $ 229,416
Non-Managed Companies (amortized cost $9,597
at December 31, 1996 and at December 31, 1995) 6,183 6,782
Temporary Investments, at amortized cost (cost $4,040 at
December 31, 1996 and $7,357 at December 31, 1995) 4,047 7,370
Cash (of which $6,049 was restricted at December 31, 1995) - Note 8 10 6,054
Prepaid Loan Fees - Notes 2, 4 1,022 1,661
Prepaid Expenses and Other Receivables 307 116
Receivable for Investments Sold - 3,377
--------------- ---------------
TOTAL ASSETS $ 97,636 $ 254,776
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities
Legal and Professional Fees Payable $ 122 $ 60
Reimbursable Administrative Expenses Payable 103 171
Independent General Partner Expenses Payable 23 28
Deferred Interest Income - Note 2 - 164
--------------- ---------------
Total Liabilities 248 423
--------------- ---------------
Partners' Capital - Note 3
Managing General Partner 1,317 884
Limited Partners (487,489 Units) 96,071 253,469
--------------- ---------------
Total Partners' Capital 97,388 254,353
--------------- ---------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 97,636 $ 254,776
=============== ===============
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
For the Years Ended December 31,
<S> <C> <C> <C>
1996 1995 1994
-------- -------- --------
INVESTMENT INCOME - Notes 2, 8, 10:
Interest $ 1,444 $ 3,804 $ 14,683
Discount 1,451 1,339 498
Dividend & Other Income 167 609 3,084
-------- -------- --------
TOTAL INCOME 3,062 5,752 18,265
-------- -------- --------
EXPENSES:
Investment Advisory Fee - Note 5 1,283 2,771 3,652
Fund Administration Fee - Note 6 299 1,330 1,844
Reimbursable Administrative Expenses - Note 6 415 171 --
Loan Fees - Notes 2, 4 701 738 773
Independent General Partners' Fees and Expenses - Note 7 208 304 285
Legal and Professional Fees 1,559 1,584 2,338
Insurance Expense 8 9 10
Interest Expense -- -- 58
-------- -------- --------
TOTAL EXPENSES 4,473 6,907 8,960
-------- -------- --------
NET INVESTMENT INCOME (LOSS) (1,411) (1,155) 9,305
NET REALIZED GAIN (LOSS) ON INVESTMENTS - -------- -------- --------
NOTE 8 AND SCHEDULE 1 63,695 75,808 (37,008)
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) -------- -------- --------
ON INVESTMENTS - NOTE 9 AND SCHEDULE 2
Publicly Traded Securities (84,416) (7,571) (39,245)
Nonpublic Securities 61,098 17,492 48,516
-------- -------- --------
Subtotal (23,318) 9,921 9,271
-------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 38,966 $ 84,574 $(18,432)
======== ======== ========
</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>
1996 1995 1994
--------- --------- ---------
FROM OPERATIONS:
Net Investment Income (Loss) $ (1,411) $ (1,155) $ 9,305
Net Realized Gain (Loss) on Investments 63,695 75,808 (37,008)
Net Change in Unrealized Appreciation (Depreciation)
on Investments (23,318) 9,921 9,271
--------- --------- ---------
Net Increase (Decrease) in Net Assets Resulting
from Operations 38,966 84,574 (18,432)
Cash Distributions to Partners (195,931) (186,920) (43,761)
--------- --------- ---------
Total Increase (Decrease) (156,965) (102,346) (62,193)
NET ASSETS:
Beginning of Period 254,353 356,699 418,892
--------- --------- ---------
End of Period $ 97,388 $ 254,353 $ 356,699
========= ========= =========
</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>
Increase (Decrease) in Cash and Cash Equivalents 1996 1995 1994
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest, Dividends and Discount Income $ 2,598 $ 6,219 $ 11,098
Investment Advisory Fee (1,283) (2,771) (3,652)
Fund Administration Fee (299) (1,330) (1,844)
Reimbursable Administrative Expenses (483) -- --
Legal and Professional Fees (1,393) (1,911) (2,181)
Loan Fees and Expenses (62) (116) (73)
Independent General Partners' Fees and Expenses (213) (296) (294)
(Purchase) Sale of Temporary Investments, Net 3,317 3,141 20,643
Proceeds from Sale of Portfolio Company Investments 187,705 186,596 39,502
Purchase of Portfolio Company Investments -- -- (6,344)
Interest Expense -- -- (58)
--------- --------- ---------
Net Cash Provided by Operating Activities 189,887 189,532 56,797
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of Borrowings, Net -- -- (9,594)
Cash Distributions to Partners (195,931) (186,920) (43,761)
--------- --------- ---------
Net Cash Applied to Financing Activities (195,931) (186,920) (53,355)
--------- --------- ---------
Net Increase (Decrease) in Cash (6,044) 2,612 3,442
Cash at Beginning of Period 6,054 3,442 --
--------- --------- ---------
Cash at End of Period $ 10 $ 6,054 $ 3,442
========= ========= =========
RECONCILIATION OF NET INVESTMENT INCOME (LOSS)
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Investment Income (Loss) $ (1,411) $ (1,155) $ 9,305
--------- --------- ---------
Adjustments to Reconcile Net Investment Income (Loss)
to Net Cash Provided by Operating Activities:
Decrease in Investments 123,947 116,079 79,085
(Increase) Decrease in Receivable for Investments Sold 3,377 (2,150) 13,781
(Increase) Decrease in Accrued Interest,
Dividend and Discount Receivables (458) 466 (7,167)
Decrease in Prepaid Expenses 748 530 684
Increase (Decrease) in Independent General Partner Fees Payable (5) 7 3
Increase (Decrease) in Reimbursable Administrative Expenses Payable (68) 171 --
Increase (Decrease) in Legal and Professional Fees Payable 62 (224) 171
Net Realized Gain (Loss) on Investments 63,695 75,808 (37,008)
Decrease in Option Payable -- -- (2,057)
--------- --------- ---------
Total Adjustments 191,298 190,687 47,492
--------- --------- ---------
Net Cash Provided by Operating Activities $ 189,887 $ 189,532 $ 56,797
========= ========= =========
</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
General Limited
Partner Partners Total
--------- --------- ---------
For the Twelve Months Ended December 31, 1994
Partners' Capital at January 1, 1994
Allocation of Net Investment Income $ 93 $ 9,212 $ 9,305
Allocation of Net Realized Loss on Investments (370) (36,638) (37,008)
Allocation of Net Change in Unrealized Appreciation 93 9,178 9,271
Cash Distributions to Partners (438) (43,323) (43,761)
----------- ----------- -----------
Partners' Capital at December 31, 1994 $ 1,908 $ 354,791 $ 356,699
=========== =========== ===========
For the Twelve Months Ended December 31, 1995
Partners' Capital at January 1, 1995 $ 1,908 $ 354,791 $ 356,699
Allocation of Net Investment Loss (12) (1,143) (1,155)
Allocation of Net Realized Gain on Investments 758 75,050 75,808
Allocation of Net Change in Unrealized Appreciation 99 9,822 9,921
Cash Distributions to Partners (1,869) (185,051) (186,920)
----------- ----------- -----------
Partners' Capital at December 31, 1995 $ 884 $ 253,469 $ 254,353
=========== =========== ===========
For the Twelve Months Ended December 31, 1996 - Note 3
Partners' Capital at January 1, 1996 $ 884 $ 253,469 $ 254,353
Allocation of Net Investment Loss (14) (1,397) (1,411)
Allocation of Net Realized Gain on Investments 637 63,058 63,695
Allocation of Net Change in Unrealized Depreciation 1,769 (25,087) (23,318)
Cash Distributions to Partners (1,959) (193,972) (195,931)
----------- ---------- -----------
Partners' Capital at December 31, 1996 $ 1,317 $ 96,071 $ 97,388
=========== ========== ===========
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1996
(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 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
785,542.64 Warrants Alliance International Group, Common Stock Purchase Warrants(d) various 0 0(i)
(52.5% of fully diluted common equity assuming exercise
of warrants) (k)
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 26.36
----------------------------
BEEFAMERICA, INC. (a) (e) - Notes 8,9
$14,000 BAOC Acquisition, Inc. Sr. Preferred Stock 10% due 04/01/01 (c)(g) 09/09/88 14,000 5,800
$10,000 BAOC Acquisition, Inc. Jr. Preferred Stock 4% due 04/01/01 (c)(g) 09/09/88 10,000 4,200
$1,072 15% Sub. Nt.
Purchased 09/9/88 $ 1,072
Redeemed 02/20/92 $ 1,072
Realized Gain $ 0
Preferred Stock
Purchased 09/9/88 $ 2,700
Redeemed 02/20/92 $ 2,700
Realized Gain. $ 0
$41,997 15.5% Sr.Sub Interim Nt
Purchased 09/9/88 $ 20,000
$80,951 15% Sub Nt
Purchased 09/9/88 $ 38,928
Exchanged 03/29/96 for
Cash Proceeds $ 26,000
10% Sr Pref Stk $ 14,000
4% Jr Pref Stk $ 10,000
Realized Loss $ (8,928)
5661.11 Shares Class A Pref. Stk
Purchased 04/10/91 $ 40,050
Value at restructuring 3/29/96 $ 0
Realized Loss $(40,050)
51,000 Shares Common Stk
Purchased various $ 2,000
Value at restructuring 3/29/96 $ 0
Realized Loss $ (2,000) ----------------------------
Total Net Realized Loss $(50,978) 24,000 10,000 10.39
----------------------------
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1996
(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)(j) 06/16/92 $ 75 $ 21
(0.2% of fully diluted common equity)(k)
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 21 0.02
---------------------------------
CHADWICK-MILLER, INC. (a)(e) - Notes 8,9,10
15,406 Warrants CMI Holding Corp.,
Preferred Stock Purchase Warrants (d)(h) 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)(k)
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>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1996
(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)(k)
$589 Senior Bridge Note
Purchased 09/25/90 $589
Sold 11/15/90 $589 -------------------------
Realized Gain $ 0 0 0 0.00
-------------------------
HEALTH O METER PRODUCTS, INC. (a) Note 9
952,500 Shares Health o meter Products, Inc., Common Stock (d)(j) 04/28/88 1,270 5,120
610,553 Shares Health o meter Products, Inc., Common Stock (d)(j) 08/17/94 3,282 3,281
(14.7% of fully diluted common equity)(k)
$16,000 14.50% Subordinated Note
Purchased 04/28/88 $16,000
Sold 03/24/92 $16,000
Realized Gain $ 0
187,500 Shares of Common Stock
Purchased 04/28/88 $ 250
Sold 03/30/92 $ 2,441
Realized Gain $ 2,191 -------------------------
Total Realized Gain $ 2,191 4,552 8,401 8.72
-------------------------
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1996
(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 $11,249
(2.6% of fully diluted common equity) (k)
$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 11,249 11.69
-------------------------------------
STANLEY FURNITURE COMPANY, INC. (a)(e) - Notes 8, 9, 16
1,560,296 Shares Stanley Furniture Co., Inc., Common Stock(d)(h)(j) Various 19,549 31,011
(32.9% of fully diluted common equity)(k)
$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 19,549 31,011 32.20
-------------------------------------
TOTAL INVESTMENT IN MANAGED COMPANIES $ 93,468 $ 86,067 89.38
=====================================
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1996
(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
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
-------------------------------
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
185,048 Shares Common Stock
Purchased 8/10/90 $ 440
Exchanged 10/2/96
1,430 Shares Common Stock $ 440
1,506 Common Stock Purchase Warrants $ 0
Realized Gain $ 0 -------------------------------
Total 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
(formerly Hillsborough Holdings Corporation)
435,569 Shares Walter Industries, Inc., Common Stock(d)(j) 01/07/88 8,877 6,152
326 Shares Walter Industries, Inc., Common Stock (d)(j) 09/13/95 0 5
$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 6,157 6.39
-------------------------------
TOTAL INVESTMENT IN NON-MANAGED COMPANIES 9,597 6,183 6.42
===============================
SUMMARY OF MEZZANINE INVESTMENTS
Subordinated Notes $ 11,932 $ 11,932 12.39
Preferred Stock 35,502 21,502 22.33
Common Stock and Warrants 55,631 58,816 61.08
-------------------------------
TOTAL MEZZANINE INVESTMENTS $103,065 $ 92,250 95.80
===============================
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 1996
(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
$1,950 State Street Clipper Receivable, 5.46% due 01/02/97 12/17/96 $ 1,945 $ 1,950
$2,100 Ford Motor Credit Corp. 5.62% due 01/08/97 12/24/96 2,095 2,097
-------------------------------
TOTAL INVESTMENT IN COMMERCIAL PAPER 4,040 4,047 4.20
-------------------------------
TOTAL TEMPORARY INVESTMENTS $ 4,040 $ 4,047 4.20
-------------------------------
TOTAL INVESTMENT PORTFOLIO $107,105 $ 96,297 100.00%
===============================
(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, 1996, owned more than 25% of
the voting securities and which therefore were presumed to be controlled by
the Fund under the Investment Company Act of 1940 as of such date.
(f) Represents original cost and excludes accretion of discount of $7 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.
(k) Percentages of Common Equity ownership have not been audited by Price Waterhouse LLP.
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
ML-LEE ACQUISITION FUND, L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
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 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 described 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, 1996. Although the Managing General Partner and Investment Adviser are not
aware of any factors not disclosed herein that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued since that time; and especially in light of the fact that the portfolio
investments of companies whose equity is publicly traded are valued at the last
price available at December 31, 1996, the current estimated fair value of these
investments may have changed significantly since that point in time.
Interest Receivable on Investments
Investments generally will be placed on non-accrual status in the event
of a default (after applicable grace period expires) or if the Investment
Adviser and the Managing General Partner determine that there is no reasonable
assurance of collecting interest.
Payment-In-Kind Securities
All payment-in-kind securities received in lieu of cash interest payments
by the Fund's portfolio companies are recorded at face value (which approximates
accrued interest), unless the Investment Adviser and the Managing General
Partner determine that there is no reasonable assurance of collecting the full
principal amounts of such securities. As of December 31, 1996 and December 31,
1995, the Fund has in its portfolio of investments $1,122,216, of
payment-in-kind notes, which excludes subordinated notes placed on non-accrual
status. As of December 31, 1996 and December 31, 1995, the Fund has in its
portfolio of investments $6,485,801, 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 were 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, as defined in the Partnership Agreement, 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.
The Partnership Agreement does not specify a method for allocation of
unrealized appreciation and depreciation among the Partners. Such allocations do
not affect either cash distributions or allocation or taxable income and loss.
The Fund has generally allocated such amounts 99% to the Limited Partners and 1%
to the Managing General Partner. During 1996, it was determined that certain
prior year allocations were not made on this basis. The 1996 allocation of
unrealized appreciation/depreciation includes an adjustment to correct this
error.
4. Leverage
The Fund entered into a credit agreement, dated as of 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"). The Credit Facility consisted of a $100 million
term loan and a $40 million secured revolving credit line. In October of 1993,
the Fund amended the Credit Facility enabling it to make prepayments of the term
loan at any time and without any corresponding reduction to the revolving line
of credit. As a result of paydowns of the term loan, the Fund's outstanding term
loan was paid in full as of March 29, 1994. The remaining credit line has been
further amended and reduced to $7.5 million, all of which is available at
December 31, 1996. The Credit Facility will mature on July 31, 1998. In
connection with the Credit Facility, the Fund has pledged almost all its
remaining 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 1996
was $639,552.
An annual Loan Administration Fee of $25,000 for the administration of
the Credit Facility.
Unused Commitment Fees of $36,743, which are equal to 1/2 of 1% per
annum of the unused Credit Facility.
For the years ended December 31, 1996, 1995 and 1994, the Fund incurred
$701,021, $738,029 and $772,593, respectively, in loan fees.
5. Investment Advisory Fee
The Investment Adviser provides for the identification, management and
liquidation of investments for the Fund. As compensation for services rendered
to the Fund, the Investment Adviser receives a quarterly fee at the annual rate
of 1% of assets under management (net offering proceeds, reduced by cumulative
capital reductions, plus outstanding bank borrowing as specified in the Fund's
Partnership Agreement), with a minimum annual fee of $1.2 million. The
Investment Advisory Fee is calculated and paid quarterly, in advance. For the
years ended December 31, 1996, 1995 and 1994, the Fund paid $1,282,991,
$2,770,934 and $3,652,538, 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. 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. As
compensation for its services prior to October 19, 1995, the Fund Administrator
received from the Fund an annual amount equal to the greater of $400,000 or
0.45% of the Net Proceeds Available for Investments subject to certain
reductions as specified in the Fund's Partnership Agreement. For the years ended
December 31, 1996, 1995, and 1994, the Fund paid $299,335, $1,330,212 and
$1,843,907, respectively, in Fund Administration Fees.
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 for the
year ended December 31, 1996 were $414,544. For the period ending October 19,
1995, the Fund's expenses for accounting, audit, 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.
<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, 1996, 1995 and 1994, the Fund incurred
$207,827, $303,527, and $284,682, respectively, in Independent General Partners'
Fees and Expenses.
8. Investment Transactions
On February 7, 1996 the Securities and Exchange Commission declared
effective a Registration Statement filed by GNC in connection with the offering
of up to 17,994,176 shares of GNC Common Stock, including 1,635,834 shares which
were offered pursuant to the underwriters' over-allotment option. Of such
shares, 16,358,342 were sold by certain selling shareholders of GNC, including
the Fund, and the 1,635,834 shares subject to the underwriters' over-allotment
option were sold by GNC. In connection with the offering, the Fund sold its
entire remaining investment in GNC consisting of 4,903,766 shares of common
stock for net proceeds of $101.7 million and realized a gain of $87.9 million.
These net distributable proceeds of $206.61 per Unit were distributed on March
29, 1996 to Limited Partners of record as of the date of such sale.
On February 22, 1996, the Fund sold its remaining investment in SFX
Broadcasting Inc., consisting of 8,667 shares of common stock purchase warrants,
to Sillerman Communications Management Corporation for net proceeds of $14.50
per share which resulted in a gain of $125,672 to the Fund.
On March 29, 1996, BeefAmerica, Inc. ("BeefAmerica"), entered into an
agreement whereby BeefAmerica sold all of the capital stock of BeefAmerica
Operating Company, Inc.("Opco"), to BAOC Acquisition, Inc. ("BAOC"), a company
owned by the President of Opco and certain other investors. Opco was the sole
operating asset of BeefAmerica. As a result of such sale, the Fund, as chief
creditor of BeefAmerica, received cash proceeds of $26 million, $10 million in
Junior Preferred Stock of BAOC, and $14 million in Senior Preferred Stock of
BAOC, all of which was received on April 1, 1996 in exchange for all
subordinated notes held by the Fund. Although a realized loss of $50.98 million
was recorded, the Fund reversed the unrealized depreciation totaling $90.98
million on the investment that was recorded in prior years. Please refer to the
Supplemental Schedule of Unrealized Appreciation and Depreciation Schedule 2.
In connection with the sale of Omega Wire in the first quarter of 1995,
$1.1 million of proceeds owed to the Fund from the sale were held in escrow. On
April 5, 1996 the Fund received the Omega Escrow Proceeds, plus accrued
interest, totaling $1.2 million.
On April 4, 1996 Petco filed a registration statement with the Securities
and Exchange Commission for an offering of 5 million shares of Common Stock. Of
the 5 million shares offered, 2.6 million were offered by Petco and the
remaining shares were offered by certain current stockholders, including the
Fund. The offering was effected on April 30, 1996 and the Fund sold its entire
investment in Petco which consisted of 1,472,622 shares of Common Stock and
received net proceeds from the sale of $40.3 million or $27.36 per share which
were distributed on June 11, 1996 to partners on record as of the date of such
sale. The Fund realized a gain of $24.4 million on the sale.
<PAGE>
In connection with the financial restructuring on November 23, 1994, of
Chadwick-Miller, Inc. and its holding company, CMI Holding Corp., the Fund's $5
million 14.75% Senior Note was redeemed. The net proceeds were $5 million, of
which $3.1 million of such proceeds were classified as restricted cash and held
in escrow. As a result of an additional financial restructuring of Chadwick
Miller in July 1996, the Fund received all proceeds held in escrow plus accrued
interest and exchanged all Common and Preferred Stock and Common Stock Purchase
Warrants held for 39,487 Common Stock Purchase Warrants and 15,406 Preferred
Stock Purchase Warrants. No gain or loss was recognized on the transaction.
On November 1, 1995, pursuant to an Agreement and Plan of Merger (the
"Agreement"), Duro-Test Corporation effected a merger pursuant to which
Duro-Test was acquired by a third party for approximately $33 million. Net
proceeds to the Fund were $4.6 million of which $1.7 million was classified as
restricted cash and held in escrow. On September 30, 1996, the Fund received
escrow proceeds totaling $989,738 resulting in an additional realized loss of
$769,236 on this investment.
Stanley Furniture designs, manufactures and markets furniture products. On
November 13, 1996, Stanley Furniture completed a public offering of 1,000,000
shares of its common stock at a price of $16 per share. These shares were sold
by the Fund and certain affliates of the Thomas H. Lee Company. Following the
offering, Stanley purchased a total of 150,000 shares from the selling
stockholders including the Fund at the same price per share. Pursuant to these
transactions, the Fund sold a total of 1,115,256 shares of its Stanley common
stock for $16.9 million or $15.12 per share. The Fund recognized a gain of $2.8
million on the transaction. Net distributable proceeds of $34.24 per Unit were
distributed on December 23, 1996 to Limited Partners of record as of the dates
of such sales.
At December 31, 1996, the Fund had a total of (at cost) $103.1 million
invested in Mezzanine Investments representing $93.5 million Managed and $9.6
million Non-Managed portfolio investments. For the year ended December 31, 1996,
the proceeds from the sales of investments resulted in net realized gains of
$63.7 million. For additional information, please refer to the Supplemental
Schedule of Realized Gains and Losses - Schedule 1.
Because the Fund primarily invests in high-yield private placement
securities, the risk of loss upon default by an issuer is greater than with
investment grade securities because high-yield securities are generally
unsecured and are often subordinated to other creditors of the issuer. Also,
high-yield issuers usually have higher levels of indebtedness and are more
sensitive to adverse economic conditions.
Although the Fund cannot eliminate the risks associated with its
investments in high-yield securities, it has procedures in place to continually
monitor such risks under a variety of market conditions. Any potential Fund loss
would generally be limited to its investment in the portfolio company reflected
in the portfolio of investments. See Note 11 for information concerning
commitments and guarantees.
Should bankruptcy proceedings commence, either voluntarily or by action of
the court against a portfolio company, the ability of the Fund to liquidate the
position or collect proceeds from the action may be delayed or limited.
9. Unrealized Appreciation and Depreciation of Investments
For the year ended December 31, 1996, the Fund recorded net unrealized
depreciation of $23.3 million of which $111.9 million was a reversal of
unrealized appreciation for investments sold during 1996. Approximately $27
million recorded in 1996 related to net appreciation in market value of publicly
traded/underlying publicly traded securities held by the Fund at December 31,
1996. This compares to a 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 at December 31, 1995. For
the year ended December 31, 1994, the Fund recorded net unrealized appreciation
of $9.3 million, of which $39.2 million was related to net depreciation in
market value of publicly traded securities. The Fund's cumulative net unrealized
depreciation on investments at December 31, 1996 totaled $10.8 million.
For additional information, please refer to the Supplemental Schedule of
Unrealized Appreciation and Depreciation (Schedule 2).
<PAGE>
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 have filed a Notice of
Appeal on October 4, 1996, and expect to have a hearing on their appeal in 1997.
The Fund may be obligated to indemnity and advance litigation expenses to one or
more of the defendants under the terms and conditions of various indemnity
provisions of the Fund's Partnership Agreement and separate indemnification
agreements. The Fund has advanced litigation expenses to the indemnified parties
based upon amounts which are deemed reimbursable in accordance with the
indemnification provisions and has included these amounts in Legal and
Professional Fees.
<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 defandants'
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 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. In the opinion of legal council,
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.
During 1996 the Managing General Partner received cash distributions in the
amount of $1,959,308 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. Following the fourth
quarter 1996 cash distributions made on February 14, 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, Health o meter and Petco 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. As of December 31, 1996, the tax basis of the
Fund's assets are greater than the amounts reported in the financial statements
by $1.6 million. This difference is primarily attributable to unrealized
appreciation and depreciation recorded on investments which has not been
recognized for tax purposes.
16. Subsequent Events
On February 3, 1997, the Individual General Partners approved the fourth
quarter 1996 cash distribution totaling $650,009, which consisted of $92,310 of
net investment income from Temporary Investments, $4,058 return of capital from
the sale of Mezzanine Investments and $1 million return of the Reserve for
Follow-On-Investments, which was reduced to pay fund expenses of $446,359. The
total amount distributed to Limited Partners was $643,485, or $1.32 per Unit.
The Managing General Partner received $6,524 in proportion to its 1% interest in
the Fund. The distributions were made on February 14, 1997.
During February 1997, the Fund sold an additional 31,515 shares of Stanley
common stock pursuant to the provisions of Rule 144 under the Securities Act of
1933, as amended. Total proceeds from the sale were approximately $756,335. As
of March 20, 1997, the Fund continues to hold 1,528,781 shares of Stanley Common
Stock.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
ML-LEE ACQUISITION FUND, L.P.
SUPPLEMENTARY SCHEDULE OF REALIZED GAINS (LOSSES)
FOR THE YEAR ENDED December 31, 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
SECURITY Number of Investment Proceeds Gain/(Loss)
Shares/Principal Cost
Amount
General Nutrition Companies, Inc.
Common Stock 4,903,766 $ 13,759 $ 101,741 $ 87,982
BeefAmerica, Inc.
Subordinated Notes (a) $ 122,948 58,928 26,000 (b) (32,928)
Preferred Stock 5,661.11 40,050 24,000 (b) (16,050)
Common Stock 51,000 2,000 -- (2,000)
SFX Broadcasting, Inc.
Common Stock Options 8,667 -- 126 126
Petco Animal Supplies, Inc.
Common Stock 1,472,622 15,846 40,291 24,445
Duro-Test
Restricted Cash $ - 1,759 989 (770)
Stanley Furniture Inc.
Common Stock 1,115,256 13,973 16,863 2,890
---------- ---------- ----------
$ 146,315 $ 210,010 $ 63,695
========== ========== ==========
(a) Includes all BeefAmerica Payment-in-kind Notes.
(b) Net proceeds include cash proceeds of $26 million and $24 million
face amount of Senior and Junior Preferred Stock in BAOC Acquisition, Inc.
(See Note 8 to the Financial Statements)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
ML-LEE ACQUISITION FUND, L.P.
SUPPLEMENTARY SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
FOR THE PERIOD ENDED December 31, 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Unrealized
Appreciation
(Depreciation)
Investment Fair December 31
SECURITY Cost Value 1996 1996 1995 1994 1993 1992 & Prior
- ----------------------------------- -------- -------- -------- -------- ------- -------- -------- -------------
PUBLICLY TRADED/UNDERLYING
SECURITIES:
Celebrity
Common Stock* $ 75 $ 21 $ (54) $ 30 $ 65 $ 47 $ (188) $ (8)
Health o meter
Common Stock* 4,552 8,401 3,849 2,735 293 (5,291) -- 6,112
Playtex
Common Stock* 3,255 11,248 7,993 701 528 (10,319) (4,466) 21,549
Stanley
Common Stock* 19,549 31,011 11,462 23,580 (5,351) (9,030) 15,263 (13,000)
Walter
Common Stock 8,877 6,157 (2,720) 436 2,947 -- -- (6,103)
------- ------- ------- -------- ------- -------
TOTAL UNREALIZED APPRECIATION
(DEPRECIATION) FROM PUBLICLY
TRADED SECURITIES $20,530 $27,482 $(1,518) $(24,593) $10,609 $ 8,550
------- ------- ------- -------- ------- -------
NONPUBLIC SECURITIES:
BeefAmerica Incorporated
Jr. and Sr.Preferred Stock* $24,000 $10,000 $(14,000) $(14,000) $ -- $ -- $ -- $ --
Senior Subordinated Note -- -- -- 10,000 -- -- (10,000) --
Subordinated Notes -- -- -- 38,928 -- -- (20,000) (18,928)
Preferred Stock -- -- -- 40,050 -- -- -- (40,050)
Common Stock -- -- -- 2,000 -- -- -- (2,000)
Chadwick-Miller, Inc.
Common Stock* 3,736 -- (3,736) ( 1,929) -- -- (1,807) --
Preferred Stock 12,916 -- (12,916) (12,916) -- -- -- --
Magellan Health Service
Common Stock Warrants* 4 -- (4) -- -- -- -- (4)
SWO Holdings Corporation
Common Stock* 690 -- (690) (1,035) -- -- -- 345
------- ------- ------- -------- ------- -------
TOTAL UNREALIZED APPRECIATION
(DEPRECIATION) FROM
NONPUBLIC SECURITIES $(31,346) $ 61,098 $ -- $ -- $(31,807) $(60,637)
-------- -------- ------- -------- -------- --------
Reversal of Unrealized
Appreciaiton/(Depreciation)
for Investments Sold in 1996:
General Nutrition Companies, Inc.
Common Stock $ -- $ -- $ -- $(99,028) $(26,589) $ (7,781) $133,398 $ --
Petco
Common Stock -- -- -- (12,870) 16,137 (3,267) -- --
-------- --------- -------- ------- -------- --------
Reversal of Unrealized
Appreciaiton/(Depreciation)
for Investments Sold prior to 1996: -- -- 21,891 44,912 (21,038) (45,765)
-------- --------- -------- ------- -------- --------
Total Unrealized Appreciation/
(Depreciation)for Investments Sold: $ -- $(111,898) $ 11,439 $33,864 $112,360 $(45,765)
------- --------- -------- ------- -------- --------
Net Unrealized Appreciation
(Depreciation) $(10,816) $ (23,318) $ 9,921 $ 9,271 $ 91,162 $(97,852)
======== ========= ======== ======= ======== ========
* Restricted Security
</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 1997
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 Adviser (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.
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 Exhibit
1988, given by Registrant, 10.2 to Registrant's Current Report
as Borrower, to The First National on Form 8-K filed with the Commission
Bank of Chicago, as Payee. 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
between the Registrant and the Form 8-K filed with the Commission
First National Bank of Chicago, on August 26, 1991.
as agent for 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, Incorporated by reference to Exhibit
dated December 1, 1995 among the 10.4.8 to Registrant's Annual Report on
Registrant, and the First National Form 10-K for the year ended December
Bank of Chicago, as Agent. 31, 1995.
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 31, 1987.
Inc.
99 Pages 15 through 57 of Prospectus Incorporated by reference to Exhibit 99
dated August 12, 1987, filed pursuant to Registrant's Annual Report on Form 10-K
to Rule424(b) under the Securities for the year ended December 31, 1987.
Act of 1933.
27 Financial Data Schedule for the year Filed Herewith.
ended December 31, 1996.
(b) - Registrant Filed Forms 8-K with respect to the following:
NONE
</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 26th day of March 1997.
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 26, 1997 Kevin K. Albert
President, ML Mezzanine Inc.
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 26th day of March, 1997.
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. Vice President and 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 26th day of March 1997.
ML-LEE ACQUISITION FUND, L.P.
By: Mezzanine Investments, L.P.
Managing General Partner
By: ML Mezzanine Inc.
its General Partner
Dated: March 26, 1997 --------------------------------
Kevin K. Albert
President, ML Mezzanine Inc.
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 26th day of March, 1997.
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. Vice President and 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.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
the 1996 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 107,104,298
<INVESTMENTS-AT-VALUE> 96,296,891
<RECEIVABLES> 299,935
<ASSETS-OTHER> 1,039,033
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 97,635,860
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 248,022
<TOTAL-LIABILITIES> 248,022
<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> (10,814,466)
<NET-ASSETS> 97,387,831
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,897,600
<OTHER-INCOME> 164,008
<EXPENSES-NET> 4,473,422
<NET-INVESTMENT-INCOME> (1,411,814)
<REALIZED-GAINS-CURRENT> 63,695,316
<APPREC-INCREASE-CURRENT> (23,317,903)
<NET-CHANGE-FROM-OPS> 38,965,600
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,224,709)
<DISTRIBUTIONS-OF-GAINS> 124,458,354
<DISTRIBUTIONS-OTHER> 72,697,537
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (156,965,582)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,282,991
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,473,422
<AVERAGE-NET-ASSETS> 175,870,622
<PER-SHARE-NAV-BEGIN> 519.95
<PER-SHARE-NII> (2.87)
<PER-SHARE-GAIN-APPREC> (51.46)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 397.90
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<PER-SHARE-NAV-END> 197.07
<EXPENSE-RATIO> 0.025
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
