-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G2h8BHkAYo7aNLBa3GQV0pgbPVm3KvhogCcPxiPssi0owpZdpja9FSESJba9zPnF PScn+sD5kQwES1CTcnhn/w== 0000950109-97-002492.txt : 19970328 0000950109-97-002492.hdr.sgml : 19970328 ACCESSION NUMBER: 0000950109-97-002492 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ML PRINCIPAL PROTECTION LP CENTRAL INDEX KEY: 0000917259 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY & COMMODITY BROKERS, DEALERS, EXCHANGES & SERVICES [6200] IRS NUMBER: 133750642 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-25000 FILM NUMBER: 97564428 BUSINESS ADDRESS: STREET 1: 6TH FL, SOUTH TOWER, M L WORLD HDQR STREET 2: C/O ML FUTURES INVESTMENT PARTNERS INC CITY: NEW YORK STATE: NY ZIP: 10080-6106 BUSINESS PHONE: 2122364161 MAIL ADDRESS: STREET 1: C/O MERRILL LYNCH INVESTMENT PARTNERS IN STREET 2: WORLD FINANCIAL CENTER S TOWER 6TH FL CITY: NEW YORK STATE: NY ZIP: 10080-6106 FORMER COMPANY: FORMER CONFORMED NAME: ML PRINCIPAL PROTECTION PLUS LP DATE OF NAME CHANGE: 19940616 FORMER COMPANY: FORMER CONFORMED NAME: SECTOR STRATEGY FUND VII LP DATE OF NAME CHANGE: 19940107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ML PRINCIPAL PROTECTION TRADING LP CENTRAL INDEX KEY: 0000925433 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 133775509 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 033-73914-01 FILM NUMBER: 97564429 BUSINESS ADDRESS: STREET 1: ML INVESTMENT PARTNERS INC STREET 2: WORLD FINANCIAL CENTER S TOWER 6TH FL CITY: NEW YORK STATE: NY ZIP: 10080-6106 BUSINESS PHONE: 2122364167 MAIL ADDRESS: STREET 1: MERRILL LYNCH INVESTMENT PARTNERS STREET 2: WORLD FINANCIAL CENTER S TOWER 6TH FL CITY: NEW YORK STATE: NY ZIP: 10080-6106 FORMER COMPANY: FORMER CONFORMED NAME: ML PRINCIPAL PROTECTION PLUS TRADING LP DATE OF NAME CHANGE: 19940616 10-K405 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (x) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended: December 31, 1996 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number: 0-23240 ML PRINCIPAL PROTECTION L.P. (formerly, ML Principal Protection Plus L.P.) --------------------------------------------- (Exact name of registrant as specified in its charter) ML Principal Protection Trading L.P. (formerly, ML Principal Protection Plus Trading L.P.) ----------------------------------------------------- (Rule 140 Co-Registrant) Delaware 13-3750642 - -------------------------------- ------------------- (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) c/o Merrill Lynch Investment Partners Inc. Merrill Lynch World Headquarters World Financial Center South Tower, 6th Floor, New York, NY 10080-6106 ----------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (212) 236-4167 --- -------- Securities registered pursuant to Section 12(b) of the Act: None Limited Securities registered pursuant to Section 12(g) of the Act: Partnership Units ----------------- (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) the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of the voting stock held by non-affiliates: the registrant is a limited partnership and, accordingly, has no voting stock held by non-affiliates or otherwise. Documents Incorporated by Reference The registrant's "1996 Annual Report and Independent Auditors' Report," the annual report to security holders for the fiscal year ended December 31, 1996, is incorporated by reference into Part II, Item 8, and Part IV hereof and filed as an Exhibit herewith. ML PRINCIPAL PROTECTION L.P. ANNUAL REPORT FOR 1996 ON FORM 10-K Table of Contents -----------------
PART I PAGE ------ ---- Item 1. Business...................................................................................... 1 Item 2. Properties.................................................................................... 11 Item 3. Legal Proceedings............................................................................. 11 . Item 4. Submission of Matters to a Vote of Security Holders........................................... 11 PART II ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 12 Item 6. Selected Financial Data....................................................................... 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 17 Item 8. Financial Statements and Supplementary Data................................................... 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 22 PART III -------- Item 10. Directors and Executive Officers of the Registrant............................................ 22 Item 11. Executive Compensation........................................................................ 24 Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 24 Item 13. Certain Relationships and Related Transactions................................................ 24 PART IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 25
-i- PART I Item 1: Business -------- (a) General Development of Business: ------------------------------- ML Principal Protection L.P. (formerly, ML Principal Protection Plus L.P.) (the "Partnership" or the "Fund") was organized under the Delaware Revised Uniform Limited Partnership Act on January 3, 1994 and began trading operations on October 12, 1994. The Partnership changed its name to ML Principal Protection L.P. as of July 1, 1996. The Fund is a multi-strategy, multi-market managed futures investment employing a range of proprietary strategies diversified across major markets of the global economy -- financials, currencies, energy, metals and agriculture. The Fund trades in the international futures and forward markets under the direction of multiple independent professional advisors (the "Trading Advisors," or the "Advisors"). The Fund's objectives are achieving, through speculative trading, long-term capital appreciation while controlling performance volatility. Merrill Lynch Investment Partners Inc. (the "General Partner" or "MLIP") acts as the general partner of the Partnership, and selects and allocates the Fund's assets among the Advisors, each of which trades independently of the others. MLIP also determines what percentage of the Fund's assets to allocate to trading and what percentage to hold in reserve. Merrill Lynch Futures Inc. (the "Commodity Broker" or "MLF") is the Partnership's commodity broker. Merrill Lynch Asset Management, L.P. ("MLAM") provides cash management services to the Partnership, pursuant to guidelines established by MLIP for which MLAM assumes no responsibility, investing Fund assets in securities issued by the U.S. Government and its agencies ("Government Securities"). The General Partner is a wholly-owned subsidiary of Merrill Lynch Group Inc., which in turn is a wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML&Co."). The Commodity Broker is an indirect wholly-owned subsidiary of ML&Co. (ML&Co. and its affiliates are herein sometimes referred to as "Merrill Lynch.") The Partnership does not trade directly but rather through a subsidiary limited partnership, ML Principal Protection Trading L.P. (formerly, ML Principal Protection Plus Trading, L.P.) (the "Trading Partnership"), of which the General Partner is the general partner and the Partnership the sole limited partner. See Item 1(c), "Narrative Description of Business -- Two-Tier Structure of the Fund." Only the assets attributable to each series of Units and allocated to the Trading Partnership are allocated to the Trading Advisors for management. To date, all outstanding series of Units have allocated approximately 60% of their total capital to the Trading Partnership, holding the rest in reserve at the Partnership level. The Fund offers its units of limited partnership interest ("Units") and receives and processes subscriptions, on a continuous basis, throughout each calendar quarter at $100 per Unit. Investors whose subscriptions are accepted at any time during a calender quarter are admitted to the Fund as Limited Partners as of the beginning of the immediately following quarter. Investors' customer securities accounts are debited in the amount of their subscriptions on settlement dates throughout each quarter shortly after their subscriptions are accepted by MLIP. Subscription proceeds received during a quarter are held in escrow pending investment in Units as of the beginning of the following quarter. All interest earned on subscriptions while held in escrow is paid to the investors on or about the date that Units are issued to them or their subscription is rejected. The Units sold at the beginning of each calendar quarter are sold in separate series, each of which has its own Net Asset Value. All series trade pursuant to the same Advisor combination, but because they begin trading at different times they have different Net Asset Values and may have different percentages of their capital invested in the Trading Partnership and allocated to the Trading Advisors for management. When the Fund began trading in October 1994, it had an initial capitalization of $32,000,000. Through December 31, 1996, a total of an additional $69,903,535 had been invested in the Units at seven subsequent quarter-end closings (the last sale of the Units occurred as of July 16, 1996). Through December 31, 1996, Units with an aggregate Net Asset Value of $25,748,519 have been redeemed (including December 31, 1996 redemptions which were not actually paid out until January 1997), the Partnership's capitalization was $78,905,273, and the Fund had a total of 3,506 Limited Partners. -1- Through December 31, 1996, the net gain in the Net Asset Value per Series A Unit (the initial series of Units) was 22.70%, the highest month- end Net Asset Value of a Series A Unit was $110.93 (after reducing such Net Asset Value by distributions of $12.00 per Series A Unit ), as of November 30, 1996, and the lowest $101.04, as of October 31, 1994. As of December 31, 1996, the Net Asset Value of the different series of Units, each issued at $100 per Unit as of the beginning of successive calendar quarters, were as follows:
December 31, 1996 Unit December 31, 1996 Net Asset Value per Unit Series Date of Issuance Net Asset Value per Unit Adding back Distributions ------ ----------------- ------------------------ ------------------------- A October 12, 1994 $110.70 $122.70 B January 9, 1995 $114.24 $120.24 C April 10, 1995 $109.33 $112.83 D July 11, 1995 $108.19 $111.69 E October 12, 1995 $108.58 $112.08 F January 16, 1996 $108.92 $108.92 G April 19, 1996 $107.32 $107.32 H July 16, 1996 $106.47 $106.47
The outstanding Series of Units are entitled to fixed-rate annual distributions (which cannot be reduced prior to the first Principal Assurance Date, as defined below, for such Series) and may also receive certain discretionary distributions. Distributions of $6.00 per Series A Units were paid as of October 1, 1995 and October 1, 1996, distributions of $6.00 per Series B Units were paid as of January 1, 1996. These distributions included a $3.50 fixed-rate and a $2.50 discretionary distribution. Fixed-rate distributions of $3.50 per Series C, Series D and Series E Units were paid as of April 1, 1996, July 1, 1996 and October 1, 1996, respectively. No discretionary distributions have been made on the Series C, D or E Units. No distributions for Series F, G and H Units had been paid as of December 31, 1996. Distributions of $6.50 per Series B Units and $6.00 per Series F Units were paid as of January 1, 1997. MLIP does not presently intend to make any distributions on any series of Units sold after July 16, 1996. The Fund is a "principal protected" commodity pool. ML&Co. provides the guarantee described below ML&Co.'s under 1(c), "Narrative Description of Business -- ML&Co.'s 'Principal Protection' Undertaking to the Fund" that all Units of any given series will have a Net Asset Value -- after payment of all fixed-rate annual as well as discretionary distributions on such Units, in the case of Units sold on or prior to July 16, 1996 -- of at least their initial $100 subscription price as of a specified date after their issuance (the "Principal Assurance Date" for such series, seven years after issuance for all outstanding Series of Units, anticipated to be generally five years after issuance for Series sold after July 16, 1996). This guarantee does not prevent substantial losses, but rather serves only as a form of "stop loss," limiting the maximum loss which investors who retain their Units until such Units' Principal Assurance Date can incur. In order to protect ML&Co. from any liability under its guarantee, MLIP imposes substantial opportunity costs on the Partnership by deleveraging its trading, retaining a substantial portion of the Fund's assets in the Partnership rather than investing such assets in the Trading Partnership for allocation to trading. At such time, if any, as the Net Asset Value per Unit of a Series declined to 110% or less of the present value of $100, plus all fixed-rate annual distributions due on such Series, discounted back from the Principal Assurance Date, MLIP would terminate trading with respect to such Series altogether in order to ensure that ML&Co. incurred no financial obligation to the Fund under ML&Co.'s guarantee of the minimum Net Asset Value per Unit of such Series. In the case of Units sold after July 16, 1996, the potential opportunity costs of the Fund's "principal protection" are significantly increased due to the fact that in the event that MLIP deleverages any particular series of Units, it must deleverage all series to the same degree. A series could be deleveraged as a result of losses which accrued subsequent to such series having recognized profits more than sufficient to offset such losses, but which were earned before a more recent series was issued and, consequently, were not available to offset the same losses incurred by such series. -2- Conversely, losses incurred before a particular series is issued could indirectly cause a further deleveraging of such series' trading due to the effect of such losses on the leverage which MLIP believes it is appropriate to use for an earlier-issued series. (b) Financial Information about Industry Segments: --------------------------------------------- The Partnership's business constitutes only one segment for financial reporting purposes, i.e., a speculative "commodity pool." (c) Narrative Description of Business: --------------------------------- GENERAL The Fund trades in the international futures, options on futures and forward markets, with the objectives of achieving long-term capital appreciation while controlling performance volatility. One of the objectives of the Fund is to provide diversification to a limited portion of the risk segment of the Limited Partners' portfolios into an investment field that has historically often demonstrated a low degree of performance correlation with traditional stock and bond holdings. Since it began trading, the Fund's returns have, in fact, frequently been significantly non-correlated (not, however, negatively correlated) with the United States stock and bond markets. Due to certain concerns expressed by the Securities and Exchange Commission (the "SEC") regarding whether the different series of Units issued by the Partnership were significantly similar to each other for the Partnership to be considered to be engaged in a "continuous offering" of the same class of security, i.e., the Units (which the Partnership must be in order not to be able to offer the Units on an ongoing open-end basis), MLIP changed the terms of all series to be issued after July 16, 1996 to provide that: (i) no distributions are intended to be made on any such series; (ii) any discretionary trading leverage adjustments would have to be made so that after any such adjustments all series were trading at the same degree of leverage (i.e., with the same percentage of their total capital invested in the Trading Partnership and allocated to the Advisors for management); and (iii) all series would have the same five year "Time Horizon" between their respective issuance dates and their respective Principal Assurance Dates. The series issued on and prior to July 16, 1996 have seven-year Time Horizons, are entitled to fixed rate as well as discretionary distributions and contemplate MLIP adjusting the leverage of each series in MLIP's discretion on an individual series-by-series basis. ML&CO.'S "PRINCIPAL PROTECTION" UNDERTAKING TO THE FUND ML&Co. has agreed to contribute sufficient assets to the Fund so that the Net Asset Value of each Unit outstanding as of its Principal Assurance Date will be no less than such Unit's initial $100 subscription price (after payment of all distributions in the case of Units sold on or prior to July 16, 1996). In order to prevent trading losses which might require ML&Co. to make payments under such undertaking, each series of Units issued to date has commenced trading with only 60% of its assets allocated to the Advisors for management. On an ongoing basis, MLIP controls the percentage of each series' assets allocated to trading primarily in order to protect ML&Co. from any liability under its guarantee but also with the objective of increasing the percentage of each series' capital allocated to trading, thereby increasing such series' profit potential (and risk). All series of Units issued on or before July 16, 1996 have (i) traded with 60% of their capital allocated to trading, (ii) received annual fixed-rate and possible discretionary distributions and (iii) had a Principal Assurance Date seven years after issuance. All Units sold after July 16, 1996 (none have been as of the date of this Report) and in the future will (x) commence trading with 75% of their assets allocated to trading, (y) receive (in all likelihood) no distributions and (z) have a Principal Assurance Date five years after issuance. These different leverage, distribution and Principal Assurance Date parameters could materially affect both rates of return and volatility. -3- TWO-TIER STRUCTURE OF THE FUND The Fund does not trade in the futures and forward markets directly, but rather through the Trading Partnership, of which the Fund is the sole limited, and MLIP the sole general, partner. The Fund's liability for any trading losses is limited to the Fund's investment in the Trading Partnership. Trading through the limited liability "conduit" of the Trading Partnership rather than directly makes it possible for MLIP to ensure, as required by applicable CFTC rules, that the assets attributable to any one series of Units cannot become subject to paying trading losses attributable to any other series. The combination of each series' pro rata sharing of losses at the Trading Partnership level based on the series' respective investments therein, and the insulation of the Fund assets not invested in the Trading Partnership from the risk of trading losses, eliminates the possibility of one series' assets paying debts attributable to another. USE OF PROCEEDS AND CASH MANAGEMENT INCOME Subscription Proceeds. MLIP pays from its own funds the --------------------- selling commissions relating to the sale of the Units. Accordingly, 100% of the proceeds of Unit sales are received in cash by the Partnership and available for use in its speculative trading. In such trading, the Partnership's assets are not used to purchase or acquire any physical commodity but rather held as security for and to pay the Partnership's trading losses as well as any expenses and redemptions. The primary use of the proceeds of the sale of the Units is to permit the Advisors to trade on a speculative basis in a wide range of different futures, forwards and options on futures markets on behalf of the Trading Partnership. While being used for this purpose, the Partnership's assets are also generally available for cash management, as more fully described below under "-- Available Assets." Market Sectors. The Partnership trades in a diversified group -------------- of markets under the direction of multiple independent Advisors. These Advisors can, and do, from time to time materially alter the allocation of their overall trading commitments among different market sectors. Except in the case of certain trading programs which are purposefully limited in the markets which they trade, there is essentially no restriction on the commodity interests which may be traded by any Advisor or the rapidity with which an Advisor may alter its market sector allocations. The Fund's financial statements contain information relating to the market sectors traded by the Fund. There can, however, be no assurance as to which markets may be included in the Fund's portfolio or as to in which market sectors the Fund's trading may be concentrated at any one time or over time. Market Types. The Partnership trades on a variety of United ------------ States and foreign futures exchanges. Applicable exchange rules differ significantly among different countries and exchanges. Substantially all of the Fund's off-exchange trading takes places in the highly liquid, institutionally based currency forward markets. The forward markets are generally unregulated, and in its forward trading the Fund does not deposit margin with respect to its positions. The Partnership's forward currency trading is executed exclusively through the Foreign Exchange Service Desk (the "F/X Desk") operated by MLIP and certain of its affiliates, with MLF as the back-to-back intermediary to the ultimate counterparties, which include Merrill Lynch International Bank ("MLIB") with which the Advisors trade on behalf of the Fund. As in the case of its market sector allocations, the Fund's commitments to different types of markets -- U.S. and non-U.S., regulated and unregulated -- differ substantially from time to time as well as over time. The Fund has no policy restricting its relative commitment to any of these different types of markets, although generally the bulk of the Fund's trading takes place on regulated exchanges. The Fund's financial statements contain information relating to the types of markets traded by the Fund. There can, however, be no assurance as to in which markets the Fund may trade or the Fund's trading may be concentrated at any one time or over time. -4- Custody of Assets. All of the Fund's assets -- other than the ----------------- assets managed by MLAM and held in a custodial account as described below under "--The Fund's U.S. Dollar Available Assets Managed by MLAM" -- are currently held in customer accounts at Merrill Lynch. Available Assets. The Fund earns income, as described below, ---------------- on its "Available Assets," which can be generally described as the cash actually held by the Fund or invested in short-term Treasury bills. Available Assets are held primarily in U.S. dollars or in U.S. dollar denominated Government Securities, and to a lesser extent in foreign currencies, and are comprised of the following: (a) the Fund's cash balances managed by MLAM or held in the offset accounts (as described below) -- which include "open trade equity" (unrealized gain and loss on open positions) on United States futures contracts, which is paid into or out of the Fund's account on a daily basis; (b) short-term Treasury bills purchased by the Fund; and (c) the Fund's cash balance in foreign currencies derived from its trading in non-U.S. dollar denominated futures and options contracts, which includes open trade equity on those exchanges which settle gains and losses on open positions in such contracts prior to closing out such positions. Available Assets do not include, and the Fund does not earn interest on, the Fund's gains or losses on its open forward, commodity option and certain foreign futures positions since such gains and losses are not collected or paid until such positions are closed out. The Partnership's Available Assets may be greater than, less than or equal to the Fund's Net Asset Value (on which the redemption value of the Units is based) primarily because Net Asset Value reflects all gains and losses on open positions as well as accrued but unpaid expenses. The interest income arrangements for the Partnership's U.S. dollar Available Assets differ from those applicable to its non-U.S. dollar Available Assets. Interest income, once accrued by the Fund, is subject to the risk of trading losses. The Fund's U.S. Dollar Available Assets Managed by MLAM. ------------------------------------------------------- Approximately 80% of the Fund's U.S. dollar Available Assets are managed directly by MLAM, pursuant to guidelines established by MLIP for which MLAM assumes no responsibility, in the Government Securities markets. MLIP's objective in retaining MLAM to provide cash management services to the Fund is to enhance the return earned on the Fund's U.S. dollar Available Assets managed by MLAM to slightly above the 91-day Treasury bill rate, while maintaining minimal (but by no means eliminating) market risk in the Fund's cash management operations. The Government Securities acquired by MLAM on behalf of the Fund are maintained in a custodial account at a Merrill Lynch affiliate and are specifically traceable to the Fund. All income earned on such Government Securities inures to the benefit of the Fund. MLF pays all fees due to MLAM in respect of its management of a portion of the Fund's U.S. dollar Available Assets, at no additional cost to the Fund. MLAM does business as Merrill Lynch Asset Management. MLAM is a limited partnership. ML&Co. is its limited partner, and Princeton Services, Inc., a wholly-owned subsidiary of ML&Co., is the general partner. As of December 31, 1996, MLAM and its affiliates, collectively, had a total of approximately $234.1 billion in investment company and other portfolio assets under management, including accounts of certain affiliates of MLAM. Interest Earned on the Fund's U.S. Dollar Available Assets Not -------------------------------------------------------------- Managed by MLAM. The following description relates to the approximately 20% of - --------------- the Fund's U.S. dollar Available Assets not managed by MLAM. The Fund's U.S. dollar Available Assets not managed by MLAM are held in cash in offset accounts and in short-term Treasury bills purchased from dealers unaffiliated with Merrill Lynch. Offset accounts are non-interest bearing demand deposit accounts maintained with banks unaffiliated with Merrill Lynch. An integral feature of the offset arrangements is that the participating banks specifically acknowledge that the offset accounts are MLF customer accounts, not subject to any Merrill Lynch liability. -5- MLF credits the Partnership, as of the end of each month, with interest at the effective daily 91-day Treasury bill rate on the average daily U.S. dollar Available Assets held in the offset accounts during such month. The Fund receives all the interest paid on the short-term Treasury bills in which it invests. The use of the offset account arrangements for the Partnership's U.S. dollar Available Assets not managed by MLAM may be discontinued by Merrill Lynch whether or not Merrill Lynch otherwise continues to maintain its offset arrangements. The offset arrangements are dependent on the banks' continued willingness to make overnight credits available to Merrill Lynch, which, in turn, is dependent on the credit standing of ML&Co. If Merrill Lynch were to determine that the offset arrangements had ceased to be practicable (either because ML&Co. credit lines at participating banks were exhausted or for any other reason), Merrill Lynch would thereafter attempt to invest all of the Fund's U.S. dollar Available Assets not managed by MLAM to the maximum practicable extent in short-term United States Treasury bills. All interest earned on the U.S. dollar Available Assets so invested would be paid to the Fund, but MLIP would expect the amount of such interest to be less than that available to the Fund under the offset account arrangements. The remaining U.S. dollar Available Assets of the Fund not managed by MLAM would be kept in cash to meet variation margin payments and pay expenses, but would not earn interest for the Fund. The banks at which the offset accounts are maintained make available to Merrill Lynch interest-free overnight credits, loans or overdrafts in the amount of the Fund's U.S. dollar Available Assets held in the offset accounts, charging Merrill Lynch a small fee for this service. The economic benefits derived by Merrill Lynch -- net of the interest credits paid to the Fund and the fee paid to the offset banks -- from the offset accounts have not exceeded 3/4 of 1% per annum of the Fund's average daily U.S. dollar Available Assets not managed by MLAM and held in the offset accounts. These revenues to Merrill Lynch are in addition to the Brokerage Commissions and Administrative Fees paid by the Fund to MLF and MLIP, respectively. Interest Paid by Merrill Lynch on the Fund's Non-U.S. Dollar ------------------------------------------------------------ Available Assets. Under the single currency margining system implemented for the - ----------------- Partnership, the Partnership itself does not deposit foreign currencies to margin trading in non-U.S. dollar denominated futures contracts and options. MLF provides the necessary margin, permitting the Fund to retain the monies which would otherwise be required for such margin as part of the Partnership's U.S. dollar Available Assets. Consequently, the Partnership does not earn interest on foreign margin deposits. The Partnership does, however, earn interest on its non-U.S. dollar Available Assets. Specifically, the Fund is credited by Merrill Lynch with interest at the local short-term rate on realized and unrealized gains on non-U.S. dollar denominated positions for such gains actually held in cash by the Fund (MLAM does not manage any of the Fund's non-U.S. dollar Available Assets.). Merrill Lynch charges the Fund Merrill Lynch's cost of financing realized and unrealized losses on such positions. In order to avoid the expense of daily currency conversions, the Partnership holds foreign currency gains and finances foreign currency losses on an interim basis until converted into U.S. dollars and either paid into or out of the Partnership's U.S. dollar Available Assets. Foreign currency gains or losses on open positions are not converted into U.S. dollars until the positions are closed. Assets of the Partnership while held in foreign currencies are subject to exchange rate risk. Forward Transactions. Spot and forward currency contracts are -------------------- the only non-exchange traded instruments held by the Fund. To date, approximately 20% to 30% of the Fund's trades by volume have been in forward currency contracts, but from time to time the percentage of the Fund's trading represented by forward currency trades may fall substantially outside this range. In using the F/X Desk, the Fund trades through MLF. Because the Fund need not deposit any margin with MLF in respect of the Fund's forward trading, the Fund's additional risk in trading in such unregulated markets should be limited to a possible loss of unrealized profits on open forward positions which a counterparty accessed through MLF would not, in the event of its bankruptcy, be able to pay to MLF for the account of the Fund (MLF not itself being obligated to pay such unrealized profits to the Fund unless MLF is paid by MLF's counterparty). Having the Fund (and the other MLF clients using the F/X Desk) trade through the F/X Desk on the basis of MLF's credit lines permits the F/X Desk to access a wide range of counterparties without the need of such counterparties evaluating the individual credit of the Fund (or any other MLF client). -6- Charges The following table summarizes the charges incurred by the Fund during 1994 (2 2/3 months), 1995 and 1996.
1994 1995 1996 --------------- --------------- --------------- % of % of % of Average Average Average Dollar Month-End Dollar Month-End Dollar Month-End Cost Amount Net Assets* Amount Net Assets Amount Net Assets* ---- ------ ---------- ------ ---------- ------ ---------- Brokerage Commissions** $ 405,653 5.61% $3,216,364 5.76% $4,775,116 5.77% Administrative Fees** 10,964 0.15 86,928 0.16 129,057 0.16 Reimbursement of Organizational and Initial Offering Costs 17,712 0.24 79,700 0.14 79,700 0.10 Profit Shares 129,169 1.79 652,366 1.17 978,264 1.18 -------- ---- ------- ---- ------- ---- Total $ 563,498 7.79% $4,035,358 7.23% $5,962,137 7.21% =========== ==== ========== ==== ========== ====
- ----------------------------- * Only approximately 60% of the Fund's average month-end Net Assets were allocated to trading during the periods presented. Series of Units issued subsequent to July 16, 1996 (no such Units have been issued as of the date of this Report) will commence trading with 75% of their assets allocated to trading. Consequently, the percentage figures presented would be correspondingly higher as a percentage of the Fund's average month-end Net Assets. ** A portion of the Brokerage Commissions in prior periods have been reclassified to conform to the current period presentation of the Administrative Fees. -------------------- The flat-rate Brokerage Commissions and Administrative Fees will in the future be higher than those in the foregoing table as the Units issued after July 16, 1996 will trade at 75% rather than 60% initial leverage. -------------------- The foregoing table does not reflect the bid-ask spreads paid by the Fund on its forward trading, or the benefits which may be derived by Merrill Lynch from the deposit of certain of the Fund's U.S. dollar available assets in offset accounts. See Item 1(c), "Narrative Description of Business -- Use of Proceeds and Cash Management Income." The Fund's average month-end Net Assets during 1994 (2 2/3 months), 1995 and 1996 equaled $32,552,448, $55,827,125 and $82,789,767, respectively. During 1994 (2 2/3 months), 1995 and 1996, the Fund earned $377,303, $3,415,670 and $4,545,186 in interest income, or approximately 1.16%, 6.12% and 5.49% of the Fund's average month-end Net Assets. Effective January 1, 1997, MLIP reduced the Fund's annual Brokerage Commissions from 9.25% to 8.75% of trading assets (i.e., assets committed to trading). ------------------------------ -7- Breakeven Table
- -------------------------------------------------------------------------------------------------------------- Column I Column II Breakeven Breakeven Dollar Return Required Percentage Return ($5,000 Initial Required First Investment) First Twelve Months Twelve Months of Investment of Investment (based on a constant (based on a constant Expenses and 75% allocation of 75% allocation of Cash Management Income assets to trading) assets to trading) - -------------------------------------------------------------------------------------------------------------- Brokerage Commissions(1) 6.56% $328.00 - -------------------------------------------------------------------------------------------------------------- Administrative Fee(2) 0.19% $ 9.50 - -------------------------------------------------------------------------------------------------------------- Organizational and Initial Offering Costs (3) 0.10% $ 5.00 - -------------------------------------------------------------------------------------------------------------- F/X Desk Service and Related Fee (4) 0.25% $ 12.50 - -------------------------------------------------------------------------------------------------------------- Profit Shares (5) 2.00% $100.00 - -------------------------------------------------------------------------------------------------------------- Redemption Charge (6) 3.10% $155.00 - -------------------------------------------------------------------------------------------------------------- Cash Management Income(7) (5.00)% $(250.00) - -------------------------------------------------------------------------------------------------------------- RETURN ON A $5,000 INITIAL INVEST- MENT REQUIRED TO BREAKEVEN 7.20% $360.00 - --------------------------------------------------------------------------------------------------------------
Notes to Breakeven Table (1) Brokerage Commissions include the Consulting Fees payable to the Advisors by MLF. Consulting Fees range up to 4% per annum of Fund assets managed, depending on the Advisor. As of January 1, 1997, the 9.25% per annum Brokerage Commissions were reduced to 8.75%. (2) Beginning January 1, 1996, the annual Brokerage Commissions payable by MLF were reduced to 9.25% from 9.50% with 0.25% per annum being recharacterized as an Administrative Fee payable directly to MLIP by the Fund. This recharacterization had no effect on the Fund. (3) Estimated; based on the Fund's December 31, 1996 capitalization. (4) Estimated; paid on a per-transaction basis. The bid-ask spreads paid on forward currency trades are difficult to estimate and are not included as an expense in the Breakeven Table. The F/X Desk is the Foreign Exchange Desk organized by MLIP through which the Fund trades forward currency contracts. (5) It is not possible to predict the Profit Shares which might be paid in a breakeven year. MLIP believes, based on the experience of the Fund to date, that 2.00% of average month-end capitalization is a reasonable estimate of breakeven Profit Share expense; however, actual Profit Shares could differ. (6) Redemption charges would equal 3.1% of the initial $5,000 investment because these charges would equal 3% of the $5,155 year-end Net Asset Value necessary in order for the investor to receive net redemption proceeds of $5,000 after subtracting the 3% redemption charge. (7) Estimated. The total cash management return earned on the Fund's assets, including the results of MLAM's cash management services, is assumed to approximate the 91-day Treasury bill rate for purposes of this estimate; in fact, however, MLAM's cash management may be unable to produce an enhanced cash management return or avoid a loss of principal. Such estimate does not reflect the economic benefit which may be derived by Merrill Lynch from the deposit of certain of the Fund's U.S. dollar Available Assets in offset accounts. See Item 1(c), "Narrative Description of Business -- Use of Proceeds and Cash Management Income-- Interest Earned on the Fund's U.S. Dollar Available Assets not Managed by MLAM." ---------------- If the percentage of a series' capital allocated to trading were to increase, so would Brokerage Commissions and Administrative Fees (as well as F/X Desk service and related fees) as a percentage of total capital. At 100% leverage, the Fund's annual Brokerage Commissions and Administrative Fees would equal 8.75% and 0.25%, respectively, of the Fund's average month-end Net Assets and the trading profits required for an initial $5,000 investment to breakeven would increase to 9.45% or $472.50. -8- Description of Current Charges
Recipient Nature of Payment Amount of Payment - --------- ----------------- ----------------- MLIP Organizational and The Fund is reimbursing MLIP for organizational initial offering cost and initial offering costs in 36 monthly installments reimbursement of $6,642 (a total of $239,100) ending October 31, 1997. MLF Brokerage Commissions A flat-rate monthly commission of 0.7708 of 1% (an 9.25% annual rate) of the Fund's month-end assets committed to trading. The Fund will initially commit 75% of the capital attributable to each series of Units issued after July 16, 1996 to trading. All series outstanding as of the date of this Report began trading with 60% of their assets committed to trading. During 1994 (2 2/3 months), 1995 and 1996, the round-turn (each purchase and sale or sale and purchase of a single futures contract) equivalent rate of the Fund's flat-rate Brokerage Commissions was approximately $53, $134 and $116, respectively. As of January 1, 1997, the 9.25% per annum Brokerage Commissions were reduced to 8.75% per annum (0.7291 of 1% of the Fund's Month-end assets). MLF Use of Fund assets MLF may derive an economic benefit from the deposit of certain of the Fund's U.S. dollar Available Assets not managed by MLAM in offset accounts; this benefit to date has not exceeded 3/4 of 1% of such average daily U.S. dollar Available Assets. MLIP Administrative Fees A flat-rate monthly charge, payable to MLIP, of 0.020833 of 1% (a 0.25 of 1% annual rate) of the Fund's month-end assets committed to trading. MLIP pays the Fund's routine administrative costs. MLIB Bid-ask spreads Under MLIP's F/X Desk arrangements, MLIB receives bid-ask spreads on the forward trades it executes with the Fund. Other Bid-ask spreads The counterparties other than MLIB with which the Counterparties F/X Desk deals each also receive bid-ask spreads on the forward trades it executes with the Fund.
-9- Description of Current Charges (Cont'd)
Recipient Nature of Payment Amount of Payment - --------- ----------------- ----------------- MLIP F/X Desk service fees Under the F/X Desk arrangements, MLIP or another Merrill Lynch entity receives a service fee equal, at current exchange rates, to approximately $5.00 to $12.50 on each purchase or sale of each futures contract-equivalent forward contract executed with counterparties other than MLIB. MLIB EFP differentials MLIB or an affiliate receives a differential spread for exchanging the Fund's spot currency positions (which are acquired through the F/X Desk, as described above) for equivalent futures positions. Government Securities Bid-ask spreads The dealers with which MLAM executes Government Securities Dealers trades include bid-ask spreads in the prices they quote to the Fund. Trading Advisors Profit Shares Prior to January 1, 1997, all Advisors received quarterly Profit Shares ranging from 15% to 25% (depending on the Trading Advisor) of any New Trading Profit. As of January 1, 1997, a number of Advisors agreed to receive only annual Profit Shares. Profit Shares are also paid upon redemption of Units. New Trading Profit is calculated separately in respect of each Advisor, irrespective of the overall performance of the Fund. The Fund may pay substantial Profit Shares during periods when it is incurring significant overall losses. MLF; Extraordinary expenses Actual costs incurred; none paid to date, and expected to be Others negligible.
--------------- REGULATION The General Partner, the Trading Advisors and the Commodity Broker are each subject to regulation by the Commodity Futures Trading Commission and the National Futures Association. Other than in respect of its periodic reporting requirements, and the registration of the Units for continuous public distribution under the Securities Act of 1933, the Partnership itself is generally not subject to regulation by the Securities and Exchange Commission. However, MLIP itself is registered as an "investment adviser" under the Investment Advisers Act of 1940. (i) through (xii) -- not applicable. (xiii) The Partnership has no employees. (d) Financial Information about Foreign and Domestic Operations ----------------------------------------------------------- and Export Sales: ---------------- The Partnership and the Trading Partnership do not engage in material operations in foreign countries, nor is a material portion of the Partnership's revenues derived from customers in foreign countries. The Trading Partnership does, however, trade, from the United States, on a number of foreign commodity exchanges. -10- Item 2: Properties ---------- Neither the Partnership nor the Trading Partnership use any physical properties in the conduct of its business. The Partnership's and the Trading Partnership's only place of business is the place of business of the General Partner (see Item 10 herein). The General Partner performs all administrative services for the Partnership and the Trading Partnership from the General Partner's offices. Item 3: Legal Proceedings ----------------- There are no pending legal proceedings to which the Partnership, the Trading Partnership or the General Partner is a party. John W. Henry & Company, Inc. ("JWH") is one of the Advisors retained by the Fund, managing approximately 15% of the Fund's assets committed to trading as of January 1, 1997. In September 1996, JWH was named as a co- defendant in class action lawsuits brought in the California Superior Court, Los Angeles County and in the New York Supreme Court, New York County. In November, JWH was named as a co-defendant in a class action complaint filed in Superior Court of the State of Delaware for Newcastle County that contained the same allegations as the New York and California complaints. The actions, which seek unspecified damages, purport to be brought on behalf of investors in certain Dean Witter, Discover & Co. ("Dean Witter") commodity pools, some of which are advised by JWH, and are primarily directed at Dean Witter's alleged fraudulent selling practices in connection with the marketing of those pools. JWH is essentially alleged to have aided and abetted or directly participated with Dean Witter in those practices. JWH believes the allegations against it are without merit; it intends to contest these allegations vigorously, and is convinced that it will be shown to have acted properly and in the best interest of the investors. Item 4: Submission of Matters to a Vote of Security Holders --------------------------------------------------- The Partnership has never submitted any matters to a vote of its Limited Partners. -11- PART II Item 5: Market for Registrant's Common Equity and Related Stockholder Matters --------------------------------------------------------------------- (a) Market Information: ------------------ There is no established public trading market for the Units, nor will one develop. Rather, Limited Partners may purchase or redeem Units as of the end of each month at Net Asset Value, subject to certain early redemption charges. Units redeemed prior to the Principal Assurance Date are not entitled to any benefits under the Merrill Lynch & Co., Inc. guarantee. (b) Holders: ------- As of December 31, 1996, there were 3,514 holders of Units, including the General Partner and the Trading Advisors. (c) Dividends: --------- For series issued on or prior to July 16, 1996, the Partnership makes annual fixed-rate distributions, payable irrespective of profitability, of between $2 and $6 per Unit (depending upon the series). The General Partner may also make discretionary distributions of up to 50% of any Distributable New Appreciation, as defined, recognized as of each twelve-month anniversary of the issuance of each series of Units, subject to an annual limited of 4% of the Net Asset Value per Unit of each series as of the beginning of the preceding twelve-month period. The first such distribution with respect to the Series A Units took place on October 1, 1995. At such time Series A Unitholders received a fixed-rate distribution equal to $3.50 per Unit and a discretionary distribution equal to $2.50 per Unit (for a total distribution of $6.00 per Unit). Series A Unitholders received another distribution of $6.00 per Unit on October 1, 1996. The first distribution with respect to Series B Units took place on January 1, 1996. At such distribution, Series B Unitholders also received a fixed-rate distribution equal to $3.50 per Unit and a discretionary distribution equal to $2.50 per Unit (for a total distribution of $6.00 per Unit). The first such distributions for Series C, D and E of a fixed rate distribution of $3.50 per Unit took place on April 1, 1996, July 1, 1996 and October 1, 1996, respectively. Distributions, whether fixed-rate or discretionary, do not reduce the $100 minimum Net Asset Value per Unit assured to investors as of the Principal Assurance Date for their series of Units. The General Partner does not contemplate making any distributions on any series of Units issued subsequent to July 16, 1996 (no such series have been issued to date). -12- Item 6: Selected Financial Data ----------------------- The following selected financial data has been derived from the audited financial statements of the Partnership:
October 12, 1994 January 1, 1996 January 1, 1995 (commencement to to of operations) to Income Statement Data December 31, 1996 December 31, 1995 December 31, 1994 - --------------------- ----------------- ----------------- ----------------- Revenues: Trading Profits (Loss) Realized Gain (Loss) $9,038,064 $4,407,833 $ (363,054) Change in Unrealized (Loss) Gain (396,221) 1,355,377 1,115,935 --------- ---------- ---------- Total Trading Results 8,641,843 5,763,210 752,881 Interest Income 4,545,186 3,415,670 377,303 --------- ---------- ---------- Total Revenues 13,187,029 9,178,880 1,130,184 ---------- ---------- ---------- Expenses: Brokerage Commissions 4,775,116 3,216,364 405,653 Administrative Fees/1/ 129,057 86,928 10,964 Profit Shares 978,264 652,366 129,169 ---------- ---------- ---------- Total Expenses 5,882,437 3,955,658 545,786 ---------- ---------- ---------- Net Income Before Minority Interest 7,304,592 5,223,222 584,398 Minority Interest/2/ (81,228) (36,730) (4,504) ---------- ---------- ---------- Net Income $ 7,223,364 $5,186,492 $ 579,894 =========== ========== =========== Balance Sheet Data/3/ December 31, 1996 December 31, 1995 December 31, 1994 - ------------------ ----------------- ----------------- ----------------- Aggregate Net Asset Value (Series A-H) $78,905,273 $74,846,544 $32,314,228 Net Asset Value per Unit Series A $110.70/4/ $106.96/5/ $101.76 Series B $114.24/4/ $110.36 N/A Series C $109.33/4/ $103.35 N/A Series D $108.19/4/ $102.34 N/A Series E $108.58/4/ $102.72 N/A Series F $108.92 N/A N/A Series G $107.32 N/A N/A Series H $106.47 N/A N/A - -------------------
/1/ As of January 1, 1996, a portion of the Brokerage Commissions were reclassified as Administrative Fees, at no additional cost to the Fund. Certain amounts in prior periods have been reclassified to conform to the current period presentation of the Administrative Fees. /2/ MLIP is general partner of the Trading Partnership. Because the Fund owns substantially all of the Trading Partnership, Trading Partnership activities are referred to as Fund activities in this Report. The minority interest represents MLIP's share, as general partner of the Trading Partnership, of the Trading Partnership's profit or loss. /3/ Balance Sheet Data is based on redemption values which differ immaterially from Net Asset Values as determined under Generally Accepted Accounting Principals ("GAAP") due to the treatment of organizational and initial offering cost reimbursements. /4/ Net of aggregate distributions of $12.00 per Unit on the Series A Units, $6.00 on the B Units and $3.50 on the Series C, D and E Units. /5/ Net of the distribution of $6.00 per Unit on the Series A Unit. -13-
- ------------------------------------------------------------------------------------------------------------------------------------ MONTH-END NET ASSET VALUE PER SERIES A UNIT - ------------------------------------------------------------------------------------------------------------------------------------ Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. - ------------------------------------------------------------------------------------------------------------------------------------ 1994 N/A N/A N/A N/A N/A N/A N/A N/A N/A $101.04 $101.36 $101.76 - ------------------------------------------------------------------------------------------------------------------------------------ 1995 $101.36 $103.63 $107.94 $109.09 $110.40 $110.18 $108.94 $109.98 $109.62 $103.91* $104.63* $106.96* - ------------------------------------------------------------------------------------------------------------------------------------ 1996 $109.65* $105.56* $106.69* $110.05* $107.82* $109.33* $107.51* $108.04* $109.80* $108.24** $110.93** $110.70** - ------------------------------------------------------------------------------------------------------------------------------------ * After reduction for the $6.00 per Series A Unit distribution made as of October 1, 1995. ** After reduction for the second $6.00 per Series A Unit distribution made as of October 1, 1996. - ------------------------------------------------------------------------------------------------------------------------------------ MONTH-END NET ASSET VALUE PER SERIES B UNIT - ------------------------------------------------------------------------------------------------------------------------------------ Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. - ------------------------------------------------------------------------------------------------------------------------------------ 1994 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------------------------------------ 1995 $98.82 $101.05 $105.24 $106.36 $107.67 $107.46 $106.25 $107.27 $106.91 $107.21 $107.96 $110.36 - ------------------------------------------------------------------------------------------------------------------------------------ 1996 $106.98* $102.99* $104.09* $107.37* $105.20* $106.67* $104.90* $105.41* $107.13* $111.70* $114.47* $114.24* - ------------------------------------------------------------------------------------------------------------------------------------ * After reduction for the $6.00 per Series B Unit distribution made as of January 1, 1996. - ------------------------------------------------------------------------------------------------------------------------------------ MONTH-END NET ASSET VALUE PER SERIES C UNIT - ------------------------------------------------------------------------------------------------------------------------------------ Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. - ------------------------------------------------------------------------------------------------------------------------------------ 1995 N/A N/A N/A $99.66 $100.81 $100.60 $ 99.51 $100.44 $100.13 $100.40 $101.10 $103.35 - ------------------------------------------------------------------------------------------------------------------------------------ 1996 $105.97 $102.00 $103.10 $102.73* $100.66* $102.05* $100.35* $100.85* $102.49* $106.87* $109.55* $109.33* - ------------------------------------------------------------------------------------------------------------------------------------ * After reduction for the $3.50 per Series C Unit distribution made as of April 1, 1996. - ------------------------------------------------------------------------------------------------------------------------------------ MONTH-END NET ASSET VALUE PER SERIES D UNIT - ------------------------------------------------------------------------------------------------------------------------------------ Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. - ------------------------------------------------------------------------------------------------------------------------------------ 1995 N/A N/A N/A N/A N/A N/A $98.63 $99.53 $99.23 $99.50 $100.20 $102.34 - ------------------------------------------------------------------------------------------------------------------------------------ 1996 $104.83 $100.94 $102.02 $105.21 $103.11 $104.51 $99.33* $99.82* $101.45* $105.74* $108.40* $108.19* - ------------------------------------------------------------------------------------------------------------------------------------ * After reduction for the $3.50 per Series D Unit distribution made as of July 1, 1996.
-14-
- ------------------------------------------------------------------------------------------------------------------------------------ MONTH-END NET ASSET VALUE PER SERIES E UNIT - ------------------------------------------------------------------------------------------------------------------------------------ Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. - ------------------------------------------------------------------------------------------------------------------------------------ 1995 N/A N/A N/A N/A N/A N/A N/A N/A N/A 100.26 100.90 102.72 - ------------------------------------------------------------------------------------------------------------------------------------ 1996 $105.17 $101.32 $102.40 $105.55 $103.49 $104.86 $103.12 $103.62 $105.31 $106.12* $108.79* $108.58* - ------------------------------------------------------------------------------------------------------------------------------------ * After reduction for the $3.50 per Series E Unit distribution made as of October 1, 1996. - ------------------------------------------------------------------------------------------------------------------------------------ MONTH-END NET ASSET VALUE PER SERIES F UNIT - ------------------------------------------------------------------------------------------------------------------------------------ Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. - ------------------------------------------------------------------------------------------------------------------------------------ 1996 $102.16 $98.45 $99.46 $102.34 $100.44 $101.72 $100.01 $100.49 $102.08 $106.43 $109.13 $108.92 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ MONTH-END NET ASSET VALUE PER SERIES G UNIT - ------------------------------------------------------------------------------------------------------------------------------------ Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. - ------------------------------------------------------------------------------------------------------------------------------------ 1996 N/A N/A N/A $100.87 $98.95 $100.35 $98.66 $99.14 $100.71 $104.90 $107.53 $107.32 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ MONTH-END NET ASSET VALUE PER SERIES H UNIT - ------------------------------------------------------------------------------------------------------------------------------------ Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. - ------------------------------------------------------------------------------------------------------------------------------------ 1996 N/A N/A N/A N/A N/A N/A $97.82 $98.32 $99.90 $104.11 $106.69 $106.47 - ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value per Unit varies from how it would be calculated for purposes of GAAP due to the amortization of organizational and initial offering costs. -15- ML PRINCIPAL PROTECTION L.P. December 31, 1996 Type of Pool: Multi-Advisor; Selected Advisor/Publicly-Offered/ "Principal Protected"/(1)/ Inception of Trading: October 12, 1994 Aggregate Subscriptions: $101,903,535 Current Capitalization: $78,843,285 Worst Monthly Drawdown:/(2)/ (3.70)% (2/96) Worst Peak-to-Valley Drawdown:/(3)/ (3.70)% (2/96)
- -------------------------------------------------------------------------------- Monthly Rates of Return/(4)/ - -------------------------------------------------------------------------------- Month 1996 1995 1994 - ------------------------------------------------------------------------------- January 2.45% (0.55)% -- - ------------------------------------------------------------------------------- February (3.70)% 2.24% -- - ------------------------------------------------------------------------------- March 1.06% 4.17% -- - ------------------------------------------------------------------------------- April 3.10% 0.91% -- - ------------------------------------------------------------------------------- May (1.98)% 1.20% -- - ------------------------------------------------------------------------------- June 1.36% (0.21)% -- - ------------------------------------------------------------------------------- July (1.68)% (1.30)% -- - ------------------------------------------------------------------------------- August 0.49% 0.95% -- - ------------------------------------------------------------------------------- September 1.62% (0.32)% -- - ------------------------------------------------------------------------------- October 4.25% 0.29% 1.04% - ------------------------------------------------------------------------------- November 2.50% 0.69% 0.32% - ------------------------------------------------------------------------------- December (0.20)% 2.12% 0.40% - ------------------------------------------------------------------------------- Compound 9.36% 10.55% 1.76% Rate of Return (2 2/3 months) - -------------------------------------------------------------------------------
Rates of Return are presented on a composite, not a series-by-series, basis. ------------------------- THE UNITS ISSUED AFTER JULY 16, 1996 WILL COMMENCE TRADING WITH 75% OF THEIR ASSETS ALLOCATED TO TRADING. ALL SERIES OF UNITS ISSUED TO DATE HAVE TRADED AT ONLY APPROXIMATELY 60% LEVERAGE. INCREASING TRADING LEVERAGE SHOULD INCREASE MONTHLY RATES OF RETURN (BOTH POSITIVE AND NEGATIVE), DRAWDOWNS, PROFIT POTENTIAL, RISK AND VOLATILITY. ------------------------- (1) Pursuant to applicable CFTC regulations, a "Multi-Advisor" fund is defined as one that allocates no more than 25% of its trading assets to any single manager. The Fund does not currently allocate more than 25% of its trading assets to any single Advisor but may do so in the future; consequently, it is referred to as a"Multi-Advisor; Selected Advisor" fund. Certain funds, including funds sponsored by MLIP, are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as "principal protected." The ML&Co. Guarantee and MLIP related deleveraging of the Fund's trading provides the "principal protection" feature of the Fund. (2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced by the Fund; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures. (3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-end. For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level. (4) Monthly Rate of Return is the net performance of the Fund during the month of determination (including interest income and after all expenses accrued or paid) divided by the total equity of the Fund as of the beginning of such month. The composite returns of the Fund reflect the results of the Fund as a whole, not the performance of any single series of Units (however, the composite returns closely match during the same period the performance of all series then outstanding). Although the series begin trading at different times and, accordingly, have materially different cumulative returns, as all series participate in the same trading account and at approximately the same degree of leverage, the only significant difference between the performance of different series during a given month is typically the different amount of Profit Shares paid. In no month has any series had a rate of return 10% higher or lower than any other series. -16- Item 7: Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operation ------------ The Two-Tier Structure of the Fund The Fund does not trade directly through opening managed accounts with the Advisors, but rather through investing in the Trading Partnership. The Trading Partnership, in turn, allocates substantially all of its capital to the Advisors, and the different series of Units share pro rata in the overall profits and losses of the Trading Partnership based on their respective investments in it. No series of Units can lose more in its trading than the amount which such series has invested in the Trading Partnership. Although different series of Units invest different percentages of their overall capital in the Trading Partnership, all assets so invested are 100% allocated to trading. All trading losses are shared pro rata among the different series based on their respective investments in the Trading Partnership. The use of the Trading Partnership by the Fund has no effect on the leverage at which the different series of Units trade. The Fund trades through investing in the Trading Partnership rather than directly, solely in order to eliminate the highly unlikely risk that one series of Units might be subject to paying trading debts attributable to another. This risk arises because it is theoretically possible that catastrophic losses could deplete all the assets of a particular series allocated to the Advisors for management. Any remaining losses would remain a debt of the Fund to which all other series' capital would be subject. The Fund/Trading Partnership structure eliminates the risk of such inter-series liability. The CFTC would not permit the Fund to continue the offering of the Units unless such inter-series liability were eliminated. For example, assume that each of Series I and Series II Units had $10 million in capital, and Series I allocated $9.5 million (95% leverage) and Series II $8.5 million (85% leverage) to the Trading Partnership. If losses bankrupted the Trading Partnership, each Series' trading account would share pro rata in such losses. The Series I Units would create a larger deficit balance because of the higher degree of leverage at which that Series traded. However, there would be no risk that, for example, a $3 million deficit balance allocable to Series I trading account would be subject to being repaid from any of the $1.5 million withheld from trading by the Series II Units (or from any of the $0.5 million withheld from trading by the Series I Units, for that matter), because the Fund itself is not liable for the debts of its subsidiary Trading Partnership. Any deficit balance incurred by a bankrupt Trading Partnership would become an uncollectible debt due to MLF. MLF accepts such deficit balance risk each time it accepts a limited liability entity such as the Trading Partnership as a client. There is no benefit (or detriment) to investors from the two-tier Fund/Trading Partnership structure other than permitting the Fund to issue the series of Units at different times, which series, may, over time, trade with different percentages of their capital allocated to trading.
- ----------- Investors MLPF&S - ----------- Limited Partnership Cash Management Custody Units of Fund and Trading Agreement Sole Partnership Assets held General -------- at MLPF&S and MLF --------------------- Partner MLIP ML Principal -------- - ---------- Protection L.P. MLAM Investment (the "Fund") - ---------- Advisory --------------------- Cash Management Contract Sole Sole of Fund and Trading Limited Partner General Partnership Assets held ------------------------- Partner at MLPF&S and MLF ML Principal - ---------- Customer Protection Trading L.P. MLF Agreement (the "Trading - ---------- ----------------- Partnership") F/X Desk ------------------------- Service Agreement
Global Futures and Forward Markets -17- OPERATIONAL OVERVIEW; ADVISOR SELECTIONS The Fund's results of operations depend on MLIP's ability to select Advisors and the Advisors' ability to trade profitably. MLIP's selection procedures and trading leveraging analysis, as well as the Advisors' trading methods, are confidential, so that substantially the only available information relevant to the Fund's results of operations is its actual performance record to date. However, because of the speculative nature of its trading, the Fund's past performance is not necessarily indicative of its future results. In the Partnership's 26 2/3 months of trading through December 1996, MLIP has (i) terminated one core Advisor, (ii) added 6 non-core Advisors, (iii) terminated 2 non-core Advisors, and (iv) reallocated trading assets as of the beginning of 9 different months. MLIP expects to continue making frequent changes to both allocations and Advisor combinations. All series of Units trade under the direction of the same Advisor allocation and combination, as the same may be changed from time to time by MLIP. MLIP's decision to terminate or reallocate assets among Trading Advisors is based on a combination of numerous factors. Advisors are, in general, terminated primarily for unsatisfactory performance, but other factors - -- for example, a change in MLIP's or an Advisor's market outlook, apparent deviation from announced risk control policies, excessive turnover of positions, changes in principals, commitment of resources to other business activities, etc. -- may also have a role in the termination or reallocation decision. The market judgment and experience of MLIP's principals is an important factor in its allocation decisions. MLIP has no timetable or schedule for making Advisor changes or reallocations, and generally makes a medium- to long-term commitment to all Advisors selected. There can be no assurance as to the frequency or number of the Advisor changes that may take place in the future, or as to how long any of the current Advisors will continue to manage assets for the Partnership. RESULTS OF OPERATIONS General. MLIP believes that multi-advisor futures funds should be ------- regarded as medium- to long-term (i.e., three to five year) investments, but it is difficult to identify trends in the Fund's operations and virtually impossible to make any predictions regarding future results based on the results to date. An investment in the Fund may be less successful over a longer than a shorter period. Markets with sustained price trends tend to be more favorable to managed futures investments than whipsaw, choppy markets, but (i) this is not always the case, (ii) it is impossible to predict when price trends will occur and (iii) different Advisors are affected differently by trending markets as well as by particular types of trends. MLIP attempts to control credit risk in the Fund's futures, forward and options trading (the Fund does not trade derivatives other than futures and forward contracts and options thereon) by trading only through MLF. MLF acts solely as a broker or counterparty to the Fund's trades; it does not advise with respect to, or direct, any such trading. MLIP attempts to control the market risk inherent in the Fund's trading by MLIP multi-advisor structuring and Trading Advisor selection. MLIP reviews the positions acquired by the Advisors on a daily basis in an effort to determine whether the overall positions of the Fund may have become what MLIP analyzes as being excessively concentrated in a limited number of markets or under the direction of generally similar strategies -- in which case MLIP may, as of the next month-end or quarter-end, adjust the Fund's Advisor combination and/or allocations so as to attempt to reduce the risk of such over-concentration occurring in the future. MLIP also adjusts the percentage of each series' capital allocated to trading, with the principal objective of protecting ML&Co. from any liability under its guarantee of a $100 minimum Net Asset Value per Unit as of the Principal Assurance Date for each of the respective series of Units. The market risk to the Fund is limited by the combination of its "principal protection" feature and its multi-advisor strategy. To date, all series of Units have allocated approximately 60% of their assets to trading. All series of Units sold after July 16, 1996 (no such Units have been as of the date of this Report) will initially allocate 75% of their assets to trading. MLIP's determination as to how much of a series' capital to allocate to trading from time to time -- again, a determination primarily dictated by MLIP's objective of ensuring that ML&Co. is never required to make any payments under its guarantee -18- that the Net Asset Value per Unit of each series will be at least $100 as of such series' Principal Assurance Date-- has a material impact on the performance of such series. In the case of Units issued subsequent to July 16, 1996, MLIP's ability to adjust the leverage at which these series trade will be restricted by the regulatory requirement that if MLIP adjusts the leverage of any one such series, it must adjust the leverage of all such series so that all are trading with the same percentage of their total capital allocated to trading. MLIP may consider making distributions on the Units offered subsequent to July 16, 1996 under certain circumstances (for example, if substantial profits are recognized); however, MLIP does not presently intend to do so. MLIP has, however, undertaken to make certain distributions on all Units issued on or prior to July 16, 1996. The performance of the different series of Units differs somewhat over the same period, primarily, because as the various series begin trading at different times, they pay different Profit Shares (although at the same base rates), during the same periods. Performance Summary 1994 (2 2/3 months) Statistics. During 1994 (2 2/3 months), the Fund's average month-end ---------- Net Assets equaled $32,552,448, and the Fund recognized gross trading gains of $752,881 while incurring Brokerage Commissions of $416,617 and Profit Shares of $129,169 (2.3%, 1.28% and 0.40%, respectively, of average month-end Net Assets). Interest income of $377,303 or 1.16% of average month-end Net Assets resulted in net income of $579,894 (before organizational and initial offering cost reimbursement payments of $17,712 and after deducting MLIP's $4,504 minority interest in the profits and losses of the Trading Partnership) or 1.78% of average month-end Net Assets, which resulted in a 1.76% increase in the Net Asset Value per Series A Unit, the only series outstanding in 1994. Overview. The 2 2/3 months of trading during 1994 were characterized by -------- relatively quiet markets without many major price trends. United States interest rates generally declined during the period and as they did, so did the U.S. dollar as compared to the Deutschemark and certain other major currencies. During this period, the Fund recorded a modest gain. 1995 Statistics. During 1995, the Fund's average month-end Net Assets ---------- equaled $55,827,125, and the Fund recognized gross trading gains of $5,763,210 while incurring Brokerage Commissions of $3,303,292 and Profit Shares of $652,366 (10.32%, 5.92% and 1.17%, respectively, of average month-end Net Assets). Interest income of $3,415,670 or 6.12% of average month-end Net Assets resulted in net income of $5,186,492 (before organizational and initial offering cost reimbursement payments of $79,700 and after deducting MLIP's $36,730 minority interest in the profits and losses of the Trading Partnership) or 9.29% of average month-end Net Assets. Overview. In 1995, prevailing price trends in several key markets -------- enabled the Advisors to trade profitably for the Fund. Although trading in many of the traditional commodity markets may have been lackluster, the currency and financial markets offered exceptional trading conditions. After months characterized by very difficult trading environments, solid price trends across many markets (including U.S. Treasury and non-dollar bond markets) began to emerge during the first quarter of 1995. In the second quarter of 1995, market volatility once again began to affect trading, as many previously strong price trends began to weaken and, in some cases, reverse. The U.S. dollar hit new lows versus the Japanese yen and Deutschemark before rebounding sharply. In addition, there were strong indications that the U.S. economy was slowing which, when coupled with a failure of the German Central Bank to lower interest rates, stalled a rally in the German bond market. During the third quarter there was a correction in U.S. bond prices after several months of a strong uptrend. Despite exposure to the global interest-rate markets, the Fund's long positions in U.S. Treasury bonds had a negative impact on performance. Throughout August and into September, the U.S. dollar rallied sharply against the Japanese yen and the Deutschemark as a result of the coordinated intervention by major central banks and widespread recognition of the growing banking crisis in Japan. Despite continued price volatility during the final quarter of 1995, the Trading Advisors were able to identify several trends in key markets. U.S. Treasury bond prices continued their strong move upward throughout November, due both to weak economic data and optimism on federal budget talks. As the year ended, the yield on the 30-year Treasury bond was pushed to its lowest level in more than two years. -19- 1996 Statistics. During 1996, the Fund's average month-end Net Assets ----------- equaled $82,789,767 and the Fund recognized gross trading gains of $8,641,843 while incurring Brokerage Commissions of $4,775,116, Administrative Fees of $129,057 and Profit Shares of $978,264 (10.44%, 5.77%, 0.16% and 1.18%, respectively, of average month-end Net Assets). Interest income of $4,545,186 or 5.49% of average month-end Net Assets resulted in net income of $7,223,364 (before organizational and initial offering cost reimbursement payments of $79,700 and after deducting MLIP's $81,228 minority interest in the profits and losses of the Trading Partnership) or 8.72% of average month-end Net Assets. Overview. 1996 began with the East Coast blizzard, continuing --------- difficulties in the U.S. federal budget talks and an economic slowdown having a negative impact on many markets. The Fund was profitable in January due to the strong profits in currency trading as the U.S. dollar reached a 23-month high against the Japanese yen. In February, however, the Fund incurred its worst monthly loss due to the sudden reversals in several strong price trends and considerable volatility in the currency and financial markets. During March, large profits were taken in the crude oil and gasoline markets as strong demand continued and talks between the United Nations and Iraq were suspended. This trend continued into the second quarter, during which strong gains were also recognized in the agricultural markets as a combination of drought and excessive rain drove wheat and grain prices to historic highs. In the late summer and early fall months, the Fund continued to trade profitably as trending prices in a number of key markets favorably impacted the Fund's performance. In September heating oil hit a five-year high on soaring prices in Europe, and the Fund was also able to capitalize on downward trends in the metals markets. Strong trends in the currency and global bond markets produced significant gains in October and November, but the year ended with declining performance as December witnessed the reversal of several strong upward trends and increased volatility in key markets. PERFORMANCE OVERVIEW The principal variables which determine the net performance of the Partnership are gross profitability and interest income. During all periods set forth under "Selected Financial Data," the interest rates in many countries were at unusually low levels. This negatively impacted revenue because interest income is typically a major component of commodity pool profitability. In addition, low interest rates are frequently associated with reduced fixed income market volatility, and in static markets the Fund's profit potential generally tends to be diminished. On the other hand, during periods of higher interest rates, the relative attractiveness of a high risk investment such as the Fund may be reduced as compared to high yielding and much lower risk fixed-income investments. The Partnership's Brokerage Commissions and Administrative Fees are a constant percentage of assets allocated to trading. The only Fund costs (other than the insignificant F/X Desk service fees, EFP differentials and organizational and offering cost reimbursement payments as well as bid-ask spreads on forward contracts) which are not based on a percentage of the Fund's assets allocated to trading are the Profit Shares payable to the Trading Advisors on an Advisor-by-Advisor basis. During periods when Profit Shares are a high percentage of net trading gains, it is likely that there has been substantial performance non-correlation among Advisors (so that the total Profit Shares paid to those Advisors which have traded profitably are a high percentage, or perhaps even in excess, of total profits recognized, as other Advisors have incurred offsetting losses, reducing overall trading gains but not the Profit Shares paid to successful Advisors) -- suggesting the likelihood of generally trendless, non-consensus markets. The events that primarily determine the Partnership's profitability are those that produce sustained and major price movements. The Advisors are generally more likely to be able to profit from sustained trends, irrespective of their direction, than from static markets. During the course of the Partnership's performance to date, such events have ranged from Federal Reserve Board reductions in interest rates, the apparent refusal of Iraq to arrive at a settlement which would permit it to sell oil internationally, the inability of the U.S. government to agree upon a federal budget, and a combination of drought and excessive rain negatively impacting U.S. agricultural harvesting as well as planting. While these events are representative of the type of circumstances which materially affect the Fund, the specific events which will do so in the future cannot be predicted or identified. Unlike many investment fields, there is no meaningful distinction in the operation of the Fund between realized and unrealized profits. Most of the contracts traded by the Fund are highly liquid and can be closed out at any time. Furthermore, the profits on many open positions are effectively realized on a daily basis through the payment of variation margin. -20- Except in unusual circumstances, factors -- regulatory approvals, cost of goods sold, employee relations and the like -- which often materially affect an operating business have virtually no impact on the Fund. THE DIFFERENT SERIES OF UNITS All series of Units issued after July 16, 1996 will begin trading with the same percentage (75%) of their total capital allocated to trading (by investment in the Trading Partnership). All series trade in a common trading account and are subject to the same method of calculating their fees. Furthermore, any discretionary action taken by MLIP -- e.g., making a distribution or adjusting trading leverage -- must be done in such a way, that all Units receive the same distributions (if any) as well as having the same percentage of capital allocated to trading after the adjustment. Despite these fundamental similarities among the different series, because the series begin trading at different times they are likely to come, as a result of trading profits and losses, to have different percentages of their capital allocated to trading, pay different Profit Shares (although to the same group of Advisors) and have different Net Asset Values. LIQUIDITY AND CAPITAL RESOURCES The amount of capital raised for the Fund should not, except at extremely high levels of capitalization, have a significant impact on its operations. The Fund's costs are generally proportional to its asset base and, within broad ranges of capitalization, the Advisors' trading positions (and the resulting gains and losses) should increase or decease in approximate proportion to the size of the Fund account managed by each of them, respectively. The Partnership raises additional capital only through the continuous offering of its Units. Inflation per se is not a significant factor in the Fund's profitability, although inflationary cycles can give rise to the type of major price movements that can have a materially favorable or adverse impact on the Fund's performance. Changes in the level of prevailing interest rates could have a material effect on the Fund's trading leverage. Interest rates directly affect the calculation of the discounted value (discounted back from the relevant Principal Assurance Date) of the guaranteed $100 minimum Net Asset Value per Unit and, accordingly, the assets which a given series of Units has available for trading. In its trading to date, the Fund has from time to time had substantial unrealized gains and losses on its open positions. These gains or losses are received or paid on a periodic basis as part of the routine clearing cycle on exchanges or in the over-the-counter markets (the only over-the-counter market in which the Fund trades is the inter-bank forward market in currencies). In highly unusual circumstances, market illiquidity could make it difficult for certain Advisors to close out open positions, and any such illiquidity could expose the Fund to significant losses, or cause it to be unable to recognize unrealized gains. However, in general, there is no meaningful difference between the Fund's realized and unrealized gains. In terms of cash flow, it makes little difference whether a market position remains open, (so that the profit or loss on such position remains "unrealized"), as cash settlement of "unrealized" gains and losses occurs periodically whether or not positions are closed out. The only meaningful difference between realized and unrealized gains or losses in the case of the Fund is that unrealized items reflect gains or losses on positions which the Advisors have determined not to close out (presumably, in the hope of future profits), whereas realized gains or losses reflect amounts received or paid in respect of positions no longer being maintained. Item 8: Financial Statements and Supplementary Data ------------------------------------------- The financial statements required by this Item are included in Exhibit 13.01. The supplementary financial information ("selected quarterly financial data" and "information about oil and gas producing activities") specified by Item 302 of Regulation S-K is not applicable. -21- Item 9: Changes in and Disagreements with Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure - -------------------- There were no changes in or disagreements with accountants on accounting and financial disclosure. PART III Item 10: Directors and Executive Officers of the Registrant - ------------------------------------------------------------ (a,b) Identification of Directors and Executive Officers: --------------------------------------------------- As a limited partnership, the Partnership itself has no officers or directors and is managed by the General Partner. Trading decisions are made by the Trading Advisors on behalf of the Partnership. The principal officers of MLIP and their business backgrounds are as follows. John R. Frawley, Jr. Chief Executive Officer, President and Director James M. Bernard Chief Financial Officer, Senior Vice President and Treasurer Jeffrey F. Chandor Senior Vice President, Director of Sales, Marketing and Research and Director Allen N. Jones Chairman and Director Steven B. Olgin Vice President, Secretary and Director of Administration John R. Frawley, Jr. was born in 1943. Mr. Frawley is Chief Executive Officer, President and a Director of MLIP as well as Co-Chairman of MLF. He joined Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") in 1966 and has served in various positions, including Retail and Institutional Sales, Manager of New York Institutional Sales, Director of Institutional Marketing, Senior Vice President of Merrill Lynch Capital Markets, and Director of International Institutional Sales. Mr. Frawley holds a Bachelor of Science degree from Canisius College. Mr. Frawley served on the CFTC's Regulatory Coordination Advisory Committee from its inception in 1990 through its dissolution in 1994. Mr. Frawley is currently a member of the CFTC's Financial Products Advisory Committee. In January 1996, he was re-elected to a one-year term as Chairman of the Managed Futures Association, the national trade association of the United States managed futures industry. Mr. Frawley is a Director of that organization, and a Director of the Futures Industry Institute. Mr. Frawley also currently serves on a panel created by the Chicago Mercantile Exchange and The Board of Trade of the City of Chicago to study cooperative efforts related to electronic trading, common clearing, and issues regarding a potential merger. James M. Bernard was born in 1950. Mr. Bernard is Chief Financial Officer, Senior Vice President and Treasurer of MLIP. He joined MLF in 1983. Before that he was the Commodity Controller for Nabisco Brands Inc. from November 1976 to 1982 and a Supervisor at Ernst & Whinney from 1972 to November 1976. Mr. Bernard is a member of the American Institute of Certified Public Accountants and holds a Bachelor of Science degree from St. John's University and a Master of Business Administration degree from Fordham University. Jeffrey F. Chandor was born in 1942. Mr. Chandor is Senior Vice President and the Director of Sales, Marketing and Research and a Director of MLIP. He joined MLPF&S in 1971 and has served as the Product Manager of Equity, Derivative Products and Mortgage-Backed Securities as well as Managing Director of International Sales in the United States, and Managing Director of Sales in Europe. Mr. Chandor holds a Bachelor of Arts degree from Trinity College, Hartford, Connecticut. -22- Allen N. Jones was born in 1942. Mr. Jones is Chairman and a Director of MLIP. Mr. Jones graduated from the University of Arkansas with a Bachelor of Science, Business Administration degree in 1964. Since June 1992, Mr. Jones has held the position of Senior Vice President of MLPF&S. From June 1992 through February 1994, Mr. Jones was the President and Chief Executive Officer of Merrill Lynch Insurance Group, Inc. ("MLIG") and remains on the Board of Directors of MLIG and its subsidiary companies. In February 1994, Mr. Jones became the Director of Individual Financial Services of the Merrill Lynch Private Client Group. From January 1992 to June 1992, he held the position of First Vice President of MLPF&S. From January 1990 to June 1992, he held the position of District Director of MLPF&S. Before January 1990, he held the position of Senior Regional Vice President of MLPF&S. Steven B. Olgin was born in 1960. Mr. Olgin is Vice President, Secretary and the Director of Administration of MLIP. He joined MLIP in July 1994 and became a Vice President in July 1995. From 1986 until July 1994, Mr. Olgin was an associate of the law firm of Sidley & Austin. In 1982, Mr. Olgin graduated from The American University with a Bachelor of Science degree in Business Administration and a Bachelor of Arts degree in Economics. In 1986, he received his Juris Doctor degree from The John Marshall Law School. Mr. Olgin is a member of the Managed Futures Association's Government Relations Committee and has served as an arbitrator for the NFA. At its December 1996 Board of Directors meeting, MLIP formed a Finance Committee composed of representatives of several different operating and administrative units at Merrill Lynch to oversee the financial controls and accounting procedures implemented by MLIP. The Finance Committee will meet periodically to review MLIP's financial reporting, monitoring and record keeping, as well as all proposed changes -- other than the selection of Advisors - -- affecting the operations of the Fund. As of December 31, 1996, the principals of MLIP had no investment in the Fund and MLIP's general partner interest in the Fund was valued at approximately $3 million. MLIP acts as general partner to thirteen public futures funds whose units of limited partnership interest are registered under the Securities Exchange Act of 1934: The Futures Expansion Fund Limited Partnership, The Growth and Guarantee Fund L.P., ML Futures Investments II L.P., ML Futures Investments L.P., John W. Henry & Co./Millburn L.P., The S.E.C.T.O.R. Strategy Fund(sm) L.P., The SECTOR Strategy Fund(sm) II L.P., The SECTOR Strategy Fund(sm) IV L.P., The SECTOR Strategy Fund(sm) V L.P., The SECTOR Strategy Fund(sm) VI L.P., ML Global Horizons L.P., ML JWH Strategic Allocation Fund L.P. and the Fund. Because MLIP serves as the sole general partner of each of these funds, the officers and directors of MLIP effectively manage them as officers and directors of such funds. (c) Identification of Certain Significant Employees: ----------------------------------------------- None. (d) Family Relationships: -------------------- None. (e) Business Experience: ------------------- See Item 10(a)(b) above. (f) Involvement in Certain Legal Proceedings: ---------------------------------------- None. (g) Promoters and Control Persons: ----------------------------- The General Partner is the sole promoter and controlling person of the Partnership. -23- Item 11: Executive Compensation ---------------------- The officers of the General Partner are remunerated in their respective positions. The Partnership does not itself have any officers, directors or employees. The Partnership pays Brokerage Commissions to an affiliate of the General Partner and Administrative Fees to the General Partner. The General Partner or its affiliates may also receive certain economic benefits from holding certain of the Fund's dollar Available Assets in offset accounts, as described in Item 1(c) above. The directors and officers receive no "other compensation" from the Partnership, and the directors receive no compensation for serving as directors of the General Partner. There are no compensation plans or arrangements relating to a change in control of either the Partnership or the General Partner. Item 12: Security Ownership of Certain Beneficial Owners and Management -------------------------------------------------------------- (a) Security Ownership of Certain Beneficial Owners: ----------------------------------------------- As of December 31, 1996, no person or "group" is known to be or have been the beneficial owner of more than five percent of the Units. All of the Partnership's units of general partnership interest are owned by the General Partner. (b) Security Ownership of Management: -------------------------------- As of December 31, 1996, the General Partner owned 20,873.06 Units (unit-equivalent general partnership interests), which was less than 3% of the total Units outstanding. (c) Changes in Control: ------------------ None. Item 13: Certain Relationships and Related Exchange of Futures Transactions ------------------------------------------------------------------ (a) Transactions with Management and Others: --------------------------------------- The General Partner acts as administrative and trading manager of the Fund. The General Partner provides all normal ongoing administrative functions of the Partnership, such as accounting, legal and printing services. The General Partner, which receives the Administrative Fee, pays all expenses relating to such services. (b) Certain Business Relationships: ------------------------------ MLF, an affiliate of the General Partner, acts as the principal commodity broker for the Partnership. In 1996, the Partnership paid: (i) Brokerage Commissions of $4,775,116 to the Commodity Broker, which included $1,248,233 in consulting fees paid by the Commodity Broker to the Trading Advisors; and (ii) Administrative Fees of $129,057 to MLIP. In addition, MLIP and its affiliates may have derived certain economic benefits from maintaining a portion of the Fund's assets in "offset accounts" as described under Item 1(c), "Narrative Description of Business -- Use of Proceeds and Cash Management -- Income Interest Earned on the Fund's U.S. Dollar Available Assets not managed by MLAM" and Item 11, "Executive Compensation" herein, as well as from the Fund's F/X Desk and exchange of futures for physical ("EFP") trading. See Item 1(c), "Narrative Description of Business -- Charges" and "-- Description of Current Charges" for a discussion of other business dealings between MLIP affiliates and the Partnership. (c) Indebtedness of Management: -------------------------- The Partnership is prohibited from making any loans, to management or otherwise. (d) Transactions with Promoters: --------------------------- Not applicable. -24- PART IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K ---------------------------------------------------------------
(a)1. Financial Statements (Found in Exhibit 13.01): Page --------------------------------------------- ---- Independent Auditors' Report 1 Consolidated Statements of Financial Condition as of December 31, 1996 and 1995 2 For the years ended December 31, 1996 and 1995 and the period from October 12, 1994 (Commencement of Operations) to December 31, 1994: Consolidated Statements of Operations 3 Consolidated Statements of Changes in Partners' Capital 4 Notes to Financial Statements 5-13
(a)2. Financial Statement Schedules: ----------------------------- Financial statement schedules not included in this Form 10-K have been omitted for the reason that they are not required or are not applicable or that equivalent information has been included in the financial statements or notes thereto. (a)3. Exhibits: -------- The following exhibits are incorporated by reference or are filed herewith to this Annual Report on Form 10-K:
Designation Description - ----------- ----------- 1.01 Selling Agreement among the Partnership, the General Partner, Merrill Lynch Futures Inc., the Selling Agent and the Trading Advisors. Exhibit 1.01: Is incorporated herein by reference from Exhibit 1.01 - ------------ contained in Amendment No. 1 to the Registration Statement (File No. 33-73914) filed on July 14, 1994, on Form S-1 under the Securities Act of 1933 (the "Registrant's Registration Statement.") 1.01(a) Form of Selling Agreement Amendment among the Partnership, the General Partner, Merrill Lynch Futures Inc., the Selling Agent and the Trading Advisors. Exhibit 1.01(a): Is filed herewith. - --------------- 3.01(i) Amended and Restated Limited Partnership Agreement of the Partnership. Exhibit 3.01(i): Is incorporated herein by reference from Exhibit - --------------- 3.01(ii) contained in the Registrant's Registration Statement (as Exhibit A). 3.01(ii) Amended and Restated Limited Partnership Agreement of the Trading Partnership. Exhibit 3.01(ii): Is incorporated herein by reference from Exhibit - ---------------- 3.01(ii) contained in Registrant's the Registration Statement. 3.05(ii) Amended and Restated Certificate of Limited Partnership of the Partnership, dated July 27, 1995.
-25- Exhibit 3.05(ii): Is incorporated herein by reference from Exhibit - --------------- 3.05(ii) contained in the Registrant's report on Form 10-Q for the Quarter Ended June 30, 1995. 10.01(h) Form of Advisory Agreement among the Partnership, the General Partner, Merrill Lynch Futures Inc. and each Trading Advisor. Exhibit 10.01(h): Is incorporated herein by reference from - ---------------- Exhibit 10.01(h) contained in the Registrant's report on Form 10-Q for the Quarter Ended June 30, 1995. 10.02 Form of Consulting Agreement between Merrill Lynch Futures Inc. and each trading advisors. Exhibit 10.02: Is incorporated herein by reference from Exhibit - -------------- 10.02 contained in the Registrant's Registration Statement. 10.03 Form of Customer Agreement between the Trading Partnership and Merrill Lynch Futures Inc. Exhibit 10.03 Is incorporated herein by reference from Exhibit - ------------- 10.03 contained in the Registrant's Registration Statement (as Exhibit B). 10.05 Merrill Lynch & Co., Inc. Guarantee. Exhibit 10.05: Is incorporated herein by reference from Exhibit - ------------- 10.05 contained in the Registrant's Registration Statement (as Exhibit B). 10.06 Form of Subscription Agreement and Power of Attorney. Exhibit 10.06: Is incorporated herein by reference from Exhibit - ------------- 10.06 contained in the Registrant's Registration Statement (as Exhibit D). 10.07(a) Foreign Exchange Desk Service Agreement, dated July 1, 1993 among Merrill Lynch Investment Bank, Merrill Lynch Investment Partners Inc., Merrill Lynch Futures Inc. and various MLIP funds. Exhibit 10.07(a): Is incorporated herein by reference from Exhibit - ---------------- 10.07 contained in the Registrant's Registration Statement (as Exhibit D). 10.07(b) Amendment to Foreign Exchange Desk Service Agreement, dated July 14, 1994, among Merrill Lynch Investment Bank, Merrill Lynch Investment Partners Inc., Merrill Lynch Futures Inc. and the Fund. Exhibit 10.07(b): Is incorporated herein by reference from Exhibit - ---------------- 10.07 contained in the Registrant's Registration Statement. 10.08 Investment Advisory Contract between Merrill Lynch Futures, the Partnership, the Trading Partnership and MLAM. Exhibit 10.08: Is incorporated herein by reference from Exhibit - ------------- 10.08 contained in the Registrant's Registration Statement. 10.09(a) Form of Advisory and Consulting Agreement Amendment among the General Partner, each Advisor, the Partnership and Merrill Lynch Futures Inc. Exhibit 10.09(a): Is filed herewith. - ---------------- 10.09(b) Form of Amendment to the Customer Agreement among the Partnership and MLF. -26- Exhibit 10.09(b): Is filed herewith. - ---------------- 13.01 1996 Annual Report and Independent Auditors' Report. Exhibit 13.01: Is filed herewith. - ------------- 28.01 Prospectus of the Partnership dated January 25, 1996. Exhibit 28.01: Is incorporated by reference as filed with the - ------------- Securities and Exchange Commission pursuant to Rule 424 under the Securities Act of 1933, Registration Statement (File No. 33-73914) on Form S-1 (effective January 25, 1996). (b) Report on Form 8-K: ------------------ No reports on Form 8-K were filed during the fourth quarter of 1996. -27- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ML PRINCIPAL PROTECTION L.P. By: MERRILL LYNCH INVESTMENT PARTNERS INC. General Partner By: /s/ John R. Frawley, Jr. ----------------------------------------- John R. Frawley, Jr. President, Chief Executive Officer and Director (Principal Executive Officer) Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed on March 14, 1997 by the following persons on behalf of the Registrant and in the capacities indicated.
Signature Title Date - --------- ----- ---- /s/John R. Frawley, Jr. President and Chief Executive Officer and Director March 14, 1997 - ----------------------- John R. Frawley, Jr. /s/James M. Bernard Chief Financial Officer, Treasurer (Principal Financial March 14, 1997 - ------------------- James M. Bernard and Accounting Officer) and Senior Vice President /s/Jeffrey F. Chandor Senior Vice President and Director of Sales, March 14, 1997 - --------------------- Jeffrey F. Chandor Marketing and Research, and Director /s/Allen N. Jones Director March 14, 1997 - ----------------- Allen N. Jones
(Being the principal executive officer, the principal financial and accounting officer and a majority of the directors of Merrill Lynch Investment Partners Inc.) MERRILL LYNCH INVESTMENT General Partner of Registrant March 14, 1997 PARTNERS INC. By/s/ John R. Frawley, Jr. ------------------------ John R. Frawley, Jr. -28- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ML PRINCIPAL PROTECTION TRADING L.P. By: MERRILL LYNCH INVESTMENT PARTNERS INC. General Partner By: /s/ John R. Frawley, Jr. ----------------------------------------- John R. Frawley, Jr. President, Chief Executive Officer and Director (Principal Executive Officer) Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed on March 14, 1997 by the following persons on behalf of the Registrant and in the capacities indicated.
Signature Title Date - --------- ----- ---- /s/John R. Frawley, Jr. President and Chief Executive Officer and Director March 14, 1997 - ----------------------- John R. Frawley, Jr. /s/James M. Bernard Chief Financial Officer, Treasurer (Principal Financial March 14, 1997 - ------------------- James M. Bernard and Accounting Officer) and Senior Vice President /s/Jeffrey F. Chandor Senior Vice President and Director of Sales, March 14, 1997 - --------------------- Jeffrey F. Chandor Marketing and Research, and Director /s/Allen N. Jones Director March 14, 1997 - ----------------- Allen N. Jones
(Being the principal executive officer, the principal financial and accounting officer and a majority of the directors of Merrill Lynch Investment Partners Inc.) MERRILL LYNCH INVESTMENT General Partner of Registrant March 14, 1997 PARTNERS INC. By/s/ John R. Frawley, Jr. ------------------------ John R. Frawley, Jr. -29- ML PRINCIPAL PROTECTION L.P. ANNUAL REPORT FOR 1996 ON FORM 10-K INDEX TO EXHIBITS -----------------
Exhibit ------- Exhibit 1.01(a) Form of Selling Agreement Amendment among the Partnership, the General Partner, Merrill Lynch Futures Inc., the Selling Agent and prospective trading advisors Exhibit 10.09(a) Form of Advisory and Consulting Agreement Amendment among the General Partner, each Advisor, the Partnership and Merrill Lynch Futures Inc. Exhibit 10.09(b) Form of Customer Agreement Amendment among the Partnership and MLF Exhibit 13.01 1996 Annual Report and Independent Auditors' Report
-30- To the best of the knowledge and belief of the undersigned, the information contained in this report is accurate and complete. James M. Bernard Chief Financial Officer Merrill Lynch Investment Partners Inc. General Partner of ML Principal Protection L.P. -31- EX-1.01(A) 2 EXHIBIT 1.01(A)-SELLING AGREEMENT AMENDMENT EXHIBIT 1.01(a) Exhibit 1.01(a) ML PRINCIPAL PROTECTION L.P. (a Delaware Limited Partnership) 2,000,000 Units of Limited Partnership Interests AMENDMENT NO. 11 TO THE SELLING AGREEMENT ----------------------------------------- Dated as of ________________, 199_ MERRILL LYNCH, PIERCE FENNER & SMITH INCORPORATED Merrill Lynch World Headquarters North Tower World Financial Center New York, New York 10080-6106 Dear Sirs: Your affiliate, Merrill Lynch Investment Partners Inc. (formerly, ML Futures Investment Partners Inc.), a Delaware corporation (referred to herein in its individual corporate capacity and as general partner as the "General Partner"), and an initial limited partner have caused the formation of a limited partnership pursuant to the Revised Uniform Limited Partnership Act of the State of Delaware (the "DRULPA") under the name ML PRINCIPAL PROTECTION L.P. (the "Partnership") (formerly, ML Principal Protection Plus L.P.), for the purpose of engaging in speculative trading of futures and forward contracts and commodity options in the international markets. As described in the Prospectus, the Partnership does not have any trading operations of its own but rather, through its wholly-owned trading subsidiary, ML PRINCIPAL PROTECTION TRADING L.P., a Delaware limited partnership (the "Trading Partnership") (formerly, ML Principal Protection Plus Trading L.P.), has entered into separate Advisory Agreements with various professional commodity trading advisors which have no affiliation with the General Partner (other than perhaps managing accounts for the clients of the General Partner) (individually, a "Trading Advisor" and, collectively, the "Trading Advisors"). The Trading Partnership engages in speculative trading in the commodities markets as aforesaid, and the Trading Advisors direct such trading; the initial commodity broker and forward contract dealer for the Partnership is Merrill Lynch Futures Inc., a Delaware corporation and certain of its affiliates or such other brokers as approved of in writing by Merrill Lynch Futures Inc.; and the exclusive selling agent for the Partnership will be yourself, including, without limitation, Merrill Lynch International & Co., C.V.O.A., and certain of your affiliates (herein sometimes collectively referred to as the "Selling Agent"). The undersigned hereby agree to be bound by all terms and conditions of the Selling Agreement between the Partnership, the Trading Partnership, the General Partnership, Merrill Lynch Futures Inc., the Selling Agent and certain trading advisors dated July 14, 1994 as amended by various amendments (the "Selling Agreement"). References in the Selling Agreement to the Registration Statement and Prospectus shall, for purposes of this Amendment to the Selling Agreement, mean the Registration Statement and the Prospectus most recently filed with the Securities and Exchange Commission as of the date hereof and any subsequent amendments or prospectuses. If the foregoing is in accordance with each party's understanding of its agreement, each party is requested to sign and return to the General Partner a counterpart hereof, whereupon -2- this instrument along with all counterparts will become a binding agreement among them in accordance with its terms. Very truly yours, ML PRINCIPAL PROTECTION L.P. BY: MERRILL LYNCH INVESTMENT PARTNERS INC., General Partner By: --------------------------------- Name: Title: ML PRINCIPAL PROTECTION TRADING L.P. BY: MERRILL LYNCH INVESTMENT PARTNERS INC., General Partner By: --------------------------------- Name: Title: [TRADING ADVISORS] By: --------------------------------- Name: Title: Confirmed and Accepted as of the date first above written MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED Selling Agent By: --------------------------------- Name: Title: -3- EX-10.09(A) 3 EXHIBIT 10.09(A)-ADVISORY & CONSULTING AGREEMENT EXHIBIT 10.09(a) FORM OF ADVISORY AND CONSULTING AGREEMENT AMENDMENT This ADVISORY AND CONSULTING AGREEMENT AMENDMENT dated as of January 1, 1997 by and among the funds listed on Schedule I hereto (THE "FUNDS"), ________________ (THE "ADVISOR"), MERRILL LYNCH INVESTMENT PARTNERS INC. ("MLIP") and MERRILL LYNCH FUTURES INC. ("MLF") W I T N E S S E T H WHEREAS, the Advisor is acting as a commodity trading advisor for the Funds pursuant to the Advisory Agreements, and in certain cases the Consulting Agreements, among the parties hereto (as the case may be) set forth on Schedule II hereto (collectively. the "Advisory Agreements"); WHEREAS, the parties hereto have agreed to reduce the Consulting Fees paid by MLF, the commodity broker of the Fund, to the Advisor; WHEREAS, the parties hereto have agreed to adjust the Profit Share paid by the Fund to the Advisor, including, without limitation, by providing that the Profit Share shall be calculated on an annual rather than a quarterly basis; and WHEREAS, this Agreement shall be deemed to renew each of the Advisory Agreements (on the terms set forth herein and therein) until December 31, 1997. NOW THEREFORE, the parties hereto agree as follows: 1. REDUCTION OF CONSULTING FEE --------------------------- Beginning January 1, 1997, the Consulting Fee paid by MLF to the Advisor will be reduced to ___% per annum (0.___% of the month-end assets each month). 2. ADJUSTMENT OF PROFIT SHARE -------------------------- From and after January 1, 1997, the Profit Share payable by the Funds to the Advisor will be calculated at the rate of ___% of any New Trading Profit in excess of the highest level of cumulative Trading Profit (the "high water mark") achieved by the Advisor for each of the Funds, respectively, as of any previous calendar quarter-end (including December 31, 1996); or $0 if the Advisor has traded unprofitably for a Fund. Trading Profit shall be calculated pursuant to Schedule C to the Advisory Agreements, after reduction for combined Brokerage and Administrative Fees of ___% of average month-end assets per annum (0.__% of the month-end assets each month). Further more, beginning January 1, 1997, Profit Shares shall be calculated not as of the end of each calendar quarter, but rather as of the end of each calendar year and the "high water mark" for purposes of determining whether Trading Profit recognized after January 1, 1997 constitutes New Trading Profit will equal the highest level of cumulative Trading Profit as of any calendar year-end (at such point, if any, that cumulative Trading Profit as of a calendar year-end exceeds the "high water mark" in effect with respect to each Fund as of the effective date of this Agreement). 3. TERM ---- The current term of the Advisory Agreements will expire December 31, 1997, at which time each such Advisory Agreement will be automatically renewed, unless (i) MLIP or one or more of the Funds gives 30 days' notice to the Advisor of the termination of such Advisory Agreement, or (ii) from and after the end of the period during which such Advisory Agreement may be renewed at the option of either MLIP or the affected Fund (treating the term ending December 31, 1997 as the current twelve month term of each such Advisory Agreement) the Advisor gives 30 days' termination notice. Any renewal rights exercisable by one or more Funds or MLIP under the Advisory Agreements shall remain in full force and effect as if December 31, 1997 were the end of the current twelve-month term of each such Advisory Agreement. 4. ENTIRE AGREEMENT ---------------- This Agreement, together with the Advisory Agreements, constitutes the entire agreement among the parties hereto with respect to the matters referred to herein, and no other agreement, verbal or otherwise, shall be binding as between the parties unless it shall be in writing and signed by the part against whom enforcement is sought. -2- IN WITNESS WHEREOF, the undersigned have hereto duly set forth their hand as of the 1st day of January 1997. THE FUNDS LISTED ON SCHEDULE I WHICH ARE U.S. LIMITED PARTNERSHIPS By: MERRILL LYNCH INVESTMENT PARTNERS INC. General Partner By: ______________________________ Name: Title: THE FUNDS LISTED ON SCHEDULE I, OTHER THAN ML PRINCIPAL PROTECTION PLUS LTD., WHICH ARE CAYMAN ISLANDS INVESTMENT COMPANIES By: ______________________________ Name: Title: ML PRINCIPAL PROTECTION PLUS LTD. By: ______________________________ Name: Title: MERRILL LYNCH FUTURES INC. By: ______________________________ Name: Title: THE ADVISOR MERRILL LYNCH INVESTMENT PARTNERS, INC. By: ___________________________ By: ________________________________ Name: Name: Title: Title: -3- SCHEDULE I THE FUNDS U.S. Funds Cayman Islands Funds ---------- -------------------- 1. 1. --------------------------- --------------------------- 2. 2. --------------------------- --------------------------- 3. 3. --------------------------- --------------------------- 4. 4. --------------------------- --------------------------- -4- SCHEDULE II ADVISORY AGREEMENTS Advisory Agreements with the U.S. Funds dated: U.S. Fund No. (See Schedule I) ---------------- 1. ________________ 2. ________________ 3. ________________ 4. ________________ Advisory Agreements with the Cayman Islands Funds dated: Cayman Islands Fund No. (See Schedule I) ---------------- 1. ________________ 2. ________________ 3. ________________ 4. ________________ EX-10.09(B) 4 EXHIBIT 10.09(B)-CUSTOMER AGREEMENT AMENDMENT EXHIBIT 10.09(B) FORM OF AMENDMENT TO THE CUSTOMER AGREEMENT This Customer Agreement Amendment ("Amendment") is made as of this 1st day of [MONTH, YEAR] by and between [THE FUND] (the "Fund") and Merrill Lynch Futures Inc. W I T N E S S E T H: WHEREAS, the parties hereto entered into a Customer Agreement relating to the purchase and sale of commodity futures and forward contracts and commodity options (the "Customer Agreement"); WHEREAS, the parties hereto have agreed to reduce the brokerage commissions paid by the Fund to Merrill Lynch Futures Inc., the Fund's commodity broker, pursuant to the Customer Agreement and wish to amend the Customer Agreement accordingly; NOW THEREFORE, in consideration of the premises and mutual covenants contained in the Customer Agreement and herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree to amend the Customer Agreement as follows: 1. Brokerage Commissions. Beginning [DATE, YEAR] the brokerage commissions --------------------- payable by the Fund to Merrill Lynch Futures Inc. will be reduced to ______ of 1% of month-end Net Assets, before reduction for such monthly brokerage commissions and any New Profits Account allocation but after the crediting of interest income received during the month (a ____% annual rate). Such brokerage commissions shall not include any administrative fee paid directly to Merrill Lynch Investment Partners Inc. 2. Amendment. This Amendment may not be amended except by the written --------- consent of each of the parties hereto. 3. Counterparts. This Amendment may be executed in one or more ------------ counterparts, each of which shall, however, together constitute one and the same documents. -1- IN WITNESS WHEREOF, this Amendment has been executed by the parties hereto as of the day and year first above written. [THE FUND] BY: MERRILL LYNCH INVESTMENT PARTNERS INC., General Partner BY: ________________________________ Name: Title: MERRILL LYNCH FUTURES INC. BY: ________________________________ Name: Title: -2- EX-13.01 5 EXHIBIT 13.01-1996 ANNUAL REPORT & AUDITORS REPORT ML PRINCIPAL PROTECTION L.P. (Formerly, ML Principal Protection Plus L.P.) (A Delaware Limited Partnership) Consolidated Financial Statements for The Years Ended December 31, 1996, 1995 and the Period from October 12, 1994 (Commencement of Operations) to December 31, 1994 and Independent Auditors' Report To: The Limited Partners of ML Principal Protection L.P. ML Principal Protection L.P. (formerly, ML Principal Protection Plus L.P.; the "Fund" or the "Partnership") ended its third fiscal year of trading on December 31, 1996 with an increase in Net Asset Value ("NAV"). During 1996, trading profits were generated in the interest rate, currency, energy and agriculture sectors while losses were incurred in the stock index and metals sectors. Please see the accompanying summary financial information for the NAV of your series of Units. In 1996, strong price trends prevailed in several key markets enabling the Fund's Trading Advisors to trade profitably for the Fund. Although trading in stock index and agricultural commodity markets may have been lackluster, the global bond and currency markets offered substantial trading opportunities. Interest rate and currency price trends resulted in profitable trading opportunities in these markets throughout the year. As the new year began, the U.S. dollar rallied throughout most of January, after being locked in a tight trading range for the two prior months. However, the dollar weakened against major currencies in February, and returned to a relatively narrow trading range. In March, crude oil prices rose throughout most of the month, as unusually cold weather in the U.S. and Europe resulted in an extended period of strong demand and oil talks between the United Nations and Iraq were suspended. During April, grain and soybean prices rallied to new highs, sometimes daily, as adverse weather conditions and strong demand affected prices. Difficult trading conditions in many markets prevailed and a lack of clear price trends in key markets negatively impacted the Fund's performance in May and June. For example, U.S. bond markets remained trendless as continued volatility, reflected investor confusion over conflicting reports on the direction of the economy. As the third quarter of 1996 began, it was the U.S. stock market that experienced increased volatility coupled with sharp declines in July. In the currency markets, the U.S. dollar posted its biggest one-day gain against the Deutsche mark in almost four months on August 14, after comments from the Bundesbank's chief economist encouraged expectations for lower German interest rates. In September, crude oil prices continued, as they had during the summer, to trend upward throughout most of the month. Despite continued price volatility during the final quarter of 1996, the Fund's Trading Advisors were able to single out trends in key markets, such as the world's major bond markets which rallied into October and November. Additionally, price trends prevailed in several major foreign currency markets, for instance, the British pound extended its rally into November, as it soared to a 4-year high against the U.S. dollar and a 29-month high against the Deutsche mark on November 20. In December, however, the world's major bond market rallies came to an abrupt halt early in the month. Specifically, U.S. Treasury prices dropped on reports of strength in the economy, as well as a weaker dollar which further encouraged investor selling of treasury securities. 1996 proved to be a profitable year for the Fund. We continue to work diligently with the Trading Advisors to meet the Fund's objective of achieving, through speculative trading, substantial capital appreciation over time. We look forward to 1997 and the trading opportunities it may bring. Sincerely, John R. Frawley, Jr. President Merrill Lynch Investment Partners Inc. (General Partner) FOR THE EXCLUSIVE USE OF INVESTORS IN ML PRINCIPAL PROTECTION L.P. THIS ANNUAL REPORT IS NOT AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. AN OFFER CAN ONLY BE MADE BY THE PROSPECTUS, WHICH CONTAINS IMPORTANT INFORMATION CONCERNING RISK FACTORS, PERFORMANCE AND OTHER MATERIAL ASPECTS OF THE FUND, TOGETHER WITH THE CURRENT PROSPECTUS SUPPLEMENT AND RECENT MONTHLY AND ANNUAL REPORTS FOR THE FUND. THE PROSPECTUS MUST BE READ CAREFULLY BEFORE ANY DECISION WHETHER TO INVEST IS MADE. THIS ANNUAL REPORT MUST NOT BE REPRODUCED OR DISTRIBUTED IN ANY MANNER. FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. ML PRINCIPAL PROTECTION L.P. (formerly, ML Principal Protection Plus L.P.) (A Delaware Limited Partnership) ------------------------------ TABLE OF CONTENTS - ---------------------------------------------------------------------- Page ---- INDEPENDENT AUDITORS' REPORT 1 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994: Consolidated Statements of Financial Condition 2 Consolidated Statements of Income 3 Consolidated Statements of Changes in Partners' Capital 4 Notes to Consolidated Financial Statements 5-13 INDEPENDENT AUDITORS' REPORT - ---------------------------- To the Partners of ML Principal Protection L.P.: We have audited the accompanying consolidated statements of financial condition of ML Principal Protection L.P. (formerly, ML Principal Protection Plus L.P.) (a Delaware limited partnership; the "Partnership") as of December 31, 1996 and 1995, and the related consolidated statements of income and changes in partners' capital for the years ended December 31, 1996 and 1995 and the period from October 12, 1994 (commencement of operations) to December 31, 1994. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of ML Principal Protection L.P. (a Delaware limited partnership) as of December 31, 1996 and 1995, and the results of their operations for the years ended December 31, 1996 and 1995 and the period from October 12, 1994 (commencement of operations) to December 31, 1994 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP February 3, 1997 New York, New York ML PRINCIPAL PROTECTION L.P. (formerly, ML Principal Protection Plus L.P.) (A Delaware Limited Partnership) ------------------------------ CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1996 AND 1995
- ------------------------------------------------------------------------------------------------------------ 1996 1995 ---- ---- ASSETS - ------ Cash $ 328 $ 19,332 Accrued interest receivable (Note 2) 23,501 17,852 U. S. Government obligations (Note 1) 72,815,648 74,280,477 Equity in commodity futures trading accounts: Cash and option premiums 7,177,888 1,586,839 Net unrealized profit on open contracts 1,677,317 2,073,538 ------------------- ---------------- TOTAL $81,694,682 $77,978,038 =================== ================ LIABILITIES AND PARTNERS' CAPITAL - --------------------------------- LIABILITIES: Redemptions payable $ 966,906 $ 539,877 Brokerage commissions payable (Note 2) 378,291 356,607 Administrative fee payable (Note 2) 10,224 - Profit shares payable (Note 4) 658,800 78,840 Organization and initial offering costs payable (Note 1) 68,630 148,331 Settlement payment due to broker - 1,496,925 ------------------- ---------------- Total liabilities 2,082,851 2,620,580 ------------------- ---------------- Minority Interest 768,546 510,914 ------------------- ---------------- PARTNERS' CAPITAL: General Partner (20,873.06 and 16,603.42 units) 2,301,180 1,766,403 Limited Partners (702,786.91 and 697,715.56 units) 76,542,105 73,080,141 ------------------- ---------------- Total partners' capital 78,843,285 74,846,544 ------------------- ---------------- TOTAL $81,694,682 $77,978,038 =================== ================
NET ASSET VALUE PER UNIT (Note 5) See notes to consolidated financial statements. -2- ML PRINCIPAL PROTECTION L.P. (formerly, ML Principal Protection Plus L.P.) (A Delaware Limited Partnership) ------------------------------ CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- -------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- REVENUES: Trading profit (loss): Realized $ 9,038,064 $4,407,833 $ (363,054) Change in unrealized (396,221) 1,355,377 1,115,935 ------------------ --------------- ------------------ Total trading results 8,641,843 5,763,210 752,881 Interest income (Note 2) 4,545,186 3,415,670 377,303 ------------------ --------------- ------------------ Total revenues 13,187,029 9,178,880 1,130,184 ------------------ --------------- ------------------ EXPENSES: Profit shares (Note 4) 978,264 652,366 129,169 Brokerage commissions (Note 2) 4,775,116 3,303,292 416,617 Administrative fee (Note 2) 129,057 - - ------------------ --------------- ------------------ Total expenses 5,882,437 3,955,658 545,786 ------------------ --------------- ------------------ INCOME BEFORE MINORITY INTEREST 7,304,592 5,223,222 584,398 ------------------ --------------- ------------------ Minority interest in income (81,228) (36,730) (4,504) ------------------ --------------- ------------------ NET INCOME $ 7,223,364 $5,186,492 $ 579,894 ================== =============== ================== NET INCOME PER UNIT OF PARTNERSHIP INTEREST: Weighted average number of Units outstanding (Note 6) 754,428 551,944 319,887 ================== =============== ================== Net income per weighted average General Partner and Limited Partner Unit $9.57 $9.40 $1.81 ================== =============== ==================
See notes to consolidated financial statements. -3- ML PRINCIPAL PROTECTION L.P. (formerly, ML Principal Protection Plus L.P.) (A Delaware Limited Partnership) ------------------------------ CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- ------------------------------------------------------------------------------------------------------------ Limited General Units Partners Partner Total ----- -------- ------- ----- Initial offering 320,000.00 $30,942,800 $1,057,200 $32,000,000 Organization and initial offering costs - (237,615) (1,485) (239,100) Redemptions (2,438.00) (247,955) - (247,955) Net income - 560,624 19,270 579,894 -------------- ----------------- --------------- --------------- PARTNERS' CAPITAL, DECEMBER 31, 1994 317,562.00 31,017,854 1,074,985 32,092,839 Redemptions (47,810.02) (5,054,249) - (5,054,249) Subscriptions 444,567.00 43,851,304 605,396 44,456,700 Distributions - (1,771,806) (63,432) (1,835,238) Net income - 5,037,038 149,454 5,186,492 -------------- ----------------- --------------- --------------- PARTNERS' CAPITAL, DECEMBER 31, 1995 714,318.98 73,080,141 1,766,403 74,846,544 Redemptions (245,127.36) (25,748,519) - (25,748,519) Subscriptions 254,468.35 25,102,217 344,618 25,446,835 Distributions - (2,833,925) (91,014) (2,924,939) Net income - 6,942,191 281,173 7,223,364 -------------- ----------------- --------------- --------------- PARTNERS' CAPITAL, DECEMBER 31, 1996 723,659.97 $76,542,105 $2,301,180 $78,843,285 ============== ================= =============== ===============
See notes to consolidated financial statements. -4- ML PRINCIPAL PROTECTION L.P. (formerly, ML Principal Protection Plus L.P.) (A Delaware Limited Partnership) ------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization ------------ ML Principal Protection L.P. (formerly, ML Principal Protection Plus L.P.) (the "Partnership") was organized as an open-ended fund under the Delaware Revised Uniform Limited Partnership Act on January 3, 1994 and commenced trading activities on October 12, 1994. The Partnership engages in both the speculative trading of futures, options on futures and forward contracts on a wide range of commodities through ML Principal Protection Trading L.P. (formerly, ML Principal Protection Plus Trading L.P.) (the "Trading Partnership"), of which the Partnership is the sole limited partner and investing in U.S. Government Securities, as defined. Merrill Lynch Investment Partners Inc. (formerly, ML Futures Investment Partners Inc.) (the "General Partner" or "MLIP"), a wholly-owned subsidiary of Merrill Lynch Group Inc., which in turn is a wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill Lynch"), is the general partner of both the Partnership and the Trading Partnership and Merrill Lynch Futures Inc. ("MLF"), also an affiliate of Merrill Lynch, is the Trading Partnership's commodity broker. Merrill Lynch Asset Management, L.P. ("MLAM"), another affiliate of Merrill Lynch, provides cash management services to the Partnership investing in Government Securities, as defined. Substantially all of the Partnership's assets are held in accounts maintained at MLF or Merrill Lynch, Pierce, Fenner & Smith Incorporated, a Merrill Lynch affiliate. The General Partner has agreed to maintain a general partner's interest of at least 1% of the total capital in each of the Partnership and the Trading Partnership. The General Partner and the Limited Partners share in the profits and losses of the Partnership, and the General Partner and the Partnership share in the profits and losses of the Trading Partnership, in proportion to the respective interests in the Partnership and the Trading Partnership owned by each. The consolidated financial statements include the accounts of the Trading Partnership in which the Partnership is the sole limited partner. All related transactions and intercompany balances between the Partnership and the Trading Partnership are eliminated in consolidation. The ownership by the General Partner in the Trading Partnership represents a minority interest when the financial results of the Trading Partnership are consolidated into those of the Partnership. The General Partner's share of the Trading Partnership's profits and losses is deducted from the Consolidated Statements of Income, and the General Partner's interest in the Trading Partnership reduces the partners' capital on the Consolidated Statements of Financial Condition and the Consolidated Statements of Changes in Partners' Capital. The Partnership issues units of limited partnership interest ("Units") generally as of the beginning of each calendar quarter. Each series has its own Net Asset Value per Unit. Different series may allocate different percentages of their total capital to trading, but all series trade under the direction of the same combination of independent advisors (the "Trading Advisors" or the "Advisors"), chosen from time to time by MLIP to manage the Trading Partnership's trading. -5- MLIP selects the Advisors to manage the Partnership's assets, and allocates and reallocates the Partnership's trading assets among existing, replacement and additional Advisors. MLIP also determines what percentage of the Partnership's total capital to allocate to trading from time to time, attempting to balance the desirability of reducing the opportunity costs of the Partnership's "principal protection" structure against the necessity of preventing Merrill Lynch from ever being required to make any payments to the Partnership under the Merrill Lynch guarantee (see Note 7). Through December 31, 1996, no series of Units had allocated to trading a greater percentage of its assets than was so allocated at the time the series was issued. Estimates --------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition ------------------- Commodity futures, options on futures and forward contract transactions are recorded on the trade date, and open contracts are reflected in net unrealized profit (loss) on open contracts in the Consolidated Statements of Financial Condition at the difference between the original contract amount and the fair value. The change in net unrealized profit (loss) on open contracts from one period to the next is reflected in change in unrealized in the Consolidated Statements of Income. Fair value is based on quoted market prices on the exchange or market on which the contract is traded. U.S. Government Securities -------------------------- The Partnership invests a portion of its assets in obligations of the U.S. Treasury and certain other U.S. government agencies ("Government Securities") under the direction of MLAM within the parameters established by MLIP for which MLAM accepts no responsibility. These investments are carried at fair value. Organization and Initial Offering Costs, Operating Expenses and Selling ----------------------------------------------------------------------- Commissions ----------- The General Partner advanced all organization and initial offering costs relating to the Partnership and the Trading Partnership. The Partnership and Trading Partnership are reimbursing the General Partner for such costs in 36 equal monthly installments. For financial reporting purposes, the Partnership deducted the organization and initial offering reimbursement costs of $239,100 from partners' capital at inception. For all other purposes (including determining Net Asset Values of the Units), the Partnership deducts the organization and initial offering cost reimbursements only as actually paid. The General Partner pays all routine operating costs (including legal, accounting, printing and similar administrative expenses) of the Partnership and the Trading Partnership, including the cost of the ongoing offering of the Units. The General Partner receives an administrative fee as well as a portion of the brokerage commissions paid to MLF by the Partnership as reimbursement for the foregoing expenses. No selling commissions have been or are paid by Limited Partners. -6- Income Taxes ------------ No provision for income taxes has been made in the accompanying consolidated financial statements as each Partner is individually responsible for reporting income or loss based on such Partner's respective share of the Partnership's consolidated income and expenses as reported for income tax purposes. Redemptions ----------- A Limited Partner may require the Partnership to redeem some or all of such Partner's Units at Net Asset Value as of the close of business on the last business day of any month upon ten calendar days' notice. Units redeemed on or prior to the end of the twelfth full month after purchase are assessed an early redemption charge of 3% of their Net Asset Value as of the date of redemption. Dissolution of the Partnership ------------------------------ The Partnership will terminate on December 31, 2024, or at an earlier date if certain conditions occur, as well as under certain other circumstances as set forth in the Limited Partnership Agreement. 2. RELATED PARTY TRANSACTIONS A portion of the Partnership's U.S. dollar-denominated assets are held at MLF in cash or short-term Treasury bills. The Partnership receives all interest paid on such Treasury bills. On the cash held at MLF, the Partnership receives interest from Merrill Lynch at rates ranging from .50 of 1% per annum below the prevailing 91-day Treasury bill rate up to the full prevailing 91-day Treasury bill rate. Merrill Lynch may derive certain economic benefits, in excess of the interest which Merrill Lynch pays to the Partnership, from possession of such cash. Merrill Lynch credits the Partnership with interest on the Partnership's non-U.S. dollar-denominated available assets based on local short-term rates. Merrill Lynch charges the Partnership Merrill Lynch's cost of financing realized and unrealized losses on the Partnership's non-U.S. dollar-denominated positions. Prior to 1996, the Partnership paid brokerage commissions to MLF in respect of each series of Units at a flat monthly rate equal to .792 of 1% (a 9.5% annual rate) of such series' month-end assets allocated to the trading. Effective January 1, 1996, this rate was reduced to .771 of 1% (a 9.25% annual rate) of each series' month-end assets allocated to trading and the Partnership began to pay MLIP a monthly administrative fee of .021 of 1% (a .25% annual rate) of each series' month-end assets allocated to trading (this recharacterization had no economic effect on the Partnership). Assets committed to trading are not reduced for purposes of calculating brokerage commissions and administrative fees by any accrued brokerage commissions, administrative fees, profit shares or other fees or charges. The General Partner estimates that the round-turn equivalent commission rate charged to the Partnership during the years ended December 31, 1996 and 1995, and the period from October 12, 1994 to December 31, 1994, was approximately $116, $134 and $53, respectively, not including, in calculating round-turn equivalents, forward contracts on a futures- equivalent basis. MLF pays MLAM annual management fees of .20 of 1% on the first $25 million of Partnership capital managed by MLAM, .15 of 1% on the next $25 million of capital, .125 of 1% on the next $50 - 7 - million, and .10 of 1% on capital in excess of $100 million. Such fees are paid quarterly in arrears and are calculated on the basis of the average daily assets managed by MLAM. MLF pays the Trading Advisors annual Consulting Fees, ranging up to 4% of the Partnership's average month-end assets allocated to them for management, after reduction for a portion of the brokerage commissions accrued with respect to such assets. The Partnership trades forward contracts through a Foreign Exchange Service Desk (the "F/X Desk") established by MLIP that contacts at least two counterparties along with Merrill Lynch International Bank ("MLIB") for all of the Partnership's currency transactions. All counterparties other than MLIB are unaffiliated with any Merrill Lynch entity. The F/X Desk charges a service fee (at current exchange rates) equal to approximately $5.00 to $12.50 on each purchase or sale of a futures-contract equivalent face amount of a foreign currency. No service fee is charged on trades awarded to MLIB (on which MLIB receives a "bid-ask" spread). MLIB is awarded trades only if its price (without the service fee) is equal to or better than the best price (including the service charge) offered by any of the other counterparties contacted. The F/X Desk trades using credit lines provided by a Merrill Lynch entity. The Partnership is not required to margin or otherwise guarantee its F/X Desk trading. Certain of the Partnership's currency trades are executed in the form of "exchange of futures for physical" ("EFP") transactions involving MLIB and MLF. In these transactions, a spot or forward (collectively referred to as "cash") currency position is acquired and exchanged for an equivalent futures position on the Chicago Mercantile Exchange's International Monetary Market. In its EFP trading, the Partnership acquires cash currency positions through the F/X Desk in the same manner and on the same terms as in the case of the Partnership's other F/X Desk trading. When the Partnership exchanges these positions for futures, there is a "differential" between the prices of these two positions. This "differential" reflects, in part, the different settlement dates of the cash and the futures contracts as well as prevailing interest rates, but also includes a pricing spread in favor of MLIB or another Merrill Lynch entity. The Partnership's F/X Desk service fee and EFP differential costs combined have, to date, totaled no more than .25 of 1% per annum of the Partnership's average month-end assets allocated to trading. 3. ANNUAL DISTRIBUTIONS The Trading Partnership makes annual fixed-rated distributions, payable irrespective of profitability, of between $2 and $6 per Unit on the Series A-H Units. The Partnership may also pay discretionary distributions on such Series of Units of up to 50% of any Distributable New Appreciation, as defined. As of December 31, 1996, the Partnership has made the following distributions:
Distribution Fixed-Rate Discretionary Series Date Distribution Distribution ---------- ---------------- ------------------ ------------------- 1996 ------ Series A 10/1/96 $3.50 $2.50 Series B 1/1/96 3.50 2.50 Series C 4/1/96 3.50 - Series D 7/1/96 3.50 - Series E 10/1/96 3.50 - 1995 ------ Series A 10/1/95 3.50 2.50
- 8 - 4. AGREEMENTS The Trading Partnership and the Advisors have each entered into Advisory Agreements. These Advisory Agreements generally terminate one year after they are entered into, subject to certain renewal rights exercisable by the Partnership. The Advisors determine the commodity futures and forward contract trades to be made on behalf of their respective Partnership accounts, subject to certain trading policies and to certain rights reserved for the General Partner. Profit Shares, generally ranging from 15% to 25% of any New Trading Profit, as defined, recognized by each Advisor individually, irrespective of the overall performance of the Partnership, as of the end of each calendar quarter are paid to the appropriate Advisors. Profit shares are also paid out as in respect of Units redeemed as of the end of interim months during a quarter to the extent of the applicable percentage of any New Trading Profit attributable to such Units. 5. NET ASSET VALUE PER UNIT For financial reporting purposes, the Partnership deducted the total organizational and initial offering costs payable to the General Partner at inception for purposes of determining Net Asset Value. Such deduction was allocated pro-rata among the outstanding Units of each series based upon the aggregate Net Asset Value of each series, and then equally among all Units of the same series. For all other purposes (including computing Net Asset Value for redemptions) the Partnership deducts the organizational and initial offering cost reimbursements only as actually paid. Consequently, at December 31, 1996 and 1995, the Net Asset Values of the different series of Units for financial reporting purposes and for all other purposes were:
Net Asset Value Net Asset Value per Unit -------------------------------- --------------------------- All Other Financial Number of All Other Financial Purposes Reporting Units Purposes Reporting ---------------- -------------- ----------- ------------ ------------- 1996 --------------------------------------------------------------------------- Series A Units $21,048,780 $21,031,369 190,136.00 $110.70 $110.61 Series B Units 3,447,686 3,444,936 30,179.00 114.24 114.15 Series C Units 4,996,014 4,992,389 45,696.00 109.33 109.25 Series D Units 12,582,502 12,567,310 116,303.00 108.19 108.06 Series E Units 10,484,159 10,476,812 96,561.50 108.58 108.50 Series F Units 10,179,910 10,173,793 93,465.62 108.92 108.85 Series G Units 6,967,116 6,962,973 64,920.50 107.32 107.25 Series H Units 9,199,107 9,193,703 86,398.35 106.47 106.41 ------------ ------------ ---------- Total $78,905,274 $78,843,285 723,659.97 =========== =========== ========== 1995 --------------------------------------------------------------------------- Series A Units $29,380,564 $29,321,472 274,693.00 $106.96 $106.74 Series B Units 7,011,988 6,999,016 63,540.00 110.36 110.15 Series C Units 6,800,466 6,788,236 65,800.00 103.35 103.16 Series D Units 20,522,519 20,485,530 200,540.00 102.34 102.15 Series E Units 11,272,696 11,252,290 109,745.98 102.72 102.53 ------------ ----------- ---------- Total $74,988,233 $74,846,544 714,318.98 =========== =========== ==========
- 9 - 6. WEIGHTED AVERAGE UNITS Weighted average number of Units outstanding was computed for purposes of disclosing consolidated net income per weighted average Unit. The weighted average Units at December 31, 1996, 1995 and 1994 equals the Units outstanding as of such date, adjusted proportionately for Units redeemed or issued based on the respective length of time each was outstanding during such period. 7. MERRILL LYNCH & CO., INC. GUARANTEE Merrill Lynch has guaranteed to the Partnership that it will have sufficient net assets, as of the Principal Assurance Date, as defined, for each series of Units, that the Net Asset Value per Unit of such series as of such Principal Assurance Date will equal, after reduction for all liabilities to third parties and all distributions paid to such Units, not less than $100. 8. FAIR VALUE AND OFF-BALANCE SHEET RISK The Partnership trades futures, options on futures and forward contracts on interest rates, stock indices, commodities, currencies, energy and metals. The Partnership's trading results by reporting category were as follows:
Total Trading Results ------------------------------------------ 1996 1995 -------------- -------------- Interest Rates $3,183,955 $3,933,366 Stock Indices (746,255) 587,931 Commodities 20,119 (447,486) Currencies 3,301,360 2,914,300 Energy 3,280,677 238,988 Metals (398,013) (1,463,889) -------------- -------------- $8,641,843 $5,763,210 ============== ===============
Market Risk ----------- Derivative financial instruments involve varying degrees of off-balance sheet market risk, and changes in the level or volatility of interest rates, foreign currency exchange rates or market values of the financial instruments or commodities underlying such derivative instruments frequently result in changes in the Partnership's unrealized profit (loss) on such derivative instruments as reflected in the Consolidated Statements of Financial Condition. The Partnership's exposure to market risk is influenced by a number of factors, including the relationships among the derivative instruments held by the Trading Partnership as well as the volatility and liquidity in the markets in which the derivative instruments are traded. The General Partner has procedures in place intended to control market risk, although there can be no assurance that they will, in fact, succeed in doing so. The procedures focus primarily on monitoring the trading of the Advisors selected from time to time for the Partnership, adjusting the percentage of the Partnership's total assets allocated to trading with respect to each Series of Units, calculating the Net Asset Value of the Advisors' respective Partnership accounts as of the close of business on each day and reviewing outstanding positions for over-concentrations -- both on an Advisor-by- Advisor and on an overall Partnership basis. While the General Partner will not itself intervene in the markets to hedge or diversify the Partnership's market exposure, the General Partner may urge Advisors to reallocate - 10 - positions, or itself reallocate Partnership assets among Advisors (although typically only as of the end of a month), in an attempt to avoid over- concentrations. However, such interventions are unusual. Except in cases in which it appears that an Advisor has begun to deviate from past practice and trading policies or to be trading erratically, the General Partner's basic risk control procedures consist simply of the ongoing process of Advisor monitoring and selection, with the market risk controls being applied by the Advisors themselves. One important aspect of the General Partner's risk controls is its adjustments to the leverage at which each series of Units trades. By controlling the percentage of each series' assets allocated to trading, the General Partner can directly affect the market exposure of the Partnership. Leverage control is the principal means by which the General Partner hopes to be able to ensure that Merrill Lynch is never required to make any payments under its guarantee that the Net Asset Value per Unit of each series will equal no less than $100 as of the Principal Assurance Date for such series. Fair Value ---------- The derivative instruments traded by the Trading Partnership are marked to market daily with the resulting unrealized profit (loss) recorded in the Consolidated Statements of Financial Condition and the related profit (loss) reflected in trading revenues in the Consolidated Statements of Income. The contract/notional values of the Trading Partnership's open derivative instrument positions as of December 31, 1996 and 1995 were as follows:
1996 1995 ----------------------------------------- ----------------------------------------- Commitment to Commitment to Commitment to Commitment to Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures, Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards) ------------------- ------------------- ------------------- ------------------- Interest Rates $103,258,306 $ 38,270,540 $230,060,441 $ 37,950,386 Stock Indices 4,259,475 2,340,013 8,866,682 152,858 Commodities 8,541,433 12,761,047 17,582,456 3,850,643 Currencies 53,592,111 86,479,803 34,118,884 71,457,359 Energy 5,566,768 - 9,047,015 3,440,800 Metals 4,593,702 14,839,516 7,796,167 11,765,623 ---------------- ---------------- ---------------- ---------------- $179,811,795 $154,690,919 $307,471,645 $128,617,669 ================ ================ ================ ================
Substantially all of the Trading Partnership's open derivative instruments outstanding as of December 31, 1996, expire within one year. - 11 - The contract/notional value of the Trading Partnership's exchange-traded and non-exchange-traded derivative instrument positions as of December 31, 1996 and 1995 was as follows:
1996 1995 ------------------------------------------- ------------------------------------------ Commitment to Commitment to Commitment to Commitment to Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures, Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards) ------------------- ------------------- ------------------- ------------------- Exchange-Traded $133,757,339 $ 85,639,298 $238,654,840 $ 76,980,099 Non-Exchange Traded 46,054,456 69,051,621 68,816,805 51,637,570 ---------------- ----------------- --------------- ----------------- $179,811,795 $154,690,919 $307,471,645 $128,617,669 ================ ================= =============== =================
The average fair value of the Trading Partnership's derivative instrument positions which were open as of the end of each calendar month during the year ended December 31, 1996 and 1995 was as follows:
1996 1995 ------------------------------------------ ------------------------------------------ Commitment to Commitment to Commitment to Commitment to Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures, Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards) ------------------- ------------------- ------------------- ------------------- Interest Rates $224,985,973 $91,029,835 $170,252,009 $14,100,439 Stock Indices 10,235,486 2,492,230 5,390,839 1,288,747 Commodities 13,316,970 7,175,841 9,360,681 2,915,357 Currencies 94,601,907 115,671,672 36,054,488 38,557,545 Energy 6,862,906 1,348,945 2,823,925 2,417,008 Metals 13,579,528 19,196,951 6,113,263 10,207,341 ----------------- ---------------- ---------------- --------------- $363,582,770 $236,915,474 $229,995,205 $69,486,437 ================= ================ ================ ===============
A portion of the amounts indicated as off-balance sheet risk reflects offsetting commitments to purchase and to sell the same derivative instrument on the same date in the future. These commitments are economically offsetting but are not, as a technical matter, offset in the forward markets until the settlement date. Credit Risk ----------- The risks associated with exchange-traded contracts are typically perceived to be less than those associated with over-the-counter (non-exchange-traded) transactions, because exchanges typically (but not universally) provide clearinghouse arrangements in which the collective credit (in some cases limited in amount, in some cases not) of the members of the exchange is pledged to support the financial integrity of the exchange. In over-the- counter transactions, on the other hand, traders must rely solely on the credit of their respective individual counterparties. Margins, which may be subject to loss in the event of a default, are generally required in exchange trading, and counterparties may require margin in the over-the- counter markets. The fair value amounts in the above tables represent the extent of the Trading Partnership's market exposure in the particular class of derivative instrument, but not the credit risk associated with counterparty nonperformance. The credit risk associated with these instruments, from counterparty - 12 - nonperformance, is the net unrealized profit, if any, included on the Consolidated Statements of Financial Condition. The Trading Partnership also has credit risk because the sole counterparty or broker with respect to most of the Trading Partnership's assets is MLF. The gross unrealized profit and the net unrealized profit (loss) on the Trading Partnership's open derivative instrument positions as of December 31, 1996 and 1995 were as follows:
1996 1995 ----------------------------------- -------------------------------------- Gross Unrealized Net Unrealized Gross Unrealized Net Unrealized Profit Profit (Loss) Profit Profit (Loss) ---------------- ---------------- ---------------- ---------------- Exchange Traded $2,090,698 $1,611,482 $2,942,622 $2,223,484 Non-Exchange 1,172,965 65,835 352,246 (149,946) Traded ------------- ------------- -------------- -------------- $3,263,663 $1,677,317 $3,294,868 $2,073,538 ============= ============= ============== ==============
The Partnership controls credit risk by dealing almost exclusively with Merrill Lynch entities as brokers and counterparties. The Partnership, through its normal course of business, enters into various contracts with MLF acting as its commodity broker. Pursuant to the brokerage arrangement with MLF, to the extent that such trading results in receivables from and payables to MLF, these receivables and payables are offset and reported as a net receivable or payable. 9. SUBSEQUENT EVENT Effective January 1, 1997, each series of Units' brokerage commission percentage was reduced to .729 of 1% (an 8.75% annual rate) of the Partnership's month-end assets allocated to trading. To the best of the knowledge and belief of the undersigned, the information contained in this report is accurate and complete. James M. Bernard Chief Financial Officer Merrill Lynch Investment Partners Inc. General Partner of ML Principal Protection L.P. -13 - EX-27 6 FINANCIAL DATA SCHEDULE
BD THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, CONSOLIDATED STATEMENTS OF INCOME, CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000917259 ML PRINCIPAL PROTECTION L.P. 12-MOS 12-MOS DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1995 DEC-31-1996 DEC-31-1995 328 19,332 8,878,706 3,678,229 0 0 0 0 72,815,648 74,280,477 0 0 81,694,682 77,978,038 0 0 2,082,851 2,620,580 0 0 0 0 0 0 0 0 0 0 0 0 0 0 79,611,831 75,357,458 81,694,682 77,978,038 8,641,843 5,763,210 4,545,186 3,415,670 4,775,116 3,303,292 0 0 0 0 0 0 0 0 7,223,364 5,186,492 7,223,364 5,186,492 0 0 0 0 7,223,364 5,186,492 9.57 9.40 9.57 9.40
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