UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
Commission File Number 0-15669
ML-LEE ACQUISITION FUND, L.P.
(Exact name of registrant as specified in its Charter)
Delaware 13-3426817
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
World Financial Center
South Tower - 23rd Floor
New York, New York 10080-6123
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:(212) 236-7339
Securities registered pursuant to Section 12(b) of the Act: None
Name of each exchange on which registered: Not Applicable Securities
registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___.
Aggregate market value of voting securities held by non-
affiliates: Not Applicable.
<PAGE>
ML-LEE ACQUISITION FUND, L.P.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Assets, Liabilities and Partners' Capital
as of March 31, 1998 and December 31, 1997
Statements of Operations - For the Three Months Ended
March 31, 1998 and 1997
Statements of Changes in Net Assets - For the Three Months Ended
March 31, 1998 and 1997
Statements of Cash Flows - For the Three Months Ended
March 31, 1998 and 1997
Statement of Changes in Partners' Capital - March 31, 1998
Schedule of Portfolio Investments - March 31, 1998
Notes to Financial Statements
Supplemental Schedule of Realized Gains and Losses - Schedule 1
Supplemental Schedule of Unrealized Appreciation and
Depreciation - Schedule 2
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
<S> <C> <C>
March 31, 1998 December 31, 1997
-------------- -----------------
ASSETS:
Investments - Notes 2, 8, 9
Portfolio Investments at fair value
Managed Companies (cost $24,459 at March 31,
1998 and $53,480 at December 31, 1997) $ 33,588 $ 35,227
Non-Managed Companies (cost $720 at March 31,
1998 at December 31, 1997) 36 26
Temporary Investments, at amortized cost (cost $13,626 at
March 31, 1998 and $4,040 at December 31, 1997) 13,654 18,125
Cash 5 1
Prepaid Loan Fees - Notes 2, 4 221 384
Prepaid Expenses 4 6
Receivable for Investment Sold 1,075 3,926
--------------- ---------------
TOTAL ASSETS $ 48,583 $ 57,695
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities
Legal and Professional Fees Payable $ 81 $ 110
Reimbursable Administrative Expenses Payable 133 116
Independent General Partner Expenses Payable 29 23
--------------- ---------------
Total Liabilities 243 249
--------------- ---------------
Partners' Capital - Note 2
Managing General Partner 827 918
Limited Partners (487,489 Units) 47,513 56,528
--------------- ---------------
Total Partners' Capital 48,340 57,446
--------------- ---------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 48,583 $ 57,695
=============== ===============
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
For the Three Months Ended
------------ --------------
March 31,1998 March 31, 1997
------------ --------------
INVESTMENT INCOME - Notes 2, 8, 10:
Interest $ 6 $ 295
Discount 196 47
Dividend & Other Income 1 6
------------ ------------
TOTAL INCOME 203 348
------------ ------------
EXPENSES:
Investment Advisory Fee - Note 5 300 297
Fund Administration Fee - Note 6 75 75
Loan Fees - Notes 2, 4 173 172
Independent General Partners' Fees and Expenses - Note 7 40 53
Legal and Professional Fees -- 232
Reimbursable Administrative Expenses - Note 6 133 70
Insurance Expense 2 2
------------ ------------
TOTAL EXPENSES 723 901
------------ ------------
NET INVESTMENT LOSS (520) (553)
NET REALIZED GAIN (LOSS) ON INVESTMENTS -
NOTE 8 AND SCHEDULE 1 (17,202) 361
NET CHANGE IN UNREALIZED APPRECIATION
ON INVESTMENTS - NOTE 9 AND SCHEDULE 2
Publicly Traded Securities 6,392 284
Nonpublic Securities 21,000 0
------------ ------------
Subtotal 27,392 284
------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 9,670 $ 92
============ ============
See the Accompanying Notes to Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
For the Three Months Ended
------------ ------------
March 31, 1998 March 31, 1997
------------ ------------
FROM OPERATIONS:
Net Investment Income (Loss) $ (520) $ (553)
Net Realized Gain (Loss) on Investments (17,201) 361
Net Change in Unrealized Appreciation (Depreciation) on Investments 27,392 284
------------ ------------
Net Increase in Net Assets Resulting from Operations 9,670 92
Cash Distributions to Partners (18,776) (650)
------------ ------------
Total Decrease (9,106) (558)
NET ASSETS:
Beginning of Period 57,446 97,388
------------ ------------
End of Period $ 48,340 $ 96,830
============ ============
See the Accompanying Notes to Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
For the Three Months Ended
------------ -------------
March 31, 1998 March 31, 1997
-------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest, Dividends and Discount Income $ 238 $ 356
Investment Advisory Fee (300) (297)
Fund Administration Fee (75) (75)
Legal and Professional Fees (28) (307)
Loan Fees and Expenses (10) (9)
Independent General Partners' Fees and Expenses (33) (34)
(Purchase) Sale of Temporary Investments, Net 4,435 358
Reimbursable Administrative Expenses (117) (103)
Proceeds from Sale of Portfolio Company Investments 14,670 756
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 18,780 645
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Distributions to Partners (18,776) (650)
------------ ------------
NET CASH APPLIED TO FINANCING ACTIVITIES (18,776) (650)
------------ ------------
Net Increase (Decrease) in Cash 4 (5)
Cash at Beginning of Period 1 10
------------ ------------
CASH AT END OF PERIOD $ 5 $ 5
============ ============
RECONCILIATION OF NET INVESTMENT INCOME (LOSS) TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Investment Income (Loss) $ (520) $ (553)
------------ ------------
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME (LOSS)
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Decrease in Investments 33,456 753
Increase in Receivable for Investments Sold 2,851 --
Decrease in Accrued Interest,
Dividend and Discount Receivables 36 8
Decrease in Prepaid Expenses 165 166
Increase in Independent General Partner Fees Payable 6 19
Increase (Decrease) in Reimbursable Administrative Expenses Payable 17 (33)
Decrease in Legal and Professional Fees Payable (29) (76)
Net Realized Gain (Loss) on Investments (17,202) 361
------------ ------------
TOTAL ADJUSTMENTS 19,300 1,198
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 18,780 $ 645
============ ============
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Managing
General Limited
Partner Partners Total
---------- --------- ----------
For the Three Months Ended March 31, 1998
Partners' Capital at January 1, 1998 $ 918 $ 56,528 $ 57,446
Allocation of Net Investment Loss (5) (515) (520)
Allocation of Net Realized Loss on Investments (172) (17,029) (17,202)
Allocation of Net Change in Unrealized Appreciation 274 27,118 27,392
Cash Distributions to Partners (188) (18,588) (18,776)
--------- --------- ----------
Partners' Capital at March 31, 1998 $ 827 $ 47,513 $ 48,340
========= ========= ==========
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
March 31, 1998
(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
CHADWICK-MILLER, INC. - Notes 9,12
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)
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
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) - Notes 9, 14
1,406,204 Shares Playtex Products, Inc., Common Stock(b)(g) 12/28/88 3,255 20,742
(2.6% of fully diluted common equity)
$19,285 15% Subordinated Notes
Purchased 12/28/88 $ 19,285
Sold 06/30/89 $ 19,285
Realized Gain $ 0
3,214,000 Shares Preferred Stock
Purchased 12/28/88 $ 3,214
Sold 06/30/89 $ 3,214
Realized Gain $ 0
2,571,314 Shares Common Stock
Purchased 12/28/88 $ 1,286
Sold 06/30/89 $ 1,286
Realized Gain $ 0
$11,250 15% Subordinated Note
Purchased 12/28/88 $ 11,250
Sold 09/28/90 $ 11,275
Realized Gain $ 25
2,571,314 Shares Common Stock
Purchased 12/28/88 $ 1,286
Sold 09/28/90 $ 10,512
Realized Gain $ 9,226
347,209 Shares Common Stock
Purchased 12/28/88 $ 174
Sold 12/20/91 $ 1,343
Realized Gain $ 1,169
$71,251 15% Subordinated Notes
Purchased 12/28/88 $ 71,251
Sold 02/01/93 $ 71,181
Realized Loss $ (70) ------------------------------
Total Net Realized Gain $ 10,350 3,255 20,742 43.87
------------------------------
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
March 31, 1998
(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 8, 9,14
(formerly HEALTH O METER PRODUCTS, INC.)
952,500 Shares Signature Brands USA, Inc., Common Stock (b)(g) 04/28/88 $ 1,270 $ 7,828
610,553 Shares Signature Brands USA, Inc., Common Stock (b)(g) 08/17/94 3,282 5,018
(14.7% of fully diluted common equity)
$16,000 14.50% Subordinated Note
Purchased 04/28/88 $ 16,000
Sold 03/24/92 $ 16,000
Realized Gain $ 0
187,500 Shares of Common Stock
Purchased 04/28/88 $ 250
Sold 03/30/92 $ 2,441
Realized Gain $ 2,191 ------------------------------
Total Realized Gain $ 2,191 4,552 12,846 27.17
------------------------------
------------------------------
TOTAL INVESTMENT IN MANAGED COMPANIES $ 24,459 $33,588 71.04
==============================
NON-MANAGED COMPANIES
SWO HOLDINGS CORPORATION - Notes 9,14
250,000 Shares SWO Holdings Corp., Common Stock(b) 11/24/87 250 -
1,430 Shares Homeland Holding Corp., Common Stock(b)(g) 08/10/90 440 10
1,506 Warrants Homeland Holding Corp., Common Stock 08/10/90 - -
Purchase Warrants (b)
$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 10 0.02
------------------------------
TLC BEATRICE INTERNATIONAL HOLDINGS, INC. - Note 14
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 0.06
------------------------------
MAGELLAN HEALTH SERVICES, INC. - Notes 9,14
(formerly CHARTER MEDICAL CORPORATION)
2,067 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 36 0.08
==============================
SUMMARY OF MEZZANINE INVESTMENTS
Common Stock and Warrants 25,179 33,624 71.12
------------------------------
TOTAL MEZZANINE INVESTMENTS $ 25,179 $33,624 71.12
==============================
See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
March 31, 1998
(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
$ 4,415 Ford Motor Credit Corp., 5.53% due 4/2/98 3/18/98 $ 4,404 $ 4,414 9.34
$ 9,240 IBMC, 5.51% due 4/1/98 3/19/98 9,222 9,240 19.54
------------------------------
TOTAL INVESTMENT IN COMMERCIAL PAPER 13,626 13,654 28.88
------------------------------
TOTAL TEMPORARY INVESTMENTS 13,626 13,654 28.88
------------------------------
TOTAL INVESTMENT PORTFOLIO $ 38,805 $47,278 100.00
==============================
(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 $28 for Temporary Investments.
(e) Non-accrual investment status.
(f) Inclusive of receipt of payment-in-kind securities.
(g) Publicly traded class of securities.
</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
ML-LEE ACQUISITION FUND, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
1. Organization and Purpose
ML-Lee Acquisition Fund, L.P. (the "Fund") was formed and the Certificate
of Limited Partnership was filed under the Delaware Revised Uniform Limited
Partnership Act on April 1, 1987. The Fund's operations commenced on October 19,
1987.
The Managing General Partner, subject to the supervision of the Individual
General Partners, is responsible for overseeing and monitoring the Fund's
investments. Mezzanine Investments, L.P. (the "Managing General Partner"), is a
limited partnership in which ML Mezzanine Inc., an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc., is the general partner, and Thomas H.
Lee 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 term of the Fund will expire on 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 expiration of the term, 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. At that meeting, the Individual General Partners expressed
their intention to vote on the matter at their meeting scheduled for June 5,
1998.
On April 15, 1998, Playtex Products Inc. filed a registration statement
pursuant to which the Fund intends to sell all of its remaining interest in the
Company. The Fund owns 1,406,204 shares of Playtex Products, Inc. Common Stock.
If the Playtex Products, Inc. transaction is consummated prior to June 15, 1998,
and/or the Individual General Partners are otherwise satisfied with the
arrangements for disposition of the Fund's remaining assets, the Individual
General Partners may elect not to extend the term of the Fund.
Between March 31, 1998 and the expiration date of the term of the Fund, the
Investment Adviser will continue to manage the Fund's remaining investments with
a view towards maximizing value, whenever possible. In the event that the term
of the Fund is not extended because the Playtex Products, Inc. transaction has
been consummated and the Individual General Partners are otherwise satisfied
with the arrangements for disposition of the Fund's remaining assets, the
Management Agreement will not be amended as discussed in Note 5 and will expire
according to its original terms.
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.
<PAGE>
Temporary Investments with maturities of less than 60 days are stated at
amortized cost, which approximates market.
The information presented herein is based on pertinent information
available to the Managing General Partner and Investment Adviser as of March 31,
1998. Although the Managing General Partner and Investment Adviser are not aware
of any factors not disclosed herein that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued since that time and, especially in light of the fact that the portfolio
investments of companies whose equity is publicly traded are valued at the last
price available at March 31, 1998, the current estimated fair value of these
investments may have changed significantly since that point in time.
Interest Receivable on Investments
Investments generally will be placed on non-accrual status in the event of
a default (after applicable grace period expires) or if the Investment Adviser
and the Managing General Partner determine that there is no reasonable assurance
of collecting interest. As of March 31, 1998, there are no portfolio investments
generating interest income to the Fund.
Payment-In-Kind Securities
All payment-in-kind securities received in lieu of cash interest payments
by the Fund's portfolio companies are recorded at face value (which approximates
accrued interest), unless the Investment Adviser and the Managing General
Partner determine that there is no reasonable assurance of collecting the full
principal amounts of such securities. As of March 31, 1998 and December 31,
1997, the Fund had in its portfolio of investments $3 million and $3.7 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.
<PAGE>
3. Allocation of Profits and Losses
Pursuant to the Partnership Agreement, all profits from Temporary
Investments generally are allocated 99% to the Limited Partners and 1% to the
Managing General Partner. Profits from Mezzanine Investments are, in general,
allocated as follows:
first, if the capital accounts of any partners have negative balances, to
such partners in proportion to the negative balances in their capital
accounts until the balances of all such capital accounts equal zero,
second, 99% to the Limited Partners and 1% to the Managing General Partner
until the sum allocated to the Limited Partners equals any previous losses
allocated together with a cumulative Priority Return of 10% on the average
daily balance of Mezzanine securities, and any outstanding Compensatory
Payments,
third, 69% to the Limited Partners and 31% to the Managing General Partner
until the Managing General Partner has received 21% of the total profits
allocated,
thereafter, 79% to the Limited Partners and 21% to the Managing General
Partner.
Losses will be allocated in reverse order of profits previously allocated
and thereafter 99% to the Limited Partners and 1% to the Managing General
Partner.
4. Leverage
The Fund 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. 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 incurred the following loan
fees:
Nonrecurring loan advisory and loan facility fees of $4,441,580, paid to
First Chicago in 1991 in connection with the creation of the credit
facility, which are being amortized over the life of the credit facility.
The amount expensed for the three months ended March 31, 1998 was $157,194.
An annual Loan Administration Fee of $25,000 for the administration of the
credit facility. The amount expensed for the three months ended March 31,
1998 was $6,164.
An Unused Commitment Fee of 1/2 of 1% per annum of the unused line of
credit. The amount expensed for the three months ended March 31, 1998
was $9,375.
For the three months ended March 31, 1998 and 1997, the Fund incurred
$172,733 and $172,629, respectively, in total loan fees.
<PAGE>
5. Investment Advisory Fee
The Investment Adviser provides for the identification, management and
liquidation of investments for the Fund. As compensation for services rendered
to the Fund, the Investment Adviser receives a quarterly fee at the annual rate
of $1.2 million. The Investment Advisory Fee is paid quarterly, in advance. For
the three months ended March 31, 1998 and 1997, the Fund paid $300,000 and
$296,691, respectively, in Investment Advisory Fees to Thomas H. Lee Advisors I.
The Investment Adviser has discussed with the Managing General Partner and
with the Independent General Partners the need for continued investment service
during the liquidation of the Fund's investments and during any extension period
currently being considered, and the level of appropriate management fee during
any such extension. Following those discussions, the Investment Adviser and the
Fund have agreed to amend the Management Agreement, reducing the management fee
payable thereunder commencing July 1, 1998 to $250,000 per annum, payable
quarterly in advance, plus all actual out-of-pocket expenses incurred by the
Investment Adviser in connection with the Fund (other than compensation of
employees of the Investment Adviser). Such out-of-pocket expenses would be for
any third-party fees for consultation with counsel, accountants or other experts
in connection with the Investment Adviser's duties to the Fund.
6. Fund Administration Fees & Expenses
ML Fund Administrators Inc. (the "Fund Administrator") (an affiliate of the
Managing General Partner) performs the operational and administrative services
necessary for the management of the Fund. Beginning October 19, 1995, the Fund
Administration Fee 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 three months ended
March 31, 1998 and 1997, the Fund paid $75,000, respectively, in Fund
Administration Fees.
In accordance with the Partnership Agreement, the Fund Administrator is
being reimbursed by the Fund for 100% of administrative expenses incurred.
Actual out-of-pocket expenses ("reimbursable expenses") primarily consist of
printing, audits, tax preparation and custodian fees. For the three months ended
March 31, 1998 and 1997, reimbursable expenses totalled $133,055 and $69,739,
respectively.
7. Independent General Partners' Fees
As compensation for services rendered to the Fund, each of the three
Independent General Partners receives $40,000 annually in quarterly
installments, $1,000 for each meeting of the General Partners attended and
$1,000 for each committee meeting attended ($500 if a committee meeting is held
on the same day as a meeting of the General Partners) plus reimbursement for any
legal and out-of-pocket expenses. Compensation for the Independent General
Partners is reviewed annually by the Individual General Partners.
For the three months ended March 31, 1998 and 1997, the Fund incurred
$39,532 and $52,945, respectively, in Independent General Partners' Fees and
Expenses.
8. Investment Transactions
On January 6, 1998 the Fund and affiliates of the Thomas H. Lee Company
(the "Lee Affiliates"), together with the Fund, the ("Selling Stockholders")
sold their remaining holdings of common stock in Stanley. The common stock of
each of the Selling Stockholders was sold pursuant to a Form S-3 Registration
Statement, which was filed by Stanley on December 22, 1997 and declared
effective by the Securities and Exchange Commission on December 23, 1997. In
connection with the sale, the Fund sold its remaining 400,719 shares of common
stock and received net proceeds of $10.8 million or $27 per share. On February
12, 1998, the Independent General Partners established a reserve of $1.65
million from these proceeds to pay future expenses of the Fund. Net
Distributable Capital Proceeds from the sale, as defined in the Partnership
Agreement, of $9.2 million or $18.63 per Unit were distributed to Limited
Partners of record as of January 6, 1998.
<PAGE>
On 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 recognized a loss of $23 million.
For the three months ended March 31, 1998, the proceeds from the sales of
investments resulted in net realized losses of $17,201,622. For additional
information, please refer to the Supplemental Schedule of Realized Gains and
Losses - Schedule 1.
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 the three months ended March 31, 1998, the Fund recorded net unrealized
appreciation of $27.4 million. As of March 31, 1998, the Fund's cumulative net
unrealized appreciation on investments totalled $8.4 million.
For additional information, please refer to the Supplemental Schedule of
Unrealized Appreciation and Depreciation - Schedule 2.
10. Litigation
On April 10, 1998, the parties to Seidel v. Thomas H. Lee, et al, No.
93-494 (JJF), a putative class action brought on behalf of limited partners of
the Fund, filed with United States District Court for the District of Delaware,
a Stipulation of Settlement preliminarily settling the action.
The proposed settlement, which is subject to Court approval, provides for
dismissal with prejudice of all claims against the Fund, the Fund's Investment
Advisor and certain of its affiliates, the Fund's Managing General Partner and
certain of its affiliates, and the Fund's Independent General Partners.
Defendants, other than the Fund, have agreed to provide cash of $2.5 million and
certain other considerations to settle the claims asserted in this action.
Defendants continue to deny all liability in this action. On May 4, 1998, the
Court granted preliminary approval to the Settlement and scheduled a final
hearing to consider the Settlement for July 16, 1998.
11. Related Party Transactions
Certain of the Mezzanine Investments and Bridge Investments which were made
by the Fund involve co-investments with entities affiliated with the Investment
Adviser. Such co-investments are generally prohibited absent exemptive relief
from the Securities and Exchange Commission (the "Commission"). As a result of
these affiliations and the Fund's expectation of engaging in such
co-investments, the Fund sought an exemptive order from the Commission allowing
such co-investment, which was received on September 23, 1987. An additional
exemptive order allowing co-investment with ML-Lee Acquisition Fund II, L.P.
("Fund II") and ML-Lee Acquisition Fund (Retirement Accounts) II, L.P.
("Retirement Fund") was received from the Commission on September 1, 1989. The
Fund's investments in Managed Companies, and in certain cases its investments in
Non-Managed Companies, typically involve the entry by the Fund and other equity
security holders into stockholders' agreements. While the provisions of such
stockholders' agreements vary, such agreements may include provisions as to
corporate governance, registration rights, rights of first offer or first
refusal, rights to participate in sales of securities to third parties, rights
of majority stockholders to compel minority stockholders to participate in sales
of securities to third parties, transfer restrictions and preemptive rights.
Thomas H. Lee Company, a sole proprietorship owned by Thomas H. Lee, an
Individual General Partner of the Fund and an affiliate of the Investment
Adviser, typically performs certain management services for Managed Companies
and receives management fees in connection therewith, usually pursuant to
written agreements with such companies. In addition, certain of the Portfolio
Companies have contractual or other relationships pursuant to which they do
business with one another.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") is an
affiliate of the Managing General Partner. MLPF&S and certain of its affiliates,
in the ordinary course of their business, perform various financial services for
various portfolio companies of the Fund, which may include investment banking
services, broker/dealer services and economic forecasting, and receive in
consideration therewith various fees, commissions and reimbursements.
Furthermore, MLPF&S and its affiliates or investment companies advised by
affiliates of MLPF&S may, from time to time, purchase or sell securities issued
by portfolio companies of the Fund in connection with their ordinary investment
operations.
In the first quarter of 1998, the Managing General Partner received cash
distributions in the amount of $187,779 representing its 1% interest in the
Fund.
<PAGE>
12. Reserves
In February 1993, the Fund established a $15 million reserve to provide
funds for follow-on investments and to pay expenses. On February 12, 1998, the
Independent General Partners approved an additional reserve of $1.65 million for
Fund expenses. This reserve was established from the proceeds received from the
sale of Stanley Furniture Common Stock in January 1998 to fund anticipated cash
shortfalls in the future. As of March 31, 1998, the aggregate reserve balance
has been reduced to approximately $4.1 million due to follow-on investments, pay
downs of the Fund's loan, cash distributions to Limited Partners and payment of
Fund expenses.
13. Income Taxes (Statement of Financial Accounting Standards No. 109)
No provision for income taxes has been made because all income and losses
are allocated to the Fund's partners for inclusion in their respective tax
returns.
Pursuant to the Statement of Financial Accounting Standards No. 109
Accounting for Income Taxes, the Fund is required to disclose any difference in
the tax basis of the Fund's assets and liabilities versus the amounts reported
in the financial statements. As of March 31, 1998, the tax basis of the Fund's
assets are greater than the amounts reported in the financial statements by $4.9
million. This difference is primarily attributable to unrealized appreciation
and depreciation recorded on investments which has not been recognized for tax
purposes.
14. Subsequent Events
On February 28, 1998, Signature Brands USA and Sunbeam Corporation
("Sunbeam") executed a definitive merger agreement whereby Sunbeam acquired 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 assumed all the debt of Signature Brands USA. Pursuant to the Tender Offer,
the Fund tendered all its shares of Signature Brands USA Common Stock and
received proceeds of approximately $13 million. Net Distributable Capital
Proceeds of $26.19 per Unit were distributed on April 23, 1998, to the Fund's
Limited Partners of record as of April 2, 1998, the expiration date of this
Tender Offer.
On April 7, 1998, the Individual General Partners approved a cash
distribution totaling $22,069,967. The distribution includes Net Distributable
Capital Proceeds of $9,174,764, which includes Return of Capital of $5,020,650
from the sale of Stanley Furniture. A cash distribution to Limited Partners in
the amount of $18.63 per Unit and a cash distribution to the Managing General
Partner of $91,748 in proportion to its Capital Contribution, were distributed
on April 23, 1998.
On April 7, 1998, the Individual General Partners approved a cash
distribution from the sale of Signature Brands USA on April 2, 1998, as to Net
Distributable Capital Proceeds of $12,896,283, which includes Return of Capital
of $4,551,722. A cash distribution to Limited Partners in the amount of $26.19
per Unit and a cash distribution to the Managing General Partner of $128,963 in
proportion to its Capital Contribution, were distributed on April 23, 1998.
On April 7, 1998, pursuant to Rule 144 of the Securities Act of 1993, the
Fund sold 25,500 shares of TLC Beatrice International Holdings common stock for
$1.3 million or $51.25 per share. The Fund will recognize a gain of $1.28
million on the sale, and net Distributable Capital Proceeds will be distributed
to Limited Partners of record as of April 7, 1998.
On April 15, 1998 Playtex filed a registration statement covering all
shares of the common stock owned by the Fund, Fund II, the Retirement Fund and
the Lee Affiliates pursuant to an underwritten public offering. Such offering is
expected to be consummated during the second quarter of 1998; however, there can
be no assurance that such offering will be consummated or that the selling
stockholders, including the Fund, will be able to sell all of their remaining
shares of Playtex common stock in such offering.
On May 4, 1998, the Fund sold 2,067 common stock purchase warrants of
Magellan Health Services for $5,168. Additionally, the Fund sold its investment
of 1,430 shares of Homeland Holdings common stock and 1,506 Homeland Holdings
common stock purchase warrants and received aggregate proceeds of $11,102. The
Fund will recognize a loss from the sale of Homeland Holdings common stock of
$429,689.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
ML-LEE ACQUISITION FUND, L.P.
SUPPLEMENTAL SCHEDULE OF REALIZED GAINS AND LOSSES
FOR THE 3 MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Number of Investment Realized
SECURITY Shares/Principal Cost Net Proceeds Gain/(Loss)
- ------------------------------ ----------------- ------------ ------------ ------------
Stanley Furniture Company Inc.
Common Stock 400,719 $ 5,021 $ 10,819 $ 5,798
BeefAmerica Incorporated
Jr. and Sr.Preferred Stock 24,000 24,000 1,000 (23,000)
-------- -------- ---------
Total For the Three Months
Ended March 31, 1998 $ 29,021 $ 11,819 $ (17,202)
======== ======== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2
ML-LEE ACQUISITION FUND, L.P.
SUPPLEMENTAL SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
FOR THE PERIOD ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Unrealized
Appreciation
(Depreciation) Total Unrealized Total Unrealized
For the Appreciation Appreciation
Investment Fair Three Months (Depreciation) at (Depreciation) at
SECURITY Cost Value March 31, 1998 December 31, 1997 March 31, 1998
- ---------------------------------------- ----------- ----------- ----------- ----------------- -----------------
PUBLICLY TRADED SECURITIES
Signature Brands USA
Common Stock* 4,552 12,846 $ 6,203 $ 2,091 $ 8,294
Playtex
Common Stock* 3,255 20,742 6,328 11,159 $ 17,487
SWO Holdings Corporation
SWO Holdings Common Stock* 250 -- -- (250) (250)
Homeland Holdings Common Stock* 440 10 10 (440) (430)
----------- ----------- -----------
TOTAL UNREALIZED APPRECIATION
FROM PUBLICLY TRADED SECURITIES $ 12,541 $ 12,560 $ 25,101
----------- ----------- -----------
NONPUBLIC SECURITIES:
Chadwick-Miller, Inc.
Common Stock* 3,736 -- -- (3,736) (3,736)
Preferred Stock 12,916 -- -- (12,916) (12,916)
Magellan Health Service
Common Stock Warrants* 4 -- -- (4) (4)
----------- ----------- -----------
TOTAL UNREALIZED APPRECIATION
(DEPRECIATION) FROM
NONPUBLIC SECURITIES $ -- $ (16,656) $ (16,656)
----------- ----------- -----------
Revearsal of Unrealized Appreciation
(Depreciation) for Investments Sold
Stanley (1)
Common Stock $ (6,149) $ 6,149 $ --
BeefAmerica Incorporated
Jr. and Sr.Preferred Stock (2) 21,000 (21,000) --
----------- ----------- -----------
Total Unrealized Appreciation/(Depreciation)
for Investments Sold: $ 14,851 $ (14,851) $ --
----------- ----------- -----------
Net Unrealized Appreciation (Depreciation) $ 27,392 $ (18,947) $ 8,445
=========== =========== ===========
* Restricted Security.
(1) Publiclty Traded Security
(2) Non-public Security
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity & Capital Resources
As of March 31, 1998, the Fund had a total of $25.2 million (at cost)
invested in Mezzanine Investments. These investments were financed by net
offering proceeds and debt financing. This represents a $29.0 million decrease
versus the total invested in Mezzanine Investments at December 31, 1997 of $54.2
million. The decrease in investments is due to the sale in the first quarter of
1998 of Stanley Furniture and BeefAmerica, Inc. The Fund's remaining Mezzanine
Investments consist of common stock and warrants in middle market companies
typically issued in private placement transactions and are usually subject to
restrictions on the transfer or sale of the security, thereby limiting their
liquidity.
On August 13, 1991, the Fund completed a refinancing of its credit
agreement with a lending group led by The First National Bank of Chicago. 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 31, 1998, the Fund had the
entire $7.5 million credit line available.
The term of the Fund will expire on 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 expiration of the term, 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. At that meeting, the Individual General Partners expressed
their intention to vote on the matter at their meeting scheduled for June 5,
1998.
On April 15, 1998, Playtex Products Inc. filed a registration statement
pursuant to which the Fund intends to sell all of its remaining interest in the
Company. The Fund owns 1,406,204 shares of Playtex Products, Inc. Common Stock.
If the Playtex Products, Inc. transaction is consummated prior to June 15, 1998,
and/or the Individual General Partners are otherwise satisfied with the
arrangements for disposition of the Fund's remaining assets, the Individual
General Partners may elect not to extend the term of the Fund.
Between March 31, 1998 and the expiration date of the term of the Fund, the
Investment Adviser will continue to manage the Fund's remaining investments with
a view towards maximizing value, whenever possible. In the event that the term
of the Fund is not extended because the Playtex Products, Inc. transaction has
been consummated and the Individual General Partners are otherwise satisfied
with the arrangements for disposition of the Fund's remaining assets, the
Management Agreement will not be amended as discussed in Note 5 and will expire
according to its original terms.
Because all of the Fund's debt investments have been sold or redeemed,
income expected to be received by the Fund is not 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, along with distributions to partners and to pay down the First
Chicago loan on January 6, 1994. As of the last meeting on February 12, 1998,
the Independent General Partners had 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 aggregate reserve balance
as of $4.1 million 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.
<PAGE>
Results of Operations
Investment Income and Expenses
For the three months ended March 31, 1998, the Fund had a net investment
loss of $520,021 as compared to a net investment loss of $552,667 for the same
period in 1997. The total investment income earned on investments for the three
months ended March 31, 1998 was $203,395 of which all was earned from Temporary
Investments. For the same period in 1997, total investment income earned on
investments was $348,206 of which $300,998 was earned from Mezzanine Investments
and $47,208 was earned from Temporary Investments.
The major expense for the period consisted of Investment Advisory Fees,
Fund Administration fees, Loan Fees and Reimbursable Administration Expenses.
The Investment Adviser and Fund Administrator receive their compensation on
a quarterly basis. Total Investment Advisory Fees paid to the Investment Adviser
for the three months ended March 31, 1998 was $300,000 compared with $296,691
for the three months ended March 31, 1997. The fee is calculated at an annual
rate of 1% of assets under management, subject to certain reductions as
specified in the Fund's Partnership Agreement with a minimum annual payment of
$1,200,000.
The Investment Adviser has discussed with the Managing General Partner and
with the Independent General Partners the need for continued investment service
during the liquidation of the Fund's investments and during any extension period
currently being considered, and the level of appropriate management fee during
any such extension. Following those discussions, the Investment Adviser and the
Fund have agreed to amend the Management Agreement, reducing the management fee
payable thereunder commencing July 1, 1998 to $250,000 per annum, payable
quarterly in advance, plus all actual out-of-pocket expenses incurred by the
Investment Adviser in connection with the Fund (other than compensation of
employees of the Investment Adviser). Such out-of-pocket expenses would be for
any third-party fees for consultation with counsel, accountants or other experts
in connection with the Investment Adviser's duties to the Fund.
Beginning October 19, 1995, in accordance with Partnership Agreement, the
Fund Administration Fee changed to an annual fee of $300,000 plus 100% of
Reimbursable Administrative Expenses (accounting, printing, tax preparation and
other administrative services) incurred by the Fund Administrator. For the three
months ended March 31, 1998 and 1997, the Fund Administration Fee was $75,000.
For the same period, Reimbursable Administration Expenses totalled $133,055 and
$69,739, respectively.
Loan fees consist of fees on the unused portion of the Fund's facility,
loan administration fees, amortization of the loan advisory and facility fees
and various miscellaneous fees attributable to the facility. Loan fees for the
three months ended March 31, 1998 and 1997 totalled $172,733 and $172,629,
respectively.
<PAGE>
Net Assets
The Fund's net assets decreased by $9,105,118 during the three months ended
March 31, 1998, due to a net investment loss of $520,021, partialy offset by net
realized losses of $17,201,622 and net unrealized appreciation of $27,392,260
and cash distributions of $18,775,735.
Unrealized Appreciation and Depreciation and Non-Accrual of Investments
For the three months ended March 31, 1998, the Fund recorded net unrealized
appreciation of $27,392,260 as compared to net unrealized appreciation of
$284,027 for the same period in 1997. On March 31, 1998, the Fund's cumulative
net unrealized appreciation on investments totalled $8,445,074.
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 any 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 March 31, 1998, approximately 43.6% 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 March
31, 1998. Although the Managing General Partner and Investment Adviser are not
aware of any factors not disclosed herein that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued since that time; and the current estimated fair value of these
investments may have changed significantly since that point in time.
The Fund's valuation of the common stock of Signature Brands USA, Playtex
and Homeland Holdings reflect their closing market price at March 31, 1998.
The Signature Brands USA and Playtex 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 pursuant to Rule 144, under the
securities act of 1933 and therefore, any resale of Signature Brands
USAsecurities 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 and Playtex securities held by the Fund do not necessarily
represent the prices at which these securities could currently be sold. See Note
14 of the Financial Statements.
On February 28, 1998, Signature Brands USA and Sunbeam Corporation
("Sunbeam") executed a definitive merger agreement whereby Sunbeam acquired 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 assumed 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 received proceeds of approximately $13
million. Net Distributable Capital Proceeds of $26.19 per Unit were distributed
on April 23, 1998, to the Fund's Limited Partners of record as of April 2, 1998,
the expiration date of this Tender Offer.
On April 15, 1998 Playtex filed a registration statement covering all
shares of the common stock owned by the Fund, Fund II, the Retirement Fund and
the Lee Affiliates pursuant to an underwritten public offering. Such offering is
expected to be consummated during the second quarter of 1998; however, there can
be no assurance that such offering will be consummated or that the selling
stockholders, including the Fund, will be able to sell all of their remaining
shares of Playtex common stock in such offering.
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.
<PAGE>
Realized Gains and Losses
The net realized loss on investments sold for the three months ended March
31, 1998 was $17,201,622 compared to a net realized gain of $361,480 for the
same period in 1997.
For additional information, please refer to the Supplemental Schedule of
Realized Gains and Losses - Schedule 1.
Cash Distributions
On April 7, 1998, the Individual General Partners approved a cash
distribution totaling $22,069,967. The distribution includes Net Distributable
Capital Proceeds of $9,174,764, which includes Return of Capital of $5,020,650
from the sale of Stanley Furniture. A cash distribution to Limited Partners in
the amount of $18.63 per Unit and a cash distribution to the Managing General
Partner of $91,748 in proportion to its Capital Contribution, were distributed
on April 23, 1998.
On April 7, 1998, the Individual General Partners approved a cash
distribution from the sale of Signature Brands USA on April 2, 1998, as to Net
Distributable Capital Proceeds of $12,896,283, which includes Return of Capital
of $4,551,722. A cash distribution to Limited Partners in the amount of $26.19
per Unit and a cash distribution to the Managing General Partner of $128,963 in
proportion to its Capital Contribution, were distributed on April 23, 1998.
Because all of the Fund's debt holdings were previously sold or redeemed,
remaining portfolio income expected to be received by the Fund is not sufficient
to cover the Fund's expenses. As a result, any income received will be used to
pay Fund expenses and 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>
Part II - Other Information
Item 1. Legal Proceedings
On April 10, 1998, the parties to Seidel v. Thomas H. Lee, et al, No.
93-494 (JJF), a putative class action brought on behalf of limited partners of
the Fund, filed with United States District Court for the District of Delaware,
a Stipulation of Settlement preliminarily settling the action.
The proposed settlement, which is subject to Court approval, provides for
dismissal with prejudice of all claims against the Fund, the Fund's Investment
Advisor and certain of its affiliates, the Fund's Managing General Partner and
certain of its affiliates, and the Fund's Independent General Partners.
Defendants, other than the Fund, have agreed to provide cash of $2.5 million and
certain other considerations to settle the claims asserted in this action.
Defendants continue to deny all liability in this action. On May 4, 1998, the
Court granted preliminary approval to the Settlement and scheduled a final
hearing to consider the Settlement for July 16, 1998.
Items 2 - 4 are herewith omitted as the response to all items is either
none or not applicable.
Item 5. Other Information
As of April 10, 1998, John W. Childs resigned as the President and Trustee
of the Investment Adviser to the Fund. In addition, Mr. Childs transferred his
Shares in the Investment Adviser to a limited liability company of which he is
the sole member. At such time, David V. Harkins, formerly the Investment
Adviser's Senior Vice President, was appointment as President. Mr. Harkins will
remain a Trustee of the Investment Adviser. In addition, C. Hunter Boll, a Vice
President of the Investment Adviser, was appointed as a trustee. At the same
time, Mr. Childs also resigned his position of President of the Investment
Adviser to Fund II and the ML-Lee Acquisition Fund (Retirement Account) II, L.P.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule for the first quarter ended
March 31, 1998.
(b) Reports on form 8-K: Form 8-K dated January 6, 1998
Filed January 27, 1998 related to
Sale of Stanley Furniture
Form 8-K dated February 28, 1998
Filed March 17, 1998 related to
Signature Brands & BeefAmerica
Form 8-K dated and filed April 10, 1998
related to settlement of litigation
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 14th day of
May, 1998.
ML-LEE ACQUISITION FUND, L.P.
By: Mezzanine Investments, L.P.,
Managing General Partner
By: ML Mezzanine Inc.,
its General Partner
Dated: May 14, 1998 /s/ Audrey Bommer
Audrey Bommer
Vice President and Treasurer
(Chief Financial Officer)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 14th day of
May, 1998.
ML-LEE ACQUISITION FUND, L.P.
By: Mezzanine Investments, L.P.,
Managing General Partner
By: ML Mezzanine Inc.,
its General Partner
Dated: May 14, 1998
Audrey Bommer
Vice President and Treasurer
(Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary information extracted from the first quarter
of 1998 Form 10-Q Balance Sheets and Statements of Operations and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 38,805,088
<INVESTMENTS-AT-VALUE> 47,278,039
<RECEIVABLES> 1,075,173
<ASSETS-OTHER> 230,546
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 48,583,758
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 242,605
<TOTAL-LIABILITIES> 242,605
<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> 8,445,074
<NET-ASSETS> 48,341,152
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 201,863
<OTHER-INCOME> 532
<EXPENSES-NET> 722,416
<NET-INVESTMENT-INCOME> (520,021)
<REALIZED-GAINS-CURRENT> (17,201,622)
<APPREC-INCREASE-CURRENT> 27,392,260
<NET-CHANGE-FROM-OPS> 9,670,617
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 206,729
<DISTRIBUTIONS-OF-GAINS> 5,435,566
<DISTRIBUTIONS-OTHER> 13,546,897
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (9,105,118)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 300,000
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 722,416
<AVERAGE-NET-ASSETS> 52,893,710
<PER-SHARE-NAV-BEGIN> 115.96
<PER-SHARE-NII> (1.06)
<PER-SHARE-GAIN-APPREC> 55.63
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 38.13
<RETURNS-OF-CAPITAL> 27.79
<PER-SHARE-NAV-END> 97.47
<EXPENSE-RATIO> 0.01
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
