As filed with the Securities and Exchange Commission on May 30, 1997
Securities Act File No. 333-15035
Investment Company Act File No. 811-7887
==============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. 2
/ / Post-Effective Amendment No.
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 2
------------------------------
MERRILL LYNCH KECALP L.P. 1997
(Exact name of registrant as specified in charter)
------------------------------
World Financial Center - South Tower
225 Liberty Street
New York, New York 10080-6123
(Address of principal executive offices)
Registrant Telephone Number, including Area Code: (212) 236-7302
KECALP INC.
World Financial Center - North Tower
250 Vesey Street
New York, New York 10281-1334
Attn: Mark B. Goldfus
(Name and address of agent for service)
-----------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. / /
- -------------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
files a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the registration statement shall
become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
=============================================================================
Merrill Lynch KECALP L. P. 1997
CROSS REFERENCE SHEET
Between Items of Registration Statement (Form N-2)
and Prospectus
Pursuant to Rule 404 (c)
PARTS A and B
Item
No. Caption Location in Prospectus
------- ----------------------
1. Outside Front Cover...... Outside Front Cover
2. Inside Front and Outside
Back Cover Page......... Inside Front and Outside Back Cover Page
3. Fee Table and Synopsis... Prospectus Summary; Fund Expenses
4. Financial Highlights..... Not Applicable
5. Plan of Distribution..... Outside Front Cover; Offering and Sale of
Units
6. Selling Shareholders..... Not Applicable
7. Use of Proceeds.......... The Partnership; Investment Objective and
Policies
8. General Description of
the Registrant........... Cover Page of Prospectus; The
Partnership; Risk and Other Important
Factors; Investment Objective and
Policies; Fiduciary Responsibility of the
General Partner;
Summary of the Partnership Agreement
9. Management.............. Fiduciary Responsibility of the General
Partner; The General Partner and Its
Affiliates; Summary of the Partnership
Agreement
10. Capital Stock, Long-Term
Debt, and
Other Securities....... Summary of the Partnership Agreement;
Transferability of the Units
11. Defaults and Arrears on
Senior Securities...... Not Applicable
12. Legal Proceedings....... Not Applicable
13. Table of Contents of the
Statement
of Additional.......... Not Applicable
14. Cover Page.............. Not Applicable
15. Table of Contents....... Not Applicable
16. General Information
and History............ Not Applicable
17. Investment Objective
and Policies........... Investment Objective and Policies
18. Management.............. Fiduciary Responsibility of the General
Partner; The General Partner and Its
Affiliates; Summary of the Partnership
Agreement
19. Control Persons and
Principal Holders
of Securities......... Cover Page; The General Partner and Its
Affiliates
20. Investment Advisory and
Other Services........ The General Partner and Its Affiliates
21. Brokerage Allocation
and Other Practices... Not Applicable
22. Tax Status............. Tax Aspects of Investment in the
Partnership
23. Financial Statements... Financial Statements
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 30, 1997
$250,000,000
250,000 UNITS OF LIMITED PARTNERSHIP INTEREST
MERRILL LYNCH KECALP L.P. 1997
$1,000 PER UNIT MINIMUM INVESTMENT 5 UNITS ($5,000)
Merrill Lynch KECALP L.P. 1997 (the "Partnership") hereby offers 250,000
units of limited partnership interest (the "Units") in the Partnership to
certain employees of Merrill Lynch & Co., Inc. ("ML & Co.") and its
subsidiaries and to non-employee directors of ML & Co. ("Eligible
Investors"). Units are also being offered to ML & Co. for purchase in
connection with a deferred compensation program of ML & Co. for certain of
its key employees. The Partnership's principal offices are at South Tower,
World Financial Center, 225 Liberty Street, New York, New York 10080-6123 and
its telephone number is (212) 236-7302. KECALP Inc., a wholly-owned
subsidiary of ML & Co., is the general partner (the "General Partner") of the
Partnership. The Partnership will operate as a non-diversified, closed-end
investment company of the management type. The General Partner has obtained
an order from the Securities and Exchange Commission exempting the
Partnership, as an "employees' securities company", from certain provisions
of the Investment Company Act of 1940. See "Exemptions from the Investment
Company Act of 1940".
The investment objective of the Partnership is to seek long-term capital
appreciation. It is expected that a significant portion of the proceeds of
this offering will be invested in privately-offered equity investments in
U.S. and non-U.S. issuers. The Partnership's investments may include
securities issued in leveraged buyout transactions, financings of companies
in an early stage of development, investments in growth equities
and transactions involving financial restructurings or
recapitalizations of operating companies, as described herein. Investments
may also be made in
real estate opportunities. Investments in non-U.S. issuers may include
opportunities in both emerging markets and developed countries. The
Partnership's investments may be made directly or through the purchase of
interests in other funds. The Partnership may make other investments in
equity and fixed income securities that the General Partner considers
appropriate in terms of their potential for long-term capital appreciation.
The Partnership's investment policies involve a very high degree of risk.
See "Investor Suitability Standards", "Conflicts of Interest", "Risk and
Other Important Factors" and "Investment Objective and Policies". The
Partnership may borrow funds for investment in securities, which would have
the effect of leveraging the Units. See "Investment Objective and
Policies Leverage".
The Units are being offered by Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S") on a "best efforts" basis. Eligible Investors must
submit completed subscription documents not later than July , 1997, or such
other subsequent date, not later than August , 1997, as MLPF&S and the
General Partner may agree upon. Subsequent to such date, the General Partner
will advise such investors as to whether their subscriptions have been
accepted and thereupon MLPF&S shall promptly debit funds from
accepted investors' accounts for payment into
the Partnership's escrow account. The General Partner will also advise
prospective investors of the termination date of the offering (the "Offering
Termination Date"). If subscriptions (including subscriptions of ML & Co.)
for 40,000 Units have not been received by the Offering Termination Date, no
Units will be sold. Funds paid by subscribers will be deposited in a bank
escrow account and held in trust for the benefit of subscribers, and, if the
required minimum is not obtained or other conditions not satisfied, will be
refunded promptly with interest, if any. Subscriptions deposited in the
escrow account may not be terminated or withdrawn by subscribers. See
"Offering and Sale of Units".
------------------------
This Prospectus sets forth concisely information about the Partnership that a
prospective investor ought to know before investing. Investors are advised
to read this Prospectus and retain it for future reference.
------------------------
THE UNITS ARE A SPECULATIVE INVESTMENT AND THIS OFFERING INVOLVES
VARIOUS SUBSTANTIAL RISKS AS DESCRIBED IN THIS PROSPECTUS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO PUBLIC SALES LOAD(1) PROCEEDS TO PARTNERSHIP(2)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit . . . . . . . . $ 1,000 -- $ 1,000
Total Minimum . . . . . . $ 40,000,000 -- $ 40,000,000
Total Maximum . . . . . . $250,000,000 -- $250,000,000
</TABLE>
(footnotes on next page)
MERRILL LYNCH & CO.
----------------------
THE DATE OF THIS PROSPECTUS IS MAY , 1997.
(Continued from cover page)
(1) No sales commission will be charged purchasers of Units. The General
Partner has agreed to indemnify MLPF&S against certain liabilities,
including liabilities under the Securities Act of 1933. See "Offering
and Sale of Units".
(2) Before deducting organizational and offering expenses payable by the
Partnership, estimated at $400,000 but not exceeding 1% of the proceeds
of the offering. The General Partner will bear the remaining costs, if
any, of forming the Partnership and registering the Units under the
Securities Act of 1933 and the securities laws of various states.
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST
NOT BE RELIED UPON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER.
UNTIL AUGUST , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE UNITS,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A CURRENT COPY OF THIS PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS.
INVESTOR SUITABILITY STANDARDS
Only employees of ML & Co. and its subsidiaries and non-employee
directors of ML & Co. who meet the suitability standards described below
("Eligible Investors"), together with ML & Co., will be eligible to purchase
Units. THE PURCHASE OF UNITS INVOLVES SIGNIFICANT RISKS AND UNITS ARE NOT A
SUITABLE INVESTMENT FOR ALL QUALIFIED INVESTORS. See "Risk and Other
Important Factors".
1. Substantial Means and Net Worth. The purchase of Units is suitable
only for those persons who have no need for liquidity in this investment and
who have adequate means of providing for their current needs and
contingencies. Accordingly, no Units will be sold to an employee of ML & Co.
or its subsidiaries or a non-employee director of ML & Co. unless such
investor (i) in the case of employees of ML & Co. or its subsidiaries, has a
current annual salary in an amount which, together with bonus received from
ML & Co. or its subsidiaries in respect of 1996, equals at least $100,000 or,
if employed for less than a full calendar year, is employed with an
annualized gross income from ML & Co. or its subsidiaries of at least
$100,000, or (ii) in the case of non-employee directors of ML & Co., (a) has
a net worth (exclusive of homes, home furnishings, personal automobiles and
the amount to be invested in Units) of not less than $125,000 in excess of
the price of the Units for which such investor has subscribed, or (b) has a
net worth (exclusive of homes, home furnishings, personal automobiles and the
amount to be invested in Units) of not less than $100,000 in excess of the
price of the Units for which such investor has subscribed and expects to have
during each of the current and the next three taxable years, gross income
from all sources in excess of $100,000. Investors will be required to
represent in writing in the Subscription Agreement that they meet the
applicable requirements. Investors who can make such representation, together
with ML & Co., are hereinafter referred to as "Qualified Investors". CERTAIN
MAXIMUM PURCHASE RESTRICTIONS HAVE BEEN IMPOSED ON QUALIFIED INVESTORS. SEE
"OFFERING AND SALE OF UNITS MAXIMUM PURCHASE BY QUALIFIED INVESTORS".
2. Ability and Willingness to Accept Risks. The economic benefit from
an investment in the Partnership depends on many factors beyond the control
of the General Partner, including general economic conditions, changes in
governmental regulation, inflation, tax treatment of portfolio investments
and resale value of such investments. See "Risk and Other Important
Factors". Accordingly, the suitability for any Qualified Investor of a
purchase of Units will depend on, among other things, such investor's
investment objectives and such investor's ability to accept speculative
risks.
3. Ability to Accept Limitations on Transferability. PURCHASERS OF
UNITS SHOULD VIEW THEIR INTEREST IN THE PARTNERSHIP AS A LONG-TERM, ILLIQUID
INVESTMENT. Limited partners may not be able to liquidate their investment
in the event of emergency or for any other reason because there is not any
public market for Partnership Units and there are restrictions contained in
the Amended and Restated Agreement of Limited Partnership (the "Partnership
Agreement"), the form of which is attached as Exhibit A to this Prospectus,
which are intended to prevent the development of a public market for Units.
Moreover, the transferability of Units is subject to certain restrictions in
the Partnership Agreement and may be affected by restrictions on resales
imposed by the laws of some states. See "Transferability of Units".
SUMMARY OF THE OFFERING
The summary information below should be read in conjunction with the
detailed information provided elsewhere in this Prospectus.
INTRODUCTION: The Partnership is designed as a convenient
vehicle for Qualified Investors to acquire
interests in a portfolio of varied investments.
It is expected that a significant portion of
the Partnership's investments will be
privately-offered equity investments that have
been made available to ML & Co. or its
affiliates and are generally not available to
individuals. See "Investment Objective and
Policies".
THE OFFERING: 250,000 units of limited partnership interest
in the Partnership, each representing a capital
contribution of $1,000. MLPF&S is acting as
selling agent for the Partnership and the
General Partner. The minimum investment is
five Units ($5,000) and additional Units may be
purchased in increments of $1,000. Certain
maximum purchase restrictions will be imposed
on Qualified Investors (see "Offering and Sale
of Units Maximum Purchase by Qualified
Investor"). Eligible Investors must submit
completed subscription documents not later than
July , 1997, or such subsequent date, not
later than August , 1997, as the General
Partner and MLPF&S may determine. Subsequent
to such date, the General Partner will advise
such investors as to whether their
subscriptions have been accepted and thereupon
MLPF&S shall promptly debit funds from accepted
investors' accounts for payment
into the Partnership's escrow account. The
General Partner will also advise such investors
of the termination date of the offering (the
"Offering Termination Date"). If subscriptions
(including subscriptions of ML & Co.) for
40,000 Units are not received by the Offering
Termination Date, the offering will be
terminated, and all funds received will be
refunded with interest, if any, actually earned
thereon. If subscriptions for more than
250,000 Units are received, the General Partner
may reject any subscription in whole or part.
Funds paid for any subscription for Units that
is rejected will be refunded promptly.
Qualified Investors admitted as limited
partners are hereinafter referred to, together
with the initial limited partner and any
substituted limited partners, as the "Limited
Partners". The Units will be non-assessable.
See "Offering and Sale of Units".
The Partnership is also offering Units to ML &
Co. for purchase by it in connection with its
obligations under a 1997 deferred compensation
plan offered by ML & Co. to certain of its key
employees. Such employees will not,
themselves, be Limited Partners of the
Partnership by virtue of their participation in
such plan. ML & Co. has advised the
Partnership that it may purchase up to 200,000
Units as a result of participation by eligible
employees in such deferred compensation plan.
See "Offering and Sale of Units--Purchase of
Units by ML & Co."
THE PARTNERSHIP: A Delaware limited partnership formed on
October 28, 1996. Its address is South Tower,
World Financial Center, 225 Liberty Street, New
York, New York 10080-6123 (telephone: (212)
236-7302). The Partnership will operate as a
non-diversified, closed-end investment company
of the management type under the Investment
Company Act of 1940. An order has been
obtained from the Securities and Exchange
Commission exempting the Partnership from
certain provisions of such Act. The functions
and responsibilities of the General Partner and
the rights of the Limited Partners are
authorized by or specified in the Partnership
Agreement. See "The Partnership", "Summary of
the Partnership Agreement" and "Exemptions from
the Investment Company Act of 1940".
THE GENERAL PARTNER: KECALP Inc. (the "General Partner"), a Delaware
corporation indirectly wholly-owned by ML &
Co., a Delaware corporation, and located at
South Tower, World Financial Center, 225
Liberty Street, New York, New York 10080-6123
(telephone: (212) 236-7302). The General
Partner will manage and make investment
decisions for the Partnership. KECALP Inc.
serves as the general partner of seven limited
partnerships which have been established since
1983 for investment by qualifying employees of
ML & Co. (collectively, the "KECALP
Partnerships"), and it is contemplated that in
the future it will serve in the same capacity
for other similar partnerships that may be
offered to the same class of limited partner
investors. See "The General Partner and Its
Affiliates". The General Partner has also been
designated to serve as Tax Matters Partner for
the Partnership with respect to all
administrative and judicial proceedings
relating to an audit of the Partnership's U.S.
Federal income tax information return. See
"Tax Aspects of Investment in the Partnership".
INVESTMENT OBJECTIVE: The investment objective of the Partnership is
to seek long-term capital appreciation. It is
expected that a significant portion of its
assets will be invested in privately-offered
equity investments in U.S. and non-U.S.
issuers. The Partnership's investments may
include securities issued in leveraged buyout
transactions, financings by companies in an
early stage of development, investments in
growth equities and
transactions involving financial restructurings
or recapitalizations of operating companies,
as described below.
Investments may also be made in real estate
opportunities. Investments in non-U.S. issuers
may include opportunities in both emerging
markets and developed countries. The
Partnership's investments may be made directly
in portfolio companies or through the purchase
of interests in other investment funds,
including hedge funds. The Partnership
anticipates that many of its investments will
be made available to it by ML & Co. or its
affiliates. Information concerning potential
sources of investments, including potential co-
investment opportunities, is set forth under
"Investment Objective and Policies--Sources of
Investment Opportunities". The Partnership may
make other investments in equity and fixed
income securities that the General Partner
considers appropriate in terms of their
potential for capital appreciation. Current
income will not generally be a significant
factor in the selection of investments. There
can be no assurance that the Partnership's
investment objective will be attained. See
"Investment Objective and Policies" and "Tax
Aspects of Investment in the Partnership".
LEVERAGE: The Partnership is authorized to borrow funds
when it believes such action is desirable to
enable the Partnership to make new investments
or follow-on investments. Such use of leverage
would exaggerate increases or decreases in the
Partnership's net assets. See "Investment
Objective and Policies--Leverage".
COMPENSATION AND FEES: The Partnership will pay organizational and
offering expenses in an amount of up to 1% of
the proceeds of the offering. During the term
of the Partnership, the General Partner is
obligated to pay all expenses, fees,
commissions and other expenditures on behalf of
the Partnership not paid by ML & Co. or its
other subsidiaries. The General Partner will
be entitled to receive annual reimbursement
from the Partnership, in amounts up to 0.5% of
Limited Partners' capital contributions (1%, if
the capital contributions are less than $60
million), of operating expenses incurred by the
General Partner with respect to the
Partnership. Expenses paid by the General
Partner that are not reimbursed to it shall be
deemed a contribution to capital and be
reflected in the General Partner's capital
account. Since repayment of any positive
amount in a Partner's capital account is a
priority item upon dissolution, the General
Partner may, upon dissolution, recoup
expenditures made on behalf of the Partnership.
In addition, the General Partner will be
entitled to a 1% interest in all items of
Partnership income, gain, deduction, loss and
credit, for which it has no obligation to make
a cash capital contribution upon the admission
of Qualified Investors as Limited Partners. To
the extent that investments are made in
transactions in which affiliates of the General
Partner are involved, certain other benefits
may accrue to affiliates. See "Compensation
and Fees".
PARTNERSHIP DISTRIBUTIONS
AND ALLOCATIONS: During the Partnership term, items of income,
gain, deduction, loss and credit will generally
be allocated 99% to the Limited Partners and 1%
to the General Partner. Cash distributions
will be made in the same manner. The General
Partner may make distributions of Partnership
assets in kind, in addition to cash
distributions. Each Limited Partner will be
required to take into account in computing his
Federal income tax liability his allocable
share of the Partnership's income, gain, loss,
deductions, credits and items of tax preference
for any taxable year of the Partnership ending
within or with the taxable year of such Limited
Partner, without regard to whether he has
received or will receive any distribution from
the Partnership. The Partnership has adopted a
calendar year for tax reporting purposes. TO
THE EXTENT THE PARTNERSHIP INVESTS IN OTHER
INVESTMENT FUNDS, IT MAY EXPERIENCE DELAYS IN
OBTAINING ANNUAL TAX INFORMATION, WHICH MAY
REQUIRE LIMITED PARTNERS TO OBTAIN EXTENSIONS
FOR FILING INCOME TAX RETURNS. Employees who
participate in the 1997 deferred compensation
plan will not, themselves, be Limited Partners
by virtue of their participation in such plan.
See "The Partnership" and "Tax Aspects of
Investment in the Partnership".
REINVESTMENT POLICY: The General Partner has the discretion to
reinvest all Partnership revenues. To the
extent portfolio investments are disposed of
within two years after the closing of the sale
of Units, the General Partner will consider
reinvesting all or a substantial portion of the
proceeds realized by the Partnership. However,
the General Partner does not expect to reinvest
proceeds from the liquidation of portfolio
investments (other than temporary investments)
occurring more than two years after the closing
of the sale of Units, except in connection with
follow-on investments made in existing
portfolio companies. In addition, income or
gains generated by investments in hedge funds
may be re-invested in such funds until such
time as the Partnership determines to dispose
of its investments therein. The General
Partner may also cause the Partnership to
maintain reserves for follow-on investments or
to apply cash received from investments to the
prepayment of any borrowings made by the
Partnership. To the extent that cash received
by the Partnership is not required for such
purposes or to reimburse the General Partner
for any expenses incurred or held for
reinvestment, it will be distributed to the
Partners at least annually. See "Investment
Objective and Policies".
DISSOLUTION: The Partnership term extends to December 31,
2037. However, pursuant to the Partnership
Agreement, the General Partner may dissolve the
Partnership, without the consent of the Limited
Partners, at any time after January 1, 2003.
It is not the General Partners intention to
dissolve the Partnership prior to the time when
the Partnership's equity investments have
matured and disposition of its other portfolio
investments can be effected. See "The
Partnership" and "Summary of the Partnership
Agreement".
RISKS: The purchase of Units involves a number of
significant risk factors. See "Risk and Other
Important Factors". Prospective investors
should also see the information set forth under
"Conflicts of Interest".
HOW TO SUBSCRIBE: (a) The Qualified Investor completes, dates,
executes and delivers to KECALP Inc., a copy of
the Limited Partner Signature Page and Power of
Attorney attached as part of the Subscription
Agreement, a form of which is attached as
Exhibit B to this Prospectus.
(b) The Qualified Investor's MLPF&S securities
account will be debited in the amount of $1,000
for each Unit (minimum purchase of five Units)
that he desires to purchase. A securities
account will be opened by MLPF&S for any
Qualified Investor who does not have such an
account.
PARTNERSHIP EXPENSES
The following table is intended to assist potential investors in
understanding the various costs and expenses associated with investing in the
Partnership.
Limited Partner Transaction Expenses
Sales Load (as a percentage of offering price)............. None
Annual Expenses (as a percentage of net assets)
Management Fees Payable to General Partner /(1)/........... None
Other Expenses (audit, legal and administrative) /(2)/..... 1.0%
-----
Total Annual Expenses...................................... 1.0%
======
------------------
(1) Does not include management fees that may be payable to managers of
any investment funds in which the Partnership invests, which will
be accounted for as an item of Partnership expense.
(2) "Other Expenses" have been estimated for the current fiscal year
and assume Limited Partners' capital contributions of $40 million,
the minimum in the Partnership's offering. Although the
Partnership does not pay operating expenses directly, the General
Partner is entitled to receive annual reimbursements from the
Partnership of Partnership expenses paid by the General Partner, in
amounts of up to 0.5% of the Limited Partners' capital
contributions (1%, if the capital contributions are less than $60
million).
Example
An investor would pay the following expenses on a hypothetical $1,000
investment in the Partnership, assuming a 5% annual return:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C>
$10 $32 $55 $126
</TABLE>
This "Example" assumes that all distributions are reinvested at net
asset value and that the percentage amounts listed under Annual Expenses
remain the same in the years shown. However, Limited Partners will not be
able to reinvest distributions of the Partnership. The above tables and the
assumption in the Example of a 5% annual return are required by regulations
of the Securities and Exchange Commission applicable to all investment
companies. THE ASSUMED 5% ANNUAL RETURN AND ANNUAL EXPENSES SHOULD NOT BE
CONSIDERED A REPRESENTATION OF ACTUAL OR EXPECTED PARTNERSHIP PERFORMANCE OR
EXPENSES, BOTH OF WHICH MAY VARY.
CONFLICTS OF INTEREST
The General Partner and its affiliates may be subject to various
conflicts of interest in their relationships with the Partnership. Such
conflicts of interest include:
1. Conflicts with Respect to Investment Opportunities. Affiliates of
the General Partner may in the future perform investment advisory services
for other investment entities with investment objectives and policies similar
to those of the Partnership and such entities may compete with the
Partnership for investment opportunities. It is anticipated that investment
vehicles with investment objectives and policies similar to the Partnership
may be offered from time to time to employees of subsidiaries of ML & Co.
located outside of the United States, including two investment vehicles (the
"Offshore KECALP Funds") expected to be offered concurrently with the
offering by the Partnership. It is anticipated that, to the extent permitted
by the Investment Company Act or exemptions therefrom, such vehicles will co-
invest with the Partnership in making portfolio investments, except where
such investments would not be advisable for such vehicles due to tax or other
considerations. Furthermore, ML & Co. and its affiliates may invest directly
in investments that would be appropriate investments for the Partnership.
While the General Partner is obligated to use its best efforts to provide the
Partnership with a continuing and suitable investment program consistent with
its investment objective and policies, the General Partner is not required to
present to the Partnership any particular investment opportunity that has
come to its attention, even if such opportunity is within the investment
objective and policies of the Partnership. Subject to the provisions of the
Investment Company Act or exemptions therefrom, the Partnership may invest
in companies in which ML & Co. and its affiliates (including other KECALP
Partnerships (as defined below)) have an existing investment. Because of
different objectives or other factors, a particular investment may be
bought by the Partnership, the General Partner or its affiliates or one of
their clients at a time when one of such entities is selling such investment.
In addition, affiliates of the General Partner, including its officers and
directors, may benefit to the extent the Partnership invests in securities
offered to other investors by MLPF&S in public offerings or private
placements. See "Compensation and Fees". The General Partner will
endeavor to resolve conflicts with respect to investment opportunities in
a manner deemed equitable to all to the extent possible under the
prevailing facts and circumstances.
2. Relations with Issuers of Portfolio Investments. Affiliates of
the General Partner, including MLPF&S, may perform financial services for
issuers of securities held by the Partnership or for affiliates of such
issuers. These relationships could influence the General Partner to take
actions, or forbear from taking actions, that an independent general partner
might not take or forbear from taking.
3. Conflicts with Respect to Dissolution. The General Partner has the
authority to dissolve the Partnership, without the consent of the Limited
Partners, at any time after January 1, 2003. The General Partner does not
intend to dissolve the Partnership until its equity investments have reached
a level of maturity where their disposition can be considered and the
Partnership can dispose of its portfolio securities. However, the General
Partner may dissolve the Partnership, for its administrative convenience, at
a time when some Limited Partners might prefer to have the Partnership
continue its operations.
4. Allocation of Management Time and Services. The Partnership will
not have independent management or employees and will rely on the General
Partner and its affiliates for management and administration of the
Partnership and its assets. Conflicts of interest may arise in allocating
management time, services or functions between the Partnership, the
established KECALP Partnerships and other entities for which officers of the
General Partner may provide services. The officers and directors of the
General Partner will devote such time to the affairs of the Partnership as
they, in their sole discretion, determine to be necessary for the conduct of
the business of the Partnership.
5. Participation by an Affiliate as Underwriter. As an affiliate of
the General Partner, MLPF&S may experience a conflict of interest in
performing its due diligence in connection with the public offering of the
Units. Although MLPF&S believes that its investigation of the General
Partner, the Partnership and their affairs for purposes of this offering has
in fact been as complete as would be the case in dealing with nonaffiliated
persons, the review performed by MLPF&S cannot be considered independent.
6. Determination of Reserves. In determining the appropriate level of
working capital reserves, the interest of the General Partner in assuring
adequate funds for operation (which may reduce the potential liability of the
General Partner to certain Partnership creditors) may, in some cases, be in
conflict with the interest of the Limited Partners in maximizing cash
distributions.
7. Lack of Separate Representation. The Partnership, the General
Partner and MLPF&S are represented by the same legal counsel and auditors.
However, should a dispute arise between the Partnership and either the
General Partner or any affiliate, the General Partner anticipates that it
will retain separate counsel or auditors as required for the Partnership for
such matter.
8. Conflicts Resulting from ML & Co.'s Ownership of Units and the 1997
Deferred Compensation Plan. Conflicts
may arise in the selection of investments for the Partnership as a result of
ML & Co.'s ownership of units and the participation in the 1997 Deferred
Compensation Plan by certain employees involved with the Partnership. Employee
participants in the 1997 deferred compensation plan (including certain
directors and
officers of the General Partner and members of the Advisory Committee (as
defined below) who are expected to participate through such plan and may
participate on an economically leveraged basis) will have an interest in
seeking to maximize total return
(including the receipt of ordinary income) as opposed to capital gains.
Participants in such plan who are not Limited Partners of the Partnership
would receive
no advantageous tax treatment for capital gains in respect of their
participation in such plan, while Limited Partners would receive such
advantageous treatment for capital gains. In addition, ML & Co., in light of
its anticipated significant holdings as a Limited Partner in the Partnership,
would have the ability to determine matters submitted to the vote of Limited
Partners. However, ML & Co. will agree to vote its Units in the same
proportion as other Limited Partners in respect of any matter submitted to
the vote of Limited Partners.
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER
The General Partner is under a fiduciary duty to conduct the affairs of
the Partnership in the best interests of the Partnership and consequently
must exercise good faith and integrity in handling Partnership affairs.
Prospective Limited Partners who have questions concerning the duties of the
General Partner should consult with their counsel.
The Partnership Agreement provides that neither the General Partner nor
any of its officers, directors, stockholders, employees, or agents shall be
liable to the Partnership or the Limited Partners for any act or omission
based on errors of judgment or other fault in connection with the business or
affairs of the Partnership so long as the person against whom liability is
asserted acted in good faith on behalf of the Partnership and in a manner
reasonably believed by such person to be within the scope of his or its
authority under the Partnership Agreement and in or not opposed to the best
interests of the Partnership, but only if such action or failure to act does
not constitute negligence or misconduct, and, with respect to any criminal
proceeding, such person had no reasonable cause to believe his or its conduct
was unlawful. The General Partner and its officers, directors, stockholders,
employees, and agents will be indemnified by the Partnership to the fullest
extent permitted by law for any (a) fees (including, without limitation,
legal fees), costs and expenses incurred in connection with or resulting from
any claim, action or demand, or threatened claim, action or demand, against
the General Partner, the Partnership or any of their officers, directors,
stockholders, employees or agents that arise out of or in any way relate to
the Partnership, its properties, business or affairs and (b) losses or
damages resulting from such claims, actions and demands, or threatened
claims, actions or demands, including amounts paid in settlement or
compromise (if recommended by attorneys for the Partnership) of any such
claim, action or demand or threatened claims, actions or demands; provided,
however, that this indemnification shall apply only so long as the person
against whom a claim, action or demand is asserted or threatened to be
asserted has acted in good faith and in a manner reasonably believed by such
person to be within the scope of his or its authority under the Partnership
Agreement and in or not opposed to the best interests of the Partnership, but
only if such action or failure to act does not constitute negligence or
misconduct. Thus, the Limited Partners may have a more limited right of
action than would otherwise be the case in the absence of such provisions.
In the absence of a court determination that the General Partner or officers
or directors of the General Partner were not liable on the merits or guilty
of disabling conduct within the meaning of Section 17(h) of the Investment
Company Act of 1940, the decision by the Partnership to indemnify the General
Partner or any such person must be based on the reasonable determination of
independent counsel, after review of the facts, that such disabling conduct
did not occur.
RISK AND OTHER IMPORTANT FACTORS
The purchase of Units offered hereby involves a number of significant
risk factors. In addition to risk factors set forth elsewhere in this
Prospectus, prospective purchasers should consider the following:
A. GENERAL RISKS
1. Risk of Unspecified and Unprofitable Investments. The proceeds of
this offering are intended to be invested in speculative growth securities
most of which have not yet been selected by the General Partner. See
"Investment Objective and Policies". Therefore, persons who purchase Units
will not have an opportunity to evaluate for themselves the specific
investments in which funds of the Partnership will be invested or the terms
of any such investments, and, accordingly, the risk of investing in Units may
be substantially increased. In addition, there can be no assurance that the
Partnership's investments will prove to be profitable. The purchasers of
Units must depend solely on the ability of the General Partner with respect
to the selection and timing of investments. See "The General Partner and Its
Affiliates" and "Investment Objective and Policies--Sources of Investment
Opportunities".
2. Risks of Equity Investments. The Partnership is authorized to make
equity investments offering the potential for long-term capital appreciation
in U.S. and non-U.S. issuers. These investments may include equity
investments in leveraged buyout transactions, financings of companies
in an early stage of development, investments in growth equities, and
transactions involving
financial restructurings or recapitalization of operating companies, as
described below. Investments may
also be made in real estate opportunities and in venture capital
transactions. These investments involve a high degree of business and
financial risk that can result in substantial losses. Among these are the
risks associated with investment in companies with little or no operating
history and companies operating at a loss or with substantial variations in
operating results from period to period. These companies may encounter
intense competition from established companies with greater resources. In
addition, companies in high-technology fields face special risks of product
obsolescence. Leveraged buyout investments typically involve a high degree
of debt financing and the highly leveraged financial structure of these
transactions introduces substantial additional risks. Investments in
companies that undertake financial recapitalization or restructuring
transactions involve the risk, among others, that the transaction may not
resolve financial or operational conditions that led to the recapitalization
or restructuring; in addition, to the extent that a company remains
leveraged following the completion of such a transaction, an equity
investment in the company may involve risks similar to an equity investment
in a leveraged buyout transaction. In addition, companies in which the
Partnership makes private equity investments may subsequently require
additional capital and may seek follow-on investments.
3. Illiquid Investments. Investments of the types to be made by the
Partnership are generally illiquid. Leveraged buyout and venture capital
investments may typically take from four to seven years to reach a state of
maturity where disposition can be considered. Real estate investments are
expected to be illiquid as described below. Investments in corporate
restructurings and recapitalization transactions may also require a
substantial time period before dispositions can be effected. In addition,
investments acquired by the Partnership in private transactions will
generally be subject to restrictions imposed by the Federal securities laws
on resale by the Partnership. Investments made by the Partnership in issuers
in which ML & Co. or its affiliates have significant investment positions may
be subject to further limitations imposed by the Federal securities laws
which may delay the disposition of publicly-traded securities owned by the
Partnership.
4. Delay in Partnership Investments. Although the General Partner will
use its best efforts to commit Partnership funds as promptly as practicable,
it is anticipated that there may be a significant period of time (up to three
to four years) before the proceeds from the offering will be fully committed.
In addition, investment funds in which the Partnership invests may not draw
down on the Partnership's commitment (i.e. require the Partnership to
contribute the funds it has previously committed) for an additional period of
up to four to five years. Such investment funds also may re-invest capital
returned to them from portfolio investments during an initial period. These
delays in the Partnership's investments will detract from the average annual
return of an investment in the Partnership.
5. Availability of and Competition for Investments. The success of the
Partnership depends upon the availability of appropriate investment
opportunities. The availability of investment opportunities generally will
be subject to market conditions. It may be expected that the Partnership
will encounter substantial competition for certain investments, particularly
from other entities having similar investment objectives. There can be no
assurance that the Partnership will be successful in obtaining suitable
investment opportunities or that a desirable mix of investments will be
achieved.
6. Risks of Real Estate Investments. Real estate investments are
subject to a number of risks, including uncertainty of cash flow to meet
fixed obligations, adverse changes in local market conditions and
neighborhoods, changes in interest rates, the need for unanticipated
renovation, changes in real estate taxes and increases in other operating
expenses. Real estate investments may be illiquid. Investments in real
estate of the type contemplated by the Partnership are usually long term and
can be as long as fifteen years. Real estate investment cycles typically
have lasted three to five years, but recently have been longer.
7. Risks of High Yield Debt Investments. The Partnership is authorized
to make investments in high yield corporate debt securities (also referred to
as "junk bonds") offering the potential for long-term capital appreciation.
High yield debt securities are predominantly speculative with respect to the
capacity to pay interest and repay principal in accordance with the terms of
the security and generally involve a greater volatility of price than
securities in higher rating categories. In addition, to the extent that
affiliates of the Partnership hold securities of issuers in which the
Partnership has invested, the Partnership may be precluded by the Investment
Company Act of 1940 (the "Investment Company Act") from participating in
sales or other transactions in which such affiliates are participants unless
it is able to obtain exemptions under such statute from the Securities and
Exchange Commission. The inability to participate in such transactions may
adversely affect the Partnership in terms of the timing of dispositions of
such investments and the proceeds realized by the Partnership from such
investments.
8. Need for Investment Company Act Exemptions. In addition to the
restrictions described above, the Investment Company Act contains
restrictions on co-investments by a registered investment company (such as
the Partnership) and affiliates of its sponsor and on purchases of securities
by a registered investment company from affiliates of its sponsor.
Accordingly, as described under "Investment Objective and Policies--Sources
of Investment Opportunities", exemptions under the Investment Company Act may
be required before the Partnership can make investments in transactions where
ML & Co. or its affiliates are co-investors or where ML & Co. or its
affiliates seek to sell an investment to the Partnership. In this regard,
the General Partner has obtained blanket exemptive relief from the Securities
and Exchange Commission permitting co-investments and other transactions
with ML & Co. and its affiliates in leveraged buyout and other equity
investments. There can be no assurance that the Partnership will be able to
obtain similar exemptions in the future with respect to proposed purchases
and sales of portfolio securities in transactions in which affiliates of the
Partnership are participants and which do not qualify under the terms of
existing exemptions or those currently pending.
9. Reliance on the General Partner and Others. All decisions with
respect to the management of the Partnership will be made exclusively by the
General Partner. Limited Partners have no right or power to take part in the
management or control of the business of the Partnership. Accordingly, no
person should purchase Units unless such person is willing to entrust all
aspects of the management of the Partnership to the General Partner. See
"Summary of the Partnership Agreement" for the limitations imposed on the
Limited Partners' ability to remove the General Partner as general partner.
The Partnership may make minority equity investments in corporations, general
partnerships, limited partnerships, grantor trusts or management programs
where investors are permitted at most a limited role in the management of
such ventures. To the extent the Partnership invests in or through such
entities or programs, the success or failure of such ventures will depend on
the skills of the venture's sponsor, promoter or manager and not on the
General Partner.
10. Absence of Operating History and Management Experience. The
Partnership has been recently formed and has no operating history upon which
purchasers of Units may base an evaluation of its likely performance. While
the composition of its officers and directors has changed over the years
since the General Partner's formation, the General Partner has managed
similar partnerships for more than ten years. See "The General Partner and
Its Affiliates".
11. Use of Leverage. The Partnership has authority to utilize leverage
(i.e., borrowed funds or senior securities) in making investments as will
many of the entities in which the Partnership will make its investments. The
use of leverage, either by the Partnership or by the entities in which it
invests, would exaggerate increases or decreases in the Partnership's net
assets and, because of required debt service obligations, may result in
delays in the distribution of cash to Limited Partners. The Partnership
Agreement does not limit the amount of indebtedness that the Partnership may
incur. The Investment Company Act generally limits the amount of
indebtedness the Partnership may incur to 331/3% of its gross assets.
B. INTERNATIONAL INVESTMENT RISKS
12. General. Investments on an international basis involve certain
risks not involved in domestic investments, including fluctuations in foreign
exchange rates, future political and economic developments, different legal
systems and the existence or possible imposition of exchange controls or
other foreign or U.S. government laws or restrictions applicable to such
investments. Investments in different countries are subject to different
economic, financial, political and social factors. Because the Partnership
may invest in securities denominated in currencies other than the U.S.
dollar, changes in foreign currency exchange rates may affect the value of
securities owned by the Partnership and the unrealized appreciation or
depreciation of investments. With respect to certain countries, there may be
the possibility of expropriation of assets, confiscatory taxation, high rates
of inflation, political or social instability, changes in laws and rules or
in interpretations thereof, or diplomatic developments which could adversely
affect investments, or result in a total loss of investments, in issuers in
those countries. These risks may be heightened in countries that have only
recently permitted private ownership (including foreign private ownership) of
businesses. In addition, certain foreign investments may be subject to
foreign withholding taxes. Further, satisfactory custodial services for
investment securities may not be available in certain countries.
13. Regulatory Considerations. It is expected that the securities
purchased by the Partnership in international investments will not be
registered with the Securities and Exchange Commission and that the issuers
thereof will not be subject to the reporting requirements of such agency.
Accordingly, there will likely be less publicly available information about a
foreign company than about a U.S. company, and foreign companies may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to those to which U.S. companies are subject. In
addition, certain countries in which the Partnership may invest may not have
a comprehensive system of laws protecting the rights and interests of
investors (particularly foreign investors), and the enforcement of existing
laws may be inconsistent. The profitability of foreign investments may also
be impacted by regulatory burdens, such as lengthy regulatory approval
processes and strict environmental regulation. Some countries prohibit or
impose substantial restrictions on investments in their countries by foreign
entities such as the Partnership. Certain countries may also limit the
ability of the Partnership to dispose of investments by requiring regulatory
approvals prior to such disposition or by other means, including limiting the
ability to convert local currencies.
14. Developing Country Considerations. It is anticipated that a
significant portion of the Partnership's international investments may be in
the developing countries of the world, including countries located in the Far
East, the Indian subcontinent, Eastern Europe and Latin America. The risks
noted above are heightened for investments in developing countries.
C. INVESTMENT FUND CONSIDERATIONS
15. General. Investments by the Partnership in investment funds
involve considerations or risks not otherwise present in direct investments.
The managers of investment funds are usually compensated from the assets of
the funds based upon a fixed percentage of assets or capital, and also may
receive an incentive performance component such as a carried interest in the
profits generated by the funds. These fees will be paid by the Partnership
and will not be counted toward the limitation on the annual expenses of the
Partnership under which the General Partner is reimbursed for expenses paid
on behalf of the Partnership in an amount up to 0.5% of the Limited Partners'
capital contributions (1%, if the capital contributions are less than $60
million). Further, to the extent the Partnership invests in investment
funds, it will surrender a significant degree of control over the underlying
investment. In addition, investment funds incur certain administrative and
other expenses. As a result, the Partnership may incur additional, indirect
expenses with respect to investments in such funds in the form of management
compensation paid to such managers and other expenses incurred by such funds.
Furthermore, such funds may adopt time horizons for their underlying
investments that differ from that of the Partnership. As a result,
investments in such funds may cause the expected term of the Partnership to
continue beyond the date the Partnership would otherwise have terminated and
may have a negative impact on investors' rate of return. In addition, it is
possible that the Partnership's allocable share of earnings from an
investment fund for a taxable year could exceed the amount of cash
distributed to the Partnership by the investment fund for such year. As a
result, Limited Partners may receive allocations of income or gain during a
taxable year without a corresponding distribution of cash from the
Partnership to pay the related tax.
16. Delays in Preparation of Tax Information. It is expected that
annual tax information from investment funds in which the Partnership invests
may not be received in sufficient time to permit the Partnership to
incorporate such information into its annual tax information and distribute
such information to Limited Partners prior to April 15 of each year. As a
result, Limited Partners may be required to obtain extensions for filing
federal, state and local income tax returns each year. Limited Partners
anticipating tax refunds in respect of such year will not be able to file
their tax return requesting such refund until receipt of the annual tax
information from the Partnership. To the extent practicable, the Partnership
anticipates that it will provide estimated annual tax information in a timely
manner in order to assist Limited Partners in estimating their tax
liabilities. The Partnership's ability to make such estimates will be
dependent upon its ability to obtain estimated annual tax information from
the investment funds.
17. Investments in Hedge Funds. The Partnership may invest up to 10%
of its total assets in hedge funds. These funds, for purposes of the
Partnership's policy, consist of private investment funds seeking to maximize
total return through use of various trading strategies. Investments in hedge
funds are speculative and involve substantial risks, including risks related
to implementation of the funds' trading strategies, leverage and investments
in derivative instruments. In addition, hedge funds may generate income or
gains that are re-invested in the hedge funds and the Partnership's allocable
share of earnings from such funds for a taxable year may exceed the amount of
cash distributed to the Partnership by the hedge funds for such year. Under
these circumstances, Limited Partners may receive allocations of income or
gain during a taxable year without a corresponding distribution of cash from
the Partnership to pay the related tax.
D. INCOME TAX RISKS
18. Fringe Benefits. The General Partner will incur various expenses
in connection with the organization and operation of the Partnership and will
pay any sales or brokerage commissions charged in connection with the
Partnership's investments. Since Units are being offered solely to ML & Co.
employees and non-employee directors, it is possible that the IRS would view
the General Partner's payment of such expenses as an indirect method of
compensating the employee-Limited Partner (i.e., as a fringe benefit). If
the IRS were successful in such characterization, an amount equal to the fair
market value of the underlying goods and services provided by the General
Partner in connection with the Partnership might be includable in the Limited
Partner's gross income as additional compensation. The Limited Partner may
not, however, be allocated a Partnership deduction in an amount corresponding
to such income inclusion because some of such fees and expenses incurred by
the General Partner on behalf of the Partnership would be attributable to
nondeductible syndication expenses, or investment expenses subject to the
limitations on deductibility of itemized miscellaneous expenses, or treated
as part of the capitalized cost of the Partnership's portfolio assets. See
"Fringe Benefits" under "Tax Aspects of Investment in the Partnership--Other
Tax Considerations".
19. Possible Changes in Law. The rules dealing with Federal income
taxation are under continual review by Congress and the IRS, resulting in
frequent revisions of the Federal tax laws and regulations promulgated
thereunder and revised interpretations of established concepts. No assurance
can be given that, during the term of the Partnership, applicable Federal
income tax laws or the interpretations thereof will not be changed in a
manner that would have a material adverse effect on an investment in the
Partnership.
E. PARTNERSHIP AND CONTRACTUAL RISKS
20. Funds Available from Offering. The potential profitability of the
Partnership and the risks associated therewith could be affected by the
amount of funds at its disposal. In the event the Partnership receives less
than the maximum proceeds, its ability to invest in a diversity of
investments and obtain a spreading of risk will be lessened and thus the
risks associated with the investment may be increased. See "Investment
Objective and Policies".
21. Possible Loss of Limited Liability. The Partnership Agreement
provides certain rights for the Limited Partners by vote of a
majority-in-interest of the Limited Partners to, among other things, remove
and replace the General Partner, amend the Partnership Agreement, dissolve
the Partnership, approve or consent to certain actions of the General Partner
and approve the sale of all or substantially all of the Partnership's assets.
(As used in this Prospectus, "majority-in-interest" means the Limited
Partners whose aggregate capital contributions represent over 50% of the
aggregate capital contributions of all Limited Partners.) Although under
current law in Delaware, the jurisdiction of the Partnership's organization,
such rights are permitted without resulting in a loss of limited liability of
Limited Partners, in some jurisdictions there is uncertainty as to whether
the exercise of these rights under certain circumstances could cause the
Limited Partners to be deemed general partners of the Partnership under
applicable state laws with a resulting loss of limited liability. If the
Limited Partners were deemed to be general partners of the Partnership, they
would be generally liable for Partnership obligations (other than nonrecourse
obligations), which could be satisfied out of their personal assets.
In order to minimize the risk of general liability, the exercise of
these rights by the Limited Partners is subject under the Partnership
Agreement to the prior receipt of an opinion of counsel to the effect that
the existence and exercise of such rights will not adversely affect the
status of the Limited Partners as limited partners of the Partnership. If
the Limited Partners receive such an opinion of counsel, the General Partner
will pay the cost involved in obtaining such an opinion. See "Summary of the
Partnership Agreement--Voting Rights". It should be noted that due to
present and possible future uncertainties in this area of partnership law, it
may be difficult or impossible to obtain an opinion of counsel to the effect
that the Limited Partners may exercise certain of their rights without
jeopardizing their status as Limited Partners.
22. Repayment of Certain Distributions. In the event that the
Partnership is unable otherwise to meet its obligations, its Limited Partners
may be required to pay to the Partnership or to pay to creditors of the
Partnership distributions previously received by them to the extent such
distributions are deemed to have been wrongfully paid to them. In addition,
Limited Partners may be required to repay to the Partnership any amounts
distributed which are required to be withheld by the Partnership for tax
purposes.
23. Absence of Market for Partnership Units. Purchasers of Units
should view their interest in the Partnership as a long-term, illiquid
investment. There is not now any market for Partnership Units and no market
is expected to develop. See "Transferability of Units". In addition, Units
will not be redeemable, except that the estate of any deceased Limited
Partner will be able to elect to have the Limited Partner's Units repurchased
by the General Partner or the Partnership for a price equal to the value of
the Limited Partner's interest determined at the next succeeding annual
appraisal date, which will generally occur as of the last day of the fiscal
year. To have Units repurchased, the estate of a Limited Partner must
notify the General Partner of its election to have the Units repurchased
within 30 days after the date the annual appraisal is sent to Limited
Partners.
24. Reinvestment. The General Partner has the discretion to reinvest
all Partnership revenues. See "Summary of the Offering--Reinvestment
Policy".
25. Dissolution. The General Partner has the right to dissolve the
Partnership without the consent of the Limited Partners at any time after
January 1, 2003. See "Summary of the Offering--Dissolution".
COMPENSATION AND FEES
The Partnership is designed to serve as an employee-benefit vehicle for
employees of ML & Co. and its subsidiaries satisfying certain income
requirements and is not intended to earn compensation or fees for ML & Co. or
its affiliates. However, due to the structure of the Partnership, its
management by an affiliate of ML & Co. and its proposed investment
activities, some benefits will accrue to affiliates of ML & Co. and their
employees, including the following:
(i) The General Partner will receive a 1% interest in all items of
Partnership income, gain, deduction, loss and credit, for which
it will make no cash capital contribution beyond the $99.00 it
contributed upon formation of the Partnership. However, the
General Partner is generally obligated to pay, on behalf of the
Partnership, all expenses incurred by the Partnership that are
not paid by ML & Co. or its other subsidiaries, including
brokerage costs and sales commissions (including sales
commissions paid directly or indirectly to MLPF&S) and operating
expenses. The General Partner will be entitled to receive annual
reimbursements from the Partnership, in amounts of up to 0.5% of
the Limited Partner's capital contributions (1%, if the capital
contributions are less than $60 million), of operating expenses
incurred by the General Partner with respect to the Partnership.
Expenses paid by the General Partner which are not reimbursed to
it will be treated as capital contributions of the General
Partner and reflected in its capital account. Under the terms of
the Partnership Agreement, upon dissolution of the Partnership,
positive amounts in a Partner's capital account will be a
priority item in the distribution of liquidated assets, and the
General Partner will be entitled to such distributions, if any.
(ii) To the extent that the Partnership invests in investment
partnerships or other investment vehicles offered by MLPF&S
("Sponsored Programs"), the Partnership's purchase of such
securities or assets will be counted toward the minimum sales
requirements often included as a condition to "best efforts"
offerings and therefore help satisfy conditions to MLPF&S's
receipt of any compensation in connection with such offerings.
(iii) Employees of affiliates of ML & Co. (including certain members of
the Advisory Committee of the General Partner) are involved in
the origination of investments that may be acquired by the
Partnership and the sale or management of Sponsored Programs, and
their compensation is in large part determined by or related to
the success of such offerings. If the Partnership invests in
these investments, such employees may benefit accordingly.
(iv) If the Partnership invests in Sponsored Programs in which
affiliates of the General Partner issue securities and/or perform
management and other services for which they receive
compensation, ML & Co. and its subsidiaries will derive such
benefits. The Partnership's investment will, in all cases, be on
the same terms as an investment offered to nonaffiliated
parties.
(v) To the extent the General Partner or its affiliates lend funds to
the Partnership or any partnership or other entity in which the
Partnership invests, the interest charges on such funds may be
deemed to be additional compensation to the General Partner or
such affiliates.
THE PARTNERSHIP
The Partnership was formed on October 28, 1996, as a limited partnership
under Delaware law for the purpose of enabling Qualified Investors to pool
their investment resources in order to participate in certain investment
opportunities that are sponsored by or become available to ML & Co. and its
affiliates. It is intended that the Partnership serve as an investment
vehicle which provides access to investment opportunities which are not
otherwise available, thus serving as an incentive for Qualified Investors to
remain as employees of ML & Co. and its affiliates.
Upon the admission of Qualified Investors as Limited Partners, the
Initial Limited Partner will withdraw as a Partner of the Partnership.
The Partnership intends, whenever possible, to form, re-form or
otherwise qualify to do business in all jurisdictions where such
qualification is necessary to carry on Partnership business or to preserve
the limited liability of the Limited Partners.
The Partnership is a non-diversified, closed-end investment company.
See "Exemptions from the Investment Company Act of 1940" for a summary of
certain exemptions from the Investment Company Act applicable to the
Partnership.
FINANCIAL STATUS OF THE PARTNERSHIP
The Partnership was formed with a minimal capitalization of $100.00,
consisting of capital contributions of $99.00 by the General Partner and
$1.00 by the Initial Limited Partner. The Partnership has not commenced
operations, other than temporarily to invest its start-up monies in a money
market fund sponsored by a subsidiary of ML & Co. Because the General
Partner is obligated to pay all the operating and overhead expenses of the
Partnership, the Partnership has no current or long-term liabilities arising
from such expenses. See "Financial Statements".
The Partnership has adopted a calendar year for tax reporting purposes.
USE OF PROCEEDS
All of the proceeds of the offering of Units will be contributed to the
Partnership as capital contributions of the Limited Partners. After payment
by the Partnership of organizational and offering expenses, estimated at
$400,000, but not exceeding 1% of the proceeds of the offering, the net
proceeds will be available for investment.
The Partnership will expend substantially all of its funds for
Partnership investments as soon as practicable. Pending selection of
long-term investments, Partnership funds will be temporarily invested in
money market instruments, securities issued by other investment companies and
other marketable securities. The Partnership may maintain reserves for
follow-on investments and other investment contingencies. See "Investment
Objective and Policies". The Partnership may also maintain reserves to the
extent necessary to reimburse the General Partner for expenses incurred by it
as described below under "Capital Contributions; Partnership Expenses".
Capital contributions of Limited Partners will be held by the
Partnership in a Partnership account for the benefit of the Limited Partners
and will be used only for the purposes set forth herein.
CAPITAL CONTRIBUTIONS; PARTNERSHIP EXPENSES
The proceeds of the offering of Units will be contributed to the
Partnership as capital contributions of the Limited Partners. The General
Partner made an initial capital contribution of $99.00 to the Partnership
upon its formation and will not make any further cash capital contribution
upon the admission of subscribing Qualified Investors as Limited Partners;
however, the General Partner will incur various expenses in connection with
the operation of the Partnership for, among other items, legal and accounting
fees, telephone charges, postage and other general and administrative items
and out-of-pocket costs of examination, appraisal and negotiation of
investments, which expenses may exceed the amounts for such expenses paid by
ML & Co. or its other subsidiaries or reimbursed to it by the Partnership.
The General Partner will also be obligated to pay any sales or brokerage
commissions charged in connection with Partnership investments, but will not
be obligated to pay debt service or other interest charges incurred in
connection with Partnership investments. The General Partner will be
entitled to receive annual reimbursements from the Partnership, in amounts of
up to 0.5% of the Limited Partners' capital contributions (1%, if the capital
contributions are less than $60 million), of operating expenses incurred by
the General Partner with respect to the Partnership. Expenses paid by the
General Partner which are not reimbursed to it will be deemed to be a capital
contribution by the General Partner to the Partnership. See "Compensation
and Fees". The General Partner will deliver to the Partnership quarterly a
certificate itemizing the Partnership expenses it has paid and maintain
adequate records of such expenses.
PARTNERSHIP DISTRIBUTIONS AND ALLOCATIONS
In general, during the term of the Partnership, all items of Partnership
income, gain, deduction, loss or credit will be allocated 1% to the General
Partner and 99% to the Limited Partners (except that losses will be allocated
to the General Partner to the extent the Limited Partners' capital accounts
equal zero and the General Partner's capital account is positive due to its
payment of organizational expenses of the Partnership in excess of 1% of the
Limited Partners' capital contributions and annual operating expenses in
excess of 0.5% of Limited Partners' capital contributions (1%, if the capital
contribution are less than $60 million)). Upon liquidation, gross income
from the sale of the Partnerships assets will be allocated to the Partners in
the amount of their negative capital account balances, then to the General
Partner to the extent the amount of the capital contribution made by it to
the Partnership is in excess of 1% of the Limited Partners' capital
contributions, and thereafter 99% to the Limited Partners and 1% to the
General Partner. These items will be allocated among the Limited Partners in
the ratio the capital contribution of each Limited Partner (or the capital
contribution attributable to the interest held by a transferee Limited
Partner) bears to the total capital contributions of all Limited Partners.
Distributable Cash, as defined in the Partnership Agreement, will be
distributed 99% to the Limited Partners and 1% to the General Partner. The
General Partner may also make distributions in kind of securities or assets
held by the Partnership, including, in the discretion of the General Partner,
distributions in which certain Limited Partners receive cash while other
Limited Partners receive marketable securities of an equivalent value. Cash
distributions will be credited to the Limited Partner's MLPF&S securities
account specified in his Signature Page and Power of Attorney unless the
General Partner is instructed otherwise by a Limited Partner.
Allocations among the transferor and transferee of a Partnership
interest are described under "Transferability of Units".
DISSOLUTION; DISTRIBUTIONS ON LIQUIDATION
The Partnership term extends to December 31, 2037. However, pursuant to
the Partnership Agreement, the General Partner may dissolve the Partnership,
without the consent of the Limited Partners, at any time after January 1,
2003. It is not the General Partner's intention to dissolve the Partnership
prior to the time when the Partnership's equity investments have matured and
the Partnership can dispose of its other portfolio investments. Other events
causing dissolution are summarized under "Summary of the Partnership
Agreement--Dissolution".
In settling accounts after the sale of all Partnership property upon
liquidation, the assets of the Partnership shall be paid out (i) to creditors
(including any creditor who is a Partner), in the order of priority as
provided by law; (ii) to each Partner in an amount equivalent to the positive
amount of his capital account on the date of distribution, after giving
effect to any allocation of profits or losses arising from sales on
liquidation; and (iii) the balance, 99% to the Limited Partners and 1% to the
General Partner.
Upon liquidation, the General Partner may distribute Partnership assets
in kind.
THE GENERAL PARTNER AND ITS AFFILIATES
KECALP Inc., an indirect wholly-owned subsidiary of ML & Co., is the
General Partner of the Partnership and as such will manage and control the
business and affairs of the Partnership and invest Partnership funds. The
General Partner is a Delaware corporation formed in June 1981 for the purpose
of serving as general partner of employee benefit partnerships such as the
Partnership, and has its business and executive offices at South Tower, World
Financial Center, 225 Liberty Street, New York, New York 10080-6123
(telephone: (212) 236-7302). Although most of the officers and directors of
the General Partner have been employed in the financial community for many
years, the experience of the General Partner in managing portfolios of
investments has been limited to the management of seven partnerships similar
to the Partnership. Certain of the officers and directors of the General
Partner and members of the Advisory Committee (as defined below) are
expected to participate in the 1997 deferred compensation plan or purchase
Units directly and may participate
on an economically leveraged basis. The directors and principal
officers of the General Partner and their business experience for the past
five years are:
John L. Steffens Chairman of the Board and
Director
Matthias B. Bowman President, Chief Investment
Officer and Director
Daniel P. Tully Vice President and Director
James V. Caruso Vice President and Director
Mark B. Goldfus Vice President and Director
Andrew J. Melnick Vice President and Director
Patrick J. Walsh Vice President and Director
Margaret E. Nelson Secretary and Counsel
Robert F. Tully Vice President and Treasurer
John L. Steffens, age 55, Chairman of the Board and Director. Mr.
Steffens has served the General Partner as a member of the Board of Directors
since 1981. Mr. Steffens is Vice Chairman and Head of the Domestic Private
Client Group of ML & Co. From 1990-1996, Mr. Steffens was Executive Vice
President and Head of the Private Client Group of ML & Co. Prior to that,
from July 1985, he was President of the Consumer Markets Sector of ML & Co.
Matthias B. Bowman, age 48, President, Chief Investment Officer and
Director. Mr. Bowman has served the General Partner in various capacities
since 1981. Mr. Bowman has been a Managing Director in the Investment
Banking Group of ML & Co. since 1978 and a Vice Chairman since 1993. Mr.
Bowman is Chief Investment Officer of the General Partner and the Manager of
a department within the Investment Banking Group that has responsibility for
certain of the Group's principal investments. Prior to 1994, Mr. Bowman managed
a department that was responsible for maintaining ML & Co.'s relationship
with several corporate clients and financial investors.
Daniel P. Tully, age 65, Vice President and Director. Mr. Tully was
elected to the Board of Directors of the General Partner in April 1997.
Prior to April 15, 1997 when he retired from ML & Co., Mr. Tully was Chairman
of the Board of ML & Co. Mr. Tully was Chief Executive Officer of ML & Co.
from May 1992 until December 1996. He became Chairman of the Board and CEO
in June 1993. Mr. Tully was President and Chief Operating Officer of ML &
Co. from 1985 until 1992.
James V. Caruso, age 45, Vice President and Director. Mr. Caruso has
served the General Partner in various capacities since 1981 and as a member
of the Board of Directors since 1986. Mr. Caruso is a Director in the
Investment Banking Group of ML & Co., managing the Investment Banking Group
Corporate Accounting Department and the Controller's area of the Partnership
Analysis and Finance Department. He also serves as the chief administrative
officer for certain of ML & Co.'s key employee investment partnerships and
Treasurer of Merrill Lynch Capital Partners, Inc., the general partner of two
institutional leveraged buyout funds. Since June 1992, Mr. Caruso has also
performed administrative services for Merrill Lynch's retail partnerships.
Mark B. Goldfus, age 50, Vice President and Director. Mr. Goldfus was
elected to the Board of Directors of the General Partner in 1997. Mr.
Goldfus is General Counsel of the Corporate Law Department of ML & Co. and a
Senior Vice President of MLPF&S. From January 1985 until April 1997, Mr.
Goldfus was Vice President of Merrill Lynch Asset Management.
Andrew J. Melnick, CFA, age 55, Vice President and Director. Mr.
Melnick has served the General Partner as a Director since 1990. Mr. Melnick
is a Senior Vice President of MLPF&S and co-head of Global Research &
Economics at ML & Co. From 1988 to March 1997, Mr. Melnick was Director of
the Global Fundamental Equity Research Department.
Patrick J. Walsh, age 53, Vice President and Director. Mr. Walsh has
served the General Partner as a member of the Board of Directors since 1991.
Mr. Walsh is Senior Vice President, Director of Human Resources of ML & Co.
From 1984 to January 1991, Mr. Walsh managed Asset Accumulation Services in
the Consumer Markets Sector of ML & Co. and was responsible for managing and
marketing various account services tailored to individual investors.
Margaret E. Nelson, age 47, Secretary and Counsel. Ms. Nelson has
served the General Partner as Counsel and Corporate Secretary since 1993.
Ms. Nelson is a Vice President and Senior Counsel in the Corporate Law
Department of the General Counsel's Office of ML & Co.
Robert F. Tully, age 49, Vice President and Treasurer. Mr. Tully has
served the General Partner as a Vice President and Treasurer since 1993. Mr.
Tully has been a Vice President in the Investment Banking Group of ML & Co.
since 1989.
In addition, the General Partner has an advisory committee (the
"Advisory Committee") to assist the directors and principal officers of the
General Partner in evaluating investment opportunities presented to the
Partnership. The members of the Advisory Committee and their business
experience for the past five years are:
Kevin K. Albert
James J. Burke, Jr.
Kevin M. Cox
Robert J. Farrell
Alain Lebec
G. Kelly Martin
Alison J. Mass
E. Stanley O'Neal
Stephen I. Silverman
Charles K. Sweeney
Nathan C. Thorne
Kevin K. Albert, age 44. Mr. Albert was appointed to the Advisory
Committee in April 1997. Mr. Albert is head of the Private Equity Group of
ML & Co. Mr. Albert has also served as a Managing Director in the Investment
Banking Group since 1988 and as a Vice President in such group from 1983 to
1988.
James J. Burke, Jr., age 45. Mr. Burke has served the General Partner
in various capacities since 1987. Mr. Burke is a Managing Partner and
Director of Stonington Partners, Inc., a private investment firm, a position
that he has held since 1993. He has also been a member of the Board of
Directors of MLCP since 1987. He was the Managing Partner of MLCP from 1993
to July 1994 and President of MLCP from 1987 to 1994. Mr. Burke was also a
Managing Director of the Investment Banking Division of MLPF&S from 1985 to
1994.
Kevin M. Cox, age 44. Mr. Cox has served the General Partner as a
member of the Advisory Committee since 1990. Mr. Cox is a Managing Director
and head of capital commitment management in Debt Markets. Prior to that he
was head of the Leveraged Finance Group in New York and of MLPF&S's Investment
Banking office in Tokyo. Mr. Cox, who has been with Merrill Lynch since
1984, has also held various positions in the Merchant Banking, High Yield
and Treasury/Finance departments.
Robert J. Farrell, age 64. Mr. Farrell has served the General Partner
in various capacities since 1981. Mr. Farrell is Senior Investment Advisor
for MLPF&S. From 1968 to March, 1992, he served as Chief Market Analyst and
Manager of the Market Analysis Department of the Securities Research Division
of MLPF&S. Mr. Farrell has served as a Senior Vice President of MLPF&S since
January, 1986.
Alain Lebec, age 47. Mr. Lebec has served the General Partner in
various capacities since 1987. Mr. Lebec is a Vice Chairman of the
Investment Banking Group of ML & Co. Mr. Lebec joined ML & Co. as a Managing
Director in the Investment Banking Group and as a Vice President of MLPF&S in
1984, and, within MLPF&S's Investment Banking Group, has been co-head of its
Mergers and Acquisitions Department from 1988 to 1993 and head or co-head of
its Telecommunications, Media and Technology Department from 1993 to 1996
before being named a Vice Chairman of Investment Banking in 1996.
G. Kelly Martin, age 38. Mr. Martin was appointed to the Advisory
Committee in April 1997. Mr. Martin is Chief Operating Officer of ML & Co.'s
Corporate and Institutional Client Group, a position he has held since 1993,
and serves as CICG's Chief Technology Officer.
Alison J. Mass, age 38. Ms. Mass has served the General Partner as a
member of the Advisory Committee since 1994. Ms. Mass is a Managing Director
in the Investment Banking Group of ML & Co. She has responsibility for the
Global Consumer Products Industry Group. Ms. Mass also serves as the Chair
for the Investment Banking Promotions Committee. Ms. Mass joined ML & Co. in
1990.
E. Stanley O'Neal, age 45. Mr. O'Neal has served the General Partner as
a member of the Advisory Committee since 1994. Mr. O'Neal is an Executive
Vice President of ML & Co. and Co-head of ML & Co.'s Corporate and
Institutional Client Group. From 1995 to 1997, Mr. O'Neal was head of Global
Capital Markets and prior to 1995, Mr. O'Neal was responsible for the
Financial Services Group. Mr. O'Neal joined ML & Co. in 1986.
Stephen I. Silverman, age 46. Mr. Silverman was appointed to the
Advisory Committee in April 1997. Mr. Silverman is a Vice President and
portfolio manager of the Merrill Lynch Pacific Fund, a position he has held
since 1983, and the Merrill Lynch Global Value Fund.
Charles K. Sweeney, age 55. Mr. Sweeney has served the General Partner
as a member of the Advisory Committee since 1993. Mr. Sweeney joined MLPF&S
in 1965 as a member of the Junior Executive Training Program. Since 1966, he
has continued to work as a Financial Consultant within both the Private
Client and Capital Markets Groups of the firm. He was elected a Senior Vice
President - Investments in 1989.
Nathan C. Thorne, age 43. Mr. Thorne has served the General Partner as
a member of the Advisory Committee since 1995. Mr. Thorne has been a
Managing Director in the Investment Banking Group of ML & Co. since 1986.
Mr. Thorne has managed many different departments within MLPF&S's Investment
Banking Group including the High Yield Finance and Restructuring Group and is
presently head of a department within the Investment Banking Group that has
responsibility for certain of the Group's principal investments.
AUTHORITY OF THE GENERAL PARTNER
The General Partner will have the authority to make all decisions
regarding the acquisition, financing, operation, management and ultimate
disposition of Partnership investments, assets and properties. The Board of
Directors of the General Partner will approve all investments made by the
Partnership and will be responsible for the general supervision and
administration of Partnership activities. In investing the Partnership's
capital, the General Partner will consider those investments proposed by
unrelated third parties as well as opportunities presented to the Partnership
by affiliates of the General Partner. All investments chosen by the General
Partner for the Partnership, whether from third parties or from other
opportunities presented to the Partnership by affiliates, will be evaluated
independently of each other and chosen only if the General Partner believes
they are suitable for and in the best interest of the Partnership. The
General Partner is unable to predict to what extent Partnership investments
will be made in affiliate-proposed investments or investment opportunities
proposed by unrelated third parties. The General Partner will execute or
cause to be executed any and all agreements, purchase orders, debt
agreements, documents, certificates and other instruments necessary for the
purchase of, and investment in, assets by the Partnership. See "Conflicts of
Interest" and "Investment Objective and Policies".
FINANCIAL STATUS OF THE GENERAL PARTNER
The General Partner was formed with minimal capitalization. The General
Partner has agreed to use its best efforts at all times to maintain its net
worth at a level necessary to meet any present or future requirements of the
Federal income tax law regarding the net worth of a general partner of a
limited partnership. ML & Co. will issue a demand promissory note to the
General Partner in an amount necessary to meet current requirements and
provide the General Partner with such funds as are necessary to meet its
other obligations under the Partnership Agreement. See "Financial
Statements".
SIGNIFICANT AFFILIATES OF THE GENERAL PARTNER
MLPF&S and the General Partner are both wholly-owned subsidiaries of ML
& Co. It is anticipated that ML & Co. and the Investment Banking Group
within MLPF&S will be important sources of Partnership investments, and that
other groups within MLPF&S and other subsidiaries of ML & Co. may also be
sources of investments.
PRIOR PARTNERSHIPS
The General Partner also acts as the general partner for Merrill Lynch
KECALP L.P. 1994 (the "1994 Partnership"), Merrill Lynch KECALP L.P. 1991
(the "1991 Partnership"), Merrill Lynch KECALP L.P. 1989 (the "1989
Partnership"), Merrill Lynch KECALP L.P. 1987 (the "1987 Partnership"),
Merrill Lynch KECALP L.P. 1986 (the "1986 Partnership"), Merrill Lynch KECALP
L.P. 1984 (the "1984 Partnership") and Merrill Lynch KECALP Growth
Investments Limited Partnership 1983 (the "1983 Partnership", and together
with each of such other partnerships, the "KECALP Partnerships"). The
limited partnership interests in these partnerships were offered only to
certain employees and directors of ML & Co. and its subsidiaries. Set forth
below is information concerning these investments by the partnerships. This
information should not be construed to indicate that the Partnership will or
could make investments that will produce results comparable to those of the
investments made by the earlier partnerships. Investors should note that the
average annual return of an investment in the KECALP Partnerships may be
adversely affected by delays in the making and realizing of investments. The
Partnership expects that the types of investments it will make will more
closely resemble those of the 1994 Partnerships than the earlier
partnerships. In addition, the Partnership may invest in international
investments and investment funds to a greater extent than have other KECALP
Partnerships.
1994 PARTNERSHIP
The 1994 Partnership closed its subscription offering on September 21,
1994, at which time it sold 40,384 units of partnership interest to 1,401
investors for $40,384,000. As of May 15, 1997, the 1994 Partnership has
invested or committed approximately $42.8 million (including $40.4 million of
its initial assets and $2.4 million in interest earned by the 1994
Partnership) to 24 portfolio investments. As a result, at such date
approximately $1.6 million of its initial assets remained to be invested or
committed. Existing investments consist of investments in 11 leveraged
buyout transactions (with an aggregate cost of $18.8 million), one real
estate related transaction (with an aggregate cost of $2.0 million), five
venture capital transactions (with an aggregate cost of $7.8 million) and
seven growth equity investments (with an aggregate cost of $14.2 million).
Set forth below is a chart showing the results, as of March 31, 1997, of
completed equity transactions with respect to the 1994 Partnership's
investments. The dates of purchase refer to the dates on which investments
were acquired by the 1994 Partnership.
<TABLE>
<CAPTION>
Date of Date of
Classification Company Purchase Sale Cost Proceeds
-------------- ------- --------- ------- ----- -----------
<S> <C> <C> <C> <C> <C>
Leveraged Buyout Mail-Well, Inc. 7/95 3/96 $ 263,089 $ 636,875
Leveraged Buyout Westlink Holdings, Inc. 7/95 5/96 2,114,825 4,672,000
Leveraged Buyout Mail-Well, Inc. 7/95 6/96 704,456 1,592,857
Leveraged Buyout Revere Holding 1/95 12/96 1,800,000 4,890,600
Corporation
Leveraged Buyout Mail-Well, Inc. 12/94 12/96 304,976 1,240,274
Total $5,187,346 $13,032,606
---------- -----------
NET PROFIT REALIZED $7,845,260
===========
</TABLE>
1991 PARTNERSHIP
The 1991 Partnership closed its subscription offering on September 11,
1991, at which time it sold 20,799 units of limited partnership interest to
964 investors for $20,799,000. By July 20, 1995, the 1991 Partnership had
invested in or committed to 19 investments with an aggregate purchase price
of $21.8 million. Seventeen were made in leveraged buyouts ($19.6 million),
one in a growth equity investment ($1.0 million) and one in real estate ($1.6
million).
Set forth below is a chart showing the results, as of March 31, 1997, of
completed equity transactions with respect to the 1991 Partnership's
investments. The dates of purchase refer to the dates on which investments
were acquired by the 1991 Partnership.
<TABLE>
<CAPTION>
Date of Date of
Classification Company Purchase Sale Cost Proceeds
-------------- ------- -------- ------- ---- --------
<S> <C> <C> <C> <C> <C>
Leveraged Buyout First USA, Inc. 9/91 2/93 $ 52,913 $ 162,037
Leveraged Buyout First USA, Inc. 9/91 3/93 3,052 9,345
Leveraged Buyout Hospitality Franchise 1/92 7/93 345,751 1,009,411
Systems, Inc.
Leveraged Buyout First USA, Inc. 9/91 8/93 68,808 390,261
Leveraged Buyout Hospitality Franchise 1/92 11/93 315,159 1,244,700
Systems, Inc.
Leveraged Buyout Hospitality Franchise 1/92 2/94 339,090 1,726,943
Systems, Inc.
Leveraged Buyout First USA, Inc. 9/91 3/94 62,649 451,075
Leveraged Buyout First USA, Inc. 9/91 1/95 12,750 103,674
Leveraged Buyout First USA, Inc. 9/91 3/95 139,880 1,327,052
Leveraged Buyout Triarc Companies, Inc 4/93 7/95 1,500,000 1,963,158
Leveraged Buyout Mail-Well, Inc. 2/94 3/96 244,723 636,875
Leveraged Buyout American Re 9/92 3/96 1,500,000 5,967,188
Corporation
Leveraged Buyout Westlink Holdings, 7/94 5/96 1,000,000 2,336,000
Inc.
Leveraged Buyout Mail-Well, Inc. 2/94 6/96 655,277 1,592,857
Growth Equity ACE Limited 9/93 11/96 1,000,000 1,862,789
Leveraged Buyout Blue Bird Corporation 4/92 11/96 1,500,000 3,300,000
Leveraged Buyout Mail-Well, Inc. 12/94 12/96 304,976 1,240,274
Leveraged Buyout WEI Holdings, Inc. 7/92 1/97 999,988 0
Total $10,045,016 $25,323,639
----------- -----------
NET PROFIT REALIZED $15,278,623
===========
</TABLE>
1989 PARTNERSHIP
The 1989 Partnership closed its subscription offering on May 16, 1989,
at which time it sold 21,096 units of limited partnership interest to 843
investors for $21,096,000. By May 1, 1992, the 1989 Partnership was fully
invested in 22 investments with an aggregate purchase price of $23.1 million.
Of the 22 investments, 21 were in leveraged buyouts ($22.6 million) and one
in venture capital ($500,000).
Set forth below is a chart showing the results, as of March 31, 1997, of
completed equity transactions with respect to the 1989 Partnership. The
dates of purchase refer to the dates on which investments were acquired by
the 1989 Partnership.
<TABLE>
<CAPTION>
Date of Date of
Classification Company Purchase Sale Cost Proceeds
-------------- ------- -------- ------- ---- --------
<S> <C> <C> <C> <C> <C>
Leveraged Buyout RJR Nabisco Holding 5/91 9/92 $ 5,071 $ 2,407,194
Corp.
Leveraged Buyout RJR Nabisco Holding 5/91 12/92 2,535,044 3,621,389
Corp.
Leveraged Buyout First USA, Inc. 5/91 2/93 83,961 379,830
Leveraged Buyout First USA, Inc. 8/91 2/93 316,370 968,837
Leveraged Buyout First USA, Inc. 5/91 3/93 17,193 77,778
Leveraged Buyout First USA, Inc. 5/91 8/93 376,132 3,151,488
Leveraged Buyout First USA, Inc. 5/91 8/93 17,463 146,317
Leveraged Buyout First USA, Inc. 5/91 3/94 358,358 3,811,597
Leveraged Buyout Eckerd Corporation 5/91 5/94 139,512 517,378
Leveraged Buyout Ann Taylor Stores 5/91 5/94 895,676 3,370,105
Corporation
Leveraged Buyout Ann Taylor Stores 5/91 12/94 297,510 1,423,450
Corporation
Leveraged Buyout Kash n' Karry Food 5/91 12/94 253,050 0
Stores, Inc.
Leveraged Buyout First USA, Inc. 5/91 1/95 74,801 898,508
Leveraged Buyout First USA, Inc. 5/91 3/95 798,261 11,187,510
Leveraged Buyout Eckerd Corporation 5/91 8/95 161,754 1,018,839
Leveraged Buyout Houlihan's Restaurant 5/91 8/95 1 69,660
Group, Inc.
Leveraged Buyout Esstar Incorporated 5/91 9/95 1,601,960 324,415
Leveraged Buyout London Fog Industries 5/91 5/95 2,259,221 0
Leveraged Buyout Caterair Holdings 5/91 11/95 138,817 0
Corporation
Leveraged Buyout Eckerd Corporation 5/91 12/95 264,141 2,362,673
Leveraged Buyout Caterair Holdings 5/91 12/95 788,769 26,008
Corporation
Venture Capital TranSwitch Corporation 7/89 12/95 183,232 748,173
Venture Capital TranSwitch Corporation 7/89 1/96 297,461 899,338
Leveraged Buyout El Holdings, Inc. 5/91 1/96 323,074 318,887(A)
Leveraged Buyout Simmons Company 5/91 3/96 744,130 2,757,345
Leveraged Buyout Loehmann's Holdings 5/91 5/96 61,609 213,245
Leveraged Buyout Loehmann's Holdings 5/91 6/96 183,393 301,325
Leveraged Buyout Loehmann's Holdings 5/91 11/96 202,555 1,136,384
Leveraged Buyout Blue Bird Corporation 4/91 11/96 425,000 935,000
Leveraged Buyout Eckerd Corporation 5/91 12/96 81,763 600,320
Total $13,885,282 $43,672,993
----------- -----------
NET PROFIT REALIZED $29,787,711
===========
</TABLE>
_________________
(A) Received shares of EI Holdings as part of sale of Esstar Incorporated
1987 PARTNERSHIP
The 1987 Partnership closed its subscription offering on May 28, 1987,
at which time it sold 13,549 units of limited partnership interest to 895
investors for $13,549,000. By May 23, 1991, the 1987 Partnership was fully
invested to invest in 27 investments with an aggregate purchase
price of $15.3 million. Of the 27 investments, 19 were in leveraged buyouts
($10.6 million), six in venture capital ($2.3 million), one growth equity
investment ($400,000) and one in real estate ($2.0 million).
Set forth below is a chart showing the results, as of March 31, 1997, of
completed equity transactions with respect to the 1987 Partnership's
investments. The dates of purchase indicated refer to the dates on which
investments were acquired by the 1987 Partnership.
<TABLE>
<CAPTION>
Date of Date of
Classification Company Purchase Sale Cost Proceeds
-------------- ------- -------- ------- ---- --------
<S> <C> <C> <C> <C> <C>
Leveraged Buyout Mueller Holdings, Inc. 11/88 11/88 $ 62,507 $ 169,124
Leveraged Buyout Apparel Marketing 5/89 5/89 158,872 1,124,950
Industries, Inc.
Leveraged Buyout GU Acquisition Corporation 7/89 7/89 1,373,836 2,497,239
Venture Capital Telecom USA 6/89 7/89 440,616 649,625
Venture Capital Magnesys 9/88 12/89 253,073 0
Venture Capital TCOM Systems, Inc. 12/87 3/91 581,791 0
Venture Capital Meteor Message Corporation 9/88 9/91 308,086 0
Leveraged Buyout GND Holdings Corporation 7/89 6/92 0 1,215,869
Leveraged Buyout Peter J. Schmitt Co., Inc. 5/91 6/92 190,580 0
Venture Capital IDEC Pharmaceuticals 6/89 7/92 16,304 88,244
Corporation
Leveraged Buyout RJR Nabisco Holdings 5/91 9/92 2,901 1,374,093
Corporation
Leveraged Buyout John Alden Financial Group 5/91 10/92 248,476 230,257
Venture Capital Bolt, Barenek & Newman 3/89 11/92 554,128 19,956(A)
Leveraged Buyout RJR Nabisco Holdings 5/91 12/92 1,450,665 2,066,766
Corporation
Leveraged Buyout General Felt Industries 5/91 3/93 237,846 359,023
Leveraged Buyout John Alden Financial Group 5/89 11/93 20,705 645,439
Leveraged Buyout Servam Corporation 5/91 12/93 26,048 0
Leveraged Buyout Ann Taylor Stores 5/91 5/94 42,456 159,748
Corporation
Leveraged Buyout John Alden Financial Group 5/89 6/94 2,797 116,223
Leveraged Buyout John Alden Financial Group 5/89 8/94 25,438 945,182
Leveraged Buyout Borg-Warner Automotive, 9/88 10/94 118,836 476,350
Inc.
Leveraged Buyout Borg-Warner Automotive, 9/88 11/94 1,429 5,728
Inc.
Leveraged Buyout Ann Taylor Stores 5/91 12/94 16,257 78,620
Corporation
Leveraged Buyout Kash 'N Karry Food Stores, 5/91 12/94 96,951 0
Inc.
Leveraged Buyout John Alden Financial Group 5/89 1/95 24,702 789,447
Leveraged Buyout Apparel Marketing 5/89 12/95 0 179,079
Industries, Inc.
Venture Capital TranSwitch Corporation 12/88 12/95 72,800 406,300
Venture Capital TranSwitch Corporation 12/88 1/96 127,200 524,100
Leveraged Buyout El Holdings, Inc. 5/91 1/96 1,181,250 235,139(B)
Leveraged Buyout Simmons Company 5/91 3/96 858,253 3,180,222
Leveraged Buyout Loehmann's Holdings 5/91 5/96 61,609 213,245
Leveraged Buyout Loehmann's Holdings 5/91 6/96 183,393 301,325
Leveraged Buyout Borg-Warner Automotive, 9/88 8/96 419,400 2,513,242
Inc.
Leveraged Buyout Loehmann's Holdings 5/91 11/96 202,555 1,136,384
Leveraged Buyout Borg-Warner Automotive, 9/88 2-3/97 547,033 3,855,967
Inc.
Total $9,908,793 $25,556,886
---------- -----------
NET PROFIT REALIZED $15,648,093
===========
</TABLE>
- -----------------
(A) Received shares of Bolt, Barenek & Newman as part of dissolution of
partnership.
(B) Received shares of EI Holdings as part of the sale of Esstar
Incorporated.
1986 PARTNERSHIP
The 1986 Partnership closed its subscription offering on April 15, 1986,
at which time it sold 7,234 units of limited partnership interest to
approximately 500 investors for $7,234,000. By May 10, 1991, the Partnership
was fully invested in 26 investments with an aggregate purchase price of $8.3
million. Of the 26 investments, 15 were in venture capital situations ($3.3
million), nine in leveraged buyouts ($3.1 million), one growth equity
investment ($1.1 million) and one other transaction ($759,000).
Set forth below is a chart showing the results, as of March 31, 1997, of
completed equity transactions with respect to the 1986 Partnership's
investments. The dates of purchase indicated refer to the dates on which
investments were acquired by the 1986 Partnership.
<TABLE>
<CAPTION>
Date of Date of
Classification Company Purchase Sale Cost Proceeds
-------------- ------- --------- ------- ---- --------
<S> <C> <C> <C> <C> <C>
Growth Equity FGIC Corporation 6/86 3/88 $1,084,447 $ 1,889,415
Venture Capital Dallas Semiconductor 4/86 5/88 203,867 470,412
Corporation
Venture Capital Data Recording Systems, 2/88 6/88 202,450 0
Inc.
Venture Capital Alliant Computer Systems 6/86 7/88 158,529 95,375
Corp.
Leveraged Buyout CMI Holdings, Inc. 1/88 4/89 45,349 153,451
Other Varity 4/89 4/89 758,842 1,906,283
Leveraged Buyout Printing Holdings, L.P. 4/89 4/89 649,949 2,135,285
Leveraged Buyout Amstar Corporation 1/88 7/89 354,728 1,303,520
Venture Capital Intek Diagnostics, Inc. 8/86 9/89 104,534 0
Leveraged Buyout Education Management Corp. 4/89 10/89 192,432 643,824
Venture Capital Qume Corporation 8/86 4/90 211,193 485,625
Venture Capital Computer-Aided Design 1/88 9/90 117,183 0
Group
Venture Capital International Power 2/87 9/90 208,592 61,466
Technology, Inc.
Venture Capital Robert Wooldridge & Co. 7/87 9/90 205,882 0
Venture Capital Shared Resource Exchange, 2/87 9/90 262,501 0
Inc.
Leveraged Buyout Prince Holdings, Inc. 5/89 10/90 147,601 1,400,807
Venture Capital IDEXX Corporation 2/87 6/91 33,583 66,388
Venture Capital Computer-Aided Design 1/88 9/91 39,061 0
Group
Venture Capital ViewLogic Systems, Inc. 6/86 12/91 212,874 1,474,388
Venture Capital IDEXX Corporation 2/87 1/92 178,312 580,571
Venture Capital Enhance Financial Services 4/89 2/92 238,366 332,558
Group Inc.
Leveraged Buyout ALLTEL Corporation 2/87 7/92 11,589 163,649
Venture Capital Enhance Financial Svcs. 4/89 8/92 251,042 369,949
Group Inc.
Venture Capital Zentec Corporation 12/86 9/92 277,500 0
Leveraged Buyout ALLTEL Corporation 2/87 3/93 24,277 428,451
Venture Capital BehaviorTech, Inc. 8/86 7/93 105,669 9,900
Leveraged Buyout ALLTEL Corporation 2/87 8/93 25,480 483,124
Leveraged Buyout ALLTEL Corporation 2/87 11/93 12,071 240,807
Leveraged Buyout Eckerd Corporation 4/89 5/94 91,725 381,088
Leveraged Buyout Borg-Warner Automotive, 9/88 11/94 24,076 96,419
Inc.
Leveraged Buyout Eckerd Corporation 4/89 12/94 17,561 110,000
Leveraged Buyout Eckerd Corporation 4/89 4/95 17,561 114,711
Leveraged Buyout Eckerd Corporation 4/89 8/95 95,400 673,195
Leveraged Buyout Eckerd Corporation 4/89 12/95 286,372 1,561,177
Venture Capital Shared Resource Exchange, 2/87 12/95 87,500 1
Inc.
Leveraged Buyout World Color Press, Inc. 4/89 1/96 480,806 922,012
Leveraged Buyout Borg-Warner Automotive, 9/88 8/96 83,960 502,661
Inc.
Leveraged Buyout Education Management 4/89 11/96 0 133,278
Corporation
Leveraged Buyout Eckerd Corporation 4/89 12/96 41,993 396,655
Leveraged Buyout Borg-Warner Automotive, 9/88 2/97 95,147 670,059
Inc.
Leveraged Buyout Borg-Warner Automotive, 9/88 3/97 14,358 101,112
Inc.
Total $7,654,362 $20,357,616
---------- -----------
NET PROFIT REALIZED $12,703,254
===========
</TABLE>
1984 PARTNERSHIP
The 1984 Partnership closed its subscription offering on May 22, 1984,
at which time it sold 3,747 units of limited partnership interest to
approximately 300 investors for $3,747,000. By February 3, 1988, the 1984
Partnership was fully invested in 23 investments with an aggregate purchase
price of $4.1 million. Of the 23 investments, six were in real estate
($750,000), nine in venture capital ($1.1 million), five in leveraged buyouts
($1.1 million), one in oil and gas ($350,000), one in leasing ($250,000) and
one growth equity investment ($600,000).
Set forth below is a chart showing the results, as of March 31, 1997, of
completed equity transactions with respect to the 1984 Partnership's
investments. The dates of purchase indicated refer to the dates on which
investments were acquired by the 1984 Partnership.
<TABLE>
<CAPTION>
Date of Date of
Classification Company Purchase Sale Cost Proceeds
-------------- ------- --------- ------- ---- --------
<S> <C> <C> <C> <C> <C>
Real Estate Courtland Realty 6/84 12/86 $ 82,416 $ 43,772
Venture Capital California Devices, Inc. 12/85 8/87 150,000 0
Leveraged Buyout Denny's, Inc. 9/86 9/87 399,968 1,898,631
Leveraged Buyout Ithaca Corporation 4/86 1/88 422,563 7,448,000
Growth Equity FGIC Corp. 6/86 3/88 601,205 1,133,550
Venture Capital Alliant Computer Systems 6/86 7/88 101,225 63,563
Corp.
Venture Capital Data Recording Systems 2/85 8/88 152,444 0
Leveraged Buyout Printing Holdings, L.P. 4/89 4/89 115,706 376,815
Leveraged Buyout New Axia Holdings 9/86 12/89 31,225 262,500
Corporation
Venture Capital Intek Diagnostics, Inc. 8/86 12/89 100,980 0
Leveraged Buyout C.C. Packaging, Inc. 9/86 3/90 11,223 15,110
Venture Capital Shared Resource Exchange, 2/87 9/90 74,999 0
Inc.
Oil and Gas Berresford Enterprises- 11/84 3/93 350,000 70
Jerry 1984
Venture Capital BehaviorTech, Inc. 8/86 7/93 70,973 6,930
Venture Capital Private Satellite Network, 8/84 9/93 158,575 30,665
Inc.
Leveraged Buyout Axia Incorporated 9/86 3/94 0 86,120
Leasing Dry Van Trailers 11/84 9/94 250,572 149,650
Venture Capital Acuity Imaging Corporation 12/85 12/94 200,000 227,496
(Itran)
Real Estate JMB Income Properties, 11/85 12/95 34,335 12,010
Ltd. - VIII
Venture Capital Shared Resource Exchange, 2/87 12/95 25,000 1
Inc.
Leveraged Buyout World Color Press, Inc. 4/89 1/96 84,848 162,718
(Printing Holdings, L.P.)
Real Estate JMB Income Properties, 11/85 12/96 6,488 4,469
Ltd.-IX
Total $3,424,745 $11,922,070
---------- -----------
NET PROFIT REALIZED $ 8,497,325
===========
</TABLE>
1983 PARTNERSHIP
The 1983 Partnership closed its subscription offering on May 20, 1983,
at which time it sold 6,915 units of limited partnership interest to
approximately 600 investors for $6,915,000. By March 2, 1987, the 1983
Partnership was fully invested with 21 investments with an aggregate purchase
price of approximately $7.4 million. Of the 21 investments, five were in
venture capital ($700,000), three in leveraged buyouts ($1.0 million), six in
real estate ($2.8 million), three in oil and gas ($900,000), three in leasing
($1.0 million) and one growth equity investment ($1.0 million).
Set forth below is a chart showing the results as of March 31, 1997, of
completed equity transactions with respect to the 1983 Partnership's
investments. The dates of purchase indicated refer to the dates on which
investments were acquired by the 1983 Partnership.
<TABLE>
<CAPTION>
Date of Date of
Classification Company Purchase Sale Cost Proceeds
-------------- ------- -------- ------- ---- --------
<S> <C> <C> <C> <C> <C>
Leveraged Buyout Signode Industries 12/85 9/86 $ 761,003 $ 8,096,509
Venture Capital UAS Automation Systems, Inc. 6/83 11/86 100,003 394,520
Leasing Aztex Associates, L.P. 5/83 12/86 142,224 0
Venture Capital BBN R/S Expert, L.P. 6/84 5/87 230,000 769,531
Leveraged Buyout Denny's, Inc. 9/86 9/87 199,984 949,315
Growth Equity FGIC Corporation 8/85 3/88 1,000,000 1,649,840
Venture Capital Alliant Computer Systems Corp. 6/86 7/88 100,000 63,563
Leveraged Buyout Medical Disposables Company 6/86 4/90 65,000 162,070
Oil and Gas Posse Petroleum, Ltd. 10/83 2/91 176,469 60,000
Venture Capital NPI Plant Research, Ltd. 4/84 3/91 232,500 25,000
Leasing Cortlandt Intermodal Leasing 6/83 4/92 432,882 180,624
Oil and Gas Berresford Enterprises-Jerry 1984 11/84 3/93 150,000 30
Oil and Gas Berresford Enterprises- 10/83 3/93 550,000 55
Margaret #1
Real Estate Casselberry-Oxford Associates, 6/83 12/95 840,007 140,000
L.P.
Leasing Windpower Partners 1983-1 6/83 12/95 540,350 14,000
Real Estate Capital Realty Investors - II 6/83 2/96 452,500 19,385
Venture Capital ML Venture Partners I L.P. 6/83 9/96 39,249 4,140
Total $6,012,171 $12,528,582
---------- -----------
NET PROFIT REALIZED $ 6,516,411
===========
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
GENERAL
The investment objective of the Partnership is to seek long-term capital
appreciation. It is expected that a significant portion of the Partnership's
assets will be invested in privately-offered equity investments in U.S. and
non-U.S. issuers. The Partnership's investments may include securities
issued in leveraged buyout transactions, financings of companies in an early
stage of development, investments in growth equities and
transactions involving financial restructurings or recapitalizations of
operating companies, as described below. Investments in non-U.S.
issuers may include
opportunities in both the emerging markets and developed countries.
Investments may also be made in real estate opportunities. Investments in
non-U.S. issuers may include opportunities in both emerging markets and
developed countries. The Partnership's investments may be made directly in
portfolio companies or through the purchase of interests in other investment
funds, including hedge funds. The Partnership may make other investments in
equity and fixed income securities that the General Partner considers
appropriate in terms of their potential for capital appreciation. Current
income will not generally be a significant factor in the selection of
investments. The Partnership may not change its investment objective unless
authorized by the vote of a majority-in-interest of the Limited Partners of
the Partnership. There can be no assurance that the investment objective of
the Partnership will be attained.
While privately-offered equity investments of the types expected to be
acquired by the Partnership generally have the potential for achieving
greater appreciation than investments in publicly-traded securities of
established companies, these investments are highly speculative and involve
substantial risks which are increased by the long-term nature and limited
liquidity of such investments. It is anticipated that the proceeds of the
offering will be invested, or committed for investment, within three to four
years after the date the Partnership commences operations. To the extent
portfolio investments are disposed of within two years after the closing of
the sale of Units, the General Partner will consider reinvesting all or a
substantial portion of the proceeds realized by the Partnership. However,
the General Partner does not expect to reinvest proceeds from the liquidation
of portfolio investments (other than temporary investments) occurring more
than two years after the closing of the sale of Units, except in connection
with follow-on investments made in existing portfolio companies.
The Partnership may invest, without limit, in the securities of non-U.S.
corporations and other issuers. While there are no prescribed limits on the
geographic allocation of the Partnership's international investments, the
Partnership expects that a substantial portion of these investments may be
made in developing countries, including developing countries located in the
Far East, the Indian subcontinent, Eastern Europe (including the former
Soviet Union) and Latin America. The General Partner believes that private
equity investments in growing companies in developing countries are
consistent with the Partnership's investment objective and can provide
attractive opportunities in light of the fact that emerging capital markets
are not as developed as those in Western Europe and the United States.
In addition to its direct investments, the Partnership may invest in
U.S. or non-U.S. investment funds offering opportunities consistent with its
investment objective. The Partnership expects that investments in investment
funds organized or operating outside the United States will be made to
facilitate the Partnership's investments in selected regions or industries.
In addition, such investments may be made when it is considered more
efficient to invest in a particular market on an indirect basis rather than
through direct investments in non-U.S. issuers. The Partnership expects that
domestic investment funds in which it invests will generally emphasize the
types of equity securities in which the Partnership invests directly.
Examples include funds investing in buyout opportunities, recapitalizations
transactions involving financial restructuring and funds with a focus on
technology or real estate. The Partnership may also invest in hedge funds as
described below. The General Partner believes that investment funds may have
access to certain investment opportunities that will not otherwise be
available to the Partnership. In addition, managers of investment funds may
have specialized investment skills regarding certain industries, types of
investments or regions.
TYPES OF INVESTMENTS
Leveraged buyout transactions typically involve the purchase of public
or privately-held corporations, or divisions or subsidiaries of such
corporations, through financing provided by equity investors and debt
financing. The transactions generally involve a significant degree of debt
financing and the highly leveraged financial structure of these investments
may introduce substantial risks to equity investors apart from those directly
related to a company's operations. As described under "Sources of Investment
Opportunities" below, the Partnership anticipates that it will seek to
co-invest in a number of these investments with ML & Co. or its affiliates.
The Partnership also expects that it will make investments in venture
capital transactions offering investment potential consistent with the
Partnership's objective of seeking long-term capital appreciation. To the
extent the Partnership makes such investments, it expects that these
investments will generally consist of investments in a limited number of new
companies or companies in an early stage of development that the General
Partner believes have outstanding appreciation and profit potential.
Typically venture capital investments may take from four to seven years to
reach a state of maturity where disposition can be considered.
The Partnership anticipates that it will also invest in "growth
equities." These investments are equity investments in mid- to later-stage
companies seeking to expand current operations or enter new types of
business.
The Partnership anticipates that it may also make equity investments in
transactions involving financial restructurings or recapitalizations of
operating companies. It is expected that these investments would be made in
connection with the restructuring or recapitalization of a leveraged company
pursuant to which a portion of its outstanding capitalization is to be
exchanged for, or repaid from the proceeds of the issuance of, one or more
classes of new securities. A company will generally undertake a financial
restructuring or recapitalization transaction because its financial structure
is overly leveraged in light of its current or anticipated operations.
These companies may also be encountering financial difficulties in meeting
current debt service payments. The Partnership anticipates that it will seek
to co-invest in financial restructuring or recapitalization transactions with
ML & Co. or its affiliates. The Partnership may also invest a portion of its
assets in real estate investments.
In considering international investments, the Partnership may seek
investments particularly in emerging markets, where there is generally more
limited access to capital than in developed countries. Such international
investments may include companies in a variety of sectors, including
manufacturing, telecommunications, infrastructure, and financial and other
services. In reviewing international investment opportunities, the General
Partner will consider factors such as whether companies have an established
record of profitability, proven management capability, the potential for
above average rates of growth, a significant market share and competitive
advantages in their markets (such as barriers to entry). The General Partner
will also review the potential exit strategies with respect to international
investments, and factors particular to the location of a company such as the
availability of trained labor, political, economic and social conditions and
tax and regulatory considerations.
The international investments that the Partnership may make include (i)
the private purchase from an enterprise of an equity interest in the
enterprise in the form of shares of common stock or equity interests in
trusts, partnerships, joint ventures or similar enterprises, (ii) the
purchase of such an equity interest in an enterprise from an investor in the
enterprise and (iii) securities traded on exchanges in emerging markets.
It is expected that in certain cases, the Partnership may at the time of
making the investment, enter into a shareholder or similar agreement with the
enterprise or one or more other holders of equity interests in the
enterprise. These agreements may, in appropriate circumstances, provide the
Partnership or an affiliate of the General Partner with the ability to
appoint one or more representatives to the board of directors or similar body
of the enterprise and for eventual disposition of the Partnership's
investment in the enterprise.
The investment funds in which the Partnership may invest include
investment vehicles that are deemed to be "investment companies" under the
Investment Company Act and similar managed investment vehicles organized
outside the United States that are outside the scope of such Act. The
Investment Company Act contains limitations on the ability of the Partnership
to invest in entities that are considered "investment companies" for purposes
of such Act, although this limitation does not apply to the Partnership's
investments in U.S.-organized private investment funds. Pursuant to the
Investment Company Act, the Partnership may invest generally no more than 10%
of its total assets in shares of other investment companies (as defined in
such Act) and no more than 5% of its total assets in any one investment
company. To the extent the Partnership and its "affiliated persons" (as
defined in the Investment Company Act) own no more than 3% of the outstanding
stock of an investment company, the Partnership's ownership of the securities
of such investment company is not subject to the foregoing 5% and 10%
limitations.
The Partnership may invest up to 10% of its total assets in hedge funds.
These funds, for purposes of the Partnership's policy, consist of private
investment partnerships or other private investment funds seeking to maximize
total return through use of various trading strategies. The Partnership
anticipates that the hedge funds in which it may invest will typically
operate on a leveraged basis and will reserve authority to maintain long and
short positions in equity and debt securities and to invest in a variety of
financial instruments, including derivative instruments, warrants, swap
agreements and currency-related obligations, and commodities.
After an initial equity investment in transactions described above, the
Partnership anticipates that it may, at times, provide additional or
follow-on funds to the issuer. Follow-on investments may be made pursuant to
rights to acquire additional securities, or otherwise in order to increase
the Partnership's position in a successful or promising portfolio company.
The Partnership may also be called on to provide follow-on investments for a
number of other reasons, including providing additional capital to a company
to implement fully its business plans, to develop a new line of business or
to recover from unexpected business problems.
The Partnership may make direct investments of up to 5% of its total
assets in high yield corporate debt securities that the General Partner
believes have significant potential for capital appreciation. These
securities may be acquired in restructuring or reorganization transactions in
which ML & Co. or its affiliates are participating as financial adviser or in
other capacities. High yield debt securities, also referred to as "junk
bonds", are regarded as predominantly speculative as to the issuer's ability
to make payments of principal and interest. See "Risk and Other Important
Factors". The Fund also may make investments in funds that invest in high
yield corporate debt securities.
The Partnership does not intend to invest more than 15% of its assets in
any one portfolio company. The equity investments made by the Partnership in
portfolio companies will typically be structured in negotiated private
transactions and will generally be restricted as to the manner of resale or
disposition. The securities acquired by the Partnership will primarily
consist of common stocks and securities convertible into common stocks, but
may also consist of a combination of equity and debt securities and warrants,
options and other rights to obtain such securities or, in the case of high
yield debt securities, the debt securities themselves.
SOURCES OF INVESTMENT OPPORTUNITIES
The Partnership expects to locate suitable investments from a variety of
sources, including affiliates of the General Partner and third parties.
Although the Partnership cannot predict what percentage of its investments
will be in opportunities presented by affiliates of the General Partner or by
third parties, it expects that a significant portion will be invested in
opportunities presented by affiliates of the General Partner. See "The
General Partner and Its Affiliates--Significant Affiliates of the General
Partner" and "Conflicts of Interest".
The Partnership will seek to invest in leveraged buyout and other equity
investments. Previous KECALP Partnerships (particularly the 1989 Partnership
and the 1991 Partnership) co-invested to a significant degree in buyout
investments with partnerships managed by Merrill Lynch Capital Partners Inc.
("MLCP"), a subsidiary of ML & Co. These investments were made available to
the KECALP Partnerships by ML & Co. from its co-investments with such buyout
partnerships. The investment professionals of MLCP formed a new management
company in 1994 which is not affiliated with ML & Co. for the purpose of
managing buyout partnerships. The principals of such new management company
have advised the General Partner that the KECALP Partnerships may co-invest
with such partnership in an aggregate amount of up to $2.5 million in each
investment made by such partnership, subject to a maximum investment by the
KECALP Partnerships of a 3% interest in any acquired company. Since ML & Co.
invested in such partnership as a limited partner, the General Partner
obtained an exemptive order from the Securities and Exchange Commission to
enable the KECALP Partnerships to make any such co-investments.
The Investment Company Act contains restrictions on co-investments by a
registered investment company (such as the Partnership) and affiliates of its
sponsor and on purchases of securities by a registered investment company
from affiliates of its sponsor. Accordingly, to the extent the Partnership
seeks to invest in transactions in which ML & Co. or any of its affiliates is
also a participant or to purchase securities from ML & Co. or any of its
affiliates, the Partnership may be required to obtain an exemptive order from
the Securities and Exchange Commission under such Act before it can make the
investment. The prior partnerships for which the General Partner acts as
general partner have been able to obtain such exemptive orders under the
Investment Company Act. In this regard, the Partnership has obtained blanket
exemptive relief from the Securities and Exchange Commission permitting
co-investments under certain circumstances in leveraged buyout and other
equity investments with ML & Co. and its affiliates. There can be no
assurance that the General Partner will be able to obtain exemptions in the
future with respect to investments that do not qualify under the terms of
existing exemptions.
INVESTMENT FACTORS
Prospective investments will be evaluated by the General Partner upon
selection factors established by the General Partner from time to time. The
following are typical of the factors which may be considered by the General
Partner:
(1) the potential return that may be earned from the investment;
(2) the nature of the risks associated with such investment (e.g.,
industry risks or risks related to the structure of the
investment opportunity);
(3) the degree of diversification in the Partnership's investment
portfolio;
(4) the financial stability, creditworthiness and reputation of
any proposed partners or joint venturers;
(5) in the case of Sponsored Programs or indirect investments made
through third parties, the background, experience and, where
applicable, prior performance of the issuer of the constituent
securities;
(6) the potential return available in alternative investments; and
(7) other considerations relative to a specific investment being
considered.
PROPOSED INITIAL INVESTMENTS
As of the date of this Prospectus, the General Partner has approved the
purchase by the Partnership of 19 investments, the details of which are set
forth below. It is anticipated that, to the extent permitted by the
Investment Company Act or exemptions therefrom, each of the 19 investments
that are deemed suitable investments for the Offshore KECALP Funds will be
allocated proportionately among the Partnership and the Offshore KECALP Funds
based upon uncommitted capital (or, prior to the closings of the Offshore
KECALP Funds, based upon the estimated uncommitted capital of such funds),
although such investments may be allocated in a different manner in the
discretion of the General Partner. The Offshore KECALP Funds may refrain
from investing in one or more of the investments due to tax or other
considerations. The cost of the 19 investments that the General Partner has
approved for investment by the Partnership and, to the extent suitable, the
Offshore KECALP Funds, aggregates approximately $84.6 million. There can be
no assurance that the Partnership will acquire each of the following
investments, or that the Partnership will acquire such investments in the
amounts indicated.
CANDESCENT TECHNOLOGIES CORPORATION. Candescent Technologies Corporation,
- -----------------------------------
formerly known as Silcon Video ("Candescent") is a company founded to
develop, manufacture and market a thin cathode ray tube for use in
televisions and laptop computers. Candescent is developing a technology that
would produce the quality of the standard television set in a thin format
that could be used in small televisions, laptop computers and other video
displays. The company is producing the thin CRT in small formats but has not
begun actual commercial manufacture of the thin cathode ray tube, which it
expects to do starting in 1998 with the assistance of technical,
manufacturing and customer strategic partners. The General Partner has
approved an investment of $5 million in Candescent.
CAPTURA SOFTWARE, INC. Captura Software, Inc. ("Captura") is a privately
- ----------------------
held enterprise software company, founded in 1994, which has developed a
business application to automate travel and expense processing, reporting and
analysis into one fully-integrated system. Such system (i) enables corporate
credit card companies to electronically submit expenses; (ii) interfaces
directly with corporate accounting systems; (iii) allows information to be
processed using company expense rules that eliminates significant processing
and (iv) allows remote users to input cash receipt data into laptop
computers. The General Partner has approved an investment of $1.25 million
in Captura.
ICHAT, INC. ichat, Inc., ("ichat") is a leading supplier of interactive
- -----------
real-time Internet and intranet communications software products, tools and
technology. The company's ROOMS product enable companies and organizations
to add two-way communications to their external or internal web sites, so
that site visitors can communicate with representatives and each other. When
visitors enter a chat-enabled web page, an ichat frame opens up and displays
any on-going chat session among visitors. The General Partner has approved
an investment of $2 million ichat.
LEINER HEALTH PRODUCTS GROUP INC. Leiner Health Products Groups Inc.
- ---------------------------------
("Leiner") is the U.S.'s largest manufacturer of vitamins, minerals, and
nutritional supplements and distributes its products primarily through the
mass market retailers. Leiner has a 23% market share of all mass market
vitamin sales in the United States and a 50% share of the mass market private
label segment. Leiner's products are sold in more than 50,000 of the
nation's leading retail outlets, including the 20 largest drugstore chains
and 18 of the 20 largest supermarket chains. This investment will be held
indirectly through another entity, North Castle Partners I, L.L.C., formed by
a third party to acquire the investment. Such third party will receive a
carried interest in the profits of such entity. The General Partner has
approved an investment of at least $14.3 million in Leiner.
ORBITAL IMAGING CORPORATION. Orbital Imaging Corporation ("Orbimage") is a
- ---------------------------
start-up company that seeks to become a satellite operator in the global
space-based imagery industry. Orbimage, an affiliate of the Orbital Sciences
Corporation, intends to launch and operate a fleet of small, low-cost Earth
observation satellites to collect, process and distribute digital imagery of
land areas, oceans and weather conditions. The General Partner has approved
an investment of up to $7 million in Orbimage.
PACKARD BIOSCIENCE COMPANY. Packard BioScience Company ("Packard"), founded
in 1949, is a leading global
- --------------------------
manufacturer of analytical instruments and related supplies and services.
Packard's long-term relationships with pharmaceutical laboratories,
engineering capabilities and extensive international sales and service
organization leaves it in a unique position to benefit from trends
influencing the life sciences market such as (1) the growth in funding from
pharmaceutical and biotechnology industries; (2) the demand for increased
automation at pharmaceutical, biotechnology and clinical laboratories; (3)
the need for accelerated drug discovery; (4) the need to improve research
efficiency and (5) the growth of non-radioisotopic bioanalytical research.
Packard's subsidiary Canberra Nuclear Products Group sells instruments (1) to
detect the presence of nuclear materials; (2) for use in the decommission and
decontamination of nuclear plants; (3) for use for worker health and safety
in connection with nuclear products and (4) for use in connection with the
disposal of nuclear waste. The General Partner has approved an investment of
$1 million in Packard.
PROCOMP AMAZONIA INDUSTRIA ELECTRONICA LTDA. Procomp Amazonia Industria
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Electronica LTDA ("Procomp"), is the leading bank automation company in
Brazil. Procomp sells packaged proprietary and remarketed hardware and
software to banks in Brazil and provides after-market maintenance and
services to its customers. The company's products, which are assembled at a
production facility in the Free-Trade Zone of Manaus in Brazil, include
Automatic Teller Machines ("ATMs"), financial terminals and other peripheral
products. The General Partner has approved an investment in Procomp of up to
$4 million.
PT KERAMIKA INDONESIA ASSOSIASI. PT Keramika Indonesia Assosiasi ("KIA") is
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an Indonesian ceramic tile manufacturer, which trades on the Jakarta Stock
Exchange. The company is 70.6%-owned by the Ongko Group, an Indonesian
conglomerate owned and managed by the Ongko family. KIA is the only domestic
ceramic tile producer that offers a full line of wall, roof and floor tiles
in addition to ceramic bathroom products. The company has a network of
showrooms through which it markets its products. The company's strategy is
to: (1) expand its capacity to address undersupply in its primary market;
(2) emphasize the manufacture of larger tile, which can be sold at higher
prices; (3) move away from the manufacture of swimming pool tile which is
expensive to produce; (4) increase its capacity to produce roof tiles; and
(5) strengthen its marketing and distribution network. The General Partner
has approved an investment in KIA of up to $2 million.
WALLS HOLDING COMPANY, INC. Walls Holding Company, Inc. ("Walls") is a
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leading designer, manufacturer and marketer of a broad line of high-quality
branded workwear, hunting and outdoor apparel and outerwear. Founded more
than 50 years ago, Walls sells its products nationwide through mass
merchandisers, sporting goods stores, independent retailers and catalog
retailers. In addition, Walls operates eight retail factory outlets. This
investment will be held indirectly through another entity formed by a third
party to acquire the investment. Such entity will charge a management fee
and a carried interest. The General Partner has approved an investment of
$1.9 million in Walls.
WENDENG TIANRUN CRANKSHAFT CO. LTD. Wendeng Tianrun Crankshaft Co. Ltd.
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("WTC") is a joint venture established to own Shandong Crankshaft General
Factory ("SCGF"), the largest independent manufacturer of crankshafts for
diesel trucks in the People's Republic of China. The factory is located in
Shandong province in China. WTC is 60% owned by Wendeng City, which
contributed SCGF to the joint venture and 40% owned by entities affiliated
with Merrill Lynch. The proceeds of the new investment is targeted to build
a new casting plant and additional facilities and to purchase equipment for
these facilities which are scheduled to be completed in 1999. The plant
currently produces crankshafts for diesel trucks and for the replacement
market. SCGF's current customers include some of the top domestic diesel
manufacturers in China. The General Partner has approved an investment of up
to $1 million by the Partnership in WTC.
CHARTERHOUSE EQUITY PARTNERS III, L.P. Charterhouse Equity Partners is a
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limited partnership fund with a maximum size of $750 million that will seek
to make private equity investments in buyouts, recapitalizations and
companies requiring capital for business expansion. The General Partner has
approved an investment of $5 million in Charterhouse Equity Partners III,
L.P.
FLEMING U.S. DISCOVERY FUND III, L.P. The Fleming U.S. Discovery Fund III
- -------------------------------------
("U.S. Discovery Fund III") is a fund organized by Fleming Capital Management
that will seek to make privately-negotiated purchases of companies with small
capitalizations that are already traded in the public market. The fund will
seek to take advantage of the inefficiencies in the public market with
respect to so-called "small cap" companies with little research coverage and
therefore not as well known to the public. The General Partner has approved
an investment of $1 million by the Partnership in the U.S. Discovery Fund
III.
JERUSALEM VENTURE PARTNERS, L.P. Jerusalem Venture Partners, L.P. is a
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private venture capital fund, that will seek to make venture capital
investments in technological companies based in or with connections to
Israel. The General Partner has approved an investment of up to $1 million
in Jerusalem Venture Partners, L.P.
M.D. SASS CORPORATE RESURGENCE PARTNERS, L.P. M.D. Sass Corporate Resurgence
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Partners, L.P. ("MD Sass") is a limited partnership fund formed by the M.D.
Sass investment management firm that will seek to continue the firm's
historical strategy of investing in various classes of securities of
companies in financial distress or which have recently emerged from financial
reorganization. The new fund will also seek positions in distressed
securities on a short-term basis, but will also take control positions in
distressed companies. The General Partner has approved an investment of up
to $3 million in MD Sass.
SPECTRUM EQUITY INVESTORS II L.P. Spectrum Equity Investors II L.P.
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("Spectrum II") is a fund formed that will seek to make private equity
investments in companies in the communications, information, media,
entertainment and telecommunications segments of the economy. Spectrum II
will seek to make equity investments in communications, telecommunications,
information, media and entertainment product and service companies by taking
majority positions in middle-market growth companies and minority positions
in earlier-stage companies serving rapidly developing market segments. The
General Partner has approved an investment of up to $2.7 million in Spectrum
II.
SUN CAPITAL PARTNERS L.P. SUN Capital Partners L.P. is a fund organized by
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the SUN group of companies to make direct equity and equity-related
investments in enterprises organized or operating primarily in the Russian
Federation countries. The SUN group of companies is affiliated with the
Khemka group based in India, which has been operating in Russia for almost
four decades. The General Partner has approved an investment of $10 million
by the Partnership in the fund.
TPG PARTNERS II L.P. TPG Partners II L.P. is a limited partnership fund with
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a maximum size of $2.5 billion which will seek to acquire control of
companies (primarily in the United States) though acquisitions and corporate
restructurings. The fund was formed by the Texas Pacific Group. The General
Partner has approved an investment of $10 million in TPG Partners II L.P.
WARBURG, PINCUS VENTURES INTERNATIONAL, L.P. Warburg, Pincus Ventures
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International, L.P. is a limited partnership fund which will be managed by
E.M. Warburg, Pincus & Co. LLC and will seek to make private equity and
venture capital investments in companies whose principal place of business is
located outside the United States. The General Partner has approved an
investment of $10 million in Warburg, Pincus Ventures International, L.P.
ZML PARTNERS LIMITED PARTNERSHIP IV. ZML Partners Limited Partnership IV
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("Zell IV") is a limited partnership formed to act as the general partner of
Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership IV
(the "Fund"). The Fund will seek to acquire a high quality, geographically
diversified portfolio of real estate assets, primarily office buildings. The
investment period is ten years and Zell IV has agreed to use its best efforts
to sell the property of the Fund within 15 years from the initial closing of
the Fund. The General Partner has approved an investment of $2.5 million in
Zell IV. Such limited partnership interest permits participation in the
carried interest of Zell IV in the Fund.
LEVERAGE
The Partnership Agreement permits the General Partner to borrow funds on
behalf of or lend funds to the Partnership. The General Partner will obtain
funds for making Partnership investments when it believes such action is
desirable. The Partnership may also borrow funds to enable it to make
follow-on investments with respect to any direct investments it might make in
portfolio companies. However, it is expected that the Partnership would not
otherwise incur substantial debt with respect to other types of investments.
The Investment Company Act generally limits the amount of indebtedness the
Partnership may incur to 331/3% of its gross assets. However, the General
Partner has obtained an order from the Securities and Exchange Commission
applicable to the Partnership which permits the Partnership to enter into
nonrecourse loans relating to investments other than securities without
regard to such limitation.
The use of leverage would exaggerate increases or decreases in the
Partnership's net assets. To the extent that Partnership revenues are
required to meet debt service obligations, the Partners may be allocated
income (and therefore tax liability) in excess of cash available for
distribution.
LIQUIDATION OF INVESTMENTS
The Partnership intends to liquidate its portfolio investments prior to
dissolution. Leveraged buyout and venture capital investments typically
require from four to seven years to reach a state of maturity before
disposition can be considered. Investments in corporate restructuring and
recapitalization transactions may also require a substantial holding period.
Investments in partnerships involved in real estate investments may also be
illiquid for significant periods, including periods extending for the term of
the underlying investment vehicle. As a result, the Partnership's
investments will generally be held for a significant time period until
disposition can be considered through negotiated private sales or sales made
in the public market pursuant to exemptions from registration under the
Federal securities laws. The Partnership expects to utilize the services of
MLPF&S, to the extent permitted by the Investment Company Act, in executing
transactions for the sale of its investments. In the absence of a specific
exemption, the Partnership is generally precluded by the Investment Company
Act from selling portfolio securities, including high yield debt securities,
to MLPF&S on a principal basis.
REINVESTMENT POLICY
The General Partner has the discretion to reinvest all Partnership
revenues. To the extent portfolio investments are disposed of within two
years after the closing of the sale of Units, the General Partner will
consider reinvesting all or a substantial portion of the proceeds realized by
the Partnership. However, the General Partner does not expect to reinvest
proceeds from the liquidation of portfolio investments (other than temporary
investments) occurring more than two years after the closing of the sale of
Units, except in connection with follow-on investments made in existing
portfolio companies. In addition, income or gains generated by investments
in hedge funds may be re-invested in such funds until such time as the
Partnership determines to dispose of its investments therein. The General
Partner may also cause the Partnership to maintain reserves for follow-on
investments or to apply cash received from investments to the prepayment of
any borrowings made by the Partnership. To the extent that cash received by
the Partnership is not required for such purposes or to reimburse the General
Partner for expenses incurred by it, such cash will be distributed to the
Partners at least annually.
INVESTMENT RESTRICTIONS
The Partnership has adopted the following investment restrictions which
may not be changed unless authorized by an amendment of the Partnership
Agreement by the vote of a majority-in-interest of the Limited Partners of
the Partnership. These restrictions provide that the Partnership may not (i)
issue senior securities other than in connection with borrowings described in
(iii) below, (ii) make short sales of securities, purchase securities on
margin, except for use of short-term credit necessary for the clearance of
transactions, or write put or call options, (iii) borrow amounts in excess of
331/3% of its gross assets, except that the Partnership may enter into
nonrecourse loans relating to investments other than securities without
regard to such limitation, (iv) underwrite securities of other issuers,
except insofar as the Partnership may be deemed an underwriter under the
Securities Act of 1933 in selling portfolio securities, (v) invest more than
25% of its Partners' capital contributions in the securities of issuers in
any particular industry, except for temporary investments in United States
Government and Government agency securities, domestic bank money market
instruments and money market funds, or (vi) make loans to other persons in
excess of 331/3% of its gross assets, provided that investments in privately
offered debt securities issued by entities in which the Partnership has an
equity participation or with which the Partnership has contracted to acquire
an equity participation are not considered loans for purposes of this
restriction. In addition, the Partnership will not invest any of its assets
in the securities of other registered investment companies or investment
companies organized outside of the United States, except to the extent
permitted by the Investment Company Act.
TEMPORARY INVESTMENTS
Prior to the expenditure of the capital contributions of the Limited
Partners, and pending distributions of available cash, the Partnership will
invest funds in various types of marketable securities. These securities
include money market instruments and securities issued by taxable or tax-
exempt money market funds (including funds sponsored by affiliates of the
General Partner). An exemptive order obtained from the Securities and
Exchange Commission permits the Partnership to purchase money market
instruments, shares of money market funds and certain other securities from
affiliates of ML & Co. in principal transactions.
TAX ASPECTS OF INVESTMENT IN THE PARTNERSHIP
EACH PROSPECTIVE LIMITED PARTNER IS URGED TO CONSULT A PERSONAL TAX ADVISOR
WITH RESPECT TO THE MATTERS DISCUSSED BELOW AS THEY RELATE TO SUCH
PROSPECTIVE LIMITED PARTNER'S CIRCUMSTANCES.
SCOPE AND LIMITATION
The following discussion of the Federal income tax consequences of an
investment in the Partnership, together with the opinions of counsel referred
to below, are based upon the existing provisions of the Internal Revenue Code
of 1986, as amended to date (the "Code"), the regulations promulgated or
proposed thereunder (the "Regulations" or the "Proposed Regulations"),
current administrative rulings and practices of the Internal Revenue Service
(the "IRS") and existing court decisions, any of which could be changed at
any time. Any such changes may or may not be retroactive with respect to
transactions prior to the date of such changes and could significantly modify
the statements and opinions expressed herein.
At the Closing of the offering of Units, the Partnership will receive
the opinion of Brown & Wood LLP ("Tax Counsel") to the effect that:
(i) the Partnership will be classified as a partnership for Federal
income tax purposes and not as an "association" taxable as a corporation and
will not be classified as a publicly traded partnership within the meaning of
Code Section 7704(b) (see "Classification as a Partnership" below); and
(ii) the allocations of income, gain, loss, deduction and credit of the
Partnership will be respected for Federal income tax purposes, so long as no
Limited Partner's capital account becomes negative (see "General Principles
of Partnership Taxation--Allocations and Distributions" below).
The Partnership also will request additional opinions of Tax Counsel
with respect to the other material Federal income tax issues described in
this Prospectus as such matters arise in the course of the Partnership's
investment decisions. All such opinions of Tax Counsel will be subject to,
and limited by, the assumptions made and matters referred to in such
opinions, including the laws, rulings and regulations in effect as of the
date of such opinions, all of which are subject to change.
Partners should note that the opinions of Tax Counsel are not binding on
the IRS or the courts. The opinions of Tax Counsel regarding the issues
specifically identified represent Tax Counsel's judgment based on its
analysis of the law, and express what Tax Counsel believes a court would
conclude if properly presented with such issues. Accordingly, no assurance
can be given that the IRS will not challenge the tax treatment of certain
items or, if it does, that it will not be successful. The opinions are based
on the applicable statutes, regulations, cases and rulings in effect on the
date of the opinions. If any of the authorities on which the opinions are
based should change, the conclusions set forth in the opinions may be
affected. The opinions of Tax Counsel are also based on certain
representations by the General Partner, including a representation that the
factual matters referred to herein are accurate and complete as of the date
of Closing. If such facts or representations are inaccurate, Tax Counsel's
opinion may not apply to such changed circumstances.
OVERVIEW OF TAX ASPECTS
The Code provides that a partnership is not itself subject to Federal
income taxation. Rather, each Limited Partner will be required to take into
account in computing his of her Federal income tax liability his or her
allocable share of the Partnership's capital gains and capital losses and
other income, losses, deductions, credits and items of tax preference for any
taxable year of the Partnership ending within or with the taxable year of
such Limited Partner, without regard to whether he or she has received or
will receive any distribution from the Partnership. Partnership revenues may
be retained by the Partnership to be applied to working capital reserves, or
used to reduce outstanding debts or borrowings or Partnership expenses. In
addition, some of the investment funds in which the Partnership may invest,
including hedge funds, may re-invest all or a potion of realized capital
gains or other income rather than making cash distributions. Also, certain
of the temporary investments which may be made by the Partnership or any
investment partnership in which the Partnership invests include zero coupon
bonds or other obligations having original issue discount. For Federal
income tax purposes, accrual of original issue discount will be attributable
to Partners as interest income even though the Partnership does not realize
any cash flow as a result of such accrual.
The Partnership is required to (i) file annually an information return
on Form 1065 and (ii) following the close of the Partnership's taxable years,
provide to each Partner a Schedule K-1 indicating such Partner's allocable
share of the Partnership's income, gain, losses, deductions, credits, and
items of tax preference. Assignees of Limited Partners who are not admitted
to the Partnership will not receive any tax information from the Partnership.
See "General Principles of Partnership Taxation--Partners, Not Partnership,
Subject to Tax" below.
CLASSIFICATION OF A PARTNERSHIP AS A PTP
Under Section 7704 of the Code, generally a publicly traded partnership
("PTP") is to be treated as a corporation for Federal income tax purposes.
PTPs are defined in Code Section 7704(b) as partnerships whose interests
are (i) traded on an established securities market (i.e., a national
exchange, local exchange, or over-the-counter market) or (ii) readily
tradeable on a secondary market or the substantial equivalent thereof. Units
in the Partnership will not be listed for trading on an established
securities market and the General Partner will not participate in the
establishment of any secondary market or substantial equivalent thereof and
will not recognize any transfers made on any such market. A Limited Partner
may not transfer a Unit unless the Limited Partner represents, and provides
other documentation, satisfactory in form and substance to the General
Partner that such transfer was not effected through a broker-dealer or
matching agent which makes a market in Units or which provides a readily
available, regular and ongoing opportunity to Partners to sell or exchange
their Units through a public means of obtaining or providing information of
offers to buy, sell or exchange Units. Prior to recognizing the sale of a
Unit, the General Partner must determine that such sale, assignment or
transfer will not, by itself or together with any other sales, transfers or
assignments, substantially increase the risk of the Partnership being
classified as a publicly traded partnership. A transferor will not be
required to make the representations described above if the transferor
represents that the transfer is effected through an agent whose procedures
have been approved by the General Partner as consistent with the requirements
for avoiding classification as a publicly traded partnership.
On November 21, 1995, the IRS issued final regulations on classifying
certain publicly traded partnerships as corporations (the "Final PTP
Regulations"). The Final PTP Regulations provide certain safe harbors which,
if satisfied by a partnership, will result in interests in the partnership
not being treated as readily tradeable on a secondary market or the
substantial equivalent thereof. The Final PTP Regulations provide, in
relevant part, that interests in a partnership will not be considered readily
tradeable on a secondary market or a substantial equivalent thereof within
the meaning of Section 7704(b) of the Code for a taxable year of the
partnership if the sum of the percentage interests in partnership capital or
profits represented by partnership interests that are sold or otherwise
disposed of during the taxable year does not exceed 2% of the total interest
in partnership capital or profits (the "2% Safe Harbor"). For this purpose,
the following transfers, as well as certain redemptions (collectively, "Safe
Harbor Transfers"), will be disregarded: (i) transfers in which the basis of
the partnership interest in the hands of the transferee is determined, in
whole or in part, by reference to its basis in the hands of the transferor or
is determined under Section 732 of the Code; (ii) transfers at death,
including transfers from an estate or testamentary trust; (iii) transfers
between members of a family (as defined in Section 267(c)(4) of the Code);
(iv) the issuance of interests by or on behalf of the partnership in exchange
for cash, property, or services; (v) distributions from a retirement plan
qualified under Section 401(a); and (vi) block transfers. (The term "block
transfer" means the transfer by a partner in one or more transactions during
any thirty calendar day period of partnership interests representing in the
aggregate more than 2% of the total interest in partnership capital or
profits.)
The Final PTP Regulations also provide that sales through a matching
service ("Matched Sales") will be disregarded (the "Matching Service Safe
Harbor") for purposes of determining whether partnership interests are to be
considered readily tradeable on a secondary market or the substantial
equivalent thereof if: (i) at least a 15 calendar day delay occurs between
the day the operator receives written confirmation from the listing customer
that an interest in a partnership is available for sale (the "contact date")
and the earlier of (A) the day information is made available to potential
buyers regarding the offering of such interest for sale, or (B) the day
information is made available to the listing customer regarding the existence
of any outstanding bids to purchase an interest in such partnership at a
stated price; (ii) the closing of the sale effected through the matching
service does not occur prior to the 45th calendar day after the contact date;
(iii) the listing customer's information is removed from the matching service
within 120 calendar days after the contact date; (iv) following any removal
of the listing customer's information from the matching service (other than
removal by reason of a sale of any part of such interest), no interest in the
partnership is entered into the matching service by such listing customer for
at least 60 calendar days; and (v) the sum of the percentage interests in
partnership capital and profits represented by partnership interests that are
sold or otherwise disposed of other than in Safe Harbor Transfers during the
taxable year of the partnership does not exceed 10 percent of the total
interest in partnership capital and profits.
The Partnership Agreement provides that the Partnership will satisfy one
of such safe harbors. The Partnership Agreement also provides that any
transfer of Units to a market maker will be null and void unless the market
maker certifies that it is holding such Units for investment purposes. The
General Partner has also represented that it intends to exercise its
discretion regarding transfers in a manner designed to prevent the
Partnership from becoming a PTP. Accordingly, it is not anticipated that
the Partnership will be a PTP. There can be no assurance, however, that the
General Partner will be successful in its efforts.
CLASSIFICATION AS A PARTNERSHIP
SIGNIFICANCE OF PARTNERSHIP STATUS
A limited partnership may be classified for Federal income tax purposes
as either a "partnership" or an association taxable as a corporation. If the
Partnership is classified as a partnership, the Partners will be subject to
tax currently on their respective distributive shares of Partnership income
and gain, and, subject to certain limitations, will be entitled to claim
currently their respective distributive shares of any Partnership losses and
credits. If the Partnership were to be classified as an association taxable
as a corporation, the Partners therein would be treated as shareholders of a
corporation and, consequently, (i) items of income, gain, deduction, loss and
credit would not flow through to such Partners to be accounted for on their
individual Federal income tax returns, (ii) cash distributions would be
treated as corporate distributions to such Partners, some or all of which
might be taxable as dividends, and (iii) the taxable income of the
Partnership would be subject at the partnership level to the Federal income
tax imposed on corporations and, potentially, to state and local corporate
income and franchise taxes.
The Partnership will not seek a ruling from the IRS on the question of
its classification for Federal income tax purposes as a partnership but
rather will rely on an opinion of Tax Counsel as described below. The
opinion of Tax Counsel will not be binding upon the IRS.
QUALIFICATION OF THE PARTNERSHIP AS A PARTNERSHIP
At the Closing of the offering of Units, Tax Counsel will deliver its
opinion that, under the present provisions of the Code, Regulations,
published rulings of the IRS and court decisions, all of which are subject to
change, assuming the activities of the Partnership are conducted as described
herein and in compliance with the provisions of the Partnership Agreement,
and based on certain representations of the General Partner, for Federal
income tax purposes, the Partnership will be treated as a partnership.
Tax Counsel's opinion as to the partnership status of the Partnership is
based in part upon Section 301.7701-2 of the current Regulations which
provides that an unincorporated organization with two or more members that is
created or qualifies under applicable state law will be classified as a
partnership for Federal income tax purposes unless the organization elects to
be classified as a corporation. In Tax Counsel's opinion, based upon certain
representations of the General Partner, the Partnership will be treated as a
partnership for Federal income tax purposes rather than an association
taxable as a corporation.
No assurance can be given that partnership status will not be lost as a
result of future changes in the applicable law or Regulations (which changes
might be applied retroactively) or due to changes in the manner in which the
Partnership in fact is operated. As more fully described below, loss of
partnership status and treatment of the Partnership as an "association"
taxable as a corporation would have a material adverse effect of the tax
treatment of the Partnership, the Partners and on the value of the Units.
In addition to the foregoing considerations concerning classification of
the Partnership as a partnership, the General Partner has instituted measures
which are intended to reduce the risk of the Partnership being treated as a
PTP or an association taxable as a corporation for Federal income tax
purposes. Specifically, the General Partner will represent, at the time of
Closing, that it will take such actions and implement such procedures as are
necessary to enable the Partnership to comply with one of the safe harbors
enumerated in the Final PTP Regulations. In addition, the General Partner
will not recognize any transfer of Units if, in the opinion of the
Partnership's tax counsel, the manner of such transfer could cause the
Partnership to be classified as an association taxable as a corporation for
Federal income tax purposes or cause it to be a PTP. Accordingly, at the
Closing of the offering of Units, Tax Counsel will deliver their opinion that
the Partnership will not be a PTP within the meaning of Section 7704(b) of
the Code.
If for any reason the Partnership were treated as an "association"
taxable as a corporation, capital gains and losses and other income and
deductions of the Partnership would not be passed through to the Limited
Partners, and the Limited Partners would be treated as shareholders for tax
purposes. Any distributions by the Partnership to each Limited Partner would
be taxable to that Limited Partner as a dividend, to the extent of the
Partnership's current and accumulated earnings and profits, and treated as
gain from the sale of a Partnership interest to the extent it exceeded both
the current and accumulated earnings and profits of the Partnership and the
Limited Partner's tax basis for his or her interest.
_____________________
The remainder of the discussion under "Tax Aspects of Investment in the
Partnership", including observations as to the tax results of the normal
operation of the Partnership and of such events as the Partnership's sale of
an interest in portfolio companies or a Partner's sale of an interest in the
Partnership, is based on the assumption that the Partnership will be
classified as a partnership for Federal income tax purposes. In general,
this discussion is limited to the Federal income tax aspects of investment in
the Partnership, although reference is made to other tax considerations. See
"State and Local Taxes".
GENERAL PRINCIPLES OF PARTNERSHIP TAXATION
PARTNERS, NOT PARTNERSHIP, SUBJECT TO TAX
As discussed above, the Partnership, if recognized as a partnership for
Federal income tax purposes, will not itself be liable for any Federal income
tax. Although the Partnership must annually file a U.S. Partnership Return of
Income, Form 1065, that return is merely an information return. Instead, the
Partnership will report to each Partner such Partner's distributive share
(generally, as determined under the Partnership Agreement, as discussed under
"Allocations and Distributions" below, and reported on Schedule K-1 of Form
1065) of income, gain, loss, deduction, credit and items of tax preference.
Each Partner will then report on his or her own Federal income tax return,
much as if the Partner were directly engaged in the investment activities of
the Partnership, such Partner's share of those items for the Partnership tax
year that ends with or within the Partner's tax year.
A Partner's share of items of Partnership income are included directly
in the computations of the Partner's adjusted gross income and taxable
income. The Partner's share of any Partnership deductions or losses may,
subject to certain exceptions discussed below (see "Basis of Partnership
Interest", "`At Risk' Limitation on Deducting Losses", "Passive Activity Loss
Limitation", " Deductibility of Operating Expenses" and "Limitations on the
Deductibility of Interest"), offset the Partner's allocable share of
Partnership income and, if sufficient in amount, a Partner's income from
other sources.
As a general rule, any cash distributions or constructive distributions
(e.g., a decrease in the Partner's share of Partnership liabilities) by the
Partnership will be taxable to a Partner only to the extent that such
distributions exceed the tax basis of the recipient Partner in the year of
receipt or are received in exchange for the recipient Partner's interest in
"unrealized receivables" or substantially appreciated "inventory items" under
Section 751 of the Code. See "Basis of Partnership Interest" and "Transfer
of a Partnership Interest" below. Conversely, the mere absence of cash or
constructive distributions will not, of itself, limit or affect the
recognition of taxable income by Partners.
BASIS OF PARTNERSHIP INTEREST
As a general matter, a partner's basis for his or her interest in a
partnership is significant in determining (i) taxable gain or loss to the
partner on disposition or liquidation of such partner's interest in the
partnership, (ii) the extent to which partnership expenses or losses are
deductible by the partner, and (iii) the extent to which partnership
distributions represent taxable income to the partner. In this respect, a
partner's basis for his or her partnership interest represents a measure of
the partner's "investment" in the partnership at any given time for Federal
income tax purposes.
A Limited Partner's basis for his or her interest in the Partnership
will initially be the amount of such Partner's cash contribution to the
capital of the Partnership, plus such Partner's share, as discussed below, of
any Partnership liabilities. Such basis will be increased by (i) the
Partner's distributive share of Partnership taxable income, including capital
gain, (ii) the Partner's distributive share of Partnership income exempt from
tax, if any, and (iii) any increase in the Partner's share of Partnership
liabilities. A Partner's basis will be decreased (but not below zero) by (i)
the Partner's distributive share of cash distributions, (ii) the Partner's
distributive share of Partnership losses and deductions, (iii) any decrease
in the Partner's share of Partnership liabilities, and (iv) the Partner's
distributive share of Partnership expenditures that are neither deductible
nor properly chargeable to his or her capital account.
It is anticipated that the Partnership may incur borrowings to make
follow-on investments with respect to its direct equity investments. It
should also be anticipated that debt financing will be utilized by other
investment funds in which the Partnership may acquire interests. Such
borrowings will usually be nonrecourse liabilities by their terms secured
solely by the assets of the Partnership or such other investment funds and
for which no Partner will have any personal liability. Each Limited Partner
will be permitted to include his or her allocable share (as determined under
Code Section 752) of any such nonrecourse liabilities in the basis of his or
her Partnership interest, but only to the extent that the amount of such
liabilities does not exceed the fair market value of the property securing
such liabilities. However, even though a Limited Partner's allocable share
of Partnership nonrecourse borrowings will be includable in the tax basis of
his or her Partnership interest, such borrowings will not increase the amount
the Limited Partner is considered "at risk" for purpose of the deductibility
of Partnership losses. See "`At Risk' Limitation on Deducting Losses".
If recognition of a Partner's distributive share of Partnership losses
would reduce the tax basis of the Partner's interest in the Partnership below
zero, the recognition of such losses is deferred until such time as the
recognition of such losses would not reduce the Partner's basis below zero.
To the extent that Partnership cash distributions, or any decrease in a
Partner's share of the nonrecourse liabilities of the Partnership (which is
considered a constructive cash distribution to the Partners), would reduce a
Partner's basis below zero, such distributions constitute taxable income to
the recipient Partner. If the Partner is not a "dealer" in securities, the
distribution will normally represent a capital gain and, if the Partnership
interest has been held for longer than the capital gains holding period
(currently one year), the distribution will constitute a long-term capital
gain.
`AT RISK' LIMITATION ON DEDUCTING LOSSES
Under Section 465 of the Code, individuals and certain closely-held
corporations are entitled to deduct their distributive shares of partnership
losses attributable to partnership activities only to the extent of the
amount they are considered "at risk" with respect to their partnership
interests at the end of the taxable year.
A Limited Partner in the Partnership will initially be considered "at
risk" with respect to his or her Partnership interest to the extent of the
cash contributed to the Partnership for Units, provided such Units are not
financed with borrowings from persons with certain interests (other than as a
creditor) in the Partnership activities or with borrowings solely secured by
Units. While a Limited Partner's tax basis in his or her Units will be
increased by his or her allocable share of any nonrecourse liabilities of the
Partnership (see "Basis in Partnership Interest" above), such liabilities are
not includable in the Partner's amount "at risk". However, the Code provides
an exception to this general rule that permits certain qualified nonrecourse
financing secured by real property to be included in an investor's amount "at
risk". This exception may have relevance if the Partnership indirectly
invests in real estate through other investment funds.
The amount a Limited Partner is "at risk" in the Partnership will be
increased by, among other things, his or her share of Partnership ordinary
income and capital gain. A Limited Partner's amount "at risk" will be
reduced by (i) all Partnership distributions to, or on behalf of, the Partner
and (ii) his or her share of Partnership deductions and losses. The
Partner's share of Partnership deductions and losses over Partnership income
not allowable in any year as a result of the "at risk" limitation is carried
forward until such time, if ever, as it is allowable under the "at risk"
rules.
If, at the end of any taxable year, the amount a Limited Partner is "at
risk" is less than zero (for example, as a result of a cash distribution from
the Partnership) the deficit amount "at risk" is "recaptured"; that is, the
Limited Partner must include in gross income an amount equal to the negative
amount "at risk". However, the amount of gross income so recognized to
offset the deficit amount "at risk" may be treated as a deduction and carried
forward as a suspended loss until such time, if ever, as it is allowable.
The timing, duration and extent of any deferral or "recapture" of losses
as a consequence of the "at risk" limitation will depend upon the nature of
the Partnership's investments, the amount of Partnership revenue and expenses
and the amount and the terms of Partnership leverage. In any event,
prospective Limited Partners should consider the effect of the "at risk"
rules in arranging any financing for a purchase of Units.
PASSIVE ACTIVITY LOSS LIMITATION
Under the passive activity loss provisions of Section 469 of the Code,
losses and credits from trade or business activities in which a Limited
Partner does not materially participate (i.e., "passive activities") will
only be allowed against income from such activities. Therefore, such losses
cannot be used to offset salary or other earned income, active business
income or "portfolio income" (such as dividends, interest, royalties and
nonbusiness capital gains) of the Limited Partner. Losses and credits
suspended under this limitation can be carried forward indefinitely and can
be used in later years against income from passive activities. Moreover, a
taxable disposition by a Limited Partner of the entire interest in a passive
activity will cause the recognition of any suspended losses attributable to
that activity. The passive activity loss limitation applies to individuals,
estates, trusts, and most personal service corporations. A modified form of
the rule also applies to closely-held corporations.
The primary activity of the Partnership will be the investment, holding
and eventual disposition of privately-offered securities acquired in
connection with direct equity investments. Prior to the commitment of
Partnership funds to such investments, and pending distributions of available
cash to the Partners, the Partnership will temporarily invest funds in
various types of marketable securities. Any ordinary income (such as
interest or dividend income) derived from either of such investment
activities, or capital gains realized upon disposition of such investments,
will be treated as portfolio income. Portfolio income is not considered
passive income and, thus, cannot be offset by a Partner's passive losses from
other activities of the Partnership (such as investment in certain other
investment funds) or other sources. Accordingly, a prospective Limited
Partner should not invest in the Partnership with the expectation of using
his or her proportionate share of portfolio income and capital gain from the
Partnership to offset losses from his or her interest in passive activities.
On the other hand, a Limited Partner's proportionate share of any capital
loss from portfolio investments or any ordinary expense (including any
interest expense) allocable to portfolio investments, although they may be
subject to the limitations imposed on deductibility of (i) capital losses
(ii) itemized investment expenses incurred in the production of portfolio
income (see "Deductibility of Operating Expenses") or (iii) investment
interest (see "Other Tax Considerations--Limitations on the Deductibility of
Interest"), will not be subject to the passive loss limitation rules
described above.
ALLOCATIONS AND DISTRIBUTIONS
Under Section 704 of the Code, a partner's distributive share of the
income, gain, loss and deduction of a partnership is determined in accordance
with the partnership agreement unless the allocation of such items does not
have a "substantial economic effect" independent of tax consequences. The
IRS has issued final Regulations relating to a partner's distributive share
of tax items and the "substantial economic effect" test. Under such
Regulations, an allocation of partnership income, gain, loss or deduction (or
item thereof) to a partner will be considered to have "substantial economic
effect" if it is determined that (i) the allocation has "economic effect" and
(ii) that economic effect is "substantial". An allocation of tax items to
partners will be considered to have "economic effect" if (a) the partnership
maintains capital accounts in accordance with specific rules set forth in
such Regulations and such allocation is reflected through an appropriate
increase or decrease in the partners' capital accounts, (b) liquidating
distributions (including liquidations of a partner's interest in the
partnership) are required to be made in accordance with the partners'
respective capital account balances, and (c) any partner with a deficit in
his or her capital account following the distribution of liquidation proceeds
would be unconditionally required to restore the amount of such deficit to
the partnership. If the first two of these requirements are met, but the
partner to whom an allocation is made is not obligated to restore the full
amount of any deficit balance in his capital account, the allocation still
will be considered to have "economic effect" to the extent the allocation
does not cause or increase a deficit balance in the partner's capital account
(determined after reducing that account for certain "expected" adjustments,
allocations, and distributions specified by the Regulations) if the
partnership agreement contains a "qualified income offset" provision.
The Partnership Agreement provides that a capital account is to be
maintained for each Partner, that the capital accounts are to be maintained
in accordance with applicable tax accounting principles set forth in the
Regulations, and that all allocations of Federal tax items to a Partner are
to be reflected by an appropriate increase or decrease in the Partner's
capital account. In addition, distributions on liquidation of the
Partnership (or of a Partner's interest) are to be made in accordance with
respective positive capital account balances. Although the Partnership
Agreement does not impose any obligation on the part of a Limited Partner to
restore any deficit in his or her capital account balance following
liquidation, the Partnership Agreement does contain a "qualified income
offset'' provision as defined in the Regulations.
In order for the "economic effect" of an allocation to be considered
"substantial", the Regulations require that the allocation must have a
"reasonable possibility" of "substantially" affecting the dollar amounts to
be received by the partners, independent of tax consequences. An allocation
is insubstantial if its after-tax consequences on at least one partner, in
present value, are enhanced and it is likely that the allocation will not
lessen such consequences for any partner. Also, allocations are
insubstantial if they just shift tax consequences within a partnership's tax
year or, if they will probably be offset by future allocations.
Based on the Regulations, Tax Counsel is of the opinion that the tax
allocations of income, gain, loss, deduction and credit under the Partnership
Agreement for Federal income tax purposes will be considered to have
"substantial economic effect" (and thus should be respected by the IRS) to
the extent such allocations do not result in any Limited Partner having a
deficit in his or her capital account balance. Tax Counsel has advised the
Partnership that allocations to Limited Partners that actually result in
deficit capital account balances likely would not be recognized for Federal
income tax purposes in the absence of an obligation to restore deficit
capital account balances. It is extremely unlikely, however, that the
Partnership's operations will result in any Limited Partner having a deficit
balance in his or her capital account.
If any allocation fails to satisfy the "substantial economic effect"
requirement, the allocated items would be allocated among the Partners based
on their respective "interests in the Partnership", determined on the basis
of all of the relevant facts and circumstances. Such a determination might
result in the income, gains, losses, deductions or credits allocated under
the Partnership Agreement being reallocated among the Limited Partners and
the General Partner. Such a reallocation, however, would not alter the
distribution of cash flow under the Partnership Agreement, resulting in a
possible mismatching of taxable income and cash distributed to the Partners.
Retroactive allocations of income, gain, deductions, losses and credits
are not permitted under the Federal income tax laws. Accordingly, under the
Partnership Agreement, items of income, gain, deduction, loss or credit will
be allocable to Partners only for the quarterly periods of the tax year in
which they are members of the Partnership. When the Partnership recognizes a
transfer of an interest by a Limited Partner the distributive share of any
Partnership income, gain, loss, deduction or credit for the taxable year will
be allocated between the transferor Partner and the transferee based upon the
quarterly periods during the taxable year that each owned such Partnership
interest.
DEDUCTIBILITY OF OPERATING EXPENSES
The Code imposes limitations on individuals with respect to the
deductibility of investment expenses by allowing a deduction for itemized
expenses incurred for the production of income only to the extent such
expenses, combined with certain other itemized deductions, in the aggregate
exceed 2% of adjusted gross income. Accordingly, to the extent certain
Partnership expenses are not deductible as trade or business expenses, but
rather as investment expenses, the Limited Partners might not be able to
fully claim their proportionate shares of these expenses as an itemized
deduction on their individual income tax returns. To the extent certain
Partnership expenses are nondeductible under this limitation, Limited
Partners may have to recognize taxable income in an amount greater than cash
available from the Partnership for distribution to the Partners. However,
the effect of this limitation will to some extent be mitigated by the fact
that the General Partner is responsible for paying Partnership operating
expenses in excess of the amount of 0.5% of the aggregate capital
contributions of the Limited Partners (1%, if such capital contributions are
less than $60 million) (which payment will be treated as an additional
capital contribution of the General Partner to be reflected in its capital
account). Moreover, the General Partner may attempt to minimize the effect
of the investment expense limitation provision by investing funds not
invested in equity investments in short-term tax-exempt securities. The
Partnership's distributive share of investment expenses incurred by any
investment fund in which the Partnership invests will pass through to
individual Partners as investment expenses subject to this deduction
limitation.
ORGANIZATION AND SYNDICATION EXPENSES
For Federal income tax purposes, a partnership may not deduct
organizational or syndication expenses in the year in which they are paid or
incurred. Rather, Section 709(b) of the Code provides that a partnership
must amortize amounts paid or incurred to organize the partnership over a
period of not less than 60 months. Under Regulation 1.709-2 examples of
organizational expenses of a partnership include "legal fees for services
incident to the organization of the partnership, such as negotiation and
preparation of a partnership agreement; accounting fees for establishing a
partnership accounting system; and necessary filing fees." However, the
expenses of syndicating a partnership, i.e., the expenses to promote the sale
of, or to sell, interests in the partnership (such as most of the printing
costs and professional fees incurred in connection with preparation and
registration of this Prospectus), are non-amortizable capital assets of the
partnership.
The Partnership will pay expenses in connection with its organization
and the sale of Units in an amount up to 1% of the proceeds of this offering.
The General Partner will bear the remainder of any such costs. The General
Partner will allocate expenses between organizational expenses, which can be
amortized, and syndication expenses, which cannot be amortized or deducted,
but must be capitalized. There can be no assurance, however, that the IRS
would not challenge such allocation, attributing a greater amount of such
expenditures to nondeductible syndication costs.
TRANSFER OF A PARTNERSHIP INTEREST
The amount of gain recognized on the sale by a Limited Partner of his or
her interest in the Partnership generally will be the excess of the sales
price received over his or her adjusted basis in such interest. The sale by a
Limited Partner of an interest held by him or her for more than one year
generally will result in his or her recognizing long-term capital gain or
loss (provided such Limited Partner is not deemed to be a "dealer" in such
property). However, to the extent the proceeds of sale are attributable to
such Limited Partner's allocable share of Partnership "unrealized
receivables" or "substantially appreciated inventory items", as defined in
Section 751 of the Code, any gain will be treated as ordinary income. It is
not anticipated that the Partnership will have significant amounts, if any,
of "unrealized receivables" or "substantially appreciated inventory items".
The sale by a Limited Partner of an interest held by him or her for less than
one year generally will result in his or her recognizing short-term capital
gain or loss. With respect to the allocation of tax items between the
transferor and the transferee in the year in which an interest is
transferred, see "Allocations and Distributions" above.
It is not expected that a transfer of an interest in the Partnership by
gift or upon death will result in recognition of gain or loss. In general,
the recipient of an interest in the Partnership by gift will have a tax basis
in that interest equal to the transferor's basis increased by the amount of
any gift tax paid on the transfer. However, if the fair market value of the
interest at the time of the gift is less than this amount, Section 1015 of
the Code may reduce the amount of loss the recipient can recognize on a
subsequent sale. The recipient of such an interest resulting from a transfer
upon death generally would have a tax basis in such interest equal to the
fair market value of the interest at the date of death or, where applicable,
the estate tax alternate valuation date.
NO ELECTION UNDER SECTION 754
Section 754 of the Code permits a partnership to make an election to
adjust the basis of the partnership's assets in the event of a distribution
of partnership property to a partner or transfer of a partnership interest.
Depending upon particular facts at the time of any such event, such an
election could increase the value of a partnership interest to the transferee
(because the election would increase the basis of the partnership's assets
for the purpose of computing the transferee's allocable share of partnership
tax items) or decrease the value of a partnership interest to the transferee
(because the election would decrease the basis of the partnership's assets
for that purpose). Because an election under Section 754, once made, cannot
be revoked without obtaining the consent of the IRS, because such an election
may not necessarily be advantageous to all the Limited Partners, and because
of the accounting complexities that can result from having such an election
in effect, it is unlikely that the General Partner would make such an
election on behalf of the Partnership. The General Partner will advise the
Limited Partners prior to any election under Section 754.
TERMINATION OF THE PARTNERSHIP FOR TAX PURPOSES
Because of the absence of an established market for the Units, and
because investments in the Partnership most likely will be made primarily
with a view toward realizing long-term capital appreciation, it is not
anticipated that 50% or more of the capital and profits interests in the
Partnership will be sold or exchanged within any single 12-month period.
However, if 50% or more of such interest were sold or exchanged within any
single 12-month period, the Partnership would be deemed terminated for
Federal income tax purposes. Among other tax consequences, the effect to a
Limited Partner of such a deemed termination would be that he or she would
recognize gain to the extent that his or her allocable share of the
Partnership's cash on the date of termination exceeded the adjusted tax basis
of his or her interest in the Partnership.
LIQUIDATION OF THE PARTNERSHIP
In the event of the liquidation of the Partnership, the Limited Partner
will recognize gain (i) to the extent that the cash received in the
liquidation exceeds the tax basis for such Partner's interest in the
Partnership, adjusted by such Partner's share of income, gain or loss arising
from normal operations or the sale of any property held by the Partnership in
the year of dissolution or (ii) if the cash so received does not exceed such
Partner's basis, as so adjusted, to the extent such cash is treated as
received in exchange for such Partner's interest in "unrealized receivables"
and substantially appreciated "inventory items". Such gain would be capital
gain, except to the extent treated as ordinary income because attributable to
"unrealized receivables" and substantially appreciated "inventory items" held
by the Partnership.
Capital loss will be recognized in the event only cash, "unrealized
receivables" and "inventory items" are distributed, and only to the extent
the adjusted basis of a Limited Partner's interest in the Partnership exceeds
the sum of money distributed and such Limited Partner's acquired basis for
"unrealized receivables" and substantially appreciated "inventory items".
Income, gain, losses, deductions, credits and items of tax preference of
the Partnership realized prior to the liquidation of the Partnership will be
allocated to the Limited Partners in accordance with the Partnership
Agreement.
TAX RETURNS AND INFORMATION; AUDITS
The Partnership has adopted the calendar year as its tax year. The Code
requires entities, such as the Partnership, in which interests are publicly
offered for sale pursuant to a registration statement under the Securities
Act of 1933, to adopt an accrual method of accounting for Federal income tax
purposes. Within 75 days or as soon as practicable, after the close of the
taxable year, the Partnership will furnish each Limited Partner (and the
assignees of the Partnership interest of any Partner) copies of (i) the
Partnership Schedule K-1 indicating the Partner's distributive share of tax
items and (ii) such additional information as is reasonably necessary to
permit the Limited Partners to prepare their own Federal, state and local tax
returns. HOWEVER, IT IS EXPECTED THAT ANNUAL TAX INFORMATION FROM INVESTMENT
FUNDS IN WHICH THE PARTNERSHIP INVESTS MAY NOT BE RECEIVED IN SUFFICIENT TIME
TO PERMIT THE PARTNERSHIP TO INCORPORATE SUCH INFORMATION INTO ITS ANNUAL TAX
INFORMATION AND DISTRIBUTE SUCH INFORMATION TO LIMITED PARTNERS PRIOR TO
APRIL 15 OF EACH YEAR. AS A RESULT, LIMITED PARTNERS MAY BE REQUIRED TO
OBTAIN EXTENSIONS FOR FILING FEDERAL, STATE AND LOCAL INCOME TAX RETURNS EACH
YEAR. LIMITED PARTNERS ANTICIPATING TAX REFUNDS IN RESPECT OF SUCH YEAR WILL
NOT BE ABLE TO FILE THEIR TAX RETURN REQUESTING SUCH REFUND UNTIL RECEIPT OF
THE ANNUAL TAX INFORMATION FROM THE PARTNERSHIP. TO THE EXTENT PRACTICABLE,
THE PARTNERSHIP ANTICIPATES THAT IT WILL PROVIDE ESTIMATED ANNUAL TAX
INFORMATION IN A TIMELY MANNER IN ORDER TO ASSIST LIMITED PARTNERS IN
ESTIMATING THEIR TAX LIABILITIES. THE PARTNERSHIP'S ABILITY TO MAKE SUCH
ESTIMATES WILL BE DEPENDENT UPON ITS ABILITY TO OBTAIN ESTIMATED ANNUAL TAX
INFORMATION FROM THE INVESTMENT FUNDS. EMPLOYEES WHO PARTICIPATE IN THE 1997
DEFERRED COMPENSATION PLAN WILL NOT, THEMSELVES, BE LIMITED PARTNERS BY VIRTUE
OF THEIR PARTICIPATION IN SUCH PLAN.
The Code provides for a single unified audit of partnerships at the
partnership level rather than separate audits of individual partners. Under
this procedure, a "Tax Matters Partner" must be appointed to represent the
partnership in connection with IRS audits and other administrative and
judicial proceedings. (The General Partner will act as Tax Matters Partner
of the Partnership.) The IRS must send notice of a commencement of a
partnership level audit to each partner with a 1% or more interest in the
partnership and to the Tax Matters Partner. All partners may participate in
administrative proceedings relating to the determination of partnership
items; however, the Tax Matters Partner has the primary responsibility for
representing the partnership in an audit and for contesting any adverse
determinations. A settlement agreement between the IRS and one or more
partners binds all parties to the agreement, and all other partners have the
right to enter into consistent agreements. The final result of the
partnership proceeding will be binding on all partners (other than partners
agreeing to or being bound by a settlement with the IRS), and any resulting
deficiency may be assessed and collected by notice and demand at any time
after the determination becomes final.
The Code also provides that (i) a partner must report a partnership item
consistent with its treatment on the partnership return, unless the partner
files a statement which identifies the inconsistency, and (ii) the statute of
limitations for assessment of tax with respect to partnership items (or
affected items) under the partnership level proceedings will generally be
three years from the date of filing of the partnership return or the last
date without extension for filing such return, whichever date is later.
Notwithstanding the partnership level audit procedures, the IRS may assess a
deficiency against any partner where treatment of an item in his or her
individual return is inconsistent with the treatment on the partnership
return.
Any costs which the Partnership or the General Partner may incur with
respect to a "unified" partnership audit and related administrative or
judicial proceedings would reduce the cash otherwise available for
distribution to the Partners or otherwise be borne by the Partners.
The "unified" partnership audit procedures may increase the likelihood
of IRS audits for organizations such as the Partnership.
OTHER TAX CONSIDERATIONS
FOREIGN SOURCE INCOME, FOREIGN TAX CREDITS AND INVESTMENTS IN PASSIVE FOREIGN
INVESTMENT COMPANIES
Dividends and interest received by the Partnership from foreign
investments generally will be considered foreign source income and may be
subject to foreign withholding taxes. Each Limited Partner may be entitled
to credit his or her respective portion of any such taxes against his or her
U.S. federal income taxes or to deduct such taxes from his or her U.S.
taxable income. The amount of foreign withholding taxes that may be credited
against a Limited Partner's U.S. federal income tax liability in any
particular year will be limited, as a general rule, to an amount equal to the
Limited Partner's U.S. federal income tax rate multiplied by such Limited
Partner's foreign source taxable income. This limitation must be applied
separately to certain categories of foreign source income, one category of
which is foreign source "passive income". For this purpose, foreign source
"passive income" includes dividends and interest. As a consequence, although
certain Limited Partners may be able to carry back or carry forward their
unused foreign tax credits, certain Limited Partners may not be able to claim
a foreign tax credit for the full amount of their proportionate share of
foreign taxes paid by the Partnership. Any gain or loss recognized on the
sale or exchange of a foreign investment generally will be considered United
States source income. Accordingly, if a foreign jurisdiction were to impose
a tax on such gain, Limited Partners may not be able to derive effective U.S.
foreign tax benefits in respect of such tax.
The Partnership may invest directly or indirectly in equity interests of
an investment company organized under foreign law that is treated as a
passive foreign investment company ("PFIC"). Generally, income from a PFIC
in excess of a certain average amount and any gain on sale or exchange of an
interest in a PFIC is subject to an additional level of tax calculated in a
manner that could substantially reduce, eliminate, or even exceed such income
or gain. Such income or gain earned by the Partnership is treated as earned
by the Limited Partners and a Limited Partner that sells or exchanges an
interest in the Partnership is deemed to have sold or exchanged his or her
pro rata share of any PFIC stock held directly or indirectly by the
Partnership. An election (the "QEF Election") can be made by a U.S.
shareholder of a PFIC that would eliminate such additional tax but would
require a current inclusion by such shareholder of its share of the earnings
of the PFIC, whether or not such earnings are distributed by the PFIC. The
QEF Election is permitted only if the PFIC makes certain information
available to shareholders. It is uncertain whether any PFIC in which the
Partnership acquires an interest will provide such information. It should be
noted, however, that only the first U.S. person that owns stock in a PFIC may
make the QEF election. Accordingly, Limited Partners cannot make such
election individually with respect to shares owned by the Partnership, and if
the Partnership owns its interest in a PFIC through another U.S. partnership,
the election can only be made by that other partnership. Any such election
by the first U.S. shareholder would bind all direct and indirect partners of
such partnership. To the extent that the Partnership is eligible to make a
QEF Election with respect to a particular PFIC, the Partnership intends to
make such an election.
LIMITATIONS ON THE DEDUCTIBILITY OF INTEREST
Section 163(d) of the Code substantially limits the deductibility of
interest on funds borrowed to purchase or hold property held for investment.
"Investment interest" generally is deductible by a Limited Partner only to
the extent of "net investment income". With certain limitations, excess
investment interest not allowed as a deduction in one taxable year may be
carried forward and deducted in subsequent taxable years to the extent that
there is sufficient net investment income in such subsequent taxable years.
The deductibility of interest also affects an investor's potential minimum
tax liability. See "Alternative Minimum Tax".
Investment interest is broadly defined as interest which is paid or
accrued on indebtedness incurred or continued to purchase or carry property
held for investment including generally the purchase by Limited Partners of
Units. Interest taken into account in determining a Limited Partner's
passive losses, including generally any interest incurred or continued by a
Limited Partner to purchase or carry an interest in a partnership to which
the passive loss rules apply, is not considered investment interest for
purposes of the investment interest limitations. See "General Principles of
Partnership Taxation--Basis of Partnership Interest; Passive Activity Loss
Limitation".
In addition to the "investment interest" limitation described above,
Section 265 (a) (2) of the Code disallows certain deductions for interest
paid by a Limited Partner or a related person on indebtedness incurred or
continued to purchase or carry tax-exempt obligations. A Limited Partner for
whom tax-exempt obligations constitute a significant portion of such Limited
Partners net worth should consider the impact of Section 265 (a) (2) of the
Code on his ability to deduct his allocable share of the Partnership's
interest expense.
ALTERNATIVE MINIMUM TAX
The alternative minimum tax, which applies to individuals, is determined
by: (i) adding "tax preference" items to the individual's adjusted gross
income (as reduced by certain itemized deductions and as otherwise adjusted
pursuant to Sections 56 and 58 of the Code), (ii) subtracting therefrom the
statutory exemption ($33,750 for single Limited Partners, $45,000 for married
Limited Partners filing joint returns; but such exemptions are phased out for
alternative minimum taxable incomes above $112,500 for single Limited
Partners and $150,000 for joint returns), and (iii) computing a tax at the
rate of 26% on the first $175,000 of alternative minimum taxable income in
excess of the exemption amount, and 28% on alternative minimum taxable income
that is more than $175,000 above the exemption amount. For married
individuals filing separate returns, the 28% rate applies to alternative
minimum taxable income that is more than $87,500 above the applicable
exemption amount. If the alternative tax so computed exceeds the
individual's regular tax, then he or she must pay an additional tax equal to
the excess.
Each Limited Partner must include his or her allocable share of the
Partnership's tax preference items in the computation of the applicable
minimum tax. It is anticipated that the Partnership will not generate any
significant items of tax preference for Limited Partners. However, for
Limited Partners with substantial tax preference items from sources other
than the Partnership, the imposition of the alternative minimum tax could
reduce the after-tax economic benefits of investment in the Partnership.
Prospective Limited Partners are urged to consult their tax advisors with
regard to the specific effect of the new alternative minimum tax on an
investment in the Partnership.
FRINGE BENEFITS
Unless excluded under Section 132 of the Code or some other statutory
provision, employee "fringe benefits" are includable in gross income. Under
the Partnership Agreement, the General Partner will bear various expenses in
connection with the organization of the Partnership (to the extent such
expenses exceed 1%) and operation of the Partnership (to the extent such
expenses exceed 0.5% of the proceeds of this offering, or 1% if such proceeds
are less than $60 million) and will bear any sales or brokerage commissions
charged in connection with the Partnerships investments. Payment by the
General Partner of such expenses in excess of such amounts of the Limited
Partners' capital contributions will be treated as an additional capital
contribution of the General Partner under the Partnership Agreement and the
General Partner's capital account will be credited to reflect such additional
contribution.
Since Units are being solely offered to ML & Co. and its employees and
non-employee directors, it is possible that the IRS would view the General
Partner's payment of such expenses as an indirect method of compensating the
employee-Limited Partner (i.e., a fringe benefit). If the IRS were
successful in such characterization, a Limited Partner's pro rata share of
such expenses (equal to the fair market value of the underlying goods and
services rendered the Limited Partner) might be includable in the Limited
Partner's gross income as additional compensation. The Limited Partner may
not, however, be allocated a Partnership deduction for such expenses in an
amount corresponding to such income inclusion because some of such expenses
would be attributable to non-deductible syndication expenses, or investment
expenses subject to the new limitation imposed on the deductibility of
itemized miscellaneous expenses, or treated as part of the capitalized cost
of the Partnerships portfolio assets. See "General Principles of Partnership
Taxation--Deductibility of Operating Expenses; Organization and Syndication
Expenses" above.
STATE AND LOCAL TAXES
In addition to the Federal income tax consequences described above,
prospective Limited Partners should consider potential state and local tax
consequences of an investment in the Partnership. State and local laws often
differ from Federal income tax law with respect to the treatment of specific
items of income, gain, loss, deductions and credit. A Limited Partner's
distributive share of the taxable income or loss of the Partnership generally
will be required to be included in determining his or her reportable income
for state and local tax purposes in the jurisdiction in which he or she is a
resident. In addition, a number of other states in which the Partnership may
do business or own properties may impose a tax on non-resident Limited
Partners determined with reference to their allocable shares of Partnership
income derived by the Partnership from such state. Partners may be subject to
tax return filing obligations and income, franchise, estate, inheritance or
other taxes in other jurisdictions in which the Partnership does business, as
well as in their own states or localities of residence or domicile. Also,
any tax losses derived through the Partnership from operations in such states
may be available to offset only income from other sources within the same
state. To the extent that a non-resident Limited Partner pays tax to a state
by virtue of Partnership operations within that state, he or she may be
entitled to a deduction or credit against tax owed to his or her state of
residence with respect to the same income. In addition, estate or
inheritance taxes might be payable in a jurisdiction in which the Partnership
owns property upon the death of a Limited Partner. Prospective Limited
Partners are urged to consult their tax advisors with respect to possible
state and local income and death tax consequences of an investment in the
Partnership.
TAX CONSIDERATIONS FOR FOREIGN INVESTORS
The tax treatment applicable to a non-resident alien who invests in the
Partnership is complex and will vary depending upon the particular
circumstances of each Limited Partner. Each foreign investor is urged to
consult with his or her tax counsel concerning the U.S. Federal, state and
local and foreign tax treatment of his or her investment in the Partnership.
In general, the U.S. tax treatment will vary depending upon whether the
Partnership is deemed to be engaged in a U.S. trade or business. At present,
it is uncertain whether, or at which point in time, the Partnership will be
so engaged.
If the Partnership is not engaged in a U.S. trade or business in the tax
year, the foreign Limited Partner would, in general, be subject to a 30% (or
lower treaty rate) withholding tax with respect to his or her share of the
Partnership's U.S. source interest, dividends and most other portfolio or
investment income for such year, but would be exempt from U.S. taxation on
his or her share of capital gains realized by the Partnership if he or she is
not present in the United States for 183 days or more in the calendar year in
which the Partnership's year ends.
If the Partnership is engaged in a U.S. trade or business in the tax
year, the foreign Limited Partner would be required to file a U.S. Federal
income tax return and would be taxed in the United States at graduated
Federal income rates upon that portion of his or her net income from the
Partnership for such year which is "effectively connected" with such
business. Moreover, under the Code, the Partnership would be required to
withhold an amount equal to the U.S. tax on the foreign partners distributive
share (whether or not actually distributed) of income which is attributable
to "effectively connected income" with the Partnerships conduct of a trade or
business in the United States. Such withholding tax would be required to be
made by the Partnership on a quarterly basis. For tax treaty purposes, the
foreign Limited Partner would generally be deemed to have a "permanent
establishment" in the United States in any year in which the Partnership is
engaged in a U.S. trade or business.
A non-resident alien's interest in the Partnership would be subject to
U.S. Federal estate taxation if the investor dies while owning such interest.
The above general guidelines are subject to modification by a tax
treaty. Moreover, the internal tax rules of the foreign investor's home
country must also be considered in determining the advisability of an
investment in the Partnership.
BACKUP WITHHOLDING
When a Unit is sold through a broker, the proceeds of the sale may
constitute a "reportable payment" under the Federal income tax rules
regarding backup withholding. Backup withholding, however, would apply only
if the Limited Partner (i) failed to furnish and certify his or her Social
Security number or other taxpayer identification number to the person subject
to the backup withholding requirement (e.g., the broker) or (ii) furnished an
incorrect Social Security number or taxpayer identification number. If
backup withholding were applicable to a Limited Partner, the person subject
to the backup withholding requirement would be required to withhold 31% of
each distribution to such Partner and to pay such amount to the IRS on behalf
of such Partner.
POSSIBLE CHANGES IN LAW
The rules dealing with Federal income taxation are under continual
review by Congress and the IRS, resulting in frequent revisions of the
Federal tax laws and regulations promulgated thereunder and revised
interpretations of established concepts. No assurance can be given that,
during the term of the Partnership, applicable Federal income tax laws or the
interpretations thereof will not be changed in a manner that would have a
material adverse effect on an investment in the Partnership.
IMPORTANCE OF OBTAINING PROFESSIONAL ADVICE
The foregoing analysis is not intended as a substitute for careful tax
planning. The tax matters relating to the Partnership and the transactions
described herein are complex and are subject to varying interpretations.
Moreover, the effect of existing income tax laws and possible changes in such
laws will vary with the particular circumstances of each investor. In
addition, with the exception of those issues specifically referred to as the
subject of the opinion of Tax Counsel to the Partnership, no opinion as to
the tax consequences of an investment in the Partnership has been obtained by
the Partnership. Accordingly, as previously stated, each prospective Limited
Partner should consult with and rely on his or her own advisors with respect
to the possible tax consequences of an investment in the Partnership.
SUMMARY OF THE PARTNERSHIP AGREEMENT
The form of the Amended and Restated Agreement of Limited Partnership
(the "Partnership Agreement") is included as Exhibit A to this Prospectus.
It is recommended that each prospective purchaser read it in its entirety.
Certain provisions of the Partnership Agreement have been described
elsewhere in this Prospectus. With regard to various transactions and
relationships of the Partnership with the General Partner and its affiliates,
see "Conflicts of Interest", with regard to the management of the
Partnership, see "The Partnership" and "The General Partner and Its
Affiliates", with regard to the transfer of Limited Partners' Units, see
"Transferability of Units", and with regard to reports to be made to the
Limited Partners, see "Reports".
The following briefly summarizes certain provisions of the Partnership
Agreement which are not described elsewhere in this Prospectus. All
statements made below and elsewhere in this Prospectus relating to the
Partnership Agreement are hereby qualified in their entirety by reference to
the Partnership Agreement. Capitalized terms used in this summary have the
meanings ascribed to them in the Partnership Agreement.
TERM
The Partnership shall continue in full force and effect until December
31, 2037, or until dissolution prior thereto.
PARTNERSHIP CAPITAL
No Partner shall be entitled to interest on any Capital Contribution to
the Partnership or on such Partner's Capital Account. No Partner, other than
the Initial Limited Partner, has the right to withdraw, or to receive any
return of, his or her Capital Contribution. However, upon the death of a
Limited Partner, the legal representative of such Partner may cause the
interest of such Partner to be purchased as described under "Transferability
of Units". No Partner has the right to receive property other than cash in
return for his or her Capital Contribution.
ANNUAL APPRAISAL
The Partnership Agreement provides that, beginning December 31, 1997 and
each succeeding December 31 (the "Valuation Date"), the General Partner will
make an Appraisal or have an Appraisal made of all of the assets of the
Partnership as of such date. The Appraisal, which may be made by independent
third parties appointed by the General Partner, is to be based on such
methods relating to the valuation of the Partnership's assets and liabilities
as are deemed appropriate by the General Partner or an independent third
party. A copy of the Appraisal will be sent to the Limited Partners within
120 days, or as soon as practicable, after the end of the Partnership's
fiscal year, which ends December 31. See "Reports" for information as to the
valuation procedures expected to be utilized with respect to private equity
investments.
VOTING RIGHTS
Under the Partnership Agreement, either the General Partner or 10% or
more in Interest of the Limited Partners may propose any act or other matter
to which the Consent of any Partner is required. Within 20 days of the
making of any such proposal, the General Partner must give all Partners
Notification of such proposal (including the text of any amendment or
document, a statement of its purposes and a favorable opinion of counsel,
pursuant to Section 10.1A of the Partnership Agreement). Any matter
requiring the Consent of any or all of the Limited Partners may be considered
at a meeting of the Partners held not less than 15 nor more than 30 days
after Notification to the Limited Partners of any proposal. Any Consent
required by the Partnership Agreement shall be deemed to have been given only
when the General Partner has actually received the written Consents of the
Partners to the doing of the act or to such matter for which the Consent was
solicited, or after the affirmative vote of the Partners to the doing of such
act or to such matter at a meeting called to consider the same. Any Consent
so given will be nullified if a written nullification by a Limited Partner of
his Consent is actually received by the General Partner prior to the time
such proposed act or such matter is actually voted upon.
Among other matters subject to approval by the Limited Partners are
admission of a successor General Partner, Removal of the General Partner,
Sale of all or substantially all of the assets of the Partnership, certain
amendments to the Partnership Agreement, and dissolution of the Partnership
prior to January 1, 2003. However, as provided in detail in Section 11.3 of
the Partnership Agreement, unless, at the time of the giving or withholding
of Consent for certain actions by the Limited Partners, counsel retained by
the Partnership at such time is of the opinion that the giving or withholding
of Consent for such action is permitted by the Delaware Revised Uniform
Limited Partnership Act, does not impair the limited liability of the Limited
Partners and does not adversely affect the tax status of the Partnership,
certain voting rights of the Limited Partners may be restricted.
In light of its anticipated significant holdings in the Partnership, ML
& Co. will agree to vote its Units in the same proportion as other Limited
Partners in respect of any matter submitted to the vote of Limited Partners.
LIABILITY OF PARTNERS TO THIRD PARTIES
The General Partner will be generally liable for all obligations of the
Partnership.
The Partnership Agreement provides that no Limited Partner shall be
personally liable for the debts of the Partnership beyond the amount
committed by such Limited Partner to the capital of the Partnership and such
Limited Partner's share of the Partnership's assets and undistributed
profits. See "Risk and Other Important Factors--Possible Loss of Limited
Liability". In the event the Partnership is unable otherwise to meet its
obligations, the Limited Partners might, under applicable law, be obligated
under some circumstances to return distributions previously received by them.
See "Risk and Other Important Factors--Repayment of Certain Distributions".
DISSOLUTION
The Partnership shall be dissolved upon: the expiration of its term; the
Incapacity, Removal or withdrawal of the General Partner and failure to
designate a successor; the Sale or other disposition at one time of all or
substantially all of the assets of the Partnership; an election prior to
January 1, 2003 to dissolve by the General Partner with the Consent of a
Majority-in-Interest of the Limited Partners; the failure of the Limited
Partners to approve, by Consent of a Majority-in-Interest, the admission of a
successor General Partner to the General Partner pursuant to Section 6.1A of
the Partnership Agreement; after January 1, 2003, the General Partner's
election to dissolve the Partnership; or the occurrence of any other event
causing dissolution of the Partnership under the laws of the State of
Delaware.
AMENDMENT
Subject to the provisions of Section 10.1 thereof, the Partnership
Agreement may be amended by action of a Majority-in-Interest of the Limited
Partners. However, without the Consent of all Partners, Section 4.3C of the
Partnership Agreement (relating to certain restrictions on the General
Partner's authority), Article Ten (relating to amendment of the Partnership
Agreement) and Section 11.3 (relating to certain limitations on Limited
Partners' voting rights) may not be amended. Also, without the Consent of
each Partner who may be adversely affected, the Partnership Agreement may not
be amended to (i) enlarge the obligation of any Partner under the Partnership
Agreement or convert a Limited Partner's Interest into a General Partner's
Interest; (ii) modify the limited liability of a Limited Partner; or (iii)
alter the provisions of the Partnership Agreement relating to distributions
of Distributable Cash and allocations of Profits and Losses. In addition,
Sections 6.1 and 6.2 (relating to successors to the General Partner) may not
be amended without the Consent of the General Partner. As a result of the
limitations on Limited Partners' voting rights described above under "Voting
Rights", there may be situations when Limited Partners are not permitted to
vote on amendments of the Partnership Agreement. However, in accordance with
Section 10.1 of the Partnership Agreement, under certain circumstances the
General Partner, without the Consent of a Majority-in-Interest of the Limited
Partners, may amend the Partnership Agreement if, in its opinion, such
amendment does not have a material adverse effect on the Limited Partners or
the Partnership.
ELECTIONS
All elections required or permitted to be made by the Partnership under
the Code may be made by the General Partner in such manner as it deems most
advantageous to individual Limited Partners who are (i) married and filing
joint returns, (ii) not "dealers" for Federal income tax purposes, and (iii)
in the highest marginal Federal income tax bracket.
APPOINTMENT OF GENERAL PARTNER AS ATTORNEY-IN-FACT
Each Limited Partner irrevocably constitutes and appoints the General
Partner such Limited Partner's true and lawful attorney-in-fact, with full
power and authority in such Limited Partner's name, place and stead to make,
execute, acknowledge and file such documents, instruments and conveyances as
may be necessary or appropriate to carry out the provisions of the
Partnership Agreement.
PRINCIPAL OFFICE OF THE PARTNERSHIP
The principal business office of the Partnership shall be at South
Tower, World Financial Center, 225 Liberty Street, New York, New York
10080-6123, unless changed by the General Partner. The business of the
Partnership may also be conducted at such additional places as the General
Partner may determine.
APPLICABLE LAW
The Partnership Agreement will be construed and enforced in accordance
with the laws of the State of Delaware.
OFFERING AND SALE OF UNITS
OFFERING OF UNITS
MLPF&S has entered into an Agency Agreement with the Partnership and the
General Partner pursuant to which MLPF&S has agreed to act as selling agent
for the Partnership and the General Partner to assist in the sale of the
Units to Qualified Investors on a "best efforts" basis. MLPF&S and its
affiliates will not receive, directly or indirectly, any payments or
compensation in connection with the offering and sale of Units.
The Agency Agreement contains cross-indemnification clauses with respect
to certain liabilities under the Securities Act of 1933.
Eligible Investors must submit completed subscription documents not
later than July , 1997, or such subsequent date, not later than August ,
1997, as the General Partner and MLPF&S may determine. Subsequent to such
date, the General Partner will advise such investors as to whether their
subscriptions have been accepted and thereupon MLPF&S shall promptly debit
funds from accepted investors' accounts for payment into the Partnership's
escrow account. The General Partner
will also advise such investors of the Offering Termination Date. If
subscriptions (including subscriptions of ML & Co.) for 40,000 Units are not
received by the Offering Termination Date, the offering will be terminated,
and all funds received will be refunded with interest, if any, actually
earned thereon.
If subscriptions for more than 250,000 Units are received, the General
Partner may, in its sole discretion, reject, in whole or in part, any Limited
Partner's subscription.
INVESTOR SUITABILITY STANDARDS
Only Qualified Investors will be eligible to purchase Units. See
"Investor Suitability Standards" on page 2.
MAXIMUM PURCHASE BY QUALIFIED INVESTORS
The Partnership has imposed restrictions on the maximum amount of Units
which may be purchased by any Qualified Investor. An employee of ML & Co. or
its subsidiaries may only purchase Units in an amount which does not exceed
15% of such employee's cash compensation from ML & Co. or its subsidiaries
received with respect to 1996 on an annualized basis unless the employee
either (x) has a net worth, individually or jointly with the employee's
spouse, in excess of $1,000,000 at the time of purchase of the Units, or (y)
had an individual income in excess of $200,000 in each of 1995 and 1996 or
joint income with the employee's spouse in excess of $300,000 in each of
those years and reached or has a reasonable expectation of reaching the same
level in 1997. An employee of ML & Co. who meets the requirements of clause
(x) or (y) above may purchase Units in an amount which does not exceed 75% of
the employee's compensation in respect of 1996 on an annualized basis, unless
otherwise approved by the General Partner. A non-employee director of ML &
Co. may only purchase Units in an amount which does not exceed two times the
director's fees (including committee fees, but not including reimbursement of
expenses) received from ML & Co. during 1996. Notwithstanding the foregoing,
a Qualified Investor (other than ML & Co.) will only be permitted to purchase
Units in the Partnership in an aggregate amount in excess of $250,000 if the
offering is not fully subscribed, unless otherwise approved by the General
Partner. In the event that the offering is not fully subscribed, Qualified
Investors will be permitted to invest up to the specified percentage of his
or her 1996 compensation (or directors fees, as applicable), provided that
such amount is equal to less than 10% of the outstanding limited partnership
interests of the Partnership.
PURCHASE OF UNITS BY ML & CO.
The Partnership is also offering Units to ML & Co. ML & Co. has advised
the Partnership that it intends to offer a deferred compensation plan to
certain key employees of ML & Co. and its subsidiaries pursuant to which such
employees will be permitted to defer compensation earned during 1996 and to
elect to receive a return from ML & Co. determined by reference to the
performance of the Partnership. ML & Co. intends to acquire Units having a
purchase price approximately equivalent to the aggregate amount of
compensation deferred under its plan. ML & Co. will acquire such Units at
the Closing for a purchase price of $1,000 per Unit. Participants in the
plan will not be Limited Partners in the Partnership by virtue of their
participation in such plan and will not acquire any
ownership interest in the Units purchased by ML & Co.
SUBSCRIPTION TO PURCHASE UNITS
Each Qualified Investor who desires to purchase any Units must:
(a) subscribe to purchase five or more Units;
(b) complete, date, execute and deliver to KECALP Inc., South Tower,
World Financial Center, 225 Liberty Street, New York, NY 10080-6123, one copy
of the Signature Page and Power of Attorney, a form of which is attached as
part of the Subscription Agreement attached to this Prospectus as Exhibit B;
and
(c) authorize an amount equal to $1,000 for each Unit that the
prospective purchaser desires to purchase to be debited from his MLPF&S
securities account.
The General Partner will not, under any circumstances, accept
subscriptions for a fractional interest in a Unit.
PAYMENT FOR UNITS
Each Qualified Investor who subscribes to purchase Units will, by
execution of the Subscription Agreement, agree to make a capital contribution
of $1,000 for each Unit subscribed for and authorize that amount to be
debited from his MLPF&S securities account specified on his Signature Page
and Power of Attorney. If sufficient funds are not already available in the
Qualified Investor's MLPF&S securities account, the Qualified Investor must
deposit additional funds so that the full amount of the capital contribution
for the Units for which the investor has subscribed will be available in such
account.
MLPF&S will advise investors as to whether their subscriptions have been
accepted and thereupon promptly debit subscription amounts upon subscription
from
subscribers' MLPF&S securities accounts and deposit such funds in an escrow
account with The Bank of New York, for the benefit of investors. The
bank escrow agent for such account may, at the direction of MLPF&S,
invest such payment in U.S. government securities, bank time deposits,
certificates of deposit of a domestic bank which mature prior to the Closing
of the purchase of Units or bank money market accounts. The Qualified
Investors' funds in such account, but not the interest earned thereon,
will be released to the Partnership only if each of the following
conditions has been satisfied: (a) on the date of Closing, the
Partnership has received subscriptions for at least 40,000 Units;
(b) on the date of Closing, the escrow agent has received the
full payment of the capital contributions for the Units which the
Partnership will issue and sell at such Closing; and
(c) on the date of Closing, Brown & Wood LLP has delivered its
opinion that the Partnership will be treated as a partnership for Federal
income tax purposes and will not be treated as a publicly traded
partnership within the meaning of Section 7704(b) of the Internal Revenue
Code of 1986, as amended.
If such conditions are not timely satisfied, all the investors' funds
so held in such account will be returned to the investors. If all of
such conditions are timely satisfied, each investor who has subscribed to
purchase Units to be issued and sold at such Closing will become a Limited
Partner and thereafter (but only thereafter) such investor's capital
contributions will be paid to the Partnership, to be applied by it as
described in this Prospectus. Any interest earned on funds held in
escrow will be paid to subscribers in proportion to their respective
subscription amounts and the length of time their subscription amounts were
on deposit.
Each Limited Partner will be entitled to the distributive share of
items of income, gain, deduction, loss or credit and cash distributions
allocable to such Limited Partners interest in the Partnership, as
provided in the Partnership Agreement, without regard to the dates on
which any Limited Partners may have subscribed to purchase Units.
TRANSFERABILITY OF UNITS
RESTRICTIONS
The Partnership is designed as an investment vehicle for
Qualified Investors only. The Partnership has obtained exemptions
from certain provisions of the Investment Company Act on the basis
that, with certain exceptions, only Qualified Investors will become
Limited Partners. PURCHASERS OF UNITS SHOULD VIEW THEIR INTEREST IN
THE PARTNERSHIP AS A LONG-TERM, ILLIQUID INVESTMENT.
No transfer or assignment by a Limited Partner of his or her interest
in the Partnership shall be effective unless made in accordance with
the provisions of the Partnership Agreement. The Partnership Agreement
prohibits transfer or assignment by a Limited Partner of his or her
interest in the Partnership to any person who is not a Qualified Investor,
except transfers to a member of his or her immediate family or
transfers resulting by operation of law. (For this purpose, the members
of a Limited Partner's immediate family consist of the partner's spouse
and children.) No transfer of a Limited Partner's interest may be made
without the consent of the General Partner, which consent may be withheld
in the sole discretion of the General Partner. No sale, assignment or
transfer of, or after which the transferor and transferee would each hold,
an interest representing a capital contribution of less than $1,000, will
be permitted or recognized for any purpose without the consent of the
General Partner, which consent will be granted only for good cause shown.
The sale or transfer of a Partnership interest may result in
adverse income tax consequences to the transferor. Limited Partners are
advised to consult their tax advisors prior to any such transfer. See "Tax
Aspects of Investment in the Partnership--Transfer of a Partnership
Interest".
No transfer, assignment or negotiation of an interest in the
Partnership will be recognized or effective if such transfer or assignment,
together with all other such transfers on the books of the
Partnership during the immediately preceding 12 months, would result in
the transfer of 50% or more of the Units. See "Tax Aspects of
Investment in the Partnership--General Principles of Partnership
Taxation--Termination of the Partnership for Tax Purposes". In
addition, pursuant to the Partnership Agreement, the Partnership
will satisfy one or more safe harbor limitations from
classification as a publicly traded partnership which would impose
more restrictive numerical limitations on the number of Units transferred.
One safe harbor under current law would restrict transfers (except for
certain exempt transfers) of 2% or more Units during the same
taxable year. Transfers, assignments or negotiations, the recognition and
effectiveness of which are so suspended and deferred, will be recognized
(in chronological order to the extent practicable) when, and to the
extent that, such recognition will not result in there having been
transfers of Units in excess of the limitations referred to above.
The General Partner has the authority to amend the
transferability provisions of the Partnership Agreement in such manner as
may be necessary or desirable to preserve the tax status of the Partnership.
Further, no sale, exchange, transfer or assignment of a
Limited Partner's interest may be made if the sale of such interest
would, in the opinion of counsel for the Partnership, result in a
termination of the Partnership for purposes of Section 708 of the Code,
violate any applicable Federal or state securities laws, cause the
Partnership to be treated as an association taxable as a corporation for
Federal income tax purposes, cause the Partnership to be classified as a
publicly traded partnership and taxable as a corporation for Federal income
tax purposes, or cause all or a portion of the Partnerships assets to be
treated as "tax-exempt use property" under Section 168(j) of the Code.
ACQUISITION OF CERTAIN LIMITED PARTNERS' INTERESTS BY THE GENERAL PARTNER OR
THE PARTNERSHIP
Upon the death of a Limited Partner, the legal representative(s) of
such Limited Partner may tender, and the General Partner shall
purchase the interest in the Partnership held by such Limited Partner at a
purchase price equal to the value of the interest determined at the next
annual Valuation Date. To have Units repurchased, the estate of a Limited
Partner must notify the General Partner of its election to have the Units
repurchased within 30 days after the date the appraisal is sent to the
Limited Partners. The Partnership, rather than the General Partner, may
purchase such interest if it is determined the purchase is in the best
interests of the Partnership. If the General Partner purchases any such
interest for its own account pursuant to this provision, it shall be
entitled to the rights of an assignee of such interest, including the
right to vote as if it were a Substituted Limited Partner, and it may
become a Substituted Limited Partner. The General Partner may sell any
interest acquired pursuant to this provision and the purchaser will be
entitled to be admitted as a Substituted Limited Partner effective as of
the date of payment to the General Partner for such interest.
ASSIGNEES
An assignee of a Limited Partner does not automatically become
a Substituted Limited Partner, but has the right to receive the same share
of profits, losses and distributable cash of the Partnership to which
the assignor Limited Partner would have been entitled. A Limited Partner
who assigns all of his Partnership interest ceases to be a Limited
Partner, and shall not retain any statutory rights as a Limited Partner.
The assignee of a Partnership interest who does not become a Substituted
Limited Partner and desires to make further assignment of such interest is
subject to all of the restrictions on transferability of Partnership
interests described in this Prospectus and the Partnership Agreement.
In the event of the death, incapacity or bankruptcy of a
Limited Partner, his or her legal representatives will have all the
rights of a Limited Partner for the purpose of settling or managing his or
her estate and such power as the decedent, incompetent or bankrupt Limited
Partner possessed to assign all or any part of his interest in the
Partnership, and to join with such assignee in satisfying conditions
precedent to such assignees becoming a Substituted Limited Partner. In
the event of the death of a Limited Partner, but not in the event of
adjudication of incompetence or bankruptcy, the deceased Limited
Partner's interest may be distributed as part of the estate, transferred
by operation of law, tendered to the General Partner as described above, or
assigned to another Qualified Investor.
A purported sale, assignment or transfer of a Limited Partner's
interest will be recognized by the Partnership on the first day of the
fiscal quarter following the quarter in which the Partnership has received
written notice of such sale, assignment or transfer in form
satisfactory to the General Partner, signed by both parties, containing
the purchaser's, assignee's or transferee's acceptance of the terms of
the Partnership Agreement and a representation by the parties that the
sale or assignment was made in accordance with all applicable laws and
regulations.
SUBSTITUTED LIMITED PARTNERS
No Limited Partner has the right to substitute an assignee as a
Limited Partner in his or her place. The General Partner, however, has the
right in its sole and absolute discretion, to permit such assignee to
become a Substituted Limited Partner and any such permission by the General
Partner is binding and conclusive without the consent or approval of
any Limited Partner. Any Substituted Limited Partner must, as a
condition to receiving any interest in the Partnership, sign a Signature
Page and Power of Attorney, pay the reasonable legal fees and filing
and publication costs of the Partnership and the General Partner in
connection with his or her substitution as a Limited Partner and
satisfy the other conditions specified in Section 10.2 of the Partnership
Agreement. Notwithstanding the actual time of the admission of a Substituted
Limited Partner, for purposes of allocating profits, losses and
distributable cash (as those terms are defined in the Partnership
Agreement), a person will be treated as having become a Limited Partner as
of the date on which the sale, assignment or transfer of such persons
interest was recognized by the Partnership, as described above, even if
that person does not in fact become a Substituted Limited Partner.
REPORTS
Financial information contained in all reports to the Limited
Partners will be prepared on an accrual basis of accounting in
accordance with generally accepted accounting principles and will include,
where applicable, a reconciliation to information furnished to the Limited
Partners for income tax purposes. Federal and state tax information will
be provided to the Limited Partners within 75 days following the close of
each calendar year or as soon as practicable thereafter. (As described
under "Risk and Other Important Factors", to the extent the Partnership
invests in other investment funds, it may experience delays in obtaining
annual tax information, which may require Limited Partners to obtain
extensions for filing income tax returns.) Financial statements, which
will be prepared annually, will be certified by independent auditors and
will be furnished within 120 days (or as soon as practicable thereafter)
following the close of the calendar year. A statement of appraisal of the
value of Partnership assets will be provided with the financial
statements. Limited Partners also have the right under applicable law to
obtain other information about the Partnership and may, at their expense,
obtain a list of the names and addresses of all of the Limited Partners for
any proper purpose.
In connection with the appraisal of the value of the
Partnership's investments in portfolio companies that are not publicly
traded, there is a range of values which is reasonable for such
investments at any particular time. The General Partner presently
expects that the following procedures will be utilized with respect to
these investments. In the early stages of development, these investments
will typically be valued based on their original cost to the
Partnership (the "cost method"). The cost method will be utilized until
significant developments affecting the portfolio company provide a basis
for use of an appraisal valuation (the "appraisal method"). The appraisal
method will be based on such factors affecting the portfolio company as
earnings and net worth, the market prices for similar securities of
comparable companies and an assessment of the company's future prospects.
In the case of unsuccessful operations, the appraisal may be based
on liquidation value. Valuations based on the appraisal method are
necessarily subjective. The General Partner may also use third party
transactions (actual or proposed) in the portfolio company's securities as
the basis of valuation (the "private market method"). The private market
method will be used only with respect to actual transactions or
actual firm offers by sophisticated, independent investors. The valuation
of debt securities that are not publicly traded will be determined by or
under the direction of the General Partner. The General Partner expects
that the private market method of valuation will be the primary method
utilized with respect to these securities. Securities with legal,
contractual or practical restrictions on transfer may be valued at a
discount from their value determined by the foregoing methods to reflect
the effect of such restrictions.
EXPERTS
The financial statements included in this Prospectus have been
examined by Deloitte & Touche LLP, independent auditors, as indicated
in their opinions with respect thereto, and are included herein in
reliance upon the authority of that firm as experts in accounting and
auditing.
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon
by Brown & Wood LLP, One World Trade Center, New York, New York 10048,
as counsel to the Partnership and the General Partner, who may rely
as to matters of Delaware law upon the opinion of Richards, Layton &
Finger, One Rodney Square, Wilmington, Delaware 19801.
The statements under the heading "Tax Aspects of Investment in
the Partnership" have been reviewed by Brown & Wood LLP.
EXEMPTIONS FROM THE INVESTMENT COMPANY ACT OF 1940
The Partnership will operate as a non-diversified,
closed-end, management investment company registered with the Securities
and Exchange Commission (the "Commission") under the Investment Company
Act. However, an exemptive order was obtained from the Commission in 1982
pursuant to Section 6(b) of the Act that exempts the Partnership, as an
"employees securities company" within the meaning of the Investment
Company Act, from certain provisions of such Act. The exemptive
order relates to the following provisions of the Investment Company
Act and the rules and regulations promulgated thereunder:
Section 8(b) to exempt the Partnership from filing annual amendments
to its Registration Statement under the Investment Company Act;
Section 10(a) to permit the Partnership to include the General
Partner as the sole general partner and to permit all of the directors and
officers of the General Partner to be persons who are employees of ML &
Co. or its affiliates;
Section 10(b) to permit the Partnership to employ subsidiaries of ML
& Co. to act as broker and principal underwriter for the Partnership;
Section 10(f) to permit the Partnership to purchase securities
in underwritten offerings, a principal underwriter of which may be an
affiliate of the General Partner;
Section 14(a) to permit the Partnership to offer Units to
Qualified Investors prior to the time the Partnership has a net worth of
$100,000;
Section 15(a) to permit the General Partner to act from time to time
as investment adviser to the Partnership without a written contract and
without the approval of the Limited Partners;
Section 16(a) to permit ML & Co. to appoint and replace the directors
of the General Partner in accordance with the Partnership Agreement;
Section 17(a) to permit ML & Co. and its subsidiaries to engage
in certain transactions as principal with the Partnership in addition
to transactions as agent, including transactions involving money
market securities and real estate, and, under limited circumstances and
subject to certain conditions, the acquisition of investments from the
General Partner (or an affiliate thereof) that were purchased for the
Partnership prior to the closing of its offering;
Section 17(d) to permit the Partnership to engage in transactions
in which certain affiliated persons of the Partnership may also be
participants;
Section 17(f) to permit ML & Co. or one of its subsidiaries to act
as custodian without a written contract;
Section 17(g) to permit the Partnership to comply with
requirements applicable to fidelity bonds without the necessity of having
a majority of the Board of Directors of the General Partner which are
not "interested persons" take such action and make such approvals as are
set forth in Rule 17g-1 under the Investment Company Act;
Section 18(a)(1) to exempt the Partnership from certain limitations
on borrowings so that the Partnership may enter into nonrecourse loans
relating to investments other than securities without regard to the
restrictions on "asset coverage" contained in the Investment Company Act;
Section 18(i) to permit the Limited Partners to have only those
rights with respect to the management of the Partnership as are set
forth in the Partnership Agreement;
Section 19(b) to permit the Partnership to distribute long-term
capital gains more frequently than annually;
Section 20(a) to exempt the Partnership from the proxy requirements
set forth in the rules under the Investment Company Act;
Section 23(c) to permit the Partnership to repurchase
Partnership interests pursuant to the terms of the Partnership Agreement;
Section 30(a),(b) and (d) to exempt the Partnership from filing
annual and quarterly reports with the Commission and from sending
semi-annual reports to Limited Partners; and
Section 32(a) to permit the General Partner to select
independent certified public accountants for the Partnership without
submitting their selection to the Limited Partners for ratification or
rejection.
In 1991, the Commission issued an order amending the order
described above to expand the categories of investments in which the
Partnership and other partnerships managed by the General Partner may
participate with ML & Co. and its affiliates. The transactions in which
such joint investments may be made relate generally to equity and
equity-related investments in buyout transactions and other transactions
structured by ML & Co. or its affiliates or in which ML & Co. or its
affiliates have an equity or equity-related investment. The order
requires, among other things, that the General Partner make specified
findings before the Partnership participates in such investments and
that the General Partner, at least annually, provide to the Limited
Partners a list of such investments in which the Partnership has
invested with ML & Co. or its affiliates.
ADDITIONAL INFORMATION
This Prospectus does not contain all the information set forth in
the Registration Statement that the Partnership has filed with the
Securities and Exchange Commission, Washington, D.C., under the Securities
Act of 1933 and the Investment Company Act. For further information
pertaining to the securities offered hereby, reference is made to the
Registration Statement including the exhibits filed as a part thereof.
INDEX TO FINANCIAL STATEMENTS
Page
----
Merrill Lynch KECALP L.P. 1997 Independent Auditors' Report . . . . . .
. . . 57 Balance Sheet, May 12, 1997 . . . . . . . . . 58
Notes to Balance Sheet . . . . . . . . . . . . 58
KECALP Inc. (Unaudited) Balance Sheet, December 27, 1996 . . . . . . .
59 Notes to Balance Sheet . . . . . . . . . . . . 60
INDEPENDENT AUDITORS' REPORT
Merrill Lynch KECALP L.P. 1997:
We have audited the accompanying balance sheet of Merrill Lynch KECALP
L.P. 1997 as of May 12, 1997. This financial statement is the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statement
is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of Merrill Lynch KECALP L.P. 1997 at May
12, 1997, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
New York, New York May 14, 1997
MERRILL LYNCH KECALP L.P. 1997
BALANCE SHEET
May 12, 1997
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$100
====
PARTNERS' CAPITAL ACCOUNT
Capital Contributions: General Partner . . . . . . . . . . . . . . . . . .
. . . . . . . . . $ 99 Initial Limited Partner . . . . . . . . . . . . .
. . . . . . . . . . 1
----
$100 ====
NOTES TO BALANCE SHEET
1. Organization and Purpose
Merrill Lynch KECALP L.P. 1997 (the "Partnership") was formed as
of October 28, 1996 and the Certificate of Limited Partnership was filed
under the Delaware Revised Uniform Limited Partnership Act on October
28, 1996. The only transactions to date have been capital contributions
of $99 by KECALP Inc. ("KECALP" or the "General Partner") and $1 by the
Initial Limited Partner. The Initial Limited Partner purchased an interest
in the Partnership for $1 to permit the formation of the Partnership.
KECALP is a Delaware corporation, formed in June 1981 and an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc. The General
Partner is authorized to admit additional limited partners to the
Partnership if, after the admission of such additional limited partners,
the capital contributions of all additional limited partners would not be
less than $40,000,000. The Partnership is an "employees securities
company" under the Investment Company Act of 1940. KECALP will pay the
organizational expenses of the Partnership incurred prior to the
commencement of the offering of the Partnership's units. The
Partnership has agreed to reimburse KECALP for such costs.
Deferred organizational expenses of the Partnership will be amortized on
a straight line basis over a period not to exceed five years from the
commencement of the Partnership's operations. In the event that the
Partnership liquidates before the deferred organizational expenses are fully
amortized, KECALP shall bear such unamortized deferred organizational
expenses for the Partnership.
2. Business
The Partnership intends to seek long-term capital appreciation.
The Partnership will invest primarily in privately offered investments.
The Partnership shall not engage in any other business or activity.
The Partnership term extends to December 31, 2037. However, pursuant
to the Partnership Agreement, the General Partner may dissolve the
Partnership, without the consent of the Limited Partners, at any time
after January 1, 2003.
3. Fiscal Year
The fiscal year of the Partnership will be the year ending December
31 of each year.
INVESTORS WILL NOT ACQUIRE ANY INTEREST IN THIS COMPANY
KECALP INC.
BALANCE SHEET (UNAUDITED)
DECEMBER 27, 1996
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
20,918 Other receivable . . . . . . . . . . . . . . . . . . . . . . . .
50,330 Due from Merrill Lynch & Co. Inc. (Note 4) . . . . . . . . . . .
881,438 Investment in limited partnerships (Note 1) . . . . . . . . . . .
736,238
--------
TOTAL
$1,688,924
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Deferred federal and state income taxes . . . . . . . . . . . .
$32,288 Accrued expenses . . . . . . . . . . . . . . . . . . . . . . .
61,790
-------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . .
94,078
- -------
STOCKHOLDER'S EQUITY: (Note 1)
Common stock $1 par value; authorized and outstanding 1,000 shares
(Note 3) . . . . . . . . . . . . . $ 1,000 Additional
paid-in-capital (Note 3) . . . . . . . . . . . . . 12,435,556 Capital
contribution receivable (Note 2) . . . . . . . . . . (11,100,000) Excess
. . . . . . . . . . . . . . . . . . . . . . . . . . . 258,290
------------
Total stockholders equity . . . . . . . . . . . . . . . . $
1,594,846
- ------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,688,924
============
See notes to balance sheet.
KECALP INC.
NOTES TO BALANCE SHEET (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
KECALP Inc. ("KECALP"), a Delaware corporation, is a
wholly-owned subsidiary of Merrill Lynch Group Inc. ("ML Group"). ML Group
is a wholly- owned subsidiary of Merrill Lynch & Co., Inc. ("ML & CO.").
KECALP is the General Partner of seven Delaware limited partnerships,
Merrill Lynch KECALP Growth Investments Limited Partnership 1983 (the "1983
Partnership"), Merrill Lynch KECALP L.P. 1984 (the "1984 Partnership"),
Merrill Lynch KECALP L.P. (the "1986 Partnership"), Merrill Lynch
KECALP L.P. 1987 (the "1987 Partnership"), Merrill Lynch KECALP L.P.
1989 (the "1989 Partnership"), Merrill Lynch KECALP L.P. 1991 (the
"1991 Partnership") and Merrill Lynch KECALP L.P. 1994 (the "1994
Partnership"), collectively referred to as the "Partnerships". As General
Partner, KECALP manages the Partnerships, pays certain of their expenses
and maintains a 1% ownership interest in each of the Partnerships.
The 1983 Partnership and the 1984 Partnership intend to seek
long-term capital appreciation and the tax advantages associated
with certain investments, primarily through the purchase of
speculative, tax-oriented investments in real estate, oil and gas
properties, personal property and/or indirect interests therein. At least
25% of the total proceeds will be invested in real estate. The
investment objectives of the 1986, 1987, 1989, 1991 and 1994 Partnerships
are to seek long-term capital appreciation with a substantial portion of
its total proceeds invested in venture capital and leveraged buyout
investments. The Partnerships may purchase other investments that
KECALP deems appropriate. The Partnerships shall not engage in any other
business or activity.
Investment in Partnerships The investment in the Partnerships
is accounted for using the cost method.
Capital Requirements As a condition to the closing of the sales
of units of limited partnership interest, KECALP has agreed to maintain a
net worth as required in accordance with applicable U.S. income tax
regulations and rulings of the Internal Revenue Service. ML & Co.
provides capital to KECALP by a demand promissory note or other
investment to satisfy the requirement that KECALP have such net worth (see
Note 2).
2. CAPITAL CONTRIBUTION RECEIVABLE
The Capital Contribution receivable represents promissory notes from
ML & Co. The notes are due on demand and bear interest at the daily
brokers call rate. Intercompany interest and taxes are not paid, but
KECALP's obligations have been settled through an adjustment of the
intercompany receivable account.
3. RELATED PARTY TRANSACTIONS
KECALP is obligated to pay certain expenses, fees, sales or
brokerage commissions, and other expenditures (except for debt service
and interest expense) of the Partnerships.
KECALP is required to maintain an investment in the Partnerships
of approximately 1% of the Partnerships' net assets less (plus) unallocated
net unrealized appreciation (depreciation) of investments.
4. DUE FROM MERRILL LYNCH & CO.
The Corporation has been authorized to transfer funds, as required
by policy, to ML & Co. ML & Co. is to repay this loan with interest
based on the daily brokers call rate.
5. INCOME TAXES
The results of operations of KECALP are included in the
consolidated Federal income tax returns of ML & Co., Inc. It is the policy
of ML & Co., Inc. to allocate to KECALP the Federal and state tax expense
associated with such operating results in its consolidated tax
return, including the recognition of deferred tax assets.
EXHIBIT A
=============================================================================
MERRILL LYNCH KECALP L.P. 1997
(A DELAWARE LIMITED PARTNERSHIP)
AMENDED AND RESTATED AGREEMENT
OF
LIMITED PARTNERSHIP
=============================================================================
TABLE OF CONTENTS
-----------------
CAPTION PAGE
------- ----
ARTICLE ONE
DEFINED TERMS . . . . . . . . . . . . . . . . . . . . . . . A-1
ARTICLE TWO ORGANIZATION
SECTION 2.1 Governance . . . . . . . . . . . . . . . . . . A-3
SECTION 2.2 Name, Place of Business and Office;
Registered Agent . . . . . . . . . . . . . . . A-3
SECTION 2.3 Purpose . . . . . . . . . . . . . . . . . . . A-4
SECTION 2.4 Term . . . . . . . . . . . . . . . . . . . . . A-4
ARTICLE THREE
PARTNERS AND CAPITAL SECTION 3.1 General Partner . .
. . . . . . . . . . . . . A-4 SECTION 3.2 Initial Limited
Partner . . . . . . . . . . . A-4 SECTION 3.3 Additional
Limited Partners . . . . . . . . . A-4 SECTION 3.4 Partnership
Capital . . . . . . . . . . . . . A-5 SECTION 3.5 Liability of
Partners . . . . . . . . . . . . A-5 SECTION 3.6 Lender as
Partner . . . . . . . . . . . . . . A-5
ARTICLE FOUR MANAGEMENT SECTION 4.1 Powers of
the General Partner . . . . . . . . A-6 SECTION 4.2 Prohibited
Transactions . . . . . . . . . . . A-7 SECTION 4.3 Restrictions
on the Authority of the General Partner . . . .
. . . . . . . . . . . A-8 SECTION 4.4 Duties and Obligations of
the General Partner A-8 SECTION 4.5 Compensation and
Reimbursement of the General Partner . . . . . . .
. . . . . . . . A-10 SECTION 4.6 Other Businesses of Partners .
. . . . . . . . A-10 SECTION 4.7 Indemnification . . . . . . .
. . . . . . . . A-10 SECTION 4.8 Management by Limited Partners
. . . . . . . . A-11
ARTICLE FIVE
DISTRIBUTIONS OF PARTNERSHIP FUNDS; ALLOCATIONS OF
PROFITS AND LOSSES SECTION 5.1 Distributions of Partnership
Funds . . . . . . A-11 SECTION 5.2 Allocations of Profits and
Losses . . . . . . A-11 SECTION 5.3 Determinations of
Allocations and Distributions Among Limited Partners
. . . . . . . . . . . . A-12
ARTICLE SIX
TRANSFERABILITY OF THE GENERAL PARTNERS INTEREST
SECTION 6.1 Voluntary Withdrawal or Transfer by the
General Partner . . . . . . . . . . . . . . . A-13 SECTION
6.2 Admission of Successor General Partner . . . . A-14 SECTION
6.3 Liability of a Withdrawn or Removed General
Partner . . . . . . . . . . . . . . . . . . . A-14 SECTION 6.4
Incapacity of the General Partner . . . . . . A-14 SECTION 6.5
Removal of the General Partner . . . . . . . . A-14 SECTION 6.6
Distributions on Withdrawal or Removal of the
General Partner . . . . . . . . . . . . . A-15
ARTICLE SEVEN TRANSFERABILITY OF A LIMITED PARTNERS
INTEREST SECTION 7.1 Restrictions on Transfers of Interest . .
. . A-15 SECTION 7.2 Incapacity of Limited Partner . . . . . . .
. A-17 SECTION 7.3 Assignees . . . . . . . . . . . . . . . . . .
A-17 SECTION 7.4 Substituted Limited Partners . . . . . . . . .
A-17 SECTION 7.5 Acquisition of Certain Limited Partners'
Interests by the General Partner or the
Partnership . . . . . . . . . . . . . . . . . A-19
ARTICLE EIGHT
DISSOLUTION, LIQUIDATION AND TERMINATION OF THE
PARTNERSHIP SECTION 8.1 Events Causing Dissolution . . . . . .
. . . . A-19 SECTION 8.2 Liquidation . . . . . . . . . . . . . .
. . . A-20
ARTICLE NINE BOOKS AND RECORDS; ACCOUNTING;
APPRAISAL; TAX ELECTIONS; ETC. SECTION 9.1 Books and Records .
. . . . . . . . . . . . . A-21 SECTION 9.2 Accounting Basis for
Tax and Reporting Purposes; Fiscal Year . . . . . .
. . . . . . A-21 SECTION 9.3 Bank Accounts . . . . . . . . . . .
. . . . . A-21 SECTION 9.4 Appraisal . . . . . . . . . . . . . .
. . . . A-21 SECTION 9.5 Reports . . . . . . . . . . . . . . . .
. . . A-22 SECTION 9.6 Elections . . . . . . . . . . . . . . . .
. . A-22
ARTICLE TEN AMENDMENTS SECTION 10.1 Proposal
and Adoption of Amendments Generally . . . . . . . .
. . . . . . . . . . A-22 SECTION 10.2 Amendments on Admission or
Withdrawal of Partners . . . . . . . . . . . . . .
. . . A-23
ARTICLE ELEVEN CONSENTS, VOTING AND MEETINGS
SECTION 11.1 Method of Giving Consent . . . . . . . . . . . A-23
SECTION 11.2 Meetings of Partners . . . . . . . . . . . . . A-24
SECTION 11.3 Limitations on Requirements for Consents . . . A-24
SECTION 11.4 Submissions to Limited Partners . . . . . . . A-25
ARTICLE TWELVE
MISCELLANEOUS PROVISIONS SECTION 12.1 Appointment of
the General Partner as Attorney-in-Fact . . . . . .
. . . . . . . . A-25 SECTION 12.2 Notification to the Partnership
or the General Partner . . . . . . . . . . . . . . .
. . . . A-26 SECTION 12.3 Binding Provisions . . . . . . . . . . .
. . . A-26 SECTION 12.4 Applicable Law . . . . . . . . . . . . . .
. . A-26 SECTION 12.5 Counterparts . . . . . . . . . . . . . . . .
. A-26 SECTION 12.6 Separability of Provisions . . . . . . . . . .
A-26 SECTION 12.7 Entire Agreement . . . . . . . . . . . . . . .
A-26 SECTION 12.8 Headings . . . . . . . . . . . . . . . . . . .
A-26
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF MERRILL LYNCH KECALP L.P. 1997
Amended and Restated Agreement of Limited Partnership of Merrill
Lynch KECALP L.P. 1997 (the "Partnership") dated _________, 1997, among
KECALP Inc., a Delaware corporation, as General Partner, Robert F.
Tully, the Initial Limited Partner, and those Persons who shall be
admitted as Additional Limited Partners and as Substituted Limited
Partners.
Whereas, pursuant to a Certificate of Limited Partnership dated as
of October 28, 1996, and filed with the Delaware Secretary of State on
October 28, 1996, and an Agreement of Limited Partnership, dated October
28, 1996 (the "Original Agreement"), KECALP Inc. and Robert F. Tully have
heretofore formed the Partnership under the Delaware Revised Uniform Limited
Partnership Act;
Whereas, KECALP Inc., the Initial Limited Partner, and the
Additional Limited Partners, as defined herein, desire to amend and
restate in its entirety the terms and provisions of the Original
Agreement governing the Partnership;
Now, Therefore, in consideration of the mutual promises made herein,
the parties, intending to be legally bound, hereby agree as follows:
ARTICLE ONE
Defined Terms
The defined terms used in this Agreement shall, unless the
context otherwise requires, have the meanings specified in this Article
One. The singular shall include the plural and the masculine gender shall
include the feminine, and vice versa, as the context requires.
"Act" means the Delaware Revised Uniform Limited Partnership Act (6
Del. C.17-101 et seq.), as amended from time to time and any successor to
the said Act.
"Additional Limited Partners" means those Persons admitted to
the Partnership pursuant to Section 3.3 and shown as limited partners of
the Partnership on the books and records of the Partnership.
"Affiliate" means when used with reference to a specified Person,
(i) any Person that, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control
with the specified Person, (ii) any Person that is an officer, partner
(excluding unrelated third parties who are joint venturers or
participants in joint ventures electing to be taxed as partners for
Federal income tax purposes) or trustee of, or serves in a similar capacity
with respect to, the specified Person or of which the specified Person is
an officer, partner or trustee, or with respect to which the specified
Person serves in a similar capacity, (iii) any Person that, directly or
indirectly, is the beneficial owner of 5% or more of any class of equity
securities of the specified Person or of which the specified Person is
directly or indirectly the owner of 5% or more of any class of equity
securities and (iv) any member of the immediate family of the specified
Person or his or her spouse.
"Agreement" means this Amended and Restated Agreement of
Limited Partnership, as originally executed and as amended and restated
from time to time, as the context requires.
"Appraisal" means the statement of valuation of the assets of
the Partnership as described in Section 9.4.
"Auditors" means Deloitte & Touche LLP or such other nationally
or regionally recognized firm of independent auditors as shall be engaged by
the Partnership.
"Capital Account", as to any Partner, means the sum of a
Partner's Capital Contributions, increased by his share of any Profits,
and decreased by his share of any Losses and by his share of any
Partnership Distributable Cash reasonably expected to be distributed to
such Partner and other assets distributed to such Partner or on behalf of
such Partner in payment of any taxes or other expenses allocable to such
Partner and as otherwise increased or decreased in accordance with the
tax accounting principles set forth in Treasury Regulation Section
1.704-1(b)(2)(iv) of the Code.
"Capital Contribution" means the total amount of money contributed
to the Partnership by all Partners or any class of Partners or any one
Partner (or the predecessor holders of the Interests of such Partners or
Partner), as the context requires, upon the formation of the Partnership or
the admission of such Partner to the Partnership, or as that money is
contributed to the Partnership.
"Code" means the Internal Revenue Code of 1986, as amended (or
any corresponding provision of succeeding law).
"Consent" means the approval of a Person, given as provided in
Section 11.1, to do the act or thing for which the approval is solicited,
or the act of granting such approval, as the context may require.
Reference to the Consent of a specified percentage in Interest of the
Limited Partners means the Consent of Limited Partners whose combined
Capital Contributions represent, at the time in question, at least such
specified percentage of the Capital Contributions of all the then Limited
Partners.
"Distributable Cash" means, with respect to any fiscal period of
the Partnership, the cash assets of the Partnership on hand at the end of
such fiscal period (but not including the Capital Contribution to the
Partnership) less amounts required to be retained out of such cash
assets in the sole judgment of the General Partner to pay the
Partnership's liabilities whether accrued or anticipated to accrue in
the future or to make permissible investments.
"Fiscal Year" means the calendar year.
"General Partner" means KECALP Inc., a Delaware corporation
whose business address is South Tower, World Financial Center, 225 Liberty
Street, New York, New York 10080-6123, and any successor to it in its
capacity as general partner of the Partnership.
"Incapacity" or "Incapacitated" means the entry of an order for
relief in a case under Title 11 of the United States Code (the
"Bankruptcy Code") ("bankruptcy") (except that, in the case of the
General Partner, the term "bankruptcy" shall mean only the being subject to
Chapter 7 of the Bankruptcy Code) or the incompetence, insanity,
interdiction, death, incapacity, disability, dissolution or
termination (other than by merger or consolidation), as the case may
be, of any Person.
"Income" means the gross income of the Partnership as determined
for Federal income tax purposes including capital gains and Code Section
1231 gains (but not losses).
"Initial Limited Partner" means Robert F. Tully.
"Interest" means the entire ownership interest of a Partner in
the Partnership at any particular time, including the right of such
Partner to any and all benefits to which a Partner may be entitled as
provided in this Agreement, together with the obligations of such Partner
to comply with all the terms and provisions of this Agreement.
Reference to a specified percentage in Interest of the Limited Partners
shall mean Limited Partners whose Capital Contributions represent, at the
time in question, at least such specified percentage of the Capital
Contributions of all the then Limited Partners.
"Limited Partner" means any Person who is a limited partner of
the Partnership as shown on the books and records of the Partnership
(whether the Initial Limited Partner, an Additional Limited Partner or
a Substituted Limited Partner) at the time of reference thereto, in such
Person's capacity as a limited partner of the Partnership.
"Majority-in-Interest" means the Limited Partners whose
aggregate Capital Contributions represent over 50% of the
aggregate Capital Contributions of all Limited Partners.
"Notification" means a writing, containing the information required
by this Agreement to be communicated to any Person, sent by first class
mail, postage prepaid, to such Person at the last known address of such
Person, five days after the mailing thereof being deemed the date of the
giving of Notification; provided however, that any communication
containing the information sent to the Person and actually received by
the Person shall constitute Notification for all purposes of this Agreement.
"Partner" means the General Partner or a Limited Partner.
"Partnership" means the limited partnership governed hereby, as
said limited partnership may from time to time be constituted.
"Partnership Account" means the bank account or bank accounts to
be maintained by the General Partner on behalf of the Partnership with any
bank in the United States having assets in excess of $100,000,000.
"Person" means any individual, partnership, corporation, trust or
other entity.
"Profits" or "Losses" means the profits or losses of the Partnership
for Federal income tax purposes including, without limitation, each
item of Partnership Income, gain, loss, deduction or credit.
"Prospectus" means the prospectus contained in the
registration statement filed by the Partnership on Form N-2 at the time
such registration statement was declared effective by the Securities and
Exchange Commission; except that if a prospectus filed by the Partnership
pursuant to Rule 497(b) or 497(d) under the Securities Act of 1933
differs from the prospectus contained in the registration statement,
as aforesaid, then the term "Prospectus" refers to the Rule 497(b) or
497(d) prospectus from and after the time it is mailed to the Securities
and Exchange Commission for filing.
"Remove", "Removed" or "Removal" when used in reference to the
removal of the General Partner means the termination of all management
powers, duties and responsibilities of the General Partner pursuant to
Section 6.5, but not the elimination of the General Partner as a Partner.
"Sale" means any event, action or transaction that is, for
Federal income tax purposes, considered a sale, exchange or
abandonment by the Partnership of any Partnership property.
"State" means the State of Delaware.
"Substituted Limited Partner" means any Person admitted to
the Partnership as a Limited Partner pursuant to the provisions of
Section 7.4 and who is shown on the books and records of the Partnership
as a limited partner of the Partnership.
"Unit" means an Interest in the Partnership attributable to an
aggregate payment of $1,000 to the Partnership by, or on behalf of, the
Limited Partner who originally acquired the Interest.
"Valuation Date" means each of the dates described in Section 9.4.
ARTICLE TWO
Organization
Section 2.1 Governance
The undersigned parties hereto hereby agree that the rights
and liabilities of the Partners shall be as provided in the Act except as
herein otherwise expressly provided.
Section 2.2 Name, Place of Business and Office; Registered Agent
The name of the limited partnership heretofore formed and
hereby continued shall be Merrill Lynch KECALP L.P. 1997. The business
of the Partnership may be conducted under any other name deemed
necessary or desirable by the General Partner in order to comply with
local law. The Partnership shall maintain a registered office in
the State c/o The Corporation Trust Company, Corporation Trust Center,
1209 Orange Street, Wilmington, New Castle County, Delaware 19801.
The Partnership shall maintain its principal office at South Tower,
World Financial Center, 225 Liberty Street, New York, New York 10080-6123.
The General Partner may at any time change the location of the
Partnership's offices and may establish additional offices, if it deems it
advisable. The name and address of the Partnership's registered agent
for service of process in the State is The Corporation Trust Company,
Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle
County, Delaware 19801. The General Partner has filed the certificate of
limited partnership of the Partnership and shall file any amendment to the
certificate of limited partnership of the Partnership as required by the
Act in the proper office in the State and shall take such steps as are
necessary to qualify the Partnership to conduct business in other
jurisdictions in which it owns properties or conducts business and
otherwise to insure that the Limited Partners will have limited
liability with respect to the activities of the Partnership in
such other jurisdictions.
Section 2.3 Purpose
The purpose and character of the business of the Partnership is
to invest the funds of the Partnership in various speculative
and non-speculative investments, seeking, among other things, long-term
capital appreciation, and to engage in any and all activities necessary or
incidental thereto.
Section 2.4 Term
The Partnership term commenced on October 28, 1996, and shall
continue in full force and effect until December 31, 2037, or until
dissolution prior thereto pursuant to the provisions hereof.
ARTICLE THREE
Partners and Capital
Section 3.1 General Partner
A. The name, residence, business or mailing address and
Capital Contribution of the General Partner are set forth in the books and
records of the Partnership, as amended from time to time, and are
incorporated herein by reference.
B. The General Partner, as general partner of the Partnership,
shall be deemed to have made additional Capital Contributions to the
Partnership to the extent it pays expenses of the Partnership pursuant to
this Agreement which are not reimbursed to it by either the Partnership
or an Affiliate of the General Partner.
Section 3.2 Initial Limited Partner
A. The name, business address and Capital Contribution of the
Initial Limited Partner are Robert F. Tully, South Tower, World Financial
Center, 225 Liberty Street, New York, N.Y. 10080-6123 and his Capital
Contribution is $1.00.
B. Upon the admission of Additional Limited Partners pursuant
to Section 3.3, the Initial Limited Partner shall withdraw from the
Partnership and receive forthwith the return of his Capital Contribution
without interest or deduction.
Section 3.3 Additional Limited Partners
A. The General Partner is authorized to admit Additional
Limited Partners to the Partnership pursuant to the terms contained in the
Prospectus and this Agreement. The manner of the offering of
Additional Limited Partners Units, the terms and conditions under which
subscriptions for such Units will be accepted, and the manner of and
conditions to the sale of Units to subscribers therefor and the admission
of such subscribers as Additional Limited Partners will be as provided in
the Prospectus and subject to any provisions thereof.
B. The name, residence, business or mailing address and
Capital Contribution of each Additional Limited Partner shall be set
forth in the books and records of the Partnership, as amended from time to
time.
C. No Limited Partner shall be required to make any
additional contributions to the capital of the Partnership.
Section 3.4 Partnership Capital
A. No Partner shall be paid interest on any Capital Contribution
to the Partnership.
B. No Partner, other than the Initial Limited Partner pursuant
to Section 3.2, shall have the right to withdraw any part of his
Capital Contribution or to receive any return of any portion of his
Capital Contribution except as otherwise provided herein.
C. Under circumstances involving a return of any Capital
Contribution, no Partner shall have the right to receive property other
than cash, except as may be specifically provided in this Agreement.
D. The General Partner shall make additional contributions to
the capital of the Partnership in an amount sufficient to pay for
Partnership expenses allocable to it pursuant to Section 4.4A.
Section 3.5 Liability of Partners
A. No Limited Partner shall be liable for the debts,
liabilities, contracts or any other obligations of the Partnership, except
to the extent of his Capital Contribution and his share of the
Partnership's assets and undistributed profits, or for the debts or
liabilities of any other Partner. To the extent provided by law, a
Limited Partner may, under certain circumstances, be required to
return, for the benefit of Partnership creditors, amounts previously
distributed to such Limited Partner.
B. A Limited Partner shall be liable only to make the payment of
his Capital Contribution as set forth in Sections 3.2A and 3.3B.
C. No Limited Partner shall be required to lend funds to
the Partnership or make any further contribution to the capital of
the Partnership.
D. The General Partner shall not be required to contribute to
the capital of, or loan, the Partnership any funds other than the
General Partner's Capital Contributions to the capital of the
Partnership as set forth in Sections 3.1 and 3.4D. Neither the General
Partner nor any of its Affiliates shall have (i) any personal liability
for the return or repayment of the Capital Contribution of any Limited
Partner or (ii) to repay to the Partnership any portion or all of any
negative amount of the General Partner's Capital Account, except as
otherwise provided in Section 8.2D.
Section 3.6 Lender as Partner
No creditor who makes a nonrecourse loan to the Partnership shall
have or acquire, at any time as a result of making the loan, any direct
interest in the profits, capital or property of the Partnership, other
than as a secured creditor.
ARTICLE FOUR
Management
Section 4.1 Powers of the General Partner
A. The General Partner shall manage the affairs of, and shall
control the business of, the Partnership and shall have all powers
necessary to manage and control the Partnership's affairs and business
and fulfill the purposes of the Partnership, including, by way of
illustration and not by way of limitation:
(i) The power and duty to invest the balance (after the
setting aside of suitable reserves) of the Capital Contributions of the
Partners and reinvest revenues of the Partnership in accordance with
the purpose of the Partnership and in keeping with its investment
objectives as stated in the Prospectus.
(ii) The power to acquire securities or property of all types
on behalf of the Partnership, including, without limitation, stocks,
bonds, debentures, notes, shares in investment companies, general and
limited partnership interests, investment contracts and interests in
trusts.
(iii) The power to enter into transactions and make
investments with or through Affiliates of the General Partner and to
participate in investment transactions sponsored or underwritten
(either on a best efforts or firm commitment basis) by Affiliates of
the General Partner or in entities as to which Affiliates of the
General Partner serve as investment adviser or placement agent.
(iv) The power to purchase interests in entities sponsored
by Affiliates of the General Partner or in which Affiliates of the
General Partner have an interest, including, but not limited to,
limited partnership interests in limited partnerships in which such
Affiliates serve as general partner.
(v) The power to cause securities owned by the Partnership to
be registered in the Partnership name or in the name of a nominee or
to be held in street name, as it shall elect.
(vi) The power and duty to maintain the books and records of
the Partnership in accordance with the provisions of Section 9.1.
(vii) The power to reserve funds out of Partnership Income
or borrow money in the name of the Partnership from any bank or
other lending institution in the United States or from an Affiliate
of the General Partner for the purpose of leveraging investments
of the Partnership, paying assessments levied on Partnership
investments or paying other costs of the Partnership (other than costs
that the General Partner is obligated to pay) and in connection with
any borrowing, to mortgage, pledge, encumber, and hypothecate
the assets of the Partnership.
(viii) The power to lend money to the Partnership on
commercially reasonable terms.
(ix) The power to make temporary investments of
Partnership capital in all types of securities, including,
without limitation, short-term U.S. Government and Government
agency securities, certificates of deposit, interest-bearing
deposits in U.S. banks, securities issued by or on behalf of
states, municipalities and their instrumentalities, the interest from
which is exempt from Federal income tax, securities issued by other
investment companies (including unit investment trusts and
taxable and tax-exempt money market funds sponsored and/or advised
by Affiliates of the General Partner) prior to long-term investment or
pending cash distributions to the Partners.
(x) The power to seek exemptions from provisions of the
Investment Company Act of 1940 from the Securities and Exchange
Commission.
(xi) The power to enter into a sales agency agreement relating
to the offering and sale of Units by the Partnership with Merrill
Lynch, Pierce, Fenner & Smith Incorporated, or any other Affiliate
of the General Partner.
(xii) In addition to and not in limitation of any rights
and powers conferred by law or other provisions of this Agreement,
and except as limited, restricted or prohibited by the express
provisions of this Agreement, the General Partner shall have and
may exercise on behalf of the Partnership all powers and rights
necessary, proper, convenient or advisable to effectuate and
carry out the purpose, business and objectives of the Partnership
including the power to have investment opportunities evaluated by an
advisory committee selected by the General Partner.
B. In order to expedite the handling of the Partnership's business,
it is understood and agreed that any document executed by the General
Partner while acting in the name and on behalf of the Partnership shall be
deemed to be the action of the Partnership vis-a-vis any third parties
(including the Limited Partners as third parties for such purpose).
C. In the event the original General Partner withdraws as provided
in Article Six, is Incapacitated or is Removed, any additional or
successor General Partner or General Partners shall possess all the power
and authority of the original General Partner. Any remaining and any
additional and successor General Partner is authorized to and shall continue
the business of the Partnership. The General Partner may admit an
additional or successor General Partner provided that if it
subsequently wishes to withdraw or transfer its interest, Sections 6.1
and 6.2 shall be complied with as to the additional or successor General
Partner prior to its becoming a sole General Partner, and provided that the
following conditions are satisfied:
(i) appropriate filings are made under the Act and in such
other jurisdictions as the Partnership's business requires;
(ii) the Interest of Limited Partners will not be
adversely affected; and
(iii) the sole General Partner shall not be Incapacitated.
In the event an additional or successor General Partner is admitted,
the term "General Partner" as used in this Agreement shall include the
additional or successor General Partner.
Section 4.2 Prohibited Transactions
Notwithstanding anything to the contrary contained herein, the
following transactions are specifically prohibited to the Partnership:
(i) The Partnership shall not make any loans to the
General Partner or any of its Affiliates unless permitted by the
Investment Company Act of 1940 or an order of exemption therefrom;
(ii) The Partnership shall not sell or lease any property to
the General Partner or any of its Affiliates except on terms at
least as favorable as those obtainable from unaffiliated third parties
and except that this provision shall not prohibit any transaction
contemplated by Section 8.2 or permitted by the terms of any
partnership agreement or investment contract into which the
Partnership may enter by virtue of its investment as a general or
limited partner, where an Affiliate of the General Partner also acts
as general partner of such partnership;
(iii) No funds of the Partnership shall be kept in any
account other than a Partnership Account, and funds shall not be
commingled with the funds of any other Person, and the General Partner
shall not employ, or permit any other Person to employ, such funds in
any manner except for the benefit of the Partnership; it being
understood that the General Partner may invest temporarily Partnership
funds in accordance with the provisions of Section 4.1 (A) (ix); and
(iv) No expense of the Partnership shall be billed except
directly to the Partnership (but shall be paid pursuant to the
terms of this Agreement), and no reimbursements shall be made
therefor to the General Partner or any of its Affiliates except as
permitted by Section 4.5.
Section 4.3 Restrictions on the Authority of the General Partner
A. The General Partner shall not have the authority to:
(i) do any act in contravention of the Investment Company Act
of 1940, as applied to the Partnership; or
(ii) do any act that would make it impossible to carry on
the ordinary business of the Partnership.
B. The General Partner shall not perform any act that would
subject any Limited Partner to liability as a general partner in any
jurisdiction.
C. Without the Consent of a Majority-in-Interest of the
Limited Partners, the General Partner shall not have the authority to:
(i) lease, sell, or otherwise dispose of at any one time all
or substantially all of the assets of the Partnership;
(ii) elect to dissolve the Partnership prior to January 1, 2003;
(iii) issue senior securities other than in connection with
the borrowings described in (v) below;
(iv) make short sales of securities, purchase securities on
margin, except for use of short-term credit necessary for the
clearance of transactions, or write put or call options;
(v) borrow amounts in excess of 331/3% of the Partnership's
gross assets, or otherwise as permitted under the Investment Company
Act of 1940, except that the Partnership may enter into
nonrecourse loans relating to investments other than securities
without regard to such limitation;
(vi) underwrite securities of other issuers, except insofar as
the Partnership may be deemed an underwriter under the Securities
Act of 1933 in selling portfolio securities;
(vii) invest more than 25% of its Partners' Capital Contributions
in the securities of issuers in any particular industry, except for
real estate investments and for temporary investments in U.S.
Government and Government agency securities, domestic bank money market
instruments and money market funds;
(viii) make loans to other Persons in excess of 331/3% of
the Partnership's gross assets, provided that investments
in privately-offered debt securities issued by entities in
which the Partnership has an equity participation or with which the
Partnership has contracted to acquire an equity participation
shall not be considered loans for purposes of this paragraph; or
(ix) alter the investment objective and business purpose of
the Partnership.
D. The General Partner shall not borrow funds on behalf of
the Partnership except in accordance with Section 4.1A (vii) and (xii).
E. The General Partner shall not cause the Partnership to consent
to, or join in, any waiver, amendment, or modification of the terms
of any partnership agreement, limited partnership agreement, management
agreement or investment contract to which it is a party unless, in the good
faith judgment of the General Partner, such waiver, amendment, or
modification would be in the best interest of the Partnership.
Section 4.4 Duties and Obligations of the General Partner
A. The General Partner shall pay all expenses (but not income,
personal property, franchise or other taxes) incurred in the
organization and operation of the Partnership, including, without
limitation, Auditors' fees, legal fees, postage, printing costs,
Appraisal costs, general and administrative costs and expenses
and, in addition, any brokerage commissions, selling agents' fees,
advisory fees or similar charges incurred in investing Partnership funds.
The General Partner is not obligated to pay from its own funds, debt
service or other interest charges incurred in connection with the
making of Partnership investments and is entitled to indemnification in
accordance with Section 4.7.
B. The General Partner shall take all action that may be necessary
or appropriate for the continuation of the Partnership's valid existence
as a limited partnership under the laws of the State, and for the
acquisition, holding and disposition, in accordance with the provisions of
this Agreement and applicable laws and regulations, of the investments of
the Partnership.
C. The General Partner shall devote to the Partnership the time
that it deems to be necessary to conduct the Partnership business and
affairs in the best interests of the Partnership and use its best efforts
to obtain a suitable investment portfolio for the Partnership.
D. The General Partner shall be under an obligation to conduct
the affairs of the Partnership in the best interest (or not opposed to the
best interest) of the Partnership, including the safekeeping and use
of all Partnership funds and assets (whether or not in the immediate
possession or control of the General Partner) and the use thereof for the
benefit of the Partnership. Notwithstanding the foregoing, the General
Partner may, in its sole and absolute discretion, elect to dissolve the
Partnership at any time after January 1, 2003, and, upon liquidation, to
purchase Partnership assets in accordance with Section 8.2. The General
Partner shall at all times act with integrity and good faith and exercise
due diligence in all activities relating to the conduct of the business of
the Partnership and in resolving conflicts of interest.
E. The General Partner will use its best efforts at all times
to maintain its net worth at a level that is sufficient to meet all present
and future requirements set by statute, Treasury Regulations, the
Internal Revenue Service or the courts applicable to a corporate general
partner in a limited partnership to insure that the Partnership will
not fail to be classified for Federal income tax purposes as a
partnership, rather than as an association taxable as a corporation, on
account of the net worth of the General Partner.
F. The General Partner shall prepare or cause to be prepared and
shall file on or before the due date (or any extension thereof) any
Federal, state or local tax returns required to be filed by the
Partnership. The General Partner shall cause the Partnership to pay, from
Partnership funds, any taxes payable by the Partnership.
G. The General Partner shall, from time to time, submit to
any appropriate Federal or state securities administrator, or any
other regulatory authorities having jurisdiction, all documents, papers,
statistics and reports required to be filed with or submitted to such
authority.
H. The General Partner shall use its best efforts to cause
the Partnership to be formed, reformed, qualified to do business, or
registered under any applicable assumed or fictitious name statute or
similar law in any jurisdiction in which the Partnership then owns
property or transacts business, if such formation, reformation,
qualification or registration is necessary in order to protect the limited
liability of the Limited Partners or to permit the Partnership lawfully to
own property or transact business.
I. The General Partner shall, from time to time, prepare and file
all amendments to this Agreement, the certificate of limited partnership
of the Partnership and other similar documents that are required by law to
be filed and recorded for any reason, in the office or offices that are
required under the laws of the State or any other jurisdiction in which
the Partnership is then qualified or formed. The General Partner shall do
all other acts and things (including making publications or periodic
filings of this Agreement or amendments thereto or other similar
documents) that may now or hereafter be required, or deemed by the General
Partner to be necessary, (i) for the perfection and continued
maintenance of the Partnership as a limited partnership under the
laws of the State and each other state in which the Partnership is then
qualified or formed, (ii) to protect the limited liability of the
Limited Partners under the laws of the State and each other state in which
the Partnership is then qualified or formed, and (iii) to cause such
certificates or other documents to reflect accurately the agreement
of the Partners, the identity of the Limited Partners and the General
Partner and the amounts of their respective Capital Contributions as may be
required by such laws.
J. The General Partner shall monitor the activities of
entities invested in by the Partnership and keep the Limited Partners
informed of such activities in the manner provided in this Agreement.
K. The General Partner shall inform each Limited Partner of
all administrative and judicial proceedings for an adjustment at the
Partnership level for Partnership tax items and forward to each Limited
Partner within 30 days of receipt all notices received from the
Internal Revenue Service regarding the commencement of a partnership
level audit or a final partnership administrative adjustment and will
perform all other duties imposed by Sections 6221 through 6232 of the
Code on the General Partner as "tax matters partner" of the Partnership,
including (but not limited to) the following: (a) the power to conduct
all audits and other administrative proceedings (including windfall
profit tax audits) with respect to Partnership tax items; (b) the
power to extend the statute of limitations for all Partners with respect to
Partnership tax items; and (c) the power to file a petition with an
appropriate Federal court for review of a final partnership
administrative adjustment. The General Partner shall be the "tax matters
partner" of the Partnership.
Section 4.5 Compensation and Reimbursement of the General Partner
A. Except as provided in Article Five, the General Partner shall
not receive any salary, fees or Profits from the Partnership.
B. The General Partner shall be entitled to reimbursement from
the Partnership for expenses it incurs up to an amount equal to 1% of the
Limited Partners' Capital Contributions in connection with the
organization of the Partnership and the offering of the Units and,
commencing in 1997 and annually in each calendar year thereafter, for
expenses it incurs up to an annual amount equal to 0.5% of the Limited
Partners' Capital Contributions if such Capital Contributions aggregate
$60,000,000 or more, or, if such Capital Contributions aggregate less than
$60,000,000, up to an amount equal to 1% of the Limited Partners' Capital
Contributions, in connection with the operation of the Partnership.
Except as provided in this Article Four and Article Eight, neither the
General Partner nor its Affiliates shall be reimbursed out of Partnership
funds for expenses incurred by them on behalf of the Partnership.
Section 4.6 Other Businesses of Partners
Subject to Section 4.4C, any Partner, and any Affiliate of any
Partner may engage in or possess any interest in other business ventures of
any kind, nature or description, independently or with others, for his, her
or its own account or for the account of others. Neither the
Partnership nor any Partner as a result of this Agreement shall have any
rights or obligations in or to such independent ventures or the income or
profits or losses derived therefrom.
Section 4.7 Indemnification
Neither the General Partner nor any of its officers,
directors, stockholders, employees, or agents shall be liable to the
Partnership or the Limited Partners for any act or omission based on
errors of judgment, or other fault in connection with the business or
affairs of the Partnership so long as the Person against whom liability is
asserted acted in good faith on behalf of the Partnership and in a manner
reasonably believed by such Person to be within the scope of its authority
under this Agreement and in or not opposed to the best interests of the
Partnership, but only if such action or failure to act does not
constitute negligence or misconduct, and, with respect to any criminal
proceeding, such Person had no reasonable cause to believe its conduct
was unlawful. The General Partner and its officers, directors,
stockholders, employees, and agents will be indemnified by the
Partnership to the fullest extent permitted by law for any (a)
fees (including, without limitation, legal fees), costs and expenses
incurred in connection with or resulting from any claim, action or demand,
or threatened claim, action or demand, against the General Partner, the
Partnership or any of their officers, directors, stockholders, employees,
or agents that arises out of or in any way relates to the Partnership, its
properties, business or affairs and (b) losses or damages resulting from
such claims, actions and demands, or threatened claims, actions or
demands, including amounts paid in settlement or compromise (if recommended
by attorneys for the Partnership) of any such claim, action or demand or
threatened claims, actions or demands; provided, however, that this
indemnification shall apply only so long as the Person against whom a
claim, action or demand is asserted or threatened to be asserted has acted
in good faith on behalf of the Partnership and in a manner reasonably
believed by such Person to be within the scope of his or its authority
under this Agreement and in or not opposed to the best interests of the
Partnership, but only if such action or failure to act does not
constitute negligence or misconduct. Absent a court determination that
the General Partner or officers or directors of the General Partner
were not liable on the merits or guilty of disabling conduct within the
meaning of Section 17(h) of the Investment Company Act of 1940, the
decision by the Partnership to indemnify the General Partner or any such
Person must be based upon the reasonable determination of independent
counsel, after review of the facts, that such disabling conduct did not
occur. The rights set forth above shall continue as to the General
Partner and its officers, directors, stockholders, employees or agents
who have ceased to serve in such capacities and shall inure to the
benefit of their heirs, successors, assigns and administrators.
Section 4.8 Management by Limited Partners
No Limited Partner shall participate in the management or in the
control of the business of the Partnership or use his name in the
Partnership's business or perform any actions prohibited to limited partners
under the laws of the State or the laws of any other jurisdiction where the
Partnership is qualified or formed to conduct business. Limited Partners
hereby consent to the exercise by the General Partner of the powers
conferred on it by this Agreement.
ARTICLE FIVE
Distributions of Partnership Funds;
Allocations of Profits and Losses
Section 5.1 Distributions of Partnership Funds
Distributable Cash of the Partnership shall be distributed at
least annually, within 30 days after the end of the Fiscal Year, and
distributions may be made at such other times as the General Partner deems
advisable, and each such distribution shall be made 99% to the Limited
Partners and 1% to the General Partner. If the General Partner
deems it advisable, distributions of Partnership assets may be made in
kind, in the same manner and to the same Persons as Distributable Cash is
then being distributed. Cash distributions to Limited Partners will be
credited to each Limited Partner's securities account with Merrill
Lynch, Pierce, Fenner & Smith Incorporated or as otherwise instructed to
the General Partner by a Limited Partner.
Section 5.2 Allocations of Profits and Losses
A. The Profits and Losses of the Partnership shall be determined
and allocated with respect to each Fiscal Year of the Partnership as of
the end of, and within 75 days after the end of, such Fiscal Year.
B. Profits and Losses of the Partnership, other than arising
from Sales upon liquidation pursuant to Section 8.2, shall be allocated
among and credited to or charged against each Partner's Capital Account as
follows:
(i) With respect to Losses, (a) 99% to the Limited Partners and
1% to the General Partner until the Limited Partners' Capital
Accounts equal zero; (b) thereafter, 100% to the General Partner
until the General Partner's Capital Account equals zero; (c)
thereafter, 99% to the Limited Partners and 1% to the General
Partner or 100% to the General Partner, as appropriate, to the
extent necessary to make the Capital Account balances of the
General Partner and Limited Partners equal 1% and 99%, respectively,
of the total of the Partners' Capital Accounts; and (d) thereafter,
99% to the Limited Partners and 1% to the General Partner; and
(ii) With respect to Profits, (a) 99% to the Limited Partners
and 1% to the General Partner or 100% to the General
Partner, as appropriate, to the extent necessary to make the
Capital Account balances of the General Partner and the Limited
Partners equal 1% and 99%, respectively, of the total of the
Partners' Capital Accounts; and (b) thereafter, 99% to the Limited
Partners and 1% to the General Partner.
C. For purposes of determining the Capital Account balance of
any Limited Partner as of the end of any Fiscal Year under this Section
5.2, any such Partner's Capital Account shall be reduced by:
(i) Allocations of Loss (or any item thereof) as of the end
of such Fiscal Year, which reasonably are expected to be made to
such Partner pursuant to Code Sections 704, 706, and 752 and
Treasury Regulations promulgated thereunder; and
(ii) Distributions that, as of the end of such Fiscal
Year, reasonably are expected to be made to such Partner to the
extent they exceed offsetting increases to such Partner's Capital
Account that reasonably are expected to occur during (or prior to) the
Partnership's Fiscal Year in which such distributions reasonably are
expected to be made.
D. Notwithstanding any provision of this Agreement to the contrary,
if a Partner receives an unexpected adjustment, allocation or
distribution described in Treasury Regulations Section
1.704-1(b)(2)(ii)(d)(4), (5) or (6) which creates or increases a deficit
balance in the Partner's Capital Account, items of income and gain
shall be allocated to such Partner in an amount and manner sufficient
to eliminate the Partner's Capital Account deficit as quickly as
possible. If any allocations are made pursuant to the previous sentence,
then future allocations of income or gain to such Partner will be reduced
by an amount of income or gain equal to the amount previously allocated to
the Partner under the previous sentence.
E. If there is a net decrease in the Partnership's Minimum Gain
(as defined in Treasury Regulations under Section 704(b) of the Code)
during a taxable year, each Partner with a deficit balance in his Capital
Account at the end of the taxable year will be allocated, before any other
allocation of Partnership items is made pursuant to this Agreement, items
of income and gain for the taxable year and, if necessary, subsequent
taxable years, in the amount necessary to eliminate such deficit as quickly
as possible. For the purpose of this Minimum Gain calculation and for
purposes of the preceding paragraph, there will be excluded from the
Partner's deficit balance in his Capital Account (i) any amount the
Partner is obligated to restore to his Capital Account and (ii) any
addition to his Capital Account represented by the Partner's share of
Minimum Gain. In addition, for the purpose of calculating the amount
of Minimum Gain, each Partner's Capital Account will be reduced for
items described in Treasury Regulations Section
1.704-1(b)(2)(ii)(d)(4), (5) and (6).
Section 5.3 Determinations of Allocations and Distributions
Among Limited Partners
A. All Distributable Cash distributed to the Limited Partners, as
a class, and all Profits and Losses allocated to the Limited Partners, as
a class, shall be distributed or allocated, as the case may be, to each
Limited Partner in the ratio that the Capital Contribution of such Limited
Partner (or of his predecessor in interest) bears to the total Capital
Contribution of all Limited Partners.
B. All Profits and Losses allocated to the Limited Partners shall
be allocated to the Persons who were Limited Partners as of the last day of
the fiscal quarter for which the allocation is made. If during any Fiscal
Year of the Partnership there is a change in any Partner's Interest
in the Partnership, then allocation of Profits and Losses among the
Partners shall be determined by the use of any method prescribed by Section
706(d)(1) of the Code and the Treasury Regulations promulgated
thereunder. Allocations of "allocable cash basis items" shall be
determined in accordance with the method prescribed by Section
706(d)(2) of the Code and the Treasury Regulations promulgated
thereunder.
C. All Distributable Cash distributed to the Limited Partners shall
be distributed to the Persons who were Limited Partners as of the last day
of the fiscal quarter preceding the fiscal quarter in which the
distribution is made.
ARTICLE SIX
Transferability of the General
Partner's Interest
Section 6.1 Voluntary Withdrawal or Transfer by the General Partner
A. Except as provided in Section 6.2, the General Partner
(including by definition any successor or additional General Partner) may
withdraw as General Partner at any time, but only upon compliance with
all of the following procedures:
(i) The General Partner shall give Notification to all
Limited Partners that it proposes to withdraw and that there be
substituted in its place a Person designated and described in such
Notification.
(ii) Enclosed with the Notification shall be a certificate,
duly executed by or on behalf of such proposed successor General
Partner, to the effect that, (a) it is experienced in performing
(or employs sufficient personnel who are experienced in performing)
functions of the type then being performed by the resigning General
Partner; (b) it has a net worth of at least 10% of the Capital
Contributions of the Partners or will otherwise meet the net worth
requirements of statutes, Treasury Regulations, the Internal Revenue
Service or the courts applicable to a corporate general partner in a
limited partnership in order to insure that the Partnership will not
fail to be classified for Federal income tax purposes as a partnership
rather than as an association taxable as a corporation; and (c) it is
willing to become the General Partner under this Agreement without
receiving any compensation for services from the Partnership in
excess of that payable under this Agreement to the withdrawing
General Partner or any interest in the Income or Profits of the
Partnership other than a transfer to the successor General Partner of
some or all of the withdrawing General Partner's Interest in the
Partnership, plus such other compensation as the successor General
Partner may receive from the withdrawing General Partner.
(iii) If the General Partner proposes to withdraw, there
shall be on file at the principal office of the Partnership, prior
to such withdrawal, audited financial statements of the proposed
successor General Partner, as of a date not earlier than 12 months
prior to the date of the Notification required by this Section 6.1A,
certified by a nationally recognized firm of independent auditors,
together with a certificate duly executed by the proposed successor
General Partner, or on its behalf by its principal financial officer,
to the effect that no material adverse change in its financial
condition has occurred since the date of such audited financial
statements that has caused its net worth, apart from the purchase
price of its Interest in the Partnership, to be reduced to less
than the amount required under Section 6.1A(ii)(b). Such
audited statements and certificates shall be available for
examination by any Limited Partner during normal business hours.
(iv) The Consent of at least a Majority-in-Interest of the
Limited Partners approving the appointment of any successor General
Partner pursuant to this Section 6.1A is obtained.
(v) The withdrawing General Partner shall cooperate fully with
the successor General Partner so that the responsibilities of the
withdrawn General Partner may be transferred to the successor General
Partner with as little disruption of the Partnership's business and
affairs as is practicable.
B. Except as part of a transfer to a successor General
Partner pursuant to Section 6.1A, the General Partner shall not have the
right to withdraw or to transfer or assign its General Partner Interest,
except that the General Partner may (i) substitute in its stead as
General Partner any entity that has, by merger, consolidation or
otherwise, acquired substantially all of the assets or capital stock of
the General Partner and continued its business, (ii) substitute in its
stead any other wholly-owned subsidiary of its corporate parent, and (iii)
pledge or grant an interest in its right to receive payments and
distributions under this Agreement, in which event the General Partner
shall continue to be the general partner of the Partnership.
C. Subject to the provisions of Section 11.3, each Limited
Partner hereby Consents pursuant to Section 6.1A to the admission as a
successor General Partner of any Person meeting the requirements of
Section 6.1A to whose admission as such at least a
Majority-in-Interest of the Limited Partners has expressly approved, and
no further express Consent or approval shall be required.
D. Notwithstanding anything to the contrary in this Article Six,
the General Partner's Interest shall at all times be subject to any
restrictions on transfer imposed by Federal or state securities laws.
E. Any withdrawal of the General Partner, or transfer or assignment
of the General Partner's entire Interest shall occur immediately after
the admission of a successor General Partner.
Section 6.2 Admission of Successor General Partner
The admission of any successor General Partner pursuant to Section
6.1 shall be effective only if and after the following conditions are
satisfied:
(i) this Agreement and the certificate of limited partnership
of the Partnership shall be amended to reflect the admission of such
Person as successor General Partner prior to the withdrawal of the
withdrawing General Partner or the transfer of the withdrawing
General Partner's Interest, pursuant to Section 6.1;
(ii) the Interests of the Limited Partners shall not be affected
by the admission of such successor General Partner;
(iii) any Person designated as successor General
Partner pursuant to Section 6.1 shall have satisfied the requirements
of Section 10.2; and
(iv) the withdrawing General Partner shall not have ceased to
be General Partner because of its Incapacity.
Any successor General Partner is hereby authorized to and shall
continue the business of the Partnership.
Section 6.3 Liability of a Withdrawn or Removed General Partner
Any General Partner who shall withdraw or be Removed from
the Partnership shall remain liable for any obligations and liabilities
incurred by it as General Partner prior to the time such withdrawal or
Removal shall have become effective, but it shall be free of any
obligation or liability incurred on account of the activities of the
Partnership from and after the time such withdrawal or Removal shall have
become effective.
Section 6.4 Incapacity of the General Partner
In the event of the Incapacity of the General Partner, the
Partnership shall be dissolved.
Upon the Incapacity of the General Partner, the General Partner
shall immediately cease to be General Partner and its General Partner's
Interest, as such, shall continue only for the purpose of determining the
amount, if any, that it is entitled to receive upon dissolution pursuant to
Section 8.2. Any termination or Removal of a General Partner shall not
affect any rights or liabilities of the Incapacitated or Removed General
Partner that matured prior to such Incapacity or Removal.
Section 6.5 Removal of the General Partner
A. Upon the delivery by counsel for the Partnership or
counsel designated by 10% in Interest of the Limited Partners of an
opinion to the effect that the possession and exercise by a
Majority-in-Interest of the Limited Partners of the power to Remove the
General Partner will not impair the liability of the Limited Partners, then
the power shall be vested in the Limited Partners to Remove the General
Partner upon the Consent of a Majority-in-Interest of the Limited
Partners, but the exercise of that power shall be subject to the conditions
set forth in Section 11.3. The Removal of any General Partner pursuant to
this Section 6.5 shall be without prejudice to the rights, if any, the
Limited Partners may have against the General Partner for damages
attributable to its negligence or misconduct or other breach of duty.
B. Upon the delivery by counsel for the Partnership or
counsel designated by 10% in Interest of the Limited Partners of an
opinion to the effect that the possession and exercise by a
Majority-in-Interest of the Limited Partners of the power to designate a
successor General Partner will not impair the limited liability of the
Limited Partners, then with the Consent of a Majority-in-Interest of the
Limited Partners to the admission of a general partner, the Limited
Partners may, subject to the provisions of Section 6.2, at any time
designate one or more Persons to be successors to the General Partner being
Removed pursuant to Section 6.5. Any such Removal shall occur immediately
after the admission of the successor General Partner.
C. Upon the Removal of the General Partner (and failure to designate
a successor General Partner) pursuant to Section 6.5A, the Partnership shall
be dissolved.
Section 6.6 Distributions on Withdrawal or Removal of the
General Partner
In the event the General Partner (i) exercises its right to
withdraw from the Partnership in accordance with Section 6.1A or (ii)
is Removed pursuant to Section 6.5, the withdrawing or Removed General
Partner shall have its then existing Capital Account (to the extent not
acquired by any successor) converted into a capital account of a Limited
Partner.
ARTICLE SEVEN
Transferability of a Limited Partner's Interest
Section 7.1 Restrictions on Transfers of Interest
A. Notwithstanding any other provisions of this Section 7.1, a
sale, exchange, transfer or assignment of a Limited Partner's Interest may
not be made if:
(i) such sale, exchange, transfer or assignment, when added to
the total of all other sales, exchanges, transfers or
assignments of Interests within the preceding 12 months, would
result in the Partnership being considered to have terminated
within the meaning of Section 708 of the Code;
(ii) such sale, exchange, transfer or assignment would violate
any U.S. securities laws, or any state securities or "blue sky"
laws (including any investor suitability standards) applicable
to the Partnership or the Interest to be sold, exchanged,
transferred or assigned;
(iii) such sale, exchange, transfer or assignment would
cause the Partnership to lose its status as a partnership for Federal
income tax purposes;
(iv) such sale, exchange, transfer or assignment would cause all
or any portion of the Partnership's property to be deemed "tax-exempt
use property" within the meaning of Section 168(j) of the Code; or
(v) such sale, exchange, transfer or assignment would cause
the Partnership to be classified as a publicly traded partnership
within the meaning of Section 7704(b) of the Code.
B. In no event shall all or any part of an Interest be assigned
or transferred to an Incapacitated Person except by operation of law.
C. Except as provided in Section 7.5B, no transfer or assignment by
a Limited Partner of all or any part of his Interest may be made to any
Person who (i) is not a Partner, (ii) is not a member of the immediate
family of a Limited Partner or (iii) does not meet the requirements
to become an Additional Limited Partner in accordance with the terms of
the offering of Units contained in the Prospectus and this Agreement, as
modified by the last sentence of this Section 7.1C; provided, however,
no Limited Partner's Interest or any fraction thereof may be sold,
assigned or transferred without the consent of the General Partner, which
consent may be withheld in the sole discretion of the General Partner. For
purposes of this Section 7.1C, the members of the immediate family of a
Limited Partner consist of persons within the meaning of such phrase as
is used in the definition of "employees' securities company" in the
Investment Company Act of 1940, and include the Partner's spouse and
children, including stepchildren and adopted children. With respect to the
requirements referenced in clause (iii), the requirement as to
compensation from Merrill Lynch & Co., Inc. shall be measured on the basis
of the current annual salary and the bonus with respect to the most
recently completed fiscal year.
D. Subject to Section 7.1C, no purported sale, assignment or
transfer by a transferor of, or after which the transferor and each
transferee would hold, an Interest representing a Capital Contribution
of less than $1,000 will be permitted or recognized for any purpose
without the consent of the General Partner, which consent shall be granted
only for good cause shown.
E. No purported sale, assignment or transfer by a transferor of,
or after which the transferor and each transferee would hold, an
Interest representing a Capital Contribution of less than $1,000 will be
permitted or recognized for any purpose without the consent of the General
Partner, which consent shall be granted only for good cause shown,
except for any sale, assignment or transfer (i) that consists of the
entire Interest of the transferor or (ii) that occurs by operation of law.
F. Each Limited Partner agrees that he will, upon request of
the General Partner, execute such certificates or other documents and
perform such acts as the General Partner deems appropriate after an
assignment of an Interest by the Limited Partner to preserve the limited
liability of the Limited Partners under the laws of any jurisdiction in
which the Partnership is doing business. For purposes of this Section
7.1F, any transfer of an Interest, whether voluntary or by operation of
law, shall be considered an assignment.
G. Any sale, assignment or transfer of an Interest to a Person
who makes a market in securities shall be void ab initio unless such Person
shall certify to the General Partner that it has acquired such Interest
solely for investment purposes and not for the purpose of resale.
H. No purported sale, assignment or transfer by a transferor of
an Interest will be recognized unless (1) the transferor shall have
represented that such transfer (a) was effected through a broker-dealer or
matching agent whose procedures with respect to the transfer of Units have
been approved by the General Partner as not being incident to a public
trading market and not through any other broker-dealer or matching agent
or (b) otherwise was not effected through a broker-dealer or matching
agent which makes a market in Interests or which provides a readily
available, regular and ongoing opportunity to Limited Partners to sell or
exchange their Interests through a public means of obtaining or providing
information of offers to buy, sell or exchange Interests and (2) the
General Partner determines that such sale, assignment or transfer would
not, by itself or together with any other sales, transfers or assignments,
likely result in, as determined by the General Partner in its sole
discretion, the Partnership's being classified as a publicly traded
partnership.
I. No purported sale, assignment or transfer of a Unit will
be recognized if, after giving effect to such sale, assignment or transfer,
the Partnership would not satisfy at least one of the safe harbors
contained in Treasury regulation 1.7704-1 (the "Final PTP Regulations").
Without limiting the foregoing, no purported sale, assignment or transfer
of a Unit will be recognized if such sale, assignment or transfer, together
with all other such transfers during the same taxable year of the
Partnership would result in either (i) the transfer of more than 2% of
the Units (excluding excludable transfers and sales completed through a
matching service which meets the requirements of the Final PTP
Regulations) or (ii) the transfer and sale of more than 10% of the Units
(excluding excludable transfers) completed through a matching service which
meets the requirements of the Final PTP Regulations. For purposes of the
limitations described in the preceding sentence, the following transfers
("excludable transfers") will be disregarded: (i) transfers in which
the basis of the Unit in the hands of the transferee is determined, in
whole or in part, by reference to its basis in the hands of the
transferor or is determined under Section 732 of the Code; (ii) transfers at
death, including transfers from an estate or testamentary trust; (iii)
transfers between members of a family (as defined in Section 267(c)(4) of
the Code); (iv) the issuance of Units by or on behalf of the
Partnership in exchange of cash, property or services; (v) distributions
from a retirement plan qualified under Section 401(a) of the Code; and
(vi) block transfers; and for purposes of the 2% limitation, there shall
be disregarded transfers through a matching service subject to the 10%
limitation described in the previous sentence. For purposes of the above
limitations, the percentage of Units transferred during a taxable year
shall equal the sum of the monthly percentage of Units transferred. The
monthly percentage of Units transferred in any month shall be the
percentage equal to a fraction the numerator of which is the number
of Units transferred during such month and the denominator of which
is the number of Units outstanding on the last day of such month,
provided that the denominator shall not include Units owned by the General
Partner or any Person related to the General Partner (within the meaning
of Section 267(b) or 707(b)(1) of the Code). The term "block
transfer" means the transfer by a Partner in one or more transactions
during any thirty calendar day period of Units representing in the
aggregate more than 2% of the total Interests in Partnership capital or
profits.
J. Any purported assignment of an Interest which is not made
in compliance with this Agreement is hereby declared to be null and void
and of no force or effect whatsoever.
K. The General Partner may reasonably interpret, and is
hereby authorized to take such action as it deems necessary or desirable to
effect, the foregoing provisions of this Section 7.1. The General Partner
may, in its reasonable discretion, amend the provisions of this Section
7.1 in such manner as may be necessary or desirable (or eliminate
or amend such provisions to the extent they are no longer necessary
or desirable) to preserve the tax status of the Partnership.
Section 7.2 Incapacity of Limited Partner
If a Limited Partner dies, his executor, administrator or trustee,
or, if he becomes an adjudicated incompetent, his committee,
guardian or conservator, or, if he becomes bankrupt, the trustee or
receiver of his estate, shall have all the rights of a Limited Partner
for the purpose of settling or managing the estate of such Limited
Partner, and such power as the Incapacitated Limited Partner possessed to
assign all or any part of the Incapacitated Limited Partner's Interest and
to join with such assignee in satisfying conditions precedent to such
assignee's becoming a Substituted Limited Partner. In the event of death
of a Limited Partner, but not in the event of bankruptcy or adjudication
of incompetence, the deceased Limited Partner's Interest may be tendered
to the General Partner within 90 days of receipt of the next Appraisal
pursuant to Section 7.5.
Section 7.3 Assignees
A. The Partnership shall not recognize for any purpose any
purported sale, assignment or transfer of all or any fraction of the
Interest of a Limited Partner unless the provisions of Section 7.1A
shall have been complied with and there shall have been filed with the
Partnership a written and dated Notification of such sale, assignment
or transfer, in form satisfactory to the General Partner, executed and
acknowledged by both the seller, assignor or transferor and the purchaser,
assignee or transferee, and such Notification (i) contains the acceptance
by the purchaser, assignee or transferee of all of the terms and
provisions of this Agreement, (ii) represents that such sale, assignment
or transfer was made in accordance with all applicable laws and
regulations and (iii) contains the purchaser's, assignee's or
transferee's power of attorney identical to that provided in Section 12.1.
Any sale, assignment or transfer shall be recognized by the Partnership
as effective as of the first day of the fiscal quarter following the
quarter in which such Notification is filed with the Partnership.
B. Any Limited Partner who shall assign all of his Interest
shall cease to be a Limited Partner as of the first day of the fiscal
quarter following the quarter in which such Notification is filed with the
General Partner.
C. A Person who is the assignee of all or any fraction of the
Interest of a Limited Partner, but does not become a Substituted Limited
Partner and desires to make a further assignment of such Interest, shall
be subject to all the provisions of this Article Seven to the same extent
and in the same manner as any Limited Partner desiring to make an assignment
of his Interest.
Section 7.4 Substituted Limited Partners
A. No Limited Partner shall have the right to substitute a
purchaser, assignee, transferee, donee, heir, legatee, distributee or other
recipient of all or any portion of such Limited Partner's Interest as a
Limited Partner in his place. Any such purchaser, assignee, transferee,
donee, heir, legatee, distributee or other recipient of an Interest
shall be admitted to the Partnership as a Substituted Limited Partner
only with the consent of the General Partner, which consent shall be
granted or withheld in the sole and absolute discretion of the General
Partner and may be arbitrarily withheld, and, if necessary, by an
amendment of this Agreement executed by all necessary parties and
filed or recorded in the proper records of each jurisdiction in which
such filing or recordation is necessary to qualify the Partnership to
conduct business or to preserve the limited liability of the Limited
Partners. The Limited Partners hereby consent to the admission of a
Substituted Limited Partner whose admission has been consented to by
the General Partner. Any such consent by the General Partner and the
Limited Partners may be evidenced, if necessary, by the execution by
the General Partner of an amendment to this Agreement on its behalf and on
behalf of all Limited Partners pursuant to Section 12.1 evidencing the
admission of such Person as a Limited Partner and the making of any
filing required by law. The admission of a Substituted Limited Partner
shall be recorded on the books and records of the Partnership.
B. No Person shall become a Substituted Limited Partner until
such Person shall have satisfied the requirements of Section 10.2;
provided, however, that for the purpose of allocating Profits, Losses and
Distributable Cash, a Person shall be treated as having become, and as
appearing in the books and records of the Partnership as, a Limited
Partner on such date as the sale, assignment or transfer to such
Person was recognized by the Partnership pursuant to Section 7.3A.
C. To the fullest extent permitted by law, each Limited Partner
shall indemnify and hold harmless the Partnership, the General Partner
and every Limited Partner who was or is a party or is threatened to be made
a party of any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of or arising from any actual or alleged misrepresentation or
misstatement of facts or omission to state facts made (or omitted to be
made) by such Limited Partner in connection with any assignment, transfer,
encumbrance or other disposition of all or any part of an Interest, or the
admission of a Substituted Limited Partner to the Partnership, against
expenses for which the Partnership or such other Person has not
otherwise been reimbursed (including attorneys' fees, judgments, fines
and amounts paid in settlement) actually and reasonably incurred by
him in connection with such action, suit or proceeding.
D. (1) Each Limited Partner represents and warrants that
the information set forth on his Subscription Agreement is a true and
correct statement of his total direct and indirect, within the meaning of
Section 318 of the Code, holdings of stock of the General Partner or
any of its Affiliates, as defined in Section 1504(a) of the Code. No
Person shall be accepted as a Limited Partner if the admission of such
Person would cause the Limited Partner to own, directly or indirectly,
more than 20% of the outstanding stock of the General Partner or any of
its Affiliates as defined in Section 1504(a) of the Code.
(2) Each Limited Partner further represents and warrants that
the following statements are true: (i) if such Limited Partner is an
individual, he is over 21 years of age; if such Limited Partner is a
corporation, it is authorized and otherwise duly qualified to hold
an Interest in the Partnership; (ii) he has thoroughly read the
Prospectus and this Agreement and understands the nature of the risks
involved in the proposed investment; (iii) he is experienced in investment
and business matters; (iv) in the case of an employee of Merrill Lynch &
Co., Inc. or its subsidiaries he has a current annual salary in an
amount which, together with bonus received from Merrill Lynch & Co., Inc.
or its subsidiaries in respect of 1996, equals at least $100,000 or, if
employed for less than a full calendar year, is employed with an
annualized gross income from Merrill Lynch & Co., Inc. or its subsidiaries
of at least $100,000 and the aggregate amount of Units he will invest in
will not exceed an amount that would result in the price of such Units
exceeding 15% of his cash compensation from Merrill Lynch & Co., Inc. or
its subsidiaries with respect to the most recent calendar year on an
annualized basis unless he either (x) has a net worth, individually
or jointly with his spouse, in excess of $1,000,000 at the time of purchase
of the Units or (y) had an individual income in excess of $200,000 in
each of the two most recent calendar years or joint income with his spouse
in excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current calendar
year, or in the case of non-employee directors of Merrill Lynch & Co.,
Inc., (a) has a net worth (exclusive of homes, home furnishings, personal
automobiles and the amount to be invested in Units) of not less than
$125,000 in excess of the price of the Units for which such investor has
subscribed, or (b) has a net worth (exclusive of homes, home
furnishings, personal automobiles and the amount to be invested in Units) of
not less than $100,000 in excess of the price of the Units for which such
investor has subscribed and expects to have during each of the current and
the next three taxable years, gross income from all sources in excess
of $100,000; (v) he recognizes that the Partnership is newly organized
and has no history of operations or earnings and is subject to speculative
risks; (vi) he understands that the transferability of his Interest(s)
in the Partnership is restricted pursuant to the provisions of this
Agreement and that he cannot expect to be able to liquidate his
investment readily in case of emergency; and (vii) unless otherwise
indicated in his Subscription Agreement, he is the sole party in
interest in his Interest and, as such, is vested with all legal and
equitable rights in such Interests. Investors will be required to
represent in writing in the Subscription Agreement that they meet all
applicable requirements and satisfy any more restrictive suitability
requirements imposed by applicable Blue Sky laws.
Section 7.5 Acquisition of Certain Limited Partners' Interests by
the General Partner or the Partnership
A. The General Partner shall purchase from its own funds for its
own account, or cause to be purchased by the Partnership, from the
Partnership's funds for the Partnership's account, any Limited Partner's
Interest tendered to it pursuant to Section 7.2. The purchase price shall
be the value of such Interest determined at the next annual Valuation Date
less any distribution paid in respect of such Interest subsequent to such
Valuation Date.
B. The Partnership may, but is not obliged to, purchase from
the Partnership's funds for the Partnership's account any Interest
tendered to the General Partner pursuant to Section 7.2 if such purchase
is in the best interests of the Partnership.
C. If the General Partner purchases any Interest pursuant to
this Section 7.5 for its own account and not for the account of the
Partnership, the General Partner shall be entitled to the rights of an
assignee of such Interest and be entitled to vote such Interest as if it
were a Substituted Limited Partner or be admitted as a Substituted Limited
Partner. The General Partner may sell any Interest acquired by it under
the provisions of this Section 7.5 on such terms as are acceptable to it,
and if the purchaser of such Interests is not a Partner of this
Partnership, he will be entitled to be admitted to the Partnership as a
Substituted Limited Partner with respect to such Interest. The effective
date of any such sale shall be the date on which payment has been made by
the purchaser of such Interest.
ARTICLE EIGHT
Dissolution, Liquidation and
Termination of the Partnership
Section 8.1 Events Causing Dissolution
A. Except as provided in Section 8.1(B), the Partnership shall
be dissolved and its affairs shall be wound up upon the happening of any of
the following events:
(i) the expiration of its term;
(ii) the Incapacity of the General Partner;
(iii) the Removal of the General Partner and the failure
to designate a successor;
(iv) the Sale or other disposition at one time of all
or substantially all of the Partnership's assets;
(v) the election to dissolve the Partnership prior to January
1, 2003 by the General Partner with the Consent of a
Majority-in-Interest of the Limited Partners, which Consent shall
be subject to Article Eleven;
(vi) the election to dissolve the Partnership by the
General Partner at any time after January 1, 2003; or
(vii) the withdrawal of the General Partner without the
designation of a successor General Partner under Section 6.1.
The occurrence of any event described in Sections 17-402(a)(4) or
17- 402(a)(5) of the Act (other than an event that would cause the
Incapacity of the General Partner) shall not cause the General Partner to
cease to be a General Partner of the Partnership or cause the Partnership
to dissolve.
B. Upon the happening of an event described in Section
8.1(A)(ii), (iii) or (vii), the Partnership shall not be dissolved if, at
the time of the occurrence of such event there is at least one other
General Partner, or within ninety (90) days after the occurrence of such an
event, all remaining partners agree to continue the business of the
Partnership and to the appointment, effective as of the date of such
event, of one or more successor General Partners.
C. The Incapacity of any Limited Partner shall not dissolve
the Partnership and the seizure of the Interest of any Partner shall not
dissolve the Partnership. Dissolution of the Partnership shall be
effective on the day on which the event occurs giving rise to the
dissolution, but the Partnership shall not terminate until the
Partnership's certificate of limited partnership has been cancelled and
the assets of the Partnership have been distributed as provided in Section
8.2.
Section 8.2 Liquidation
A. Upon dissolution of the Partnership, its liabilities shall be
paid in the order provided herein. The General Partner shall cause
Partnership property to be sold in such manner as it, in its sole
discretion, shall determine in an effort to obtain the best price for such
property. In order for the Partnership to obtain a reasonable price
for any Partnership investments which are illiquid, the General
Partner may, to the extent permitted by applicable law, purchase from
the Partnership any Partnership investments upon which there are
significant restrictions as to transferability or for which a fair
market price is not readily obtainable. Payment of the fair market value of
any such investment as established by the annual Appraisal made in
accordance with Section 9.4, adjusted for any distributions or other
significant events subsequent to the Valuation Date, shall be deemed fair
and reasonable and not a violation of any General Partner's duty to the
Partnership. Pending Sale of Partnership property, the General Partner
shall have the right to continue to operate and otherwise deal with
Partnership property. In the event that the General Partner has been
Removed and a successor General Partner has not been designated, the
Limited Partners shall elect, in accordance with the provisions of
Article Eleven, a Person to perform the functions of the General
Partner in liquidating the assets of the Partnership and in winding up its
affairs.
B. Profits and Losses arising from Sales upon liquidation shall
be allocated as follows:
(i) Profits shall be allocated (a) first, to the Partners
in amounts equal to the negative balances, if any, in their
respective Capital Accounts, without giving effect to any cash
distributions arising from Sales at liquidation; (b) second, to the
General Partner up to the amount of the Capital Contributions of the
General Partner made to the Partnership during its term under Section
3.1B in excess of 1% of the Limited Partners' Capital Contributions,
but not to exceed the amount of assets payable to the General
Partner under Section 8.2C(ii); and (c) third, all remaining Profits,
99% to the Limited Partners and 1% to the General Partner.
(ii) Losses shall be allocated 99% to the Limited Partners and
1% to the General Partner.
C. In settling accounts after dissolution, the assets of
the Partnership shall be paid out in the following order:
(i) first, to any creditors (including any creditor who is
a Partner), in the order of priority as provided by law or
the establishment of reasonable reserves for the payment of
obligations to creditors;
(ii) second, to each Partner in an amount equivalent to
the positive amount of his Capital Account on the date of
distribution, after giving effect to any allocation of Profits or
Losses arising from Sales on liquidation; and
(iii) third, the balance, 99% to the Limited Partners and 1% to
the General Partner.
D. In the event that following the final dissolution under
Section 8.2C, the General Partner has a deficit balance in its Capital
Account balance, the General Partner shall contribute cash to the
Partnership necessary to eliminate said deficit balance.
ARTICLE NINE
Books and Records; Accounting; Appraisal;
Tax Elections; Etc.
Section 9.1 Books and Records
The books and records of the Partnership, including information
relating to the sale by the General Partner or any of its Affiliates of
securities, property, goods or services to the Partnership, and a list
of the name, residence, business or mailing address and Interest of each
Limited Partner, shall be maintained by the General Partner at the office
of the Partnership or of the General Partner and shall, for any purpose,
other than commercial purposes, reasonably related to a Limited Partner's
Interest as a limited partner, be available for examination there by any
Limited Partner or his duly authorized representative at any and all
reasonable times. Any Limited Partner, or his duly authorized
representatives, upon paying the costs of collection, duplication and
mailing, for any purpose reasonably related to a Limited Partner's Interest
as a limited partner, shall be entitled to a copy of the list of name,
residence, business or mailing address and Interest of each Limited
Partner. Such information shall be used for Partnership purposes
only. The Partnership may maintain such other books and records and may
provide such financial or other statements as the General Partner in its
discretion deems advisable.
Section 9.2 Accounting Basis for Tax and Reporting Purposes;
Fiscal Year
The books and records, and the financial statements and reports of
the Partnership, both for tax and financial reporting purposes, shall be
kept on an accrual basis. The Fiscal Year of the Partnership for both
tax and financial reporting purposes shall be the calendar year.
Section 9.3 Bank Accounts
The General Partner shall maintain the Partnership Account
and withdrawals shall be made only in the regular course of the
Partnership business on such signature or signatures as the General
Partner may determine. Temporary investments of the type permitted by
Section 4.1A(ix) are deemed activities in the ordinary course of Partnership
business.
Section 9.4 Appraisal
Beginning December 31, 1997, and as of December 31, of each
succeeding year thereafter (the "Valuation Date"), the General Partner will
make or have made an appraisal of all of the assets of the Partnership as of
the Valuation Date (the "Appraisal"). The Appraisal of the Partnerships
assets may be by independent third parties appointed by the General
Partner and deemed qualified by the General Partner to render an
opinion as to the value of Partnership assets, using such methods and
considering such information relating to the investments, assets and
liabilities of the Partnership as such Persons may deem appropriate, but
in the case of an event subsequent to the Valuation Date materially
affecting the value of any Partnership asset or investment, the General
Partner may revise the Appraisal as it, in its good faith and sole
discretion, deems appropriate. For purposes of the Appraisal to be made on
December 31, 1997, the General Partner may use the purchase price of
Partnership assets as the value of such assets.
Section 9.5 Reports
Within 75 days after the end of each Fiscal Year or as soon
as practicable thereafter, the General Partner shall send to each Person who
was a Limited Partner at any time during the Fiscal Year then ended
(i) a statement (which shall be audited by the Auditors) showing the
Distributable Cash (or assets distributed in kind) distributed in respect
of such year; (ii) such tax information as shall be necessary for the
preparation by such Limited Partner of his Federal and state income tax
returns; and (iii) a report of the investment activities of the
Partnership during such year. Within 120 days after the end of each Fiscal
Year, the General Partner shall send to each Person who was a Limited
Partner at any time during the Fiscal Year then ended Partnership financial
statements audited by the Auditors and a copy of the Appraisal. Within 45
days after the end of each quarter of a Fiscal Year the General Partner
shall send to the Partnership a certificate itemizing the Partnership
expenses it has paid during such quarter. The General Partner shall
not be required to deliver or mail a copy of the certificate of
limited partnership of the Partnership or any amendment thereof to the
Limited Partners.
Section 9.6 Elections
The General Partner may cause the Partnership to make all
elections required or permitted to be made by the Partnership under the
Code and not otherwise expressly provided for in this Agreement, in the
manner that the General Partner believes will be most advantageous to
individual Limited Partners who (i) are married and filing joint Federal
income tax returns, (ii) are not "dealers" for Federal income tax purposes,
and (iii) have income at least part of which, without giving effect to
any additional tax on preference items, is subject to Federal income
taxation at the then highest marginal tax rate for persons set forth in
(i).
ARTICLE TEN
Amendments
Section 10.1 Proposal and Adoption of Amendments Generally
A. Amendments to this Agreement to reflect the addition or
substitution of a Limited Partner, the admission of a successor General
Partner or the withdrawal of the General Partner, shall be made at the
time and in the manner referred to in Section 10.2. Any other amendment
to this Agreement may be proposed by the General Partner or by 10% in
Interest of the Limited Partners. The Partner or Partners proposing such
amendment shall submit (a) the text of such amendment, (b) a statement of
the purpose of such amendment, and (c) an opinion of counsel obtained by
the Partner or Partners proposing such amendment to the effect that such
amendment is permitted by the Act and the laws of any other jurisdiction
where the Partnership is qualified to do business, will not impair the
liability of the Limited Partner and will not adversely affect the
classification of the Partnership as a partnership for Federal income tax
purposes. The General Partner shall, within 20 days after receipt of any
proposal under this Section 10.1A, give Notification to all Partners of
such proposed amendment, of such statement of purpose and of such opinion of
counsel, together, in the case of an amendment proposed by Limited Partners,
with the views, if any, of the General Partner with respect to such proposed
amendment.
B. Amendments of this Agreement shall be adopted if:
(i) in the case of amendments referred to in Sections 10.2A
and 10.2B, the conditions specified in Sections 6.1 and 6.2 shall have
been satisfactorily completed;
(ii) in the case of amendments referred to in Section 10.2C,
the conditions specified in Section 7.4 shall have been
satisfactorily completed; or
(iii) in the case of all amendments, subject to the provisions
of Section 11.3, such amendment shall have been Consented to
by a Majority-in-Interest of the Limited Partners; provided, however,
that no such amendment may:
(a) enlarge the obligations of any Partner under this Agreement
or convert the Interest of any Limited Partner into the
Interest of a General Partner or modify the liability of
any Limited Partner without the Consent of such Partner;
(b) modify the method provided in Article Five of
determining, allocating or distributing, as the case may
be, Profits and Losses and Distributable Cash without the
Consent of each Partner adversely affected by such
modification;
(c) amend Sections 6.1 or 6.2 without the Consent of the
General Partner;
(d) amend Section 4.3C, this Article Ten or Section 11.3
without the Consent of all the Partners; or
(e) allow additional contributions of capital by some or all
of the Limited Partners without the Consent of the
General Partner and a Majority-in-Interest of the Limited
Partners.
C. Upon the adoption of any amendment to this Agreement, the
amendment shall be executed by the General Partner and the Limited
Partners and, if required by the Act, an amendment to the certificate of
limited partnership of the Partnership shall be filed or recorded in the
proper records of the State and of each jurisdiction in which filing or
recordation is necessary for the Partnership to conduct business or to
preserve the limited liability of the Limited Partners. Each Limited
Partner hereby irrevocably appoints and constitutes the General Partner
as his agent and attorney-in-fact to execute, file, and record any and
all such amendments including, without limitation, amendments to admit
Limited Partners and to increase or decrease the amount of the contribution
to the Partnership of any Partner. The power of attorney given herewith
is irrevocable, is coupled with an interest and shall survive and not be
affected by the subsequent Incapacity of any Limited Partner granting it.
D. Notwithstanding anything to the contrary contained herein,
the General Partner may, without prior notice or Consent of any Limited
Partner, amend any provision of this Agreement if, in its opinion, such
amendment does not have a material adverse effect upon the Limited Partners.
Section 10.2 Amendments on Admission or Withdrawal of Partners
A. If this Agreement shall be amended to reflect the admission of
a General Partner, the amendment to this Agreement and to the certificate
of limited partnership of the Partnership shall be adopted, executed and
filed as required by the Act and this Agreement.
B. If this Agreement shall be amended to reflect the withdrawal
or Removal of the General Partner and the continuation of the business of
the Partnership, the amendment to this Agreement and to the
certificate of limited partnership shall be adopted, executed and filed
as required by the Act and this Agreement.
C. No Person shall become a Partner unless such Person shall
have become a party to, and adopted all of the terms and conditions of,
this Agreement, and except for the Initial Limited Partner or an
Additional Limited Partner, paid any reasonable legal fees of the
Partnership and the General Partner and filing and publication costs in
connection with such Person's becoming a Partner elected to be so charged
in the General Partner's discretion.
ARTICLE ELEVEN
Consents, Voting and Meetings
Section 11.1 Method of Giving Consent
Any Consent required by this Agreement may be given as follows:
(i) by a written Consent given by the approving Partner at
or prior to the date set by the General Partner for the delivery of
the Consent, provided that such Consent shall not have been
nullified by either (a) Notification to the General Partner by the
approving Partner at or prior to the time of, or the negative vote
by such approving Partner at, any meeting held to consider the doing
of such act or thing, or (b) Notification to the General Partner by
the approving Partner prior to the date set by the General Partner
for the delivery of the Consent with respect to actions the doing
of which is not subject to approval at such meeting; or
(ii) by the affirmative vote by the approving Partner to the
doing of the act or thing for which the Consent is solicited at any
meeting called and held pursuant to Section 11.2 to consider the doing
of such act or thing.
Section 11.2 Meetings of Partners
The termination of the Partnership and any other matter requiring
the Consent of all or any of the Limited Partners pursuant to this
Agreement may be considered at a meeting of the Partners held not less
than 15 nor more than 30 days after Notification thereof shall have been
given by the General Partner to all Partners. Such Notification (i) may
be given by the General Partner, in its discretion, at any time and
(ii) shall be given by the General Partner within 15 days after receipt
by the General Partner of a request for such a meeting made by 10% in
Interest of the Limited Partners. Such meeting shall be held within or
outside the State at such reasonable place as shall be specified by the
General Partner if Notification of such meeting is given pursuant to this
Section 11.2.
Section 11.3 Limitations on Requirements for Consents
Notwithstanding the provisions of Sections 4.3C, 6.1A(iv), 6.1C,
6.5A, 6.5B, 8.1(v) and 10.1B, as the case may be,
(i) the provision of Section 4.3C(i) requiring the Consent of
a Majority-in-Interest of the Limited Partners to the sale or
other disposition at any one time of all or substantially all of the
assets of the Partnership shall be void and the General Partner
shall have authority to sell or dispose at any one time all or
substantially all of the assets of the Partnership;
(ii) the provisions of Section 4.3C(ii) and 8.1(v) permitting
the General Partner to dissolve the Partnership prior to January 1,
2003 with the Consent of the Majority-in-Interest of the Limited
Partners shall be void and the General Partner shall have the
authority to dissolve the Partnership at any time without the Consent
of the Limited Partners;
(iii) the provisions of Section 4.3C(iii) through (ix) requiring
the Consent of a Majority-in-Interest of the Limited Partners as
to the taking of certain actions by the General Partner shall be void
and the General Partner may take such actions on behalf of the
Partnership if not prohibited by the Investment Company Act of 1940;
(iv) the provisions of Sections 6.1A(iv) and 6.1C permitting
the giving of the Consent of the Limited Partners by the express
Consent of a Majority-in-Interest of the Limited Partners shall be void;
(v) the power granted pursuant to the provisions of Section
6.5A and 6.5B to Remove the General Partner and designate a successor
General Partner upon the Consent of a Majority-in-Interest of the
Limited Partners may not be exercised; and
(vi) the provisions of Section 10.1B(iii) relating to the
amendment of this Agreement by or upon the Consent of a
Majority-in-Interest of the Limited Partners shall be void;
unless at the time of the giving or withholding of the Consent
pursuant to the provisions of Sections 4.3C, 6.1A(iv), 6.1C, 6.5A, 6.5B,
8.1(v) or 10.1B, as the case may be, counsel for the Partnership or counsel
designated by 10% in Interest of the Limited Partners shall have delivered
to the Partnership an opinion to the effect that the giving or
withholding of the Consent is permitted by the Act, will not impair the
limited liability of the Limited Partners and will not adversely affect
the classification of the Partnership as a partnership for Federal income
tax purposes.
Section 11.4 Submissions to Limited Partners
The General Partner shall give all the Limited Partners Notification
of any proposal or other matters required by any provisions of this
Agreement or by law to be submitted for the consideration and approval
of the Limited Partners. Such Notification shall include any information
required by the relevant provision of this Agreement or by law.
ARTICLE TWELVE
Miscellaneous Provisions
Section 12.1 Appointment of the General Partner as Attorney-in-Fact
A. Each Limited Partner, by his execution hereof, hereby
makes, constitutes and appoints the General Partner and each of its
officers his true and lawful agent and attorney-in-fact, with full power
of substitution and full power and authority in his name, place and stead
to make, execute, sign, acknowledge, swear to, record and file, on behalf
of him and on behalf of the Partnership, such documents, instruments and
conveyances that may be necessary or appropriate to carry out the
provisions or purposes of this Agreement, including, without limitation:
(i) this Agreement and the certificate of limited partnership
of the Partnership and all amendments to this Agreement and the
certificate of limited partnership of the Partnership required or
permitted by law or the provisions of this Agreement including,
without limitation, such certificates, agreements and amendments
thereto relating to the admission to the Partnership of Partners
and the increase or decrease of the amount of the Capital Contributions
of any Partner;
(ii) all certificates and other instruments deemed advisable by
the General Partner to carry out the provisions of this Agreement
or to permit the Partnership to become or to continue as a limited
partnership or partnership wherein the Limited Partners have limited
liability in any jurisdiction where the Partnership may be doing
business;
(iii) all instruments that the General Partner deems appropriate
to reflect a change or modification of this Agreement, in accordance
with this Agreement, including, without limitation, the
substitution of assignees as Substituted Limited Partners pursuant to
Sections 7.4 and 10.2C and, if required, the filing of certificates to
effect the same;
(iv) all conveyances and other instruments or papers
deemed advisable by the General Partner to effect the
dissolution and termination of the Partnership, including a
certificate of cancellation;
(v) all fictitious or assumed name certificates required
or permitted to be filed on behalf of the Partnership;
(vi) all instruments or papers required by law to be filed
in connection with the issuance of limited partnership interests senior
to the Units;
(vii) all other instruments or papers which may be required
or permitted by law to be filed on behalf of the Partnership; and
(viii) all instruments and filings required by Section 6111 of
the Code ("Registration of Tax Shelters") and Section 6112 of the
Code relating to maintenance of lists of investors in tax shelters.
B. The foregoing power of attorney:
(i) is coupled with an interest, shall be irrevocable, shall
not be affected by and shall survive the subsequent Incapacity of
each Limited Partner;
(ii) may be exercised by the General Partner either by
signing separately or jointly as attorney-in- fact for each or all
Limited Partner(s) or, with or without listing all of the Limited
Partners executing an instrument, by a single signature of the
General Partner acting as attorney-in-fact for all of them; and
(iii) shall survive the delivery of an assignment by a
Limited Partner of the whole of his Interest; except that, where the
assignee of the whole of such Limited Partner's Interests has been
approved by the General Partner for admission to the Partnership
as a Substituted Limited Partner, the power of attorney of the
assignor shall survive the delivery of such assignment for the sole
purpose of enabling the General Partner to execute, swear to,
acknowledge and file any instrument necessary or appropriate to
effect such substitution.
C. Each Limited Partner shall execute and deliver to the
General Partner within five days after receipt of the General Partner's
request therefor such further designations, powers-of-attorney and other
instruments as the General Partner deems necessary or appropriate to carry
out the terms of this Agreement.
Section 12.2 Notification to the Partnership or the General Partner
Any notification to the Partnership or the General Partner shall be
sent to the principal office of the Partnership.
Section 12.3 Binding Provisions
The covenants and agreements contained herein shall be binding upon
and inure to the benefit of the heirs, executors, administrators,
permitted successors and assigns of the respective parties hereto.
Section 12.4 Applicable Law
This Agreement shall be construed and enforced in accordance with
the laws of the State.
Section 12.5 Counterparts
This Agreement may be executed in several counterparts, all of
which together shall constitute one agreement binding on all parties
hereto, notwithstanding that not all the parties have signed the same
counterpart except that no counterpart shall be binding unless signed by
the General Partner. The General Partner may execute any document by
facsimile signature of a duly authorized officer.
Section 12.6 Separability of Provisions
If for any reason any provisions hereof that are not material to
the purposes or business of the Partnership or the Limited Partners'
Interests are determined to be invalid and contrary to any existing or
future law, such invalidity shall not impair the operation of or affect
those portions of this Agreement that are valid.
Section 12.7 Entire Agreement
This Agreement constitutes the entire agreement among the parties.
This Agreement supersedes any prior agreement or understanding among the
parties and may not be modified or amended in any manner other than as
set forth therein.
Section 12.8 Headings
The headings in this Agreement are for descriptive purposes only
and shall not control or alter the meaning of this Agreement as set forth
in the text.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
KECALP INC.
General Partner
By: ____________________________
Attest:
By: ______________________
Secretary
Withdrawing and Initial
Limited Partner
_______________________________________
Robert F. Tully
LIMITED PARTNERS
All Limited Partners now and
hereafter admitted as limited
partners to the Partnership,
pursuant to Powers of Attorney
now and hereafter executed in
favor of, and delivered to, the
General Partner.
By: KECALP Inc.
By:
_________________________________
EXHIBIT B
SUBSCRIPTION AGREEMENT
MERRILL LYNCH KECALP L.P. 1997
KECALP Inc., General Partner of Merrill Lynch KECALP L.P. 1997 South Tower
World Financial Center 225 Liberty Street New York, New York 10080-6123
Gentlemen:
By signing the Limited Partner Signature Page and Power of
Attorney attached hereto, the undersigned hereby applies for the
purchase of the number of limited partner interests (the "Units"), set
forth below, in Merrill Lynch KECALP L.P. 1997, a Delaware limited
partnership (the "Partnership"), at a price of $1,000 per Unit
(minimum purchase of five Units), and authorizes Merrill Lynch, Pierce,
Fenner & Smith Incorporated to debit his securities account in the amount
set forth below for such Units. The undersigned understands that such funds
will be held by The Bank of New York, as Escrow Agent, and will be
returned promptly in the event that 40,000 Units of the Units offered by
the Prospectus are not subscribed for by the Offering Termination Date
(as defined in the Prospectus). The undersigned hereby acknowledges
receipt of a copy of the Prospectus, as well as the Amended and
Restated Agreement of Limited Partnership (the "Partnership Agreement")
of the Partnership attached to the Prospectus as Exhibit A, and hereby
specifically accepts and adopts each and every provision of, and
executes, the Partnership Agreement and agrees to be bound thereby.
The undersigned hereby represents and warrants to you as follows:
1. The undersigned has carefully read the Prospectus and has
relied solely on the Prospectus and investigation made by the undersigned or
his or her representatives in making the decision to invest in the
Partnership.
2. The undersigned is aware that investment in the Units
involves certain risk factors and has carefully read and considered the
matters set forth under the captions "Investment Objective and Policies",
"Conflicts of Interest", "Risk and Other Important Factors" and "Tax
Aspects of Investment in the Partnership" in the Prospectus.
3. The undersigned is 21 years of age or over, has adequate means
of providing for his or her current needs and personal contingencies and
has no need for liquidity in this investment.
4. The undersigned represents that he or she (i) in the case of
an employee of Merrill Lynch & Co., Inc. ("ML & Co.") or its
subsidiaries, receives a current annual salary which, together with bonus
received from ML & Co. or its subsidiaries in respect of 1996, equals at
least $100,000; or, if employed for less than a full calendar year,
is employed with an annualized gross income from ML & Co. or its
subsidiaries of at least $100,000 or (ii) in the case of a non-employee
director of ML & Co., (a) has a net worth (exclusive of homes, home
furnishings, personal automobiles and the amount to be invested in Units)
of not less than $125,000 in excess of the price of the Units for which
such investor has subscribed, or (b) has a net worth (exclusive of homes,
home furnishings, personal automobiles and the amount to be invested in
Units) of not less than $100,000 in excess of the price of the Units for
which such investor has subscribed and expects to have during each of the
current and the next three taxable years, gross income from all sources
in excess of $100,000.
5. The undersigned represents that the amount of Units to be
purchased hereby (i) in the case of an employee of ML & Co. or its
subsidiaries, does not exceed an amount that would result in the price of
such Units exceeding either (a) 15% of the employee's cash compensation
from ML & Co. or its subsidiaries received in respect of 1996 on an
annualized basis unless the employee either (x) has a net worth,
individually or jointly with the employee's spouse, in excess of
$1,000,000 at the time of purchase of the Units, or (y) had an individual
income in excess of $200,000 in each of 1995 and 1996 or joint income
with the employee's spouse in excess of $300,000 in each of those years
and reached or has a reasonable expectation of reaching the same income
level in 1997 or (b) 75% of his compensation received in respect of 1996
on an annualized basis, provided that the employee meets the standards of
(x) or (y) above; or (ii) in the case of a non-employee director of ML &
Co., does not exceed an amount equal to two times the director's
fees (including committee fees, but not including reimbursements of
expenses) received from ML & Co. during 1996.
6. The undersigned represents and warrants that the
statements contained in Section 7.4D of the Partnership Agreement are true
insofar as they relate to the undersigned:
The undersigned understands and recognizes that:
(a) The subscription may be accepted or rejected in whole or
in part by the General Partner in its sole and absolute discretion,
except that, if this subscription is to be accepted in part only, it
shall not be reduced to an amount less than $5,000.
(b) No Federal or state agency has made any finding
or determination as to the fairness for public investment, nor
any recommendation or endorsement, of the Units.
(c) There are restrictions on the transferability of the
Units, there will be no public market for Units, and accordingly, it
may not be possible for the undersigned readily, if at all, to
liquidate his or her investment in the Partnership in case of an
emergency.
(d) Prior to any contrary notification to the General Partner
by the undersigned, the undersigned hereby authorizes all
cash distributions to be made by the Partnership to the undersigned
as a Limited Partner to be credited to the undersigned's securities
account at Merrill Lynch, Pierce, Fenner & Smith Incorporated as
specified in the Signature Page and Power of Attorney attached hereto.
The undersigned hereby acknowledges and agrees that the undersigned
is not entitled to cancel, terminate or revoke this subscription or
any agreements of the undersigned hereunder and that such subscription
and agreements shall survive the disability of the undersigned.
This Subscription Agreement and all rights hereunder shall be
governed by, and interpreted in accordance with, the laws of the State of
Delaware.
In Witness Whereof, the undersigned executes and agrees to be bound
by this Subscription Agreement by executing the Limited Partner Signature
Page and Power of Attorney attached hereto on the date therein indicated.
INSTRUCTIONS FOR PURCHASERS OF UNITS
Any person desiring to subscribe for Units should carefully read
and review the Prospectus and, if he or she desires to subscribe for Units
in the Partnership, complete the following steps:
1. Complete, date and execute the Limited Partner Signature Page
and Power of Attorney (sent with Prospectus, on green paper).
2. Use the sample that follows, to assist you in the
accurate completion of the Signature Page.
3. Indicate in the four boxes provided the number of Units you
would like to purchase (minimum 5 Units). If this amount is in excess
of 250 Units, your subscription will be entered initially for 250 Units
and, if the offering is not fully subscribed at the offering termination
date, you will receive as many of the Units you have requested as are
available on a pro rata basis based on the amount of Units available
subject to the limitations described in the Prospectus.
4. Direct Investment Services will, upon receipt of the acceptance
of your subscription, enter and execute an order. An execution wire
will be generated to your branch office and a trade confirmation will be
made to you. Settlement date will be five (5) business days following
execution.
Your MLPF&S Securities Account will be debited in the amount of
$1,000 for each Unit that you purchase.
5. Cancellations and quantity reductions are difficult to handle
after an investor has been accepted and the funds placed in escrow.
Nonetheless, if you wish to cancel, contact Andrew Kaufman at (212) 236-7302.
MERRILL LYNCH KECALP L.P. 1997 LIMITED
PARTNER SIGNATURE PAGE AND POWER OF ATTORNEY
The undersigned, desiring to become a Limited Partner of Merrill
Lynch KECALP L.P. 1997 (the "Partnership"), pursuant to Section 3.3 or 7.4
of the Amended and Restated Agreement of Limited Partnership (the
"Partnership Agreement"), a form of which is included as Exhibit A to the
Prospectus of the Partnership dated ___________, 1997 (the "Prospectus"),
hereby executes, and agrees to all of the terms of, the Partnership
Agreement of the Partnership and agrees to be bound by the terms and
provisions thereof. The undersigned further, by executing this Limited
Partner Signature Page and Power of Attorney, hereby executes, adopts
and agrees to all terms, conditions and representations of the
Subscription Agreement included as Exhibit B to the Prospectus. The
undersigned further irrevocably constitutes and appoints KECALP Inc., the
General Partner of the Partnership, and its successors and assigns with
full power of substitution, the true and lawful attorney for the
undersigned and in the name, place and stead of the undersigned to
make, execute, sign, acknowledge, swear to, deliver, record and file any
documents or instruments which may be considered necessary or desirable by
the General Partner to carry out fully the provisions of the Partnership
Agreement, including, without limitation, the Partnership Agreement,
the certificate of limited partnership of the Partnership and any amendment
or amendments thereto, including, without limitation, amendments thereof
for the purpose of increasing or decreasing the capital contribution of any
partner and adding and deleting the undersigned and others as the
partners in the Partnership, as contemplated by the Partnership
Agreement (which amendment(s) the undersigned hereby joins in and
executes, hereby authorizing his Limited Partner Signature Page and Power
of Attorney to be attached, if required, to any such amendment) and of
otherwise amending the Partnership Agreement from time to time, or
cancelling the same. The power of attorney hereby granted shall be deemed
to be coupled with an interest and shall be irrevocable and survive and
not be affected by the subsequent death, disability, incapacity or
insolvency of the undersigned or any delivery by the undersigned of an
assignment of the whole or any portion of the interest of the undersigned.
The place of residence of the undersigned is as shown below.
ALL INFORMATION MUST BE COMPLETED
Signature of Limited Partner: _______________________
# of Units applied for (whole Units only) /x//25/ x $1,000. = Dollar
Amount to be debited from account listed below
$ /x//2/5/0/0/0
Does purchase price of Units applied for exceed 15% of your Merrill Lynch
compensation in respect of 1996? Yes /x/ No / /
If so, do you satisfy either of the exceptions specified under "Maximum
Purchase by Qualified Investors" on page (51) of the Prospectus? Yes /x/
No / /
Limited Partner Name: /S/M/I/T/H/ Last Name
/J/A/M/E/S/ /Q/ First
Name MI
Social Security/Indiv. Taxpayer ID ML Account Number
/1/2/3/-/4//5/-/6//7//8//9/ Number /1//0//0/-/9//9//2//0//0/
ML Employee Number /9//8//7//6//5/
Mailing Address: (As it is to appear on Envelopes)
Name: /J//A//M//E//S/ /Q/ /S//M//I//T//H/
Home Address: /2//2//5/ /L//I//B//E//R//T//Y/ /S//T//R//E//E//T/
/A/P//T/ /2//F/ /B//U//I//L//D//I//N//G/ /#//4/
City: /N//E//W/ /Y//O//R//K/ State: /N//Y/ Zip Code:
/1//0//0//8//0/-/6//1//2//3/
Residence State if different from above: / // /
Home Telephone: /2//1//2/-/2//3//6/-/7//3//2//3/
Office Telephone: /2//1//2/-/2//3//6/-/7//3//0//3/
Fax: /2//1//2/-/2//3//6/-/7//3//6//4/
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================================= TABLE OF CONTENTS
250,000 UNITS OF
LIMITED PARTNERSHIP
Page INTEREST ----
Investor Suitability Standards. . 2 Summary of the Offering . . . . .
3 Partnership Expenses . . . . . . 7 Conflicts of Interest . . . . . .
7 Fiduciary Responsibility of the General Partner . . . . . . . . 9
Risk and Other Important Factors. 9 MERRILL LYNCH
Compensation and Fees . . . . . . 14 KECALP L.P. The
Partnership . . . . . . . . 14 1997 The General
Partner and Its Affiliates . . . . . . . . . . 16 Investment
Objective and Policies . . . . . . . . . . . 27 Tax Aspects of
Investment in the Partnership . . . . . . . . . . 34 Summary of the
Partnership Agreement . . . . . . . . . . . 47 Offering and Sale of
Units. . . . 49 Transferability of Units. . . . . 51 Reports . . . . . .
. . . . . . . 53 Experts . . . . . . . . . . . . . 53 Legal Matters . .
. . . . . . . . 54 Exemptions from the Investment Company Act of 1940
. . . . . . 54 Additional Information . . . . . 55 Index to Financial
Statements . . 56
-----------------------------
Form of Amended and Restated Agreement of Limited Partnership . .
. . . . . . .Ex. A Subscription Agreement. . . . .Ex. B MAY
, 1997
MERRILL LYNCH &
CO.
======================================= =================================
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements
Contained in Part A:
See "Index to Financial Statements" in the Prospectus.
Contained in Part B
-- Not Applicable
Contained in Part C
-- None
(2) Exhibits
(a)(i) -- Certificate of Limited Partnership of Merrill Lynch
KECALP L.P. 1997/(1)/ (a)(ii) -- Form of Amended
and Restated Agreement of Limited Partnership of Merrill
Lynch KECALP L.P. 1997 is included as Exhibit A in the
Prospectus (a)(iii) -- Subscription Agreement is included in Exhibit
B in the Prospectus (b) -- Not Applicable
(c) -- Not Applicable (d) -- Copies of Instruments Defining the
Rights of Unitholders/(2)/ (e) -- Not Applicable (f) -- Not
Applicable (g) -- Not Applicable (h) -- Form of Agency
Agreement (i) -- Not Applicable (j) -- Form of Escrow
Deposit Agreement (k) -- Not Applicable (l) -- Opinion and
Consent of Brown & Wood LLP// (m) -- Not Applicable (n)(i)
- -- Consent of Independent Accountants (n)(ii) -- Form of opinion
of Brown & Wood LLP as to certain tax matters// (o)
-- Not Applicable (p) -- Not Applicable (q) -- Not
Applicable ----------------- /(1)/ Previously
filed.
/(2)/ Reference is made to the Amended and Restated Agreement of Limited
Partnership of Merrill Lynch KECALP L.P. 1997, a form of which is
included as Exhibit A in the Prospectus.
ITEM 25. MARKETING ARRANGEMENTS.
None.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement.
Registration fees $ 75,758
National Association of Securities Dealers, Inc. fees 25,500
Printing 150,000
Legal fees and expenses 125,000
Accounting fees and expenses 1,650
Miscellaneous 22,092
------------
Total $400,000
============
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The General Partner of the Partnership is a wholly-owned subsidiary of
Merrill Lynch & Co., Inc.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
Robert F. Tully, an employee of Merrill Lynch & Co., Inc. purchased a
limited partnership interest in the Partnership for $1.00 in order to become
the Initial Limited Partner and permit the filing of the Agreement and
Certificate of Limited Partnership. This sale was prior to the date of
effectiveness of this Registration Statement, as a "private offering"
pursuant to the exemption contained in Section 4(2) of the Securities Act of
1933. Upon admission of the purchasers of Units to the Partnership as
Limited Partners, Mr. Tully will withdraw from the Partnership and receive a
return of his $1.00.
ITEM 29. INDEMNIFICATION.
Pursuant to Section 4.7 of the Partnership Agreement, neither the
General Partner nor any of its officers, directors or agents shall be liable
to the Partnership or the Limited Partners for any act or omission based
upon errors of judgment or other fault in connection with the business or
affairs of the Partnership so long as the person against whom liability is
asserted acted in good faith and in a manner reasonably believed by such
person to be within the scope of its authority under the Partnership
Agreement and in or not opposed to the best interests of the Partnership,
but only if such action or failure to act does not constitute negligence,
misconduct or any other breach of fiduciary duty. The General Partner and
its officers, directors and agents will be indemnified by the Partnership to
the fullest extent permitted by law for any (a) fees, costs and expenses
incurred in connection with or resulting from any claim, action or demand
against the General Partner, the Partnership or any of their officers,
directors and agents that arises out of or in any way relates to the
Partnership, its properties, business or affairs and (b) such claims,
actions and demands and any losses or damages resulting from such claims,
actions and demands, including amounts paid in settlement or compromise (if
recommended by attorneys for the Partnership) of any such claim, action or
demand; provided, however, that this indemnification shall apply only so
long as the person against whom a claim, action or demand is asserted has
acted in good faith and in a manner reasonably believed by such person to be
within the scope of his or its authority under the Partnership Agreement and
in or not opposed to the best interests of the Partnership, but only if such
action or failure to act does not constitute negligence, misconduct or any
other breach of fiduciary duty.
Insofar as indemnification for liabilities under the Securities Act of
1933 may be permitted to the General Partner, the Partnership has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against the public policy as expressed in such Act and is
therefore unenforceable. If a claim for indemnification against such
liabilities under the Securities Act of 1933 (other than for expenses
incurred in a successful defense) is asserted against the Partnership by
the General Partner under the Partnership Agreement or otherwise, the
Partnership will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in such Act and will be governed by the final
adjudication of such issue.
Reference is made to Section 8 of the form of Agency Agreement to be
filed as Exhibit (h) hereto, which contains provisions requiring
indemnification of the Partnership's principal underwriter by the General
Partner and of the Partnership and the General Partner by the Partnership's
principal underwriter.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
Information concerning the General Partner and biographical information
for each of the directors and executive officers of the General Partner is
contained in Part A of this Registration Statement under the caption "The
General Partner and Its Affiliates."
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS.
The accounts and records of the Partnership will be maintained at the
office of the Partnership at South Tower, World Financial Center, 225
Liberty Street, New York, New York 10080-6123.
ITEM 32. MANAGEMENT SERVICES.
Not Applicable.
ITEM 33. UNDERTAKINGS.
(1) Registrant undertakes to suspend offering of the Common Stock
covered hereby until it amends its Prospectus contained herein if (i)
subsequent to the effective date of this Registration Statement, its net
asset value declines more than 10 percent from its net asset value as of the
effective date of this Registration Statement, or (ii) its net asset value
increases to an amount greater than its net proceeds as stated in the
Prospectus contained herein.
(2) Not applicable.
(3) Not applicable.
(4) Registrant undertakes:
(a) to file, during any period in which offers or sales are
being made, a post-effective amendment to the registration
statement:
(1) to include any prospectus required by Section 10(a)(3)
of the 1933 Act (15 U.S.C. 77j(a)(3));
(2) to reflect in the prospect any facts or events after the
effective date of the registration statement (or the
most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement; and
(3) to include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(b) that, for the purpose of determining any liability under
the 1933 Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities
offered therein, and the offering of those securities at that time
shall be deemed to be the initial bona fide offering thereof; and
(c) to remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(5) Registrant undertakes that:
(a) For the purposes of determining any liability under the
Act, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to
be part of this Registration Statement as of the time it was
declared effective.
(b) For the purpose of determining any liability under the
Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(6) Not applicable.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK AND STATE OF NEW YORK ON
THE 15TH DAY OF MAY, 1997.
Merrill Lynch KECALP L.P. 1997
By KECALP Inc., its General Partner
By /s/ James V. Caruso
-------------------------------
James V. Caruso
Vice President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED AND ON THE 15TH DAY OF MAY, 1997.
Signature Title
--------- ----- John L.
Steffens* President and Director (Chief
- ----------------------------------- Executive Officer)
(John L. Steffens) KECALP Inc.
/s/ Robert F. Tully Vice President and Treasurer
- ----------------------------------- (Chief Financial and
(Robert F. Tully) Accounting Officer)
KECALP Inc.
James V. Caruso* Vice President and Director
- ----------------------------------- KECALP Inc. (James V.
Caruso)
Vice President and Director
- ----------------------------------- KECALP Inc. Mark B.
Goldfus
Andrew J. Melnick* Vice President and Director
- ----------------------------------- KECALP Inc. (Andrew J.
Melnick)
Patrick J. Walsh* Vice President and Director
- ----------------------------------- KECALP Inc. (Patrick J.
Walsh)
*By: /s/ James V. Caruso ---------------------------
James V. Caruso Attorney-in-fact
EXHIBIT INDEX
Exhibit Page
No. -------
- --------
(n)(i) -- Consent of Independent Accountants
Exhibit (n)(i)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement No. 333-15035, Pre-
Effective Amendment No. 2, of our report dated May 14, 1997 relating to the
balance sheet of Merrill Lynch KECALP L.P. 1997 as of May 12, 1997 appearing
in the Prospectus, which is part of this Registration Statement, and to the
reference to us under the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
New York, New York May 29, 1997
