UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Three Months Ended March 31, 1999
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 - 14th Floor
New York, New York 10080-6114
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (212) 236-6562
Securities registered pursuant to Section 12(b) of the Act: None Name of each
exchange on which registered: Not Applicable Securities registered pursuant to
Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___.
Aggregate market value of voting securities held by non-
affiliates: Not Applicable.
<PAGE>
ML-LEE ACQUISITION FUND, L.P.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Assets, Liabilities and Partners' Capital
as of March 31, 1999 and December 31, 1998
Statements of Operations - For the Three Months Ended
March 31, 1999 and 1998
Statements of Changes in Net Assets - For the Three Months Ended
March 31, 1999 and 1998
Statements of Cash Flows - For the Three Months Ended
March 31, 1999 and 1998
Statement of Changes in Partners' Capital - March 31, 1999
Schedule of Portfolio Investments - March 31, 1999
Notes to Financial Statements
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>
ML-LEE ACQUISITION FUND, L.P.
Statements of Assets, Liabilities and Partners' Capital
(Dollars in Thousands)
<TABLE>
<S> <C> <C>
March 31, 1999 December 31, 1998
--------------- ---------------
Assets:
Investments - Notes 2, 9
Temporary Investments, at amortized cost (cost $3,552 at
March 31, 1999 and $3,760 at December 31, 1998) $ 3,560 $ 3,760
Cash 10 3
Note Receivable (Net of reserve of $1,000) -- --
--------------- ---------------
Total Assets $ 3,570 $ 3,763
=============== ===============
Liabilities and Partners' Capital:
Liabilities
Legal and Professional Fees Payable $ -- $ 1
Reimbursable Administrative Expenses Payable 68 125
Independent General Partner Expenses Payable 22 23
--------------- ---------------
Total Liabilities 90 149
=============== ===============
Partners' Capital - Note 2
Managing General Partner 378 379
Limited Partners (487,489 Units) 3,102 3,235
--------------- ---------------
Total Partners' Capital 3,480 3,614
Total Liabilities and Partners' Capital $ 3,570 $ 3,763
=============== ===============
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
ML-LEE ACQUISITION FUND, L.P.
Statements of Operations
(Dollars in Thousands)
(Unaudited)
<TABLE>
<S> <C> <C>
For the Three Months Ended
-------------- ----------------
March 31, 1999 March 31, 1998
-------------- ----------------
Investment Income - Notes 2, 10:
Interest $ -- $ 6
Discount 41 196
Dividend & Other Income -- 1
-------------- ----------------
Total Income 41 203
-------------- ----------------
Expenses:
Investment Advisory Fee - Note 5 -- 300
Fund Administration Fee - Note 6 75 75
Loan Fees - Notes 2, 4 -- 173
Independent General Partners' Fees and Expenses - Note 7 33 40
Reimbursable Administrative Expenses - Note 6 67 133
Insurance Expense -- 2
-------------- ----------------
Total Expenses 175 723
-------------- ----------------
Net Investment Loss (134) (520)
Net Realized (Loss) on Investments -- (17,202)
Publicly Traded Securities -- 6,392
Nonpublic Securities -- 21,000
-------------- ----------------
Subtotal -- 27,392
-------------- ----------------
Net Increase (Decrease) in Net Assets
Resulting From Operations $ (134) $ 9,670
============== ================
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
<TABLE>
ML-LEE ACQUISITION FUND, L.P.
Statements of Changes in Net Assets
(Dollars in Thousands)
<S> <C> <C>
For the Three Months Ended
-------------- ---------------
March 31, 1999 March 31, 1998
-------------- ---------------
From Operations:
Net Investment Loss $ (134) $ (520)
Net Realized Loss on Investments -- (17,202)
Net Change in Unrealized Depreciation on Investments -- 27,392
-------------- ---------------
Net Increase in Net Assets Resulting from Operations (134) 9,670
Cash Distributions to Partners -- (18,776)
-------------- ---------------
Total Decrease (134) (9,106)
Net Assets:
Beginning of Period 3,614 57,446
-------------- ---------------
End of Period $ 3,480 $ 48,340
============= ===============
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
<TABLE>
ML-LEE ACQUISITION FUND, L.P.
Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
<S> <C> <C>
For the Three Months Ended
-------------- --------------
March 31, 1999 March 31, 1998
-------------- --------------
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows From Operating Activities:
Interest, Dividends and Discount Income $ 34 $ 238
Investment Advisory Fee -- (300)
Fund Administration Fee (75) (75)
Legal and Professional Fees (1) (28)
Loan Fees and Expenses -- (10)
Independent General Partners' Fees and Expenses (34) (33)
(Purchase) Sale of Temporary Investments, Net 208 4,435
Reimbursable Administrative Expenses (125) (117)
Proceeds from Sale of Portfolio Company Investments -- 14,670
-------------- --------------
Net Cash Provided by Operating Activities 7 18,780
-------------- --------------
Cash Flows From Financing Activities:
Cash Distributions to Partners -- (18,776)
-------------- --------------
Net Cash Applied to Financing Activities -- (18,776)
-------------- --------------
Net Increase in Cash 7 4
Cash at Beginning of Period 3 1
-------------- --------------
Cash at End of Period $ 10 $ 5
============== ===============
Reconciliation of Net Investment Loss to
Net Cash Provided by Operating Activities
Net Investment Loss $ (134) $ (520)
-------------- --------------
Adustments to Reconcile Net Investment Loss
to Net Cash Provided by Operating Activities
Decrease in Investments 208 33,456
Decrease in Receivable for Investments Sold
(Net of Allowance) -- 2,851
(Increase) Decrease in Accrued Interest,
Dividend and Discount Receivables (8) 36
Decrease in Prepaid Expenses -- 165
Increase in Independent General Partner Fees Payable (1) 6
Increase in Reimbursable Administrative Expenses Payable (57) 17
Increase (Decrease) in Legal and Professional Fees Payable (1) (29)
Net Realized Gain (Loss) on Investments -- (17,202)
-------------- --------------
Total Adjustments 141 19,300
-------------- --------------
Net Cash Provided by Operating Activities $ 7 $ 18,780
============== ===============
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
<TABLE>
ML-LEE ACQUISITION FUND, L.P.
Statements of Changes in Partners' Captial
(Dollars in Thousands)
(Unaudited)
<S> <C> <C> <C>
Managing
General Limited
Partner Partners Total
--------------- --------------- ---------------
For the Three Months Ended March 31, 1999
Partners' Capital at January 1, 1999 $ 379 $ 3,235 $ 3,614
Allocation of Net Investment Loss (1) (133) (134)
--------------- --------------- ---------------
Partners' Capital at March 31, 1999 $ 378 $ 3,102 $ 3,480
=============== =============== ===============
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1999
(DOLLARS IN THOUSANDS)
(Unaudited)
<S> <C> <C> <C> <C> <C>
Fair % Of
Investment Investment Value Total
Shares/Warrants Investment Date Cost (Note 2) Investments
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$3,560 General Electric Capital Services, 4.78% due 4/1/99 3/15/99 3,552 3,560 100.00
------------------------------
TOTAL INVESTMENT IN COMMERCIAL PAPER 3,552 3,560 100.00
------------------------------
TOTAL TEMPORARY INVESTMENTS 3,552 3,560 100.00
------------------------------
TOTAL INVESTMENT PORTFOLIO $ 3,552 $ 3,560 100.00
==============================
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
ML-LEE ACQUISITION FUND, L.P.
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
1. Organization and Purpose
ML-Lee Acquisition Fund, L.P. (the "Fund") was formed and the Certificate
of Limited Partnership was filed under the Delaware Revised Uniform Limited
Partnership Act on April 1, 1987. The Fund's operations commenced on October 19,
1987.
The Managing General Partner, subject to the supervision of the Individual
General Partners, is responsible for overseeing and monitoring the Fund's
investments. Mezzanine Investments, L.P. (the "Managing General Partner"), is a
limited partnership in which ML Mezzanine Inc., an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc., is the general partner, and Thomas H.
Lee Advisers I (the "Investment Adviser"), an affiliate of Thomas H. Lee, is the
limited partner. The Individual General Partners are Vernon R. Alden, Joseph L.
Bower and Stanley H. Feldberg (the "Independent General Partners") and Thomas H.
Lee.
The Fund elected to operate as a business development company under the
Investment Company Act of 1940. Its primary investment objective was to provide
current income and long-term capital appreciation by investing in "Mezzanine"
securities consisting primarily of Subordinated Debt and Preferred Stock
combined with an equity participation issued in connection with leveraged
acquisitions or other leveraged transactions.
The term of the Fund expired on June 15, 1998 resulting in the dissolution
of the Fund. The Fund has an additional five years to liquidate its remaining
assets. As of March 31, 1999, the Fund has sold all of its remaining investments
in Portfolio Companies. The last portfolio-related asset held by the Fund is a
$1 million (principal amount) Promissory Note related to the sale of the Fund's
interest in BeefAmerica Inc. The Promissory Note was written-down to zero during
1998. The Fund no longer generates sufficient cash to pay current obligations;
however the Fund has available approximately $3.5 million as of March 31, 1999,
of cash reserves to cover future expenses including all expenses related to the
winding up of the Fund's affairs such as administrative and custodial expenses,
and audit, tax and legal fees. Any remaining cash reserves in excess of amounts
required to pay the Fund's obligations prior to its termination (as discussed in
Note 11) will be distributed as soon as practicable as a final liquidating
distribution to Limited Partners.
2. Significant Accounting Policies
Basis of Accounting
For financial reporting purposes, the records of the Fund are maintained
using the accrual method of accounting. For Federal income tax reporting
purposes, the results of operations are adjusted to reflect statutory
requirements arising from book to tax differences.
Valuation of Investments
Temporary Investments with maturities of less than 60 days are stated at
amortized cost, which approximates market.
<PAGE>
Interest Receivable on Investments
Since the Fund has hold all of its remaining investments in Portfolio
Companies, the only interest the Fund will receive will be the result of
temporary investments.
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 have been fully amortized as of June 30,
1998.
Partners' Capital
Partners' Capital represents the Fund's equity divided in proportion to the
Partners' Capital Contributions. Profits and losses, when realized, are
allocated in accordance with the provisions of the Partnership Agreement
summarized in Note 3.
3. Allocation of Profits and Losses
Pursuant to the Partnership Agreement, all profits from Temporary
Investments generally are allocated 99% to the Limited Partners and 1% to the
Managing General Partner. Profits from Mezzanine Investments are, in general,
allocated as follows:
first, if the capital accounts of any partners have negative balances, to
such partners in proportion to the negative balances in their capital
accounts until the balances of all such capital accounts equal zero,
second, 99% to the Limited Partners and 1% to the Managing General Partner
until the sum allocated to the Limited Partners equals any previous losses
allocated together with a cumulative Priority Return of 10% on the average
daily balance of Mezzanine securities, and any outstanding Compensatory
Payments,
third, 69% to the Limited Partners and 31% to the Managing General Partner
until the Managing General Partner has received 21% of the total profits
allocated,
thereafter, 79% to the Limited Partners and 21% to the Managing General
Partner.
Losses will be allocated in reverse order of profits previously allocated
and thereafter 99% to the Limited Partners and 1% to the Managing General
Partner.
<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 Facilities 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. The Credit Facilities were due to
expire on July 31, 1998, however due to the expiration of the term of the Fund
on June 15, 1998, and in order to stop incurring Unused Commitment Fees, the
Credit Facilities were amended to expire as of June 30, 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 were amortized over the life of the credit facility. The
Credit Facility expired on June 30, 1998.
For the three months ended March 31, 1999 and 1998, the Fund incurred
$0 and $172,733, respectively, in total loan fees.
5. Investment Advisory Fee
The expiration of the Fund's term on June 15, 1998, has caused the
Management Agreement between the Investment Adviser and the Fund to expire. As a
result, the Investment Adviser is no longer receiving compensation for services
rendered effective July 1, 1998, however the Investment Adviser has agreed to
provide investment advisory services to the Fund as needed until final
liquidation.
The Investment Adviser provides for the identification, management and
liquidation of investments for the Fund. As compensation for services rendered
to the Fund, the Investment Adviser received a quarterly fee at the annual rate
of 1% 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 was calculated and paid quarterly, in advance. For the
three months ended March 31, 1998, the Fund paid $300,000 in Investment Advisory
Fees to Thomas H. Lee Advisors I. As of July 1, 1998, the Fund no longer pays
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 three months ended
March 31, 1999 and 1998, the Fund paid $75,000 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, legal fees
and expenses, and custodian fees. Total out-of-pocket expenses incurred by the
Fund for the three months ended March 31, 1999 and 1998 were $67,972 and
$133,055, 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 three months ended March 31, 1999 and 1998, the Fund incurred
$33,121 and $39,532, respectively, in Independent General Partners' Fees and
Expenses.
8. Litigation
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 (the "Court"). 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. 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. On March 30,
1998, the Court entered an order adopting the Report and Recommendation of the
Magistrate Judge granting defendants' motion to dismiss the amended complaint in
its entirety with prejudice. Plaintiffs thereafter filed an appeal, which has
been briefed and argued by both plaintiffs and defendants. The parties are
awaiting the Court's decision on the appeal.
<PAGE>
9. 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 the first quarter of 1999, the Managing General Partner received no
cash distributions.
10. 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
Independant General Partners approved an additional reserve of $1.65 million to
fund anticipated cash shortfalls. This reserve was established from the proceeds
received from the sale of Stanley Furniture Common Stock in January 1998.
Because the Fund no longer generates sufficient cash to pay current
obligations, the Fund has approximately $3.5 million as of March 31, 1999,
available of these remaining cash reserves to cover future expenses including
all expenses related to the winding up of the Fund's affairs such as
administrative and custodial expenses, and audit and tax preparation fees. Any
remaining cash reserves in excess of amounts required to pay the Fund's
obligations prior to its termination will be distributed as soon as practicable
as a final liquidating distribution to Limited Partners.
11. Income Taxes
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, 1999, the tax basis of the Fund's
assets are greater than the amounts reported in the financial statements by $1
million. This difference is primarily attributable to the write-off of a
receivable which has not been recognized for tax purposes.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity & Capital Resources
The term of the Fund expired on June 15, 1998 resulting in the dissolution
of the Fund. The Fund has five additional years to liquidate its remaining
assets. As of July 1, 1998, the Fund no longer pays the Investment Adviser
an Investment Advisory Fee.
The Fund no longer generates sufficient cash to pay current obligations;
however the Fund has available approximately $3.5 million of cash reserves to
cover future expenses including all expenses related to the winding up of the
Fund's affairs such as administrative and custodial expenses, and audit and tax
preparation fees. Any proceeds received from the Promissory Note related to the
Fund's investment in BeefAmerica Inc. as well as any remaining cash reserves in
excess of amounts required to pay the Fund's obligations prior to its
termination will be distributed as soon as practicable as a final liquidating
distribution to Limited Partners.
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. The Credit Facility
was due to expire on July 31, 1998, however, due to the expiration of the term
of the Fund on June 15, 1998, and in order to stop incurring Unused Committment
Fees the Credit agreement was amended to instead expire as of June 30, 1998.
Because all of the Fund's debt investments were previously sold or
redeemed, interest and other income expected to be received by the Fund will not
be sufficient to cover the Fund's expenses. 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
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. In February 1998, the Independent General Partners 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 was
established to fund anticipated cash shortfalls in the future. The Fund's
reserve balance as of May 14, 1999 was approximately $3.4 million, which is made
up of cash and temporary investments.
Results of Operations
Investment Income and Expenses
For the three months ended March 31, 1999, the Fund had a net investment
loss of $134,730 as compared to a net investment loss of $520,021 for the same
period in 1998. The total investment income earned on investments for the three
months ended March 31, 1999 and 1998 was $41,425 and $203,398, respectively, all
of which was earned from Temporary Investments.
The major expense for the period consisted of Fund Administration Fees and
Reimbursable Administrative Expenses.
As a result of the expiration of the Fund's term, the Investment Adviser is
no longer receiving compensation for services rendered, however, the Investment
Adviser has agreed to provide investment advisory services to the Fund as needed
until final liquidation. Total Investment Advisory Fees paid to the Investment
Adviser for the three months ended March 31, 1998 was $300,000. The fee was
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.
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,
legal fees and expenses, and other administrative services) incurred by the Fund
Administrator. For the three months ended March 31, 1999 and 1998, the Fund
Administration Fee was $75,000. For the same period, Reimbursable Administration
Expenses totalled $67,972 and $133,055, 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 totalled $172,733.
<PAGE>
Net Assets
The Fund's net assets decreased by $134,730 during the three months ended
March 31, 1999, due to a net investment loss of $134.730.
Unrealized Appreciation and Depreciation on Investments
For the three months ended March 31, 1999, the Fund recorded no unrealized
appreciation. This compares to a net unrealized appreciation of $27.4 million
during the 1998 period.
Realized Gains and Losses
For the three months ended March 31, 1999, the Fund recorded no net
realized losses on investments as compared to a net realized loss of $17,201,622
for the same period in 1998.
Cash Distributions
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 income received will
be used to pay Fund expenses and will not be available for distribution.
Should a Limited Partner decide to sell his Units, any such sale will be
recorded on the books and records of the Fund quarterly, only upon the
satisfactory completion and acceptance of the Fund's transfer documents. There
can be no assurances that such transfer will be effected before any specified
date. Additionally, pursuant to the Partnership Agreement, until a transfer is
recognized, the Limited Partner of record (i.e. the transferor) is entitled to
receive all the benefits and burdens of ownership of Units, and any transferee
has no rights to distributions of sale proceeds generated at any time prior to
the recognition of the transfer and assignment. Accordingly, Distributable Cash
from Investments for a quarter and Distributable Capital Proceeds from sales
after transfer or assignment have been entered into, but before such transfer
and assignment is recognized, would be payable to the transferor and not the
transferee.
Year 2000 Compliance Initiative
The year 2000 ("Y2K") problem is the result of a widespread programming
technique that causes computer systems to identify a date based on the last two
numbers of a year, with the assumption that the first two numbers of the year
are "19". As a result, the year 2000 would be stored as "00", causing computers
to incorrectly interpret the year as 1900. Left uncorrected, the Y2K problem may
cause information technology systems (e.g., computer databases) and
non-information technology systems (e.g., elevators) to produce incorrect data
or cease operating completely.
Overall, the Fund believes that it has identified and evaluated its
internal Y2K problem and that it is devoting sufficient resources to renovating
technology systems that are not already Y2K compliant. The Fund has been working
with third-party software vendors to ensure that computer programs utilized by
the Fund are Y2K compliant. In addition, the Fund has contacted third parties to
ascertain whether these entities are addressing the Y2K issue within their own
operation.
ML Fund Administrators, Inc. an indirect wholly owned subsidiary of Merrill
Lynch and Co., Inc. ("Merrill Lynch"), is responsible for providing
administrative and accounting services necessary to support Fund II's
operations, including maintenance of the books and records, maintenance of the
partner database, issuance of financial reports and tax information to partners
and processing distribution payments to partners. In 1995, Merrill Lynch
established the Year 2000 Compliance Initiative, which is an enterprisewide
effort (of which ML Fund Administrators Inc., is a part) to address the risks
associated with the Y2K problem, both internal and external. The integration
testing phase, which will occur throughout 1999, validates that a system can
successfully interface with both internal and external systems. Merrill Lynch
continues to survey and communicate with third parties whose Year 2000 readiness
is important to the company. Based on the nature of the response and the
importance of the product or service involved, Merrill Lynch determines if
additional testing is needed.
<PAGE>
Merrill Lynch participated in further industrywide testing in March and
April 1999 sponsored by the Securities Industry Association. These tests
involved an expanded number of firms, transactions, and conditions compared with
those previously conducted.
Although the Fund has not finally determined the cost associated with its
Year 2000 readiness efforts, the Fund does not anticipate the cost of the Y2K
problem to be material to its business, financial condition or results of
operations in any given year. However, there can be no guarantee that the
systems of other companies on which the Fund's systems rely will be timely
converted, or that a failure to convert by another company or a conversion that
is incompatible with the Fund's systems would not have a material adverse effect
on the Fund's business, financial condition or results of operations.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
As of March 31, 1999, the Fund maintains a portion of its cash
equivalents in financial instruments with original maturities of three months or
less. These financial instruments are subject to interest rate risk, and will
decline in value if interest rates increase. A significant increase or decrease
in interest rates would not have a material effect on the Fund's financial
position.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
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 (the "Court"). 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. 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. On March 30,
1998, the Court entered an order adopting the Report and Recommendation of the
Magistrate Judge granting defendants' motion to dismiss the amended complaint in
its entirety with prejudice. Plaintiffs thereafter filed an appeal, which has
been briefed and argued by both plaintiffs and defendants. The parties are
awaiting the Court's decision on the appeal.
Items 2 - 4 are herewith omitted as the response to all items is either
none or not applicable.
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on form 8-K: NONE
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on this 14th day of May 1999.
ML-LEE ACQUISITION FUND, L.P.
By: Mezzanine Investments, L.P.
Managing General Partner
By: ML Mezzanine Inc.
its General Partner
/s/ Robert J. Remick
--------------------------------
Dated: May 14, 1999 Robert J. Remick
ML Mezzanine Inc.
Vice President and Treasurer
(Principal Financial Officer of Registrant)
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
the 1998 Form 10-Q Balance Sheet and Statements of Operations and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<INVESTMENTS-AT-COST> 3,552
<INVESTMENTS-AT-VALUE> 3,560
<RECEIVABLES> 0
<ASSETS-OTHER> 10
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<TOTAL-ASSETS> 3,570
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<OTHER-ITEMS-LIABILITIES> 90
<TOTAL-LIABILITIES> 90
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 487
<SHARES-COMMON-PRIOR> 487
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
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<OVERDISTRIBUTION-GAINS> 0
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<EXPENSES-NET> 176
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<APPREC-INCREASE-CURRENT> 0
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<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (134)
<ACCUMULATED-NII-PRIOR> 0
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<GROSS-EXPENSE> 176
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<PER-SHARE-NAV-BEGIN> 6.64
<PER-SHARE-NII> (.027)
<PER-SHARE-GAIN-APPREC> 0
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<PER-SHARE-NAV-END> 6.37
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
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