Item 2. Properties
The Fund does not own or lease any physical properties.
Item 3.
Item 3. Legal Proceedings
On September 7, 1991, the Fund brought suit in the Court of Common Pleas for the County of Greenville, South Carolina against Deloitte & Touche in connection with Deloitte & Touche's audit opinions on the financial statements of Emb-Tex Corporation, formerly an operating subsidiary of a portfolio company of the Fund. The Fund contends that the value of Emb-Tex Corporation's inventory and operating income were substantially overstated in its financial statements. The Fund seeks actual and punitive damages in connection with the loss of its aggregate $18 million investment. Deloitte & Touche obtained a summary judgment in its favor and the Fund pursued an appeal in the Appellate Courts of South Carolina. On August 21, 1995, the South Carolina Court of Appeals reversed the summary judgment ruling and remanded the case for trial. On September 11, 1995, Deloitte & Touche filed a petition for rehearing with the Court of Appeals which was denied. Thereafter, Deloitte & Touche filed a petition for a writ of Certiorari with South Carolina Supreme Court, which was granted. A decision by the South Carolina Supreme Court is expected in 1997.
On October 18, 1991, one Limited Partner of the Fund commenced a class action in the Supreme Court of the State of New York in the County of New York, on behalf of a class of all Limited Partners of record during 1990 or their successors in interest, against the Fund's Managing General Partner, ("MGP"), Individual General Partners, Investment Adviser and certain of their affiliates. The complaint alleged that the defendants breached the Fund's Partnership Agreement in 1990 by causing the Fund to pay $7,554,855 in incentive compensation to the MGP with respect to that year and sought monetary damages in the amount of $7,554,855, together with interest, and other relief. After trial, the Court found that the MGP Distributions for the fourth quarter of 1989 through the fourth quarter of 1990 were paid in violation of the Partnership Agreement and as a result, held the General Partners liable for repayment to the plaintiff class of $6,627,752 of excessive distributions, plus interest. The Court's decision dismissed Merrill Lynch & Co., Inc. and MLPF&S because they were not parties to the Partnership Agreement. On June 13, 1996, the Court amended its decision, dismissing ML Mezzanine Inc., the corporate general partner of the Fund's MGP because it was not a party to the Partnership Agreement. On July 25, 1996, judgment was entered against remaining Defendants in the amount of $10,399,505. The remaining Defendants have filed a Notice of Appeal on October 4, 1996, and expect to have a hearing on their appeal in 1997. The Fund may be obligated to indemnity and advance litigation expenses to one or more of the defendants under the terms and conditions of various indemnity provisions of the Fund's Partnership Agreement and separate indemnification agreements. The Fund has advanced litigation expenses to the indemnified parties based upon amounts which are deemed reimbursable in accordance with the indemnification provisions and has included these amounts in Legal and Professional Fees.
On October 14, 1993, a Limited Partner commenced a putative class action in the U.S. District Court for the District of Delaware, purportedly on behalf of all persons who purchased limited partnership interests in the Fund between August 12, 1987 and the date of filing of the complaint, against the Fund, the Managing General Partner, the Individual General Partners, the Investment Adviser to the Fund and certain named affiliates of such persons. As amended, the complaint alleges that the defendants operated the Fund, and caused it to make certain investments, for the benefit of some or all of the defendants at the expense of the Fund's Limited Partners in breach of defendants' fiduciary and contractual duties to the Limited Partners, thereby violating federal securities laws applicable to the Fund and its affiliates under the Investment Company Act of 1940, as amended, as well as Delaware state law. By Order dated September 30, 1994 and Opinion dated October 14, 1994, the court granted in part and denied in part defendants' motion to dismiss the amended complaint, dismissing plaintiff's claims with respect to several investments as time-barred and dismissing all claims for aiding and abetting liability under the Investment Company Act of 1940. The plaintiff thereafter filed a second amended complaint on November 3, 1995 raising additional allegations in connection with certain transactions by the Fund, and alleging that defendants violated the Investment Company Act of 1940 and Delaware state law. In its Order and Opinion dated December 30, 1996, the court granted in part and denied in part the defandants' motion to dismiss the second amended complaint holding that a number of new claims and theories asserted by plaintiffs are dismissed as time-barred. Plaintiffs have moved for reconsideration of the Court's Order. The plaintiff seeks an accounting, rescission, rescissory or actual damages and punitive damages. Plaintiffs have moved to certify the case as a class action. Defendants have opposed that motion which is currently pending before the Court. The defendants in this action believe that the claims in the second amended complaint are without merit and have moved to dismiss them. Whether or not the plaintiff prevails on any remaining claims, the Fund may be obligated to indemnify and advance litigation expenses to certain of the defendants under the terms and conditions of various indemnity provisions in the Fund's Partnership Agreement and separate indemnification agreements, and the amounts of such indemnification and expenses could be material. In the opinion of legal council, the outcome of this case is not determinable at this time. The Fund has incurred litigation expenses which are recorded in professional fees.
On August 2, 1996, an action was commenced against General Nutrition Companies, Inc. ("GNC"), its officers, directors and certain of its former shareholders, including the Fund, in the United States District Court for the Western District of Pennsylvania. Plaintiffs assert that GNC is liable for violations of Sections 11 and 12(a)(2) of the Securities Act of 1933 and Section 1-501(a) of the Pennsylvania Securities Act, arising out of allegedly false and misleading statements in the prospectus and registration statement for the February 7, 1996 public offering of GNC common stock, and for violations of Section 10(b) of the Securities Exchange Act of 1934 and negligent misrepresentation arising out of allegedly false and misleading public statements during the period from the public offering through May 28, 1996. Plaintiffs also allege that certain officers, directors and shareholders of GNC, including the Fund, as well as the underwriters for the public offering, are liable for certain of such violations of the federal and state securities laws and/or control person liability in connection therewith, and negligent misrepresentation. Plaintiffs seek certification of the action as a class action purportedly on behalf of all persons, other than defendants, who purchased shares of GNC common stock during the proposed class action period from February 7, 1996 through May 28, 1996. The defendants filed a motion to dismiss the action in its entirety on December 2, 1996, which motion is still in its briefing stages. The defendants in this action believe that the claims against them are without merit. In the opinion of legal council, the outcome of this case is not determinable at this time.
Item 4.
Item 4. Submission of Matters to a Vote of Security-Holders
No matters were submitted to a vote of the Limited Partners of the Fund during the fourth quarter of the year ended December 31, 1996.
Part II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established trading market for the Units. The Partnership Agreement contains restrictions that are intended to prevent the development of a public market. Accordingly, accurate information as to the market values of Units at any given date is not available.
The approximate number of Unit holders as of January 1, 1997, the last effective date of transfer (as described below), was 36,542. The Managing General Partner also holds a general partner interest in the Fund.
Effective November 9, 1992, MLPF&S introduced a new limited partnership secondary service through Merrill Lynch's Limited Partnership Secondary Transaction Department ("LPSTD"). This service assists Merrill Lynch clients wishing to buy or sell limited partnership interests, but does not represent an established trading market for the Units.
Beginning with the December 1994 client account statements, MLPF&S implemented new guidelines for providing estimated values of limited partnerships and other direct investments reported on client account statements. As a result, MLPF&S no longer reports the general partner's estimate of limited partnership net asset value to Unit holders. Pursuant to such MLPF&S guidelines, estimated values for limited partnership interests originally sold by MLPF&S (such as the Fund's Units) will be provided two times per year to MLPF&S by independent services. These estimated values will be based on financial and other information available to the independent services on the prior August 15th for reporting on December year-end client account statements and month-end account statements through May of the following year, and on information available to the services on March 31st for reporting on June through November MLPF&S client account statements of the same year. MLPF&S clients may contact their MLPF&S Financial Consultants or telephone the number provided to them on their account statements to obtain a general description of the methodology used by the independent valuation services to determine their estimates of value. The estimated values provided by the independent services and the Fund's current net asset value as estimated by the general partner are not market values and Unit holders may not be able to sell their Units or realize either amount upon a sale of their Units. In addition, Unit holders may not realize the independent estimated value or the Fund's current net asset value upon the liquidation of the Fund's assets over its remaining life.
The Fund distributes Distributable Cash from Investments and Distributable Capital Proceeds in accordance with the terms of the Partnership Agreement.
Pursuant to the Partnership Agreement, transfers of Units are recognized on the first day of the fiscal quarter after which the Managing General Partner has been duly notified of a transfer pursuant to the Partnership Agreement. Until a transfer is recognized, the limited partner of record (i.e. the transferor) will continue to receive all the benefits and burdens of ownership of Units (including allocations of profit and loss and distributions), and any transferee will have no rights to distributions on sale proceeds or distributable cash from investments generated at any time prior to the recognition of the transfer and assignment.
Accordingly, Distributable Cash from investments for a quarter and Distributable Capital Proceeds from sales after transfer or assignment have been entered into, but before such transfer and assignment is recognized by the Managing General Partner, will be payable to the transferor and not the transferee.
Cash Distributions
The Fund has made quarterly distributions, including both Distributable Cash from Investments and Distributable Capital Proceeds. The Fund's ability to make future distributions is restricted.
As set forth in Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity & Capital Resources
As of December 31, 1996, the Fund had a total of (at cost) $103,063,947 (including $1,122,216 of payment-in-kind notes and $6,485,801 of payment-in-kind equity) invested in Mezzanine Investments, representing $93,467,506 Managed and $9,596,443 Non-Managed portfolio investments. These investments were financed by net offering proceeds and debt financing. This represents a $120 million decrease versus the total at December 31, 1995 of $223,694,546. The decrease in gross assets is due to sales and redemptions of the Fund's investments during 1996. The Fund's Mezzanine Investments consist of high-yield subordinated debt and/or preferred stock linked with an equity participation in middle market companies typically issued in private placement transactions and are usually subject to restrictions on the transfer or sale of the security, thereby limiting their liquidity. The Fund's remaining Mezzanine Investments currently consist of common and preferred equity.
On August 13, 1991, the Fund completed a refinancing of its credit agreement with a lending group led by The First National Bank of Chicago ("First Chicago"). The new 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). The Fund had pledged substantially all of its securities to secure repayment of the Credit Facility. The agreement generally provides for mandatory prepayments, and a permanent reduction in the Credit Facility, equal to the lesser of cost or cash proceeds in the event of the sale or other cash disposition of Mezzanine Investments.
On October 29, 1993, the Fund amended its Credit Facility Agreement enabling the Fund to make prepayments of the term loan at any time and without any corresponding reduction to the revolving credit line. 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, 1997, the Fund had the entire $7.5 million credit line available.
The Fund is now in its tenth year of operation. Because all but one of the Fund's debt investments were previously sold or redeemed, interest and other income expected to be received by the Fund may not be sufficient to cover the Fund's expenses. As a result, future cash distributions to Limited Partners will be mostly derived from capital proceeds and gains resulting from sales of securities. The amount and timing of asset sales are dependent on future market conditions and therefore are inherently unpredictable. Generally, the proceeds generated from the sale of the Fund's investments will be distributed to partners only after payment of obligations of the Fund, or for appropriate reserves. To fund the anticipated cash flow shortfall in the near future and to maintain adequate reserves for possible follow-on investments and expenses, the Fund reserved $15 million of the proceeds received from the Playtex notes sale in February, 1993. A portion of the reserve was used to make follow-on investments in American Health Companies, Duro-Test Corp., Chadwick-Miller, Health o meter and Petco, along with a distribution to partners in the second quarter of 1993 of $424,264 and the first quarter of 1997 of $1 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. The Fund's reserve balance as of March 20, 1997 was approximately $3.1 million which has been invested in temporary investments. As of the last meeting of the Independent General Partners on February 25, 1997, the Independent General Partners have approved retention of the reserve at its current level.
Investment in High-Yield Securities
The Fund 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. Most of these securities are subject to resale restrictions and have no quoted market price.
Although the Fund cannot eliminate the risks associated with its investments in High-Yield Securities, it has 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 limits the amount of its investment in a particular issuer. The Fund's Investment Adviser also continually monitors portfolio companies in order to minimize the risks associated with its investments in High-Yield Securities.
Certain issuers of securities held by the Fund (Celebrity, Playtex, Stanley Furniture and Health o meter) have registered their equity securities in public offerings. Although the equity securities of the same class presently held by the Fund (except Celebrity Inc., Stanley Furniture and Health o meter) were not registered in these offerings, the Fund has the ability under Rule 144 under the Securities Act of 1933 to sell publicly traded equity securities held by it for at least two years on the open market, subject to the volume restrictions set forth in that rule. The Rule 144 volume restrictions generally are not applicable to equity securities of non-affiliated companies held by the Fund for at least three years. The Fund in certain cases has agreed not to make any sales of equity securities for a specified hold-back period following a public offering.
The Investment Adviser reviews each portfolio company's financial statements quarterly. In addition, the Investment Adviser routinely reviews and discusses financial and operating results with the company's management and, where appropriate, attends board of director meetings. In some cases, representatives of the Investment Adviser, acting on behalf of the Fund (and affiliated investors where applicable), serve as one or more of the directors on the boards of portfolio companies. The Fund may from time to time make follow-on investments to the extent necessary to protect or enhance its existing investments.
Results of Operations
Investment Income and Expenses
The total investment income earned on investments for the year ended December 31, 1996 was $3,061,608, of which $1,611,001 was earned from Mezzanine Investments and $1,450,607 was earned from Temporary Investments. For the same period in 1995, total investment income earned on investments was $5,751,535, of which $4,412,491 was earned from Mezzanine Investments and $1,339,044 was earned from Temporary Investments.
For the same period in 1994, total investment income earned on investments was $18,265,190 of which $17,764,759 was earned from Mezzanine Investments and $500,431 was earned from Temporary Investments.
For the year ended December 31, 1996, the Fund had net investment loss from operations of $1,411,814 as compared to a net investment loss of $1,155,421 and net investment income of $9,305,007 for the same periods in 1995 and 1994, respectively. The decrease in net investment income for the year ended December 31, 1996 compared to the year ended December 31, 1995 is the result of the decrease in interest income generated from debt investments held by the Fund at December 31, 1996. During the twelve month period ending December 31, 1996 the Fund held one security that generated interest income. However, the reduction in interest income during 1996 was partially offset by a reduction of Fund expenses; primarily Investment Advisory Fees and Fund Administration Fees and Expenses.
The decrease in net investment income for the year ended December 31, 1995 versus the comparative period in 1994 reflects the decrease in income producing securities held by the Fund in 1995, primarily due to the sale of the Omega Wire subordinated debt and the conversion of all GNC subordinated notes to common stock. However, this decrease was offset by lower Investment Advisory Fees, Fund Administration Fees and Legal and Professional Fees recorded in 1995.
Major expenses for the period consisted of the Legal and Professional Fees Investment Advisory Fee, and Fund Administration Fees and Reimbursable Administrative Expenses.
The Investment Adviser and Fund Administrator receive their compensation on a quarterly basis. The total Investment Advisory Fee paid to the Investment Adviser for the year ended December 31, 1996 was $1,282,991, compared with $2,770,934 for the year ended December 31, 1995 and $3,652,538 for the year ended December 31, 1994. The fee is calculated at an annual rate of 1% of Assets Under Management, subject to certain reductions as specified in the Fund's Partnership Agreement with a minimum annual payment of $1.2 million. This decrease in 1996 as compared to 1995 and 1994 Investment Advisory Fees is a direct result of the reductions in outstanding borrowings, sales of investments, returns of capital to partners and realized losses on investments.
Legal and Professional Fees paid by the Fund consist primarily of legal fees incurred in conjunction with the Fund's litigation. For the years ended December 31, 1996, 1995 and 1994, legal and professional fees were $1,559,223, $1,584,381 and $2,338,418, respectively. This decrease is primarily attributable to the decrease in litigation expenses incurred by the Fund to support its claims and defending allegations against various parties as well as legal fees required to be advanced by the Fund in connection with the litigation described in Note 12 to the Financial Statements.
Total Fund Administration Fees paid to the Fund Administrator for the year ended December 31, 1996, 1995 and 1994 were $299,335, $1,330,212 and $1,843,910, respectively. Beginning October 19, 1995, the Fund Administration Fee changed to an annual fee of $300,000, plus 100% of actual out-of-pocket expenses incurred by the Fund Administrator, as noted below. For the period ending October 19, 1995, Fund Administration Fees were calculated at an annual rate of 0.45% of net offering proceeds reduced by one-half of the sum of returns of capital to partners and realized losses on investments, with a minimum annual payment of $400,000. This decrease in Fund Administration Fees reflects adjustments relating to a return of capital and realized losses recorded in 1995 and the change in the Fund Administration fee to $300,000 per annum.
Beginning October 19, 1995, in accordance with Partnership Agreement, the Fund Administrator is being reimbursed by the Fund for 100% of the out-of-pocket expenses incurred. Total out-of-pocket expenses incurred by the Fund were $414,544 for the year ended December 31, 1996. For the period ending October 19, 1995, the Fund's expenses for accounting, audit, printing, tax preparation and other administrative services ("out-of-pocket expenses") (excluding the costs of bonding and extraordinary legal expenses) were paid by the Fund Administrator.
Loan fees consist of fees on the unused portion of the Fund's facility, loan administration fees, amortization of the loan advisory and facility fees and various miscellaneous fees attributable to the facility. Loan fees for the years ended December 31, 1996, 1995 and 1994 totaled $701,021, $738,029, and $772,593, respectively. This decrease in 1996 as compared to the 1995 and 1994 loan fees is the result of reductions in the Credit Facility.
Net Assets
The Fund's net assets decreased by $156,965,582 during the year ended December 31, 1996 due to net investment loss of $1,411,814 and cash distributions to partners of $195,931,182 ($72,697,537 of cash distributions distributed in 1996 was return of capital from the sales of portfolio investments) and additional net unrealized depreciation of $23,317,903, offset by net realized gains of $63,695,316.
The Fund's net assets decreased by $102,346,582 during the year ended December 31, 1995 due to cash distributions to partners of $186,920,065 ($61,054,782 of the cash distributions paid were return of capital from the sales of Mezzanine Investments) and net realized losses of $1,155,421 partially offset by additional net unrealized appreciation of $9,920,766 and net realized gains of $75,808,138.
The Fund's net assets increased by $62,192,091 during the year ended December 31, 1994 due to additional net unrealized appreciation of $9,271,721, net realized losses of $37,008,074 and net investment income of $9,305,007 partially offset by cash distributions to partners of $43,760,745 ($4,046,615 of the of cash distributions distributed in 1993 was return of capital from the sales of portfolio investments).
Unrealized Appreciation and Depreciation on Investments
For the year ended December 31, 1996, the Fund recorded total net unrealized depreciation of $23.3 million, of which $111.9 million was a reversal of net unrealized appreciation for investments sold during 1996. Approximately $27.5 million recorded in 1996 related to net unrealized appreciation recorded in the market value of publicly traded securities held by the Fund at December 31, 1996. This compares to a net unrealized appreciation of $9.9 million of which $11.9 million was related to net unrealized depreciation in market value of publicly traded/underlying publicly traded securities held by the Fund at December 31, 1995. For the year ended December 31, 1994, the Fund recorded net unrealized appreciation of $9.3 million of which $39.2 million was related to net depreciation in market value of publicly traded securities. The Fund's cumulative net unrealized depreciation on investments at December 31, 1996 totaled $10.8 million.
The Managing General Partner and Investment Adviser review the valuation of the Fund's portfolio investments that do not have a readily ascertainable market value on a quarterly basis with final approval from the Individual General Partners. Portfolio Investments are valued at original cost plus accrued value in the case of original issue discount or deferred pay securities. Such investments will be revalued if there is an objective basis for doing so at a different price. Investments will be written down in value if the Managing General Partner and Investment Adviser believe adverse credit developments of a significant nature require a write-down of such securities. Investments will be written up in value only if there has been an arms'-length third party transaction to justify the increased valuation.
Approximately 62% of the Fund's investments (at cost) are invested in private placement securities for which there are no ascertainable market values. Although the Managing General Partner and Investment Adviser use their best judgment in estimating the fair value of these investments, there are inherent limitations in any estimation technique. Therefore, the fair value estimates presented herein are not necessarily indicative of the amount which the Fund could realize in a current transaction.
The information presented herein is based on pertinent information available to the Managing General Partner and Investment Adviser as of December 31, 1996. 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 Celebrity, Inc., Health o meter, Playtex, Stanley Furniture and Walter Industries reflect their closing market price at December 31, 1996.
The Health o meter, Playtex and Stanley Furniture securities held by the Fund are restricted securities under the Securities and Exchange Commission's Rule 144 and can only be sold under that rule, in a registered public offering, or pursuant to an exemption from the registration requirement. In addition, resale in some cases is restricted by lockup or other agreements. The Fund may be considered an affiliate of Health o meter and Stanley Furniture pursuant to Rule 144, under the securities act of 1933 and therefore, any resale of Health o meter or Stanley Furniture securities under Rule 144, is limited by the volume limitations in that rule. Accordingly, the values referred to in the financial statements for the Health o meter, Playtex and Stanley Furniture securities held by the Fund do not necessarily represent the prices at which these securities could currently be sold.
As overall economic, market and business conditions improve, the sales and profit levels of some of the Fund's companies have increased, resulting in higher valuations for some of the Fund's equity investments.
For additional information, please refer to the Supplemental Schedule of Unrealized Appreciation and Depreciation (Schedule 2).
Realized Gains and Losses
Net realized gains on investments for the year ended December 31, 1996 were $63,695,316 compared to a net realized gain of $75,808,174 in 1995 and a net realized loss of $37,008,074 for 1994.
For additional information, please refer to the Supplemental Schedule of Realized Gains and Losses (Schedule 1).
Cash Distributions
On February 3, 1997, the Individual General Partners approved the fourth quarter 1996 cash distribution totaling $650,009, which consisted of $92,310 of net investment income from Temporary Investments, $4,058 return of capital from the sale of Mezzanine Investments, $1 million return of the Reserve for Follow-On-Investments, which was reduced to pay Fund expenses of $446,359. The total amount distributed to Limited Partners was $643,485, or $1.32 per Unit. The Managing General Partner received $6,524 in proportion to its 1% interest in the Fund. The distributions were made on February 14, 1997.
Item 8.
Item 8. Financial Statements and Supplementary Data
ML-LEE ACQUISITION FUND, L.P.
Report of Independent Accountants
Statements of Assets, Liabilities and Partners' Capital As of December 31, 1996 and December 31, 1995
Statements of Operations For the Years Ended December 31, 1996, 1995 and 1994
Statements of Changes in Net Assets For the Years Ended December 31, 1996, 1995 and 1994
Statements of Cash Flows For the Years Ended December 31, 1996, 1995 and 1994
Statements of Changes in Partners' Capital For the Years Ended December 31, 1996, 1995 and 1994
Schedule of Portfolio Investments - December 31, 1996
Notes to Financial Statements
Supplementary Schedule of Realized Gains and Losses (Schedule 1)
Supplementary Schedule of Unrealized Appreciation and Depreciation (Schedule 2)
PART III - OTHER INFORMATION
Item 10. Directors and Executive Officers of the Registrant Item 14. Exhibits Financial Statement Schedules and Reports on Form 8-K.
Report of Independent Accountants
To the General and Limited Partners of ML-Lee Acquisition Fund L.P.
In our opinion, the accompanying statements of assets, liabilities and partners' capital, including the schedule of portfolio investments, and the related statements of operations, of changes in net assets, of cash flows, and of changes in partners' capital present fairly, in all material respects, the financial position of ML-Lee Acquisition Fund L.P. (the "Fund") at December 31, 1996 and 1995, and the results of its operations, the changes in its net assets, its cash flows, and the changes in its partners' capital for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 1996 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations were not received, provide a reasonable basis for the opinion expressed above.
The financial statements include securities, valued at $92,228,926 at December 31, 1996 (94.7% of net assets), whose values have been estimated by the Managing General Partner and the Investment Adviser (with the approval of the Independent General Partners) in the absence of readily ascertainable market values, as further described in Note 2. We have reviewed the procedures used by the Managing General Partner and the Investment Adviser in arriving at their estimate of value and have inspected underlying documentation, and, in the circumstances, we believe the procedures are reasonable and the documentation appropriate. However, those estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material to the financial statements.
Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule of realized gains and losses (Schedule 1) and the schedule of unrealized appreciation and depreciation (Schedule 2) are presented for the purpose of additional analysis and are not a required part of the basic financial statements. These schedules are the responsibility of the Fund's management. Such schedules have been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, are fairly stated in all material respects when considered in relation to the basic financial statements taken as a whole.
PRICE WATERHOUSE LLP New York, New York
March 20, 1997
See the Accompanying Notes to Financial Statements.
See the Accompanying Notes to Financial Statements.
See the Accompanying Notes to Financial Statements.
See the Accompanying Notes to Financial Statements.
See the Accompanying Notes to Financial Statements.
ML-LEE ACQUISITION FUND, L.P. NOTES TO FINANCIAL STATEMENTS December 31, 1996
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.
Mezzanine Investments, L.P. (the "Managing General Partner"), subject to the supervision of the Individual General Partners, is responsible for overseeing and monitoring the Fund's investments. 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 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.
As described in the Prospectus, the Fund will terminate upon the liquidation of all Fund investments but no later than 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 it is in the best interest of the Fund. The Fund has an additional five years to liquidate its remaining investments.
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
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. Future events will also affect the estimates of fair value and the effect of such events on the estimates of fair value could be material.
Temporary Investments with maturities of less than 60 days are stated at amortized cost, which approximates market.
The information presented herein is based on pertinent information available to the Managing General Partner and Investment Adviser as of December 31, 1996. Although the Managing General Partner and Investment Adviser are not aware of any factors not disclosed herein that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since that time; and especially in light of the fact that the portfolio investments of companies whose equity is publicly traded are valued at the last price available at December 31, 1996, 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.
Payment-In-Kind Securities
All payment-in-kind securities received in lieu of cash interest payments by the Fund's portfolio companies are recorded at face value (which approximates accrued interest), unless the Investment Adviser and the Managing General Partner determine that there is no reasonable assurance of collecting the full principal amounts of such securities. As of December 31, 1996 and December 31, 1995, the Fund has in its portfolio of investments $1,122,216, of payment-in-kind notes, which excludes subordinated notes placed on non-accrual status. As of December 31, 1996 and December 31, 1995, the Fund has in its portfolio of investments $6,485,801, of payment-in-kind equity.
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.
Deferred Interest Income
All fees received by the Fund upon the funding of Mezzanine or Bridge Investments were treated as deferred interest income and amortized over the maturity of such investments.
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 by the Partners' Capital Contributions and does not represent the Partners' Capital Accounts. Profits and losses, as defined in the Partnership Agreement, when realized, will be 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 will be allocated 99% to the Limited Partners and 1% to the Managing General Partner. Profits from Mezzanine Investments will, in general, be 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 investments in 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.
The Partnership Agreement does not specify a method for allocation of unrealized appreciation and depreciation among the Partners. Such allocations do not affect either cash distributions or allocation or taxable income and loss. The Fund has generally allocated such amounts 99% to the Limited Partners and 1% to the Managing General Partner. During 1996, it was determined that certain prior year allocations were not made on this basis. The 1996 allocation of unrealized appreciation/depreciation includes an adjustment to correct this error.
4. Leverage
The Fund entered into a credit agreement, dated as of August 13, 1991 , 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 Facility"). The Credit Facility consisted of a $100 million term loan and a $40 million secured revolving credit line. In October of 1993, the Fund amended the Credit Facility 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 term loan was paid in full as of March 29, 1994. The remaining credit line has been further amended and reduced to $7.5 million, all of which is available at December 31, 1996. The Credit Facility will mature on July 31, 1998. In connection with the Credit Facility, the Fund has pledged almost all its remaining debt and equity portfolio securities to its lenders.
With respect to the Credit Facility, 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 total amortization during the twelve months ended 1996 was $639,552.
An annual Loan Administration Fee of $25,000 for the administration of the Credit Facility.
Unused Commitment Fees of $36,743, which are equal to 1/2 of 1% per annum of the unused Credit Facility.
For the years ended December 31, 1996, 1995 and 1994, the Fund incurred $701,021, $738,029 and $772,593, respectively, in loan fees.
5. Investment Advisory Fee
The Investment Adviser provides for the identification, management and liquidation of investments for the Fund. As compensation for services rendered to the Fund, the Investment Adviser receives a quarterly fee at the annual rate of 1% of assets under management (net offering proceeds, reduced by cumulative capital reductions, plus outstanding bank borrowing as specified in the Fund's Partnership Agreement), with a minimum annual fee of $1.2 million. The Investment Advisory Fee is calculated and paid quarterly, in advance. For the years ended December 31, 1996, 1995 and 1994, the Fund paid $1,282,991, $2,770,934 and $3,652,538, respectively, in Investment Advisory Fees to Thomas H. Lee Advisors I.
6. Fund Administration Fee and Expenses
ML Fund Administrators Inc. (the "Fund Administrator"), an affiliate of the Managing General Partner, performs the operational and administrative services necessary for the management of the Fund. Beginning October 19, 1995, the Fund Administration Fee changed to an annual amount equal to $300,000 plus out-of-pocket expenses incurred by the Fund Administrator as discussed below. The Fund Administration Fee is calculated and paid quarterly, in advance. As compensation for its services prior to October 19, 1995, the Fund Administrator received from the Fund an annual amount equal to the greater of $400,000 or 0.45% of the Net Proceeds Available for Investments subject to certain reductions as specified in the Fund's Partnership Agreement. For the years ended December 31, 1996, 1995, and 1994, the Fund paid $299,335, $1,330,212 and $1,843,907, respectively, in Fund Administration Fees.
Beginning October 19, 1995, in accordance with Partnership Agreement, the Fund Administrator is being reimbursed by the Fund for 100% of the out-of-pocket expenses incurred. Total out-of-pocket expenses incurred by the Fund for the year ended December 31, 1996 were $414,544. For the period ending October 19, 1995, the Fund's expenses for accounting, audit, printing, tax preparation and other administrative services ("out-of-pocket expenses") (excluding the costs of bonding and extraordinary legal expenses) were paid by the Fund Administrator.
7. Independent General Partners' Fees and Expenses
As compensation for services rendered to the Fund, each of the three Independent General Partners receives $40,000 annually in quarterly installments, $1,000 for each meeting of the General Partners attended and $1,000 for each committee meeting attended ($500 if a committee meeting is held on the same day as a meeting of the General Partners) plus reimbursement for any legal and out-of-pocket expenses. Compensation for the Independent General Partners is reviewed annually by the Individual General Partners.
For the years ended December 31, 1996, 1995 and 1994, the Fund incurred $207,827, $303,527, and $284,682, respectively, in Independent General Partners' Fees and Expenses.
8. Investment Transactions
On February 7, 1996 the Securities and Exchange Commission declared effective a Registration Statement filed by GNC in connection with the offering of up to 17,994,176 shares of GNC Common Stock, including 1,635,834 shares which were offered pursuant to the underwriters' over-allotment option. Of such shares, 16,358,342 were sold by certain selling shareholders of GNC, including the Fund, and the 1,635,834 shares subject to the underwriters' over-allotment option were sold by GNC. In connection with the offering, the Fund sold its entire remaining investment in GNC consisting of 4,903,766 shares of common stock for net proceeds of $101.7 million and realized a gain of $87.9 million. These net distributable proceeds of $206.61 per Unit were distributed on March 29, 1996 to Limited Partners of record as of the date of such sale.
On February 22, 1996, the Fund sold its remaining investment in SFX Broadcasting Inc., consisting of 8,667 shares of common stock purchase warrants, to Sillerman Communications Management Corporation for net proceeds of $14.50 per share which resulted in a gain of $125,672 to the Fund.
On March 29, 1996, BeefAmerica, Inc. ("BeefAmerica"), entered into an agreement whereby BeefAmerica sold all of the capital stock of BeefAmerica Operating Company, Inc.("Opco"), to BAOC Acquisition, Inc. ("BAOC"), a company owned by the President of Opco and certain other investors. Opco was the sole operating asset of BeefAmerica. As a result of such sale, the Fund, as chief creditor of BeefAmerica, received cash proceeds of $26 million, $10 million in Junior Preferred Stock of BAOC, and $14 million in Senior Preferred Stock of BAOC, all of which was received on April 1, 1996 in exchange for all subordinated notes held by the Fund. Although a realized loss of $50.98 million was recorded, the Fund reversed the unrealized depreciation totaling $90.98 million on the investment that was recorded in prior years. Please refer to the Supplemental Schedule of Unrealized Appreciation and Depreciation Schedule 2.
In connection with the sale of Omega Wire in the first quarter of 1995, $1.1 million of proceeds owed to the Fund from the sale were held in escrow. On April 5, 1996 the Fund received the Omega Escrow Proceeds, plus accrued interest, totaling $1.2 million.
On April 4, 1996 Petco filed a registration statement with the Securities and Exchange Commission for an offering of 5 million shares of Common Stock. Of the 5 million shares offered, 2.6 million were offered by Petco and the remaining shares were offered by certain current stockholders, including the Fund. The offering was effected on April 30, 1996 and the Fund sold its entire investment in Petco which consisted of 1,472,622 shares of Common Stock and received net proceeds from the sale of $40.3 million or $27.36 per share which were distributed on June 11, 1996 to partners on record as of the date of such sale. The Fund realized a gain of $24.4 million on the sale.
In connection with the financial restructuring on November 23, 1994, of Chadwick-Miller, Inc. and its holding company, CMI Holding Corp., the Fund's $5 million 14.75% Senior Note was redeemed. The net proceeds were $5 million, of which $3.1 million of such proceeds were classified as restricted cash and held in escrow. As a result of an additional financial restructuring of Chadwick Miller in July 1996, the Fund received all proceeds held in escrow plus accrued interest and exchanged all Common and Preferred Stock and Common Stock Purchase Warrants held for 39,487 Common Stock Purchase Warrants and 15,406 Preferred Stock Purchase Warrants. No gain or loss was recognized on the transaction.
On November 1, 1995, pursuant to an Agreement and Plan of Merger (the "Agreement"), Duro-Test Corporation effected a merger pursuant to which Duro-Test was acquired by a third party for approximately $33 million. Net proceeds to the Fund were $4.6 million of which $1.7 million was classified as restricted cash and held in escrow. On September 30, 1996, the Fund received escrow proceeds totaling $989,738 resulting in an additional realized loss of $769,236 on this investment.
Stanley Furniture designs, manufactures and markets furniture products. On November 13, 1996, Stanley Furniture completed a public offering of 1,000,000 shares of its common stock at a price of $16 per share. These shares were sold by the Fund and certain affliates of the Thomas H. Lee Company. Following the offering, Stanley purchased a total of 150,000 shares from the selling stockholders including the Fund at the same price per share. Pursuant to these transactions, the Fund sold a total of 1,115,256 shares of its Stanley common stock for $16.9 million or $15.12 per share. The Fund recognized a gain of $2.8 million on the transaction. Net distributable proceeds of $34.24 per Unit were distributed on December 23, 1996 to Limited Partners of record as of the dates of such sales.
At December 31, 1996, the Fund had a total of (at cost) $103.1 million invested in Mezzanine Investments representing $93.5 million Managed and $9.6 million Non-Managed portfolio investments. For the year ended December 31, 1996, the proceeds from the sales of investments resulted in net realized gains of $63.7 million. For additional information, please refer to the Supplemental Schedule of Realized Gains and Losses - Schedule 1.
Because the Fund primarily invests 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 the risks associated with its investments in high-yield securities, it has procedures in place to continually monitor such risks 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. See Note 11 for information concerning commitments and guarantees.
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.
9. Unrealized Appreciation and Depreciation of Investments
For the year ended December 31, 1996, the Fund recorded net unrealized depreciation of $23.3 million of which $111.9 million was a reversal of unrealized appreciation for investments sold during 1996. Approximately $27 million recorded in 1996 related to net appreciation in market value of publicly traded/underlying publicly traded securities held by the Fund at December 31, 1996. This compares to a net unrealized appreciation of $9.9 million of which $11.9 million was related to net unrealized depreciation in market value of publicly traded/underlying publicly traded securities at December 31, 1995. For the year ended December 31, 1994, the Fund recorded net unrealized appreciation of $9.3 million, of which $39.2 million was related to net depreciation in market value of publicly traded securities. The Fund's cumulative net unrealized depreciation on investments at December 31, 1996 totaled $10.8 million.
For additional information, please refer to the Supplemental Schedule of Unrealized Appreciation and Depreciation (Schedule 2).
10. Non-Accrual of Investments
In accordance with the Fund's Accounting Policy, the following equity securities have been on non-accrual status since the date indicated:
- BeefAmerica, Inc. on July 1, 1990 - Chadwick Miller on July 1, 1993
11. Commitments and Guarantees
On January 20, 1992, the Fund entered into a commitment to guarantee up to $150,480 to support an obligation of a subsidiary of Alliance International Group, Inc. The amount of such guarantee represents the Fund's pro-rata portion of a $600,000 aggregate additional advance provided by the senior lender of Alliance.
12. Litigation
On September 7, 1991, the Fund brought suit in the Court of Common Pleas for the County of Greenville, South Carolina against Deloitte & Touche in connection with Deloitte & Touche's audit opinions on the financial statements of Emb-Tex Corporation, formerly an operating subsidiary of a portfolio company of the Fund. The Fund contends that the value of Emb-Tex Corporation's inventory and operating income were substantially overstated in its financial statements. The Fund seeks actual and punitive damages in connection with the loss of its aggregate $18 million investment. Deloitte & Touche obtained a summary judgment in its favor and the Fund pursued an appeal in the Appellate Courts of South Carolina. On August 21, 1995, the South Carolina Court of Appeals reversed the summary judgment ruling and remanded the case for trial. On September 11, 1995, Deloitte & Touche filed a petition for rehearing with the Court of Appeals which was denied. Thereafter, Deloitte & Touche filed a petition for a writ of Certiorari with South Carolina Supreme Court, which was granted. A decision by the South Carolina Supreme Court is expected in 1997.
On October 18, 1991, one Limited Partner of the Fund commenced a class action in the Supreme Court of the State of New York in the County of New York, on behalf of a class of all Limited Partners of record during 1990 or their successors in interest, against the Fund's Managing General Partner, ("MGP"), Individual General Partners, Investment Adviser and certain of their affiliates. The complaint alleged that the defendants breached the Fund's Partnership Agreement in 1990 by causing the Fund to pay $7,554,855 in incentive compensation to the MGP with respect to that year and sought monetary damages in the amount of $7,554,855, together with interest, and other relief. After trial, the Court found that the MGP Distributions for the fourth quarter of 1989 through the fourth quarter of 1990 were paid in violation of the Partnership Agreement and as a result, held the General Partners liable for repayment to the plaintiff class of $6,627,752 of excessive distributions, plus interest. The Court's decision dismissed Merrill Lynch & Co., Inc. and MLPF&S because they were not parties to the Partnership Agreement. On June 13, 1996, the Court amended its decision, dismissing ML Mezzanine, Inc., the corporate general partner of the Fund's MGP because it was not a party to the Partnership Agreement. On July 25, 1996, judgment was entered against remaining Defendants in the amount of $10,399,505. The remaining Defendants have filed a Notice of Appeal on October 4, 1996, and expect to have a hearing on their appeal in 1997. The Fund may be obligated to indemnity and advance litigation expenses to one or more of the defendants under the terms and conditions of various indemnity provisions of the Fund's Partnership Agreement and separate indemnification agreements. The Fund has advanced litigation expenses to the indemnified parties based upon amounts which are deemed reimbursable in accordance with the indemnification provisions and has included these amounts in Legal and Professional Fees.
On October 14, 1993, a Limited Partner commenced a putative class action in the U.S. District Court for the District of Delaware, purportedly on behalf of all persons who purchased limited partnership interests in the Fund between August 12, 1987 and the date of filing of the complaint, against the Fund, the Managing General Partner, the Individual General Partners, the Investment Adviser to the Fund and certain named affiliates of such persons. As amended, the complaint alleges that the defendants operated the Fund, and caused it to make certain investments, for the benefit of some or all of the defendants at the expense of the Fund's Limited Partners in breach of defendants' fiduciary and contractual duties to the Limited Partners, thereby violating federal securities laws applicable to the Fund and its affiliates under the Investment Company Act of 1940, as amended, as well as Delaware state law. By Order dated September 30, 1994 and Opinion dated October 14, 1994, the court granted in part and denied in part defendants' motion to dismiss the amended complaint, dismissing plaintiff's claims with respect to several investments as time-barred and dismissing all claims for aiding and abetting liability under the Investment Company Act of 1940. The plaintiff thereafter filed a second amended complaint on November 3, 1995 raising additional allegations in connection with certain transactions by the Fund, and alleging that defendants violated the Investment Company Act of 1940 and Delaware state law. In its Order and Opinion dated December 30, 1996, the court granted in part and denied in part the defandants' motion to dismiss the second amended complaint holding that a number of new claims and theories asserted by plaintiffs are dismissed as time-barred. Plaintiffs have moved for reconsideration of the Court's Order. The plaintiff seeks an accounting, rescission, rescissory or actual damages and punitive damages. Plaintiffs have moved to certify the case as a class action. Defendants have opposed that motion which is currently pending before the Court. The defendants in this action believe that the claims in the second amended complaint are without merit and have moved to dismiss them. Whether or not the plaintiff prevails on any remaining claims, the Fund may be obligated to indemnify and advance litigation expenses to certain of the defendants under the terms and conditions of various indemnity provisions in the Fund's Partnership Agreement and separate indemnification agreements, and the amounts of such indemnification and expenses could be material. In the opinion of legal council, the outcome of this case is not determinable at this time. The Fund has incurred litigation expenses which are recorded in professional fees.
On August 2, 1996, an action was commenced against General Nutrition Companies, Inc. ("GNC"), its officers, directors and certain of its former shareholders, including the Fund, in the United States District Court for the Western District of Pennsylvania. Plaintiffs assert that GNC is liable for violations of Sections 11 and 12(a)(2) of the Securities Act of 1933 and Section 1-501(a) of the Pennsylvania Securities Act, arising out of allegedly false and misleading statements in the prospectus and registration statement for the February 7, 1996 public offering of GNC common stock, and for violations of Section 10 (b) of the Securities Exchange Act of 1934 and negligent misrepresentation arising out of allegedly false and misleading public statements during the period from the public offering through May 28, 1996. Plaintiffs also allege that certain officers, directors and shareholders of GNC, including the Fund, as well as the underwriters for the public offering, are liable for certain of such violations of the federal and state securities laws and/or control person liability in connection therewith, and negligent misrepresentation. Plaintiffs seek certification of the action as a class action purportedly on behalf of all persons, other than defendants, who purchased shares of GNC common stock during the proposed class action period from February 7, 1996 through May 28, 1996. The defendants filed a motion to dismiss the action in its entirety on December 2, 1996, which motion is still in its briefing stages. The defendants in this action believe that the claims against them are without merit. In the opinion of legal council, the outcome of this case is not determinable at this time.
13. 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 1996 the Managing General Partner received cash distributions in the amount of $1,959,308 representing its 1% interest in the Fund.
14. Reserves
In February 1993, the Fund established a $15 million reserve to provide funds for follow-on investments and to pay expenses. Following the fourth quarter 1996 cash distributions made on February 14, 1997, the reserve balance was reduced to approximately $3.1 million due to follow-on investments in CMI Holding Corp., Diet Center Inc., Duro-Test, Health o meter and Petco along with a distribution to partners in the second quarter of 1993 of $424,264 and a payment of $2.9 million to First Chicago to pay down the Fund's loan.
15. Income Taxes (Statement of Financial Accounting Standards No. 109)
No provision for income taxes has been made because all income and losses are allocated to the Fund's partners for inclusion in their respective tax returns.
Pursuant to the Statement of Financial Accounting Standards No. 109 Accounting for Income Taxes, the Fund is required to disclose any difference in the tax basis of the Fund's assets and liabilities versus the amounts reported in the financial statements. As of December 31, 1996, the tax basis of the Fund's assets are greater than the amounts reported in the financial statements by $1.6 million. This difference is primarily attributable to unrealized appreciation and depreciation recorded on investments which has not been recognized for tax purposes.
16. Subsequent Events
On February 3, 1997, the Individual General Partners approved the fourth quarter 1996 cash distribution totaling $650,009, which consisted of $92,310 of net investment income from Temporary Investments, $4,058 return of capital from the sale of Mezzanine Investments and $1 million return of the Reserve for Follow-On-Investments, which was reduced to pay fund expenses of $446,359. The total amount distributed to Limited Partners was $643,485, or $1.32 per Unit. The Managing General Partner received $6,524 in proportion to its 1% interest in the Fund. The distributions were made on February 14, 1997.
During February 1997, the Fund sold an additional 31,515 shares of Stanley common stock pursuant to the provisions of Rule 144 under the Securities Act of 1933, as amended. Total proceeds from the sale were approximately $756,335. As of March 20, 1997, the Fund continues to hold 1,528,781 shares of Stanley Common Stock.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None. PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The Fund
The information set forth under the caption "Election of General Partners" in the Fund's definitive proxy statement in connection with the 1997 Annual Meeting of Limited Partners to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 (the "Proxy Statement") is incorporated herein by reference.
Individual General Partners
The Individual General Partners provide overall guidance and supervision with respect to the operations of the Fund and will perform the various duties imposed on the directors of business development companies by the Investment Company Act.
The information set forth under the caption "Election of General Partners - Individual General Partners" in the Proxy Statement is incorporated herein by reference.
The Investment Adviser
The Investment Adviser, pursuant to an investment management agreement among the Investment Adviser, the Thomas H. Lee Company and the Fund dated September 14, 1987, as amended, is responsible for the identification, management and liquidation of Mezzanine Investments for the Fund.
The information set forth under the caption "The Management Agreement" in the Proxy Statement is incorporated herein by reference.
The Managing General Partner
The Managing General Partner is a limited partnership in which ML Mezzanine Inc. is the sole general partner and Thomas H. Lee Advisors I is the limited partner. The Managing General Partner is responsible for the supervision of the Fund's investments.
The information set forth under the caption "Election of General Partners - Managing General Partner - Information concerning the Managing General Partner" in the Proxy Statement is incorporated herein by reference.
The Fund Administrator
The Fund Administrator, provides administrative services necessary for the operations of the Fund pursuant to an Administrative Services Agreement between the Fund and the Fund Administrator, dated June 30, 1989.
The information set forth under the caption "Election of General Partners - Managing General Partner - Information concerning the Fund Administrator" in the Proxy Statement is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
The information with respect to compensation of the Individual General Partners set forth under the caption "Election of General Partners - Individual General Partners -- Compensation" in the Proxy Statement is incorporated herein by reference.
The information with respect to the allocation and distribution of the Fund's profits and losses to the Managing General Partner set forth under the caption "Election of General Partners - Managing General Partner -Distributions" in the Proxy Statement is incorporated herein by reference.
The information with respect to the Fund Administration Fee payable to the Fund Administrator set forth under the caption "Election of General Partners Managing General Partner -- The Fund Administrator Fee" in the Proxy Statement is incorporated herein by reference.
The information with respect to the Management Fee payable to the Investment Adviser (and distributions from the Managing General Partner) set forth under the caption "The Management Agreement - Terms of the Management Agreement -- Management Fee" in the Proxy Statement is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information concerning the security ownership of the Individual General Partners set forth under the caption "Individual General Partners" and certain Limited Partners under the caption "Introduction" in the Proxy Statement is incorporated herein by reference.
There exists no arrangement known to the Fund, the operation of which may at a subsequent date result in a change of control of the Fund.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information set forth under the captions "Certain Transactions", "Election of General Partners -- Managing General Partner" and "The Management Agreement" in the Proxy Statement is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits
Financial Statements and Financial Statement Schedules
See Item 8. "Financial Statements and Supplementary Data-Table of Contents"
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 26th day of March 1997.
ML-LEE ACQUISITION FUND, L.P.
By: Mezzanine Investments, L.P. Managing General Partner
By: ML Mezzanine Inc. its General Partner
/s/ Kevin K. Albert -------------------------------- Dated: March 26, 1997 Kevin K. Albert President, ML Mezzanine Inc. General Partner of Mezzanine Investments, L.P., the Managing General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on the 26th day of March, 1997.
Signature Title
/s/ Kevin K. Albert ML Mezzanine Inc. Kevin K. Albert President and Director (Principal Executive Officer of Registrant)
/s/ Vernon R. Alden Individual General Partner Vernon R. Alden ML-Lee Acquisition Fund, L.P.
/s/ Audrey L. Bommer ML Mezzanine Inc. Audrey L. Bommer Vice President and Treasurer (Principal Financial Officer of Registrant)
/s/ Joseph L. Bower Individual General Partner Joseph L. Bower ML-Lee Acquisition Fund, L.P.
/s/ Roger F. Castoral, Jr. ML Mezzanine Inc. Roger F. Castoral, Jr. Vice President and Assistant Treasurer (Principal Accounting Officer of Registrant)
/s/ Stanley H. Feldberg Individual General Partner Stanley H. Feldberg ML-Lee Acquisition Fund, L.P.
/s/ Thomas H. Lee Individual General Partner Thomas H. Lee ML-Lee Acquisition Fund, L.P.
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 26th day of March 1997.
ML-LEE ACQUISITION FUND, L.P.
By: Mezzanine Investments, L.P. Managing General Partner
By: ML Mezzanine Inc. its General Partner
Dated: March 26, 1997 -------------------------------- Kevin K. Albert President, ML Mezzanine Inc. General Partner of Mezzanine Investments, L.P., the Managing General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on the 26th day of March, 1997.
Signature Title
______________________ ML Mezzanine Inc. Kevin K. Albert President and Director (Principal Executive Officer of Registrant)
______________________ Individual General Partner Vernon R. Alden ML-Lee Acquisition Fund, L.P.
______________________ ML Mezzanine Inc. Audrey Bommer Vice President and Treasurer (Principal Financial Officer of Registrant)
______________________ Individual General Partner Joseph L. Bower ML-Lee Acquisition Fund, L.P.
______________________ ML Mezzanine Inc. Roger F. Castoral, Jr. Vice President and Assistant Treasurer (Principal Accounting Officer of Registrant)
______________________ Individual General Partner Stanley H. Feldberg ML-Lee Acquisition Fund, L.P.
______________________ Individual General Partner Thomas H. Lee ML-Lee Acquisition Fund, L.P.