UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
Commission File Number 0-15669
ML-LEE ACQUISITION FUND, L.P.
(Exact name of registrant as specified in its Charter)
Delaware 13-3426817
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
World Financial Center
South Tower - 14th Floor
New York, New York 10080-6123
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:(212) 236-6562
Securities registered pursuant to Section 12(b) of the Act: None
Name of each exchange on which registered: Not Applicable Securities
registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___.
Aggregate market value of voting securities held by non-affiliates: Not
Applicable.
<PAGE>
ML-LEE ACQUISITION FUND, L.P.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Assets, Liabilities and Partners' Capital
as of September 30, 1998 and December 31, 1997
Statements of Operations - For the Three and Nine Months Ended
September 30, 1998 and 1997
Statements of Changes in Net Assets - For the Nine Months Ended
September 30, 1998 and 1997
Statements of Cash Flows - For the Nine Months Ended
September 30, 1998 and 1997
Statement of Changes in Partners' Capital - September 30, 1998
Schedule of Investments - September 30, 1998
Notes to Financial Statements
Supplemental Schedule of Realized Gains and Losses - Schedule 1
Supplemental Schedule of Unrealized Appreciation and
Depreciation - Schedule 2
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
<S> <C> <C>
(Unaudited)
September 30, 1998 December 31, 1997
----------- -----------------
ASSETS:
Investments - Notes 2, 8, 9
Portfolio Investments at fair value
Managed Companies (cost $0 at September 30, 1998
and $53,480 at December 30, 1997) $ -- $ 35,227
Non-Managed Companies (cost $0 at September 30, 1998
and $720 at December 31, 1997) -- 26
Temporary Investments, at amortized cost (cost $3,946
at September 30, 1998 and $18,062 at December 31, 1997) 3,947 18,125
Cash 10 1
Prepaid Loan Fees - Notes 2, 4 -- 384
Prepaid Expenses -- 6
Receivable for Investment Sold (Net of Allowance for
Uncollectable Proceeds) - Note 8 13 3,926
----------- -----------
TOTAL ASSETS $ 3,970 $ 57,695
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities
Legal and Professional Fees Payable $ 47 $ 110
Reimbursable Administrative Expenses Payable 137 116
Independent General Partner Expenses Payable 23 23
----------- -----------
Total Liabilities 207 249
----------- -----------
Partners' Capital - Note 2
Managing General Partner 380 918
Limited Partners (487,489 Units) 3,383 56,528
----------- -----------
Total Partners' Capital 3,763 57,446
----------- -----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 3,970 $ 57,695
=========== ===========
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
For the Three Months Ended For the Nine Months Ended
---------- ---------- ------------- ------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
---------- ---------- ------------- ------------
INVESTMENT INCOME - Notes 2, 8, 10:
Interest and Discount $ 104 $ 447 $ 543 $ 1,136
Dividend & Other Income -- 6,000 1 6,006
---------- ---------- ---------- ----------
TOTAL INCOME 104 6,447 544 7,142
---------- ---------- ---------- ----------
EXPENSES:
Investment Advisory Fee - Note 5 -- 300 600 894
Fund Administration Fee - Note 6 75 75 225 225
Uncollectable Receivable Expense - Note 8 -- -- 1,000 --
Loan Fees - Notes 2, 4 -- 175 403 524
Independent General Partners' Fees and Expenses - Note 7 33 42 112 213
Legal and Professional Fees 29 217 29 865
Reimbursable Administrative Expenses - Note 6 137 141 428 402
Insurance Expense -- 3 7 7
---------- ---------- ---------- ----------
TOTAL EXPENSES 274 953 2,804 3,130
---------- ---------- ---------- ----------
NET INVESTMENT INCOME (LOSS) (170) 5,494 (2,260) 4,012
NET REALIZED GAIN (LOSS) ON INVESTMENTS -
NOTE 8 AND SCHEDULE 1 (16,652) -- (9,557) 5,795
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
ON INVESTMENTS - NOTE 9 AND SCHEDULE 2
Publicly Traded Securities -- 5,797 (18,959) 3,070
Nonpublic Securities 16,652 -- 37,906 --
---------- ---------- ---------- ----------
Subtotal 16,652 5,797 18,947 3,070
---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (170) $ 11,291 $ 7,130 $ 12,877
========== ========== ========== ==========
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
For the Nine Months Ended
------------- -------------
September 30, September 30,
1998 1997
------------- -------------
FROM OPERATIONS:
Net Investment Income (Loss) $ (2,260) $ 4,012
Net Realized Gain (Loss) on Investments (9,557) 5,795
Net Change in Unrealized Appreciation (Depreciation) on Investments 18,947 3,070
---------- ----------
Net Increase in Net Assets Resulting from Operations 7,130 12,877
Cash Distributions to Partners (60,813) (15,117)
---------- ----------
Total Decrease (53,683) (2,240)
NET ASSETS:
Beginning of Period 57,446 97,388
---------- ----------
End of Period $ 3,763 $ 95,148
========== ==========
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
For the Nine Months Ended
---------- -------------
September 30, September 30,
1998 1997
---------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest, Dividends and Discount Income $ 606 $ 1,141
Investment Advisory Fee (600) (894)
Fund Administration Fee (225) (225)
Legal and Professional Fees (94) (815)
Loan Fees and Expenses (17) (53)
Independent General Partners' Fees and Expenses (112) (191)
(Purchase) Sale of Temporary Investments, Net 14,116 (4,793)
Reimbursable Administrative Expenses (408) (365)
Proceeds from Sale of Portfolio Company Investments 47,556 21,303
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 60,822 15,108
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Distributions to Partners (60,813) (15,117)
---------- ----------
NET CASH APPLIED TO FINANCING ACTIVITIES (60,813) (15,117)
---------- ----------
Net Increase (Decrease) in Cash 9 (9)
Cash at Beginning of Period 1 10
---------- ----------
CASH AT END OF PERIOD $ 10 $ 1
========== ==========
RECONCILIATION OF NET INVESTMENT INCOME (LOSS) TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Investment Income (Loss) $ (2,260) $ 4,012
---------- ----------
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME (LOSS)
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Decrease in Investments 68,340 10,790
(Increase) Decrease in Receivable for Investments Sold
(Net of Allowance for Uncollectable Proceeds) 3,888 (75)
(Increase) Decrease in Accrued Interest,
Dividend and Discount Receivables 62 (6,000)
Decrease in Prepaid Expenses 391 478
Increase in Independent General Partner Fees Payable -- 22
Increase in Reimbursable Administrative Expenses Payable 21 38
Increase (Decrease) in Legal and Professional Fees Payable (63) 48
Net Realized Gain (Loss) on Investments (9,557) 5,795
---------- ----------
TOTAL ADJUSTMENTS 63,082 11,096
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 60,822 $ 15,108
========== ==========
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Managing
General Limited
Partner Partners Total
------------ ------------ ------------
For the Nine Months Ended September 30, 1998
Partners' Capital at January 1, 1998 $ 918 $ 56,528 $ 57,446
Allocation of Net Investment Loss (23) (2,237) (2,260)
Allocation of Net Realized Loss on Investments (96) (9,461) (9,557)
Allocation of Net Change in Unrealized Appreciation 189 18,758 18,947
Cash Distributions to Partners (608) (60,205) (60,813)
------------ ------------ ------------
Partners' Capital at September 30, 1998 $ 380 $ 3,383 $ 3,763
============ ============ ============
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
Fair % Of
Investment Investment Value Total
Shares/Warrants Investment Date Cost(a) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$ 3,950 General Electric Co., 5.30% due 10/7/98 9/30/98 $ 3,946 $ 3,947 100.00%
------------------------------
TOTAL TEMPORARY INVESTMENTS 3,946 3,947 100.00
------------------------------
TOTAL INVESTMENT PORTFOLIO $ 3,946 $ 3,947 100.00%
==============================
(a) Represents original cost and excludes accretion of discount of $1 for Temporary Investments.
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
ML-LEE ACQUISITION FUND, L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. Organization and Purpose
ML-Lee Acquisition Fund, L.P. (the "Fund") was formed and the Certificate
of Limited Partnership was filed under the Delaware Revised Uniform Limited
Partnership Act on April 1, 1987. The Fund's operations commenced on October 19,
1987.
The Managing General Partner, subject to the supervision of the Individual
General Partners, is responsible for overseeing and monitoring the Fund's
investments. Mezzanine Investments, L.P. (the "Managing General Partner"), is a
limited partnership in which ML Mezzanine Inc., an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc., is the general partner, and Thomas H.
Lee Advisers 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 was 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.
The term of the Fund expired on June 15, 1998 resulting in the dissolution
of the Fund. The Fund has an additional five years to liquidate its remaining
investments. As of September 30, 1998, the Fund has sold all of its remaining
investments in Portfolio Companies. The last security held by the Fund is a $1
million (principal amount) Promissory Note related to the sale of the Fund's
interest in BeefAmerica Inc. (see Note 8). The Fund no longer generates
sufficient cash to pay current obligations; however the Fund has available
approximately $3.9 million of cash reserves to cover future expenses including
all expenses related to the winding up of the Fund's affairs such as
administrative and custodial expenses, and audit and tax preparation fees. Any
remaining cash reserves in excess of amounts required to pay the Fund's
obligations prior to its termination (as discussed in Note 12) will be
distributed as soon as practicable as a final liquidating distribution to
Limited Partners.
2. Significant Accounting Policies
Basis of Accounting
For financial reporting purposes, the records of the Fund are maintained
using the accrual method of accounting. For Federal income tax reporting
purposes, the results of operations are adjusted to reflect statutory
requirements arising from book to tax differences.
Valuation of Investments
Securities for which market quotations were readily available were 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 was 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 invested,
the fair value of an investment was its original cost plus accrued value in the
case of original issue discount or deferred pay securities. Such investments
were revalued if there was an objective basis for doing so at a different price.
Investments were written down in value if the Managing General Partner and
Investment Adviser believe adverse credit developments of a significant nature
required a write-down of such securities. Investments were 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 used their best judgment in estimating the fair value of these
investments, there were 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.
<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 September
30, 1998. 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.
Investment Transactions
The Fund recorded investment transactions on the date on which it obtained
an enforceable right to demand the securities or payment therefor. The Fund
recorded Temporary Investment transactions on the trade date.
Realized gains and losses on investments are determined on the basis of
specific identification for accounting and tax purposes.
Loan Facility and Advisory Fees
Loan Facility and Advisory Fees have been fully amortized as of June 30,
1998.
Partners' Capital
Partners' Capital represents the Fund's equity divided in proportion to the
Partners' Capital Contributions. Profits and losses, when realized, are
allocated in accordance with the provisions of the Partnership Agreement
summarized in Note 3.
3. Allocation of Profits and Losses
Pursuant to the Partnership Agreement, all profits from Temporary
Investments generally are allocated 99% to the Limited Partners and 1% to the
Managing General Partner. Profits from Mezzanine Investments are, in general,
allocated as follows:
first, if the capital accounts of any partners have negative balances, to
such partners in proportion to the negative balances in their capital
accounts until the balances of all such capital accounts equal zero,
second, 99% to the Limited Partners and 1% to the Managing General Partner
until the sum allocated to the Limited Partners equals any previous losses
allocated together with a cumulative Priority Return of 10% on the average
daily balance of Mezzanine securities, and any outstanding Compensatory
Payments,
third, 69% to the Limited Partners and 31% to the Managing General Partner
until the Managing General Partner has received 21% of the total profits
allocated,
thereafter, 79% to the Limited Partners and 21% to the Managing General
Partner.
Losses will be allocated in reverse order of profits previously allocated
and thereafter 99% to the Limited Partners and 1% to the Managing General
Partner.
4. Leverage
The Fund's Credit Facility, which provided the Fund with a maximum credit
facility of $140 million was due to expire on July 31, 1998, however, the credit
agreement was amended to instead expire at June 30, 1998. All fees incurred in
connection with the credit agreement have been fully amortized as of June 30,
1998. Such amortization amounted to $384,079 during the six months ended June
30, 1998.
The Fund paid Unused Commitment Fees of 1/2 of 1% per annum during the nine
months ended September 30, 1998 of $18,854.
<PAGE>
5. Investment Advisory Fee
The expiration of the Fund's term on June 15, 1998, has caused the
Management Agreement between the Investment Adviser and the Fund to expire. As a
result, the Investment Adviser is no longer receiving compensation for services
rendered effective July 1, 1998, however, the Investment Adviser has agreed to
provide investment advisory services to the Fund as needed until final
liquidation.
The Investment Adviser provided for the identification, management and
liquidation of investments for the Fund. As compensation for services rendered
to the Fund, the Investment Adviser received a quarterly fee at the annual rate
of $1.2 million. During 1998, the Fund paid $600,000 in Investment Advisory Fees
to Thomas H. Lee Advisers I. Such fees have ceased as of July 1, 1998.
6. Fund Administration Fees & Expenses
ML Fund Administrators Inc. (the "Fund Administrator") (an affiliate of the
Managing General Partner) performs the operational and administrative services
necessary for the management of the Fund. The Fund Administration Fee is
calculated at an annual fee of $300,000 plus out-of-pocket expenses incurred by
the Fund Administrator, as described below. The Fund Administration Fee is paid
quarterly, in advance. For the nine months ended September 30, 1998 and 1997,
the Fund paid $225,000, respectively, in Fund Administration Fees.
In accordance with the Partnership Agreement, the Fund Administrator is
being reimbursed by the Fund for 100% of administrative expenses incurred.
Actual out-of-pocket expenses ("reimbursable expenses") primarily consist of
printing, audits, tax preparation and custodian fees. For the nine months ended
September 30, 1998 and 1997, reimbursable expenses totalled $428,046 and
$402,544, respectively.
Although the Fund's term expired on June 15, 1998, the Fund Administrator
continues to earn a fee and continues to perform all operational and
administrative services required by the Fund until the Fund is terminated and
all such administrative functions are no longer required.
7. Independent General Partners' Fees
As compensation for services rendered to the Fund, each of the three
Independent General Partners receives $40,000 annually in quarterly
installments, $1,000 for each meeting of the General Partners attended and
$1,000 for each committee meeting attended ($500 if a committee meeting is held
on the same day as a meeting of the General Partners) plus reimbursement for any
legal and out-of-pocket expenses. Compensation for the Independent General
Partners is reviewed annually by the Individual General Partners.
For the nine months ended September 30, 1998 and 1997, the Fund incurred
$111,621 and $212,890, respectively, in Independent General Partners' Fees and
Expenses.
8. Investment Transactions
As of September 30, 1998, the Fund has sold all of its remaining Portfolio
Company Investments.
On January 6, 1998 the Fund and affiliates of the Thomas H. Lee Company
(the "Lee Affiliates"), together with the Fund, the ("Selling Stockholders")
sold their remaining holdings of common stock in Stanley Furniture Co.
("Stanley"). The common stock of each of the Selling Stockholders was sold
pursuant to a Form S-3 Registration Statement, which was filed by Stanley on
December 22, 1997 and declared effective by the Securities and Exchange
Commission on December 23, 1997. In connection with the sale, the Fund sold its
remaining 400,719 shares of common stock and received net proceeds of $10.8
million or $27 per share. On February 12, 1998, the Independent General Partners
established a reserve of $1.65 million from these proceeds to pay future
expenses of the Fund. Net Distributable Capital Proceeds from the sale, as
defined in the Partnership Agreement, of $9.2 million or $18.63 per Unit were
distributed to Limited Partners of record as of January 6, 1998.
<PAGE>
On February 28, 1998, Signature Brands USA and Sunbeam Corporation
("Sunbeam") executed a definitive merger agreement whereby Sunbeam agreed to
acquire all the outstanding shares of Signature Brands USA Common Stock for
approximately $250 million ($8.25 per share) by means of a tender offer (the
"Tender Offer"), and assume all the debt of Signature Brands USA. Pursuant to
the Tender Offer, the Fund tendered all its shares of Signature Brands USA
Common Stock and received proceeds of approximately $13 million. Net
Distributable Capital Proceeds of $26.19 per Unit were distributed on April 23,
1998, to the Fund's Limited Partners of record as of April 2, 1998, the
expiration date of this Tender Offer.
On March 3, 1998, the Fund sold its remaining investment in BeefAmerica,
consisting of 14,000 shares Sr. Preferred Stock and 10,000 shares Jr. Preferred
Stock (the "Securities"), for $1 million to Lajara II LLC, a limited Liability
Company owned by the Management of BeefAmerica Operating Company. The proceeds
consisted of a $1 million Promissory Note payable to the Fund. The Securities
have been pledged to secure the obligation of Lajara II, LLC under the
Promissory Note and the Fund recognized a loss of $23 million. The operating
performance at BeefAmerica has continued to deteriorate and on October 8, 1998,
the company filed for bankruptcy protection under Chapter 11 of the United
States Bankruptcy Code (see Note 14). As a result, the
Fund does not expect to collect any additional proceeds and has fully reserved
against the $1 million Promissory Note.
On May 27, 1998, Playtex Products Inc. ("Playtex"), completed a public
offering in the international markets of approximately 4 million shares of
Common Stock at a net price of $13.215 per share (the "Playtex Offering"). Of
the 4 million shares offered, approximately 3.9 million shares were offered by
affiliates of the Thomas H. Lee Company, including the Fund. As part of the
Playtex Offering, the Fund sold its remaining investment in Playtex, consisting
of approximately 1.4 million shares of Common Stock. The Fund received proceeds
of $18.5 million and recognized a gain on the sale of approximately $15.3
million. Net Distributable Proceeds of $37.74 per Unit were distributed on July
21, 1998, to Limited Partners of record as of May 27, 1998.
On April 7, 1998, pursuant to Rule 144 of the Securities Act of 1933, the
Fund sold its investment of 25,500 shares of TLC Beatrice International Holdings
Common Stock for $1.3 million or $51.25 per share. During May 1998, the Fund
sold its investment in SWO Holdings, consisting of 250,000 shares of SWO
Holdings Common Stock, 1,430 shares of Homeland Holdings Common Stock, and 1,506
Homeland Holdings Common Stock Purchase Warrants and received aggregate proceeds
of $11,102. The Fund also sold 567 Cole National Common Stock Purchase Warrants
during May 1998, and received proceeds of $15,593. Additionally, on May 4, 1998,
the Fund sold 2,067 Common Stock Purchase Warrants of Magellan Health Services
for $5,168. The sale of these Portfolio Company investments have generated total
proceeds to the Fund of $1.34 million and were distributed to Limited Partners
on July 21, 1998.
On July 9, 1998, pursuant to a purchase and sale agreement, the Fund sold
its remaining Warrants to purchase Common and Preferred Stock of Chadwick
Miller, (which includes all payment-in-kind securities) and received proceeds of
$100. The Fund recognized a loss of $16.5 million on the transaction in the
third quarter 1998. The Fund had previously recorded $16.5 million in unrealized
depreciation on this investment, all of which was reversed at the time of this
sale.
9. Unrealized Appreciation and Depreciation of Investments
For the nine months ended September 30, 1998, the Fund recorded net
unrealized appreciation of $18.9 million, all of which was a reversal of net
unrealized depreciation for investments sold.
For additional information, please refer to the Supplemental Schedule of
Unrealized Appreciation and Depreciation - Schedule 2.
10. Litigation
On April 10, 1998, the parties to Seidel v. Thomas H. Lee, et al, No.
93-494 (JJF), a putative class action brought on behalf of limited partners of
the Fund, filed with United States District Court for the District of Delaware,
a Stipulation of Settlement preliminarily settling the action.
The settlement, which was approved by the Court at a hearing on July 16,
1998, provides for dismissal with prejudice of all claims against the Fund, the
Fund's Investment Adviser and certain of its affiliates, the Fund's Managing
General Partner and certain of its affiliates, and the Fund's Independent
General Partners. Defendants, other than the Fund, have agreed to provide cash
of $2.5 million and certain other considerations to settle the claims asserted
in this action. The settlement became effective on August 24, 1998. Defendants
continue to deny all liability in this action.
The Fund had previously advanced legal expenses incurred by certain
defendants and has included such expenses in Legal and Professional Fees in the
Financial Statements.
<PAGE>
11. Related Party Transactions
Certain of the Mezzanine Investments and Bridge Investments which were made
by the Fund involved 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 involved the entry by the Fund and other equity
security holders into stockholders' agreements. While the provisions of such
stockholders' agreements have varied, such agreements may have included
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, have typically performed certain management services for Managed
Companies and have received management fees in connection therewith, usually
pursuant to written agreements with such companies. In addition, certain of the
Portfolio Companies have had 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, have performed various financial
services for various portfolio companies of the Fund, which may have included
investment banking services, broker/dealer services and economic forecasting,
and have received in consideration therewith various fees, commissions and
reimbursements. Furthermore, MLPF&S and its affiliates or investment companies
advised by affiliates of MLPF&S may have purchased or sold securities issued by
portfolio companies of the Fund in connection with their ordinary investment
operations.
During the nine months ending September 30, 1998, the Managing General
Partner received cash distributions in the amount of $420,366 representing its
1% interest in the Fund.
12. Reserves
In February 1993, the Fund established a $15 million reserve to provide
funds for follow-on investments and to pay expenses. On February 12, 1998, the
Independent General Partners approved an additional reserve of $1.65 million to
fund anticipated cash shortfalls. This reserve was established from the proceeds
received from the sale of Stanley Furniture Common Stock in January 1998.
Because the Fund no longer generates sufficient cash to pay current
obligations, the Fund has approximately $3.9 million available of these
remaining cash reserves to cover future expenses including all expenses related
to the winding up of the Fund's affairs such as administrative and custodial
expenses, and audit and tax preparation fees. Any remaining cash reserves in
excess of amounts required to pay the Fund's obligations prior to its
termination will be distributed as soon as practicable as a final liquidating
distribution to Limited Partners.
13. 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, 1997, the tax basis of the
Fund's assets are greater than the amounts reported in the financial statements
by $4.9 million. This difference is primarily attributable to unrealized
appreciation and depreciation recorded on investments which has not been
recognized for tax purposes.
14. Subsequent Events
On October 8, 1998, BeefAmerica Operating Company filed for Bankruptcy
under Chapter 11 of the United States Bankruptcy Code. Because of these
circumstances, the Fund does not expect to collect on the $1 million Promisory
Note from Lajara II LLC. The Fund has fully reserved against the Promisory Note.
(See Note 8)
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
ML-LEE ACQUISITION FUND, L.P.
SUPPLEMENTAL SCHEDULE OF REALIZED GAINS AND LOSSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Number of Investment Realized
SECURITY Shares/Principal Cost Net Proceeds Gain/(Loss)
- ----------------------------------- ----------------- --------- ------------ -----------
For the Three Months March 31, 1998
Stanley Furniture Company Inc.
Common Stock 400,719 $ 5,021 $ 10,819 $ 5,798
BeefAmerica Incorporated
Jr. and Sr.Preferred Stock 24,000 24,000 1,000(a) (23,000)
------- -------- ---------
Total For the Three Months Ended March 31, 1998 29,021 11,819 (17,202)
------- -------- --------
For the Three Months Ended June 30, 1998
Signature Brands USA
Common Stock 1,563,053 4,552 12,895 8,343
Playtex Products Inc.
Common Stock 1,406,204 3,255 18,583 15,328
TLC Beatrice Int'l Holdings
Common Stock 25,500 25 1,313 1,288
SWO Holdings Corp.
SWO Holdings Common Stock 250,000 250 -- (b) (250)
Homeland Holdings Corp. Common Stock 1,430 440 11 (429)
Homeland Holdings Corp. Purchase Warrants 1,506 -- -- (b) --
Magellan Health Services Inc.
Warrants 2,067 4 5 1
Cole National Corp.
Warrants 5,563 -- 16 16
------- -------- --------
Total for the Three Months Ended June 30, 1998 8,526 32,823 24,297
------- -------- --------
For the Three Months Ended September 30, 1998
Chadwick Miller, Inc.
Common Stock and Preferred Purchase Warrants 16,652 -- (b) (16,652)
------- -------- --------
Total for the Nine Months Ended September 30, 1998 54,199 44,642 (9,557)
======= ======== ========
(a) Proceeds received in the form of a Promissory Note which has been fully reserved
against at September 30, 1998. See Note 8 to the Financial Statements for further information.
(b) Proceeds are less than $1,000.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
ML-LEE ACQUISITION FUND, L.P.
SUPPLEMENTAL SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
FOR THE PERIOD ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Unrealized Unrealized
Appreciation Appreciation Total Total
(Depreciation) (Depreciation) Unrealized Unrealized
For the Three For the Nine Appreciation Appreciation
Months Ended Months Ended (Depreciation) at (Depreciation)
SECURITY September 30, 1998 September 30, 1998 December 31, 1997 September 30, 1998
- ---------------------------------------- ------------------ ------------------ ----------------- ------------------
Reversal of Unrealized Appreciation
(Depreciation) for Investments Sold
Chadwick-Miller, Inc.
Common Stock Purchase Warrants (2) $ 3,736 $ 3,736 $ (3,736) $ --
Preferred Stock Purchase Warrants (2) 12,916 12,916 (12,916) --
Stanley
Common Stock (1) -- (6,149) 6,149 --
BeefAmerica Incorporated
Jr. and Sr.Preferred Stock (2) -- 21,000 (21,000) --
Signature Brands USA
Common Stock (1) -- (2,091) 2,091 --
Playtex
Common Stock (1) -- (11,159) 11,159 --
SWO Holdings Corporation
SWO Holdings Common Stock (2) -- 250 (250) --
Homeland Holdings Common Stock (1) -- 440 (440) --
Magellan Health Service
Common Stock Warrants (2) -- 4 (4) --
--------- ---------- ---------- ----------
Total Reversal of Unrealized Appreciation
(Depreciation) for Investments Sold $ 16,652 $ 18,947 $ (18,947) $ --
========= ========== ========== ==========
(1) Publicly Traded Security
(2) Non-public Security
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity & Capital Resources
The term of the Fund expired on June 15, 1998 resulting in the dissolution
of the Fund. The Fund has five additional years to liquidate its remaining
investments. As of July 1, 1998, the Fund no longer pays the Investment Adviser
an Investment Advisory Fee.
In February 1993, the Fund established a $15 million reserve to provide
funds for follow-on investments and to pay expenses. On February 12, 1998, the
Independent General Partners approved an additional reserve of $1.65 million to
fund anticipated cash shortfalls of the Fund. This reserve was established from
the proceeds received from the sale of Stanley Furniture Common Stock in January
1998.
The Fund no longer generates sufficient cash to pay current obligations;
however the Fund has available approximately $3.9 million of cash reserves to
cover future expenses including all expenses related to the winding up of the
Fund's affairs such as administrative and custodial expenses, and audit and tax
preparation fees. Any proceeds received from the Promissory Note related to the
Fund's investment in BeefAmerica Inc. (see Note 8) as well as any remaining cash
reserves in excess of amounts required to pay the Fund's obligations prior to
its termination will be distributed as soon as practicable as a final
liquidating distribution to Limited Partners.
Investment in High-Yield Securities
As of September 30, 1998, the Fund has no remaining High Yield
Securities (as defined below) in its portfolio.
The Fund originally 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.
Results of Operations
Investment Income and Expenses
For the nine months ended September 30, 1998, the Fund had a net investment
loss of $2,260,679 as compared to net investment income of $4,011,802 for the
same period in 1997. The increase in net investment loss for the nine months
ended Spetember 30, 1998, represents a decrease in interest and dividend income
received by the Fund and an increase in expenses due to a reserve established
for uncollectable proceeds related to the sale of the Fund's investment in
BeefAmerica in the 1st Quarter 1998. (See Notes 8 and 14 to the financial
statements for further information.)
For the three months ended September 30, 1998, the Fund had a net
investment loss of $169,835 as compared to net investment income of $5,492,518
for the same period in 1997. The increase in net investment loss represents a
decrease in interest and discount income received by the Fund, which was
partially offset by a decrease in Investment Advisory Fees, Legal Fees and Loan
Fee amortization during the three months ended September 30, 1998.
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.
<PAGE>
The expiration of the Fund's term on June 15, 1998, has caused the
Management Agreement between the Investment Adviser and the Fund to expire. As a
result, the Investment Advisor is no longer receiving compensationn for services
rendered effective July 1, 1998, however, the Investment Adviser has agreed to
provide investment advisory services to the Fund as needed until final
liquidation.
The Investment Adviser provided for the identification, management and
liquidation of investments for the Fund. As compensation for services rendered
to the Fund, the Investment Adviser received a quarterly fee at the annual rate
of $1.2 million. During 1998, the Fund paid $600,000 in Investment Advisory Fees
to Thomas H. Lee Advisers I. Such fees have ceased on July 1, 1998. For the
three and nine months ended September 30, 1997, the Fund paid Investment
Advisory Fees of $300,000 and $893,717, respectively.
In accordance with the Partnership Agreement, the Fund Administrator is
being reimbursed by the Fund for 100% of administrative expenses incurred.
Actual out-of-pocket expenses ("reimbursable expenses") primarily consist of
printing, audits, tax preparation and custodian fees. For the nine months ended
September 30, 1998 and 1997, reimbursable expenses totalled $428,046 and
$402,544, respectively.
Although the Fund's term expired on June 15, 1998, the Fund Administrator
continues to earn a fee and continues to perform all operational and
administrative services required by the Fund until the Fund is terminated and
all such administrative functions are no longer required.
For the nine months ended September 30, 1998 and 1997, the Fund incurred
$111,621 and $212,890, respectively, in Independent General Partners' Fees and
Expenses. For the three months ended September 30, 1998 and 1997, Independent
General Partner's Fees and Expenses totalled $33,000 and $42,292, respectively.
The Fund's Credit Facility, which provided the Fund with a maximum credit
facility of $140 million was due to expire on July 31, 1998, however, the credit
agreement was amended to instead expire at June 30, 1998. All fees incurred in
connection with the credit agreement have been fully amortized as of June 30,
1998. Such amortization amounted to $384,079 during the six months ended June
30, 1998.
The Fund paid Unused Commitment Fees of 1/2 of 1% per annum during the nine
months ended September 30, 1998 of $18,854.
Legal and Professional fees paid by the Fund consist primarily of legal
fees incurred in conjunction with litigation. Legal and Professional Fees for
the nine months ended September 30, 1998 and 1997 were $29,148 and $864,566,
respectively. For the three months ended September 30, 1998 and 1997, Legal and
Professional Fees were $28,774 and $216,561, respectively. The decrease in 1998
as compared to 1997 is attributable to the decrease in legal expenses incurred
and the settlement of litigation.
Net Assets
The Fund's net assets decreased by $53,683,506 during the nine months ended
September 30, 1998, due to a net investment loss of $2,260,679, realized losses
of $9,556,977 and cash distributions of $60,813,036 which was partically offset
by net unrealized appreciation of $18,947,186
Unrealized Appreciation and Depreciation and Non-Accrual of Investments
For the nine months ended September 30, 1998, the Fund recorded net
unrealized appreciation of $18.9 million, all of which was a reversal of net
unrealized depreciation for investments sold.
For additional information, please refer to the Supplemental Schedule of
Unrealized Appreciation and Depreciation - Schedule 2.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of September
30, 1998. Although the Managing General Partner and Investment Adviser are not
aware of any factors not disclosed herein that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued since that time; and the current estimated fair value of these
investments may have changed significantly since that point in time.
For additional information, please refer to the Supplemental Schedule of
Unrealized Appreciation and Depreciation - Schedule 2.
Realized Gains and Losses
The net realized loss on investments sold during the nine months ended
September 30, 1998 was $9,556,977 compared to a net realized gains of $5,795,392
for the same period in 1997.
For additional information, please refer to the Supplemental Schedule of
Realized Gains and Losses - Schedule 1.
<PAGE>
Cash Distributions
Because all of the Fund's debt holdings were previously sold or redeemed,
remaining portfolio income expected to be received by the Fund is not sufficient
to cover the Fund's expenses. As a result, any income received will be used to
pay Fund expenses and will not be available for distribution.
Should a Limited Partner decide to sell his Units, any such sale will be
recorded on the books and records of the Fund quarterly, only upon the
satisfactory completion and acceptance of the Fund's transfer documents. There
can be no assurances that such transfer will be effected before any specified
date. Additionally, pursuant to the Partnership Agreement, until a transfer is
recognized, the Limited Partner of record (i.e. the transferor) is entitled to
receive all the benefits and burdens of ownership of Units, and any transferee
has no rights to distributions of sale proceeds 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, would be payable to the transferor and not the
transferee.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
On April 10, 1998, the parties to Seidel v. Thomas H. Lee, et al, No.
93-494 (JJF), a putative class action brought on behalf of limited partners of
the Fund, filed with United States District Court for the District of Delaware,
a Stipulation of Settlement preliminarily settling the action.
The settlement, which was approved by the Court at a hearing on July 16,
1998, provides for dismissal with prejudice of all claims against the Fund, the
Fund's Investment Adviser and certain of its affiliates, the Fund's Managing
General Partner and certain of its affiliates, and the Fund's Independent
General Partners. Defendants, other than the Fund, have agreed to provide cash
of $2.5 million and certain other considerations to settle the claims asserted
in this action. The settlement became effective on August 24, 1998. Defendants
continue to deny all liability in this action.
Items 2 - 5 are herewith omitted as the response to all items is either
none or not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule for the third quarter ended
September 30, 1998.
(b) Reports on form 8-K: NONE
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 12th day of
November, 1998.
ML-LEE ACQUISITION FUND, L.P.
By: Mezzanine Investments, L.P.,
Managing General Partner
By: ML Mezzanine Inc.,
its General Partner
Dated: November 12, 1998 /s/ Robert Remick
Robert Remick
Vice President and Treasurer
(Chief Financial Officer)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 12th day of
November, 1998.
ML-LEE ACQUISITION FUND, L.P.
By: Mezzanine Investments, L.P.,
Managing General Partner
By: ML Mezzanine Inc.,
its General Partner
Dated: November 12, 1998 _____________________________
Robert Remick
Vice President and Treasurer
(Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary information extracted from the third quarter
of 1998 Form 10-Q Balance Sheets and Statements of Operations and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<PERIOD-START> JAN-01-1998
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 3,945,929
<INVESTMENTS-AT-VALUE> 3,946,511
<RECEIVABLES> 12,673
<ASSETS-OTHER> 10,356
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,969,540
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 206,776
<TOTAL-LIABILITIES> 206,776
<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> 0
<NET-ASSETS> 3,762,764
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 542,850
<OTHER-INCOME> 532
<EXPENSES-NET> 2,804,061
<NET-INVESTMENT-INCOME> (2,260,679)
<REALIZED-GAINS-CURRENT> (9,556,977)
<APPREC-INCREASE-CURRENT> 18,947,186
<NET-CHANGE-FROM-OPS> 7,129,530
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (206,712)
<DISTRIBUTIONS-OF-GAINS> 34,567,671
<DISTRIBUTIONS-OTHER> 26,452,077
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (53,683,506)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 600,000
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,804,061
<AVERAGE-NET-ASSETS> 30,604,516
<PER-SHARE-NAV-BEGIN> 115.96
<PER-SHARE-NII> (4.59)
<PER-SHARE-GAIN-APPREC> 38.48
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 123.50
<RETURNS-OF-CAPITAL> 54.26
<PER-SHARE-NAV-END> 6.94
<EXPENSE-RATIO> 0.09
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
