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