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, 1997
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, 1997, the Fund had a
total value of $35.3 million invested in Mezzanine Investments, representing
$35.2 million Managed and $26,000 Non-Managed portfolio investments. As of
December 31, 1997, there were no Bridge Investments outstanding.
REVIEW OF INVESTMENTS SOLD DURING 1997
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.
On August 27, 1997, the Fund together with certain other stockholders
including affiliates of Thomas H. Lee Company (the "Selling Stockholders"),
entered into a Stock Purchase Agreement pursuant to which the Selling
Stockholders agreed to sell all of the issued and outstanding Common Stock of
Alliance to an unrelated third party for approximately $7.8 million or $7.78 per
share (the "Transaction"). In addition, immediately prior to the consummation of
the Transaction, Alliance redeemed all of the outstanding shares of the
Company's Preferred Stock, and paid accrued but unpaid dividends with respect
thereto. Also, Alliance's outstanding indebtedness was repaid in full, including
accrued and unpaid interest. The Transaction was completed on October 3, 1997.
As a result of these transactions, the Fund received proceeds of
approximately $30.9 million or $62.75 per Unit. These proceeds are comprised of
$11.9 million for repayment of indebtedness (including all accrued and unpaid
interest), and $18.9 million for the Common and Preferred Stock held by the Fund
(which includes approximately $5.5 million of preferred dividends). In addition,
the Fund's outstanding guarantee of Alliance debt, as discribed in Note 11, was
released. Net Distributable proceeds of $62.75 per Unit were distributed to
Limited Partners of record as of October 3, 1997.
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, 1997, the Fund sold its remaining 5,769 shares of
Celebrity, Inc. Common Stock for $75,000.
<PAGE>
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.
Pursuant to Rule 144 under the Securities Act of 1933, the Fund sold its
435,895 shares of Walter Industries Inc. Common Stock during the fourth quarter
of 1997. The Fund received total proceeds of $8,964,717 and realized a gain of
$88,188.
REVIEW OF INVESTMENTS IN MANAGED COMPANIES
------------------------------------------
BeefAmerica, Inc. ("BeefAmerica")
--------------------------------
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
consist of a $1 million Promissory Note payable to the Fund on or before May 2,
1998. The Securities have been pledged to secure the obligation of Lajara II,
LLC under the Promissory Note. The Fund will recognize a loss of $23 million.
BeefAmerica is an integrated beef packing company operating slaughter and
fabrication processing facilities in Nebraska. The Fund's valuation of this
investment reflects a writedown to $3 million at December 31, 1997, bringing
total net unrealized depreciation of approximately $21 million through December
31, 1997.
Chadwick-Miller, Inc. ("CMI")
----------------------------
CMI operates full-line retail book stores under the Encore, Lauriat and the
Royal Discount Books names.
The Fund's valuation of this investment at zero reflects aggregate net
unrealized depreciation of approximately $16.6 million through December 31,
1997.
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, 1997, operates three
separate retail subsidiaries: Cole Vision, Things Remembered and Cole Key. The
investment in Cole is valued at zero as of December 31, 1997.
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, 1997, the Fund
recorded approximately $3.2 million of net unrealized appreciation for the year
ended December 31, 1997 on its equity holdings in Playtex. The Fund's year-end
valuation of this investment reflects an aggregate of approximately $11.2
million of net unrealized appreciation through December 31, 1997.
Signature Brands USA (formerly Health o meter Products, Inc.)
------------------------------------------------------------
Signature Brands USA is a manufacturer of a comprehensive line of consumer,
medical, office and food service scales and equipment under the Signature Brands
USA and Pelouze brand names, as well as related measuring instruments and
personal care products. Mr. Coffee, a wholly-owned subsidiary of Signature
Brands USA 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.
On February 28, 1998, Signature Brands USA and Sunbeam Corporation
("Sunbeam") executed a definitive merger agreement whereby Sunbeam will 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, which was executed on March 6, 1998, the Fund tendered all its
shares of Signature Brands USA Common Stock and expects to receive proceeds of
approximately $13 million. The Fund estimates that the maximum net Distributable
Capital Proceeds per Unit will be $26.19. Any distribution of these net
Distributable Capital Proceeds after the payment of expenses and the
establishment of reserves, as provided for in the Fund's Partnership Agreement,
will be distributed to the Fund's Limited Partners of record as of the date of
the expiration of this Tender Offer, which is scheduled to be on April 2, 1998,
unless the Tender Offer is extended.
<PAGE>
As of December 31, 1997, the Fund held 1,563,053 shares of Signature Brands
USA common stock which represents 14.7% of the outstanding common equity.
Based upon the closing price at December 31, 1997, the Fund recorded net
unrealized depreciation of $1.8 million on its equity investment in Signature
Brands USA for the year ended December 31, 1997. The Fund's year-end valuation
of this investment reflects an aggregate of approximately $2.1 million in net
unrealized appreciation through December 31, 1997.
Stanley Furniture Company, Inc. ("Stanley")
------------------------------------------
During February 1997, the Fund sold 31,515 shares of Stanley for $24 per
share. The Fund received total proceeds of $756,335 and recognized a gain of
$361,480.
On June 27, 1997, the Fund along with affiliates of the Thomas H. Lee
Company entered into a Stock Purchase Agreement (the "Agreement") with Stanley.
Pursuant to the Agreement, Stanley purchased an aggregate 750,000 shares of
Stanley Common Stock from the Selling Stockholders for $20 per share. In
connection with the sale, the Fund sold 727,344 shares and received proceeds of
$14,546,880. The Fund recognized a gain of $5,433,911 on this transaction.
On November 11, 1997, Stanley announced the repurchase of a total of
413,201 shares of Common Stock from the Fund and Affiliates of the Thomas H. Lee
Co. for $25 per share. As a result, the Fund sold a total of 400,718 shares and
received proceeds of $10 million or $20.34 per Unit, which were distributed to
Limited Partners of record as of November 11, 1997.
On January 6, 1998 the Fund and affiliates of the Thomas H Lee Company
including ML-Lee Acquisition Fund II, L.P. and ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P. (the "Lee Affiliates", and together with the
Fund, the ("Selling Stockholders") sold their remaining holdings of common stock
in 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 will be
distributed to Limited Partners of record as of January 6, 1998.
Based upon the closing market price at December 31, 1997, the Fund has
recorded net unrealized depreciation for the year ended December 31, 1997 of
approximately $5.3 million on its remaining equity holdings in Stanley
Furniture. The Fund's year-end valuation of this investment reflects an
aggregate of approximately $6.1 million net unrealized appreciation through
December 31, 1997.
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 through December 31, 1997.
SWO Holdings Corporation
------------------------
SWO Holdings Corporation is an operator of supermarkets located in
Oklahoma, southern Kansas and Amarillo, Texas. The Fund's valuation at December
31, 1997 reflects net unrealized depreciation of $690,000 through December 31,
1997.
<PAGE>
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, 1997.
Competition
The Fund has completed its investment period and reinvestment period and no
longer has to compete for investments. However, a majority of the portfolio
companies are participating in extremely competitive businesses.
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 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 (the "Class"), against the Fund's Managing General
Partner, ("MGP"), Individual General Partners, Investment Adviser and certain of
their affiliates. The complaint alleged that the defendants breached the Fund's
Partnership Agreement in 1990 by causing the Fund to pay $7,554,855 in incentive
compensation to the MGP with respect to that year and sought monetary damages in
the amount of $7,554,855, together with interest, and other relief. After trial,
the Court found that the MGP Distributions for the fourth quarter of 1989
through the fourth quarter of 1990 were paid in violation of the Partnership
Agreement and as a result, held the General Partners liable for repayment to the
plaintiff class of $6,627,752 of excessive distributions, plus interest. The
Court's decision dismissed Merrill Lynch & Co., Inc. and MLPF&S because they
were not parties to the Partnership Agreement. On June 13, 1996, the Court
amended its decision, dismissing ML Mezzanine, Inc., the corporate general
partner of the Fund's MGP because it was not a party to the Partnership
Agreement. On July 25, 1996, judgment was entered against remaining Defendants
in the amount of $10,399,505. The remaining Defendants filed a Notice of Appeal
on October 4, 1996. The appeal was fully briefed, and submitted to the Court for
decision. Thereafter, the parties agreed to settle this action with certain of
the remaining defendants paying $8 million to the Class. On June 25, 1997, the
Court preliminarily approved the settlement, ordered notice to be mailed to the
Class, and scheduled a final hearing to approve the settlement and plaintiffs'
counsel's application for attorney's fees, for September 15, 1997. On September
15, 1997, the Court held a final hearing, at which it approved the settlement
and signed a Final Order dismissing the action, which released the class' claims
against the defendants. The Fund paid litigation expenses to the indemnified
parties based upon amounts which are deemed reimbursable in accordance with the
indemnification provisions of the Partnership Agreement and included these
amounts in Legal and Professional Fees.
<PAGE>
On October 14, 1993, a Limited Partner commenced a putative class action in
the U.S. District Court for the District of Delaware, purportedly on behalf of
all persons who purchased limited partnership interests in the Fund between
August 12, 1987 and the date of filing of the complaint, against the Fund, the
Managing General Partner, the Individual General Partners, the Investment
Adviser to the Fund and certain named affiliates of such persons. As amended,
the complaint alleges that the defendants operated the Fund, and caused it to
make certain investments, for the benefit of some or all of the defendants at
the expense of the Fund's Limited Partners in breach of defendants' fiduciary
and contractual duties to the Limited Partners, thereby violating federal
securities laws applicable to the Fund and its affiliates under the Investment
Company Act of 1940, as amended, as well as Delaware state law. By Order dated
September 30, 1994 and Opinion dated October 14, 1994, the court granted in part
and denied in part defendants' motion to dismiss the amended complaint,
dismissing plaintiff's claims with respect to several investments as time-barred
and dismissing all claims for aiding and abetting liability under the Investment
Company Act of 1940. The plaintiff thereafter filed a second amended complaint
on November 3, 1995 raising additional allegations in connection with certain
transactions by the Fund, and alleging that defendants violated the Investment
Company Act of 1940 and Delaware state law. In its Order and Opinion dated
December 30, 1996, the court granted in part and denied in part the defendants'
motion to dismiss the second amended complaint holding that a number of new
claims and theories asserted by plaintiffs are dismissed as time-barred.
Plaintiffs have moved for reconsideration of the Court's Order. On September 30,
1997, Plaintiff's motion was denied without prejudice. The plaintiff seeks an
accounting, rescission, rescissory or actual damages and punitive damages.
Plaintiffs have moved to certify the case as a class action. Defendants have
opposed that motion which is currently pending before the Court. The defendants
in this action believe that the claims in the second amended complaint are
without merit. Whether or not the plaintiff prevails on any remaining claims,
the Fund may be obligated to indemnify and advance litigation expenses to
certain of the defendants under the terms and conditions of various indemnity
provisions in the Fund's Partnership Agreement and separate indemnification
agreements, and the amounts of such indemnification and expenses could be
material. In the opinion of legal counsel, the outcome of this case is not
determinable at this time. The Fund has incurred litigation expenses which are
recorded in Legal and 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. After the defendants filed a motion to dismiss the
action in its entirety, the plaintiffs filed an amended complaint. The
defendants thereafter filed a motion to dismiss the amended complaint in its
entirety, which motion has been fully briefed and is awaiting action by the
Court. The defendants in this action believe that the claims against them are
without merit. In the opinion of legal counsel, 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, 1997.
<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, 1998, the last
effective date of transfer (as described below), was 34,786. 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.
MLPF&S provides estimated values of limited partnerships and other direct
investments reported on client account statements and no longer reports the
general partner's estimate of limited partnership net asset value to Unit
holders. Pursuant to MLPF&S guidelines, estimated values for limited partnership
interests originally sold by MLPF&S (such as the Fund's Units) are provided by
independent valuation services. 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, 1997 December 31, 1996 December 31, 1995 December 31, 1994 December 31, 1993
Schedule
Selected Financial Data
TOTAL FUND INFORMATION:
Net Investment Income (Loss) $ 9,323,884 $ (1,411,814) $ (1,155,421) $ 9,305,007 $ 125,500
Net Realized Gains (Losses) on
Investments 10,880,887 63,695,316 75,808,138 (37,008,074) 69,148,273
Net Change in Unrealized
Appreciation(Depreciation) on
Investments (8,132,721) (23,317,903) 9,920,766 9,271,721 91,162,444
Cash Distributions to Partners (a) 52,013,619 195,931,182 186,920,065 43,760,745 56,612,752
Net Assets 57,446,269 97,387,831 254,353,413 356,699,995 418,892,086
Cost of Mezzanine Investments 54,199,296 103,063,947 223,694,546 336,632,272 387,857,896
Total Assets 57,695,443 97,635,860 254,776,082 357,777,636 431,723,973
Outstanding Loan Payable -- -- -- -- 9,594,004
PER UNIT OF LIMITED PARTNERSHIP
INTEREST:
Investment Income $ 26.66 $ 6.21 $ 11.68 $ 37.10 $ 21.65
Expenses (7.72) (9.08) (14.03) (18.20) (21.39)
------------ ------------ ------------ ------------ ------------
Net Investment Income (Loss) 18.94 (2.87) (2.35) 18.90 .26
============ ============ ============ ============ ============
Net Realized Gains (Losses) on
Investments $ 22.10 $ 129.35 $ 153.95 $ (75.16) $ 140.43
Net Change in Unrealized
Appreciation (Depreciation) (16.52) (51.46) 20.15 18.83 185.13
Cash Distributions (a) 105.63 397.90 379.60 88.87 114.97
Cumulative Cash Distributions 1,455.04 1,349.41 951.51 571.91 483.04
Net Asset Value 115.96 197.07 519.95 727.79 854.10
</TABLE>
(a) Includes $31,452,790 or $64.52 per Limited Partnership Unit return of
capital from cash distributed during 1997.
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, 1997, the Fund had a total of (at cost) $54.2 (including
$3.7 million of payment-in-kind equity) invested in Mezzanine Investments,
representing $53.5 Managed and $719,914 Non-Managed portfolio investments. These
investments were financed by net offering proceeds and debt financing. This
represents a $48.9 million decrease versus the total at December 31, 1996 of
$103.1 million. The decrease in assets is due to sales and redemptions of the
Fund's investments during 1997. The Fund's Mezzanine Investments originally
consisted 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 were 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. The
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).
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 20, 1998, the Fund had the entire $7.5 million credit line
available.
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, Signature Brands USA and Petco, along with a
distributions to partners totalling $1.4 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. As of the last meeting on February 12, 1998, the Independent
General Partners have approved an additional reserve of $1.65 million which has
been reserved from the proceeds received from the sale of Stanley Furniture in
January 1998. This reserve has been established to fund anticipated cash
shortfalls in the future. The Fund's reserve balance as of March 19, 1998 was
approximately $4.4 million which has been invested in temporary investments.
<PAGE>
Investment in High-Yield Securities
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.
Although the Fund cannot eliminate the risks associated with its
investments in High-Yield Securities, it 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 limited
the amount of its original investment in a particular issuer. The Fund's
Investment Adviser also continually monitors remaining portfolio companies in
order to minimize the risks associated with its investments in High-Yield
Securities.
Certain issuers of securities held by the Fund (Playtex and Signature
Brands USA) have registered their equity securities in public offerings.
Although the equity securities of the same class presently held by the Fund
(except Signature Brands USA) 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, 1997 was $13,127,105, of which $12,510,356 was earned from
Mezzanine Investments and $616,749 was earned from Temporary Investments. 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.
<PAGE>
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.
For the year ended December 31, 1997, the Fund had net investment income
from operations of $9,323,884 as compared to a net investment loss of $1,411,814
and $1,155,421 for the same periods in 1996 and 1995, respectively. The increase
in net investment income for the year ended December 31, 1997 compared to the
year ended December 31, 1996 is the result of an increase in dividend income
received in connection with the sale of Alliance (see Note 8 to the financial
statements). Additionally, $6 million of settlement proceeds were received in
1997 pursuant to an agreement with Deloitte and Touche. During the twelve month
period ending December 31, 1997, the Fund held one security that generated
interest income. However, the reduction in interest income during 1997 was
partially offset by a reduction of Fund expenses; primarily Investment Advisory
Fees and Legal and Professional Fees.
The decrease in net investment loss for the year ended December 31, 1996
versus the comparative period in 1995 reflects the decrease in Investment
Advisory Fees and Fund Administration Fees partically offset by a decrease in
investment income received by the Fund due to the sale of income producing
securities in 1995.
Major expenses for the period consisted of Investment Advisory Fees and
Legal and Professional Fees.
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, 1997 was $1,193,717, compared with
$1,282,991 for the year ended December 31, 1996 and $2,770,934 for the year
ended December 31, 1995. The fee is calculated at an annual rate of 1% of Assets
Under Management, subject to certain reductions as specified in the Fund's
Partnership Agreement with a minimum annual payment of $1.2 million. This
decrease in 1997 as compared to 1996 and 1995 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, 1997, 1996 and 1995, legal and professional fees were $854,470,
$1,559,223 and $1,584,381, 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, 1997, 1996 and 1995 were $300,000, $299,335 and $1,330,212,
respectively. In accordance with Partnership Agreement, 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. 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, 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 years ended December 31, 1997, 1996 and
1995 were $519,134, $414,544, and $171,150, respectively. 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, 1997, 1996 and 1995 totaled $700,249, $701,021 and
$738,029, respectively. This decrease in 1997 as compared to the 1996 and 1995
loan fees is the result of reductions in the Credit Facility.
<PAGE>
Net Assets
The Fund's net assets decreased by $39,941,569 during the year ended
December 31, 1997 due to additional net unrealized depreciation of $8,132,721,
net realized gains of $10,880,887 and net investment income of $9,323,884
partially offset by cash distributions to partners of $52,013,619 ($31,452,790
of the cash distributions distributed in 1997 was return of capital from the
sales of portfolio investments).
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.
Unrealized Appreciation and Depreciation on Investments
For the year ended December 31, 1997, the Fund recorded total net
unrealized depreciation of $8.13 million of which $2.78 million was a reversal
of net unrealized depreciation for investments sold during 1997. Approximately
$3.9 million recorded in 1997 related to net unrealized depreciation recorded in
the market value of publicly traded securities held by the Fund at December 31,
1997. This compares to a net unrealized depreciation of $23.3 million of which
$27.5 million was net unrealized appreciation in market value of publicly traded
securities held by the Fund at December 31, 1996. For the year ended December
31, 1995, the Fund recorded net unrealized appreciation of $9.9 million of which
$11.9 million was related to net depreciation in market value of publicly traded
securities held by the Fund at December 31, 1995. The Fund's cumulative net
unrealized depreciation on investments at December 31, 1997 totaled $18.9
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.
As of December 31, 1997, approximately 57% of the Fund's investments 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, 1997. Although the Managing General Partner and Investment Adviser are not
aware of any factors not disclosed herein that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued since that time; and the current estimated fair value of these
investments may have changed significantly since that point in time.
The Fund's valuation of the common stock of Signature Brands USA, Playtex
and Stanley Furniture reflect their closing market price at December 31, 1997.
<PAGE>
The Signature Brands USA, 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 Signature Brands USA and Stanley
Furniture pursuant to Rule 144, under the securities act of 1933 and therefore,
any resale of Signature Brands USA 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 Signature Brands USA, 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, 1997 were
$10,880,887 compared to a net realized gain of $63,695,316 in 1996 and a net
realized gain of $75,808,174 for 1995.
For additional information, please refer to the Supplemental Schedule
of Realized Gains and Losses (Schedule 1).
Cash Distributions
On January 8, 1998, the Individual General Partners approved the fourth
quarter 1997 cash distribution totaling $18,775,734, which consisted of Net
Distributable Capital Proceeds, after Fund expenses, (of which $13,546,897 was
return of capital from the sale of Stanley Furniture and Walter Industries
Common Stock) during the quarter ending December 31, 1997. The total amount
distributed to Limited Partners was $18,587,955, or $38.13 per Unit. The
Managing General Partner received $187,779 in proportion to its 1% interest in
the Fund. The distributions were made on January 21, 1998.
Because all of the Fund's debt holdings were previously sold or redeemed,
remaining portfolio interest income expected to be received by the Fund is not
sufficient to cover the Fund's expenses. As a result, any interest income
received will be used to pay Fund expenses and may not be available for
distribution. The majority of future cash distributions to Limited Partners will
be derived from recovered capital from asset sales, and gains, if any, which are
dependent upon future market conditions and therefore are inherently
unpredictable. Cash distributions, therefore, are likely to vary significantly
in amount and may not be made in every quarter.
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>
<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 -
Third Quarter 1995 114,781,543 113,633,686 233.10 60.61 1,147,857 -
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 -
First Quarter 1997 285,576 282,744 .58 (a) .79 2,832
Second Quarter 1997 14,181,503 14,039,683 28.80 18.12 141,820
Third Quarter 1997 5,997,616 5,937,616 12.18 - 60,000
Fourth Quarter 1997 49,674,649 49,177,891 100.88 71.08 496,759
------------- ------------- --------- --------- ------------ -----------
Totals $ 757,108,670 $ 725,328,057 $1,493.17 $ 419.31 $ 7,570,540 $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) Return of Capital amounts received in such quarters were reduced by Fund
expenses .
</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, 1997 and December 31, 1996
Statements of Operations
For the Years Ended December 31, 1997, 1996 and 1995
Statements of Changes in Net Assets
For the Years Ended December 31, 1997, 1996 and 1995
Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
Statements of Changes in Partners' Capital
For the Years Ended December 31, 1997, 1996 and 1995
Schedule of Portfolio Investments - December 31, 1997
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,
1997 and 1996, 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, 1997, 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, 1997 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 $35,253,000 at
December 31, 1997 (61.4% 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. 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.
As further discussed in Note 1, the Fund is scheduled to terminate on June
15, 1998. The Individual General Partners have the right to extend the term of
the Fund.
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 19, 1998
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
<S> <C> <C>
December 31, December 31,
1997 1996
--------------- ---------------
ASSETS:
Investments - Notes 2, 8, 9
Portfolio Investments at fair value
Managed Companies (cost $53,480 at December 31,
1997 and $93,468 at December 31, 1996) $ 35,227 $ 86,067
Non-Managed Companies (cost $720 at December 31,
1997 and $9,597 at December 31, 1996) 26 6,183
Temporary Investments, at amortized cost (cost $18,062 at
December 31, 1997 and $4,040 at December 31, 1996) 18,125 4,047
Cash 1 10
Prepaid Loan Fees - Notes 2, 4 384 1,022
Prepaid Expenses and Other Receivables 6 307
Receivable for Investment Sold 3,926 --
--------------- ---------------
TOTAL ASSETS $ 57,695 $ 97,636
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities
Legal and Professional Fees Payable $ 110 $ 122
Reimbursable Administrative Expenses Payable 116 103
Independent General Partner Expenses Payable 23 23
--------------- ---------------
Total Liabilities 249 248
--------------- ---------------
Partners' Capital - Note 2
Managing General Partner 918 1,317
Limited Partners (487,489 Units) 56,528 96,071
--------------- ---------------
Total Partners' Capital 57,446 97,388
--------------- ---------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 57,695 $ 97,636
=============== ===============
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
For the Years Ended December 31,
------------ ------------ ------------
1997 1996 1995
------------ ------------ ------------
INVESTMENT INCOME - Notes 2, 8, 10:
Interest $ 912 1,444 $ 3,804
Discount 601 1,451 1,339
Dividend & Other Income 11,614 167 609
------------ ------------ ------------
TOTAL INCOME 13,127 3,062 5,752
------------ ------------ ------------
EXPENSES:
Investment Advisory Fee - Note 5 1,194 1,283 2,771
Fund Administration Fee - Note 6 300 299 1,330
Loan Fees - Notes 2, 4 700 701 738
Independent General Partners' Fees and Expenses - Note 7 227 208 304
Legal and Professional Fees 855 1,559 1,584
Reimbursable Administrative Expenses - Note 6 519 415 171
Insurance Expense 8 8 9
------------ ------------ ------------
TOTAL EXPENSES 3,803 4,473 6,907
------------ ------------ ------------
NET INVESTMENT INCOME (LOSS) 9,324 (1,411) (1,155)
------------ ------------ ------------
NET REALIZED GAIN (LOSS) ON INVESTMENTS -
NOTE 8 AND SCHEDULE 1 10,881 63,695 75,808
------------ ------------ ------------
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
ON INVESTMENTS - NOTE 9 AND SCHEDULE 2
Publicly Traded Securities (1,133) (84,416) (7,571)
Nonpublic Securities (7,000) 61,098 17,492
------------ ------------ ------------
Subtotal (8,133) (23,318) 9,921
------------ ------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 12,072 $ 38,966 $ 84,574
============ ============ ============
</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)
<S> <C> <C> <C>
For the Years Ended December 31,
----------- ----------- -----------
1997 1996 1995
----------- ----------- -----------
FROM OPERATIONS:
Net Investment Income (Loss) $ 9,324 $ (1,411) $ (1,155)
Net Realized Gain on Investments 10,881 63,695 75,808
Net Change in Unrealized Appreciation (Depreciation) on Investments (8,133) (23,318) 9,921
----------- ----------- -----------
Net Increase in Net Assets Resulting from Operations 12,072 38,966 84,574
Cash Distributions to Partners (52,014) (195,931) (186,920)
----------- ----------- -----------
Total Decrease (39,942) (156,965) (102,346)
NET ASSETS:
Beginning of Period 97,388 254,353 356,699
----------- ----------- -----------
End of Period $ 57,446 $ 97,388 $ 254,353
=========== =========== ===========
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
For the Years Ended December 31,
----------- ----------- -----------
1997 1996 1995
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and Dividend Income $ 13,370 $ 2,598 $ 6,219
Investment Advisory Fee (1,194) (1,283) (2,771)
Fund Administration Fee (300) (299) (1,330)
Legal and Professional Fees (883) (1,393) (1,911)
Loan Fees and Expenses (53) (62) (116)
Independent General Partners' Fees and Expenses (227) (213) (296)
(Purchase) Sale of Temporary Investments, Net (14,021) 3,317 3,141
Reimbursable Administrative Expenses (506) (483) --
Proceeds from Sale of Portfolio Company Investments 55,819 187,705 186,596
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 52,005 189,887 189,532
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Distributions to Partners (52,014) (195,931) (186,920)
----------- ----------- -----------
NET CASH APPLIED TO FINANCING ACTIVITIES (52,014) (195,931) (186,920)
----------- ----------- -----------
Net Increase (Decrease) in Cash (9) (6,044) 2,612
Cash at Beginning of Period 10 6,054 3,442
----------- ----------- -----------
CASH AT END OF PERIOD $ 1 $ 10 $ 6,054
=========== =========== ===========
RECONCILIATION OF NET INVESTMENT INCOME (LOSS) TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Investment Income (Loss) $ 9,324 $ (1,411) $ (1,155)
----------- ----------- -----------
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME (LOSS)
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
(Increase) Decrease in Investments 34,844 123,947 116,079
(Increase) Decrease in Receivable for Investments Sold (3,926) 3,377 (2,150)
(Increase) Decrease in Accrued Interest,
Dividend and Discount Receivables 243 (458) 466
(Increase) Decrease in Prepaid Expenses 638 748 530
Increase (Decrease) in Independent General Partner Fees Payable -- (5) 7
Increase (Decrease) in Reimbursable Administrative Expenses Payable 13 (68) 171
Increase (Decrease) in Legal and Professional Fees Payable (12) 62 (224)
Net Realized Gain on Investments 10,881 63,695 75,808
----------- ----------- -----------
TOTAL ADJUSTMENTS 42,681 191,298 190,687
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 52,005 $ 189,887 $ 189,532
=========== =========== ===========
</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, 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 Depreciation 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
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
============ ============ ============
For the Twelve Months Ended December 31, 1997
Partners' Capital at January 1, 1997 $ 1,317 $ 96,071 $ 97,388
Allocation of Net Investment Income 93 9,231 9,324
Allocation of Net Realized Gain on Investments 109 10,772 10,881
Allocation of Net Change in Unrealized Depreciation (81) (8,052) (8,133)
Cash Distributions to Partners (520) (51,494) (52,014)
------------ ------------ ------------
Partners' Capital at December 31, 1997 $ 918 $ 56,528 $ 57,446
============ ============ ============
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
Fair % Of
Investment Investment Value Total
Shares/Warrants Investment Date Cost(f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
MEZZANINE INVESTMENTS
MANAGED COMPANIES
BEEFAMERICA, INC. - Notes 9,10,15
14,000 Shares BAOC Acquisition, Inc. Sr. Preferred Stock 10% due 04/01/01 (b)(e) 09/09/88 $ 14,000 $ 1,749
10,000 Shares BAOC Acquisition, Inc. Jr. Preferred Stock 4% due 04/01/01 (b)(e) 09/09/88 10,000 1,251
$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)
5,661.11 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 $ 3,000 5.62
------------------------------
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(CONTINUED)
Fair % Of
Investment Investment Value Total
Shares/Warrants Investment Date Cost(f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
CHADWICK-MILLER, INC. - Notes 9,10,13
15,406 Warrants CMI Holding Corp., Preferred Stock Purchase Warrants (b)(e) 12/16/88 $ 12,916 $ -
39,487 Warrants CMI Holding Corp., Common Stock Purchase Warrants (b)(e) Various 3,736 -
(7.5% of fully diluted common equity) (h)
35,161 Shares Common Stock
Purchased 06/30/93 $ 352
Sold 09/03/93 $ 352
Realized Gain $ 0
$5,000 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
-----------------------------
COLE NATIONAL CORPORATION (g)
5,563 Warrants Cole National Corporation, Common Stock Purchase Warrants(b) 09/26/90 - -
(0.0% of fully diluted common equity (h)
assuming exercise of warrants)
$589 Senior Bridge Note
Purchased 09/25/90 $ 589
Sold 11/15/90 $ 589 ------------------------------
Realized Gain $ 0 - - 0.00
------------------------------
PLAYTEX PRODUCTS, INC. (a) - Note 9
1,406,204 Shares Playtex Products, Inc., Common Stock(b)(g) 12/28/88 3,255 14,414
(2.6% of fully diluted common equity) (h)
$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 14,414 27.00
------------------------------
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(CONTINUED)
Fair % Of
Investment Investment Value Total
Shares/Warrants Investment Date Cost(f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
SIGNATURE BRANDS USA, INC. (a) - Notes 9,15
(formerly HEALTH O METER PRODUCTS, INC.
952,500 Shares Signature Brands USA, Inc., Common Stock (b)(g) 04/28/88 $ 1,270 $ 4,048
610,553 Shares Signature Brands USA, Inc., Common Stock (b)(g) 08/17/94 3,282 2,595
(14.7% of fully diluted common equity) (h)
$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 6,643 12.44
------------------------------
STANLEY FURNITURE COMPANY, INC. (a)(c) - Notes 8, 9, 15
400,719 Shares Stanley Furniture Co., Inc., Common Stock(b)(f)(g) Various 5,021 11,170
(16% of fully diluted common equity)(h)
$2,000 Loan participation
Purchased 03/12/92 $ 2,000
Repaid 04/05/93 $ 2,000
Realized Gain $ 0
Purchased Various $ 13,973
Sold 11/13/96 $ 14,664
Sold 12/13/96 $ 2,199
Realized Gain $ 2,890
Purchased Various $ 395
Sold 02/07/97 $ 756
Realized Gain $ 361
Purchased Various $ 9,113
Sold 06/30/97 $ 14,547
Realized Gain $ 5,434
Purchased Various $ 5,021
Sold 11/18/97 $ 10,018
Realized Gain $ 4,997 ------------------------------
Total Net Realized Gain $ 13,682 5,021 11,170 20.93
------------------------------
------------------------------
TOTAL INVESTMENT IN MANAGED COMPANIES $ 53,480 $35,227 65.99
==============================
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(CONTINUED)
Fair % Of
Investment Investment Value Total
Shares/Warrants Investment Date Cost(f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
NON-MANAGED COMPANIES
SWO HOLDINGS CORPORATION - Note 9
250,000 Shares SWO Holdings Corp., Common Stock(b) 11/24/87 $ 250 $ -
1,430 Shares Homeland Holding Corp., Common Stock(b) 08/10/90 440 -
1,506 Warrants Homeland Holding Corp., Common Stock
Purchase Warrants (b) 08/10/90 - -
$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 - 0.00
------------------------------
TLC BEATRICE INTERNATIONAL HOLDINGS, INC.
25,500 Shares TLC Beatrice Int'l Holdings., Inc., Common Stock(b) 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 0.05
------------------------------
MAGELLAN HEALTH SERVICES, INC. - Note 9
(formerly CHARTER MEDICAL CORPORATION)
40,000 Warrants Magellan Health Services, Inc., Common Stock Purchase Warrants(b) 09/01/88 4 -
$5,000 14% Subordinated Notes
Purchased 09/01/88 $ 5,000
Sold 12/05/88 $ 5,000 ------------------------------
Realized Gain $ 0 4 - 0.00
------------------------------
TOTAL INVESTMENT IN NON-MANAGED COMPANIES 720 26 0.05
==============================
SUMMARY OF MEZZANINE INVESTMENTS
Preferred Stock 24,000 3,000 5.62
Common Stock and Warrants 30,200 32,253 60.42
------------------------------
TOTAL MEZZANINE INVESTMENTS $ 54,200 $35,253 66.04
==============================
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(CONTINUED)
Fair % Of
Investment Investment Value Total
Shares/Warrants Investment Date Cost(f) (Note 2) Investments
<S> <C> <C> <C> <C> <C>
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$ 10,000 American General Corp., 5.81% due 1/12/98 12/04/97 $ 9,937 $ 9,982 18.70
$ 7,262 Clipper Receivable 5.97% due 1/02/98 12/18/97 7,244 7,261 13.60
$ 882 Ford Motor Credit Corp., 6.15% due 1/02/98 12/24/97 881 882 1.66
------------------------------
TOTAL INVESTMENT IN COMMERCIAL PAPER 18,062 18,125 33.96
------------------------------
TOTAL TEMPORARY INVESTMENTS 18,062 18,125 33.96
------------------------------
TOTAL INVESTMENT PORTFOLIO $ 72,262 $53,378 100.00
==============================
(a) Represents investments in Affiliates as defined in the Investment Company Act of 1940.
(b) Restricted non-income producing security.
(c) Issuers of which the Fund, as of December 31, 1997, owned more than 25% of
the voting securities and which therefore were presumed to be controlled by
the Fund under the Investment Company Act of 1940 as of such date.
(d) Represents original cost and excludes accretion of discount of $64 for Temporary Investments.
(e) Non-accrual investment status.
(f) Inclusive of receipt of payment-in-kind securities.
(g) Publicly traded class of securities.
(h) Percentages of Common Equity have not been audited by Price Waterhouse LLP.
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
ML-LEE ACQUISITION FUND, L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. Organization and Purpose
ML-Lee Acquisition Fund, L.P. (the "Fund") was formed and the Certificate
of Limited Partnership was filed under the Delaware Revised Uniform Limited
Partnership Act on April 1, 1987. The Fund's operations commenced on October 19,
1987.
The Managing General Partner, subject to the supervision of the Individual
General Partners, is responsible for overseeing and monitoring the Fund's
investments. Mezzanine Investments, L.P. (the "Managing General Partner"), is a
limited partnership in which ML Mezzanine Inc., an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc., is the general partner, and Thomas H.
Lee Advisors I (the "Investment Adviser"), an affiliate of Thomas H. Lee, is the
limited partner. The Individual General Partners are Vernon R. Alden, Joseph L.
Bower and Stanley H. Feldberg (the "Independent General Partners") and Thomas H.
Lee.
The Fund has elected to operate as a business development company under the
Investment Company Act of 1940. Its primary investment objective is to provide
current income and long-term capital appreciation by investing in "Mezzanine"
securities consisting primarily of Subordinated Debt and Preferred Stock
combined with an equity participation issued in connection with leveraged
acquisitions or other leveraged transactions which management of the Fund
believes offer significant possibilities for return.
The Fund will terminate 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 such extension is in the best
interest of the Fund. Following such time periods the Fund will have five
additional years to liquidate its remaining investments. At the meeting held on
February 12, 1998, the Individual General Partners indicated that it was likely
they would elect to extend the term of the Fund for an additional two-year
period. The Individual General Partners expressed their intention to vote on the
matter at their meeting scheduled for June 5, 1998.
2. Significant Accounting Policies
Basis of Accounting
For financial reporting purposes, the records of the Fund are maintained
using the accrual method of accounting. For Federal income tax reporting
purposes, the results of operations are adjusted to reflect statutory
requirements arising from book to tax differences.
Valuation of Investments
Securities for which market quotations are readily available are valued by
reference to such market quotation, using the last trade price (if reported) or
the last bid price for the period. For securities without a readily
ascertainable market value (including securities restricted as to resale for
which a corresponding publicly traded class exists), fair value is determined,
on a quarterly basis, in good faith by the Managing General Partner and the
Investment Adviser with final approval from the Individual General Partners of
the Fund. For privately issued securities in which the Fund typically invests,
the fair value of an investment is its original cost plus accrued value in the
case of original issue discount or deferred pay securities. Such investments
will be revalued if there is an objective basis for doing so at a different
price. Investments will be written down in value if the Managing General Partner
and Investment Adviser believe adverse credit developments of a significant
nature require a write-down of such securities. Investments will be written up
in value only if there has been an arms'-length third party transaction to
justify the increased valuation. Although the Managing General Partner and
Investment Adviser use their best judgment in estimating the fair value of these
investments, there are inherent limitations in any estimation technique.
Therefore, the fair value estimates presented herein are not necessarily
indicative of the amount which the Fund could realize in a current transaction.
Temporary Investments with maturities of less than 60 days are stated at
amortized cost, which approximates market.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of December
31, 1997. Although the Managing General Partner and Investment Adviser are not
aware of any factors not disclosed herein that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued since that time and, especially in light of the fact that the portfolio
investments of companies whose equity is publicly traded are valued at the last
price available at December 31, 1997, the current estimated fair value of these
investments may have changed significantly since that point in time.
<PAGE>
Interest Receivable on Investments
Investments generally will be placed on non-accrual status in the event of
a default (after applicable grace period expires) or if the Investment Adviser
and the Managing General Partner determine that there is no reasonable assurance
of collecting interest.
Payment-In-Kind Securities
All payment-in-kind securities received in lieu of cash interest payments
by the Fund's portfolio companies are recorded at face value (which approximates
accrued interest), unless the Investment Adviser and the Managing General
Partner determine that there is no reasonable assurance of collecting the full
principal amounts of such securities. As of December 31, 1996, the Fund had in
its portfolio of investments $1.1 million of payment-in-kind debt securities. As
of December 31, 1997 and December 31, 1996, the Fund had in its portfolio of
investments $3.7 million and $6.5 million, respectively of payment-in-kind
equity securities.
Investment Transactions
The Fund records investment transactions on the date on which it obtains an
enforceable right to demand the securities or payment therefor. The Fund records
Temporary Investment transactions on the trade date.
Realized gains and losses on investments are determined on the basis of
specific identification for accounting and tax purposes.
Loan Facility and Advisory Fees
Loan Facility and Advisory Fees are being amortized over the life (7 years)
of the Facility commencing in August, 1991.
Partners' Capital
Partners' Capital represents the Fund's equity divided in proportion to the
Partners' Capital Contributions. 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.
<PAGE>
4. Leverage
The Fund entered into an amended credit agreement, dated as of August 13,
1991 (the "Credit Facilities"), with a lending group led by the First National
Bank of Chicago ("First Chicago"), which provided the Fund with a maximum credit
facility of $140 million. The Credit Facilities consisted of a $100 million term
loan and a $40 million secured revolving credit line. In October of 1993, the
Fund amended the credit agreement enabling it to make prepayments of the term
loan at any time and without any corresponding reduction to the revolving line
of credit. As a result of paydowns of the term loan the Fund's outstanding
balance was paid in full as of March 29, 1994. Additionally, the Credit
Facilities were reduced to $7.5 million, all of which is available at December
31, 1997. The Credit Facilities will mature on July 31, 1998. In connection with
the Credit Facilities, the Fund has pledged its remaining debt and equity
portfolio securities to its lenders.
In connection with the Credit Facilities, the Fund incurred the following
loan fees:
Nonrecurring loan advisory and loan facility fees of $4,441,580, paid to
First Chicago in 1991 in connection with the creation of the credit
facility, which are being amortized over the life of the credit facility.
The amount expensed for the year ended December 31, 1997 was $637,505.
An annual Loan Administration Fee of $25,000 for the administration of the
credit facility. The amount expensed for the year ended December 31, 1997
was $24,932.
An Unused Commitment Fee of 1/2 of 1% per annum of the unused line of
credit. The amount expensed for the year ended December 31, 1997 was
$37,812.
For the years ended December 31, 1997, 1996 and 1995, the Fund incurred
$700,249, $701,021 and $738,029, respectively, in total loan fees.
5. Investment Advisory Fee
The Investment Adviser provides for the identification, management and
liquidation of investments for the Fund. As compensation for services rendered
to the Fund, the Investment Adviser receives a quarterly fee at the annual rate
of 1% of assets under management (net offering proceeds, reduced by cumulative
capital reductions, plus outstanding bank borrowing as specified in the Fund's
Partnership Agreement), with a minimum annual fee of $1.2 million. The
Investment Advisory Fee is calculated and paid quarterly, in advance. For the
years ended December 31, 1997, 1996 and 1995, the Fund paid $1,193,717,
$1,282,991 and $2,770,934, 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 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 years ended December
31, 1997, 1996, and 1995, the Fund paid $300,000, $299,335 and $1,330,212,
respectively, in Fund Administration Fees.
Beginning October 19, 1995, in accordance with the Partnership Agreement,
the Fund Administrator is being reimbursed by the Fund for 100% of
administrative expenses incurred. Actual out-of-pocket expenses ("reimbursable
expenses") primarily consist of printing, audits, tax preparation and custodian
fees. Total out-of-pocket expenses incurred by the Fund for the year ended
December 31, 1997, 1996 and 1995 were $519,134, $414,544 and $171,950
respectively.
<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, 1997, 1996 and 1995, the Fund incurred
$227,171, $207,827 and $303,527, respectively, in Independent General Partners'
Fees and Expenses.
8. Investment Transactions
During February 1997, the Fund sold 31,515 shares of Stanley Furniture
("Stanley") for $24 per share. The Fund received total proceeds of $756,335 and
recognized a gain of $361,480.
On June 27, 1997, the Fund along with affiliates of the Thomas H. Lee
Company entered into a Stock Purchase Agreement (the "Agreement") with Stanley.
Pursuant to the Agreement, Stanley purchased an aggregate 750,000 shares of
Stanley Common Stock from the Selling Stockholders for $20 per share. In
connection with the sale, the Fund sold 727,344 shares and received proceeds of
$14,546,880. The Fund recognized a gain of $5,433,911 on this transaction.
On August 27, 1997, the Fund together with certain other stockholders
including affiliates of Thomas H. Lee Company (the "Selling Stockholders"),
entered into a Stock Purchase Agreement pursuant to which the Selling
Stockholders agreed to sell all of the issued and outstanding Common Stock of
Alliance to an unrelated third party for approximately $7.8 million or $7.78 per
share (the "Transaction"). In addition, immediately prior to the consummation of
the Transaction, Alliance redeemed all of the outstanding shares of the
Company's Preferred Stock, and paid accrued but unpaid dividends with respect
thereto. Also, Alliance's outstanding indebtedness was repaid in full, including
accrued and unpaid interest. The Transaction was completed on October 3, 1997.
As a result of these transactions, the Fund received proceeds of
approximately $30.9 million or $62.75 per Unit. These proceeds are comprised of
$11.9 million for repayment of indebtedness (including all accrued and unpaid
interest), and $18.9 million for the Common and Preferred Stock held by the Fund
(which includes approximately $5.5 million of preferred dividends). In addition,
the Fund's outstanding guarantee of Alliance debt, as discribed in Note 11, was
released. Net Distributable proceeds of $62.75 per Unit were distributed to
Limited Partners of record as of October 3, 1997.
On November 11, 1997, Stanley announced the repurchase of a total of
413,201 shares of Common Stock from the Fund and Affiliates of the Thomas H. Lee
Co. for $25 per share. As a result, the Fund sold a total of 400,718 shares and
received proceeds of $10 million or $20.34 per Unit, which were distributed to
Limited Partners of record as of November 11, 1997.
Pursuant to Rule 144 under the Securities Act of 1933, the Fund sold its
435,895 shares of Walter Industries Inc. Common Stock during the fourth quarter
of 1997. The Fund received total proceeds of $8,964,717 and realized a gain of
$88,188.
Because the Fund originally invested in high-yield private placement
securities, the risk of loss upon default by an issuer is greater than with
investment grade securities because high-yield securities are generally
unsecured and are often subordinated to other creditors of the issuer. Also,
high-yield issuers usually have higher levels of indebtedness and are more
sensitive to adverse economic conditions.
Although the Fund cannot eliminate its risks associated with its
investments in high-yield securities, it has procedures in place to continually
monitor its risks associated with its investments under a variety of market
conditions. Any potential Fund loss would generally be limited to its investment
in the portfolio company reflected in the portfolio of investments.
Should bankruptcy proceedings commence, either voluntarily or by action of
the court against a portfolio company, the ability of the Fund to liquidate the
position or collect proceeds from the action may be delayed or limited.
<PAGE>
9. Unrealized Appreciation and Depreciation of Investments
For information please refer to the Supplemental Schedule of Unrealized
Appreciation and Depreciation (Schedule 2).
10. Non-Accrual of Investments
In accordance with the Fund's Accounting Policy, the following securities
have been on non-accrual status since the date indicated:
- BeefAmerica, Inc. on July 1, 1990
- Chadwick Miller on July 1, 1993
11. Litigation
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 (the "Class"), against the Fund's Managing General
Partner, ("MGP"), Individual General Partners, Investment Adviser and certain of
their affiliates. The complaint alleged that the defendants breached the Fund's
Partnership Agreement in 1990 by causing the Fund to pay $7,554,855 in incentive
compensation to the MGP with respect to that year and sought monetary damages in
the amount of $7,554,855, together with interest, and other relief. After trial,
the Court found that the MGP Distributions for the fourth quarter of 1989
through the fourth quarter of 1990 were paid in violation of the Partnership
Agreement and as a result, held the General Partners liable for repayment to the
plaintiff class of $6,627,752 of excessive distributions, plus interest. The
Court's decision dismissed Merrill Lynch & Co., Inc. and MLPF&S because they
were not parties to the Partnership Agreement. On June 13, 1996, the Court
amended its decision, dismissing ML Mezzanine, Inc., the corporate general
partner of the Fund's MGP because it was not a party to the Partnership
Agreement. On July 25, 1996, judgment was entered against remaining Defendants
in the amount of $10,399,505. The remaining Defendants filed a Notice of Appeal
on October 4, 1996. The appeal was fully briefed, and submitted to the Court for
decision. Thereafter, the parties agreed to settle this action with certain of
the remaining defendants paying $8 million to the Class. On June 25, 1997, the
Court preliminarily approved the settlement, ordered notice to be mailed to the
Class, and scheduled a final hearing to approve the settlement and plantiffs'
counsel's application for attorney's fees, for September 15, 1997. On September
15, 1997, the Court held a final hearing, at which it approved the settlement
and signed a Final Order dismissing the action, which released the class' claims
against the defendants. The Fund paid litigation expenses to the indemnified
parties based upon amounts which are deemed reimbursable in accordance with the
indemnification provisions of the Partnership Agreement and included these
amounts in Legal and Professional Fees.
<PAGE>
On October 14, 1993, a Limited Partner commenced a putative class action in
the U.S. District Court for the District of Delaware, purportedly on behalf of
all persons who purchased limited partnership interests in the Fund between
August 12, 1987 and the date of filing of the complaint, against the Fund, the
Managing General Partner, the Individual General Partners, the Investment
Adviser to the Fund and certain named affiliates of such persons. As amended,
the complaint alleges that the defendants operated the Fund, and caused it to
make certain investments, for the benefit of some or all of the defendants at
the expense of the Fund's Limited Partners in breach of defendants' fiduciary
and contractual duties to the Limited Partners, thereby violating federal
securities laws applicable to the Fund and its affiliates under the Investment
Company Act of 1940, as amended, as well as Delaware state law. By Order dated
September 30, 1994 and Opinion dated October 14, 1994, the court granted in part
and denied in part defendants' motion to dismiss the amended complaint,
dismissing plaintiff's claims with respect to several investments as time-barred
and dismissing all claims for aiding and abetting liability under the Investment
Company Act of 1940. The plaintiff thereafter filed a second amended complaint
on November 3, 1995 raising additional allegations in connection with certain
transactions by the Fund, and alleging that defendants violated the Investment
Company Act of 1940 and Delaware state law. In its Order and Opinion dated
December 30, 1996, the court granted in part and denied in part the defendants'
motion to dismiss the second amended complaint holding that a number of new
claims and theories asserted by plaintiffs are dismissed as time-barred.
Plaintiffs have moved for reconsideration of the Court's Order. On September 30,
1997, Plainfiff's motion was denied without prejudice. The plaintiff seeks an
accounting, rescission, rescissory or actual damages and punitive damages.
Plaintiffs have moved to certify the case as a class action. Defendants have
opposed that motion which is currently pending before the Court. The defendants
in this action believe that the claims in the second amended complaint are
without merit. Whether or not the plaintiff prevails on any remaining claims,
the Fund may be obligated to indemnify and advance litigation expenses to
certain of the defendants under the terms and conditions of various indemnity
provisions in the Fund's Partnership Agreement and separate indemnification
agreements, and the amounts of such indemnification and expenses could be
material. In the opinion of legal counsel, the outcome of this case is not
determinable at this time. The Fund has incurred litigation expenses which are
recorded in Legal and 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. After the defendants filed a motion to dismiss the
action in its entirety, the plaintiffs filed an amended complaint. The
defendants thereafter filed a motion to dismiss the amended complaint in its
entirety, which motion has been fully briefed and is awaiting action by the
Court. The defendants in this action believe that the claims against them are
without merit. In the opinion of legal counsel, the outcome of this case is not
determinable at this time.
<PAGE>
12. 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 1997, the Managing General Partner received cash distributions in
the amount of $520,156 representing its 1% in the Fund.
13. Reserves
In February 1993, the Fund established a $15 million reserve to provide
funds for follow-on investments and to pay expenses. As of December 31, 1997,
the reserve balance was reduced to approximately $2.6 million due to follow-on
investments in CMI Holding Corp., Diet Center Inc., Duro-Test Corporation,
Signature Brands and Petco. Additionally, $1.4 million of the reserve has been
returned to partners, $2.9 million was paid to First Chicago to pay down the
Fund's loan and approximately $300,000 has been used to fund quarterly expenses.
On February 12, 1998, the Independent General Partners approved an additional
reserve of $1.65 million for Fund expenses. This reserve was established from
the proceeds received from the sale of Stanley Furniture in January 1998 to fund
anticipated cash shortfalls in the future.
14. 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.
<PAGE>
15. Subsequent Events
On January 8, 1998, the Individual General Partners approved the fourth
quarter 1997 cash distribution totaling $18,775,734, which consisted of Net
Distributable Capital Proceeds, after Fund expenses (of which $13,546,897 was
return of capital from the sale of Stanley Furniture and Walter Industries
Common Stock) during the quarter ending December 31, 1997. The total amount
distributed to Limited Partners was $18,587,955, or $38.13 per Unit. The
Managing General Partner received $187,779 in proportion to its 1% interest in
the Fund. The distributions were made on January 21, 1998.
On January 6, 1998 the Fund and affiliates of the Thomas H Lee Company
including ML-Lee Acquisition Fund II, L.P. and ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P., (the "Lee Affiliates", and together with the
Fund, the ("Selling Stockholders") sold their remaining holdings of common stock
in 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 will be
distributed to Limited Partners of record as of January 6, 1998.
On February 28, 1998, Signature Brands USA and Sunbeam Corporation
("Sunbeam") executed a definitive merger agreement whereby Sunbeam will 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, which was executed on March 6, 1998, the Fund tendered all its
shares of Signature Brands USA Common Stock and expects to receive proceeds of
approximately $13 million. The Fund estimates that the maximum net Distributable
Capital Proceeds per Unit will be $26.19. Any distribution of these net
Distributable Capital Proceeds after the payment of expenses and the
establishment of reserves, as provided for in the Fund's Partnership Agreement,
will be distributed to the Fund's Limited Partners of record as of the date of
the expiration of this Tender Offer, which is scheduled to be on April 2, 1998,
unless the Tender Offer is extended.
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
consist of a $1 million Promissory Note payable to the Fund on or before May 2,
1998. The Securities have been pledged to secure the obligation of Lajara II,
LLC under the Promissory Note. The Fund will recognize a loss of $23 million.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
ML-LEE ACQUISITION FUND, L.P.
SUPPLEMENTARY SCHEDULE OF REALIZED GAINS (LOSSES)
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Number Of Investment
SECURITY Shares/Principal Cost Net Proceeds Realized Gain
--------------- ------------ ------------- -------------
Stanley Furniture Company Inc.
Common Stock 31,515 $ 395 $ 756 $ 361
Stanley Furniture Company Inc.
Common Stock 727,344 9,113 14,547 5,434
Stanley Furniture Company Inc.
Common Stock 400,718 5,021 10,019 4,998
Walter Industries Inc.
Common Stock 435,895 8,877 8,965 88
------------- ------------- -------------
TOTAL REALIZED GAINS $ 23,406 $ 34,287 $ 10,881
============= ============= =============
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
ML-LEE ACQUISITION FUND, L.P.
SUPPLEMENTARY SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
FOR THE PERIOD ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Unrealized
Appreciation
(Depreciation)
at
Investment Fair December 31, 1993
SECURITY Cost Value 1997 1997 1996 1995 1994 and prior
- --------------------------------------- --------- --------- --------- --------- -------- -------- ------- ---------
PUBLICLY TRADED SECURITIES
Signature Brands USA
Common Stock* $ 4,552 $ 6,643 $ 2,091 $ (1,758) $ 2,735 $ 293 $ (5,291) $ 6,112
Playtex
Common Stock* 3,255 14,414 11,159 3,166 701 528 (10,319) 17,083
Stanley Furniture
Common Stock* 5,021 11,170 6,149 (5,315) 23,580 (5,351) (9,030) 2,265
--------- --------- ---------- -------- --------- --------
TOTAL UNREALIZED APPRECIATION
(DEPRECIATION) FROM PUBLICLY
TRADED SECURITIES $ 19,399 $ (3,907) $ 27,016 $(4,530) $(24,640) $ 25,460
--------- --------- --------- ------- -------- ---------
NONPUBLIC SECURITIES:
BeefAmerica Incorporated
Jr. and Sr.Preferred Stock $ 24,000 $ 3,000 $ (21,000) $ (7,000) $ (14,000) $ -- $ -- $ --
Other Securities** -- -- -- -- 90,978 -- -- (90,978)
Chadwick-Miller, Inc.
Common Stock Warrants* 3,736 -- (3,736) -- (1,929) -- -- (1,807)
Preferred Stock Warrants* 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 $ (38,346) $ (7,000) $ 61,098 $ -- $ -- $ (92,444)
--------- ------- --------- ------- -------- ---------
Reversal of Unrealized Depreciation
for Investments Sold in 1997:
Celebrity
Common Stock $ -- $ -- $ -- $ 54 $ 30 $ 65 $ 47 $ (196)
Walter Industries
Common Stock -- -- -- 2,720 436 2,947 -- (6,103)
Reversal of Unrealized Appreciation/
(Depreciation)for Investments
Sold prior to 1997: -- -- -- -- (111,898) 11,439 33,864 66,595
------- ------- --------- ------- -------- ---------
Total Unrealized Appreciation/
(Depreciation)for Investments Sold: $ -- $ 2,774 $(111,432) $14,451 $ 33,911 $ 60,296
--------- ------- --------- ------- -------- ---------
Net Unrealized Appreciation/(Depreciation) $ (18,947) $ (8,133) $ (23,318) $ 9,921 $ 9,271 $ (6,688)
========= ======= ========= ======= ======== =========
* Restricted Security
** Includes Debt and Equity Securities previously exchanged.
See Notes to Financial Statements.
</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
to Rule424(b) under the Securities Annual Report on Form 10-K
Act of 1933. year ended December 31, 1987.
27 Financial Data Schedule for the year Filed Herewith.
ended December 31, 1997.
(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 27th day of March 1998.
ML-LEE ACQUISITION FUND, L.P.
By: Mezzanine Investments, L.P.
Managing General Partner
By: ML Mezzanine Inc.
its General Partner
/s/ Kevin K. Albert
--------------------------------
Dated: March 27, 1998 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 27th day of March, 1998.
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 27th day of March 1998.
ML-LEE ACQUISITION FUND, L.P.
By: Mezzanine Investments, L.P.
Managing General Partner
By: ML Mezzanine Inc.
its General Partner
Dated: March 27, 1998 --------------------------------
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 27th day of March, 1998.
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 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 72,260,934
<INVESTMENTS-AT-VALUE> 53,377,000
<RECEIVABLES> 3,926,089
<ASSETS-OTHER> 392,354
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 57,695,443
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 249,174
<TOTAL-LIABILITIES> 249,174
<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> (18,947,186)
<NET-ASSETS> 57,446,270
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,126,323
<OTHER-INCOME> 6,000,783
<EXPENSES-NET> 3,803,222
<NET-INVESTMENT-INCOME> 9,323,884
<REALIZED-GAINS-CURRENT> 10,880,887
<APPREC-INCREASE-CURRENT> (8,132,721)
<NET-CHANGE-FROM-OPS> 12,072,050
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 8,255,333
<DISTRIBUTIONS-OF-GAINS> 11,992,120
<DISTRIBUTIONS-OTHER> 31,768,003
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 39,941,569
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,193,717
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,803,222
<AVERAGE-NET-ASSETS> 77,417,054
<PER-SHARE-NAV-BEGIN> 197.07
<PER-SHARE-NII> 18.94
<PER-SHARE-GAIN-APPREC> (16.52)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 105.63
<RETURNS-OF-CAPITAL> 64.52
<PER-SHARE-NAV-END> 115.96
<EXPENSE-RATIO> 0.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
