UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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) 236-6577
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 ___.
<PAGE>
ML-LEE ACQUISITION FUND, L.P.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Assets, Liabilities and Partners' Capital
as of September 30, 1999 and December 31, 1998
Statements of Operations - For the Three and Nine Months Ended
September 30, 1999 and 1998
Statements of Changes in Net Assets - For the Nine Months Ended
September 30, 1999 and 1998
Statements of Cash Flows - For the Nine Months Ended
September 30, 1999 and 1998
Statement of Changes in Partners' Capital - For the Nine Months Ended
September 30, 1999
Schedule of Portfolio Investments - September 30, 1999
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
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)
(Unaudited)
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Assets:
Investments - Notes 2, 11
Temporary Investments, at amortized cost (cost $3,120 at
September 30, 1999 and $3,760 at December 31, 1998) $ 3,140 $ 3,760
Cash 152 3
Note Receivable (Net of reserve of $1,000) - Note 1, 8 - -
------------------ -----------------
Total Assets $ 3,292 $ 3,763
================== =================
Liabilities and Partners' Capital:
Liabilities
Legal and Professional Fees Payable $ 4 $ 1
Reimbursable Administrative Expenses Payable - Note 6 102 125
Independent General Partner Expenses Payable - Note 7 24 23
------------------ -----------------
Total Liabilities 130 149
------------------ -----------------
Partners' Capital - Note 2
Managing General Partner 374 379
Limited Partners (487,489 Units) 2,788 3,235
------------------ -----------------
Total Partners' Capital 3,162 3,614
------------------ -----------------
Total Liabilities and Partners' Capital $ 3,292 $ 3,763
================== =================
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
Statements of Operations
(Dollars in Thousands)
(Unaudited)
For the Three Months Ended For the Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Investment Income - Notes 2, 11
Interest $ 1 $ 1 $ 1 $ 16
Discount 40 103 123 527
Other - - - 1
------------- ------------- ------------- ------------
Total Investment Income 41 104 124 544
------------- ------------- ------------- ------------
Expenses:
Investment Advisory Fee - Note 5 - - - 600
Fund Administration Fee - Note 6 75 75 225 225
Provision for Uncollectable Receivable - Note 1,8 - - - 1,000
Loan Fees - Notes 2, 4 - - - 403
Independent General Partners' Fees and Expenses - Note 7 34 33 97 112
Legal and Professional Fees 29 29 29 29
Reimbursable Administrative Expenses - Note 6 102 137 225 428
Insurance Expense - - - 7
------------- ------------- ------------- ------------
Total Expenses 240 274 576 2,804
------------- ------------- ------------- ------------
Net Investment Loss (199) (170) (452) (2,260)
Net Realized Loss on Investments - (16,652) - (9,557)
Net Change in Unrealized Appreciation (Depreciation)
on Investments
Publicly Traded Securities - - - (18,959)
Nonpublic Securities - 16,652 - 37,906
------------- ------------- ------------- ------------
Subtotal - 16,652 - 18,947
------------- ------------- ------------- ------------
Net Increase (Decrease) in Net Assets
Resulting From Operations $ (199) $ (170) $ (452) $ 7,130
============= ============ ============= ============
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
Statements of Changes in Net Assets
(Dollars in Thousands)
(Unaudited)
For the Nine Months Ended
----------------------------------------------
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
From Operations:
Net Investment Loss $ (452) $ (2,260)
Net Realized Loss on Investments - (9,557)
Net Change in Unrealized Depreciation on Investments - 18,947
------------------ ------------------
Net Increase (Decrease) in Net Assets Resulting from Operations (452) 7,130
Cash Distributions to Partners - (60,813)
------------------ ------------------
Total Decrease (452) (53,683)
Net Assets:
Beginning of Period 3,614 57,446
------------------ ------------------
End of Period $ 3,162 $ 3,763
================== ==================
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
For the Nine Months Ended
----------------------------------------------
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Increase in Cash
Cash Flows From Operating Activities:
Interest, Discount and Other Income $ 104 $ 606
Investment Advisory Fee - (600)
Fund Administration Fee (225) (225)
Legal and Professional Fees (26) (94)
Loan Fees and Expenses - (17)
Independent General Partners' Fees and Expenses (96) (112)
(Purchase) Sale of Temporary Investments, Net 640 14,116
Reimbursable Administrative Expenses (248) (408)
Proceeds from Sale of Portfolio Company Investments - 47,556
------------------ ------------------
Net Cash Provided by Operating Activities 149 60,822
------------------ ------------------
Cash Flows From Financing Activities:
Cash Distributions to Partners - (60,813)
------------------ ------------------
Net Cash Used in Financing Activities - (60,813)
------------------ ------------------
Net Increase in Cash 149 9
Cash at Beginning of Period 3 1
------------------ ------------------
Cash at End of Period $ 152 $ 10
================== ==================
Reconciliation of Net Investment Loss to Net Cash
Provided by Operating Activities
Net Investment Loss $ (452) $ (2,260)
Adjustments to Reconcile Net Investment Loss
to Net Cash Provided by Operating Activities
Decrease in Investments 640 68,340
Decrease in Receivable for Investments Sold
(Net of Allowance) - 3,888
(Increase) Decrease in Accrued Interest,
Dividend and Discount Receivables (20) 62
Decrease in Prepaid Expenses - 391
Increase in Independent General Partners' Fees Payable 1 -
Increase (Decrease) in Reimbursable Administrative Expenses Payable (23) 21
Increase (Decrease) in Legal and Professional Fees Payable 3 (63)
Net Realized Loss on Investments - (9,557)
------------------ ------------------
Total Adjustments 601 63,082
------------------ ------------------
Net Cash Provided by Operating Activities $ 149 $ 60,822
================== ==================
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
Statements of Changes in Partners' Capital
(Dollars in Thousands)
(Unaudited)
Managing
General Limited
Partner Partners Total
------------ ------------ ----------
<S> <C> <C> <C>
For the The Nine Months Ended September 30, 1999
Partners' Capital at January 1, 1999 $ 379 $ 3,235 $ 3,614
Allocation of Net Investment Loss (5) (447) (452)
------------ ------------ ----------
Partners' Capital at September 30, 1999 $ 374 $ 2,788 $ 3,162
============ ============ ==========
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
<TABLE>
<CAPTION>
ML-LEE ACQUISITION FUND, L.P.
Schedule of Portfolio Investments
September 30, 1999
(Dollars in Thousands)
(Unaudited)
Fair % Of
Principal Investment Investment Value Total
Amount/Shares Investment Date Cost (Note 2) Investments
<S> <C> <C> <C> <C> <C>
TEMPORARY INVESTMENTS
COMMERCIAL PAPER
$ 3,140 General Electric Capital Services, 5.20% due 10/1/99 8/17/99 $ 3,120 $ 3,140 100.00%
--------------------------------------
TOTAL INVESTMENT IN COMMERCIAL PAPER $ 3,120 $ 3,140 100.00%
--------------------------------------
TOTAL TEMPORARY INVESTMENTS $ 3,120 $ 3,140 100.00%
--------------------------------------
TOTAL INVESTMENT PORTFOLIO $ 3,120 $ 3,140 100.00%
======================================
</TABLE>
See the Accompanying Notes to Financial Statements (Unaudited).
<PAGE>
ML-LEE ACQUISITION FUND, L.P.
Notes to Financial Statements
September 30, 1999
(Unaudited)
1. Organization and Purpose
ML-Lee Acquisition Fund, L.P. (the "Fund") was formed, and the Certificate
of Limited Partnership was filed, under the Delaware Revised Uniform Limited
Partnership Act on April 1, 1987. The Fund's operations commenced on October 19,
1987.
The Managing General Partner, subject to the supervision of the Individual
General Partners, is responsible for overseeing and monitoring the Fund's
investments. Mezzanine Investments, L.P. (the "Managing General Partner"), is a
limited partnership in which ML Mezzanine Inc., an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc., is the general partner, and Thomas H.
Lee Advisers I (the "Investment Adviser"), an affiliate of Thomas H. Lee, is the
limited partner. The Individual General Partners are Vernon R. Alden, Joseph L.
Bower and Stanley H. Feldberg (the "Independent General Partners") and Thomas H.
Lee.
The Fund elected to operate as a business development company under the
Investment Company Act of 1940. Its primary investment objective was to provide
current income and long-term capital appreciation by investing in "Mezzanine"
securities consisting primarily of Subordinated Debt and Preferred Stock
combined with an equity participation issued in connection with leveraged
acquisitions or other leveraged transactions.
The term of the Fund expired on June 15, 1998, resulting in the dissolution
of the Fund. The Fund has an additional five years to liquidate its remaining
assets. As of September 30, 1999, 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., which was written-down to zero during
1998 (refer to Note 8 titled "Investment Transactions" for further information).
2. Significant Accounting Policies
Basis of Accounting
For financial reporting purposes, the records of the Fund are maintained
using the accrual method of accounting. For Federal income tax reporting
purposes, the results of operations are adjusted to reflect statutory
requirements arising from book to tax differences. The preparation of financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts and
disclosures in the financial statements. Actual reported results could vary from
these estimates.
Valuation of Investments
Temporary Investments with maturities of less than 60 days are stated at
amortized cost, which approximates market.
Interest Receivable on Investments
Since the Fund has sold 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 recorded investment transactions on the date on which it obtained
an enforceable right to demand the securities or payment therefore. 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 and does not represent the Partners' Capital
Accounts. Profits and losses, when realized, are allocated in accordance with
the provisions of the Partnership Agreement summarized in Note 3.
Interim Financial Statements
The financial information included in this report as of September 30, 1999
and for the period then ended has been prepared by management without an audit
by independent certified public accountants. The results for the period ended
September 30, 1999 are not necessarily indicative of the results of the
operations expected for the year and reflect adjustments, all of a normal and
recurring nature, necessary for the fair presentation of the results of the
interim period. In the opinion of the Managing General Partner all necessary
adjustments have been made to the aforementioned financial information for a
fair presentation in accordance with generally accepted accounting principles.
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; and
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. 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 $4,442,000, 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.
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 $1,200,000. The Investment
Advisory Fee was calculated and paid quarterly, in advance. 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.
In an attempt to mitigate certain administrative costs of the Fund, the
Fund Administrator has agreed to waive its administration fee; such waiver to
take effect for the quarterly period commencing October 1, 1999 and each
quarterly period thereafter, unless and until such waiver is rescinded. However,
no such waiver shall apply to any reimbursable expenses of the Fund.
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
Administrative Expenses") primarily consist of printing, audits, tax
preparation, legal fees and expenses, and custodian fees.
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.
In an attempt to mitigate certain administrative costs to the Fund, the
three Independent General Partners have agreed to waive their compensation for
services rendered to the Fund; such waiver to take effect for the quarterly
period commencing October 1, 1999 and each quarterly period thereafter, unless
and until such waiver is rescinded. However, no such waiver shall apply to any
reimbursable expenses of the Fund.
8. Investment Transactions
In 1996, BeefAmerica, Inc. sold all of the capital stock of its subsidiary,
BeefAmerica Operating Company, Inc., in return for cash and preferred stock in
the acquiror. The Fund, as BeefAmerica Inc.'s primary creditor, was paid a
portion of the cash and preferred stock received by BeefAmerica Inc., in partial
satisfaction of its secured claim against BeefAmerica, Inc.
On March 3, 1998, the Fund sold the preferred stock to Lajara II LLC, a
limited liability company owned by the management of BeefAmerica Operating
Company, Inc., in return for a promissory note in the amount of $1,000,000 (the
"Promissory Note"). On October 8, 1998, BeefAmerica, Inc. filed for bankruptcy
protection under Chapter 11 of the United States Bankruptcy Code. As a result
the Fund, at that time, determined the value of the Promissory Note to be zero
and fully reserved against it.
In May 1999, BeefAmerica, Inc. was sued in federal district court in
Nebraska by a purported class of individuals and a related union (the
"Lawsuit"). The Lawsuit alleges, among other things, that BeefAmerica, Inc.
guaranteed certain retiree medical benefits due to these individuals by
BeefAmerica Operating Company, Inc. and that certain payments made by
BeefAmerica, Inc. in 1996 to its "insiders" were fraudulent transfers. In
response to the Lawsuit, on September 10, 1999, BeefAmerica, Inc. (now known as
BAI Liquidating Corp. ("BAI")) filed a voluntary petition under Chapter 7 of the
United States Bankruptcy Court for the District of Delaware (the "Bankruptcy").
As BAI's primary creditor, the Fund has incurred and anticipates that it will
continue to incur, expenses related to the Bankruptcy case. It is uncertain at
this time what the effect of the Lawsuit or the Bankruptcy will have on the Fund
or the final liquidation of the Fund's remaining assets, the timing of which
cannot be determined at the present date.
9. 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 of this action
believe that the claims against them are without merit. 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. The judgment of dismissal was affirmed by the Third
Circuit of Appeals on August 10, 1999.
10. 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 involved the entry by the Fund and other equity
security holders into stockholders' agreements. While the provisions of such
stockholders' agreements varied, some of these agreements included provisions as
to corporate governance, registration rights, rights of first offer or first
refusal, rights to participate in sales of securities to third parties, rights
of majority stockholders to compel minority stockholders to participate in sales
of securities to third parties, transfer restrictions and preemptive rights.
Thomas H. Lee Company, a sole proprietorship owned by Thomas H. Lee, an
Individual General Partner of the Fund and an affiliate of the Investment
Adviser, typically performed 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 had contractual or other relationships pursuant to which they did
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, performed various financial services
for various portfolio companies of the Fund, which may include investment
banking services, broker/dealer services and economic forecasting, and received
in consideration therewith various fees, commissions and reimbursements.
Furthermore, MLPF&S and its affiliates or investment companies advised by
affiliates of MLPF&S may, from time to time, purchase or sell securities issued
by portfolio companies of the Fund in connection with their ordinary investment
operations.
During the year 1999, the Managing General Partner received no cash
distributions.
11. Reserves
In February 1993, the Fund established a $15,000,000 reserve to provide
funds for follow-on investments and to pay expenses. $8,600,000 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 $1,400,000. In addition, $2,900,000 was utilized from the
reserve to pay down a portion of the First Chicago loan on January 6, 1994. On
February 12, 1998, the Independent General Partners approved an additional
reserve of $1,650,000 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 $3,300,000 as of September 30, 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, audit, tax and legal fees, and to pay
contingent costs and obligations of the Fund, including those related to former
investments. Any remaining cash reserves in excess of amounts required to pay
the Fund's obligations prior to its termination, including expenses related to
the BAI Bankruptcy case (as discussed in Note 8), will be distributed as soon as
practicable as a final liquidating distribution to Limited Partners.
12. 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 December 31, 1998, the tax basis of the
Fund's assets are greater than the amounts reported in the financial statements
by approximately $1,000,000. 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. Additionally, the Fund Administrator has agreed to
waive its administration fee and the three Independent General Partners have
agreed to waive their compensation for services rendered to the Fund; such
waivers to take effect for the quarterly period commencing October 1, 1999 and
each quarterly period thereafter, unless and until such waivers are rescinded.
However, no such waivers shall apply to any reimbursable expenses of the Fund.
Accordingly, the Fund Administration Fee of $75,000 and the Independent General
Partner's compensation of $30,000 relating to the quarter commencing October 1,
1999 have been waived.
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 $15,000,000 of the
proceeds received from the Playtex notes sale in February 1993. $8,600,000 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 $1,400,000. In addition, $2,900,000 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 $1,650,000 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.
As of September 30, 1999 the Fund has available approximately $3,300,000 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,
audit, tax and legal fees, and to pay contingent costs and obligations of the
Fund. The Fund is proceeding, in accordance with applicable Delaware law, to
assess and resolve its liabilities and contingent costs and obligations,
including those related to its former investments, prior to completing the
liquidation and distribution of the Fund's assets. Any remaining cash reserves
in excess of amounts required to pay the Fund's obligations prior to its
termination, including expenses related to the BAI Bankruptcy case (as discussed
below), will be distributed as soon as practicable as a final liquidating
distribution to Limited Partners.
In 1996, BeefAmerica, Inc. sold all of the capital stock of its subsidiary,
BeefAmerica Operating Company, Inc., in return for cash and preferred stock in
the acquiror. The Fund, as BeefAmerica Inc.'s primary creditor, was paid a
portion of the cash and preferred stock received by BeefAmerica Inc., in partial
satisfaction of its secured claim against BeefAmerica, Inc.
On March 3, 1998, the Fund sold the preferred stock to Lajara II LLC, a
limited liability company owned by the management of BeefAmerica Operating
Company, Inc., in return for a promissory note in the amount of $1,000,000 (the
"Promissory Note"). On October 8, 1998, BeefAmerica, Inc. filed for bankruptcy
protection under Chapter 11 of the United States Bankruptcy Code. As a result
the Fund, at that time, determined the value of the Promissory Note to be zero
and fully reserved against it.
In May 1999, BeefAmerica, Inc. was sued in federal district court in
Nebraska by a purported class of individuals and a related union (the
"Lawsuit"). The Lawsuit alleges, among other things, that BeefAmerica, Inc.
guaranteed certain retiree medical benefits due to these individuals by
BeefAmerica Operating Company, Inc. and that certain payments made by
BeefAmerica, Inc. in 1996 to its "insiders" were fraudulent transfers. In
response to the Lawsuit, on September 10, 1999, BeefAmerica, Inc. (now known as
BAI Liquidating Corp. ("BAI")) filed a voluntary petition under Chapter 7 of the
United States Bankruptcy Court for the District of Delaware (the "Bankruptcy").
As BAI's primary creditor, the Fund has incurred and anticipates that it will
continue to incur, expenses related to the Bankruptcy case. Through November 15,
1999, the Fund has incurred approximately $140,000 in connection with such
Bankruptcy. It is uncertain at this time what the effect of the Lawsuit or the
Bankruptcy will have on the Fund or the final liquidation of the Fund's
remaining assets, the timing of which cannot be determined at the present date.
Results of Operations
Investment Income and Expenses
For the nine months ended September 30, 1999, the Fund reported a net
investment loss of $452,000 as compared to a net investment loss of $2,260,000
for the same period in 1998. The decrease in net investment loss for the nine
months ended September 15, 1999 as compared to the nine months ended September
30, 1998 resulted primarily because the Fund did not pay any Investment Advisory
and Loan Fees in 1999 as a result of the expiration of the Fund's term on June
30, 1998. In addition, the Fund had an increase in expenses in 1998 due to a
reserve established for uncollectible proceeds relating to the sale of
BeefAmerica, Inc.
For the three months ended September 30, 1999 the Fund reported a net
investment loss of $199,000 as compared to a net investment loss of $170,000 for
the same period in 1998. The increase in net investment loss for the three
months ended September 30, 1999 as compared to the same period in 1998 is
attributable to a decrease in discount income from Temporary Investments due to
a reduction in Funds available for investment in such securities during the 1999
period compared to the same period in 1998 partially offset by a reduction of
Reimbursable Administrative Expenses in 1999 as further discussed below.
The major expenses for the three and nine months ended September 30, 1999
and 1998, consisted of Fund Administration Fees and Reimbursable Administrative
Expenses.
As a result of the expiration of the Fund's term, the Investment Adviser as
of June 15, 1998 no longer receives 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 nine months ended September 30, 1998 were
$600,000. 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 and nine months ended September 30, 1999 and 1998,
the Fund Administration Fee was $75,000, $225,000, $75,000 and $225,000
respectively. For the three and nine months ended September 30, 1999 and 1998,
Reimbursable Administrative Expenses totalled $102,000, $225,000, $137,000 and
$428,000 respectively. The decrease in Reimbursable Administrative Expenses for
the three and nine months ended September 30, 1999 as compared to the same
periods in 1998 is due to an overall reduction in auditing, custodian, printing
and legal administration fees during 1999 resulting from fewer investments held
by the Fund during 1999.
In an attempt to mitigate certain administrative costs of the Fund, the
Fund Administrator has agreed to waive its administration fee; such waiver to
take effect for the quarterly period commencing October 1, 1999 and each
quarterly period thereafter, unless and until such waiver is rescinded. However,
no such waiver shall apply to any reimbursable expenses of the Fund.
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. As of June 30, 1998
the Fund stopped incurring loan fees and for the nine months ended September 30,
1998 the Fund incurred $403,000 in loan 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. For the three and nine month periods ended
September 30, 1999 and 1998, the Fund incurred $34,000, $97,000, $33,000 and
$112,000, respectively, in Independent General Partners' Fees and Expenses.
In an attempt to mitigate certain administrative costs to the Fund, the
three Independent General Partners have agreed to waive their compensation for
services rendered to the Fund; such waiver to take effect for the quarterly
period commencing October 1, 1999 and each quarterly period thereafter, unless
and until such waiver is rescinded. However, no such waiver shall apply to any
reimbursable expenses of the Fund.
Net Assets
The Fund's net assets decreased by $452,000 during the nine months ended
September 30, 1999, due to a net investment loss of $452,000. During the nine
months ended September 30, 1998 the Fund's net assets decreased by $53,683,000
due to a net investment loss of $2,260,000, realized losses on investments of
$9,557,000 and cash distributions of $60,813,000, which were partially offset by
net unrealized appreciation on investments of $18,947,000.
Unrealized Appreciation and Depreciation on Investments
For the nine months ended September 30, 1999, the Fund recorded no net
change in unrealized appreciation (depreciation). For the nine months ended
September 30, 1998, the Fund recorded net unrealized appreciation of
$18,947,000, all of which was a reversal of net unrealized depreciation for
investments sold.
<PAGE>
Realized Gains and Losses
For the nine months ended September 30, 1999, the Fund recorded no net
realized gains (losses) on investments as compared to a net realized loss of
$9,557,000 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 the Fund'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.
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. Merrill Lynch has participated in and continues to
participate in numerous industy tests throughout the world.
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 September 30, 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 judgment of
dismissal was affirmed by the Third Circuit of Appeals on August 10, 1999.
Item 2. Changes in Securities and Use of Proceeds.
-----------------------------------------
None
Item 3. Defaults Upon Senior Securities.
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
The 1999 Annual Meeting of the Limited Partners was held on July 13,
1999. The result of the proposals were as follows:
Proposal 1. Election of the Individual General Partners
-------- -
Vernon R. Alden, Joseph L. Bower, Stanley H. Feldberg and Thomas
H. Lee were all re-elected to serve as Individual General
Partners.
Proposal 2. Election of the Managing General Partner
-------- -
Mezzanine Investments, L.P. was re-elected to serve as Managing
General Partner.
Proposal 3. Ratification of the selection of
-------- -
PricewaterhouseCoopers LLP as independent accountants
PricewaterhouseCoopers was approved to serve as independent
accountants of the Fund for its fiscal year ending December 31,
1999.
Proposal 4. Amend the Fund's Amended and Restated Limited
-------- -
Partnership Agreement to remove the requirement (a) to hold
future annual meetings, thereby eliminating any required actions
of Limited Partners taken at such meetings and (b) to provide
Limited Partners with quarterly reports.
Number of Number of Number of
Affirmative Votes Opposed Votes Withheld Votes
----------------- ------------- --------------
237,059 19,138 231,292
Accordingly, since the majority of all votes received were not in
favor of Proposal 4, it was not approved.
<PAGE>
Item 5. Other Information.
-----------------
None
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits:
Exhibit 27- Financial Data Schedule for the Quarter Ended September 30,
1999
(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 15th day of November 1999.
ML-LEE ACQUISITION FUND, L.P.
By: Mezzanine Investments, L.P.
Managing General Partner
By: ML Mezzanine Inc.
its General Partner
/s/ Kevin T. Seltzer
--------------------------------
Dated: November 15, 1999 Kevin T. Seltzer
ML Mezzanine Inc.
Vice President and Treasurer
(Principal Financial Officer of Registrant)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
the 1999 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
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<RECEIVABLES> 0
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<PER-SHARE-NAV-BEGIN> 6.64
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