<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(x) Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended: December 31, 1996
or
( ) Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
Commission file number: 0-23240
ML FUTURES INVESTMENTS II L.P.
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3481305
- ------------------------------- -------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Merrill Lynch Investment Partners Inc.
Merrill Lynch World Headquarters
World Financial Center
South Tower, 6th Floor, New York, NY 10080-6106
------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 236-4167
--------------
Securities registered pursuant to Section 12(b) of the Act: None
<TABLE>
<S> <C>
Securities registered pursuant to Section 12(g) of the Act: Limited Partnership Units
-------------------------
(Title of Class)
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates: the
registrant is a limited partnership and, accordingly, has no voting stock held
by non-affiliates or otherwise.
Documents Incorporated by Reference
The registrant's "1996 Annual Report and Independent Auditors' Report," the
annual report to security holders for the fiscal year ended December 31, 1996,
is incorporated by reference into Part II, Item 8, and Part IV hereof and filed
as an Exhibit herewith.
<PAGE>
ML FUTURES INVESTMENTS II L.P.
ANNUAL REPORT FOR 1996 ON FORM 10-K
Table of Contents
<TABLE>
<CAPTION>
PART I PAGE
------ ----
<S> <C> <C>
Item 1. Business...................................................................................... 1
Item 2. Properties.................................................................................... 6
Item 3. Legal Proceedings............................................................................. 6
Item 4. Submission of Matters to a Vote of Security Holders........................................... 6
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 6
Item 6. Selected Financial Data....................................................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 9
Item 8. Financial Statements and Supplementary Data................................................... 11
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 11
PART III
--------
Item 10. Directors and Executive Officers of the Registrant............................................ 12
Item 11. Executive Compensation........................................................................ 13
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 14
Item 13. Certain Relationships and Related Transactions................................................ 14
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 15
</TABLE>
-i-
<PAGE>
PART I
Item 1: Business
--------
(a) General Development of Business:
--------------------------------
ML Futures Investments II L.P. (the "Partnership" or the
"Fund") was organized under the Delaware Revised Uniform Limited Partnership Act
on January 20, 1987. The original public offering of units of limited
partnership interest (the "Original Units") commenced on February 1, 1988 and
the partnership began trading on May 2, 1988. A reopening of units of limited
partnership interest (the "Additional Units") commenced on July 5, 1988 and was
completed on July 28, 1988. The Additional Units began trading on July 29, 1988.
The Original Units and the Additional Units are collectively referred to herein
as the "Units." The Partnership trades in the international futures and forward
markets under the direction of multiple independent professional advisors (the
"Trading Advisors" or the "Advisors") applying proprietary strategies. The
Fund's objective is achieving, through speculative trading, substantial capital
appreciation over time.
Merrill Lynch Investment Partners Inc. (the "General Partner"
or "MLIP") acts as the general partner of the Partnership and selects and
allocates the Fund's assets among the Advisors, each of which trades
independently of the others. Merrill Lynch Futures Inc. (the "Commodity Broker"
or "MLF") is the Partnership's commodity broker. The General Partner is a
wholly-owned subsidiary of Merrill Lynch Group Inc., which in turn is a
wholly-owned subsidiary of Merrill Lynch & Co., Inc. The Commodity Broker is an
indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. (ML&Co. and its
affiliates are herein sometimes referred to as "Merrill Lynch.")
When the Fund began trading in May 1988, it had an initial
capitalization of $147,215,600. Through December 31, 1996, Units with an
aggregate Net Asset Value of $235,545,618 were added to the Fund and Units with
an aggregate Net Asset Value of $288,826,447 had been redeemed (including
December 31, 1996 redemptions through December 31, 1996, which were not actually
paid out until January 1997). As of December 31, 1996, the capitalization of the
Fund was $14,296,652, and the Net Asset Value per Unit, originally $100 as of
May 2, 1988, had risen to $169.46. As of December 31, 1996, the Fund had 1,059
Limited Partners.
Through December 31, 1996, the net gain in the Net Asset Value
per Unit was 69.46%. The highest month-end Net Asset Value per Unit through
December 31, 1996 was $177.03 (April, 1996) and the lowest $105.26 (May, 1988).
(b) Financial Information about Industry Segments:
---------------------------------------------
The Partnership's business constitutes only one segment for
financial reporting purposes, i.e., a speculative "commodity pool."
(c) Narrative Description of Business:
----------------------------------
General
The Fund trades in the international futures, options on
futures and forward markets with the objective of achieving significant profits
over time.
The Fund's assets are allocated and reallocated by MLIP to the
trading management of independent Trading Advisors applying proprietary
strategies in numerous markets.
The Fund accesses certain of the Trading Advisors not by
opening individual managed accounts with them, but rather through investing in
private funds sponsored by MLIP through which the trading accounts of different
MLIP-sponsored funds managed by the same Advisor and pursuant to the same
strategy are consolidated.
-1-
<PAGE>
The Fund trades in diverse international futures and forward
markets with the ability to rapidly deploy and redeploy its capital across
different sectors of the global economy. These markets are traded through
futures, options on futures and forward contracts and offer the ability to trade
either side of a market (long or short).
One of the objectives of the Fund is to provide
diversification to a limited portion of the risk segment of the Limited
Partners' portfolios into an investment field that has historically often
demonstrated a low degree of performance correlation with traditional stock and
bond holdings. Since it began trading, the Fund's returns have, in fact,
frequently been significantly non-correlated (not, however, negatively
correlated) with the United States stock and bond markets.
Use of Proceeds and Interest Income
General. The Fund's assets are not used to purchase or acquire
-------
any asset but rather held as security for and to pay the Partnership's
speculative trading losses as well as any expenses and redemptions. The primary
use of the Fund's capital is to permit the Advisors to trade on a speculative
basis in a wide range of different futures, forwards and options on futures
markets on behalf of the Partnership. While being used for this purpose, the
Partnership's assets are also generally available to earn interest, as more
fully described below under "--Available Assets."
Market Sectors. The Partnership trades in a diversified group
--------------
of markets under the direction of multiple independent Advisors. These Advisors
can, and do, from time to time materially alter the allocation of their overall
trading commitments among different market sectors. Except in the case of
certain trading programs which are purposefully limited in the markets which
they trade, there is essentially no restriction on the commodity interests which
may be traded by any Advisor or the rapidity with which an Advisor may alter its
market sector allocations.
The Fund's financial statements contain information relating
to the market sectors traded by the Fund. There can, however, be no assurance as
to which markets may be included in the Fund's portfolio or as to in which
market sectors the Fund's trading may be concentrated at any one time or over
time.
Market Types. The Fund trades on a variety of United States
------------
and foreign futures exchanges. Applicable exchange rules differ significantly
among different countries and exchanges. Substantially all of the Fund's
off-exchange trading takes place in the highly liquid, institutionally based
currency forward markets. The forward markets are generally unregulated, and in
its forward trading the Fund does not deposit margin with respect to its
positions. The Partnership's forward currency trading is executed exclusively
through the Foreign Exchange Service Desk (the "F/X Desk") operated by MLIP and
certain of its affiliates, with MLF as the back-to-back intermediary to the
ultimate counterparties, which include Merrill Lynch Investment Bank ("MLIB")
with which the Advisors trade on behalf of the Fund.
As in the case of its market sector allocations, the Fund's
commitments to different types of markets -- U.S. and non-U.S., regulated and
unregulated -- differ substantially from time to time as well as over time. The
Fund has no policy restricting its relative commitment to any of these different
types of markets.
The Fund's financial statements contain information relating
to the types of markets traded by the Fund. There can, however, be no assurance
as to in which markets the Fund may trade or the Fund's trading may be
concentrated at any one time or over time.
Custody of Assets. All of the Fund's assets are currently
-----------------
held in customer accounts at Merrill Lynch.
Available Assets. The Fund earns interest, as described below,
----------------
on its "Available Assets," which can be generally described as the cash actually
held by the Fund or invested in short-term Treasury bills. Available Assets are
held primarily in U.S. dollars, and to a lesser extent in foreign currencies,
and are comprised of the following: (a) the Fund's cash balance in the offset
accounts (as described below) -- which includes "open trade equity" (unrealized
gains and losses on open positions) on United States futures contracts, which is
paid into or out of the Fund's account on a daily basis; (b) short-term Treasury
bills purchased by the Fund; and (c) the Fund's cash balance in foreign
currencies derived from its trading in non-U.S. dollar denominated futures and
options contracts, which includes open trade equity on those exchanges which
settle gains and losses on open positions in such contracts prior to the closing
out of such positions. Available Assets do not
-2-
<PAGE>
include, and the Fund does not earn interest on, the Fund's gains or losses on
its open forward, commodity option and certain foreign futures positions since
such gains or losses are not collected or paid until such positions are closed
out.
The Partnership's Available Assets may be greater than, less
than or equal to the Fund's Net Asset Value (on which the redemption value of
the Units is based) primarily because Net Asset Value reflects all gains and
losses on open positions as well as accrued but unpaid expenses.
The interest income arrangements for the Partnership's U.S.
dollar Available Assets differ from those applicable to its non-U.S. dollar
Available Assets. Interest income, once accrued by the Fund, is subject to the
risk of trading losses.
Interest Earned on the Fund's U.S. Dollar Available Assets.
----------------------------------------------------------
The Fund's U.S. dollar Available Assets are held in cash in offset accounts and
in short-term Treasury bills purchased from dealers unaffiliated with Merrill
Lynch. Offset accounts are non-interest bearing demand deposit accounts
maintained with banks unaffiliated with Merrill Lynch. An integral feature of
the offset arrangements is that the participating banks specifically acknowledge
that the offset accounts are MLF customer accounts, not subject to any Merrill
Lynch liability.
MLF credits the Partnership, as of the end of each month, with
interest at the effective daily 91-day Treasury bill rate on the average daily
U.S. dollar Available Assets held in the offset accounts during such month. The
Fund receives all the interest paid on the short-term Treasury bills in which it
invests.
The use of the offset account arrangements for the
Partnership's U.S. dollar Available Assets may be discontinued by Merrill Lynch
whether or not Merrill Lynch otherwise continues to maintain its offset
arrangements. The offset arrangements are dependent on the banks' continued
willingness to make overnight credits available to Merrill Lynch, which, in
turn, is dependent on the credit standing of ML&Co. If Merrill Lynch were to
determine that the offset arrangements had ceased to be practicable (either
because ML&Co. credit lines at participating banks were exhausted or for any
other reason), Merrill Lynch would thereafter attempt to invest all of the
Fund's U.S. dollar Available Assets to the maximum practicable extent in
short-term Treasury bills. All interest earned on the U.S. dollar Available
Assets so invested would be paid to the Fund, but MLIP would expect the amount
of such interest to be less than that available to the Fund under the offset
account arrangements. The remaining U.S. dollar Available Assets of the Fund
would be kept in cash to meet variation margin payments and pay expenses, but
would not earn interest for the Fund.
The banks at which the offset accounts are maintained make
available to Merrill Lynch interest-free overnight credits, loans or overdrafts
in the amount of the Fund's U.S. dollar Available Assets held in the offset
accounts, charging Merrill Lynch a small fee for this service. The economic
benefits derived by Merrill Lynch -- net of the interest credits paid to the
Fund and the fee paid to the offset banks -- from the offset accounts have not
exceeded 3/4 of 1% per annum of the Fund's average daily U.S. dollar Available
Assets held in the offset accounts. These revenues to Merrill Lynch are in
addition to the Brokerage Commissions and Administrative Fees paid by the Fund
to MLF and MLIP, respectively.
Interest Paid by Merrill Lynch on the Fund's Non-U.S. Dollar
------------------------------------------------------------
Available Assets. Under the single currency margining system implemented for the
- ----------------
Partnership, the Partnership itself does not deposit foreign currencies to
margin trading in non-U.S. dollar denominated futures contracts and options. MLF
provides the necessary margin, permitting the Fund to retain the monies which
would otherwise be required for such margin as part of the Fund's U.S. dollar
Available Assets. Consequently, the Fund does not earn interest on foreign
margin deposits. The Fund does, however, earn interest on its non-U.S. dollar
Available Assets. Specifically, the Fund is credited by Merrill Lynch with
interest at the local short-term rate on realized and unrealized gains on
non-U.S. dollar denominated positions for such gains actually held in cash by
the Fund. Merrill Lynch charges the Fund Merrill Lynch's cost of financing
realized and unrealized losses on such positions.
In order to avoid the expense of daily currency conversions,
the Fund holds foreign currency gains and finances foreign currency losses on an
interim basis until converted into U.S. dollars and either paid into or out of
the Fund's U.S. dollar Available Assets. Foreign currency gains or losses on
open positions are not converted into U.S. dollars until the positions are
closed. Assets of the Fund while held in foreign currencies are subject to
exchange rate risk.
-3-
<PAGE>
Forward Transactions. Spot and forward currency contracts are
--------------------
the only non-exchange traded instruments held by the Fund.
To date, approximately 20% to 30% of the Fund's trades by
volume have been in forward currency contracts, but from time to time the
percentage of the Fund's trading represented by forward currency trades may fall
substantially outside this range. In using the F/X Desk, the Fund trades through
MLF. Because the Fund need not deposit any margin with MLF in respect of the
Fund's forward trading, the Fund's additional risk in trading in such
unregulated markets should be limited to a possible loss of unrealized profits
on open forward positions which a counterparty accessed through MLF would not,
in the event of its bankruptcy, be able to pay to MLF for the account of the
Fund (MLF not itself being obligated to pay such unrealized profits to the fund
unless MLF is paid by MLF's counterparty).
Having the Fund (and the other MLF clients using the F/X Desk)
trade through the F/X Desk on the basis of MLF's credit lines permits the F/X
Desk to access a wide range of counterparties without the need of such
counterparties evaluating the individual credit of the Fund (or any other MLF
client).
Charges
The following table summarizes the charges incurred by the
Fund during 1994, 1995 and 1996.
<TABLE>
<CAPTION>
1994 1995 1996
----------------------------- ------------------------------ -------------------------
% of Average % of Average % of Average
Dollar Month-End Dollar Month-End Dollar Month-End
Cost Amount Net Assets Amount Net Assets Amount Net Assets
---- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Brokerage $1,720,191 10.40% $1,581,699 10.01% $1,418,126 9.48%
Commissions**
Administrative Fees** 44,107 0.27 40,556 0.26 36,362 0.24
Profit Shares 380,332 2.30 293,724 1.86 326,058 2.18
------- ---- ------- ---- ------- ----
Total $2,144,630 12.97% $1,915,979 12.13% $1,780,546 11.90%
========== ====== ========== ===== ========== =====
</TABLE>
** A portion of the Brokerage Commissions in prior periods have been
reclassified to conform to the current period presentation of the Administrative
Fees.
----------------------------
The foregoing table does not reflect the bid-ask spreads paid
by the Fund on its forward trading, or the benefits which may be derived by
Merrill Lynch from the deposit of certain of the Fund's U.S. dollar available
assets in offset accounts. See Item 1(c), "Narrative Description of Business --
Use of Proceeds and Interest Income."
The Fund's average month-end Net Assets during 1994, 1995 and
1996 equaled $16,535,591, $15,805,702 and $14,965,058, respectively.
During 1994, 1995 and 1996, the Fund earned $614,734, $806,886
and $668,742 in interest income, or approximately 3.72%, 5.11% and 4.47% of the
Fund's average month-end Net Assets.
As of January 1, 1996, the 10% per annum Brokerage Commissions
paid by the Fund to MLF were recharacterized as 9.75% per annum Brokerage
Commissions and a 0.25% per annum Administrative Fee paid by the Fund to MLIP.
This recharacterization had no economic effect on the Fund.
Effective February 1, 1997, the Brokerage Commissions paid by
the Fund were reduced from 9.75% to 8.75% per annum.
------------------------------
-4-
<PAGE>
Description of Current Charges
<TABLE>
<CAPTION>
Recipient Nature of Payment Amount of Payment
- --------- ----------------- -----------------
<S> <C> <C>
MLF Brokerage Commissions A flat-rate monthly commission of 0.8125 of 1% of the Fund's
month-end assets (a 9.75% annual rate).
During 1994, 1995 and 1996, the round-turn (each purchase
and sale or sale and purchase of a single futures contract)
equivalent rate of the Fund's flat-rate Brokerage
Commissions was approximately $24, $90 and $80,
respectively. The round-turn rates reflect Brokerage
Commissions at the rate of 9.75% per annum. As of
February 1, 1997, this rate was reduced to 8.75%.
MLF Use of Fund assets Merrill Lynch may derive an economic benefit from the
deposit of certain of the Fund's U.S. dollar Available
Assets in offset accounts; such benefit to date has not
exceeded 3/4 of 1% of such average daily U.S. dollar
Available Assets.
MLIP Administrative Fees As of January 1, 1996, the Brokerage Commissions payable by
the Fund were reduced from 10% to 9.75% annually, and the
Fund began to pay MLIP a monthly Administrative Fee equal to
0.020833 of 1% of the Fund's month-end assets (0.25%
annually). This change had no economic effect on the Fund.
MLIP pays all of the Fund's routine administrative costs.
MLIB Bid-ask spreads Under MLIP's F/X Desk arrangements, MLIB receives bid-ask
spreads on the forward trades it executes with the Fund.
Other Bid-ask spreads The counterparties other than MLIB with which the F/X Desk
Counterparties deals also each receive bid-ask spreads on the forward
trades executed with the Fund.
MLIP F/X Desk service fees Under the F/X Desk arrangements, MLIP or another Merrill
Lynch entity receives a service fee equal, at current
exchange rates, to approximately $5.00 to $12.50 on each
purchase or sale of each futures contract- equivalent
forward contract executed with counterparties other than
MLIB.
MLIB EFP differentials MLIB or an affiliate receives a differential spread for
exchanging the Fund's spot currency positions (which are
acquired through the F/X Desk, as described above) for
equivalent futures positions.
Trading Advisors Profit Shares Prior to January 1, 1997, all Advisors received quarterly
Profit Shares ranging from 15% to 25% (depending on the
Trading Advisor) of any New Trading Profit. As of January 1,
1997, a number of Advisors agreed to receive only annual
Profit Shares. Profit Shares are also paid upon redemption
of Units. New Trading Profit is calculated separately in
respect of each Advisor, irrespective of the overall
performance of the Fund. The Fund may pay substantial Profit
Shares during periods when it is incurring significant
overall losses.
</TABLE>
-5-
<PAGE>
Description of Current Changes (con't)
<TABLE>
<CAPTION>
Recipient Nature of Payment Amount of Payment
----------------- -----------------
<S> <C> <C>
MLF; Extraordinary expenses Actual costs incurred; none paid to date, and expected to be
Others negligible.
</TABLE>
----------------------
REGULATION
The General Partner, the Trading Advisors and the Commodity
Broker are each subject to regulation by the Commodity Futures Trading
Commission and the National Futures Association. Other than in respect of its
periodic reporting requirements, the Partnership itself is generally not subject
to regulation by the Securities and Exchange Commission. However, MLIP itself is
registered as an "investment adviser" under the Investment Advisers Act of 1940.
(i) through (xii) -- not applicable.
(xiii) The Partnership has no employees.
(d) Financial Information about Foreign and Domestic Operations
-----------------------------------------------------------
and Export Sales:
----------------
The Partnership does not engage in material operations in
foreign countries, nor is a material portion of the Partnership's revenues
derived from customers in foreign countries. The Partnership does, however,
trade, from the United States, on a number of foreign commodity exchanges.
Item 2: Properties
----------
The Partnership does not use any physical properties in the conduct of
its business.
The Partnership's only place of business is the place of business of
the General Partner (see Item 10 herein). The General Partner performs all
administrative services for the Partnership from the General Partner's offices.
Item 3: Legal Proceedings
-----------------
There are no pending legal proceedings to which the Partnership or the
General Partner is a party.
----------------------
Item 4: Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Partnership has never submitted any matters to a vote of its
Limited Partners.
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
---------------------------------------------------------------------
(a) Market Information:
------------------
There is no established public trading market for the Units,
nor will one develop. Rather, Limited Partners may redeem Units as of the end of
each month at Net Asset Value.
-6-
<PAGE>
(b) Holders:
-------
As of December 31, 1996, there were 1,060 holders of Units,
including the General Partner and the Trading Advisors.
(c) Dividends:
---------
The Partnership has made no distributions since trading
commenced, nor does the General Partner presently intend to make any
distributions in the future.
Item 6: Selected Financial Data
-----------------------
The following selected financial data has been derived from the audited
financial statements of the Partnership.
<TABLE>
<CAPTION>
Income Statement Data 1996 1995 1994 1993 1992
- --------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Trading Profits (Loss)
Realized Gain $3,382,048 $3,732,452 $1,431,115 $5,305,174 $ 817,378
Change in Unrealized (Loss) Gain (2,025,157) (120,416) (270,445) 729,583 635,336
----------- ------------ ----------- ---------- ----------
Total Trading Results 1,356,891 3,612,036 1,160,670 6,034,757 1,452,714
Interest Income 668,742 806,886 614,734 451,294 714,596
---------- ---------- ---------- ---------- ----------
Total Revenues 2,025,633 4,418,922 1,775,404 6,486,051 2,167,310
Expenses:
Brokerage Commissions 1,418,126 1,622,255 1,764,298 2,148,038 2,645,916
Administrative Fees 36,362 0 0 0 0
Profit Shares 326,058 293,724 380,332 654,698 737,762
---------- ---------- --------- --------- ---------
Total Expenses 1,780,546 1,915,979 2,144,630 2,802,736 3,383,678
--------- --------- --------- --------- ---------
Income from Investment 37,777 0 0 0 0
--------- --------- --------- --------- ---------
Net Income (Loss) $ 282,864 $ 2,502,943 $ (369,226) $ 3,683,315 $ (1,216,368)
========= ============ ============ =========== =============
Balance Sheet Data 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Fund Net Asset Value $14,296,652 $16,135,438 $16,768,729 $19,683,900 $21,731,518
Net Asset Value per Unit $169.46 $166.06 $141.84 $143.81 $121.17
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
MONTH-END NET ASSET VALUE PER UNIT
- ---------------------------------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992 $124.29 $121.59 $117.77 $115.76 $117.23 $116.34 $116.96 $116.84 $119.84 $122.15 $120.99 $121.17
- ----------------------------------------------------------------------------------------------------------------------------------
1993 $119.92 $129.35 $131.25 $133.52 $133.12 $138.58 $144.47 $147.25 $142.23 $140.00 $137.99 $143.81
- ----------------------------------------------------------------------------------------------------------------------------------
1994 $136.63 $131.58 $128.36 $127.05 $136.94 $142.63 $139.91 $134.39 $139.23 $140.42 $141.56 $141.84
- ----------------------------------------------------------------------------------------------------------------------------------
1995 $137.22 $137.47 $145.26 $145.14 $154.53 $147.52 $145.50 $150.48 $151.82 $150.72 $155.36 $166.06
- ----------------------------------------------------------------------------------------------------------------------------------
1996 $176.46 $165.47 $171.43 $177.03 $168.65 $163.61 $147.36 $153.84 $155.81 $165.00 $173.89 $169.46
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Pursuant to CFTC policy, monthly performance is presented from January
1, 1992 even though the Units were outstanding prior to such date.
-7-
<PAGE>
ML FUTURES INVESTMENTS II L.P.
December 31, 1996
Type of Pool: Selected-Advisor/Publicly-Offered/Non-"Principal Protected"(1)
Inception of Trading: May 2, 1988
Aggregate Subscriptions: $382,761,218
Current Capitalization: $14,296,652
Worst Monthly Drawdown(2): (9.93)% (7/96)
Worst Peak-to-Valley Drawdown(3): (16.76)% (5/96-7/96)
-------------
Net Asset Value per Unit, December 31, 1996: $169.46
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Monthly Rates of Return(4)
- -------------------------------------------------------------------------------------------------------------
Month 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
January 6.26% (3.26)% (4.99)% (1.04)% (0.68)%
- ---------------------------------------------------------------------------------------------------------
February (6.23) 0.18 (3.69) 7.87 (2.18)
- ---------------------------------------------------------------------------------------------------------
March 3.61 5.66 (2.45) 1.47 (3.14)
- ---------------------------------------------------------------------------------------------------------
April 3.26 (0.08) (1.02) 1.73 (1.70)
- ---------------------------------------------------------------------------------------------------------
May (4.73) 6.47 7.78 (0.30) 1.27
- ---------------------------------------------------------------------------------------------------------
June (2.99) (4.54) 4.16 4.10 (0.76)
- ---------------------------------------------------------------------------------------------------------
July (9.93) (1.36) (1.91) 4.24 0.53
- ---------------------------------------------------------------------------------------------------------
August 4.39 3.42 (3.95) 1.93 (0.11)
- ---------------------------------------------------------------------------------------------------------
September 1.28 0.89 3.60 (3.41) 2.57
- ---------------------------------------------------------------------------------------------------------
October 5.90 (0.72) 0.85 (1.57) 1.92
- ---------------------------------------------------------------------------------------------------------
November 5.39 3.08 0.81 (1.44) (0.95)
- ---------------------------------------------------------------------------------------------------------
December (2.55) 6.89 0.20 4.22 0.16
- ---------------------------------------------------------------------------------------------------------
Compound Annual 2.05% 17.07% (1.36)% 18.67% (3.17)%
Rate of Return
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Pursuant to applicable CFTC regulations, a "Multi-Advisor"
fund is defined as one that allocates no more than 25% of its trading assets to
any single manager. As the Fund may allocate more than 25% of its trading assets
to one or more Advisors, it is referred to as a "Selected-Advisor" fund. Certain
funds, including funds sponsored by MLIP, are structured so as to guarantee to
investors that their investment will be worth no less than a specified amount
(typically, the initial purchase price) as of a date certain after the date of
investment. The CFTC refers to such funds as "principal protected." The
Partnership has no such feature.
(2) Worst Monthly Drawdown represents the largest negative
Monthly Rate of Return experienced since January 1, 1992 by the Fund; a drawdown
is measured on the basis of month-end Net Asset Value only, and does not reflect
intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest
percentage decline since January 1, 1992 from a month-end cumulative Monthly
Rate of Return without such cumulative Monthly Rate of Return being equalled or
exceeded as of a subsequent month-end. For example, if the Monthly Rate of
Return was (1)% in each of January and February, 1% in March and (2)% in April,
the Peak-to-Valley Drawdown would still be continuing at the end of April in the
amount of approximately (3)%, whereas if the Monthly Rate of Return had been
approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of
the end of February at approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the Fund
during the month of determination (including interest income and after all
expenses have been accrued or paid) divided by the total equity of the Fund as
of the beginning of such month.
-8-
<PAGE>
Item 7: Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operation
--------------------
OPERATIONAL OVERVIEW; ADVISOR SELECTIONS
The Fund's results of operations depend on MLIP's ability to select
Advisors and the Advisors' ability to trade profitably. MLIP's selection
procedures, as well as the Advisors' trading methods, are confidential, so that
substantially the only available information relevant to the Fund's results of
operations is its actual performance record to date. However, because of the
speculative nature of its trading, the Fund's past performance is not
necessarily indicative of its future results.
MLIP's decision to terminate or reallocate assets among Trading
Advisors is based on a combination of numerous factors. Advisors are, in
general, terminated primarily for unsatisfactory performance, but other factors
- -- for example, a change in MLIP's or an Advisor's market outlook, apparent
deviation from announced risk control policies, excessive turnover of positions,
changes in principals, commitment of resources to other business activities,
etc. -- may also have a role in the termination or reallocation decision. The
market judgment and experience of MLIP's principals is an important factor in
its allocation decisions.
MLIP has no timetable or schedule for making Advisor changes or
reallocations, and generally makes a medium- to long-term commitment to all
Advisors selected. However, there can be no assurance as to the frequency or
number of Advisor changes that may take place in the future, or as to how long
any of the current Advisors will continue to manage assets for the Partnership.
RESULTS OF OPERATIONS
General. MLIP believes that multi-advisor futures funds should be
-------
regarded as medium- to long-term (i.e., three to five year) investments, but it
is difficult to identify trends in the Fund's operations and virtually
impossible to make any predictions regarding future results based on the results
to date. An investment in the Fund may be less successful over a longer than a
shorter period.
Markets with sustained price trends tend to be more favorable to
managed futures investments than whipsaw, choppy markets, but (i) this is not
always the case, (ii) it is impossible to predict when price trends will occur
and (iii) different Advisors are affected differently by trending markets as
well as by particular types of trends.
MLIP attempts to control credit risk in the Fund's futures, forward and
options trading (the Fund does not trade derivatives other than futures and
forward contracts and options thereon) by trading only through MLF. MLF acts
solely as a broker or counterparty to the Fund's trades; it does not advise with
respect to, or direct, any such trading.
MLIP attempts to control the market risk inherent in the Fund's trading
by MLIP multi-advisor strategy and Trading Advisor selections. The market risk
to the Fund is, in any event, limited by its multi-advisor strategy. MLIP
reviews the positions acquired by the Advisors on a daily basis in an effort to
determine whether the overall positions of the Fund may have become what MLIP
analyzes as being excessively concentrated in a limited number of markets -- in
which case MLIP may, as of the next month-end or quarter-end, adjust the Fund's
Advisor combination and/or allocations so as to attempt to reduce the risk of
such over-concentration occurring in the future.
MLIP may consider making distributions to investors under certain
circumstances (for example, if substantial profits are recognized); however,
MLIP has not done so to date and does not presently intend to do so.
PERFORMANCE SUMMARY
1994
1994 was characterized by relatively quiet markets without many major
price trends. United States interest rates generally declined during the period,
and as they did, so did the U.S. dollar as compared to the Deutschemark and
certain other major currencies.
-9-
<PAGE>
1995
In 1995, prevailing price trends in several key markets enabled the
Advisors to trade profitably for the Fund. Although trading in many of the
traditional commodity markets may have been lackluster, the currency and
financial markets offered exceptional trading conditions. After months
characterized by very difficult trading environments, solid price trends across
many markets (including U.S. Treasury and non-dollar bond markets) began to
emerge during the first quarter of 1995. In the second quarter, market
volatility once again began to affect trading, as many previously strong price
trends began to weaken and, in some cases, reverse. The U.S. dollar hit new lows
versus the Japanese yen and Deutschemark before rebounding sharply. In addition,
there were strong indications that the U.S. economy was slowing which, when
coupled with a failure of the German Central Bank to lower interest rates,
stalled a rally in the German bond market. During the third quarter, there was a
correction in U.S. bond prices after several months of a strong uptrend. Despite
exposure to the global interest-rate markets, the Fund's long positions in
Treasury bonds had a negative impact on the Fund. Throughout August and into
September, the U.S. dollar rallied sharply against the Japanese yen and the
Deutschemark as a result of the coordinated intervention by major central banks
and widespread recognition of the growing banking crisis in Japan. Despite
continued price volatility during the final quarter of 1995, the Trading
Advisors were able to identify several trends in key markets. U.S. Treasury bond
prices continued their strong move upward throughout November, due both to weak
economic data and optimism on federal budget talks. As the year ended, the yield
on the 30-year Treasury bond was pushed to its lowest level in more than two
years.
1996
1996 began with the East Coast blizzard, continuing difficulties in
federal budget talks and an economic slowdown having a negative impact on many
markets. The Fund was profitable in January due to strong profits in currency
trading as the U.S. dollar reached a 23-month high against the Japanese yen. In
February, however, the Fund incurred its worst monthly loss due to the sudden
reversals in several strong price trends and considerable volatility in the
currency and financial markets. During March, large profits were taken in the
crude oil and gasoline markets as strong demand continued and talks between the
United Nations and Iraq were suspended. This trend continued into the second
quarter, during which strong gains were also recognized in the agricultural
markets as a combination of drought and excessive rain drove wheat and grain
prices to historic highs. In the late summer and early fall months, the Fund
continued to trade profitably as trending prices in a number of key markets
favorably impacted the Fund's performance. In September heating oil hit a
five-year high on soaring prices in Europe, and the Fund was also able to
capitalize on downward trends in the metals markets. Strong trends in the
currency and global bond markets produced significant gains in October and
November, but the year ended with declining performance as December witnessed
the reversal of several strong upward trends and increased volatility in key
markets.
PERFORMANCE OVERVIEW
The principal variables which determine the net performance of the
Partnership are gross profitability and interest income. During all periods set
forth under "Selected Financial Data," the interest rates in many countries were
at unusually low levels. This negatively impacted revenues because interest
income is typically a major component of commodity pool profitability. In
addition, low interest rates are frequently associated with reduced fixed-income
market volatility, and in static markets the Fund's profit potential generally
tends to be diminished. On the other hand, during periods of higher interest
rates, the relative attractiveness of a high risk investment such as the
Partnership may be reduced as compared to high yielding and much lower risk
fixed-income investments.
The Partnership's Brokerage Commissions and Administrative Fees are a
constant percentage of assets charge. The only Fund costs (other than the
insignificant F/X Desk service fees and EFP differentials as well as bid-ask
spreads on forward contracts) which are not based on a percentage of the Fund's
assets are the Profit Shares payable to the Trading Advisors on an
Advisor-by-Advisor basis. During periods when Profit Shares are a high
percentage of net trading gains, it is likely that there has been substantial
performance non-correlation among the Advisors (so that the total Profit Shares
paid to those Advisors which have traded profitably are a high percentage, or
perhaps even in excess, of the total profits recognized, as other Advisors have
incurred offsetting losses, reducing overall trading gains but not the Profit
Shares paid to the successful Advisors) -- suggesting the likelihood of
generally trendless, non-consensus markets.
-10-
<PAGE>
The events that primarily determine the Fund's profitability are those
that produce sustained and major price movements. The Advisors are generally
more likely to be able to profit from sustained trends, irrespective of their
direction, than from static markets. During the course of the Partnership's
performance to date, such events have ranged from Federal Reserve Board
reductions in interest rates, the apparent refusal of Iraq to arrive at a
settlement which would permit it to sell oil internationally, the inability of
the U.S. government to agree upon a federal budget and a combination of drought
and excessive rain negatively impacting U.S. agricultural harvesting as well as
planting. While these events are representative of the type of circumstances
which materially affect the Fund, the specific events which will do so in the
future cannot be predicted or identified.
Unlike many investment fields, there is no meaningful distinction in
the operation of the Fund between realized and unrealized profits. Most of the
contracts traded by the Fund are highly liquid and can be closed out at any
time. Furthermore, the profits on many open positions are effectively realized
on a daily basis through the payment of variation margin.
Except in unusual circumstances, factors -- regulatory approvals, cost
of goods sold, employee relations and the like -- which often materially affect
an operating business have virtually no impact on the Fund.
LIQUIDITY AND CAPITAL RESOURCES
The Fund's costs are generally proportional to its asset base, and,
within broad ranges of capitalization, the Advisors' trading positions (and the
resulting gains and losses) should increase or decrease in approximate
proportion to the size of the Fund account managed by each of them,
respectively.
Inflation per se is not a significant factor in the Fund's
profitability, although inflationary cycles can give rise to the type of major
price movements that can have a materially favorable or adverse impact on the
Fund's performance.
In its trading to date, the Fund has from time to time had substantial
unrealized gains and losses on its open positions. These gains or losses are
received or paid on a periodic basis as part of the routine clearing cycle on
exchanges or in the over-the-counter markets (the only over-the-counter market
in which the Fund trades is the inter-bank forward market in currencies). In
highly unusual circumstances, market illiquidity could make it difficult for
certain Advisors to close out open positions, and any such illiquidity could
expose the Fund to significant losses, or cause it to be unable to recognize
unrealized gains. However, in general, there is no meaningful difference between
the Fund's realized and unrealized gains.
In terms of cash flow, it makes little difference whether a market
position remains open (so that the profit or loss on such positions remains
unrealized), as cash settlement of unrealized gains and losses occurs
periodically whether or not positions are closed out. The only meaningful
difference between realized and unrealized gains or losses in the case of the
Fund is that unrealized items reflect gains or losses on positions which the
Advisors have determined not to close out (presumably, in the hope of future
profits), whereas realized gains or losses reflect amounts received or paid in
respect of positions no longer being maintained.
Item 8: Financial Statements and Supplementary Data
-------------------------------------------
The financial statements required by this Item are included in Exhibit
13.01.
The supplementary financial information ("selected quarterly financial
data" and "information about oil and gas producing activities") specified by
Item 302 of Regulation S-K is not applicable.
Item 9: Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
There were no changes in or disagreements with accountants on
accounting and financial disclosure.
-11-
<PAGE>
PART III
Item 10: Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
(a,b) Identification of Directors and Executive Officers:
As a limited partnership, the Partnership itself has no
officers or directors and is managed by the General Partner. Trading decisions
are made by the Trading Advisors on behalf of the Partnership.
The principal officers of MLIP and their business backgrounds
are as follows.
John R. Frawley, Jr. Chief Executive Officer, President
and Director
James M. Bernard Chief Financial Officer,
Senior Vice President and Treasurer
Jeffrey F. Chandor Senior Vice President, Director of
Sales, Marketing and Research and
Director
Allen N. Jones Chairman and Director
Steven B. Olgin Vice President, Secretary and
Director of Administration
John R. Frawley, Jr. was born in 1943. Mr. Frawley is Chief
Executive Officer, President and a Director of MLIP as well as Co-Chairman of
MLF. He joined Merrill Lynch, Pierce, Fenner & Smith ("MLPF&S") in 1966 and has
served in various positions, including Retail and Institutional Sales, Manager
of New York Institutional Sales, Director of Institutional Marketing, Senior
Vice President of Merrill Lynch Capital Markets, and Director of International
Institutional Sales. Mr. Frawley holds a Bachelor of Science degree from
Canisius College. Mr. Frawley served on the CFTC's Regulatory Coordination
Advisory Committee from its inception in 1990 through its dissolution in 1994.
Mr. Frawley is currently a member of the CFTC's Financial Products Advisory
Committee. In January 1996, he was re-elected to a one-year term as Chairman of
the Managed Futures Association, the national trade association of the United
States managed futures industry. Mr. Frawley is also a Director of that
organization, and a Director of the Futures Industry Institute. Mr. Frawley also
currently serves on a panel created by the Chicago Mercantile Exchange and The
Board of Trade of the City of Chicago to study cooperative efforts related to
electronic trading, common clearing and the issues regarding a potential merger.
James M. Bernard was born in 1950. Mr. Bernard is Chief
Financial Officer, Senior Vice President and Treasurer of MLIP. He joined MLF in
1983. Before that he was the Commodity Controller for Nabisco Brands Inc. from
November 1976 to 1982 and a Supervisor at Ernst & Whinney from 1972 to November
1976. Mr. Bernard is a member of the American Institute of Certified Public
Accountants and holds a Bachelor of Science degree from St. John's University
and a Master of Business Administration degree from Fordham University.
Jeffrey F. Chandor was born in 1942. Mr. Chandor is Senior
Vice President, the Director of Sales, Marketing and Research and a Director of
MLIP. He joined MLPF&S in 1971 and has served as the Product Manager of Equity,
Derivative Products and Mortgage-Backed Securities as well as Managing Director
of International Sales in the United States, and Managing Director of Sales in
Europe. Mr. Chandor holds a Bachelor of Arts degree from Trinity College,
Hartford, Connecticut.
Allen N. Jones was born in 1942. Mr. Jones is Chairman and a
Director of MLIP. Mr. Jones graduated from the University of Arkansas with a
Bachelor of Science, Business Administration degree in 1964. Since June 1992,
Mr. Jones has held the position of Senior Vice President of MLPF&S. From June
1992 through February 1994, Mr. Jones was the President and Chief Executive
Officer of Merrill Lynch Insurance Group, Inc. ("MLIG") and remains on the Board
of Directors of MLIG and its subsidiary companies. In February 1994, Mr. Jones
became the Director of Individual Financial Services of the Merrill Lynch
Private Client Group. From January 1992 to June 1992, he held the position of
First Vice
-12-
<PAGE>
President of MLPF&S. From January 1990 to June 1992, he held the position of
District Director of MLPF&S. Before January 1990, he held the position of Senior
Regional Vice President of MLPF&S.
Steven B. Olgin was born in 1960. Mr. Olgin is Vice
President, Secretary and the Director of Administration of MLIP. He joined MLIP
in July 1994 and became a Vice President in July 1995. From 1986 until July
1994, Mr. Olgin was an associate of the law firm of Sidley & Austin. In 1982,
Mr. Olgin graduated from The American University with a Bachelor of Science
degree in Business Administration and a Bachelor of Arts degree in Economics. In
1986, he received his Juris Doctor degree from The John Marshall Law School. Mr.
Olgin is a member of the Managed Futures Association's Government Relations
Committee and has served as an arbitrator for the NFA.
At its December 1996 Board of Directors meeting, MLIP formed a
Finance Committee composed of representatives of several different operating and
administrative units at Merrill Lynch to oversee the financial controls and
accounting procedures implemented by MLIP. The Finance Committee will meet
periodically to review MLIP's financial reporting, monitoring and record
keeping, as well as all proposed changes -- other than the selection of Advisors
- -- affecting the operations of the Fund.
As of December 31, 1996, the principals of MLIP had no
investment in the Fund, and MLIP's general partner interest in the Fund was
valued at $208,266.
MLIP acts as general partner to thirteen public futures funds
whose units of limited partnership interest are registered under the Securities
Exchange Act of 1934: The Futures Expansion Fund Limited Partnership, The Growth
and Guarantee Fund L.P., ML Futures Investments L.P., John W. Henry &
Co./Millburn L.P., The S.E.C.T.O.R. Strategy Fund(sm) L.P., The SECTOR Strategy
Fund(sm) II L.P., The SECTOR Strategy Fund(sm) IV L.P., The SECTOR Strategy
Fund(sm) V L.P., The SECTOR Strategy Fund(sm) VI L.P., ML Global Horizons L.P.,
ML Principal Protection L.P. (formerly, ML Principal Protection Plus L.P.), ML
JWH Strategic Allocation Fund L.P. and the Fund. Because MLIP serves as the sole
general partner of each of these funds, the officers and directors of MLIP
effectively manage them as officers and directors of such funds.
(c) Identification of Certain Significant Employees:
-----------------------------------------------
None.
(d) Family Relationships:
--------------------
None.
(e) Business Experience:
-------------------
See Item 10(a)(b) above.
(f) Involvement in Certain Legal Proceedings:
----------------------------------------
None.
(g) Promoters and Control Persons:
-----------------------------
The General Partner is the sole promoter and controlling
person of the Partnership.
Item 11: Executive Compensation
----------------------
The officers of the General Partner are remunerated in their
respective positions. The Partnership does not itself have any officers,
directors or employees. The Partnership pays Brokerage Commissions to an
affiliate of the General Partner and Administrative Fees to the General Partner.
The General Partner or its affiliates may also receive certain economic benefits
from holding the Fund's dollar Available Assets in offset accounts, as described
in Item 1(c) above. The
-13-
<PAGE>
directors and officers receive no "other compensation" from the Partnership, and
the directors receive no compensation for serving as directors of the General
Partner. There are no compensation plans or arrangements relating to a change in
control of either the Partnership or the General Partner.
Item 12: Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners:
-----------------------------------------------
As of December 31, 1996, no person or "group" is known to be
or have been the beneficial owner of more than five percent of the Units. All of
the Partnership's units of general partnership interest are owned by the General
Partner.
(b) Security Ownership of Management:
--------------------------------
As of December 31, 1996, the General Partner owned 1,229 Units
(unit-equivalent general partnership interests), which was less than 2% of the
total Units outstanding.
(c) Changes in Control:
------------------
None.
Item 13: Certain Relationships and Related Transactions
----------------------------------------------
(a) Transactions with Management and Others:
---------------------------------------
The General Partner acts as administrative and trading manager
of the Fund. The General Partner provides all normal ongoing administrative
functions of the Partnership, such as accounting, legal and printing services.
The General Partner, which receives the Administrative Fees, pays all expenses
relating to such services.
(b) Certain Business Relationships:
------------------------------
MLF, an affiliate of the General Partner, acts as the
principal commodity broker for the Partnership.
In 1996 the Partnership paid: (i) Brokerage Commissions of
$1,418,126 to the Commodity Broker, which included $296,580 in consulting fees
paid by the Commodity Broker to the Trading Advisors; and (ii) Administrative
Fees of $36,362 to MLIP. In addition, MLIP and its affiliates may have derived
certain economic benefits from maintaining a portion of the Fund's assets in
"offset accounts," as described under Item 1(c), "Narrative Description of
Business -- Use of Proceeds and Interest Income -- Interest Earned on the Fund's
U.S. Dollar Available Assets" and Item 11, "Executive Compensation" herein.
See Item 1(c), "Narrative Description of Business -- Charges"
and "-- Description of Current Charges" for a discussion of other business
dealings between MLIP affiliates and the Partnership.
(c) Indebtedness of Management:
--------------------------
The Partnership is prohibited from making any loans, to
management or otherwise.
(d) Transactions with Promoters:
---------------------------
Not applicable.
-14-
<PAGE>
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
<TABLE>
<S> <C> <C>
(a)1. Financial Statements (found in Exhibit 13.01): Page
--------------------------------------------- ----
Independent Auditors' Report 1
Statements of Financial Condition as of December 31, 1996 and 1995 2
For the years ended December 31, 1996, 1995 and 1994:
Statements of Operations 3
Statements of Changes in Partners' Capital 4
Notes to Financial Statements 5-12
(a)2. Financial Statement Schedules:
-----------------------------
</TABLE>
Financial statement schedules not included in this Form 10-K
have been omitted for the reason that they are not required or are not
applicable or that equivalent information has been included in the financial
statements or notes thereto.
(a)3. Exhibits:
--------
The following exhibits are incorporated by reference or are
filed herewith to this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
Designation Description
- ----------- -----------
<S> <C>
3.01(a) Amended and Restated Limited Partnership Agreement of the Partnership.
Exhibit 3.01(a): Is incorporated herein by reference from Exhibit 3.01(a) contained in Amendment No. 1 (as
- --------------- Exhibit A) to the Registration Statement (File No. 33-12645) filed on February 2, 1988, on
Form S-1 under the Securities Act of 1933 (the "Registrant's Registration Statement").
3.01(b) Amendment No. 2 to the Amended and Restated Limited Partnership Agreement, dated
March 1, 1990.
Exhibit 3.01(b): Is incorporated by reference from Exhibit 3.01(b) contained in the Partnership's report on
- --------------- Form 10-K for the fiscal year ended December 31, 1989.
3.01(c) Amendment No. 3 to the Amended and Restated Limited Partnership Agreement, dated June 10,
1992.
Exhibit 3.01(c): Is incorporated by reference from Exhibit 3.01(c) contained in the Partnership's report on
- --------------- Form 10-K for the fiscal year ended December 31, 1992.
3.01(d) Amendment No. 4 to the Amended and Restated Limited Partnership Agreement, dated June 18,
1992.
Exhibit 3.01(d): Is incorporated by reference from Exhibit 3.01(d) contained in the Partnership's report on
- --------------- Form 10-K for the fiscal year ended December 31, 1992.
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
Designation Description
- ----------- -----------
<S> <C>
3.01(e) Amended and Restated Certificate of Limited Partnership of the Partnership, dated July 27,
1995.
Exhibit 3.01(e): Is incorporated herein by reference from Exhibit 3.01(e) contained in the Registrant's report on
- --------------- Form 10-Q for the Quarter Ended June 30, 1995.
10.02(a) Form of Consulting Agreement between each trading advisor, the Partnership and Merrill Lynch
Futures Inc.
Exhibit 10.02(a): Is incorporated herein by reference from Exhibit 10.02(a) contained in the Registrant's
- ---------------- Registration Statement.
10.03 Form of Customer Agreement between the Partnership and Merrill Lynch Futures Inc.
Exhibit 10.03: Is incorporated herein by reference from Exhibit 10.03 contained in the Registrant's Registration
- ------------- Statement.
10.06 Foreign Exchange Desk Service Agreement, dated July 1, 1993 among Merrill Lynch
Investment Bank, Merrill Lynch Investment Partners Inc., Merrill Lynch Futures Inc. and the
Fund.
Exhibit 10.06: Is filed herewith.
- -------------
10.07(a) Form of Advisory and Consulting Agreement Amendment among Merrill Lynch Investment
Partners Inc., each Advisor, the Fund and Merrill Lynch Futures Inc.
Exhibit 10.07(a): Is filed herewith.
- ----------------
10.07(b) Form of Amendment to the Customer Agreement among the Partnership and MLF.
Exhibit 10.07(b): Is filed herewith.
- ----------------
10.14(j) Form of Advisory Agreement between the Partnership, Merrill Lynch Investment Partners Inc.,
Merrill Lynch Futures Inc. and each Trading Advisor.
Exhibit 10.14(j): Is incorporated herein by reference from Exhibit 10.14(j) contained in the Registrant's report
- ---------------- on Form 10-Q for the Quarter Ended June 30, 1995.
13.01 1996 Annual Report and Independent Auditors' Report.
Exhibit 13.01: Is filed herewith.
- -------------
28.01(i) Prospectus of the Partnership, dated February 2, 1988.
Exhibit 28.01(i): Is incorporated herein by reference as filed with the Securities and Exchange Commission
- ---------------- pursuant to Rule 424 under the Securities Act of 1933, on February 5, 1988.
28.01(ii) Prospectus of the Partnership dated July 5, 1988.
Exhibit 28.01(iii): Is incorporated herein by reference as filed with the Securities and Exchange Commission
- ------------------ pursuant to Rule 424 under the Securities Act of 1933, on July 8, 1988.
(b) Report on Form 8-K:
------------------
No reports on Form 8-K were filed during the fourth quarter of 1996.
</TABLE>
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ML FUTURES INVESTMENTS II L.P.
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
General Partner
By: /s/John R. Frawley, Jr.
------------------------------------------
John R. Frawley, Jr.
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed on March 14, 1997 by the
following persons on behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/John R. Frawley, Jr. President and Chief Executive Officer and Director March 14, 1997
- ----------------------------
John R. Frawley, Jr.
/s/James M. Bernard Chief Financial Officer, Treasurer (Principal Financial March 14, 1997
- ---------------------------- and Accounting Officer) and Senior Vice President
James M. Bernard
/s/Jeffrey F. Chandor Senior Vice President and Director of Sales, March 14, 1997
- ---------------------------- Marketing and Research, and Director
Jeffrey F. Chandor
/s/Allen N. Jones Director March 14, 1997
- ----------------------------
Allen N. Jones
</TABLE>
<TABLE>
<CAPTION>
(Being the principal executive officer, the principal financial and accounting officer and a majority of the directors of Merrill
Lynch Investment Partners Inc.)
<S> <C> <C>
MERRILL LYNCH INVESTMENT General Partner of Registrant March 14, 1997
PARTNERS INC.
By: John R. Frawley, Jr.
------------------------
John R. Frawley, Jr.
</TABLE>
-17-
<PAGE>
ML FUTURES INVESTMENTS II L.P.
1996 FORM 10-K
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
Exhibit
-------
<S> <C>
Exhibit 10.06 Foreign Exchange Desk Service Agreement, dated July 1, 1993 among
Merrill Lynch Investment Bank, Merrill Lynch Investment Partners Inc.,
Merrill Lynch Futures Inc. and the Fund
Exhibit 10.07(a) Form of Advisory and Consulting Agreement Amendment by and among
Merrill Lynch Investment Partners Inc., each Advisor, the Fund
and Merrill Lynch Futures Inc.
Exhibit 10.07(b) Form of Amendment to the Customer Agreement among the Partnership
and MLF
Exhibit 13.01 1996 Annual Report and Independent Auditors' Report
</TABLE>
-18-
<PAGE>
To the best of the knowledge and belief of the
undersigned, the information contained in
this report is accurate and complete.
James M. Bernard
Chief Financial Officer
Merrill Lynch Investment Partners Inc.
General Partner of
ML Futures Investments II L.P.
-19-
<PAGE>
EXHIBIT 10.06
<PAGE>
EXHIBIT 10.6
FOREIGN EXCHANGE DESK SERVICE AGREEMENT
BY AND AMONG
MERRILL LYNCH INTERNATIONAL BANK,
MERRILL LYNCH FUTURES INC.,
ML FUTURES INVESTMENT PARTNERS INC.
AND
EACH OF THE FUNDS LISTED ON SCHEDULE A
DATED AS OF JULY 1, 1993
<PAGE>
FOREIGN EXCHANGE DESK SERVICE AGREEMENT
MERRILL LYNCH INTERNATIONAL BANK,
MERRILL LYNCH FUTURES INC.,
ML FUTURES INVESTMENT PARTNERS INC.
AND
EACH OF THE FUNDS LISTED ON SCHEDULE A
TABLE OF CONTENTS
-----------------
PAGE
----
1. MLF Customer Agreement.................................................. 2
2. MLIB and MLF............................................................ 2
3. Equal Terms............................................................. 3
4. "Chinese Wall" Procedures............................................... 3
5. Access.................................................................. 3
6. Trading Procedures...................................................... 3
7. Service Fee............................................................. 4
8. Expenses................................................................ 4
9. Errors.................................................................. 4
10. Choice of Counterparties; MLFIP Review.................................. 5
11. Currencies Traded....................................................... 5
12. Additional Credit Lines................................................. 5
13. CTA Option not to Trade Through the F/X Desk............................ 5
14. Confidentiality......................................................... 5
15. Form of Confirmations................................................... 6
16. Separate Accounting..................................................... 6
17. Records of Service Fees................................................. 6
18. Net Asset Valuations.................................................... 6
-i-
<PAGE>
19. Supervision......................................... 6
20. No ERISA Funds...................................... 6
21. Response to Inquiries............................... 7
22. Disclosure.......................................... 7
23. Audit of F/X Desk................................... 7
24. Governing Law....................................... 7
Schedule A: Funds Party to the F/X Desk
Service Agreement as of July 1, 1993....... A-1
Appendix I: Trading Procedures to be
Monitored by MLFIP...................... APPI-1
Appendix II: "Chinese Wall" Procedures.............. APPII-1
-ii-
<PAGE>
FOREIGN EXCHANGE DESK SERVICE AGREEMENT
MERRILL LYNCH INTERNATIONAL BANK,
MERRILL LYNCH FUTURES INC.,
ML FUTURES INVESTMENT PARTNERS INC.
AND
EACH OF THE FUNDS LISTED ON SCHEDULE A
This Agreement dated as of July 1, 1993 by and among Merrill Lynch
International Bank ("MLIB"), Merrill Lynch Futures Inc. ("MLF"), ML Futures
Investment Partners Inc. ("MLFIP") and each of the funds (collectively, the
"Funds") identified on Schedule A hereto, as the same may be amended from time
to time by agreement among MLIB, MLF and MLFIP, of which MLFIP is the Sponsor,
General Partner or Trading Manager, as the case may be.
WHEREAS, MLIB, MLF and MLFIP have agreed to establish and operate a service
desk (the "F/X Desk") to assist the Funds and other clients introduced by
Merrill Lynch affiliates (the Funds and such other clients being hereinafter
collectively referred to as "Clients") in effecting off-exchange currency trades
("F/X trades") (i) through both MLF and MLIB with third-party counterparties
and/or (ii) through MLF with MLIB, in each case in the over-the-counter, inter-
dealer, inter-bank market;
WHEREAS, only Clients qualified under Part 35 of the regulations of the
Commodity Futures Trading Commission (the "CFTC") will be permitted to utilize
the F/X Desk;
WHEREAS, Clients other than the Funds will execute other documentation in
connection with their use of the F/X Desk, subject to the provisions of Section
3 hereof;
WHEREAS, all trades executed through the F/X Desk will be executed as
principal trades either: (i) between MLIB and MLF at a competitive "bid-asked"
spread, with MLF entering into a back-to-back transaction, without mark-up or
spread, with the appropriate Clients; or (ii) between MLIB and a third-party
counterparty with a back-to-back transaction executed between MLIB and MLF and,
in turn, between MLF and the appropriate Clients, without mark-up or spread
other than the Service Fee described herein, in each case as determined pursuant
to the Trading Procedures to be monitored by MLFIP referred to in Section 6
hereof;
WHEREAS, no proprietary Merrill Lynch trading shall be permitted to take
place through the F/X Desk; and
<PAGE>
WHEREAS, MLFIP as General Partner or Trading Manager of the Funds or the
Board of Directors of each of the Funds for which MLFIP serves as Sponsor, as
the case may be, has determined that it is in the best interests of the Funds to
enter into this Service Agreement in order to provide access to the increasingly
diverse and international currency markets in which certain managed futures
advisors concentrate a significant percentage of their trading and because MLFIP
is confident that doing so will reduce the overall cost of the Funds' currency
trading;
NOW THEREFORE, in consideration of the premises and for other valuable
consideration the receipt and sufficiency of which are hereby acknowledged, each
of the Funds, respectively, MLFIP, MLIB and MLF hereby agree as follows:
1. MLF Customer Agreement
----------------------
Other than in respect of the terms set forth herein, the terms of the MLF
Customer Agreement previously executed and delivered between each of the Funds
and MLFIP shall govern the Funds' F/X trading through the F/X Desk as
contemplated hereby, and such Customer Agreement is hereby restated and
incorporated herein by reference in its entirety to the extent not inconsistent
herewith.
2. MLIB and MLF
------------
In F/X Desk trading with F/X Desk counterparties other than MLIB, MLIB
shall act as principal with such counterparties and then enter into a back-to-
back trade with MLF (MLIB adding the Service Fee to the contract pricing but no
mark-up or spread) which will, in turn, enter into a back-to-back trade (without
mark-up, spread or fee) with the appropriate Clients.
In F/X Desk trading with MLIB, MLIB shall act as principal with MLF
(charging a competitive "bid-asked" spread), which will, in turn, enter into a
back-to-back trade (without mark-up, spread or fee) with the appropriate
Clients.
MLF, not MLIB, shall be responsible for allocating positions acquired
through or with MLIB among the appropriate Clients; provided that MLFIP shall
assist in allocating positions among the appropriate Funds.
MLF shall in all cases enter into back-to-back principal transactions with
the appropriate Clients, effectively transferring to their respective accounts
the positions taken by MLF with MLIB; provided that MLF shall remain financially
liable
-2-
<PAGE>
to MLIB on all such trades. MLF shall not charge any Fund any spread or
mark-ups on any such back-to-back transactions.
The Trading Procedures to be monitored by MLFIP to be implemented by the
F/X Desk are set forth in Appendix I hereto.
3. Equal Terms
-----------
All Funds will utilize the F/X Desk on substantially identical terms, and
no Client will utilize the F/X Desk on any terms more favorable than those of
the Funds.
4. "Chinese Wall" Procedures
-------------------------
The procedures attached hereto as Appendix II have been adopted to prevent
misuse or misappropriation of information relating to the Funds' order flow
through the F/X Desk.
In no event shall any Merrill Lynch proprietary trading take place through
the F/X Desk (other than trading of ML Institutional Partners L.P. which may be
deemed "proprietary" to Merrill Lynch & Co., Inc. within the meaning of CFTC
Reg. 1.3 (y)).
5. Access
------
MLIB, MLF and MLFIP shall provide and maintain direct access, through
dedicated telephone lines, between the F/X Desk and the advisors ("CTAs")
trading for the Funds through the F/X Desk, at no additional cost to the Funds.
In conjunction therewith, MLIB, MLF and MLFIP shall establish mutually
satisfactory procedures to assure the validity of all orders transmitted by the
CTAs.
6. Trading Procedures
------------------
As set forth in Appendix I hereto, upon receipt of an F/X trade order, the
F/X Desk shall obtain a price from MLIB and at least two (2) other
counterparties. The order shall be executed with MLIB if the price quoted by
MLIB (which will not include a Service Fee) is as good as or better than the
best price quoted by the other counterparties contacted (including the Service
Fee). If MLIB is not making a market in a currency in which a CTA wishes to
acquire a position, the F/X Desk shall contact three (3) other counterparties
for price quotes and shall execute the trade order with the counterparty
offering the best price quote.
-3-
<PAGE>
MLFIP shall cause to be documented the counterparties contacted for each
F/X trade executed through the F/X Desk and the price offered by each such
counterparty. Such documentation shall be retained by the F/X Desk pursuant to
MLFIP's standard recordkeeping procedures.
7. Service Fee
-----------
For the F/X Desk's services hereunder, MLFIP will receive a Service Fee, on
trades for which MLIB does not act as the ultimate counterparty, equal to one
"pip" per futures-equivalent trade on each purchase and one "pip" per futures-
equivalent trade on each sale transaction - each "pip" to be calculated in
accordance with standard industry practice. Such Service Fee will be added as a
mark-up by MLIB on all trades executed by the F/X Desk with counterparties other
than MLIB, and promptly paid by MLIB to MLFIP. No Service Fee will be charged
or paid on F/X trades executed with MLIB as principal rather than MLIB as back-
to-back principal with a third-party counterparty.
MLFIP represents and warrants that, to the best of MLFIP's knowledge after
due inquiry, the Service Fee is competitive with that charged by third parties
for comparable services. Furthermore, if, as a result of MLFIP's annual review
of the competitiveness of the operations of the F/X Desk, MLFIP determines that
the Service Fee is not competitive, MLFIP will promptly adjust such Fee so that
it becomes so.
8. Expenses
--------
The only cost to the Funds of utilizing the F/X Desk shall be the Service
Fees paid on trades executed through MLIB with counterparties other than MLIB
and the "bid-asked" spreads on trades executed with such counterparties and with
MLIB. None of the Funds shall in any event pay any expenses, overhead or other
costs relating to the operation of the F/X Desk.
9. Errors
------
In addition to any liability which MLIB or MLF may have in respect thereof,
MLFIP shall indemnify and hold each Fund harmless for all losses incurred or
quantifiable profits foregone as a result of any errors on the part of F/X Desk
personnel in executing trades on behalf of such Fund. Such indemnity shall not,
however, apply to losses incurred or profits foregone as a result of technical
or telecommunication failures, counterparty errors or defaults, CTA errors or
any other cause not within the reasonable control of MLFIP.
-4-
<PAGE>
10. Choice of Counterparties; MLFIP Review
--------------------------------------
MLFIP and MLF shall each have the right to approve any counterparty
proposed by MLIB, as well as to request MLIB to include a particular
counterparty in the F/X Desk group of counterparties, which request MLIB will
not unreasonably refuse; provided that MLIB need not include more than twelve
(12) counterparties in such group at any one time. In no event shall any
counterparty other than MLIB be directly or indirectly controlled by, or under
common control with, MLFIP, MLF or MLIB.
MLFIP will conduct, no less frequently than annually, a review of the
counterparties used by, and the general operations of, the F/X Desk in order to
evaluate their competitiveness, credit standing, service and reputation. Each
of MLIB and MLF undertake to cooperate fully with MLFIP in such review.
11. Currencies Traded
-----------------
MLIB, MLFIP and MLF agree to use best efforts, upon CTA request, to include
additional currencies in the portfolio of currencies which can be traded through
the F/X Desk.
12. Additional Credit Lines
-----------------------
MLIB agrees to use best efforts to obtain all such additional credit lines
as may be necessary to ensure that the CTAs are able to trade currencies on
behalf of the Funds to the full extent they may deem appropriate and, if such
credit lines cannot be obtained, to make alternative arrangements so as to
permit the CTAs to do so, at no additional cost to the Funds.
13. CTA Option not to Trade Through the F/X Desk
--------------------------------------------
MLFIP, MLF and MLIB each agree that in the event any CTA wishes not to use
the F/X Desk to effect trades for a Fund, MLFIP, MLF and MLIB will arrange for
such CTA to trade for such Fund exclusively with MLIB through MLF without
Service Fees or margin requirements. MLFIP will inform each CTA of the
availability of this option. CTAs may designate specific F/X trade orders as
ones which are to be executed exclusively with MLIB on a trade by trade basis.
14. Confidentiality
---------------
MLIB, MLF and MLFIP agree to keep all orders executed through the F/X Desk
strictly confidential, in accordance with industry custom, except as otherwise
required by law. MLIB, MLF and MLFIP agree to execute such agreements or
documents as any
-5-
<PAGE>
CTA may reasonably require to evidence the foregoing undertaking of
confidentiality.
MLIB, MLF and MLFIP shall observe the "Chinese Wall" procedures set forth
in Appendix II hereto in order to ensure that information relating to Clients'
F/X trades will not be misused or misappropriated.
15. Form of Confirmations
---------------------
All trades executed through the F/X Desk will be confirmed by MLIB to MLF
as principal transactions, and MLF shall, in turn, confirm back-to-back
transactions with the appropriate Clients as principal trades between MLF and
such Clients carried in an "unregulated" MLF account.
16. Separate Accounting
-------------------
MLFIP and MLF shall account separately for all trades and all assets of
each Client, and such trades and assets shall in no event be commingled with
those of any other Client.
17. Records of Service Fees
-----------------------
MLIB and MLFIP shall maintain full and accurate records of all Service Fees
paid to MLIB, and all Service Fees remitted by MLIB to MLFIP, respectively.
MLFIP shall be responsible for allocating Service Fees among the Funds, and MLF
for allocating Service Fees among other Clients.
18. Net Asset Valuations
--------------------
MLIB will cooperate fully with MLFIP and MLF in obtaining, to the extent
reasonably practicable, valuations of the open F/X positions held by Clients,
and will attempt to provide data feeds compatible with MLFIP's existing systems.
19. Supervision
-----------
There shall at all times be an appropriately qualified supervising employee
assigned to the F/X Desk.
20. No ERISA Funds
--------------
MLFIP shall ensure that no Fund, the assets of which constitute "plan
assets" under the Employee Retirement Income Security Act of 1974 ("ERISA"),
trades through the F/X Desk.
-6-
<PAGE>
21. Response to Inquiries
---------------------
MLFIP shall use best efforts to respond to any inquiries concerning the
operation of the F/X Desk which they may receive from investors in the Funds.
22. Disclosure
----------
MLFIP agrees to disclose the F/X Desk operation to all existing and
prospective Funds to the full extent that it is advised by counsel may be
necessary or appropriate.
23. Audit of F/X Desk
-----------------
MLIB, MLF and MLFIP agree to obtain an annual auditors' review of the F/X
Desk (which need not result in a formal audit report) so as to verify and
document compliance with the operation of the F/X Desk as contemplated hereby.
The expense of such review shall be paid by MLFIP.
24. Governing Law
-------------
This Service Agreement shall be governed by and construed in accordance
with the laws of the State of New York, United States of America, without regard
to principles of conflicts of law.
-7-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement by their
representatives thereunto duly authorized.
EACH OF THE FUNDS
LISTED ON SCHEDULE A HERETO
By: ML FUTURES INVESTMENT PARTNERS INC.
General Partner/Trading Manager
By: ___________________________________
Title:
ML FUTURES INVESTMENT PARTNERS INC.
By: _______________________________
Title:
MERRILL LYNCH FUTURES INC.
By: _______________________________
Title:
MERRILL LYNCH INTERNATIONAL BANK
By: _______________________________
Title:
WORLD CURRENCIES LIMITED
INTERRATE(TM) LIMITED
ML FUTURES INVESTMENTS LTD.
CURRENCY INVESTMENT PARTNERS LTD.
SECTOR(SM) INTERNATIONAL LTD.
ML JAPAN INVESTMENT PARTNERS LTD.
ML MOUNTAIN PARTNERS LTD.
ML HYMAN BECK LTD.
ML CHESAPEAKE LTD.
By: _______________________________
John R. Frawley, Jr., as a
Director of each of the above
listed companies
-8-
<PAGE>
SCHEDULE A
FUNDS PARTY TO THE F/X DESK SERVICE AGREEMENT
AS OF JULY 1, 1993
MLFIP General Partner
- ---------------------
The Futures Expansion Fund Limited Partnership
The Growth and Guarantee Fund L.P.
ML Futures Investments II L.P.
ML Futures Investments L.P.
John W. Henry & Co./Millburn L.P.
The S.E.C.T.O.R. Strategy Fund(SM) L.P.
The SECTOR Strategy Fund(SM) II L.P.
The SECTOR Strategy Fund(SM) IV L.P.
The SECTOR Strategy Fund(SM) V L.P.
The SECTOR Strategy Fund(SM) VI L.P.
The JWH Global Asset Fund L.P.
The Leyden Investment Fund L.P.
ML Institutional Partners L.P.
ML Global Horizons L.P.
MLFIP Sponsor
- -------------
World Currencies Limited
InterRate(TM) Limited
ML Futures Investments Ltd.
Currency Investment Partners Ltd.
SECTOR(SM) International Ltd.
ML Japan Investment Partners Ltd.
ML Mountain Partners Ltd.
ML Hyman Beck Ltd.
ML Chesapeake Ltd.
A-1
<PAGE>
SCHEDULE A (CONT.)
FUNDS PARTY TO THE F/X DESK SERVICE AGREEMENT
AS OF JULY 1, 1993
MLFIP Trading Manager
- ---------------------
Commodity Trading Company, Ltd. Consent: NCB Investment
Services Company
Limited
By: _________________________
Title: ______________________
A-2
<PAGE>
SCHEDULE A (CONT.)
FUNDS PARTY TO THE F/X DESK SERVICE AGREEMENT
AS OF JULY 1, 1993
MLFIP Trading Manager
- ---------------------
Permal Commodities Ltd. Consent: Worms Asset
Management, Inc.
By: _______________________
Title: _____________________
Consent: F.M.C. Limited
Managing Director
By: _______________________
Title: _____________________
Consent: S.C.S. Limited
Managing Director
By: _______________________
Title: _____________________
A-3
<PAGE>
APPENDIX I
TRADING PROCEDURES
TO BE MONITORED BY MLFIP
A) F/X Desk Trading Procedures
---------------------------
(i) prior to effecting any trade, the F/X Desk will ensure that there
exist sufficient credit limits with approved counterparties;
(ii) the F/X Desk will provide dedicated telephone lines to facilitate
trading;
(iii) upon receipt of an F/X trade order, F/X Desk personnel shall
inquire of MLIB and two (2) counterparties unaffiliated with
Merrill Lynch;
(iv) in the event that MLIB is not quoting a "bid" and "asked" price
for a particular currency, F/X Desk personnel shall inquire of
three (3) counterparties unaffiliated with Merrill Lynch;
(v) no less than six (6) counterparties other than MLIB shall be
included in the group of counterparties contacted by the F/X
Desk;
(vi) the F/X Desk need not rotate the counterparties contacted for
price quotes provided that MLFIP reasonably believes that not
doing so is in, or not opposed to, the best interests of the
Clients;
(vii) the order of inquiry as among MLIB and the two (2) other
counterparties contacted shall be as near to simultaneous as
practicable;
(viii) trades which the F/X Desk executes with MLIB shall be executed by
MLIB in the same manner as MLIB executes other customer trades;
(ix) trades shall be executed with that counterparty whose price
quote, plus Service Fee, is the best obtained upon inquiry;
provided that trades shall be executed with MLIB if its price
quote, without Service Fee, is as good as or better than the best
price quote, plus Service Fee, obtained from any other
counterparty;
APPI-1
<PAGE>
(x) in the event an F/X trade is executed with a counterparty other
than MLIB, the Service Fee shall be added to the price quoted by
such counterparty. MLIB will promptly remit such Service Fee to
MLFIP.
(xi) each F/X trade order, counterparties inquired of, price quotes
received, execution price, and trade time shall be recorded and
preserved; and
(xii) the F/X Desk will make its trading records available upon
request to internal and external auditors as well as authorized
MLFIP, MLIB and MLF personnel.
B) CTA Direct Trading with MLIB
----------------------------
(i) MLFIP will offer each CTA the opportunity to trade on behalf of
the Funds directly with MLIB rather than through the F/X Desk;
(ii) the F/X Desk will provide dedicated phone lines to facilitate
trading (which may be the same lines used for a CTA's trading
through the F/X Desk);
(iii) CTAs may designate particular trades as trades which the CTA
wishes to be executed directly with MLIB, on a trade by trade
basis;
(iv) the person or persons on the F/X Desk (the "CTA Order Handler")
handling trades designated by CTAs to be executed directly with
MLIB shall have no trading operations at MLFIP, MLIB or MLF other
than receiving CTAs' orders through the F/X Desk, communicating
these orders to the MLIB trading desk, and managing MLIB's
position and market exposure in acting as counterparty to such
orders;
(v) trades which the CTA Order Handler executes will be executed with
MLIB's trading desk, not with MLIB's proprietary traders;
(vi) each F/X trade order, execution price, and trade time shall be
recorded and preserved by the CTA Order Handler; and
(vii) the CTA Order Handler will make its trading records (which may be
kept together with those of the other F/X operations) available
upon request
APPI-2
<PAGE>
to internal and external auditors as well as
authorized MLFIP, MLIB and MLF personnel.
C) Monitoring
----------
MLFIP will monitor the F/X Desk and be responsible for the general
oversight thereof, confirming:
(i) that MLIB's prices quoted to the F/X Desk are consistent with
prices quoted by MLIB to the CTA Order Handler;
(ii) that the F/X Desk is quoting prices in a fair and
nondiscriminatory manner (i.e., does not always source MLIB's bid
first or last, rotates the order in which it solicits external
bids, and solicits such bids from competitive counterparties that
make markets in the currency being requested);
(iii) that the F/X Desk records, documents and retains the bids for
each trade, the counterparties contacted, to which counterparty
the trade was ultimately awarded and, if effected with an
external counterparty, the amount of the "pip" added to such
trade;
(iv) that each counterparty is providing service and pricing which are
consistently competitive;
(v) that the confidentiality requirements of this Service Agreement
are being satisfied;
(vi) that no MLIB personnel trading for MLIB's proprietary account
will have access to or knowledge of the transactions effected by
the F/X Desk and that the "Chinese Wall" procedures set forth in
Appendix II are being implemented;
(vii) that F/X Desk personnel effect only such trades as are
envisioned by this Service Agreement and are not effecting other
trades on behalf of MLIB;
(viii) that, on an annual basis, an audit (which need not be by
independent public accountants as opposed to Merrill Lynch audit
staff and which need not result in a formal audit report) is
conducted to insure the F/X Desk's compliance with the provisions
of this Service Agreement;
APPI-3
<PAGE>
(ix) that MLIB and MLFIP has each maintained full and accurate records
of all Service Fees paid; and
(x) that a netting agreement is and remains in effect between MLIB
and MLF (and/or the Funds).
APPI-4
<PAGE>
APPENDIX II
"CHINESE WALL" PROCEDURES
1. The F/X Desk and its personnel (including the CTA Order Handler):
(i) must be physically segregated from any persons trading on behalf
of MLIB's proprietary account (as opposed to the MLIB trading
desk which will be contacted by the F/X Desk and its personnel);
(ii) will effect trades solely as necessitated by the stated purposes
of the F/X Desk as set forth in the Foreign Exchange Desk Service
Agreement and will not effect any other trades on behalf of
MLIB's proprietary account (as opposed to the MLIB trading desk
which will be contacted by the F/X Desk and its personnel).
2. All personnel on the F/X Desk must be Merrill Lynch employees.
3. The F/X Desk will trade only with such external counterparties and in such
currencies and such products as shall have been agreed upon among MLF, MLIB
and MLFIP.
4. The F/X Desk and its personnel will keep all orders executed by it strictly
confidential in accordance with industry custom (except as disclosure
thereof may be required in the course of trading or as required by law).
5. The F/X Desk (including the CTA Order Handler) will not disclose
information relating to any F/X Desk trades to any Merrill Lynch employee
trading for the proprietary account of Merrill Lynch (as opposed to the
MLIB trading desk which will be contacted by the F/X Desk and its
personnel).
APPII-1
<PAGE>
EXHIBIT 10.07(a)
<PAGE>
FORM OF ADVISORY AND CONSULTING AGREEMENT AMENDMENT
This ADVISORY AND CONSULTING AGREEMENT AMENDMENT dated as of January 1,
1997 by and among the funds listed on Schedule I hereto (THE "FUNDS"),
________________ (THE "ADVISOR"), MERRILL LYNCH INVESTMENT PARTNERS INC.
("MLIP") and MERRILL LYNCH FUTURES INC. ("MLF")
W I T N E S S E T H
WHEREAS, the Advisor is acting as a commodity trading advisor for the Funds
pursuant to the Advisory Agreements, and in certain cases the Consulting
Agreements, among the parties hereto (as the case may be) set forth on Schedule
II hereto (collectively. the "Advisory Agreements");
WHEREAS, the parties hereto have agreed to reduce the Consulting Fees paid
by MLF, the commodity broker of the Fund, to the Advisor;
WHEREAS, the parties hereto have agreed to adjust the Profit Share paid by
the Fund to the Advisor, including, without limitation, by providing that the
Profit Share shall be calculated on an annual rather than a quarterly basis; and
WHEREAS, this Agreement shall be deemed to renew each of the Advisory
Agreements (on the terms set forth herein and therein) until December 31, 1997.
NOW THEREFORE, the parties hereto agree as follows:
1. REDUCTION OF CONSULTING FEE
---------------------------
Beginning January 1, 1997, the Consulting Fee paid by MLF to the Advisor
will be reduced to ___% per annum (0.___% of the month-end assets each month).
2. ADJUSTMENT OF PROFIT SHARE
--------------------------
From and after January 1, 1997, the Profit Share payable by the Funds to
the Advisor will be calculated at the rate of ___% of any New Trading Profit in
excess of the highest level of cumulative Trading Profit (the "high water mark")
achieved by the Advisor for each of the Funds, respectively, as of any previous
calendar quarter-end (including December 31, 1996); or $0 if the Advisor has
traded unprofitably for a Fund. Trading Profit shall be calculated pursuant to
Schedule C to the Advisory Agreements, after reduction for combined Brokerage
and Administrative Fees of ___% of average month-end assets per annum (0.__% of
the month-end assets each month). Further more, beginning January 1, 1997,
Profit Shares shall be calculated not as of the end of each calendar quarter,
but rather as of the end of each calendar year and the "high water mark" for
purposes of determining whether Trading Profit recognized after January 1, 1997
constitutes New Trading Profit
<PAGE>
will equal the highest level of cumulative Trading Profit as of any calendar
year-end (at such point, if any, that cumulative Trading Profit as of a calendar
year-end exceeds the "high water mark" in effect with respect to each Fund as of
the effective date of this Agreement).
3. TERM
----
The current term of the Advisory Agreements will expire December 31,
1997, at which time each such Advisory Agreement will be automatically renewed,
unless (i) MLIP or one or more of the Funds gives 30 days' notice to the Advisor
of the termination of such Advisory Agreement, or (ii) from and after the end of
the period during which such Advisory Agreement may be renewed at the option of
either MLIP or the affected Fund (treating the term ending December 31, 1997 as
the current twelve month term of each such Advisory Agreement) the Advisor gives
30 days' termination notice.
Any renewal rights exercisable by one or more Funds or MLIP under the
Advisory Agreements shall remain in full force and effect as if December 31,
1997 were the end of the current twelve-month term of each such Advisory
Agreement.
4. ENTIRE AGREEMENT
----------------
This Agreement, together with the Advisory Agreements, constitutes the
entire agreement among the parties hereto with respect to the matters referred
to herein, and no other agreement, verbal or otherwise, shall be binding as
between the parties unless it shall be in writing and signed by the part against
whom enforcement is sought.
-2-
<PAGE>
IN WITNESS WHEREOF, the undersigned have hereto duly set forth their hand
as of the 1st day of January 1997.
THE FUNDS LISTED ON SCHEDULE I
WHICH ARE U.S. LIMITED PARTNERSHIPS
By: MERRILL LYNCH INVESTMENT
PARTNERS INC.
General Partner
By: ______________________________
Name:
Title:
THE FUNDS LISTED ON SCHEDULE I,
OTHER THAN ML PRINCIPAL PROTECTION
PLUS LTD., WHICH ARE CAYMAN ISLANDS
INVESTMENT COMPANIES
By: ______________________________
Name:
Title:
ML PRINCIPAL PROTECTION PLUS LTD.
By: ______________________________
Name:
Title:
MERRILL LYNCH FUTURES INC.
By: ______________________________
Name:
Title:
THE ADVISOR MERRILL LYNCH INVESTMENT PARTNERS,
INC.
By: ___________________________ By: ________________________________
Name: Name:
Title: Title:
-3-
<PAGE>
SCHEDULE I
THE FUNDS
U.S. Funds Cayman Islands Funds
---------- --------------------
1. 1.
--------------------------- ---------------------------
2. 2.
--------------------------- ---------------------------
3. 3.
--------------------------- ---------------------------
4. 4.
--------------------------- ---------------------------
-4-
<PAGE>
SCHEDULE II
ADVISORY AGREEMENTS
Advisory Agreements with the U.S. Funds dated:
U.S. Fund No.
(See Schedule I)
----------------
1. ________________
2. ________________
3. ________________
4. ________________
Advisory Agreements with the Cayman Islands Funds dated:
Cayman Islands
Fund No.
(See Schedule I)
----------------
1. ________________
2. ________________
3. ________________
4. ________________
<PAGE>
EXHIBIT 10.07(b)
<PAGE>
FORM OF
AMENDMENT
TO THE
CUSTOMER AGREEMENT
This Customer Agreement Amendment ("Amendment") is made as of this 1st day
of [MONTH, YEAR] by and between [THE FUND] (the "Fund") and Merrill Lynch
Futures Inc.
W I T N E S S E T H:
WHEREAS, the parties hereto entered into a Customer Agreement relating to
the purchase and sale of commodity futures and forward contracts and commodity
options (the "Customer Agreement");
WHEREAS, the parties hereto have agreed to reduce the brokerage commissions
paid by the Fund to Merrill Lynch Futures Inc., the Fund's commodity broker,
pursuant to the Customer Agreement and wish to amend the Customer Agreement
accordingly;
NOW THEREFORE, in consideration of the premises and mutual covenants
contained in the Customer Agreement and herein, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree to amend the Customer
Agreement as follows:
1. Brokerage Commissions. Beginning [DATE, YEAR] the brokerage commissions
---------------------
payable by the Fund to Merrill Lynch Futures Inc. will be reduced to ______ of
1% of month-end Net Assets, before reduction for such monthly brokerage
commissions and any New Profits Account allocation but after the crediting of
interest income received during the month (a ____% annual rate). Such brokerage
commissions shall not include any administrative fee paid directly to Merrill
Lynch Investment Partners Inc.
2. Amendment. This Amendment may not be amended except by the written
---------
consent of each of the parties hereto.
3. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall, however, together constitute one and the same
documents.
-1-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed by the parties
hereto as of the day and year first above written.
[THE FUND]
BY: MERRILL LYNCH INVESTMENT
PARTNERS INC., General Partner
BY: ________________________________
Name:
Title:
MERRILL LYNCH FUTURES INC.
BY: ________________________________
Name:
Title:
-2-
<PAGE>
ML FUTURES INVESTMENTS II L.P.
(A Delaware Limited Partnership)
Financial Statements for the years ended
December 31, 1996, 1995 and 1994
and Independent Auditors' Report
<PAGE>
To: The Limited Partners of ML Futures Investments II L.P.
ML Futures Investments II L.P. (the "Fund" or the "Partnership") ended its ninth
fiscal year of trading on December 31, 1996 with a Net Asset Value ("NAV") per
Unit of $169.46, representing an increase of 2.05% from the December 31, 1995
NAV per Unit of $166.06. During the fiscal year, trading profits were generated
in the currency, energy and interest rate sectors while losses were incurred in
the metals, agriculture and stock index sectors.
In 1996, strong price trends prevailed in several key markets enabling the
Fund's Trading Advisors to trade profitably for the Fund. Although trading in
stock index and agricultural commodity markets may have been lackluster, the
global bond and currency markets offered substantial trading opportunities.
Interest rate and currency price trends resulted in profitable trading
opportunities in these markets throughout the year.
As the new year began, the U.S. dollar rallied throughout most of January, after
being locked in a tight trading range for the two prior months. However, the
dollar weakened against major currencies in February, and returned to a
relatively narrow trading range. In March, crude oil prices rose throughout most
of the month, as unusually cold weather in the U.S. and Europe resulted in an
extended period of strong demand and oil talks between the United Nations and
Iraq were suspended.
During April, grain and soybean prices rallied to new highs, sometimes daily, as
adverse weather conditions and strong demand affected prices. Difficult trading
conditions in many markets prevailed and a lack of clear price trends in key
markets negatively impacted the Fund's performance in May and June. For example,
U.S. bond markets remained trendless as continued volatility, reflected investor
confusion over conflicting reports on the direction of the economy.
As the third quarter of 1996 began, it was the U.S. stock market that
experienced increased volatility coupled with sharp declines in July. In the
currency markets, the U.S. dollar posted its biggest one-day gain against the
Deutsche mark in almost four months on August 14, after comments from the
Bundesbank's chief economist encouraged expectations for lower German interest
rates. In September, crude oil prices continued, as they had during the summer,
to trend upward throughout most of the month.
Despite continued price volatility during the final quarter of 1996, the Fund's
Trading Advisors were able to single out trends in key markets, such as the
world's major bond markets which rallied into October and November.
Additionally, price trends prevailed in several major foreign currency markets,
for instance, the British pound extended its rally into November, as it soared
to a 4-year high against the U.S. dollar and a 29-month high against the
Deutsche mark on November 20. In December, however, the world's major bond
market rallies came to an abrupt halt early in the month. Specifically, U.S.
Treasury prices dropped on reports of strength in the economy, as well as a
weaker dollar which further encouraged investor selling of treasury securities.
<PAGE>
Although the Fund was profitable overall in 1996, we look for improved
performance in the coming year. To that end, we will continue to work diligently
with the Trading Advisors to meet the Fund's objective of achieving, through
speculative trading, substantial capital appreciation over time. We look forward
to 1997 and the trading opportunities it may bring.
Sincerely,
John R. Frawley, Jr.
President and Chief Executive Officer
Merrill Lynch Investment Partners Inc.
(General Partner)
FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
<PAGE>
ML FUTURES INVESTMENTS II L.P.
(A Delaware Limited Partnership)
------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994:
Statements of Financial Condition 2
Statements of Operations 3
Statements of Changes in Partners' Capital 4
Notes to Financial Statements 5-12
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Partners of
ML Futures Investments II L.P.:
We have audited the accompanying statements of financial condition of ML Futures
Investments II L.P. (a Delaware limited partnership; the "Partnership") as of
December 31, 1996 and 1995, and the related statements of operation and changes
in partners' capital for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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 audits provide a reasonable basis for our opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of ML Futures Investments II L.P. (a Delaware
limited partnership) as of December 31, 1996 and 1995, and the results of its
operations for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
February 3, 1997
New York, New York
<PAGE>
ML FUTURES INVESTMENTS II L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
------
Accrued interest (Note 2) $ 43,202 $ 65,021
Equity in commodity futures trading accounts:
Cash and options premiums 10,849,816 14,612,463
Net unrealized profit on open contracts 3,892 2,029,049
Investment (Note 5) 3,680,154 -
Receivable from investment (Note 5) 39,689 -
----------- -----------
TOTAL $14,616,753 $16,706,533
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
LIABILITIES:
Redemptions payable $ 153,870 $ 351,715
Brokerage commissions payable (Note 2) 88,521 139,221
Profit shares payable (Note 3) 75,440 80,159
Administrative fees payable (Note 2) 2,270 -
----------- -----------
Total liabilities 320,101 571,095
----------- -----------
PARTNERS' CAPITAL:
General Partner (1,229 and 1,229 units) 208,266 204,068
Limited Partners (83,137 and 95,936 units) 14,088,386 15,931,370
----------- -----------
Total partners' capital 14,296,652 16,135,438
----------- -----------
TOTAL $14,616,753 $16,706,533
=========== ===========
NET ASSET VALUE PER UNIT
(Based on 84,366 and 97,165 outstanding) $ 169.46 $ 166.06
=========== ===========
</TABLE>
See notes to financial statements.
-2-
<PAGE>
ML FUTURES INVESTMENTS II L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Trading profits (loss):
Realized $3,382,048 $3,732,452 $1,431,115
Change in unrealized (2,025,157) (120,416) (270,445)
---------- ---------- ----------
Total trading results 1,356,891 3,612,036 1,160,670
Interest income (Note 2) 668,742 806,886 614,734
---------- ---------- ----------
Total revenues 2,025,633 4,418,922 1,775,404
---------- ---------- ----------
EXPENSES:
Profit shares (Note 3) 326,058 293,724 380,332
Brokerage commissions (Note 2) 1,418,126 1,622,255 1,764,298
Administrative fees (Note 2) 36,362 - -
---------- ---------- ----------
Total expenses 1,780,546 1,915,979 2,144,630
---------- ---------- ----------
INCOME FROM INVESTMENT (Note 5) 37,777 - -
---------- ---------- ----------
NET INCOME (LOSS) $ 282,864 $2,502,943 $ (369,226)
========== ========== ==========
NET INCOME (LOSS) PER UNIT OF
PARTNERSHIP INTEREST:
Weighted average number of Units
outstanding (Note 4) 90,860 107,979 127,755
========== ========== ==========
Net income per weighted average General
Partner and Limited Partner Unit $ 3.11 $ 23.18 $ (2.89)
========== ========== ==========
</TABLE>
See notes to financial statements.
-3-
<PAGE>
ML FUTURES INVESTMENTS II L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Limited General
Units Partners Partner Total
----------- ------------------ ----------------- ------------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL,
DECEMBER 31, 1993 136,879 $19,449,662 $234,238 $19,683,900
Redemptions (18,660) (2,545,945) - (2,545,945)
Net loss - (366,032) (3,194) (369,226)
----------- ------------------ --------------- ------------
PARTNERS' CAPITAL,
DECEMBER 31, 1994 118,219 16,537,685 231,044 16,768,729
Redemptions (21,054) (3,075,946) (60,288) (3,136,234)
Net income - 2,469,631 33,312 2,502,943
----------- ------------------ --------------- ------------
PARTNERS' CAPITAL,
DECEMBER 31, 1995 97,165 15,931,370 204,068 16,135,438
Redemptions (12,799) (2,121,650) - (2,121,650)
Net income - 278,666 4,198 282,864
----------- ------------------ --------------- ------------
PARTNERS' CAPITAL,
DECEMBER 31, 1996 84,366 $14,088,386 $ 208,266 $14,296,652
=========== ================== =============== ============
</TABLE>
See notes to financial statements.
-4-
<PAGE>
ML FUTURES INVESTMENTS II L.P.
(A Delaware Limited Partnership)
------------------------------
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
ML Futures Investments II L.P. (the "Partnership") was organized under the
Delaware Revised Uniform Limited Partnership Act on January 20, 1987 and
completed its initial public offering of units of limited partnership
interest ("Units") on April 28, 1988. The Partnership commenced trading
activities on May 2, 1988. The Partnership engages in speculative trading
of futures, options on futures and forward contracts on a wide range of
commodities. Merrill Lynch Investment Partners Inc. (formerly, ML Futures
Investment Partners Inc.) ("MLIP" or the "General Partner"), a
wholly-owned subsidiary of Merrill Lynch Group, Inc., which in turn is a
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill Lynch"), is
the general partner of the Partnership, and Merrill Lynch Futures Inc.
("MLF"), also an affiliate of Merrill Lynch, is its commodity broker. MLIP
has agreed to maintain a general partner's interest of at least 1% of the
total capital in the Partnership. MLIP and each Limited Partner share in
the profits and losses of the Partnership in proportion to their
respective interest in it.
MLIP selects independent advisors (the "Advisors" or the "Trading
Advisors") to manage the Partnership's assets, and allocates and
reallocates the Partnership's assets among existing, replacement and
additional Advisors.
Estimates
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
-------------------
Commodity futures, options on futures and forward contract transactions
are recorded on the trade date and open contracts are reflected in the net
unrealized profit (loss) on open contracts in the Statements of Financial
Condition at the difference between the original contract amount and the
fair value. The change in net unrealized profit (loss) on open contracts
from one period to the next is reflected in change in unrealized in the
Statements of Operations. Fair value is based on quoted market prices on
the exchange or market on which the contract is traded.
Operating Expenses
------------------
MLIP pays all routine operating expenses (including legal, accounting,
printing, postage and similar administrative expenses) of the Partnership.
-5-
<PAGE>
MLIP receives an administrative fee as well as a portion of the brokerage
commissions paid to MLF by the Partnership as reimbursement for the
foregoing expenses.
Income Taxes
------------
No provision for income taxes has been made in the accompanying financial
statements as each Partner is individually responsible for reporting
income or loss based on such Partner's respective share of the
Partnership's income and expenses as reported for income tax purposes.
Distributions
-------------
The Unitholders are entitled to receive, equally per Unit, any
distributions which may be made by the Partnership. No such distributions
had been made as of December 31, 1996.
Redemptions
-----------
A Limited Partner may require the Partnership to redeem some or all of
such Partner's Units at Net Asset Value as of the close of business on the
last business day of any month upon ten calendar days' notice.
Dissolution of the Partnership
------------------------------
The Partnership will terminate on December 31, 2007 or at an earlier date
if certain conditions occur, as well as under certain circumstances, as
set forth in the Limited Partnership Agreement.
2. RELATED PARTY TRANSACTIONS
The Partnership U.S. dollar-denominated assets are held at MLF in cash or
short-term Treasury bills. The Partnership receives all interest paid on
such Treasury bills. On the cash held at MLF, the Partnership receives
interest from Merrill Lynch at rates ranging from .50 of 1% per annum
below the prevailing 91-day Treasury bill rate up to the full prevailing
91-day Treasury bill rate. Merrill Lynch may derive certain economic
benefits, in excess of the interest which Merrill Lynch pays to the Fund,
from possession of such cash.
Merrill Lynch credits the Partnership with interest on the Partnership's
non-U.S. dollar-denominated available assets based on local short-term
rates. Merrill Lynch charges the Partnership Merrill Lynch's cost of
financing realized and unrealized losses on the Partnership's non-U.S.
dollar-denominated positions.
The Partnership paid brokerage commissions to MLF at a flat rate of .833
of 1% (a 10% annual rate) of the Partnership's month-end assets. Effective
January 1, 1996, the percentage was reduced to .813 of 1% (a 9.75% annual
rate) of the Partnership's month-end assets and the Partnership began to
pay MLIP a monthly administrative fee of .021 of 1% (a .25% annual rate)
of the month-end assets (this recharacterization had no economic effect on
the Partnership). Month-end assets are not reduced for purposes of
calculating brokerage commissions and administrative fees by any accrued
brokerage commissions, administrative fees, profit shares or other fees or
charges.
MLIP estimates that the round-turn equivalent commission rate charged to
the Partnership during the years ended December 31, 1996, 1995 and 1994,
was approximately $80, $90 and $24, respectively (not including, in
calculating round-turn equivalents, forward contracts on a
futures-equivalent basis).
-6-
<PAGE>
MLIP pays the Advisors annual Consulting Fees ranging up to 4% of the
Partnership's average month-end assets, after the reduction for a portion
of brokerage commissions.
The Partnership trades forward contracts through a Foreign Exchange
Service Desk (the "F/X Desk") established by MLIP, that contacts at least
two counterparties along with Merrill Lynch International Bank ("MLIB"),
all of the Partnership's currency trades. All counterparties other than
MLIB are unaffiliated with any Merrill Lynch entity. The F/X Desk charges
a service fee equal (at current exchange rates) to approximately $5.00 to
$12.50 on each purchase or sale of a futures contract- equivalent face
amount of a foreign currency. No service fees are charged on trades
awarded to MLIB (which receives a "bid-ask" spread on such trades). MLIB
is awarded trades provided that its price (which includes no service fee)
is equal to or better than the best price (including the service fee)
offered by any of the other counterparties contacted.
The F/X Desk trades on the basis of credit lines provided by a Merrill
Lynch entity. The Partnership is not required to margin or otherwise
guarantee its F/X Desk trading.
Certain of the Partnership's currency trades are executed in the form of
"exchange of futures for physical" ("EFP") transactions involving MLIB and
MLF. In these transactions, a spot or forward (collectively referred to as
"cash") currency position is acquired and exchanged for an equivalent
futures position on the Chicago Mercantile Exchange's International
Monetary Market. In its EFP trading, the Partnership acquires cash
currency positions through the F/X Desk in the same manner and on the same
terms as in the case of the Partnership's other F/X Desk trading. When the
Partnership exchanges these positions for futures, there is a
"differential" between the prices of these two positions. This
"differential" reflects, in part, the different settlement dates of the
cash and the futures contracts as well as prevailing interest rates, but
also includes a pricing spread in favor of MLIB or another Merrill Lynch
entity.
The Partnership's F/X Desk service fee and EFP differential costs, have to
date, totaled no more than .25 of 1% per annum of the Partnership's
average month-end Net Assets.
3. AGREEMENTS
The Partnership and the Advisors have each entered into Advisory
Agreements. These Advisory Agreements generally terminate one year after
they are entered into, subject to certain renewal rights exercisable by
the Partnership. The Advisors determine the commodity futures and forward
contract trades to be made on behalf of their respective Partnership
accounts, subject to certain Partnership trading policies and to certain
rights reserved by MLIP.
In the case of Trading LLC, as defined in Note 5, the Trading LLC entered
the Advisory Agreement with the Advisor.
Profit shares, generally ranging from 15% to 25% of any New Trading
Profit, as defined, recognized by each Advisor, considered individually
irrespective of the overall performance of the Partnership, as of the end
of each calendar quarter are paid by the Partnership to each Advisor.
Profit shares are also paid out in respect of Units redeemed as of the end
of interim months during a calendar quarter to the extent of the
applicable percentage of any New Trading Profit attributable of such
Units.
-7-
<PAGE>
4. WEIGHTED AVERAGE UNITS
The weighted average number of Units outstanding was computed for purposes
of disclosing net income per weighted average Unit. The weighted average
number of Units outstanding at December 3, 1996, 1995 and 1994 equals the
Units outstanding as of such date, adjusted proportionately for Units
redeemed based on the respective length of time each was outstanding
during the preceding period.
5. INVESTMENT
The Partnership places assets under the management of certain of the
Advisors not through opening managed accounts with them but rather through
investing in a private limited liability company ("Trading LLC") sponsored
by MLIP. The only members of the Trading LLC are commodity pools sponsored
by MLIP. The Trading LLC trades under the management of a single Advisor
pursuant to a single strategy and at a uniform degree of leverage. Placing
assets with an Advisor through investing in a Trading LLC rather than a
managed account has no economic effect on the Partnership, except to the
extent that the Partnership benefits from the Advisor not having to
allocate trades among a number of different accounts (rather than
acquiring a single position for the Trading LLC as a whole).
The investment is reflected in the financial statements at fair value
based upon the Partnership's interest in the Trading LLC. Fair value is
equal to the market value of the net assets of the Trading LLC. The
resulting difference between cost and fair value is reflected on the
Statements of Operations as income or loss from investments.
At December 31, 1996 the Partnership had an investment in the ML
Chesapeake Diversified L.L.C.
Total revenues and fees with respect to such investment are set forth as
follows:
<TABLE>
<CAPTION>
Income/(Loss)
Total Brokerage Administrative Profit from
Revenue Commissions Fees Shares Investment
------------------------ ----------------------- ----------------------- ------------------------ ---------------------
<S> <C> <C> <C> <C>
$105,002 $63,652 $1,632 $1,941 $37,777
</TABLE>
6. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership trades futures, options on futures and forward contracts
in interest rates, stock indices, commodities, currencies, energy and
metals. The Partnership's trading results by reporting category were as
follows:
<TABLE>
<CAPTION>
Total Trading Results
-----------------------------------------------------------
1996 1995
---------------------------- -----------------------------
<S> <C> <C>
Interest Rate
and Stock Indices $ 496,284 $ 3,053,438
Commodities (60,267) 164,606
Currencies 978,020 1,104,325
Energy 1,040,803 476,395
Metals (1,097,949) (1,186,728)
---------------------------- -----------------------------
$ 1,356,891 $ 3,612,036
============================ =============================
</TABLE>
-8-
<PAGE>
Market Risk
-----------
Derivative financial instruments involve varying degrees of off-balance
sheet market risk, and changes in the level or volatility of interest
rates, foreign currency exchange rates or market values of the financial
instruments or commodities underlying such derivative instruments
frequently result in changes in the Partnership's unrealized profit
(loss) on such derivative instruments as reflected in the Statements of
Financial Condition. The Partnership's exposure to market risk is
influenced by a number of factors, including the relationships among
derivative instruments held by the Partnership as well as the volatility
and liquidity of the markets in which the derivative instruments are
traded.
The General Partner has procedures in place intended to control market
risk, although there can be no assurance that they will, in fact, succeed
in doing so. The procedures focus primarily on monitoring the trading of
the Advisors selected from time to time for the Partnership, calculating
the Net Asset Value of the Advisors' respective Partnership accounts as
of the close of business on each day and reviewing outstanding positions
for over-concentrations -- both on an Advisor-by-Advisor and on an
overall Partnership basis. While the General Partner will not itself
intervene in the markets to hedge or diversify the Partnership's market
exposure, the General Partner may urge Advisors to reallocate positions,
or itself reallocate Partnership assets among Advisors (although
typically only as of the end of a month) in an attempt to avoid
over-concentrations. However, such interventions are unusual. Except in
cases in which it appears that an Advisor has begun to deviate from past
practice and trading policies or to be trading erratically, the General
Partner's basic risk control procedures consist simply of the ongoing
process of Advisor monitoring and selection, with the market risk
controls being applied by the Advisors themselves.
Fair Value
----------
The derivative instruments used in the Partnership's trading activities
are marked to market daily with the resulting unrealized profit (loss)
recorded in the Statements of Financial Condition and the related profit
(loss) reflected in trading revenues in the Statements of Operations. The
contract/notional values of open contracts as of December 31, 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------- ----------------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------------ ----------------------- ------------------------ ----------------------
<S> <C> <C> <C> <C>
Interest Rate
and Stock
Indices $ - $ - $129,489,560 $31,263,822
Commodities - - 7,069,814 488,365
Currencies 4,983,334 8,047,276 4,837,858 7,541,184
Energy - - 3,753,322 1,008,952
Metals 203,772 203,772 9,115,049 1,405,316
--------------------- --------------------- ------------------------ ---------------------
$5,187,106 $8,251,048 $154,265,603 $41,707,639
===================== ===================== ======================== =====================
</TABLE>
Substantially all of the Partnership's derivative instruments outstanding
at December 31, 1996, expire within one year.
-9-
<PAGE>
The contract/notional value of the Partnership's open exchange-traded and
non-exchange-traded open derivative instrument positions as of December
31, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------- -----------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
--------------------- --------------------- ------------------------ --------------------
<S> <C> <C> <C> <C>
Exchange
Traded $ - $ - $149,690,079 $39,752,029
Non-Exchange
Traded 5,187,106 8,251,048 4,575,524 1,955,610
--------------------- --------------------- ------------------------ --------------------
$5,187,106 $8,251,048 $154,265,603 $41,707,639
===================== ===================== ======================== =====================
</TABLE>
The average fair value of the Partnership's derivative instrument
positions which were open as of the end of each calendar month during the
year ended December 31, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------- ------------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
--------------------- --------------------- ------------------------ ---------------------
<S> <C> <C> <C> <C>
Interest Rate
and Stock
Indices $63,801,511 $29,975,829 $ 87,503,045 $ 9,790,296
Commodities 7,411,870 670,528 6,850,876 1,132,188
Currencies 9,913,048 12,448,727 9,693,546 11,307,390
Energy 2,537,389 613,726 2,831,169 677,595
Metals 9,385,390 2,926,264 7,755,902 2,700,777
--------------------- --------------------- ------------------------ ---------------------
$93,049,208 $46,635,074 $114,634,538 $25,608,246
===================== ===================== ======================== =====================
</TABLE>
A portion of the amounts indicated as off-balance sheet risk reflects
offsetting commitments to purchase and sell the same derivative instrument
on the same date in the future. These commitments are economically
offsetting but are not, as a technical matter, offset in the forward
market until the settlement date.
Credit Risk
-----------
The risks associated with exchange-traded contracts are typically
perceived to be less than those associated with over-the-counter
(non-exchange-traded) transactions, because exchanges typically (but not
universally) provide clearinghouse arrangements in which the collective
credit (in some cases limited in amount, in some cases not) of the members
of the exchange is pledged to support the financial integrity of the
exchange. In over-the-counter transactions, on the other hand, traders
must rely solely on the credit of their respective individual
counterparties. Margins, which may be subject to loss in the event of a
default, are generally required in exchange trading, and counterparties
may require margin in the over-the-counter markets.
-10-
<PAGE>
The fair value amounts in the above tables represent the extent of the
Partnership's market exposure in the particular class of derivative
instrument listed, but not the credit risk associated with counterparty
nonperformance. The credit risk associated with these instruments from
counterparty nonperformance, is the net unrealized profit, if any,
included on the Statements of Financial Condition. The Partnership also
has credit risk because the sole counterparty or broker with respect to
most of the Partnership's assets is MLF.
As of December 31, 1996 and 1995, $6,275,690 and $13,723,065 of the
Partnership's assets, respectively, were held in segregated accounts at
MLF in accordance with Commodity Futures Trading Commission regulations.
The gross unrealized profit and net unrealized profit (loss) on the
Partnership's open derivative instrument positions as December 31, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------------- ------------------------------------
Gross Unrealized Net Unrealized Gross Unrealized Net Unrealized
Profit Profit (Loss) Profit Profit (Loss)
---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
Exchange-Traded $ - $ - $1,523,390 $ 1,128,424
Non-Exchange-Traded 59,798 3,892 54,965 900,625
---------------- -------------- ---------------- --------------
$59,798 $ 3,892 $1,578,355 $ 2,029,049
================ ============== ================ ==============
</TABLE>
The Partnership controls credit risk by dealing almost exclusively with
Merrill Lynch entities as brokers and counterparties.
The Partnership, through its normal course of business, enters into
various contracts with MLF acting as its commodity broker. Pursuant to the
brokerage arrangement with MLF, to the extent that such trading results in
receivables from and payables to MLF, these receivables and payables are
offset and reported as a net receivable or payable.
7. SUBSEQUENT EVENTS
On January 2, 1997 the Partnership acquired an interest in ML Sjo Prospect
L.L.C. (see Note 5 for a general description of investments).
Effective February 1, 1997, the Partnership's brokerage commission
percentage was reduced to .729 of 1% (an 8.75% annual rate) of the
Partnership's month-end assets.
-11-
<PAGE>
To the best of the knowledge and belief of the
undersigned, the information contained in this
report is accurate and complete.
James M. Bernard
Chief Financial Officer
Merrill Lynch Investment Partners Inc.
General Partner of
ML Futures Investments II L.P.
-12-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENTS
OF FINANCIAL CONDITION, STATEMENTS OF OPERATIONS, STATEMENTS OF CHANGES IN
PARTNERS' CAPITAL AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000811533
<NAME> ML FUTURES INVESTMENTS II L.P.
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 0 0
<RECEIVABLES> 10,936,599 16,706,533
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 3,680,154 0
<PP&E> 0 0
<TOTAL-ASSETS> 14,616,753 16,706,533
<SHORT-TERM> 0 0
<PAYABLES> 320,101 571,095
<REPOS-SOLD> 0 0
<SECURITIES-LOANED> 0 0
<INSTRUMENTS-SOLD> 0 0
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 14,296,652 16,135,438
<TOTAL-LIABILITY-AND-EQUITY> 14,616,753 16,706,533
<TRADING-REVENUE> 1,356,891 3,612,036
<INTEREST-DIVIDENDS> 668,742 806,886
<COMMISSIONS> 1,418,126 1,622,255
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 282,864 2,502,943
<INCOME-PRE-EXTRAORDINARY> 282,864 2,502,943
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 282,864 2,502,943
<EPS-PRIMARY> 3.11 23.18
<EPS-DILUTED> 3.11 23.18
</TABLE>
