<PAGE>
As filed with the Securities and Exchange Commission on October 25, 1996
REGISTRATION NO. 333-7593
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
ML PRINCIPAL PROTECTION TRADING L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS TRADING L.P.)
(RULE 140 CO-REGISTRANT)
(Exact name of registrant as specified in its charter)
13-3750642(REGISTRANT)
DELAWARE 6793 13-3775509(CO-REGISTRANT)
(State of Organization) (Primary Standard Industrial (IRS Employer
Classification Code Number) Identification Number)
C/O MERRILL LYNCH INVESTMENT PARTNERS INC.
SIXTH FLOOR
SOUTH TOWER
MERRILL LYNCH WORLD HEADQUARTERS
WORLD FINANCIAL CENTER
NEW YORK, NEW YORK 10080-6106
(212) 236-4167
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
JOHN R. FRAWLEY, JR.
SIXTH FLOOR
SOUTH TOWER
MERRILL LYNCH WORLD HEADQUARTERS
WORLD FINANCIAL CENTER
NEW YORK, NEW YORK 10080-6106
(212) 236-4167
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
David R. Sawyier
James B. Biery
Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
---------------------
PURSUANT TO THE PROVISIONS OF RULE 429 OF THE RULES AND REGULATIONS OF
THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, THE
FORM OF PROSPECTUS SET FORTH HEREIN ALSO RELATES TO THE REGISTRANT'S
REGISTRATION STATEMENT ON FORM S-1 (REGISTRATION NO. 33-73914) DECLARED
EFFECTIVE ON JULY 14, 1994.
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM
NO. PROSPECTUS HEADING
- ----- --------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus....... Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus.......................... Inside Cover Page; Table of Contents
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges........... Summary; Risk Factors
4. Use of Proceeds............................... Use of Proceeds
5. Determination of Offering Price............... Inside Cover Page; Plan of Distribution
6. Dilution...................................... Not Applicable
7. Selling Security Holders...................... Not Applicable
8. Plan of Distribution.......................... Inside Cover Page; Plan of Distribution
9. Description of Securities to Be
Registered................................... Cover Page; The Limited Partnership Agreement
10. Interests of Named Experts and
Counsel...................................... Legal Matters; Experts
11. Information with Respect to the
Registrant................................... Summary; Risk Factors; Investment Factors; Performance of the Fund;
Selected Financial Data; Management's Discussion and Analysis of
Financial Condition and Results of Operations; The Advisor Selection
Process; The Advisors; MLIP and MLF; The ML&Co. Guarantee; Use
of Proceeds; Charges; Conflicts of Interest; The Limited Partnership
Agreement; Index to Financial Statements
12. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities............................. Not Applicable
</TABLE>
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(formerly, ML Principal Protection Plus L.P.)
SERIES J UNITS
PROSPECTUS SUPPLEMENT DATED OCTOBER __, 1996
TO
PROSPECTUS DATED OCTOBER __, 1996
The Series J Units will be sold on or about January__, 1997 to the extent
that acceptable subscriptions are received on or before December 31, 1996. The
"Principal Assurance Date" for the Series J Units will be December 31, 2002.
Distributions on Units sold after July 1, 1996, if any, will be in the
discretion of MLIP, although none are anticipated.
Series J Units are offered at $100 per Share ($97 in the case of Merrill
Lynch officers and employees). MLIP will initially commit 75% of the Series J
Units' assets to trading.
In addition to this Prospectus Supplement, the Prospectus must be
accompanied by recent monthly reports relating to ML Principal Protection L.P.
The Series J Units will have their own Net Asset Value, independent of that of
the other outstanding series of Units. Past performance is not necessarily
indicative of future results.
Information Regarding Certain of the Fund's Advisors
- ----------------------------------------------------
John W. Henry & Company, Inc. ("JWH"), a "core" Advisor, has had the
following change in personnel: Peter F. Karpen announced his resignation from
JWH on March 18, 1996 and intends to leave JWH in the fourth calendar quarter of
1996. Mr. Karpen joined JWH in June 1995 from CS Boston where he had been
Director of Futures and Options since 1988 and Vice President since 1991.
_________________________
The other side of this Prospectus Supplement provides certain outline
information regarding the Fund's current Advisors.
_________________________
THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED
UPON THE MERITS OF PARTICIPATING IN THIS POOL NOR HAS
THE COMMISSION PASSED UPON THE ADEQUACY OR ACCURACY
OF THIS DISCLOSURE DOCUMENT AS SUPPLEMENTED.
_________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS AS SUPPLEMENTED. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
_________________________
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
Selling Agent
MERRILL LYNCH INVESTMENT PARTNERS INC.
General Partner
<PAGE>
ML PRINCIPAL PROTECTION L.P.
The Prospectus sets forth more detailed information concerning the
"core" Advisors. The non-"core" Advisors are identified below. As of September
1, 1996, the allocation of the Fund's trading assets among the Advisors is set
forth below in the parentheses following the Advisors' names. See "The
Advisors" in the Prospectus.
<TABLE>
<CAPTION>
AS OF AUGUST 31, 1996
--------------------------------------------------------------------
ANNUALIZED
WORST/BEST STANDARD GENERAL
MONTHLY DEVIATION ASSETS UNDER TRADING
RATE OF RETURN/1/ OF RETURN/2/ MANAGEMENT/3/ STRATEGY
------------------ ---------------- -------------- --------------
<S> <C> <C> <C> <C>
"CORE" ADVISORS
Chesapeake Capital Corporation (10.98)%/15.99% 17.9% $735 million Technical;
Diversified Trading Program (20%) trend-following
John W. Henry & Co., Inc. (18.0)%/39.4% 31.2% $912 million Technical;
Financial and Metals Portfolio (20%) trend-following
NON-"CORE" ADVISORS
AIS Futures Management, Inc. (10.65)%/13.39% 18.4% $101.1 million Systematic;
MAAP-2x-4x Program (8.5%) trend-following
ARA Portfolio Management Company, L.L.C. (13.3)%/14.48% 21.5% $98.7 million Technical;
Gamma Program (8.5%) trend-following
AIB Investment Managers Limited (1.29)%/2.98% 2.59% $39.2 million Discretionary;
Currency Program (7.0%) fundamental
Millburn Ridgefield Corporation (9.04)%/19.38% 17.35% $192 million Technical;
Global Portfolio - Normal Leverage (8.0%) trend-following
Trendstat Capital Management, Inc. (5.83)%/10.71% 10.25% $192 million Technical;
World Currency Program (8.5%) trend and counter
trend-following
West Course Capital Inc. (9.54)%/14.12% 17.0% $119 million Discretionary;
(8.5%) fundamental
Graham Capital Management L.P. (6.31)%/12.33% 15.18% $136.7 million Technical;
Diversified Program (5.5%) trend-following
Quantitative Financial Strategies Inc./4/ (7.62)%/13.29% 13.8% $88 million Systematic;
The Currency Program (5.5%) fundamental;
not trend-following
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
_________________________
Futures trading is highly leveraged, as is each Advisor's trading
program. No Advisor has been asked to make any special adjustments to its
leveraging policies in the case of the Fund. See "Leverage Considerations" and
"Risk Factors" in the Prospectus. MLIP expects that, in general, the non-"core"
Advisors trading at "standard" leverage will hold positions in the range of 200%
to 400% of the net equity in their accounts and commit as margin 15% to 30% of
the Fund's assets allocated to them. Trading at this degree of leverage implies
that any non-"core" Advisor whose open positions incur a 10% loss will cause a
20% to 40% loss to its Fund account.
In considering the leverage and volatility at which the different non-
"core" Advisors trade, prospective investors should recognize that due to the
limited percentage of the Fund's assets allocated to each of them, none of these
Advisors, individually, is likely to make a material contribution over the
short-term to either the return achieved by, or the performance volatility of,
the Fund. It would require (i) monthly returns outside of historical highs and
lows for the non-"core" Advisors with the largest percentage asset allocation to
affect the Fund's overall monthly rate of return by as much as 2% (e.g., from a
10% to an 8% or 12% rate of return), and (ii) historical volatility increased by
a factor of approximately 4 for such non-"core" Advisor's performance to
increase the range of the Fund's overall standard deviation by as much as 30%.
The smaller the allocations to a non-"core" Advisor, the less the contribution
of such Advisor's performance and volatility to the overall performance and
volatility the Fund. The non-"core" Advisors as a whole can have a significant
effect on performance. However, the likely non-correlation among at least
certain of these six Advisors reduces the likelihood of any major short-term
effect.
_________________________
/1/ The lowest and the highest monthly rate of return through August 31, 1996
for the program traded for the Fund since January 1, 1991 (or the inception of
trading if later).
/2/ An annualized standard deviation of 2% and a mean return of 1% would mean
that most (approximately two-thirds) of all monthly returns during a year have
historically fallen between (1)% and 3%, i.e., within a range (deviation) of 2%
above or below the mean. Standard deviation is one widely accepted measure of
risk, as standard deviation indicates the variability of the returns. The more
variable an Advisor's historical returns, the greater the risk that substantial
losses have been included within the historical range of returns. Annualized
Standard Deviation of Return is with respect to the program used for the Fund
and covers the period beginning with January 1, 1991 (or the inception of
trading if later) through August 31, 1996.
/3/ Assets under management in the program used for the Fund ("notional" funds
excluded).
/4/ "Notional" funds are included in assets under management for Quantitative
Financial Strategies Inc.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY PROSPECTUS DATED OCTOBER 25, 1996 - SUBJECT TO COMPLETION
ML PRINCIPAL PROTECTION L.P.
$100,000,000
UNITS OF LIMITED PARTNERSHIP INTEREST
ML PRINCIPAL PROTECTION L.P. (THE "FUND") is a multi-strategy, multi-
market managed futures investment, employing a range of strategies diversified
across major markets of the global economy -- financials, currencies, energy,
metals and agriculture. The Fund's objectives are achieving long-term capital
appreciation while controlling performance volatility. MERRILL LYNCH INVESTMENT
PARTNERS INC. ("MLIP") is the general partner of the Fund, and MERRILL LYNCH
FUTURES INC. ("MLF") is its commodity broker. MERRILL LYNCH ASSET MANAGEMENT,
L.P. ("MLAM") provides cash management services within parameters established by
MLIP. The Fund trades under the direction of multiple independent trading
advisors ("TRADING ADVISORS" OR "ADVISORS") selected and monitored by MLIP.
MERRILL LYNCH & CO., INC. ("ML&CO.") has agreed to make sufficient payments to
the Fund, if necessary, to ensure that the Net Asset Value of each Unit
outstanding as of the fifth anniversary (the "Principal Assurance Date") of such
Unit's issuance will be at least the $100 subscription price.
The Fund began trading October 12, 1994 with an initial capitalization of
$32 million. The Units are continuously offered and sold as of the beginning of
each calendar quarter at $100 per Unit. As of October 1, 1996, eight series of
Units had been sold, the Fund's aggregate capitalization was approximately $70
million and the initial series of Units had recognized a cumulative rate of
return of approximately 15.80% in the first 23-2/3 months of trading.
The minimum initial investment is 50 Units ($5,000); the minimum investment
for existing Limited Partners is 10 Units ($1,000). Investors may purchase any
whole number of Units over the minimum. See "Investment Factors -- (7) Small
Minimum Investments; Smaller Minimum Additional Investment" at page 16.
Units may be redeemed as of the end of any calendar month, subject to 3%
redemption charges payable to MLIP through the end of the twelfth month after
sale. See "Charges -- Redemption Charges" at page 50.
MLIP may make distributions to the Unitholders, but does not presently
intend to do so. See "Risk Factors -- (9) Series Issued after July 1, 1996" at
page 12.
________________________________
THE UNITS ARE SPECULATIVE SECURITIES. AN INVESTMENT
IN THE FUND INVOLVES SIGNIFICANT RISKS.
. INVESTORS MUST BE PREPARED TO LOSE THE ENTIRE TIME VALUE OF THEIR
INVESTMENT. AT A 7% INTEREST RATE, THE PRESENT VALUE OF RECEIVING THE
ASSURED MINIMUM $100 PER UNIT FIVE YEARS IN THE FUTURE WOULD BE ONLY
APPROXIMATELY $71.
. PAST PERFORMANCE OF THE FUND AND ITS ADVISORS IS NOT NECESSARILY INDICATIVE
OF FUTURE RESULTS.
. THE FUND TRADES WITH A HIGH DEGREE OF LEVERAGE IN VOLATILE MARKETS.
. THE "PRINCIPAL PROTECTION" FEATURE OF THE FUND INVOLVES BOTH ACTUAL
OPPORTUNITY COSTS AND THE RISK OF SIGNIFICANTLY INCREASED OPPORTUNITY COSTS
IN THE FUTURE. MLIP INITIALLY DELEVERAGES EACH SERIES' TRADING IN ORDER TO
PROTECT ML&CO. FROM ANY LIABILITY UNDER ITS GUARANTEE, CORRESPONDINGLY
REDUCING PROFIT POTENTIAL. THERE IS ALSO THE RISK OF FURTHER DELEVERAGING
IN THE EVENT THAT THE FUND DOES NOT RECOGNIZE SUFFICIENT PROFITS FOR THE
NET ASSET VALUE OF A SERIES OF UNITS TO INCREASE FROM ITS INITIAL $100 PER
UNIT.
. RELATIVELY SMALL LOSSES COULD RESULT IN MLIP FURTHER DELEVERAGING OR
TERMINATING TRADING.
. WERE ML&CO. TO INCUR A LIABILITY UNDER ITS GUARANTEE, INVESTORS COULD ONLY
ENFORCE SUCH LIABILITY THROUGH BRINGING A "DERIVATIVE ACTION" IN THE NAME
OF THE FUND, AS THIS GUARANTEE DOES NOT RUN DIRECTLY TO INVESTORS BUT ONLY
TO THE FUND ITSELF.
. EVEN APART FROM ITS DELEVERAGED TRADING, THE RISK CONTROL FEATURES EXPECTED
FROM THE FUND'S MULTI-ADVISOR STRUCTURE MAKE IT HIGHLY UNLIKELY THAT THE
ML&CO. GUARANTEE WILL EVER BENEFIT INVESTORS.
. THE FUND IS SUBJECT TO SUBSTANTIAL CHARGES. ESTIMATED GROSS TRADING PROFITS
OF APPROXIMATELY 7.75% OF THE FUND'S AVERAGE MONTH-END NET ASSETS MUST BE
EARNED DURING THE FIRST YEAR AFTER A UNIT IS SOLD IN ORDER FOR THE
REDEMPTION VALUE OF SUCH UNIT TO EQUAL THE INITIAL $100 SUBSCRIPTION
PRICE.
. CERTAIN GENERAL TYPES OF MARKET CONDITIONS -- IN PARTICULAR, TRENDLESS
PERIODS WITHOUT MAJOR PRICE MOVEMENTS -- SIGNIFICANTLY REDUCE THE ADVISORS'
ABILITY TO TRADE SUCCESSFULLY.
SEE "RISK FACTORS" BEGINNING AT PAGE 11.
_____________________________
SUBSCRIBERS WILL BE REQUIRED TO MAKE CERTAIN REPRESENTATIONS AND WARRANTIES IN
THEIR SUBSCRIPTION AGREEMENTS AND POWERS OF ATTORNEY.
_____________________________
THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF
PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED UPON
THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.
_____________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
_____________________________
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
UNITS OF PRICE TO SELLING PROCEEDS TO
LIMITED PARTNERSHIP INTEREST PUBLIC(1) COMMISSIONS(2)(3) FUND(2)(3)
================================================================================
<S> <C> <C> <C>
PER UNIT...................... $100 NONE $100
- --------------------------------------------------------------------------------
</TABLE>
SEE NOTES ON PAGE (I).
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MERRILL LYNCH INVESTMENT PARTNERS INC.
GENERAL PARTNER
THE DATE OF THIS PROSPECTUS IS OCTOBER ___, 1996
<PAGE>
NOTES TO COVER PAGE
(1) The Units are continuously offered on a "best efforts" basis
without any firm underwriting commitment exclusively through Merrill
Lynch, Pierce, Fenner & Smith Incorporated and its affiliates ("MLPF&S" or
the "Selling Agent").
Subscriptions for Units are accepted throughout each calendar quarter.
Pending investment in the Fund as of the beginning of the following quarter,
subscription funds are held in escrow at The Bank of New York (the "Escrow
Agent") in New York City. There is no minimum number of Units that must be sold
at the beginning of a calendar quarter for any Units then to be sold.
Subscribers receive all interest earned, and no fees or costs are
assessed, on subscriptions while held in escrow.
See "Plan of Distribution -- Subscription Procedure" at page 63.
(2) See "Plan of Distribution -- Selling Agent Compensation" at page
64 for information relating to indemnification arrangements with respect to the
Selling Agent.
(3) No selling commissions are paid from the proceeds of
subscriptions. MLIP credits the Selling Agent with "production credits" of $5
per Unit on all Units at the time of sale. (No such initial production credits
are payable on sales to officers and employees of ML&Co. and its affiliates, who
purchase Units at $97 rather than $100 per Unit.)
Beginning with the thirteenth full month after a series of Units is
sold, the Selling Agent receives ongoing production credits on all outstanding
Units of such series (including Units sold at a 3% discount to officers and
employees of ML&Co. and its affiliates) sold by Financial Consultants (the
individual MLPF&S brokers) who are registered with the Commodity Futures Trading
Commission (the "CFTC") and who have passed either the Series 3 National
Commodity Futures Examination or the Series 31 Managed Futures Fund Examination.
Such ongoing production credits continue to accrue from the beginning of such
thirteenth month for as long as the Units remain outstanding, at the rate of 2%
per annum of the average month-end Net Assets attributable to such Unit
committed to trading; 75% of the capital attributable to each Unit sold under
this Prospectus will initially be committed to trading, resulting in annual
ongoing production credits of 1.5%.
If a Limited Partner redeems Units during or as of the end of a
calendar quarter, and subscribes as of the date of redemption to the new series
of Units to be issued immediately following such quarter, any otherwise
applicable 3% charge is waived to the extent that the redemption proceeds are so
reinvested.
Financial Consultants receive no initial production credits on new
Units purchased with the proceeds of Units redeemed during or as of the end of
the preceding quarter. However, the 2% ongoing production credits, described
above, will begin, to the extent that the redemption proceeds are reinvested, in
the thirteenth month after the sale of the Units redeemed, not in the thirteenth
month after reinvestment.
_________________________
THIS PROSPECTUS MUST BE ACCOMPANIED BY: (1) A PROSPECTUS SUPPLEMENT
CONTAINING CERTAIN CFTC-REQUIRED INFORMATION REGARDING THE CURRENT ADVISORS; AND
(2) SUMMARY FINANCIAL INFORMATION FOR THE FUND CURRENT WITHIN 60 CALENDAR
DAYS.
_________________________
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION ABOUT THE FUND OR THE UNITS OR TO MAKE ANY REPRESENTATION
CONCERNING THE FUND OR THE UNITS NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND, MLIP, MLAM, THE SELLING AGENT, ANY TRADING ADVISOR
OR ANY OTHER PERSON.
-i-
<PAGE>
_________________________
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION MAY NOT LAWFULLY BE MADE.
_________________________
THE BOOKS AND RECORDS OF THE FUND ARE MAINTAINED AT ITS PRINCIPAL
OFFICE, C/O MERRILL LYNCH INVESTMENT PARTNERS INC., MERRILL LYNCH WORLD
HEADQUARTERS, SIXTH FLOOR, SOUTH TOWER, WORLD FINANCIAL CENTER, NEW YORK, NEW
YORK 10080-6106. LIMITED PARTNERS MAY INSPECT AND COPY SUCH BOOKS AND RECORDS
DURING NORMAL BUSINESS HOURS FOR ANY PURPOSE REASONABLY RELATED TO THEIR
INTEREST AS LIMITED PARTNERS.
MLIP DISTRIBUTES MONTHLY REPORTS INCLUDING SUMMARY PERFORMANCE
INFORMATION FOR THE FUND TO ALL LIMITED PARTNERS. LIMITED PARTNERS ALSO RECEIVE
CERTIFIED AUDITED FINANCIAL STATEMENTS AND ALL TAX INFORMATION RELATING TO THE
FUND NECESSARY FOR THE PREPARATION OF LIMITED PARTNERS' ANNUAL FEDERAL INCOME
TAX RETURNS.
_________________________
THE FUND IS SUBJECT TO THE INFORMATIONAL REQUIREMENTS OF THE
SECURITIES EXCHANGE ACT OF 1934, AND IN ACCORDANCE THEREWITH FILES REPORTS AND
OTHER INFORMATION WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC").
REPORTS, PROXIES (IF ANY), INFORMATION STATEMENTS (IF ANY), AND OTHER
INFORMATION FILED BY THE FUND, CAN BE INSPECTED AND COPIED AT THE PUBLIC
REFERENCE FACILITIES MAINTAINED BY THE SEC AT 450 FIFTH STREET, N.W. WASHINGTON,
DC 20549 AND AT ITS REGIONAL OFFICES LOCATED AT 7 WORLD TRADE CENTER, SUITE
1300, NEW YORK, NY 10048 AND CITICORP CENTER, 500 WEST MADISON STREET, SUITE
1400, CHICAGO, IL 60661. COPIES OF SUCH MATERIAL CAN BE OBTAINED FROM THE PUBLIC
REFERENCE SECTION OF THE SEC, 450 FIFTH STREET, N.W., WASHINGTON, DC 20549, AT
PRESCRIBED RATES. THE FUND IS AN ELECTRONIC FILER. THE SEC MAINTAINS A WEB SITE
THAT CONTAINS REPORTS, PROXY AND INFORMATION STATEMENTS, AND OTHER INFORMATION
REGARDING REGISTRANTS THAT FILE ELECTRONICALLY WITH THE SEC, AT
HTTP://WWW.SEC.GOV.
_________________________
ML PRINCIPAL PROTECTION L.P. IS NOT A "MUTUAL FUND" OR ANY OTHER TYPE
OF "INVESTMENT COMPANY" WITHIN THE MEANING OF THE INVESTMENT COMPANY ACT OF
1940, AND IS NOT SUBJECT TO REGULATION THEREUNDER.
-ii-
<PAGE>
COMMODITY FUTURES TRADING COMMISSION
RISK DISCLOSURE STATEMENT
YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS
YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT
FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS.
SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND
CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS
ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE
POOL.
FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR
MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR THOSE POOLS
THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID
DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A
COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL AT PAGE 44 AND A
STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER
THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE 9.
THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS
NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE,
BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY
STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION OF THE PRINCIPAL RISK
FACTORS OF THIS INVESTMENT, AT PAGE 11.
YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN
FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE THE UNITED
STATES, INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET, MAY BE
SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION TO THE
POOL AND ITS PARTICIPANTS. FURTHER, UNITED STATES REGULATORY AUTHORITIES MAY BE
UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY AUTHORITIES OR
MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE TRANSACTIONS FOR THE POOL MAY
BE EFFECTED.
-1-
<PAGE>
SPECIAL DISCLOSURES REGARDING THE
"PRINCIPAL PROTECTION" FEATURE OF THE FUND
1. ML&CO'S GUARANTEE IS NOT A GUARANTEE OF PROFIT. IF INVESTORS'
UNITS ARE WORTH NO MORE ON THEIR PRINCIPAL ASSURANCE DATE (FIVE YEARS AFTER
ISSUANCE) THAN THE GUARANTEED MINIMUM $100 PER UNIT, INVESTORS WILL HAVE LOST
THE ENTIRE USE OF THEIR CAPITAL FOR FIVE YEARS. AT A 7% INTEREST RATE, THE
PRESENT VALUE OF RECEIVING $100 FIVE YEARS IN THE FUTURE IS ONLY APPROXIMATELY
$71.
2. IN ORDER TO PROTECT ML&CO. FROM ANY LIABILITY UNDER ITS
GUARANTEE, ALL UNITS BEGIN WITH ONLY 75% OF THEIR ASSETS ALLOCATED TO TRADING.
THIS DELEVERAGING SUBSTANTIALLY REDUCES PROFIT POTENTIAL.
3. ON AN ONGOING BASIS, MLIP CONTROLS THE LEVERAGE AT WHICH THE FUND
TRADES SPECIFICALLY IN ORDER TO PREVENT ML&CO. FROM INCURRING ANY LIABILITY
UNDER ITS GUARANTEE.
4. RELATIVELY SMALL LOSSES COULD RESULT IN MLIP FURTHER DELEVERAGING
OR EVEN TERMINATING TRADING. MLIP WOULD TERMINATE TRADING IF A NEWLY-ISSUED UNIT
LOST ONLY APPROXIMATELY $22 (AT CURRENT INTEREST RATES), AND WOULD FURTHER
DELEVERAGE TRADING BELOW 75% WELL BEFORE THAT POINT.
5. IRRESPECTIVE OF LOSSES, IN THE EVENT THAT THE FUND DOES NOT EARN
SUFFICIENT PROFITS, MLIP WILL FURTHER DELEVERAGE, SUSPEND OR TERMINATE TRADING.
6. IF THE FUND IS SUCCESSFUL, ITS PERFORMANCE WOULD HAVE BEEN
SUBSTAN TIALLY BETTER WITHOUT "PRINCIPAL PROTECTION."
7. "PRINCIPAL PROTECTION" DOES NOT PROTECT INVESTORS AGAINST THE
EFFECTS OF INFLATION.
8. "PRINCIPAL PROTECTION" DOES NOT TAKE INTO CONSIDERATION THE TAX
CONSEQUENCES OF INVESTING IN THE FUND.
9. THE ML&CO. GUARANTEE IS EFFECTIVE ONLY ON UNITS OUTSTANDING ON
THEIR PRINCIPAL ASSURANCE DATE.
10. THE ML&CO. GUARANTEE IS A CONTRACT BETWEEN ML&CO. AND THE FUND.
INVESTORS COULD ENFORCE THE GUARANTEE ONLY THROUGH BRINGING A DERIVATIVE ACTION
IN THE NAME OF THE FUND.
11. THE ML&CO. GUARANTEE IS A GENERAL, UNSECURED OBLIGATION OF ML&CO.
12. AN INVESTOR COULD CONTROL THE ASSETS HE OR SHE COMMITTED TO THE
FUTURES MARKET IN SUCH A WAY SO AS TO ACHIEVE THE SAME "PRINCIPAL PROTECTION"
OFFERED BY THE FUND, WITHOUT SUBJECTING HIMSELF OR HERSELF TO THE FUND'S
REDEMPTION RESTRICTIONS.
13. THE MULTI-ADVISOR STRATEGY OF THE FUND MAKES VERY SLIGHT THE
POSSIBILITY OF LOSSES OF A MAGNITUDE THAT COULD RESULT IN THE NET ASSET VALUE
PER UNIT DECLINING BELOW THE DISCOUNTED VALUE OF $100 -- EVEN IF THE FUND HAD NO
"PRINCIPAL PROTECTION" FEATURE (AND NONE OF THE RESULTING OPPORTUNITY COSTS).
14. PROSPECTIVE INVESTORS MUST CONSIDER CAREFULLY WHETHER THE
"PRINCIPAL PROTECTION" FEATURE OF THE FUND MERITS THE OPPORTUNITY COSTS
INVOLVED,
__________________
SEE "RISK FACTORS" AT PAGE 11, "LEVERAGE
CONSIDERATIONS" AT PAGE 37 AND "THE ML&CO. GUARANTEE" AT PAGE 38.
-2-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SECTION PAGE
- ------------------ ----
<S> <C>
SUMMARY 5
Introduction .......................................... 5
Risk Factors .......................................... 6
The Fund and Its Objectives ........................... 6
"Breakeven Table" ..................................... 9
Federal Income Tax Consequences ....................... 10
Suitability ........................................... 10
RISK FACTORS ............................................... 11
(1) Investors May Incur Substantial Losses 11
(2) Past Performance Not
Necessarily Indicative of Future Results 11
(3) Volatile Markets; Highly Leveraged
Trading ........................................ 11
(4) The Costs and Risks of
"Principal Protection" ......................... 11
(5) Multi-Advisor Risk Control and
"Principal Protection" ......................... 11
(6) Substantial Charges .............................. 12
(7) Importance of General Market
Conditions ..................................... 12
(8) No Diversification Benefits If the
the Fund Is Not Profitable ..................... 12
(9) Series Issued After July 1, 1996 ................. 12
(10) Combining Independent Strategies ................. 12
(11) Systematic Strategies ............................ 12
(12) Discretionary Strategies ......................... 13
(13) Increased Assets Under Management ................ 13
(14) No Assurance of Advisors'
Continued Services ............................... 13
(15) Changes in Trading Strategy ...................... 13
(16) Illiquid Markets ................................. 13
(17) Cash Management Risks ............................ 13
(18) No Assurance of Non-Correlation;
Limitations on Non-Correlation
If Achieved .................................. 13
(19) Redemptions Restricted ........................... 13
(20) Trading on Non-U.S. Exchanges..................... 14
(21) Conflicts of Interest ............................ 14
(22) Limited Partners Taxed Currently ................. 14
(23) "Investment Advisory Fees" ....................... 14
(24) Taxation of Interest Income ...................... 14
(25) Tax Audit ........................................ 14
(26) Bankruptcy or Default ............................ 14
(27) Regulatory Change ................................ 15
INVESTMENT FACTORS ......................................... 15
PERFORMANCE OF THE FUND .................................... 18
PERFORMANCE OF THE OTHER MLIP
MULTI-ADVISOR FUTURES FUNDS .............................. 19
SELECTED FINANCIAL DATA .................................... 24
THE TWO-TIER STRUCTURE OF THE FUND ......................... 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ........................................... 26
THE ADVISOR SELECTION PROCESS .............................. 30
THE ADVISORS ............................................... 32
MLIP AND MLF ............................................... 34
Background ............................................... 34
Principals ............................................... 34
MLF ...................................................... 35
FIDUCIARY OBLIGATIONS OF MLIP .............................. 35
LEVERAGE CONSIDERATIONS .................................... 37
THE ML&CO. GUARANTEE ....................................... 38
USE OF PROCEEDS ............................................ 40
CHARGES .................................................... 44
Charges Paid by the Fund ................................. 44
Organizational and Initial Offering
Costs ............................................. 45
Brokerage Commissions .............................. 45
Administrative Fees ................................ 46
"Bid-Ask" Spreads .................................. 47
Service Fees; "EFP" Differentials .................. 47
Securities "Bid-Ask" Spreads ....................... 47
Profit Shares ...................................... 47
General ............................................ 49
Extraordinary Expenses ............................. 49
Charges Paid by Merrill Lynch ............................ 49
Selling Commissions; Ongoing
Compensation ....................................... 49
Consulting Fees .................................... 49
MLAM Fees .......................................... 50
</TABLE>
-3-
<PAGE>
ML PRINCIPAL PROTECTION L.P
TABLE OF CONTENTS (CONT.)
<TABLE>
<CAPTION>
PROSPECTUS PAGE
- ---------- ----
<S> <C>
Redemption Charges ....................................... 50
CERTAIN LITIGATION ......................................... 50
CONFLICTS OF INTEREST ...................................... 55
Merrill Lynch Affiliated Entities .................. 55
General ............................................ 55
MLIP ............................................... 55
MLF; MLIB; MLAM .................................... 56
The Trading Advisors ............................... 56
Financial Consultants .............................. 57
Proprietary Trading ................................ 57
THE LIMITED PARTNERSHIP AGREEMENT .......................... 58
FEDERAL INCOME TAX CONSEQUENCES ............................ 59
PLAN OF DISTRIBUTION ....................................... 63
Subscription Procedure ................................... 63
Purchases by Employee Benefit Plans ...................... 64
Selling Agent Compensation ............................... 64
Advisors' Investments in the Fund ........................ 65
LEGAL MATTERS .............................................. 65
EXPERTS .................................................... 65
ADDITIONAL INFORMATION ..................................... 65
RECENT FINANCIAL INFORMATION ............................... 66
INDEX OF TERMS ............................................. 67
ORGANIZATIONAL STRUCTURE ................................... 68
INDEX TO FINANCIAL STATEMENTS .............................. 69
THE "CORE" ADVISORS ........................................ 88
PERFORMANCE OF THE
PUBLIC SINGLE-ADVISOR FUTURES
FUNDS OPERATED BY MLIP ................................... 115
THE ROLE OF MANAGED
FUTURES IN AN INVESTMENT PORTFOLIO ....................... 117
APPENDIX -- BLUE SKY GLOSSARY .............................. APP-1
EXHIBIT A -- THIRD AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT ............................ A-1
EXHIBIT B -- AMENDED FORM OF GUARANTEE
AGREEMENT ................................................ B-1
EXHIBIT C -- SUBSCRIPTION REQUIREMENTS ..................... SR-1
EXHIBIT D -- SUBSCRIPTION AGREEMENT
AND POWER OF ATTORNEY .................................... SA-(i)
</TABLE>
____________________
MERRILL LYNCH INVESTMENT PARTNERS INC.
GENERAL PARTNER
SOUTH TOWER, 6TH FLOOR
WORLD FINANCIAL CENTER
NEW YORK, NEW YORK 10080-6106
TELEPHONE: (212) 236-4167
-4-
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY
The nature of an investment in the Fund is complex and
must be reviewed carefully by any person considering purchasing
Units. The following summary is qualified in its entirety by
the information set forth elsewhere in this Prospectus.
____________________
INTRODUCTION
THE FUND AND THE OFFERING
ML Principal Protection L.P. trades in the international
futures, commodity options and forward markets, with the objectives of
achieving long-term capital appreciation while controlling performance
volatility. MLIP selects and monitors the Fund's multiple independent
Advisors, and allocates and reallocates the Fund's trading assets among
them.
$32,000,000 was invested in the Fund's initial Series A Units as
of October 12, 1994, and a total of an additional $69,903,535 the seven
subsequent quarter-end closings through September 30, 1996. Through
September 30, 1996, an aggregate of 1,019,035.36 of Units had been sold
and 240,034.54 redeemed. As of September 30, 1996, the Fund's
capitalization was $81,317,558.
PERFORMANCE
As of September 30, 1996, the Net Asset Value of the series of
Units issued at different times, in each case for $100 per Unit, were as
follows:
<TABLE>
<CAPTION>
Unit September 30, 1996
Series Date of Issuance Net Asset Value
------ ---------------- ------------------
<S> <C> <C>
A October 12, 1994 $109.80 ($6.00 distribution, 10/1/95 &
10/1/96)
B January 9, 1995 $107.13 ($6.00 distribution, 1/1/96)
C April 10, 1995 $102.49 ($3.50 distribution, 4/1/96)
D July 11, 1995 $101.45 ($3.50 distribution, 7/1/96)
E October 11, 1995 $105.31 ($3.50 distribution, 10/1/96)
F January 17, 1996 $102.08 (no distributions paid yet)
G April 19, 1996 $100.71 (no distributions paid yet)
H July 16, 1996 $ 99.90 (no distributions paid yet)
</TABLE>
As of September 30, 1996, the Fund had a total of 3,765 Limited
Partners.
ALL SERIES OF UNITS ISSUED TO DATE HAVE TRADED WITH 60% OF THEIR
CAPITAL ALLOCATED TO TRADING AND HAD A PRINCIPAL ASSURANCE DATE SEVEN
YEARS AFTER ISSUANCE. UNITS SOLD PURSUANT TO THIS PROSPECTUS WILL
COMMENCE TRADING WITH 75% OF THEIR ASSETS SO ALLOCATED AND HAVE A
PRINCIPAL ASSURANCE DATE FIVE YEARS AFTER ISSUANCE.
- --------------------------------------------------------------------------------
-5-
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY (CONT.)
RISK FACTORS
THE FOLLOWING ARE CERTAIN OF THE SIGNIFICANT RISKS OF THIS
INVESTMENT.
. INVESTORS MUST BE PREPARED TO LOSE THE ENTIRE TIME VALUE OF THEIR
INVESTMENT. AT A 7% INTEREST RATE, THE PRESENT VALUE OF RECEIVING THE
ASSURED MINIMUM $100 PER UNIT FIVE YEARS IN THE FUTURE WOULD BE ONLY
APPROXIMATELY $71. SEE "THE ADVISOR SELECTION PROCESS" AT PAGE 30 AND
"RISK FACTORS -- (1) INVESTORS MAY INCUR SUBSTANTIAL LOSSES" AT PAGE
11.
. PAST PERFORMANCE OF THE FUND AND ITS ADVISORS IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS. SEE "COMMODITY FUTURES TRADING
COMMISSION--RISK DISCLOSURE STATEMENT" AT PAGE 1 AND "RISK FACTORS --
(2) PAST PERFORMANCE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS" AT
PAGE 11.
. THE FUND TRADES WITH A HIGH DEGREE OF LEVERAGE IN VOLATILE MARKETS.
SEE "RISK FACTORS -- (3) VOLATILE MARKETS; HIGHLY LEVERAGED TRADING"
AT PAGE 11.
. THE "PRINCIPAL PROTECTION" FEATURE OF THE FUND INVOLVES BOTH ACTUAL
OPPORTUNITY COSTS AND THE RISK OF SIGNIFICANTLY INCREASED OPPORTUNITY
COSTS IN THE FUTURE. MLIP INITIALLY DELEVERAGES EACH SERIES' TRADING
IN ORDER TO PROTECT ML&CO. FROM ANY LIABILITY UNDER ITS GUARANTEE,
CORRESPONDINGLY REDUCING PROFIT POTENTIAL. IN THE EVENT THAT THE FUND
DOES NOT MAKE SUFFICIENT PROFITS FOR THE NET ASSET VALUE OF A SERIES
OF UNITS TO INCREASE FROM ITS INITIAL $100 PER UNIT, MLIP WILL FURTHER
DELEVERAGE TRADING. RELATIVELY SMALL LOSSES COULD RESULT IN MLIP
FURTHER DELEVERAGING OR TERMINATING TRADING. MOREOVER, EVEN WERE
ML&CO. TO INCUR A LIABILITY UNDER ITS GUARANTEE, INVESTORS COULD ONLY
ENFORCE SUCH LIABILITY THROUGH BRINGING A "DERIVATIVE ACTION" IN THE
NAME OF THE FUND, AS THIS GUARANTEE DOES NOT RUN DIRECTLY TO INVESTORS
BUT ONLY TO THE FUND ITSELF. SEE "RISK FACTORS -- (4) THE COSTS AND
RISKS OF 'PRINCIPAL PROTECTION'" AT PAGE 11.
. EVEN APART FROM ITS DELEVERAGED TRADING, THE RISK CONTROL FEATURES
EXPECTED FROM THE FUND'S MULTI-ADVISOR STRUCTURE MAKES IT HIGHLY
UNLIKELY THAT THE ML&CO. GUARANTEE WILL EVER BENEFIT INVESTORS. SEE
"RISK FACTORS-- (5) MULTI-ADVISOR RISK CONTROL AND 'PRINCIPAL
PROTECTION'" AT PAGE 11.
. THE FUND IS SUBJECT TO SUBSTANTIAL CHARGES. ESTIMATED GROSS TRADING
PROFITS OF 7.75% OF THE FUND'S AVERAGE MONTH-END NET ASSETS MUST BE
EARNED DURING THE FIRST YEAR AFTER A UNIT IS SOLD IN ORDER FOR ITS
REDEMPTION VALUE TO EQUAL THE INITIAL $100 SUBSCRIPTION PRICE. SEE "--
BREAKEVEN TABLE" BELOW AT PAGE 9, "CHARGES" AT PAGE 44 AND "RISK
FACTORS -- (6) SUBSTANTIAL CHARGES" AT PAGE 12.
. CERTAIN GENERAL TYPES OF MARKET CONDITIONS -- IN PARTICULAR, TRENDLESS
PERIODS WITHOUT MAJOR PRICE MOVEMENTS -- SIGNIFICANTLY REDUCE THE
ADVISORS' ABILITY TO TRADE SUCCESSFULLY. SEE "RISK FACTORS -- (7)
IMPORTANCE OF GENERAL MARKET CONDITIONS" AT PAGE 12.
NO SUBSCRIBER SHOULD INVEST MORE THAN 10% OF HIS OR
HER READILY MARKETABLE ASSETS IN THE FUND.
SEE "RISK FACTORS" AT PAGES 11 THROUGH 15.
THE FUND AND ITS OBJECTIVES
A MULTI-STRATEGY APPROACH
The Fund is a multi-strategy, multi-market managed futures
investment, employing a range of strategies diversified across major
sectors of the global economy -- financials, currencies, energy, metals
and agriculture. MLIP allocates Fund assets both to Advisors specializing
in particular market sectors and to Advisors which trade broadly
diversified portfolios. See "The Advisor Selection Process" at page
30.
- --------------------------------------------------------------------------------
-6-
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY(CONT.)
The Fund has to date retained between five and ten Advisors,
trading independently of each other and employing diverse trading
methods. MLIP allocates a substantial portion of the Fund's assets to a
limited group of "core" Advisors, each of which receives significant
allocations -- typically 20% or more of the assets committed to trading
(Advisors allocated 10% or more of the Fund's trading assets for
management). The remainder is allocated in smaller percentages to a group
of non-"core" Advisors, some of which may be newer to the business or may
implement specialized strategies (Advisors allocated less than 10% of the
Fund's trading assets for management). See "The Advisor Selection
Process" at page 30 and "The 'Core' Advisors" at page 88.
Since inception, traditional commodities -- energy, metals and
agriculture -- have represented approximately 30% to 40% of the Fund's
holdings, with the remainder of its market commitment in currencies and
financial instruments.
The Fund offers a means of diversifying a limited portion of the
risk segment of a portfolio into an investment with the potential to
exhibit a high degree of non-correlation with traditional stock and bond
investments. If such non-correlation is in fact achieved and the Fund is
profitable, investing in the Units has the potential to enhance the
reward/risk ratio of an overall portfolio. See "The Role of Managed
Futures in an Investment Portfolio" at page 117.
MLIP
MLIP, a Delaware corporation, is one of the largest managed
futures sponsors in the United States (or elsewhere) in terms of both
financial and personal resources and assets under management. As of
October 1, 1996, MLIP was serving as sponsor or trading manager for
futures funds with total capital of approximately $1.6 billion.
THE ADVISORS
As of September 1, 1996, the current "core" Advisors retained
for the Fund were collectively managing approximately $2.3 billion in
managed futures accounts in which their clients (and in certain cases the
Advisors themselves) had invested, and approximately $1.6 billion in the
trading programs used for the Fund. Many of the Fund's Advisors also
manage accounts for other futures funds for which MLIP acts as sponsor or
trading manager.
See "The 'Core' Advisors" beginning at page 88 for certain
performance and other information relating to the current "core" Advisors.
The accompanying Prospectus Supplement identifies the current non-"core"
Advisors. A number of Advisor changes, as well as reallocations of assets
among Advisors, have been made since inception.
"PRINCIPAL PROTECTION"
ML&Co. has agreed to make any payments to the Fund necessary to
ensure that the Net Asset Value of each Unit still outstanding, as of its
Principal Assurance Date, will be at least $100.
The ML&Co. guarantee is effective only on Units still
outstanding at their Principal Assurance Date.
POTENTIAL YIELD ENHANCEMENT
MLIP attempts to increase the yield received by the Fund on its
available cash by retaining the services of its affiliate, Merrill Lynch
Asset Management, L.P. ("MLAM"). MLAM manages over 90% of the Fund's
capital, investing on an unleveraged basis in U.S. Treasury bills, notes
and bonds, and securities issued by certain U.S. government agencies and
instrumentalities (collectively, "Government Securities"), within
investment parameters established by MLIP. There can be no assurance that
MLAM's cash management will be able to achieve higher yields for the Fund
or to avoid losses of principal.
- --------------------------------------------------------------------------------
-7-
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY(CONT.)
TWO-TIER STRUCTURE OF THE FUND
The Fund does not trade in the futures and forward markets
directly, but rather through a "subsidiary" limited partnership, ML
Principal Protection Trading L.P. (the "Trading Partnership"), of which
the Fund is the sole limited, and MLIP the sole general, partner. As an
investor in the Trading Partnership, the Fund's liability for any trading
losses is limited to the amount of its investment. As a result, trading
through the 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 not become subject to
paying any trading losses attributable to another.
The different series of Units will, over time, have different
percentages of their total capital invested in the Trading Partnership.
However, all capital invested in the Trading Partnership is allocated to
the Advisors for management. Consequently, each series shares in the
trading profits and losses of the Trading Partnership pro rata, based on
the amount invested by such series in the Trading Partnership. Trading
Partnership losses would be allocated among all series to the extent of,
and only to the extent of, their respective investments in the Trading
Partnership, while the limited liability character of the Trading
Partnership would prevent any assets not so invested from being subject to
any such losses. The combination of the pro rata sharing of losses at the
Trading Partnership level and the insulation of all assets held at the
Fund level from the risk of trading losses eliminates the possibility of
one series' assets paying trading losses attributable to another. See
"The Two-Tier Structure of the Fund" at page 25 and "Leverage
Considerations" at page 37.
THERE CAN BE NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS
OBJECTIVES OR AVOID SUBSTANTIAL LOSSES. NO MERRILL LYNCH ENTITY OR
ADVISOR HAS GUARANTEED THE SUCCESS OF THE FUND IN ANY RESPECT.
- --------------------------------------------------------------------------------
-8-
<PAGE>
________________________________________________________________________________
SUMMARY(CONT.)
"BREAKEVEN TABLE"
<TABLE>
<CAPTION>
__________________________________________________________________________________________________________
COLUMN I COLUMN II
"BREAKEVEN" "BREAKEVEN"
PERCENTAGE RETURN DOLLAR RETURN REQUIRED
REQUIRED FIRST ($5,000 INITIAL INVESTMENT)
TWELVE MONTHS FIRST
OF INVESTMENT TWELVE MONTHS
(BASED ON 75% OF OF INVESTMENT (BASED ON
EXPENSES AND TOTAL ASSETS ALLOCATED TO 75% OF TOTAL ASSETS
INTEREST INCOME TRADING) ALLOCATED TO TRADING)
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Brokerage commissions/ (1)/ 6.94% $ 347.00
----------------------------------------------------------------------------------------------------------
Administrative Fees 0.19% $ 9.50
----------------------------------------------------------------------------------------------------------
Organizational and Initial Offering Costs /(2)/ 0.10% $ 5.00
----------------------------------------------------------------------------------------------------------
F/X Service Desk and Related Fees /(3)/ 0.25% $ 12.50
----------------------------------------------------------------------------------------------------------
Profit Shares /(4)/ 2.00% $ 100.00
----------------------------------------------------------------------------------------------------------
Redemption Charge /(5)/ 3.10% $ 155.00
----------------------------------------------------------------------------------------------------------
Interest Income/(6)/ (5.00)% $(250.00)
TRADING PROFITS REQUIRED FOR
AN INITIAL $5,000 INVESTMENT TO 7.58% $ 379.00
"BREAKEVEN"/(7)/
__________________________________________________________________________________________________________
</TABLE>
NOTES TO "BREAKEVEN TABLE"
(1) Brokerage commissions include the consulting Fees payable to the
Advisors by Merrill Lynch Futures. Such Fees range from 2% to 4%
per annum of the Fund's assets committed to the Advisors for
their management.
(2) Estimated, based on the Fund's October 1, 1996
capitalization.
(3) Estimated; paid on a per-transaction basis. "Bid-ask" spreads are
difficult to estimate and are not included as an expense in the
"Breakeven Table." The F/X Service Desk is the Foreign Exchange
Service Desk organized by MLIP through which the Fund trades
forward currency contracts. The F/X Service Desk has, MLIP
believes, reduced the overall risk of the Fund's currency
trading. See "Charges" at page 44.
(4) 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, but actual Profit Shares could differ.
(5) Redemption charges would equal 3.1% of the initial $5,000
investment because these charges would equal 3% of the $5,155 Net
Asset Value required in order for the investor to receive net
redemption proceeds of $5,000 after subtracting the 3% redemption
charge.
(6) Estimated; the total yield earned on the Fund's assets, including
the results of MLAM's cash management services, are assumed to
approximate the 91-day Treasury bill rate; in fact, however,
MLAM's cash management and the interest credited to the Fund by
Merrill Lynch Futures or an affiliate may be unable to produce an
enhanced yield or avoid a loss of yield or principal.
(7) On the Cover Page and in the Summary, the "breakeven" point has
been rounded up to the nearest quarter percentage point.
____________________
If the percentage of a series' capital allocated to trading were
to increase, so would brokerage commissions and Administrative
Fees as a percentage of such capital. At 100% leverage, the
Fund's annual brokerage commissions and Administrative Fees would
equal 9.25% and 0.25%, respectively, of average month-end
________________________________________________________________________________
-9-
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY(CONT.)
Net Assets and the Trading Profits required for an initial $5,000
investment to "breakeven" would increase to 9.95% or $497.50.
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of counsel, the Fund is properly classified as a
partnership for federal income tax purposes. Limited Partners will pay
tax each year on their allocable share of the Fund's taxable income, if
any, whether or not they receive any distributions from the Fund or redeem
any Units. Substantially all of the Fund's trading gains and losses will
be treated as capital gains or losses for tax purposes; interest income
received by the Fund will be treated as ordinary income.
SUITABILITY
THE FUND TRADES AT A HIGH DEGREE OF LEVERAGE IN HIGHLY VOLATILE
MARKETS. AN INVESTMENT IN THE UNITS IS SPECULATIVE AND INVOLVES A HIGH
DEGREE OF RISK. THERE CAN BE NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS
OBJECTIVES OR AVOID SUBSTANTIAL LOSSES.
NO SUBSCRIBER SHOULD INVEST MORE THAN 10% OF HIS OR HER READILY
MARKETABLE ASSETS IN THE FUND. SUBSCRIBERS MUST BE PREPARED TO LOSE THE
ENTIRE TIME VALUE OF THEIR INVESTMENT.
THE UNITS ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
- --------------------------------------------------------------------------------
-10-
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE FUND IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK.
NO ONE SHOULD INVEST MORE THAN 10% OF HIS OR HER
READILY MARKETABLE ASSETS IN THE FUND.
_______________
(1) INVESTORS MAY INCUR SUBSTANTIAL LOSSES
INVESTORS MUST BE PREPARED TO LOSE THE USE OF THEIR INVESTED
CAPITAL FOR THE ENTIRE FIVE-YEAR "TIME HORIZON" FROM A UNIT'S ISSUANCE TO
ITS PRINCIPAL ASSURANCE DATE. AT A 7% INTEREST RATE, THIS WOULD
CONSTITUTE APPROXIMATELY A 30% LOSS.
(2) PAST PERFORMANCE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Past performance is not necessarily indicative of future
results. Neither the Advisors' nor the Fund's past performance to date is
representative of how they or it, respectively, will trade in the future.
(3) VOLATILE MARKETS; HIGHLY LEVERAGED TRADING
Futures and forward trading is highly leveraged, and market
price levels are volatile and materially affected by unpredictable factors
such as weather and governmental intervention. The combination of
leverage and volatility creates a high degree of risk.
(4) THE COSTS AND RISKS OF "PRINCIPAL PROTECTION"
The "principal protection" feature of the Fund involves both
actual opportunity costs, and the risk of significantly increased
opportunity costs in the future. MLIP initially deleverages each series'
trading in order to protect ML&Co. from any liability, correspondingly
reducing profit potential, under its guarantee. In addition to the
opportunity costs of this initial deleveraging, there is the risk of
further deleveraging in the event that the Fund does not recognize
sufficient profits for the Net Asset Value of a series of Units to
increase from its initial $100 per Unit. Unless the Net Asset Value per
Unit increases, MLIP will further deleverage trading as the discounted
value of $100 (the minimum Net Asset Value assured to investors as of the
Principal Assurance Date) converges to the current Net Asset Value per
Unit, eliminating any assets available to support trading. In the event
that the Fund incurs even relatively small losses (as opposed to merely
breakeven performance), MLIP might rapidly and significantly deleverage or
even terminate trading.
The "principal protection" feature of the Fund creates the risk
that the "downside" objective of ensuring that the Net Asset Value per
Unit will not decline below the present value of $100 will reduce or
eliminate the Fund's "upside" potential by impairing or terminating its
ability to trade, to the material detriment of investors.
The ML&Co. guarantee does not run directly to investors but only
to the Fund itself. Consequently, were ML&Co. to incur a liability under
its guarantee, investors could only enforce such liability through
bringing a "derivative action" in the name of the Fund.
(5) MULTI-ADVISOR RISK CONTROL AND "PRINCIPAL PROTECTION"
In addition to the opportunity costs of the deleveraging of
trading involved in the Fund's "principal protection" feature, the multi-
advisor strategy of the Fund involves the inherent opportunity costs of
combining independent trading strategies into a single portfolio. The
Advisors trade pursuant to their own respective trading strategies without
regard to the positions taken by any other Advisor. Consequently, the
profits earned by certain Advisors are frequently offset, in whole or in
part, by losses incurred by others. The inter-Advisor offsetting of
profits and losses reduces both loss and profit potential. The loss
reduction features of MLIP's multi-advisor strategy -- irrespective of the
deleveraging of the Fund's trading as a result of the Fund's "principal
protection" -- significantly reduces the likelihood of the ML&Co.
guarantee ever being of any tangible benefit to investors.
-11-
<PAGE>
(6) SUBSTANTIAL CHARGES
The Fund is subject to substantial charges. Due to the
"principal protection" structure of the Fund, it is particularly important
that capital not be depleted by expenses. Any such depletion could result
in the further deleveraging or termination of trading. The charges
assessed on Units sold under this Prospectus will be greater as a
percentage of their total equity than the charges reflected in the Fund's
performance to date because the newly-issued Units will begin trading at
75% rather than the 60% leverage used by previous series. Brokerage
commissions as well as Administrative Fees are based on the assets
committed to trading by each series. At the same time, the increased
leverage of these Units will correspondingly increase their profit
potential and risk of loss.
The Profit Shares paid to Advisors are based on the individual
performance of each Advisor, not the overall performance of the Fund.
Historically, the Fund has paid substantial Profit Shares to certain
Advisors during periods when the performance of the Fund as a whole was
"breakeven" or unprofitable.
(7) IMPORTANCE OF GENERAL MARKET CONDITIONS
Overall market or economic conditions -- which neither MLIP nor
any Advisor can predict or control -- have a material effect on
performance. Furthermore, such overall conditions can adversely affect
the performance of numerous Advisors at or about the same time, despite
their implementing different and independent strategies. Consequently,
the multi-advisor structure of the Fund does not assure that its
performance will not be adversely affected by future market or economic
conditions.
(8) NO DIVERSIFICATION BENEFITS IF THE FUND IS NOT PROFITABLE
If the Fund does not trade successfully -- after deduction of
all fees and charges -- it cannot serve as an effective diversification
element in a traditional portfolio.
(9) SERIES ISSUED AFTER JULY 1, 1996
All series of Units issued after July 1, 1996 will commence
trading at 75% leverage. Previously issued series began trading at 60%
leverage and have maintained that leverage to date. Consequently, the new
series issued under this Prospectus will generally be more highly
leveraged and their trading results correspondingly more volatile than
that of previous series.
If MLIP makes a leverage adjustment to any series issued under
this Prospectus, MLIP must make corresponding adjustments to the other
series issued after July 1, 1996 so that all such series trade at the same
level of leverage. This regulatory requirement of uniform leverage could
affect certain series adversely. For example, a series might have traded
profitably and generated profit sufficient to cause MLIP to upleverage
that series' trading were it not for the fact that another series not
comparably profitable because sold at a different time, could not
prudently be upleveraged also.
MLIP does not presently intend to make any distributions on
Units issued after July 1, 1996.
(10) COMBINING INDEPENDENT STRATEGIES
Combining independent trading strategies involves substantial
opportunity costs, as one Advisor's profits are frequently offset by
another Advisor's losses. Different Advisors often take opposite
positions for the Fund, eliminating the profit potential of the combined
positions.
(11) SYSTEMATIC STRATEGIES
Most of the Fund's current Advisors rely on technical,
systematic strategies. The widespread use of technical trading systems
frequently results in numerous managers attempting to execute similar
trades at or about the same time, altering trading patterns and affecting
market liquidity. Furthermore, the profit potential of trend-following
systems may be diminished by the changing character of the markets, which
may make historical price data (on which technical programs are based)
only marginally relevant to future market patterns.
-12-
<PAGE>
(12) DISCRETIONARY STRATEGIES
Some of the Fund's current Advisors are discretionary rather
than systematic traders. Discretionary trading managers may be prone to
"emotionalism" and a lack of discipline in their trading. Relying on
subjective trading judgment may produce less consistent results than those
obtained by more systematic approaches.
(13) INCREASED ASSETS UNDER MANAGEMENT
There appears to be a tendency for the rates of return achieved
by managed futures advisors to decline as assets under management
increase. None of the Advisors has agreed to limit the amount of
additional equity it may manage, and most of them are at or near their
all-time high in terms of assets under management.
(14) NO ASSURANCE OF ADVISORS' CONTINUED SERVICES
There is no assurance that any Trading Advisor will be willing
or able to continue to provide advisory services to the Fund. There is
severe competition for the services of qualified Advisors, and the Fund
may not be able to retain satisfactory replacement or additional Advisors
on acceptable terms. MLIP must allocate Advisor availability among its
different funds, including the Fund, and accordingly may not at all times
select for the Fund those Advisors which MLIP would otherwise believe to
be in its best interests.
(15) CHANGES IN TRADING STRATEGY
An Advisor may make certain changes in its trading strategies
without the knowledge of MLIP (i.e., changing certain of the futures
contracts in which it trades).
(16) ILLIQUID MARKETS
Certain instruments traded by the Fund may become illiquid
preventing a Trading Advisor from acquiring positions otherwise indicated
by its strategy or making it impossible for a Trading Advisor to close out
positions against which the market is moving.
(17) CASH MANAGEMENT RISKS
The possibility of increasing yields over the risk-free rate
necessarily implies increasing risk and, accordingly, the possibility of
incurring losses -- not only of yield but also of principal. MLAM has not
guaranteed in any respect either that there will be an increase in the
yield recognized on the Fund's assets or that there will not be a loss of
principal as a result of the Fund's yield enhancement strategies.
(18) NO ASSURANCE OF NON-CORRELATION; LIMITATIONS ON NON-CORRELATION IF
ACHIEVED
Not only is the past performance of the Fund not necessarily
indicative of its future results (due to the speculative character of
managed futures), but also there can be no assurance that, however the
Fund may perform, the Fund's results will be non-correlated (i.e.,
unrelated) with the general stock and bond markets. If the Fund is not
non-correlated to these markets, the Fund cannot serve its objective of
diversifying an overall portfolio. Furthermore, investors must evaluate
an investment in the Fund in terms of the alternative of an investment in
a cash equivalent, such as 91-day Treasury bills, which can be relied upon
to (i) be generally non-correlated with equity and debt price levels, (ii)
generate a positive yield and cash flow, (iii) be highly liquid and (iv)
incur virtually no loss of principal.
Even if the Fund's performance is both profitable and non-
correlated to the general stock and bond markets, there are highly likely
to be significant periods during which the Fund's results are similar to
those of an investor's stock and bond holdings. Consequently, during
unfavorable economic cycles, an investment in the Fund may increase rather
than mitigate a portfolio's aggregate losses.
(19) REDEMPTIONS RESTRICTED
Investors' limited ability to redeem Units could result in there
being a significant difference between a Unit's redemption value and its
Net Asset Value as of the cut-off date for irrevocable redemption
requests. Redemption charges of 3% apply through the end of the twelfth
month after a Unit is sold.
-13-
<PAGE>
(20) TRADING ON NON-U.S. EXCHANGES
The Trading Advisors trade extensively on non-U.S. exchanges.
These exchanges are not regulated by any United States governmental
agency. The Fund could incur substantial losses trading on foreign
exchanges to which it would not have been subject had the Trading Advisors
limited their trading to U.S. markets.
The trading profits and losses derived from trading foreign
futures and options (as well as the margin deposits made available to the
Fund by MLF) will generally be denominated in foreign currencies so that
the Fund will be subject to a certain degree of exchange rate risk in
trading in such contracts.
(21) CONFLICTS OF INTEREST
The Fund is subject to a number of material actual and potential
conflicts of interest, raising the possibility that investors will be
disadvantaged to the benefit of MLIP, the Trading Advisors or their
respective principals and affiliates. No formal policies or procedures
have been adopted to resolve these conflicts. See "Conflicts of Interest"
at page 55.
(22) LIMITED PARTNERS TAXED CURRENTLY
Each year, Limited Partners are taxed on their allocable share
of any Fund profits. If an investor purchased stocks or bonds, on the
other hand, there would generally be no tax due on the appreciation in the
value of such holdings until disposition.
The performance information included in this Prospectus is
presented exclusively on a pre-tax basis.
(23) "INVESTMENT ADVISORY FEES"
Limited Partners could be required to treat the Profit Shares as
well as certain other expenses of the Fund as "investment advisory fees,"
which are subject to substantial restrictions on deductibility for
individual taxpayers. MLIP has not been classifying the Profit Share or
such expenses as "investment advisory fees," a position to which the
Internal Revenue Service (the "IRS") may object.
(24) TAXATION OF INTEREST INCOME
The Fund's trading losses will be almost exclusively capital
losses. Capital losses may be offset against ordinary income only to the
extent of $3,000 per year for individual taxpayers. If an individual
Limited Partner had, for example, an allocable trading loss of $10,000 and
allocable interest income of $5,000, he or she would incur a net loss of
$5,000 but would recognize taxable interest income of $2,000.
(25) TAX AUDIT
There can be no assurance that the Fund's tax returns will not
be audited by the IRS. If such an audit results in an adjustment, Limited
Partners could be required to pay back taxes, interest and penalties, and
could themselves be audited.
Prospective investors are strongly urged to consult their own
tax advisers and counsel with respect to the possible tax consequences of
an investment in the Fund, particularly since the tax consequences of any
such investment may differ for different investors. See "Federal Income
Tax Consequences" at page 59.
(26) BANKRUPTCY OR DEFAULT
The Fund could be unable to recover its assets from MLF or
MLPF&S in the event of their bankruptcy. In its off-exchange trading, the
Fund deals with its counterparties as principals and is subject to the
full risk of their default or insolvency. Investors could incur
substantial losses, despite the Fund having been otherwise highly
profitable, in the event of the bankruptcy or default of a Merrill Lynch
entity or a market counterparty. Certain of the assets of the Fund will
be held in "unregulated" or only partially regulated accounts, which would
have less protection in the event of the bankruptcy of MLF or MLPF&S than
would the assets of certain other customers of these firms. In fact, in
respect of these firms' unregulated accounts, the Fund would constitute no
more than a general, unsecured creditor of these entities with respect to
its assets on deposit in unregulated accounts with them.
-14-
<PAGE>
(27) REGULATORY CHANGE
In the past several years, considerable international regulatory
attention has been focused on the activities of "non-traditional"
investment funds such as the Fund. Future regulatory change could have
material negative consequences for an investment in the Units.
____________________
INVESTMENT FACTORS
The following summarizes certain of the principal potential
advantages which MLIP believes may be associated with an investment in the
Fund. There are also substantial risks associated with such an
investment. See "Risk Factors" beginning at page 11.
____________________
(1) MLIP
MLIP is a major sponsor of futures funds. MLIP's experience and
familiarity with the industry assist MLIP in its ongoing monitoring of the
Trading Advisors' performance as well as in the administration of the
Fund. MLIP combines experience in its trading advisor selection process
with an active approach to its general partner and trading manager
roles.
(2) THE TRADING ADVISORS
All Advisors selected by MLIP for the Fund have been successful.
In evaluating what levels of performance volatility -- one commonly used
measure of risk -- are acceptable in the Advisors which are candidates to
manage assets for its funds, MLIP considers both (i) the relationship of
an Advisor's rates of return to its performance volatility and (ii) the
absolute level of such performance volatility. The "risk/reward ratio" of
returns to volatility provides some indication -- based on historical
performance which is not necessarily indicative of future results -- of
the profits achieved in relation to the level of risk assumed. However,
certain prospective Advisors, even if they have achieved significant
profits over time, exhibit a high degree of performance variability -- to
a degree which might not be appropriate to include in the Fund's
portfolio. One of the overall performance objectives of the Fund is to
produce returns exhibiting a relatively low degree of volatility, an
objective consistent with many investors' portfolio expectations.
(3) MARKET AND STRATEGY DIVERSIFICATION
In its Advisor selections, MLIP emphasizes broad diversification
and participation in numerous global markets. MLIP focuses on combining
Advisors that collectively implement a wide range of qualitatively
different strategies and trading methods. Although since inception the
Advisor group selected for the Fund has emphasized technical, trend-
following methods, in the future MLIP may favor fundamental and/or
discretionary Advisors in its selections for the Fund. See "The 'Core'
Advisors -- Futures Trading Methods in General" at pages 88 and 89.
(4) PORTFOLIO DIVERSIFICATION
The performance of the Fund should exhibit a substantial degree
of non-correlation (not, however, necessarily negative correlation) with
the performance of traditional stock and bond portfolio components.
Unlike short selling in the securities markets, selling futures short is
no more difficult than establishing a long position. The profit and loss
potential of futures trading is not dependent upon economic prosperity or
interest rate or currency stabilility. Diversifying assets among
different investments that generate positive but non-correlated returns
has the potential to decrease risk without a corresponding decrease in
returns -- enhancing the risk/reward profile of a portfolio. However,
non-correlation without positive performance will not provide any
diversification advantages, and there can be no assurance that the Fund
will trade profitably.
Non-correlated performance must be distinguished from negatively
correlated performance. MLIP has no expectation that the performance of
the Fund will be inversely related to that of the general debt and equity
markets, i.e., likely to be profitable when the latter are unprofitable or
vice versa. This would be negative
-15-
<PAGE>
correlation. Non-correlation means only that the performance of the Fund
has, in MLIP's judgment, a good likelihood of being unrelated to the
performance of stocks and bonds. Non-correlation means only that certain
factors which affect stock and bond prices may affect the Fund differently
and that certain factors which affect the former may not affect the
latter. The Net Asset Value per Unit may decline more or less than, or be
more or less profitable than, stocks and bonds during both "bear" and
"bull" markets.
An investment cannot be described as a "hedge" against another
to which the former is only non- as opposed to negatively correlated,
because there is no necessary, or even expected, offsetting of the losses
incurred by one by gains achieved by the other. Prospective investors
must not consider an investment in the Units as a hedge against their
overall debt and equity market exposure. Even if successful, the Fund can
at most serve as a diversification from, not a hedge against, a
subscriber's stock and bond portfolio. See "The Role of Managed Futures
in an Investment Portfolio" at page 117.
(5) GLOBAL TRADING
As global markets and investing become more complex,
professionally managed futures may increasingly be included in traditional
portfolios of stocks and bonds managed by advisors seeking improved
balance and diversification. By allocating a portion of the risk segment
of their portfolios to selected advisors specializing in global futures
and forward trading with the ability to move capital rapidly among the
world's economies and markets, investors have the potential, if their
futures investment is successful, to enhance their prospects for superior
performance as well as to reduce both the volatility of their portfolios
over time and their dependence on a single nation's economy. As in the
case of "--(4) Portfolio Diversification," above, if the Fund does not
trade profitably, the fact that it will trade in diversified global
markets will be of no benefit to investors.
(6) POTENTIAL YIELD ENHANCEMENT
MLAM manages substantially all (over 90%) of the Fund's assets
through investments in Government Securities, maintaining a short-term
portfolio with a maximum duration of two years. The remainder of the
Fund's assets are credited with interest by MLF at approximately .50% per
annum below the prevailing 91-day Treasury bill rate. MLAM makes no
assurances that its "yield enhancement" services will result in increased
yields or avoid the loss of principal. However, from inception through
October 1, 1996, the overall yield on the Fund's assets managed by MLAM
had equalled approximately 1% per annum over such Treasury bill rate. If
interest rates rise significantly, the Fund could incur material losses in
the market value of its Government Securities. Prospective investors must
recognize that there is a risk of loss, not only of yield but also of
principal, in MLAM's management of a Government Securities portfolio for
the Fund.
Although implementation of any 'yield enhancement' strategy
involves incremental risk, if the Fund's program can increase the return
earned by the Fund from sources other than speculative trading, it can
increase the ability of the Fund to absorb its substantial costs, thereby
potentially reducing the risk of MLIP deleveraging or terminating trading
as a result of the Fund's charges depleting its equity base. See "Use of
Proceeds -- PotentialYield Enhancement" at page 42.
(7) SMALL MINIMUM INVESTMENT; SMALLER MINIMUM ADDITIONAL INVESTMENT
The initial minimum investment in the Fund is 50 Units ($5,000),
and the minimum additional investment for existing Limited Partners only
10 Units ($1,000). Investments in excess of these minimums are permitted
in any whole Unit multiples.
The small minimum investment required by the Fund makes it
possible for first-time investors to gain exposure to managed futures
without having to commit large amounts of capital and also permits smaller
investors who wish to do so to include an investment in the Fund as a
limited portion of the risk segment of their portfolios.
-16-
<PAGE>
(8) MERRILL LYNCH EMPLOYEE DISCOUNT
Officers and employees of ML&Co. and its affiliates subscribe
for Units at the discounted price of $97 per Unit. MLIP contributes the
remaining $3 per Unit so that other subscribers' investments are not
diluted. (Due to regulatory considerations, the employee discount is not
available to retirement accounts. Such accounts are free to purchase
Units, but must do so at $100 per Unit.)
The discount permits qualified investors to share in a portion
of the benefit derived by MLIP from not having to pay initial selling
commissions on sales of Units within the Merrill Lynch organization.
(9) ADMINISTRATIVE CONVENIENCE
The Fund is structured in order to minimize the administrative
burden to Limited Partners. Limited Partners receive, directly from MLIP,
monthly unaudited statements of account and annual certified financial
reports as well as all Fund-related tax information necessary for Limited
Partners to complete their federal income tax returns. The approximate
Net Asset Value of an investor's Units is available at any time upon
request.
-17-
<PAGE>
PERFORMANCE OF THE FUND
ML PRINCIPAL PROTECTION L.P.
SEPTEMBER 30, 1996
Type of Pool: Multi-Advisor; Selected Advisor/Publicly-Offered/"Principal
Protected"/(1)/
Inception of Trading: October 12, 1994
Aggregate Subscriptions: $101,903,536
Current Capitalization: $81,235,645
Worst Monthly Drawdown (Month/Year): (3.70)% (2/96)
Worst Peak-to-Valley Drawdown (Period)/(2)/: (3.70)% (2/96)
<TABLE>
<CAPTION>
- --------------------------------------------------------
MONTHLY RATES OF RETURN/(3)/
--------------------------------------
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 0.29% 1.04%
- --------------------------------------------------------
November 0.69% 0.32%
- --------------------------------------------------------
December 2.12% 0.40%
- --------------------------------------------------------
Compound Annual 2.54% 10.55% 1.76%
Rate of Return (9 months) (2-2/3 months)
- --------------------------------------------------------
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
_________________________
THE UNITS ISSUED UNDER THIS PROSPECTUS WILL COMMENCE TRADING AT
75% INITIAL LEVERAGE. ALL SERIES OF UNITS ISSUED TO DATE HAVE TRADED AT
60% LEVERAGE. INCREASING TRADING LEVERAGE SHOULD INCREASE 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 TRADED
ASSETS TO ANY SINGLE MANAGER. THE FUND DOES NOT CURRENTLY ALLOCATE MORE
THAN 25% OF ITS TRADING ASSETS TO A SINGLE ADVISOR BUT MAY DO SO IN THE
FUTURE; CONSEQUENTLY, IT IS REFERRED TO AS A "MULTI-ADVISOR; SELECTED
ADVISOR" FUND. APPLICABLE CFTC REGULATIONS DEFINE A "PRINCIPAL PROTECTED"
FUND AS ONE WHICH IS DESIGNED TO LIMIT THE LOSS OF PARTICIPANTS' INITIAL
INVESTMENT.
(2) "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 EQUALLED OR EXCEEDED
AS OF A SUBSEQUENT MONTH-END. FOR EXAMPLE, IF THE MONTHLY RATE OF RETURN
WAS (1)% IN EACH OF JANUARY AND FEBRUARY, 1% IN MARCH AND (2)% IN APRIL,
THE "PEAK-TO-VALLEY DRAWDOWN" WOULD STILL BE CONTINUING AT THE END OF
APRIL IN THE AMOUNT OF APPROXIMATELY (3)%, WHEREAS IF THE MONTHLY RATE OF
RETURN HAD BEEN APPROXIMATELY 3% IN MARCH, THE "PEAK-TO-VALLEY DRAWDOWN"
WOULD HAVE ENDED AS OF THE END OF FEBRUARY AT APPROXIMATELY THE (2)%
LEVEL.
(3) 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 (ALTHOUGH THE COMPOSITE RETURNS CLOSELY MATCH THOSE OF THE
SERIES A UNITS, WHICH HAVE TRADED SINCE INCEPTION). 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.
SEE ALSO "THE 'CORE' ADVISORS -- NOTES TO THE PERFORMANCE SUMMARIES,"
NOTES 10 AND 11 ON PAGES 112 AND 113.
__________________________
-18-
<PAGE>
PERFORMANCE OF THE OTHER MLIP
MULTI-ADVISOR FUTURES FUNDS
The following performance summaries present the past performance
of other funds sponsored by MLIP which allocate their assets to more than
one advisor. The performance of the publicly offered "single advisor"
funds sponsored by MLIP is set forth beginning at page 115. MLIP, in
general, specializes in sponsoring "multi-advisor" and "selected advisor"
funds.
Funds with different "principal protection" features allocate
substantially different percentages of their assets to trading. Each
series of Units sold pursuant to this Prospectus will initially allocate
75% of its assets to trading. However, all series sold on or before June
30, 1996 initially allocated only 60% of their assets to trading. The
SECTOR Strategy Funds(SM) (with the exception of The SECTOR Strategy
Fund(SM) IV L.P. (Series B Units) and The SECTOR Strategy Fund(SM)
International IV Ltd. (Series B Shares)) whose performance summaries are
set forth below, each began trading with approximately 70% of their assets
allocated to trading, and certain of such SECTOR Strategy Funds(SM) have
traded at significantly more than 70% leverage over time. The MLIP funds
without "principal protection" features all generally trade at 100%
leverage.
MLIP funds are each different investments, have different
advisors and different numbers of advisors, and allocate different
percentages of assets to trading in general as well as among such
advisors.
All of the "principal protected" MLIP funds (other than The
Growth and Guarantee Fund L.P., see "Performance of the Public Single-
Advisor Futures Funds Operated by MLIP" at page 115) are also "multi-
advisor" funds.
As of the date of this Prospectus, each of the current Advisors
is managing one or more accounts for other MLIP multi- or selected-advisor
funds. However, no MLIP fund has ever had the same Advisor group as does
the Fund.
The fee structure and interest income arrangements of the
various MLIP "multi-" and "selected-advisor" funds vary somewhat, but all
are generally comparable to those of the Fund.
ML Principal Protection Plus Ltd. (see page 20) has operated as
the offshore "sister" pool of the Fund.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS, AND MATERIAL DIFFERENCES EXIST BETWEEN THE FUNDS WHOSE
PERFORMANCE SUMMARIES ARE SET FORTH ON THE FOLLOWING PAGES AND THE FUND.
TO DATE, THE FUND HAS NOT PERFORMED IN A MANNER COMPARABLE TO OTHER MLIP-
SPONSORED FUNDS, AND IT IS UNLIKELY THAT THE FUND WILL PERFORM IN A MANNER
COMPARABLE TO MANY OF SUCH FUNDS IN THE FUTURE.
INVESTORS SHOULD NOTE THAT INTEREST INCOME MAY CONSTITUTE A
SIGNIFICANT PORTION OF A COMMODITY POOL'S INCOME AND, IN CERTAIN
INSTANCES, MAY GENERATE PROFITS WHERE THERE HAVE BEEN REALIZED AND
UNREALIZED LOSSES FROM COMMODITY TRADING.
-19-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MLIP SELECTED-ADVISOR AND MULTI-ADVISOR FUNDS
WITH "PRINCIPAL PROTECTION" FEATURES
SEPTEMBER 1, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
WORST WORST
TYPE OF INCEPTION MONTHLY PEAK-TO-VALLEY
OFFERING OF AGGREGATE CURRENT DRAWDOWN/1/ DRAWDOWN/2/
NAME OF FUND TRADING SUBSCRIPTIONS CAPITALIZATION % Date % PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ML Principal Protection
Plus Ltd. (offshore
counterpart of the Fund) Private Oct. 1994 $437,301,323 $351,018,773 (3.72)% (2/96) (3.72)% (2/96)
- ------------------------------------------------------------------------------------------------------------------------------------
The S.E.C.T.O.R. Strategy
Fund(SM) L.P. Public July 1990 $125,853,001 $ 30,151,254 (6.09)% (2/96) (13.78)% (1/92-5/92)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
II L.P. (SECTOR II Units) Public Dec. 1990 $136,410,000 $ 14,681,835 (4.73)% (2/96) (15.93)% (8/93-1/95)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
II L.P. (SECTOR III Units) Public July 1991 $194,005,000 $ 26,906,145 (8.64)% (2/96) (14.25)% (1/92-5/92)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
IV L.P. (Series A Units) Public July 1992 $ 75,646,400 $ 4,154,937 (6.41)% (2/96) (8.98)% (6/95-10/95)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
V L.P. Public Jan. 1993 $137,500,000 $ 13,772,259 (7.51)% (2/96) (10.14)% (2/96-6/96)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
VI L.P. Public Sept.1993 $108,693,900 $ 31,916,415 (5.89)% (7/96) (8.97)% (5/96-7/96)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) dissolved as of
International II Ltd. Private Dec. 1990 $ 55,181,600 12/31/95 (4.56)% (8/94) (16.49)%(8/93-1/95)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
International II Ltd.
(SECTOR III Shares) Private July 1991 $ 85,701,800 $ 8,230,204 (7.10)% (1/92) (14.25)% (1/92-5/92)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
International IV Ltd.
(Series A Shares) Private July 1992 $ 55,189,400 $ 3,825,437 (6.22)% (2/96) (8.30)% (1/94-1/95)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
International V Ltd. Private Jan. 1993 $ 81,252,600 $ 5,924,535 (3.41)% (7/95) (8.00)% (6/95-10/95)
- ------------------------------------------------------------------------------------------------------------------------------------
ML Japan Investment dissolved as of
Partners Ltd. Private Aug. 1993 (Yen)1,050,000,000 6/30/96 (3.52)% (7/94) (7.32)% (1/94-2/95)
- ------------------------------------------------------------------------------------------------------------------------------------
SECTOR (SM) International
Limited Private Sept.1993 $163,806,100 $ 14,203,992 (4.60)% (2/94) (10.43)% (9/93-2/94)
- ------------------------------------------------------------------------------------------------------------------------------------
Yen Linked ML PPP Ltd. Private Oct. 1995 (Yen)8,723,000,000 (Yen)8,674,648,656 (1.67)% (2/96) (1.67)% (2/96)
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CUMMULATIVE
RATE OF 1996
RETURN COMPOUND 1995 1994 1993 1992 1991
JAN.1991 RATE OF COMPOUND COMPOUND COMPOUND COMPOUND COMPOUND
AUG.1991 FOR RETURN RATE OF RATE OF RATE OF RATE OF RATE OF
NAME OF FUND DISSOLUTION (8 MONTHS) RETURN RETURN RETURN RETURN RETURN
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ML Principal Protection
Plus Ltd. (offshore counterpart 14.27% 1.48%
of the Fund) COMPOSITE 1.35% 11.10% (2 1/2 MOS.) N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
The S.E.C.T.O.R. Strategy
Fund(SM) L.P. 55.89% 1.50% 19.25% (9.29)% 19.36% (3.43)% 23.18%
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
II L.P. (SECTOR II Units) 25.15% (0.96)% 13.50% (9.93)% 5.49% (2.76)% 20.50%
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) 13.99%
II L.P. (SECTOR III Units) 22.88% (4.19)% 9.30% (3.22)% 15.99% (8.30)% (6 MOS.)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) 0.51%
IV L.P. (Series A Units) 9.36% (7.29)% 9.78% (5.73)% 13.40% (6 MOS.) N/A
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
V L.P. 5.68% (8.51)% 14.22% (3.68)% 4.99% N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) (1.72)%
VI L.P. 8.25% 4.04% 6.72% (0.80)% (4 MOS.) N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
International II Ltd. 35.45% N/A 21.27% (9.64)% 5.49% (2.76)% 20.50%
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) 13.99%
International II Ltd. 28.23% 2.06% 2.84% 0.77% 15.99% (8.30)% (6 MOS.)
(SECTOR III Shares)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
International IV Ltd. 0.51%
(Series A Shares) 12.59% (4.81)% 11.84% (7.21)% 13.40% (6 MOS.) N/A
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
International V Ltd. 9.16% (2.59)% 11.11% (3.94)% 4.99% N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
ML Japan Investment 1.13%
Partners Ltd. (2.80)% (1.69)% 3.95% (5.95)% (5 MOS.) N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
SECTOR (SM) International (3.25)%
Limited (0.66)% (0.66)% 7.65% (3.99)% (3 2/3 MOS.) N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
0.16%
Yen Linked ML PPP Ltd. (0.30)% (0.46)% (3 MOS.) N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* THE COMPOSITE RETURN OF THIS FUND REFLECTS THE RESULTS OF THE FUND AS A
WHOLE, NOT THE PERFORMANCE OF ANY SINGLE SERIES OF SHARES. SEE NOTE (3) AT PAGE
18.
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE FUNDS.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE FUTURE RESULTS, AND THESE
FUNDS (OTHER THAN ML PRINCIPAL PROTECTION PLUS LTD.) ARE EACH TRADED
PURSUANT TO MATERIALLY DIFFERENT PROGRAMS AND WITH MATERIALLY DIFFERENT
OBJECTIVES THAN THE FUND.
THE NOTES ON PAGE 18 ARE AN INTEGRAL PART OF, AND MUST BE READ IN CONJUNCTION
WITH, THE ABOVE PERFORMANCE INFORMATION.
-20-
<PAGE>
- --------------------------------------------------------------------------------
MLIP SELECTED-ADVISOR AND MULTI-ADVISOR FUNDS
WITHOUT "PRINCIPAL PROTECTION" FEATURES
SEPTEMBER 1, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WORST
WORST MONTHLY PEAK-TO-VALLEY
TYPE OF INCEPTION AGGREGATE CURRENT DRAWDOWN/1/ DRAWDOWN/2/
NAME OF FUND OFFERING OF TRADING SUBSCRIPTIONS CAPITALIZATION % MONTH % PERIOD
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ML Global Horizons L.P. Public Jan. 1994 $116,181,819 $81,077,111 (6.42)% (2/96) (6.42)% (2/96)
- ----------------------------------------------------------------------------------------------------------------------------
ML Global Horizons Ltd.
(Series A) Private Jan. 1994 $ 89,637,253 $42,727,028 (6.29)% (2/96) (6.29)% (2/96)
- ----------------------------------------------------------------------------------------------------------------------------
ML Global Horizons Ltd.
(Series B) Private Sept. 1994 $ 3,708,415 $ 2,163,629 (5.66)% (2/96) (5.73)% (6/95-9/95)
- ----------------------------------------------------------------------------------------------------------------------------
ML Futures Investments II Public May 1988 $269,809,880 $13,467,354 (10.34)% (1/91) (17.81)% (11/90-8/91)
L.P.
- ----------------------------------------------------------------------------------------------------------------------------
CANADIAN DIVERSIFIED
FUTURES FUND LIMITED Public July 1989 $ 13,060,222 ceased trading (6.42)% (4/91) (18.38)% (12/90-8/91)
PARTNERSHIP 12/31/93
- ----------------------------------------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L.P. Public Jan. 1990 $ 18,182,000 $11,829,594 (15.99)% (1/92) (34.39)% (1/92-5/92)
(Series A Units)
- ----------------------------------------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L.P. Public Jan. 1991 $ 50,636,000 $25,202,606 (15.01)% (1/92) (32.28)% (1/92-5/92)
(Series B Units)
- ----------------------------------------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L. P. Public Jan. 1992 $ 40,000,000 $13,665,489 (9.54)% (2/96) (24.13)% (1/92-5/92)
(Series C Units)
- ----------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy
Fund(SM) IV L.P. Public July 1992 $ 13,353,600 $ 922,319 (7.04)% (2/96) (11.45)% (2/96-7/96)
(Series B Units)
- ----------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy
Fund(SM) International IV Private July 1992 $ 9,131,000 $ 499,712 (7.32)% (2/96) (10.79)% (1/94-1/95)
Ltd. (Series B Shares)
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
CUMULATIVE
RATE OF
RETURN 1996 1995 1994 1993 1992 1991
JAN. 1991- COMPOUND COMPOUND COMPOUND COMPOUND COMPOUND COMPOUND
AUG. 1996 RATE OF RATE OF RATE OF RATE OF RATE OF RATE OF
FOR DISSOLU- RETURN RETURN RETURN RETURN RETURN RETURN
NAME OF FUND TION (8 MONTHS)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ML Global Horizons L.P. 24.29% 3.72% 19.48% 4.08% N/A
N/A N/A
- --------------------------------------------------------------------------------------------------------------------
ML Global Horizons Ltd. N/A N/A
(Series A) 25.21% 0.38% 19.77% 4.15% N/A
- --------------------------------------------------------------------------------------------------------------------
ML Global Horizons Ltd.
(Series B) 27.95% 0.47% 22.62% 3.86% N/A N/A N/A
(4 mos.)
- --------------------------------------------------------------------------------------------------------------------
ML Futures Investments I 18.07% (7.36)% 17.07% (1.36)% 18.67% (3.17)% (3.95)%
L.P.
- --------------------------------------------------------------------------------------------------------------------
Canadian Diversified
Futures Fund Limited (15.21)% N/A N/A N/A N/A N/A (15.21)%
Partnership
- --------------------------------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L.P. 53.00% (3.97)% 34.89% (8.64)% 20.64% (16.65)% 28.57%
A Units)
- --------------------------------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L.P. 64.23% (3.97)% 34.49% (8.43)% 19.74% (13.88)% 34.67%
(Series B Units)
- --------------------------------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L. P. 28.11% (4.27)% 35.08% (7.88)% 14.78% (6.30)% N/A
(Series C Units)
- --------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy
Fund(SM) IV L.P. 15.38% (7.62)% 12.01% (7.44)% 19.56% 0.76% N/A
(Series B Units) (6 mos.)
- --------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy
Fund(SM) International IV 18.96% (4.85)% 14.51% (9.37)% 19.56% 0.76% N/A
Ltd. (Series B Shares) (6 mos.)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE FUNDS. PAST PERFORMANCE IS
NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, AND THESE FUNDS ARE EACH TRADED
PURSUANT TO MATERIALLY DIFFERENT PROGRAMS AND WITH MATERIALLY DIFFERENT
OBJECTIVES THAN THE FUND.
THE NOTES ON PAGE 18 ARE AN INTEGRAL PART OF, AND MUST BE READ IN CONJUNCTION
WITH, THE ABOVE PERFORMANCE INFORMATION.
-21-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MLIP SELECTED-ADVISOR AND MULTI-ADVISOR FUNDS
WITHOUT "PRINCIPAL PROTECTION" FEATURES
SEPTEMBER 1, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
WORST
WORST MONTHLY PEAK-TO-VALLEY
TYPE OF INCEPTION AGGREGATE CURRENT DRAWDOWN/1/ DRAWDOWN/2/
NAME OF FUND OFFERING OF TRADING SUBSCRIPTION CAPITALIZATION % MONTH % PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ML Futures Investments L.P. Public Marc. 1989 $ 86,500,700 $23,557,474 (5.09)% (2/91) (10.85)% (6/95-7/96)
- ------------------------------------------------------------------------------------------------------------------------------------
ML Futures Investments Ltd. Private Mar. 1989 $ 68,202,237 dissolved as of (6.17)% (2/94) (11.10)% (1/94-2/94)
8/31/94
- ------------------------------------------------------------------------------------------------------------------------------------
Currency Investment Private April 1991 $ 55,114,566 dissolved as of (5.13)% (8/91) (16.10)% (7/91-5/94)
Partners Ltd. 8/31/94
- ------------------------------------------------------------------------------------------------------------------------------------
dissolved as of
The Managed Futures Trust Private May 1991 $ 11,090,759 9/24/93 (6.22)% (7/91) (14.50)% (1/92-5/92)
Fund L.P.
- ------------------------------------------------------------------------------------------------------------------------------------
dissolved as of
Commodity Trading Company, Private July 1991 $ 25,797,626 10/31/94 (6.47)% (2/94) (23.31)% (1/92-12/92)
Ltd.
- ------------------------------------------------------------------------------------------------------------------------------------
Permal F/X, Financials & Private July 1992 $106,495,710 MLIP ceased (5.67)% (2/94) (12.24)% (2/94-4/94)
Futures Ltd. functioning as
trading manager
as of 3/31/96
- ------------------------------------------------------------------------------------------------------------------------------------
dissolved as of
ML Institutional Partners L.P. Public Feb. 1992 $ 57,312,700 12/31/94 (3.58)% (1/94) (8.78)% (10/93-4/94)
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE
RATE OF
RETURN
JAN. 1991 1996
-AUG. 1996 COMPOUND 1995 1994 1993 1992 1991
(OR RATE OF COMPOUND COMPOUND COMPOUND COMPOUND COMPOUND
DISSOLUTION) RETURN RATE OF RATE OF RATE OF RATE OF RATE OF
NAME OF FUND (8 MONTHS) RETURN RETURN RETURN RETURN RETURN
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ML Futures Investments L.P. 34.28% (6.29)% 11.80% 2.95% 16.56% 4.06% 2.64%
- ------------------------------------------------------------------------------------------------------------------------------------
ML Futures Investments Ltd. 13.39% N/A N/A (3.78)% 15.26% 3.12% (0.85)%
(8 mos.)
- ------------------------------------------------------------------------------------------------------------------------------------
Currency Investment (14.25)% N/A N/A (4.05)% (2.06)% (1.57)% (7.52)%
Partners Ltd. (8 mos.) (9 mos.)
- ------------------------------------------------------------------------------------------------------------------------------------
The Managed Futures Trust 36.19% N/A N/A N/A 20.58% 2.63% 10.06%
Fund L.P. (8.2/3mos) (8 mos)
- ------------------------------------------------------------------------------------------------------------------------------------
Commodity Trading Company, (14.46)% N/A N/A (6.21)% 14.91% (23.31)% 3.50%
Ltd. (10 mos) (6 mos)
- ------------------------------------------------------------------------------------------------------------------------------------
Permal F/X, Financials & 21.22% 6.63% 14.78% (5.33)% 11.05% (5.79)% N/A
Futures Ltd. (3 mos) (6 mos)
- ------------------------------------------------------------------------------------------------------------------------------------
ML Institutional Partners L.P. (0.35)% N/A N/A (4.06)% 7.65% (3.51)% N/A
(composite) (11 mos)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE FUNDS. PAST PERFORMANCE
IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, AND THESE FUNDS ARE
EACH TRADED PURSUANT TO MATERIALLY DIFFERENT PROGRAMS AND WITH
MATERIALLY DIFFERENT OBJECTIVES THAN THE FUND.
THE NOTES ON PAGE 18 ARE AN INTEGRAL PART OF, AND MUST BE READ IN CONJUNCTION
WITH, THE ABOVE PERFORMANCE INFORMATION
-22-
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
MLIP SELECTED-ADVISOR AND MULTI-ADVISOR FUNDS
WITHOUT "PRINCIPAL PROTECTION" FEATURES
SEPTEMBER 1, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
WORST WORST
TYPE OF INCEPTION AGGREGATE CURRENT MONTHLY PEAK-TO-VALLEY
NAME OF FUND OFFERING OF TRADING SUBSCRIPTION CAPITALIZATION DRAWDOWN/1/ DRAWDOWN/2/
% MONTH % PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Futures Opportunities Private Dec. 1988 $45,310,202 dissolved as (8.94)% (1/92) (17.34)% (1/92-5/92)
Limited of 7/31/92
- ------------------------------------------------------------------------------------------------------------------------------------
Daiwa Hudson River Fund Private Feb. 1994 $7,044,701 dissolved as (4.72)% (3/94) (17.21)% (2/94-1/95)
of 2/29/96
- ------------------------------------------------------------------------------------------------------------------------------------
The JLI Trading Co. Fund Private Mar. 1995 $14,300,136 $14,968,310 (6.93)% (2/96) (8.22)% (5/96-7/96)
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE
RATE OF
RETURN 1996
JAN. 1991- COMPOUND 1995 1994 1993 1992 1991
AUG. 1996 RATE OF COMPOUND COMPOUND COMPOUND COMPOUND COMPOUND
(OR RETURN RATE OF RATE OF RATE OF RATE OF RATE OF
NAME OF FUND DISSOLUTION) (8 MONTHS) RETURN RETURN RETURN RETURN RETURN
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Futures Opportunities (1.86)% N/A N/A N/A N/A (13.56)% 13.54%
Limited (7 mos.)
- -----------------------------------------------------------------------------------------------------------------------
Daiwa Hudson River Fund 0.65% 0.26% 19.82% (16.22)% N/A N/A N/A
(2 mos.) (11 mos.)
- -----------------------------------------------------------------------------------------------------------------------
The JLI Trading Co. Fund 4.67% 2.17% 2.45% N/A N/A N/A N/A
(10 mos.)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) "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.
(2) "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 EQUALLED OR EXCEEDED AS OF A SUBSEQUENT
MONTH-END. FOR EXAMPLE, IF THE MONTHLY RATE OF RETURN WAS (1)% IN EACH OF
JANUARY AND FEBRUARY, 1% IN MARCH AND (2)% IN APRIL, THE "PEAK-TO-VALLEY
DRAWDOWN" WOULD STILL BE CONTINUING AT THE END OF APRIL IN THE AMOUNT OF
APPROXIMATELY (3)%, WHEREAS IF THE MONTHLY RATE OF RETURN HAD BEEN APPROXIMATELY
3% IN MARCH, THE "PEAK-TO-VALLEY DRAWDOWN" WOULD HAVE ENDED AS OF THE END OF
FEBRUARY AT APPROXIMATELY THE (2)% LEVEL.
(3) 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.
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE FUNDS. PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, AND THESE FUNDS ARE
EACH TRADED PURSUANT TO MATERIALLY DIFFERENT PROGRAMS AND WITH MATERIALLY
DIFFERENT OBJECTIVES THAN THE FUND.
THE NOTES ON PAGE 18 ARE AN INTEGRAL PART OF, AND MUST BE READ IN
CONJUNCTION WITH, THE ABOVE PERFORMANCE INFORMATION.
-23-
<PAGE>
SELECTED FINANCIAL DATA
The following Selected Financial Data is derived: (i) from the
financial statements of the Fund for the period from October 12, 1994
(commencement of operations) to December 31, 1994 and for the fiscal year ended
December 31, 1995, which has been audited by Deloitte & Touche llp, independent
auditors, as stated in their report included in this Prospectus (see "Index to
Financial Statements"), and is included herein in reliance upon the authority of
Deloitte & Touche llp as experts in auditing and accounting; and (ii) from the
unaudited financial statements of the Fund for the period from January 1, 1996
to September 30, 1996 and January 1, 1995 to September 30, 1995.
<TABLE>
<CAPTION>
JANUARY 1, 1996 JANUARY 1, 1995 OCTOBER 12, 1994
TO TO JANUARY 1, 1995 (COMMENCEMENT
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 TO OF OPERATIONS) TO
INCOME STATEMENT DATA (UNAUDITED) (UNAUDITED) DECEMBER 31, 1995 DECEMBER 31, 1994
- --------------------- ----------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Realized Gain (Loss) $ 2,701,951 $4,142,209 $4,407,833 $ (363,054)
Unrealized (Loss) Gain (177,300) (773,318) 1,355,377 1,115,935
Total Trading Results 2,524,651 3,368,891 5,763,210 752,881
Interest Income 3,465,370 2,327,644 3,415,670 377,303
---------- ---------- ---------- -----------
Total Revenues 5,990,021 5,696,535 9,178,880 1,130,184
Expenses:
Administrative Fees/1/ 96,980 59,042 86,928 10,964
Profit Shares 319,464 573,525 652,366 129,169
Brokerage Commissions 3,588,269 2,184,180 3,216,364 405,653
---------- ---------- ---------- --------
Total Expenses 4,004,713 2,816,747 3,955,658 545,786
---------- ---------- ---------- --------
Net Income (Loss) Before
Minority Interest 1,985,308 2,879,788 5,223,222 584,398
Minority Interest/2/ (11,134) (17,611) (36,730) (4,504)
----------- ---------- ---------- -----------
Net Income $ 1,974,174 $2,862,177 $5,186,492 $ 579,894
=========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION> SEPTEMBER 30, 1996
BALANCE SHEET DATA DECEMBER 31, 1995 (UNAUDITED)
- ------------------- ----------------- -----------
<S> <C> Aggregate <C>
---------
Aggregate Net Asset Net Asset Value/3/
Value/3/ (Series A-E) $74,988,233 (Series A-G) $81,317,558
Net Asset Value Net Asset Value
per Unit per Unit/4/
Series A $ 106.96 Series A $ 109.80
Series B $ 110.36 Series B $ 107.13
Series C $ 103.35 Series C $ 102.49
Series D $ 102.34 Series D $ 101.45
Series E $ 102.72 Series E $ 105.31
----------- Series F $ 102.08
Series G $ 100.71
Series H $ 99.90
</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.
2 MLIP is general partner of the "trading partnership" (of which the Fund is the
sole limited partner and MLIP the general partner) through which the Fund
trades. Because the Fund owns substantially all of the "trading partnership,"
"trading partnership" activities are referred to as Fund activities in this
Prospectus. 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 information is based on redemption values which differ
immaterially from Generally Accepted Accounting Principals ("GAAP") Net Asset
Values due to the treatment of organization and initial offering cost
reimbursements.
4 Net of annual distributions of $6.00 on the Series A and B and $3.50 on the
Series C and D Units.
____________________
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
-24-
<PAGE>
THE TWO-TIER STRUCTURE OF THE FUND
The Fund does not trade directly by 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 share pro rata in the overall profits and
losses of the Trading Partnership based on the respective investments in it. The
Fund cannot lose more in its trading than the amount which the Fund has invested
in the Trading Partnership at any given time.
Although different series of Units will invest different percentages
of their overall capital in the Trading Partnership, all assets so invested by
any series are 100% allocated to trading. As a result, 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. In the event that
such losses also exceeded the remaining assets attributable to such series but
not allocated to trading, the excess would remain a debt of the Fund to which
all other series' capital would be subject. The Fund/Trading Partnership
structure eliminates even the theoretical risk of such "inter-series liability"
by: (i) allocating to each series at the Trading Partnership level only those
trading losses attributable to such series' investment in the Trading
Partnership; and (ii) ensuring that none of the assets of any series held by the
Fund are subject to paying any trading losses (let alone trading losses
attributable to another series).
The assets held by the Fund could be insufficient while the assets of
other series are more than sufficient to offset the amount of such excess loss
allocable to such series. As a result, assets attributable to the latter could
be subject to discharging the deficits incurred by the former were the Fund to
be liable for such excess loss. However, the limited liability character of the
Trading Partnership prevents this result by insulating all Fund assets from
trading losses. For example, assume that each of the 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, and 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 in the Series I trading account would be subject to being repaid from
any of the $2.5 million withheld from trading by the Series II Units (or from
any of the $0.5 million allocated to trading by the Series I Units, for that
matter) because the Fund is not liable for the debts of its subsidiary Trading
Partnership.
There is no benefit (or detriment) to investors from the two-tier
Fund/Trading Partnership structure other than permitting the Fund to issue
different series of Units which, over time, trade with different percentages of
their capital allocated to trading. Different trading leverage among series
trading through the same legal entity creates the risk of "inter-series
liability," and unless this risk were eliminated, the CFTC would not permit the
Fund to operate as a multi-series issuer. The two-tier structure of the Fund
achieves this result.
The only difference between the Fund and the Trading Partnership,
insofar as the operations of these two entities are concerned, is that only the
Trading Partnership's assets are subject to the risk of trading losses.
-25-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OPERATIONAL OVERVIEW; ADVISOR SELECTIONS
The Fund's results of operations depend on MLIP's ability to select
Advisors as well as on 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. Because of the speculative nature of its trading,
the Fund's past performance is not necessarily indicative of future results.
As of October 1, 1996, the trading assets attributable to each series
of Units allocated approximately as follows:
Chesapeake Capital Corporation 20.0%
John W. Henry & Company, Inc 20.0%
Non-"Core" Advisors 60.0%
------
Total 100.0%
======
In the Fund's first 23-2/3 months of trading, MLIP (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 to change both allocations and Advisor
selections from time to time without advance notice to existing investors.
MLIP's decision to terminate or reallocate assets among Trading Advisors is
based on a combination of the numerous factors described under "The Advisor
Selection Process" at page 30. Frequently, Advisors are terminated primarily for
unsatisfactory performance, but other factors -- for example, a change in MLIP's
or an Advisor's market outlook, apparent deviation from announced risk control
policies, excessive turnover of positions, changes in principals, commitment of
resources to other business activities, etc. -- may also have a role in the
termination or reallocation decision. The market judgment and experience of
MLIP's principals is an important factor in its allocation decisions.
MLIP has no timetable or schedule for making Advisor changes or
reallocations, and generally makes a medium- to long-term commitment to all
Advisors selected. However, there can be no assurance as to the frequency or
number of 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 Fund.
RESULTS OF OPERATIONS
General
- -------
MLIP believes that multi-Advisor futures funds should be regarded as
medium- to long-term 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.
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 and
forward trading (the Fund does not trade any 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.
The Fund attempts to control the market risk inherent in such trading
in the manner described under "The Advisor Selection Process --MLIP and Its
Advisor Selection and Monitoring Process" at page 30 and "Leverage
Considerations" at page 37. The market risk to the Fund is, in any event,
limited by the deleveraged character of its trading, its "principal protection"
feature and its multi-advisor strategy. MLIP reviews the positions acquired by
the Advisors
-26-
<PAGE>
on a daily basis in an effort to determine whether the overall positions of the
Fund may have become 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 minimize the risk of such over-
concentration occurring in the future. See "Leverage Considerations" at page 37
and "The ML&Co. Guarantee" at page 38.
Through June 30, 1996, all series of Units traded with approximately
60% of their assets allocated to trading. All series of Units sold pursuant to
this Prospectus will start trading with 75% of their assets so allocated.
The performance of the different series of Units differs somewhat over
the same period, because the various series begin trading at different times and
pay different Profit Shares.
Performance Summary
- -------------------
1994 (2-2/3 months)
STATISTICS. During 1994 (2-2/3 months), the Fund's average month-end
Net Assets equalled $32,552,448, and the Fund recognized gross trading gains of
$752,881 or 2.31% of such average month-end Net Assets. Brokerage commissions of
$416,617 (inclusive of Administrative Fees of $10,964) or 1.28% and Profit
Shares of $129,169 or 0.4% of average month-end Net Assets (31% of net trading
gain prior to Profit Share allocations) were paid. 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 "minority interest" in the trading
partnership of $4,504) 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 noticeable major 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, of which approximately 40%
was allocated to Profit Shares as different Advisors had significantly different
trading performance in largely trendless markets.
1995
STATISTICS. During 1995, the Fund's average month-end Net Assets
equalled $55,827,125, and the Fund recognized gross trading gains of $5,763,210
or 10.32% of such average month-end Net Assets. Brokerage commissions of
$3,303,292 (inclusive of Administrative Fees of $86,928) or 5.92% and Profit
Shares of $652,366 or 1.17% of average month-end Net Assets (25% of net trading
gain prior to Profit Share allocations) were paid. 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 "minority interest" in the trading
partnership of $36,730) or 9.29% of average month-end Net Assets, which resulted
in a 10.55% increase in the overall Net Asset Value of the Fund.
OVERVIEW. In 1995, prevailing price trends in several key markets
enabled the Fund's Trading 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 opportunities.
Soaring stock prices and falling interest rates, coupled with significant
currency moves, resulted in profitable trading opportunities in these markets
throughout the year.
After months characterized by very difficult trading environments,
solid price trends across many markets began to emerge during the first quarter
of 1995. In February, bond markets worldwide recovered some of the ground lost
in the previous year. Specifically, U.S. Treasury prices improved, a development
spurred by the belief that growth in the U.S. economy was slowing enough for
inflation to stabilize. The Fund was also able to profit in the non-dollar
markets, as German and Japanese bonds rallied. In the currency markets, long
positions in the Deutschemark versus the U.S. dollar resulted in strong profits
for the Fund as the Deutschemark hit a two-year high against the U.S. dollar on
February 24, 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. During April, the U.S. dollar hit new lows versus the
Japanese yen and Deutschemark before rebounding sharply. The U.S. dollar enjoyed
another sharp rally in May, due to the intervention of major central banks,
potential trade sanctions against Japan and United States Congressional action
to reduce
-27-
<PAGE>
the federal deficit. In June, strong indications that the U.S. economy
was slowing, coupled with a failure of the German Central Bank to lower interest
rates, stalled a rally in the German bond market.
In July the Federal Reserve Board Chairman Alan Greenspan's ptimistic
comments concerning the U.S. economy led to a sudden correction n U.S. bond
prices after several months of a strong uptrend. Despite xposure to the global
interest-rate markets, the Fund's long positions in .S. Treasury bonds had a
negative impact on the Fund. Throughout August nd into September, the U.S.
dollar rallied sharply against the Japanese en and the Deutschemark. The U.S.
dollar's rally was supported by oordinated intervention by major central banks
and further bolstered on ugust 30 by widespread recognition of the growing
banking crisis in apan.
Despite continued price volatility during the final quarter of 995, the
Trading Advisors were able to identify several trends in key arkets. U.S.
Treasury bond prices continued their strong move upward hroughout November, due
both to weak economic data and optimism on ederal budget talks. By month-end,
the 30-year Treasury bond rate was ushed to its lowest level in more than two
years. During December, U.S. ond prices weakened further as government budget
talks continued to tall. By year-end, however, prices strengthened somewhat as
the yield on he U.S. long bond fell below 6% for the first time in over two
years.
1996 (9 months)
STATISTICS. From January 1, 1996 through September 30, 1996, he Fund's
average month-end Net Assets equalled $83, 687,751 and the Fund ecognized gross
trading gains of $2,524,651 or 3.02% of such average onth-end Net Assets.
Brokerage commissions of $3,588,269 or 4.29%, dministrative expenses of $96,980
or 0.12% and Profit Shares of $319,464 r 0.38% of average month-end Net Assets
were paid. Interest income of 3,465,370 or 4.14% of average month-end Net Assets
resulted in a net gain f $1,974,174 (before organizational and initial offering
cost eimbursement payments of $59,775 and after deducting MLIP's "minority
nterest" in the trading partnership of $11,134), or 2.36% of average onth-end
Net Assets which resulted in a 2.66% increase in the Net Asset alue of the
Series A Units, a 2.51% increase in the Net Asset Value of he Series B Units, a
2.55% increase in the Net Asset Value of the Series Units, a 2.55% increase in
the Net Asset Value of the Series D Units, a .52% increase in the Net Asset
Value of the Series E Units, a 2.08% ncrease in the Net Asset Value of the
Series F Units, a 0.71% increase in he Net Asset Value of the Series G Units and
a (0.10)% decrease in the et Asset Value of the Series H Units (since July 16,
1996, when the eries H Units were issued).
The performance of the different series of Units differs omewhat over
the same period due primarily to Profit Share calculation ifferences resulting
from the different times at which the various series f Units began trading.
OVERVIEW. The first nine months of 1996 included the two argest single
monthly drawdowns as well as two of the three most rofitable months in the
Fund's history. The year began with the East oast blizzard, continuing
difficulties in the U.S. federal budget talks nd an economic slowdown having a
negative impact on many markets. The und was profitable in January due to the
strong profits in currency rading as the U.S. dollar reached a 23-month high
against the Yen. In ebruary, however, the Fund incurred its largest monthly loss
due to the udden reversals in several strong price trends and considerable
olatility in the currency and financial markets. During March, large rofits were
taken in the crude oil and gasoline markets as strong demand ontinued and talks
between the United Nations and Iraq were suspended. his trend continued into the
second quarter, during which strong gains ere also recognized in the
agricultural markets as a combination of rought and excessive rain drove wheat
and grain prices to historic highs. n the late spring and summer months,
however, the Fund gave back much of hese gains as difficult trading conditions
in many markets prevailed and lack of clear price trends in key markets
negatively impacted the Fund's performance.
RESULTS OF OPERATIONS IN GENERAL
The principal variables which determine the net performance of he Fund
are gross profitability and interest income. As the Fund's rokerage commissions
and Administrative Fees are constant flat-rate harges, these costs do not vary
as a percentage of Net Assets from period o period. The only marginal costs
which the Fund has are the Profit hares payable to the Trading Advisors on an
Advisor-by-Advisor basis. uring periods when Profit Shares are a high percentage
of net trading ains, it is likely that there has been substantial non-
correlation (so hat the total Profit Shares paid to those Advisors which have
traded rofitably are a high percentage of total profits recognized, as other
dvisors have incurred offsetting losses) among the Advisors -- suggesting he
likelihood of generally trendless, non-consensus markets.
-28-
<PAGE>
During all periods set forth in "Selected Financial Data," nited States
interest rates were at historically low levels. This egatively impacts
performance because interest income is typically a ajor component of commodity
pool profitability. In addition, low nterest rates are frequently associated
with reduced fixed income market olatility, and in static markets the Fund's
profit potential generally ends to be diminished. On the other hand, during
periods of higher nterest 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 events that determine the Fund's profitability are those hat
produce sustained and major price movements. It does not matter hether such
movements are up or down -- the Advisors are generally likely o be able to
profit from sustained trends, irrespective of their irection. During the course
of the Fund's performance to date, such vents have ranged from Federal Reserve
Board reductions in interest ates, the apparent refusal of Iraq to arrive at a
settlement which would ermit it to sell oil internationally, the inability of
the U.S. overnment to agree upon a federal budget, and a combination of drought
nd excessive rain negatively impacting U.S. agricultural harvesting as ell as
planting. While these events are representative of the type of ircumstances
which materially affect the Fund, the specific events which ill do so in the
future cannot be predicted or identified.
Unlike many investment fields, there is no meaningful istinction in the
operation of the Fund between realized and unrealized rofits. Most of the
contracts traded by the Fund are highly liquid and an be closed out at any time.
Furthermore, the profits on many open ositions are effectively realized on a
daily basis through the payment of variation margin."
Except in unusual circumstances, factors -- regulatory pprovals, cost
of goods sold, employee relations and the like -- which ften materially affect
an operating business -- have virtually no impact n the Fund.
THE DIFFERENT SERIES OF UNITS
All series of Units will begin trading with the same percentage f their
total capital allocated to trading (by investment in the Trading artnership).
All series will trade in a common trading account and be ubject to the same
method of calculating their fees. Furthermore, any iscretionary action taken by
MLIP -- i.e., making a distribution or djusting trading leverage -- must be done
in such a way that all Units eceive the same distribution and have the same
percentage of capital llocated to trading after the adjustment. Despite these
fundamental imilarities among the different series, because the series begin
trading t different times they are likely over time to have different
percentages f their capital allocated to trading, pay different Profit Shares
although to the same groups of Advisors) and have different Net Asset values.
LIQUIDITY AND CAPITAL RESOURCES
The amount of capital raised for the Fund does not have a significant
impact on its operations. This is because (leaving aside the e minimis
organizational and initial offering cost reimbursement bligation) the Fund has
no capital expenditure or working capital equirements other than paying trading
losses and costs, both of which hould be generally proportional to the Fund's
capitalization. In addition, within broad ranges of capitalization, the
Advisors' trading ositions should increase or decrease in approximate proportion
to the size of the Fund account managed by each of them, respectively.
The Fund raises additional capital only through the continuous offering
of its Units. The Fund does not borrow and sells no form of security other than
the 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 of the guaranteed $100 per Unit and,
accordingly, the assets 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
paid on a periodic basis as part of the routine clearing cycle on the
-29-
<PAGE>
exchanges or in the unregulated markets (in the case of the Fund, exclusively
the inter-bank forward market in currencies) in which the Fund trades. 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, 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 expectation of
future profits), whereas realized gains or losses reflect amounts received or
paid in respect of positions no longer being maintained.
THE ADVISOR SELECTION PROCESS
MLIP AND ITS ADVISOR SELECTION AND MONITORING PROCESS
MLIP, a wholly-owned indirect subsidiary of ML&Co., is an integrated
business whose capabilities include research, trading, finance, administration,
systems, operations, sales and marketing. Since its inception, MLIP has
concentrated primarily on the structuring of multi-advisor products, and has
devoted substantial resources to the development of the capacity to formulate
advantageous trading advisor combinations, as well as to assess trading advisors
on an individual basis. Advisor analysis includes the quantitative appraisal of
an Advisor's strategy and performance combined with quantitative statistical
evaluation of the performance of individual advisors and of different possible
Advisor combinations.
MLIP's trading advisor analysis professionals monitor the performance
of several hundred advisors. Both quantitative and qualitative criteria have
been factored into MLIP's selection process, including the following: type of
trading program; risk control; duration and speed of recovery from drawdowns;
experience; organizational infrastructure; and low correlation with traditional
investments such as stocks and bonds. Advisors' past records are evaluated
comparatively with a view to combining Advisors whose respective trading results
have historically demonstrated not only a low degree of correlation with stocks
and bonds but also with the other advisors selected. Certain mathematical
optimization procedures are then used to develop an advisor combination which,
based on a hypothetical composite of the past performance of the respective
advisors, exhibits a risk/reward profile consistent with MLIP's objectives. By
identifying advisor combinations on this basis, MLIP hopes to maintain profit
potential while also materially reducing the risk of major equity declines.
In selecting advisors for the Fund, MLIP emphasizes retaining multiple
Advisors, trading in multiple markets and implementing multiple strategies. MLIP
also evaluates the overall market diversification and emphasis that different
possible Advisor combinations would give the Fund. Discretionary as well as
systematic, fundamental as well as technical, Advisors may be retained. See "The
'Core' Trading Advisors --Futures Trading Methods in General" at pages 84 and
85. By diversifying strategies as well as markets, MLIP can, if successful,
create advisor combinations for the Fund that should have good profit potential
across a wide range of different market cycles. Since inception, the Fund's
Advisor portfolio has emphasized technical and trend-following methods.
MLIP's primary emphasis is on a qualitative assessment of each
Advisor, including, among other considerations, an evaluation of each Advisor's
basic investment management approach, markets traded, prior experience, past
performance, fee requirements and assets under management. Although different
factors may be considered in the case of different advisors (and no
representation is made that any given factor will be considered in selecting any
given Advisor), subjective evaluation of each prospective advisor by principals
of MLIP is an important factor in all of MLIP's Advisor selections. Quantitative
non-correlation analysis and volatility studies are employed in developing the
overall Advisor mix, but the principal objective is to identify Advisors MLIP
believes to have excellent potential to trade successfully.
No Advisor selected by MLIP has any affiliation with Merrill Lynch,
other than managing the trading of the Fund and other futures funds or accounts
sponsored or managed by MLIP. Furthermore, none of the Advisors is affiliated
with any other Advisor. MLAM, which was selected by MLIP, is affiliated with
Merrill Lynch.
-30-
<PAGE>
MLIP monitors the performance of the Fund and its Advisors on a
day-to-day basis, and, from time to time, reallocates assets among, terminates
and/or appoints new Advisors. At least quarterly, MLIP formally reviews the
performance of the Fund and each Advisor in order to assess whether to change
Advisor selections or allocations. MLIP anticipates that a number of additional
adjustments may be made over time, as they have been to date; but there can be
no assurance that the Fund's Advisor portfolio may not remain static for
significant periods of time. On the other hand, MLIP may, on short notice,
terminate or allocate assets away from an Advisor if MLIP has reason to believe
that the Advisor is deviating from historical trading patterns, violating the
Advisor's risk management policies or has otherwise given MLIP what it considers
to be cause for termination.
ACCESS TO GLOBAL MARKETS
The Fund has access to global markets including, but not limited
to, the following:
CURRENCIES
-----------------------------------------------------------------
Australian Dollar Irish Punt
Belgian Franc Italian Lira
British Pound Japanese Yen
Canadian Dollar New Zealand Dollar
Danish Krone Norwegian Krone
Deutsche Mark Singapore Dollar
Dutch Guilder Spanish Peseta
European Currency Unit Swedish Krona
Finnish Markka Swiss Franc
French Franc United States Dollar
FINANCIAL INSTRUMENTS
-----------------------------------------------------------------
Australian Bonds Major Market Stock Index (U.S.)
Australian Treasury Bills MEFF&S Stock Index (Spain)
Canadian Bonds Nikkei Stock Average (Japan)
CAC 40 Stock Index (France) PIBOR
Eurodollars S&P 500 Stock Index (U.S.)
Eurolira Spanish Bonds
Euromarks Tokyo Stock Price Index
Euroswiss U.K. "Gilts"
Euroyen U.K. Short Sterling
Financial Times 100 Stock U.S. Dollar Index
Index (U.K.)
French Bonds U.S. Treasury Bills
German Bonds U.S. Treasury Bonds
Italian Bonds U.S. Treasury Notes
Japanese Bonds Value Line Stock Index (U.S.)
METALS
-----------------------------------------------------------------
Aluminum Platinum
Gold Silver
Lead Tin
Nickel Zinc
ENERGY PRODUCTS
-----------------------------------------------------------------
Crude Oil No. 2 Heating Oil
Gas Oil Propane
Heavy Fuel Oil Residual Fuel Oil
Natural Gas Unleaded Gasoline
AGRICULTURAL PRODUCTS
-----------------------------------------------------------------
Cocoa Orange Juice
Coffee Pork Bellies
Corn Soybeans
Cotton Soymeal
Feeder Cattle Soy Oil
Live Hogs Sugar
Oats Wheat
The Fund has not traded, and may never trade, in all of the foregoing markets.
There can be no assurance as to which markets the Fund will trade in over time.
-31-
<PAGE>
CONSOLIDATION OF TRADING ACCOUNTS
MLIP is in the process of consolidating the trading accounts of a
significant number of its funds, so that instead of each such fund having to
maintain an individual futures trading account with each of its advisors, all
such funds will place their assets under the management of the same advisor by
investing in a single private entity sponsored by MLIP. Investing in such
entities rather than through individual accounts should have no adverse, or even
noticeable, effect on any fund. On the other hand, this consolidation of trading
accounts is expected to produce significant administrative and transactional
savings for MLF while ensuring that even the smaller MLIP funds continue to have
access to the full advisor combinations selected for them by MLIP. In the near
future MLIP anticipates that a substantial portion of its asset allocations will
be effected by investing, redeeming and reinvesting the funds' assets in the
securities issued by these private entities sponsored by MLIP.
THE ADVISORS
"CORE" ADVISOR SUMMARIES
As of September 1, 1996, the "core" Advisors which were, in the
aggregate, managing approximately 40% of the Fund's assets were responsible for
approximately $2.3 billion of customer assets in the futures, cash and forward
markets, of which more than $1.6 billion was being traded in the programs used
for the Fund.
THE CURRENT "CORE" ADVISORS ARE AS FOLLOWS:
<TABLE>
<CAPTION>
OCTOBER 1, 1996
ALLOCATION APPROXIMATE
OF TRADING ASSETS UNDER MANAGEMENT*
ADVISOR ASSETS SEPTEMBER 1, 1996
- ------- --------------- ------------------------
<S> <C> <C>
Chesapeake Capital 20% 780 million (total)
Corporation 735 million (Diversified Program)
John W. Henry & 20% $1.5 billion (total)
Company, Inc. 912 million (Financial and Metals
Portfolio)
</TABLE>
____________________
/*/ Excluding "notional funds." "Notional funds" represent the difference
between the level at which an advisor is instructed to trade an account and the
capital actually committed to the account. The Fund does not trade "notional
funds."
_________________________
Each of the current "Core" Advisors is a systematic, technical, trend-following
- -------------------------------------------------------------------------------
trader.
------
CHESAPEAKE CAPITAL CORPORATION (20% ALLOCATION AS OF OCTOBER 1, 1996)
- -- Chesapeake Capital Corporation ("Chesapeake") has offered investment advisory
and portfolio management services to clients since 1988. Chesapeake currently
trades three programs, relying primarily on technical analysis and "charting" in
its evaluation of historical commodity price movements. In the Diversified
Program which Chesapeake trades for the Fund, Chesapeake applies its trend-
following system to a global portfolio of futures and forward markets, including
agricultural products, precious and industrial metals, currencies, financial
instruments, and stock, financial and economic indices. Chesapeake may trade
these markets on any U.S. or foreign exchange. As of September 1, 1996,
Chesapeake was managing approximately $735 million ("notional funds" excluded)
of customer funds in the Diversified Program and approximately $780 million
("notional funds" excluded) of customer funds in all of its programs.
Chesapeake has traded the Diversified Program since February 1988. The
compound annual rates of return achieved by the Diversified Program since
January 1, 1991 have been 12.51%, 1.81%, 61.82%, 15.87%, 14.09% and (0.37)% (8-
month estimate), respectively. During that period, the largest monthly drawdown
was (10.98)% (1/92) and the largest peak-to-valley drawdown (16.62)% (1/92-
5/92).
See pages 90 through 95 for performance information relating to
Chesapeake.
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<PAGE>
JOHN W. HENRY & COMPANY, INC. (20% ALLOCATION AS OF OCTOBER 1, 1996) -
John W. Henry & Company, Inc. ("JWH") operates twelve trading programs for U.S.
and non-U.S. investors. These programs emphasize intermediate- and long-term,
quantitative trend analysis models. The Financial and Metals Portfolio, which is
traded for the Fund, implements a technical, trend-following system which
participates in four major market sectors -- global interest rates, foreign
exchange, global stock indices and precious metals -- and seeks to capitalize on
sustained moves in global financial markets. As of September 1, 1996, JWH was
trading approximately $912 million ("notional funds" excluded) of customer funds
in the Financial and Metals Portfolio and approximately $1.5 billion ("notional
funds" excluded) of customer funds in all of its programs.
JWH has traded the Financial and Metals Portfolio since October 1984.
Since inception, the Financial and Metals Portfolio has been traded at generally
the same degree of leverage, although under certain market conditions JWH may
reduce position size or even withdraw from the market altogether. The compound
annual rates of return achieved by the Financial and Metals Portfolio since
January 1, 1991 have been 61.88%, (10.89)%, 46.82%, (5.32)%, 38.53% and 1.61% (8
months), respectively. During such period the largest monthly drawdown was
(18.0)% (1/92) and the largest peak-to-valley drawdown (39.5)% (12/91-5/92).
See pages 96 through 111 for performance information relating to
JWH.
MORE COMPLETE DESCRIPTIONS AND THE PERFORMANCE SUMMARIES FOR THE
"CORE" ADVISORS ARE INCLUDED UNDER "THE 'CORE' ADVISORS." SEE "RISK FACTORS --
(2) PAST PERFORMANCE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS" AT PAGE
11.
THE ADVISORY AGREEMENTS
The Advisory Agreements among the Fund, MLIP and each Advisor
terminate at various times. MLIP generally attempts to negotiate advisory
agreements with comparable terms (although advisory fees differ) for all of the
public funds which MLIP sponsors. MLIP, but generally not the Advisors, retains
the right to terminate any Advisory Agreement at will and upon short
notice.
Each Advisory Agreement provides that the Fund will indemnify the
Advisor party to the Advisory Agreement and its affiliates, as well as their
respective officers, shareholders, directors, employees, partners and
controlling persons for conduct taken as an Advisor or in connection with the
Advisory Agreement, provided that such conduct does not constitute negligence,
misconduct or breach of the Advisory Agreement or of any fiduciary obligation to
the Fund and was done in good faith and in a manner reasonably believed to be
in, or not opposed to, the best interests of the Fund. Each Advisory Agreement
further provides that this indemnity provision will not increase the liability
of any Limited Partner to the Fund beyond the amount of such Limited Partner's
capital and profits, if any, in the Fund (exclusive of previously received
distributions or other returns of capital, including redemptions).
Under the exculpatory provisions of the Advisory Agreements, none of
the Advisors or any related parties will be liable to the Fund or to any of the
Partners except by reason of conduct in violation of the foregoing standards for
indemnification by the Fund.
MLAM'S INVESTMENT ADVISORY CONTRACT
The Investment Advisory Contract executed and delivered among MLIP,
the Fund, MLF and MLAM exculpates MLAM for actions or omissions in connection
with managing the Fund's portfolio of Government Securities, provided such
actions or omissions do not constitute gross negligence or willful and reckless
misconduct. Under the Investment Advisory Contract, MLF is obligated to pay
MLAM's management fees, and MLIP will be responsible for paying these fees
should MLF for some reason fail to do so. In the Limited Partnership Agreement,
MLIP agrees to indemnify and hold harmless the Fund for any loss or expense the
Fund may incur as a result of the difference between MLAM's standard of
liability under the Investment Advisory Contract and MLIP's standard of
liability under the Limited Partnership Agreement.
-33-
<PAGE>
MLIP AND MLF
BACKGROUND
MLIP is the sole promoter of the Fund. None of MLAM, MLF, Merrill
Lynch International Bank ("MLIB") or MLPF&S acts as a promoter with respect to
the organization of the Fund or the offering of the Units.
Merrill Lynch Investment Partners Inc., a Delaware corporation, was
organized in 1986 principally in order to serve as the general partner and
commodity pool operator of commodity pools for which MLF -- the "futures
commission merchant" for the Fund -- acts as commodity broker and MLPF&S acts as
selling agent. MLIP became registered with the CFTC as a commodity pool operator
and commodity trading advisor in October 1986 and April 1990, respectively, and
is a member of the National Futures Association ("NFA") in such capacities. MLIP
has sponsored in excess of 35 managed futures funds and, as of October 1, 1996,
there was approximately $1.6 billion in funds for which MLIP serves as trading
manager or sponsor. The principal offices of MLIP are located at Merrill Lynch
World Headquarters, Sixth Floor, South Tower, World Financial Center, New York,
New York 10080-6106; telephone (212) 236-4167. MLIP is a wholly-owned subsidiary
of Merrill Lynch Group, Inc., which, in turn, is wholly-owned by Merrill Lynch &
Co., Inc.
The registration of MLIP with the CFTC, and MLIP's membership in the
NFA, must not be taken as an indication that any such agency or self-regulatory
body has recommended or approved either MLIP or an investment in the Fund.
Since its inception in 1986, MLIP has operated with one primary
objective -- to provide investors with an opportunity for long-term capital
appreciation and diversification through quality investments in the futures,
commodity options and forward markets. MLIP, as general partner or sponsor,
structures and promotes managed futures investments in an effort to meet the
objectives of a wide variety of clients. MLIP attempts to combine a detailed
advisor selection process with active monitoring of its existing funds and their
advisors. MLIP does not manage client assets directly, but rather specializes in
selecting groups of independent trading advisors to do so.
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. (formerly, The Futures
Dimension Fund II L.P.), ML Futures Investments L.P. (formerly, The Tudor Prime
Advisors Fund 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 FundSM 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.
PRINCIPALS
The 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 and Director of
Sales, Marketing and Research
Allen N. Jones Chairman and Director
John R. Frawley, Jr. was born in 1943. Mr. Frawley is Chief Executive
Officer, President and a Director of MLIP and Co-Chairman of MLF. He joined
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
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<PAGE>
Advisory Committee. In January 1996, he was re-elected to a one-year term as
Chairman of the Managed Futures Association, the national trade association of
the United States managed futures industry. Mr. Frawley is also a Director of
that organization, and a Director of the Futures Industry Institute.
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 of MLIP. He joined
MLPF&S in 1971 and has served as the Product Manager of International
Institutional Equities, Derivatives and Mortgage-Backed Securities as well as
Managing Director of International Sales in the United States, and Managing
Director of Sales in Europe. Mr. Chandor holds a Bachelor of Arts degree from
Trinity College, Hartford, Connecticut.
Allen N. Jones was born in 1942. Mr. Jones is Chairman and a Director
of MLIP. Mr. Jones graduated from the University of Arkansas with a Bachelor of
Science, Business Administration degree in 1964. Since June 1992, Mr. Jones has
held the position of Senior Vice President of MLPF&S. From June 1992 through
February 1994, Mr. Jones was the President and Chief Executive Officer of
Merrill Lynch Insurance Group, Inc. ("MLIG") and remains on the Board of
Directors of MLIG and its subsidiary companies. In February 1994, Mr. Jones
became the Director of Individual Financial Services of the Merrill Lynch
Private Client Group. From January 1992 to June 1992, he held the position of
First Vice 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.
As of October 1, 1996, MLIP's interest in the Fund was valued at
$2,225,385. Under currently effective tax regulations, MLIP is required to
maintain at least a 1% interest in the Fund at all times in order to ensure that
the Fund will be treated as a partnership for federal income tax purposes.
MLF
MLF, the exclusive clearing "futures commission merchant" for the
Fund, is a clearing member of The Board of Trade of the City of Chicago, the
Chicago Mercantile Exchange, the New York Mercantile Exchange and all other
principal United States commodity exchanges. The principal office of MLF is
located at World Financial Center, 250 Vesey Street, 23rd Floor, New York, New
York 10281-1323.
The Customer Agreement between MLF and the Fund provides that MLF
shall not be liable for actions taken pursuant to the Customer Agreement except
for actions constituting negligence or misconduct, and that MLF shall not be
responsible for actions taken by it under the Customer Agreement in compliance
with instructions given by any Trading Advisor or the Fund.
FIDUCIARY OBLIGATIONS OF MLIP
NATURE OF FIDUCIARY OBLIGATIONS; CONFLICTS OF INTEREST
As general partner of the Fund, MLIP is a "fiduciary" to the Limited
Partners under both statutory and common law and has a responsibility to
exercise good faith, fairness and loyalty in all dealings affecting the Fund.
The scope of MLIP's fiduciary obligations is defined and established, in large
part, by the consent of each subscribing Limited Partner to the business terms
of the Fund as embodied in the Limited Partnership Agreement and as described in
this Prospectus. Certain of the conflicts of interest involved in the operation
of the Fund-- for example, the Fund's trading currency forward contracts with an
affiliate of MLIP -- might be impermissible under the fiduciary principles
applied in certain other investment contexts -- for example, "investment
advisers" are prohibited from trading securities with their clients on a
principal-to-principal basis. In the case of the Fund, such activities are
authorized by disclosure and the informed consent of subscribers. There are
substantial and inherent conflicts of interest in the structure of the Fund. One
of the purposes underlying the disclosures set forth in this Prospectus is to
disclose these conflicts of interests to all prospective Limited Partners so
that MLIP may have the opportunity to obtain their informed consent to these
conflicts prior to, and as a
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<PAGE>
condition of, their becoming Limited Partners. Prospective investors who are
not willing to consent to the various conflicts of interest described herein are
ineligible to invest in the Fund. See "Conflicts of Interest" at page 55.
Having once established the business terms of the Fund, MLIP is
effectively precluded from changing these terms in a manner that
disproportionately benefits MLIP, since any such change could constitute self-
dealing under common law fiduciary standards, and it is virtually impossible to
obtain the consent of the existing Limited Partners to any such self-dealing
particularly as fiduciaries (such as MLIP) are presumed not to be in a position
to bargain at arm's-length with their beneficiaries (such as the Limited
Partners) (given adequate disclosure, on the other hand, new investors to the
Fund should be deemed to have given their consent to its business terms by the
act of subscribing).
The Trading Advisors selected by MLIP are required to clear (although
not to execute) the Fund's futures trades through MLF, as well as to execute and
maintain the Fund's forward currency trades through the F/X Desk. See "Charges"
at page 44. MLIP has no control or input into the trades ordered for the Fund by
the Trading Advisors, and the brokerage commissions paid by the Fund are
assessed on a flat-rate, not a per-trade, basis. Nevertheless, prospective
investors must recognize that by subscribing to the Fund they have consented to
its basic structure, in which affiliates of MLIP, and MLIP itself, receive
substantial revenues from the Fund and do not negotiate on behalf of the Fund to
achieve lower rates from the Merrill Lynch entities which provide services to
it.
The Fund, as a publicly-offered "commodity pool," is subject to the
Statement of Policy of the North American Securities Administrators Association,
Inc. relating to the registration, for public offering, of commodity pool
interests (the "NASAA Guidelines"). These NASAA Guidelines explicitly prohibit a
general partner of a commodity pool from "contracting away the fiduciary
obligation owed to [investors] under the common law."
The Limited Partnership Agreement provides that MLIP and its
affiliates shall have no liability to the Fund or to any Limited Partner for any
loss suffered by the Fund that arises out of any action or inaction of MLIP or
its affiliates if MLIP or its affiliates, in good faith, determined that such
course of conduct was in the best interests of the Fund, and such course of
conduct did not constitute negligence or misconduct by MLIP or its affiliates.
The Fund has agreed to indemnify MLIP and certain of its affiliates against
claims, losses or liabilities based on their conduct relating to the Fund,
provided that the conduct resulting in the claims, losses or liabilities for
which indemnity is sought did not constitute negligence or misconduct and was
done in good faith and in a manner reasonably believed to be in the best
interests of the Fund. The NASAA Guidelines prescribe the maximum permissible
extent to which the Fund can indemnify MLIP and its affiliates, and prohibit the
Fund from purchasing insurance to cover indemnification of MLIP which the Fund
itself could not undertake directly.
The Limited Partnership Agreement provides that MLIP and its
affiliates (as well as any persons acting as selling agent for the Units) shall
not be indemnified for any losses, liabilities or expenses arising from or out
of an alleged violation of federal or state securities laws unless (1) there has
been a successful adjudication on the merits of each count involving alleged
securities law violations as to the particular indemnitee and the court approves
indemnification of the litigation costs, or (2) such claims have been dismissed
with prejudice on the merits by a court of competent jurisdiction as to the
particular indemnitee and the court approves indemnification of the litigation
costs, or (3) a court of competent jurisdiction approves a settlement of the
claims against a particular indemnitee and finds that indemnification of the
settlement and related costs should be made.
Furthermore, in the Limited Partnership Agreement it is provided that
in the event of any claim for indemnification for federal or state securities
law violations, the party seeking indemnification shall place before the court
the position of the Securities and Exchange Commission with respect to the issue
of indemnification for securities law violations. In the view of the Securities
and Exchange Commission, any such indemnification is contrary to the federal
securities laws and therefore unenforceable.
REMEDIES AVAILABLE TO LIMITED PARTNERS
Under Delaware law, a limited partner may, in certain circumstances,
institute legal action on behalf of himself or herself and all other similarly
situated limited partners (a "class action") to recover damages from a general
partner for violations of fiduciary duties, or on behalf of a partnership (a
partnership "derivative action") to recover damages from a third party where a
general partner has failed or refused to institute proceedings to recover such
damages. In addition, limited partners may have the right, subject to applicable
procedural, jurisdictional and substantive requirements, to bring actions in
federal court to enforce their rights under the federal securities laws and the
rules and regulations promulgated thereunder by the SEC. For example, limited
partners who have suffered losses in connection with the purchase or sale of
their interests in a limited partnership may be able to recover such losses from
a general partner where the losses result from his violating of the anti-fraud
provisions of the federal securities laws.
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<PAGE>
In certain circumstances, Limited Partners also have the right to
institute a reparations proceeding before the CFTC against MLIP (a registered
commodity pool operator), MLF (a registered futures commission merchant) and the
Trading Advisors (registered commodity trading advisors), as well as those of
their respective employees who are required to be registered under the Commodity
Exchange Act and the rules and regulations promulgated thereunder. There is a
private right of action under the Commodity Exchange Act. Investors in
commodities and commodity pools (such as the Fund) may, therefore, invoke its
protections.
In the case of most public companies, the management is required to
make numerous decisions in the course of the day-to-day operations of the
company and is protected in doing so by the so-called "business judgment rule."
This rule protects management from liability for decisions made in the course of
operating a business if the decisions are made on an informed basis and with the
honest belief that the decision is in the best interests of the corporation.
MLIP believes that similar principles apply to MLIP in its management of the
Fund.
Limited Partners should, in the event that the occasion arises,
consult their own counsel regarding their possible rights of action in respect
of the Fund.
LEVERAGE CONSIDERATIONS
TRADING LEVERAGE ADJUSTED TO PROTECT ML&CO.
MLIP, in consultation with ML&Co. personnel, controls the percentage
of the Fund's assets committed to trading with the objective of eliminating
market exposure before any losses are incurred that would require ML&Co. to make
any payment under its guarantee.
MLIP will terminate all trading if the Net Asset Value per Unit of any
series falls to 110% or less of the then present value of $100 discounted back
from the Principal Assurance Date for such series at ML&Co.'s cost of borrowing
for the period remaining to such Principal Assurance Date.
For example, assume when a particular series of Units commences
trading that the present value of the $100 subscription price per Unit as of the
Principal Assurance Date (five years from when such series was issued) is
approximately $71 (assuming ML&Co.'s five-year cost of funding to be 7%). As of
the date that such series is issued, MLIP would terminate trading when the Net
Asset Value per Unit of such series declined to approximately 110% of $71 or
approximately $78. At the beginning of the second year of trading, the trading
termination point would be determined by calculating 110% of the then present
value of $100 discounted back from the Principal Assurance Date at ML&Co.'s
four-year cost of funding, and so on.
Unless a series of Units recognizes revenues sufficient both to (i)
cover all expenses and (ii) increase the Net Asset Value per Unit at a rate
faster than the increase in the mandatory trading termination level, the assets
available to support such series' trading will be diminished or eliminated.
Due to its trading leverage policies, declining interest rates would
adversely affect the Fund in two respects. First, such declines would reduce the
yield earned by the Fund on its Government Securities and cash deposits. Second,
by decreasing the discount rate used by MLIP in calculating the mandatory
trading termination point, such declines would reduce the assets available for
trading. One "principal protection" fund sponsored by a major investment bank
was, in fact, compelled to terminate trading and dissolve, due primarily to a
drop in interest rates which caused the net asset value of the fund and the
present value of its guarantee to converge.
POSSIBLE UPLEVERAGING
Any deleveraging of trading involves an inherent opportunity cost,
sacrificing profit potential in return for reducing the risk of major losses. If
the Fund achieves sufficient profits, MLIP intends to commit more than 75% of
all series' capital to trading. To date, MLIP has not upleveraged any series of
Units, and MLIP must upleverage all series issued after July 1, 1996 to the same
level if it upleverages any such series. (Such discretionary upleveraging is to
be distinguished from the upleveraging caused simply by the reinvestment of
trading profits if any in the Fund's trading component, which can lead to the
different series trading at different levels of leverage.)
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<PAGE>
THE EFFECT OF PARTIAL DELEVERAGING IN HIGHLY LEVERAGED MARKETS
There is very little direct connection between the amount of assets
allocated to a particular Advisor and the face value of the positions which such
Advisor acquires for the Fund. Market positions with an aggregate face value
ranging up to $100 million or more could be acquired for a $10 million Fund
account, depending upon an Advisor's strategy. Even though only 75% of each
series' capital is initially allocated to trading, each Advisor has broad
flexibility in determining the appropriate market exposure for its Fund account.
Consequently, MLIP's adjustment of the leverage at which the Units trade will
not necessarily result in a corresponding adjustment in the market exposure of
the Fund.
THE ML&CO. GUARANTEE
THE ML&CO. GUARANTEE
The ML&Co. guarantee that the Net Asset Value of each Unit will be at
least $100 as of such Unit's Principal Assurance Date is effective only in
respect of Units which remain outstanding on their Principal Assurance Date.
The ML&Co. guarantee is irrevocable unless the Limited Partners
exercise their voting rights under the Limited Partnership Agreement either to
remove MLIP as the general partner or dis solve the Fund. If the Fund is
otherwise dissolved (for example, due to the bankruptcy of MLIP), the ML&Co.
guarantee will continue in full force and effect. MLIP has undertaken that it
will not take any action voluntarily to dissolve the Fund prior to the latest
Principal Assurance Date established for any outstanding series of Units.
There is no assurance that the ML&Co. guarantee will be renewed in
respect of any series of Units subsequent to such series' Principal Assurance
Date. However, MLIP will provide all investors in each series of Units with
information concerning the proposed operation of their series following its
Principal Assurance Date, and those who wish to do so may redeem, without
penalty and with the full benefits of the ML&Co. guarantee, as of such Principal
Assurance Date.
The ML&Co. guarantee has been obtained privately by the Fund; it is
not offered to, and it does not directly benefit, investors. Consequently,
Limited Partners could only enforce such guarantee through a derivative action
on behalf of the Fund. Derivative actions are subject to a variety of
potentially material procedural requirements that would not be applicable to
actions brought in the names of the Limited Partners themselves. In evaluating
the "principal protection" feature of the Fund, prospective investors should
consider not only that this feature is highly unlikely to be of any value to
investors, but also that they would be in a materially worse position to enforce
the ML&Co. guarantee than other creditors of ML&Co. would be to enforce their
claims.
See "Special Disclosures Regarding the 'Principal Protection' Feature of
the Fund" at page 2 and "Leverage Considerations" at page 37.
THE GUARANTOR
ML&Co., a Delaware corporation, is a holding company that, through its
subsidiaries and affiliates, provides investment, financing, insurance and
related services. Its principal subsidiary, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, which traces its origin to a brokerage business founded in
1820, is one of the largest securities firms in the world. Merrill Lynch,
Pierce, Fenner & Smith Incorporated is a broker in securities, options
contracts, commodity and financial futures contracts and selected insurance
products, a dealer in options and in corporate and municipal securities, and an
investment banking firm. ML&Co. and certain subsidiaries engage in lending
activities, including bridge financing, and extend credit to leveraged companies
in the form of senior term and subordinated debt.
ML&Co.'s major subsidiaries include the following:
Merrill Lynch International Incorporated, through its branches,
subsidiaries and affiliates, provides financial services outside the United
States and Canada similar to those of Merrill Lynch, Pierce, Fenner & Smith
Incorporated. Merrill Lynch Canada Inc., a subsidiary of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, provides institutional securities and futures
sales, trading and financing, corporate finance, and mergers and acquisitions
services in
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<PAGE>
Canada. MLIB and subsidiaries and affiliates of Merrill Lynch International
Incorporated engage in international banking and foreign exchange activities.
Merrill Lynch Government Securities Inc. is a primary dealer in
obligations issued by the U.S. Government or guaranteed or issued by federal
agencies or instrumentalities. MLAM manages mutual funds and provides investment
advisory services. ML&Co.'s insurance operations consist of the underwriting of
life insurance and annuity products by Merrill Lynch Life Insurance Company and
ML Life Insurance Company of New York, and the sale of life insurance and
annuities through Merrill Lynch Life Agency Inc. and other life insurance
agencies associated with Merrill Lynch, Pierce, Fenner & Smith Incorporated.
ML&Co. also provides investment, financing and related services
through Merrill Lynch Money Markets Inc., Merrill Lynch Mortgage Capital Inc.,
Merrill Lynch Capital Services, Inc., Merrill Lynch Derivative Products, Inc,
Merrill Lynch Specialists Inc., Merrill Lynch Capital Partners, Inc., Merrill
Lynch Interfunding Inc., MLIP, Merrill Lynch Credit Corporation, Merrill Lynch
Business Financial Services Inc., Merrill Lynch Hubbard Inc. and other
subsidiaries of ML&Co.
As of June 28, 1996, the aggregate net worth (stockholders' equity) of
ML&Co. was approximately $6.51 billion. The following is certain summary
financial information for ML&Co. for the fiscal year ended December 29, 1995 and
the fiscal quarters ended June 28, 1996 and June 30, 1995. Because the ML&Co.
guarantee is a general, unsecured obligation of ML&Co., the value of the ML&Co.
guarantee is dependent upon the continued financial soundness of ML&Co.
MERRILL LYNCH & CO., INC.
SUMMARY FINANCIAL INFORMATION
(DOLLARS IN MILLIONS, EXCEPT WHERE INDICATED)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED QUARTER ENDED
DECEMBER 29, 1995 JUNE 28, 1996 JUNE 30, 1995
----------------- ------------- -------------
<S> <C> <C> <C>
INCOME STATEMENT DATA
Revenues................................ $21,513 $3,380 $2,549
Earnings before income taxes and
cumulative effect of changes
in accounting principles............. $1,811 $698 $464
Net earnings............................ $1,114 $433 $283
SHARE DATA
Average number of primary shares
outstanding........................... 236,330,162 192,900,000 193,300,000
Common shares outstanding............... 236,330,162 236,330,162 236,330,162
BALANCE SHEET DATA
Total assets (billions)................. $176.86 $205.18 $176.86
Total liabilities (billions)............ $170.72 $198.66 $170.72
Stockholders' equity (billions)......... $6.14 $6.51 $6.14
</TABLE>
_________________________
The financial results for ML&Co. are more fully set forth in the
Annual Report to Stockholders for the 1995 fiscal year and in the Quarterly
Report on Form 10-Q for the quarter ended June 28, 1996. MLIP will provide,
without charge, copies of the Annual Report and Quarterly Report to any
prospective or existing investor upon written or oral request
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<PAGE>
to MLIP at Merrill Lynch World Headquarters, Sixth Floor, South Tower, World
Financial Center, New York, New York 10080-6106; telephone: (212) 236-4167.
In addition, ML&Co. is an electronic filer of information with the
SEC. The SEC maintains a Website that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC at http://www.sec.gov.
USE OF PROCEEDS
MARKET SECTORS
The Fund trades in diversified markets under the direction of multiple
independent Advisors. These Advisors can, and do, materially and frequently
alter the allocation of their overall trading commitments among different market
sectors (furthermore, the scope of the market sectors themselves vary and
overlap over time as new contracts and instruments become available). 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 traded by any Advisor or the rapidity with which an Advisor may alter
its market sector allocations.
The market sectors traded by the current "core" Advisors can be
summarized as follows.
CHESAPEAKE CAPITAL CORPORATION. In the Diversified Trading Program
which is traded for the Fund, Chesapeake applies its trend-following system to a
global portfolio of futures and forward markets, including agricultural
products, precious and industrial metals, currencies, financial instruments, and
stock, financial and economic indices. Chesapeake's risk management techniques
include diversification. Also, the Diversified Trading Program adheres to the
requirements of a money management system which determines and limits the equity
committed to each trade, each market, each commodity complex and each
account.
JOHN W. HENRY & COMPANY, INC. The Financial and Metals Portfolio which
is traded for the Fund utilizes intermediate- and long-term quantitative trend
analysis models which participate in four major market sectors -- global
interest rates, foreign exchange, global stock indices and precious metals --
and seeks to capitalize on sustained moves in global financial markets. The
Financial and Metals Portfolio may take long, short or neutral positions in up
to 39 markets within the four market sectors traded. Because assets are
concentrated in interest rates, currencies, stock indices and metals only,
volatility can be higher than in a more diversified portfolio.
The Fund's Annual Report, which includes the audited financial
statements of the Fund for the preceding fiscal year, contains additional
information relating to the market sectors traded by the Fund. There can,
however, be no assurance as to in which market sectors the Fund's trading may be
concentrated at any one time or over time.
MARKET TYPES
The Fund trades in a variety of United States and foreign regulated
markets. Although all such trading takes place on established exchanges, the
rules governing such trading differ significantly between different countries.
Substantially all of the Fund's unregulated trading takes places in the highly
liquid, institutionally based currency forward markets. The Fund's forward
currency trading is executed exclusively through the F/X Desk, with MLF as the
"back-to-back" intermediary counterparty to the ultimate counterparties with
which the Advisors trade on behalf of the Fund. Consequently, the Fund's
financial exposure to defaults in its forward trading is effectively no
different than in its regulated futures trading through MLF.
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 -- differs substantially from time to time as well as over time. The
Fund has no policy restricting its relative commitment to any of these different
types of markets. The following table presents the approximate distribution of
the Fund's positions, again based on the face value of the positions held, in
the various markets in which the Fund participated as of the end of its most
recent fiscal year.
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<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
MARKET TYPE ALLOCATIONS
--------------------------------
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
<S> <C> <C>
U.S. Exchanges 22.41% 33.67%
Non-U.S. Exchanges 38.24 33.54
Forward Currency Markets 39.35 32.79
100% 100%
</TABLE>
The Fund's Annual Report, which includes the audited financial
statements of the Fund for the preceding fiscal year, contains additional
information relating to the types of markets traded by the Fund. There can,
however, be no assurance as to in which type of markets the Fund's trading may
be concentrated at any one time or over time.
SUBSCRIPTION PROCEEDS; CUSTODY OF FUNDS; INTEREST INCOME
MLIP pays from its own funds all selling commissions incurred on the
sale of the Units. Consequently, 100% of the proceeds of such sales are
available to the Fund for use in its speculative trading and yield enhancement
activities.
The Fund uses the proceeds of the Units to support, both as margin and
reserve funds, the speculative trading of the Advisors.
Because of the low margin requirements generally applicable to futures
and forward trading, as well as the fact that the positions held by the
different Advisors (each of which trades entirely independently of the others)
on behalf of the Fund are frequently at least partially offsetting and therefore
"netted" for margining purposes, the overall margin requirements imposed on the
Fund's trading generally represent no more than approximately 20% of its Net
Assets (trading at 60% leverage).
All of the Fund's assets are deposited with either MLF or MLPF&S and
are potentially available for cash management by MLAM.
The assets of the Fund held to margin futures contracts traded on
United States exchanges are deposited, together with the assets of numerous
other MLF customers, in CFTC-regulated "customer segregated funds accounts" at
MLF. Potentially all such assets are managed by MLAM. MLF credits the Fund with
interest on any of the assets so deposited (i.e., the cash on deposit adjusted
to include open-trade equity and funds in collection or settlement), and not
invested at the direction of MLAM, at prevailing 91-day Treasury bill rates less
0.50% per annum.
The assets of the Fund used for trading on foreign futures exchanges
are held at MLF, together with the assets of numerous other MLF customers, in
its "foreign futures and foreign options secured amount account." Due to MLF's
recently inaugurated "single currency margining system" all such assets are held
in U.S. dollars and available for MLAM's cash management.
MLAM is able to manage over 90% of total Fund capital (MLAM manages
assets held directly by the Fund as well as by the Trading Partnership). MLIP
maintains a limited amount of the Fund's assets in cash in order to meet margin
requirements and avoid ongoing purchases and sales of short-term interest-rate
instruments.
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<PAGE>
ML PRINCIPAL PROTECTION L.P.
CUSTODY ALLOCATIONS
<TABLE>
<CAPTION>
PURPOSE CASH HELD AS A % OF CAPITAL HELD IN CUSTODY IN:
- ------- --------------------------- ------------------
<S> <C> <C>
Margin on U.S. Exchanges 20%-30% "Customer segregated funds accounts"
Margin on Foreign Exchanges 10%-20% "Foreign futures and foreign options
secured amount accounts"
Reserves 50%-70% Unregulated accounts
</TABLE>
____________________
Substantially all of the Fund's assets held by MLF in cash are
maintained in "offset accounts" ("customer segregated funds" as well as funds
held in "foreign futures and foreign options" and "unregulated" accounts may be
held in "offset").
"Offset accounts," which are widely used in the managed futures
industry, involve the banks with which MLF maintains its customer funds making
available to ML&Co. and certain of its affiliates credits against their
outstanding borrowings in the amount of the daily cash balances in such
accounts. The Merrill Lynch organization, in the ordinary course of its
brokerage operations, maintains substantial overnight borrowings from the banks
at which the MLF customer "offset accounts" are maintained. By depositing
"customer segregated funds" with the offset banks, Merrill Lynch effectively
eliminates such banks' cost of funding such overnight borrowings,
correspondingly reducing Merrill Lynch's borrowing costs. The net benefit to
Merrill Lynch from the offset account arrangements -- i.e., the difference
between the savings recognized by Merrill Lynch entities on their overnight
borrowings and the 0.50% below the 91-day Treasury bill rate which MLF pays to
the Fund -- has not to date exceeded approximately 0.25% to 0.50% per annum of
the average daily cash balances held in "offset."
It is a fundamental feature of the "offset account" arrangements that
the "offset" banks acknowledge that the "customer segregated funds" deposited
with them are not the property of any Merrill Lynch entity and are not subject
to any liability of Merrill Lynch. In this respect, "offset accounts" differ
substantially from "compensating balances," in which the assets so held are
subject to the depository bank's other claims against the depositor. The maximum
risk to which the Fund is exposed on its cash balances held in "offset" is the
risk of MLF defaulting on the interest which it owes daily to the Fund.
MLF invests a small portion of the Fund's assets in Treasury bills of
up to one-year duration. In crediting the Fund with interest on such assets at
0.50% per annum below the 91-day Treasury bill rate, MLF earns a spread
comparable to the net benefit which it receives from maintaining such assets in
"offset."
The assets of the Fund not held to margin U.S. and foreign futures
trading are held in "unregulated" accounts at MLF or MLPF&S (no regulatory
capital requirements are imposed on MLF in respect of Fund assets held in
unregulated accounts).
Assets held in MLF's "foreign futures and options secured amount
account" or in "unregulated" MLPF&S accounts would not have the benefit of the
same protections that are afforded "customer segregated funds" in the event of
the bankruptcy of MLF or MLPF&S.
POTENTIAL YIELD ENHANCEMENT
"Yield enhancement" strategies are so named because by limiting the
range of instruments traded to essentially credit-risk free investments while
also avoiding instruments subject to significant principal loss in the event of
an increase in the level or volatility of interest rates, these strategies seek
to strictly limit the risk of loss in return by conceding on limited rate of
return decreases. The Fund's yield enhancement, even if successful, is unlikely
to increase the Fund's overall returns by more than at most 0.50% to 1% per
annum, and is purely incidental to the Fund's speculative futures trading.
-42-
<PAGE>
MLIP has retained MLAM to invest the Fund's available assets
(generally approximately 90% to 95% of total Fund capital) in Government
Securities, maintaining a short-term portfolio with a maximum duration of two
years pursuant to guidelines established by MLIP. MLAM makes no representation
whatsoever as to whether its cash management will be successful or avoid losses.
MLAM, in performing cash management services for the Fund, will do so pursuant
to general instructions issued by MLIP, for which MLAM assumes no
responsibility. Fund assets are available for cash management whether held by
the Fund itself or by its subsidiary partnership, the Trading Partnership. (See
"The Two-Tier Structure of the Fund" at page 25.) The only assets of the Fund
not available for cash management are a limited cash reserve to meet liquidity
needs (e.g., daily margin payments and the funding of redemptions and expenses).
Consequently, although each series of Units will commence trading with 75% of
its capital invested in the Trading Partnership, MLAM is typically able to
manage approximately 90% to 95% of total Fund capital.
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
September 30, 1996, MLAM and its affiliates, collectively, had a total of
approximately $212.90 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of MLAM.
FORWARD TRANSACTIONS
Spot and forward contracts are the only non-CFTC regulated instruments
other than foreign currencies and foreign futures and options contracts traded
by the Fund. The forward markets are unregulated and involve certain risks
additional to the risks of trading CFTC-regulated or foreign exchange traded
futures contracts.
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. MLIP, through the F/X Desk, has arranged lines of credit
with various counterparties for the Fund's forward currency trades. Because MLIP
has made arrangements so that the Fund need not deposit any margin with the
various counterparties with which the F/X Desk executes currency forward trades
on the Fund's behalf, 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 would not, in the event of its
bankruptcy, be able to pay to the Fund.
In executing transactions through the F/X Desk, the Fund will be
dealing with MLF as its sole counterparty. MLF will, in turn, deal with MLIB and
the other counterparties accessed by the F/X Desk. Having the Fund (and the
other MLIP clients using the F/X Desk) trade through the F/X Desk on the basis
of MLIP's credit lines (and without any requirement to deposit margin in respect
of such trading with MLF) permits the F/X Desk to access a wide range of
counterparties without need of such counterparties' evaluating the individual
credit of the Fund or requiring margin from it.
-43-
<PAGE>
CHARGES
The following table summarizes the charges paid by the Fund during
1994 (2-2/3 months), 1995 and 1996 (9 months).
<TABLE>
<CAPTION>
1/1/96 - 9/30/96 1/1/95 - 12/31/95 10/12/94 - 12/31/94
---------------- ----------------- -------------------
COST AS A % OF COST AS A % OF
AVERAGE MONTH- COST AS A % OF AVERAGE MONTH-
DOLLAR END NET ASSETS DOLLAR AVERAGE MONTH- DOLLAR END NET ASSETS
COST AMOUNT (ANNUALIZED) AMOUNT END NET ASSETS AMOUNT (ANNUALIZED)
- ---- ------ ------------ ------ -------------- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Brokerage Commissions* $3,588,269 5.72% $3,216,364 5.76% $405,653 5.61%
Administrative Fee* 96,980 0.16 86,928 0.16 10,964 0.15
Reimbursement of
Organizational and
Initial Offering Costs 59,775 0.09 79,700 0.14 17,712 0.24
Profit Shares 319,464 0.51 652,366 1.17 129,169 1.79
---------- ---- ---------- ---- -------- ----
Total $4,064,488 6.49% $4,035,358 7.23% $563,498 7.79%
========== ==== ========== ==== ======== ====
</TABLE>
_______________
* Certain amounts in prior periods have been reclassified to conform to the
current period presentation.
The Fund's average month-end Net Assets during 1994 (2-2/3 months),
1995 and 1996 (9 months) equalled $32,552,448, $55,827,125 and $83,687,751,
respectively.
The foregoing table does not reflect the "bid-ask" spreads paid by the
Fund on its forward trading.
During 1994 (2-2/3 months), 1995 and 1996 (9 months), the Fund earned
$377,303, $3,415,670 and $3,465,370, respectively, in interest income, or
approximately 1.16%, 6.12% and 4.14%, respectively, of the Fund's average month-
end Net Assets.
See also the "Breakeven Table" included in the "Summary" at page
9.
______________________________
CHARGES PAID BY THE FUND
<TABLE>
<CAPTION>
RECIPIENT NATURE OF PAYMENT AMOUNT OF PAYMENT
- --------- ----------------- -----------------
<S> <C> <C>
MLIP Organizational and The Fund is reimbursing MLIP in 36 monthly
initial offering costs installments of $6,642 ending October 31, 1997.
Merrill Lynch Brokerage commissions A flat-rate monthly commission of 0.7708 of 1% of
Futures the month-end assets committed to trading (a
9.25% annual rate; 6.94% at 75% leverage).
MLIP Administrative Fees A flat-rate monthly charge, payable to MLIP, of
0.020833 of 1% of the month-end assets committed
to trading (a 0.25 of 1% annual rate; 0.1875 of 1%
at 75% leverage). MLIP pays all of the Fund's
routine administrative costs.
</TABLE>
-44-
<PAGE>
<TABLE>
<S> <C> <C>
MLIB "Bid-ask" spreads Under MLIP's F/X Desk arrangements, MLIB
receives "bid-ask" spreads on all forward trades
executed on behalf of the Fund with MLIB.
Other "Bid-ask" spreads The counterparties other than MLIB with which the
Counterparties F/X Desk deals each receive "bid-ask" spreads on
the forward trades executed with the Fund.
MLIP 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 cash currency
positions for equivalent futures positions.
Government Securities "Bid-ask" spreads The dealers with which MLAM executes Govern
Dealers ment Securities trades include "bid-ask" spreads in
the prices they quote to the Fund.
Trading Advisors Quarterly Profit Shares Currently, 15% or 20% (depending on the Trading
Advisor) of any New Trading Profit as of the end of
each calendar quarter and upon redemption of
Units. New Trading Profit is calculated separately
with respect to each series of Units.
MLF; Extraordinary charges Actual costs; none incurred to date, and expected to
Others be negligible.
</TABLE>
_________________________
ORGANIZATIONAL AND INITIAL OFFERING COSTS
MLIP advanced the organizational and initial offering costs of the
Fund, which totaled $239,100. The Fund is reimbursing MLIP for such costs in 36
equal monthly installments of $6,642 each, through October 31, 1997. The accrued
liability for the remaining reimbursement of organizational and initial offering
costs does not reduce Net Assets for any purpose (other than financial
reporting).
BROKERAGE COMMISSIONS
Commodity brokerage commissions for futures trades are typically paid
on the completion or liquidation of a trade and are referred to as "round-turn
commissions," which cover both the initial purchase (or sale) of a commodity
futures contract and the subsequent offsetting sale (or purchase). However, the
Fund pays commissions at a monthly flat rate of 0.7708 of 1% (a 9.25% annual
rate) of the Fund's month-end assets committed to trading. These commissions
include the Advisors' consulting fees and all execution and clearing costs.
Assets committed to trading are not reduced for purposes of calculating
brokerage commissions by any accrued but unpaid Profit Shares, Administrative
Fees or the brokerage commissions being calculated. The Fund could obtain lower
rates for similar brokerage services at other firms.
The Fund initially commits 75% of the capital attributable to each
series of Units to the Trading Advisors for management. At this leverage factor,
the brokerage commissions equal 6.94% per annum of the average total month-end
assets attributable to each series, including assets not allocated to trading.
The Fund's brokerage commissions are allocated among the outstanding
series of Units pro rata based on the respective amount of assets which each
series commits to trading, without reduction for accrued but unpaid brokerage
commissions, Profit Shares or Administrative Fees.
-45-
<PAGE>
During 1994 (2-2/3 months), 1995 and 1996 (9 months), the Fund paid
brokerage commissions of $416,617, $3,303,292 and $3,588,269, respectively;
these flat-rate brokerage com missions were the approximate equivalent of per-
trade commissions of $53, $134 and $116, respectively, per "round-turn" futures
trade. These "round-turn" equivalent rates were somewhat higher than those of
most MLIP funds. The per-trade equivalent of the Fund's flat-rate commissions
varies over time with market conditions and different Advisor combinations.
The annual reports distributed by MLIP to Limited Partners include the
approximate round-turn equivalent commission rate paid by the Fund during the
previous year.
State securities administrators require MLIP to state that brokerage
commissions paid by the Fund shall not be increased while redemption charges are
in effect. Moreover, MLIP has undertaken to various state securities commissions
that in no event will MLIP increase the 9.5% annual "wrap fee" (which, as of
January 1, 1996, includes the 9.25% annual brokerage commissions and 0.25%
annual Administrative Fee) without the unanimous consent of all Limited
Partners. In fact, MLIP has never raised the futures brokerage commissions paid
by any of its funds and has on a number of occasions reduced such charges. In
addition, MLIP has been required by various state regulators to make the
following disclosure:
The Fund's "brokerage commissions" and Administrative Fees constitute
a "wrap fee." The "wrap fee" is ML&Co.'s only source of revenues from the
Fund (other than "offset account" and interest credit benefits as described
under "Use of Proceeds"), from which revenues ML&Co. must pay a variety of
different costs and expenses. The level of the "wrap fee" is set with these
costs and expenses in mind. Different ML&Co. entities pay the following
costs and expenses with respect to the operation of the Fund: (a)
administrative expenses; (b) selling commissions; (c) ongoing compensation
to Financial Consultants; (d) all costs of executing the Fund's futures
trades; (e) the Advisors' consulting fees; (f) MLAM's advisory fees; and
(g) ML&Co. employee discounts. All of these costs and expenses, not only
execution costs, are reflected in the 9.5% annual "wrap fee" (including
both the brokerage commissions and the Administrative Fees) charged to the
Fund.
PROSPECTIVE INVESTORS MUST BE AWARE THAT THE "BROKERAGE COMMISSIONS"
AND "ADMINISTRATIVE FEES" CHARGED TO THE FUND IN FACT INCLUDE A SIGNIFICANT
NUMBER OF COSTS OTHER THAN THOSE OF ACTUALLY EXECUTING THE FUND'S TRADES OR
PROVIDING ADMINISTRATIVE SERVICES TO IT. SUCH FLAT-RATE "BROKERAGE
COMMISSIONS" AND "ADMINISTRATIVE FEES" MAY NOT BE INCREASED, IN THE
AGGREGATE, ABOVE THE CURRENT ANNUAL LEVEL OF 9.5% OF THE AVERAGE MONTH-END
NET ASSETS COMMITTED TO TRADING WITHOUT THE UNANIMOUS CONSENT OF ALL
LIMITED PARTNERS.
MLF pays, from the brokerage commissions received by it, all costs of
executing the Fund's futures trades, including the NFA transaction fees assessed
on the Fund's futures trading on United States exchanges. Such fees currently
equal $0.14 per round-turn trade of a futures contract and $0.07 for each trade
of a commodity option contract.
ADMINISTRATIVE FEES
As of January 1, 1996, MLIP began charging flat-rate monthly
Administrative Fees of 0.020833 of 1% of each series of Units' month-end assets
committed to trading (a 0.25 of 1% annual rate). Month-end assets for such
purposes are not reduced by accrued but unpaid Profit Shares, brokerage
commissions or the Administrative Fees being calculated. As of January 1, 1996,
the Fund's flat-rate brokerage commissions were reduced in an amount
corresponding to the Administrative Fees, so that there is no increased expense
to the Fund.
MLIP pays the ongoing administrative costs of the Fund, including the
expense of updating this Prospectus. During 1994 (2-2/3 months), 1995 and 1996
(9 months), MLIP paid $36,900, $31,142 and $96,980, respectively, in
administrative expenses relating to the Fund.
-46-
<PAGE>
"BID-ASK" SPREADS
Many of the Fund's currency trades are executed in the forward
markets, in which participants include in their pricing a spread between the
prices at which they are prepared to buy and sell a particular currency. The
fact that the Fund pays such "spreads" does not reduce the flat-rate brokerage
commissions paid by the Fund.
SERVICE FEES; "EFP" DIFFERENTIALS
The Fund trades forward contracts through the F/X Desk. The F/X Desk
gives the Fund access to counterparties in addition to (but also including)
MLIB. MLIP (or another Merrill Lynch entity) charges a service fee equal to, at
current exchange rates, approximately $5.00 to $12.50 on each purchase or sale
of a futures contract-equivalent face amount of a given currency traded in the
forward markets. No service fees are charged on trades awarded to MLIB (which
receives "bid-ask" spreads on such trades).
In its "exchange of futures for physical" ("EFP") trading with Merrill
Lynch, the Fund acquires spot or forward (collectively, "cash") currency
positions through MLIP's F/X Desk in the same manner and on the same terms as in
the case of the Fund's other F/X Desk trading. EFPs are used relatively
infrequently by the Advisors, but are a trading technique which effectively
permits an Advisor to establish a futures position out of normal exchange hours
as well as to obtain a single price for an entire large order, whereas when
large orders are executed on the futures exchange floor, they tend to be broken
up into a number of different futures trades, each of which may be bought or
sold at a different price. The current Advisor group makes very little use of
the EFP technique. When the Fund exchanges these positions for futures, there is
a "differential" between the prices of the two positions. This "differential"
reflects, in part, the different settlement dates of the cash and the futures
contracts and prevailing interest rates, but also includes a pricing spread in
favor of MLIB or another Merrill Lynch entity.
These F/X Desk service fees and EFP differentials, combined, are
estimated to total no more than 0.25 of 1% of the Fund's average month-end
traded assets on an annual basis.
SECURITIES "BID-ASK" SPREADS
The Fund's Government Securities trades are executed with dealers
unaffiliated with any Merrill Lynch entity on an arm's-length "best net price
and execution" basis. MLAM is required to use unaffiliated dealers to execute
the Fund's securities trades, because applicable SEC rules prohibit an
"investment adviser" such as MLAM from executing -- either itself or through an
affiliate -- any securities trades on a principal-to-principal basis with a
client (virtually all Government Securities trades are executed on a principal-
to-principal basis in the over-the-counter, rather than on an agency basis on an
exchange, market).
PROFIT SHARES
John W. Henry & Company, Inc. receives a quarterly Profit Share of 15%
and Chesapeake Capital Corporation of 20%, in each case of any New Trading
Profit earned by such Advisors, respectively, for each series of Units
considered independently. Advisors could receive Profit Shares from one series
of Units but not from others due to the different times at which the series
began trading. For example, the account managed by an Advisor for the series of
Units sold as of October 1, 1996 might incur losses during the fourth quarter of
1996. Accordingly, such Advisor will have a loss carryforward with respect to
such series at the time that the series sold as of January 1, 1997 was issued.
The January 1, 1997 series would not, of course, be issued with any loss
carryforward (as such series would have incurred no losses as of its date of
issuance). Consequently, if such Advisor traded profitably in the first quarter
of 1997, such Advisor would be entitled to a Profit Share in respect of the
January 1, 1997 series, although such Advisor may not have recognized the losses
incurred by the October 1, 1996 series during the fourth quarter of 1996.
The quarterly Profit Shares paid to the non-"core" Advisors are
calculated in the same manner as described below. As of the date of this
Prospectus, these Profit Shares equal 15% or 20% of any New Trading Profit
generated by each such Trading Advisor, depending upon the Advisor.
The Profit Shares paid to certain Advisors ("core" or non-"core") in
the future may fall outside of the 15% to 20% range.
-47-
<PAGE>
New Trading Profit for purposes of calculating each Trading Advisor's
Profit Share includes (i) realized trading profit (loss) plus or minus (ii) the
change in unrealized trading profit (loss) on open positions and is calculated
after payment of all or a portion of the monthly brokerage commissions and
Administrative Fees, but is not reduced by Profit Shares previously paid. New
Trading Profit does not include interest or any yield enhancement return earned
on the Fund's assets. Organizational and initial offering cost reimbursement
payments do not reduce New Trading Profits for purposes of calculating Profit
Shares. New Trading Profit is only generated to the extent that a Trading
Advisor's cumulative New Trading Profit exceeds the highest level of cumulative
New Trading Profit achieved by such Advisor as of the end of any previous
calendar quarter (or $0, if an Advisor has traded unprofitably for a series of
Units).
Assume that as of the end of a series' first calendar quarter of
trading, 1996, Chesapeake Capital Corporation ("Chesapeake") had, after all or a
portion of the allocable monthly brokerage commissions and Administrative Fees,
a realized profit of $50,000 and an unrealized profit of $150,000 in respect of
such series' New Trading Profit would equal $200,000. The entire amount would
represent an increase in cumulative Trading Profit allocable to such series and
20%, or $40,000 would be paid by such series to Chesapeake. Assume also that
during the second quarter of such series' trading, again after all or a portion
of allocable monthly brokerage commissions and Administrative Fees, the
Chesapeake account had realized additional profits of $60,000 on its closed-out
positions but incurred a decrease in the unrealized profits on its open
positions of $50,000 in respect of such series. Cumulative Chesapeake Trading
Profit allocable to such series would have increased to $210,000, and 20% of
such $10,000 increase or $2,000 would be paid by such series to Chesapeake. If
the assets allocable to the series and managed by Chesapeake were subsequently
to sustain losses, Chesapeake would not be required to refund any of the Profit
Shares previously paid by the series, but it would not be until Chesapeake's
cumulative Trading Profit allocable to the series exceeded $210,000 as of a
calendar quarter-end that Chesapeake would again generate New Trading Profit in
respect of such series that would be subject to additional Profit Share
accruals. The Fund pays Profit Shares in respect of each series of Units to each
Trading Advisor based on each such Advisor's individual performance, rather than
paying Profit Shares based on the overall performance of any such series. It is
likely that there will be periods when the aggregate New Trading Profits on
which Profit Shares are paid by a series to one or more Trading Advisors are
exceeded by the losses incurred in respect of such series by one or more of the
other Trading Advisors.
The Profit Shares are calculated separately in respect of each
series of Units.
In the case of Units redeemed as of the end of any month that is not
the end of a calendar quarter, the Net Asset Value at which such Units are
redeemed will reflect a reduction for the per-Unit Profit Share accrued in
respect of each Advisor's account (equally reducing the attributable Net Asset
Value of all Units) as if the redemption date were at calendar quarter-end. The
amounts so deducted will be paid to the appropriate Advisor(s) and will not be
subject to being returned to the Fund or the redeeming Limited Partners,
irrespective of subsequent losses during the quarter.
Reduction of the assets attributable to a particular series of Units
managed by a Trading Advisor, whether due to redemptions, distributions or
reallocations of assets by MLIP away from such Trading Advisor (but not as a
result of trading losses), results in (i) a proportional pay-out of any accrued
Profit Shares and (ii) a proportional decrease in any cumulative loss
carryforwards (i.e., shortfalls between the current level of Trading Profit and
the "high water mark" level of cumulative Trading Profits as of cumulative the
end of any previous calendar quarter, or $0 if higher) for Profit Share
calculation purposes.
In calculating New Trading Profit, Profit Shares paid at previous
quarter-ends do not reduce cumulative New Trading Profit in subsequent periods
(i.e., the Trading Advisors do not have to earn back their Profit Shares before
their trading can generate additional New Trading Profit).
Redemption charges do not affect the Profit Shares assessed on Units
being redeemed.
Termination of an Advisory Agreement is treated as if the date of
termination were at calendar quarter-end for purposes of calculating any Profit
Shares due to an Advisor. If a new or replacement Advisor is retained, such
Advisor calculates its Profit Shares without regard to any losses previously
incurred by any series of Units.
-48-
<PAGE>
During the last 2-2/3 months of 1994, 1995 and the first three
quarters of 1996, the Fund paid Profit Shares of $129,169, $652,362 and
$319,464, respectively, and had net income of $579,894 and $5,186,492 and
$1,974,174, respectively. These Profit Shares equalled 0.4%, 1.17% and 0.38% of
average month-end Net Assets, and 22%, 12.6% and 16.2% of net income during such
periods.
GENERAL
Because the Profit Shares are calculated on a quarterly basis, it is
possible, irrespective of the fact that the Profit Shares are paid separately to
each Advisor based on its individual performance, that the Fund will pay
substantial Profit Shares during a year even though the Net Asset Value per Unit
declines substantially during such year.
Profit Shares paid may have little direct correlation with Limited
Partners' investment experience in the Fund. MLIP's multi-advisor funds have
historically paid substantial Profit Shares even during periods when they were
incurring losses.
EXTRAORDINARY EXPENSES
The Fund is required to pay any extraordinary charges (such as taxes)
incidental to its trading. No extraordinary charges have been paid by the Fund
to date, and in MLIP's experience such charges have been negligible.
____________________
MLIP sends each Limited Partner a monthly statement that includes a
description of performance during the prior month and year-to-date and sets
forth, among other things, the brokerage commissions, Administrative Fees and
Profit Shares paid or accrued during such month and on a year-to-date
basis.
____________________
CHARGES PAID BY MERRILL LYNCH
The following costs are paid by the Merrill Lynch entities indicated
below. In each case, these entities receive substantial revenues, directly or
indirectly, from the Fund.
SELLING COMMISSIONS; ONGOING COMPENSATION
MLIP pays the selling commissions due on the Units, as well as the
ongoing compensation on Units which remain outstanding for more than twelve
months. See "Plan of Distribution -- Selling Agent Compensation" at page
64.
Through September 30, 1996 MLIP had paid a total of $5,037,521 in
selling commissions (in the form of "production credits," not cash out-of-
pocket) on sales of the first eight series of Units.
The first monthly installments of ongoing compensation began to accrue
as of October 1, 1995 on the Series A Units sold as of October 1, 1994. Through
September 30, 1996, MLIP paid a total of $238,777 in ongoing compensation (in
the form of "production credits," not cash out-of-pocket).
CONSULTING FEES
The Trading Advisors each enter into a Consulting Agreement with MLF.
Pursuant to such Consulting Agreements, MLF pays monthly consulting fees to each
of the Advisors: Chesapeake receives 0.167% (2% annually), and JWH 0.333% (4%
annually) of the month-end assets of the Fund committed to each of them,
respectively.
Currently all non-"core" Advisors receive consulting fees equal to
0.167% (2% annually) of the month-end Fund assets committed to their management.
-49-
<PAGE>
MLIP anticipates that the consulting fees paid to Advisors in the
future will generally fall within the range of 1% to 4% annual rate, but such
fees could fall outside of such range in certain cases.
During 1994 (2-2/3 months), 1995 and 1996 (9 months), MLF paid
consulting fees of $106,951, $858,044 and $951,439, respectively, or
approximately 0.33%, 1.54% and 1.14% of the Fund's average month-end Net Assets
during these periods.
MLAM FEES
MLF pays MLAM annual management fees of 0.20% on the first $25 million
of Fund capital managed by MLAM, 0.15% on the next $25 million of capital,
0.125% on the next $50 million, and 0.10% 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. In the event that MLF for some reason
fails to make prompt payment to MLAM, MLIP is responsible for doing so.
During 1994 (2-2/3 months), 1995 and 1996 (9 months), MLF expensed
approximately $11,319, $70,670 and $121,949, respectively, in cash management
fees paid or accrued to MLAM.
REDEMPTION CHARGES
Units redeemed on or prior to the end of the twelfth full month after
issuance are subject to redemption charges of 3% of the Net Asset Value at which
they are redeemed. Such charges are paid to MLIP and are intended to compensate
MLIP for the financial burden to MLIP associated with paying selling commissions
on short-term investments.
If a Limited Partner redeems Units during or as of the end of a
calendar quarter, and subscribes as of the date of redemption to the new series
of Units to be issued immediately following such quarter, any otherwise
applicable 3% charge is waived to the extent that the redemption proceeds are
reinvested. The Units acquired upon reinvestment are subject to a 3% redemption
charge from the date of issuance.
Receipt of redemption charges does not reduce the Fund's reimbursement
obligations to MLIP for organizational and initial offering costs.
During 1994 (2-2/3 months), 1995 and 1996 (9 months), MLIP received a
total of $7,436, $57,489 and $32,597, respectively, in redemption charges.
CERTAIN LITIGATION
JWH
MLIP has received the following information from JWH:
"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
State Supreme Court, New York County. The actions, which seek unspecified
damages, purport to be brought on behalf of investors in certain 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."
MLIP
ML&Co. -- the sole stockholder of Merrill Lynch Group, Inc. (which is
the sole stock holder of MLIP and MLF) and of MLPF&S, and the 100% indirect
owner of all Merrill Lynch entities involved in the operation of the Fund -- as
well as certain of its subsidiaries have been named as defendants in numerous
civil actions and arbitration proceedings arising out of their respective
business activities.
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The following actions have been filed against or on behalf of ML&Co.
in connection with ML&Co.'s business activities with the Treasurer-Tax Collector
of Orange County, California ("Orange County") or from the purchase of debt
instruments issued by Orange County that were underwritten by MLPF&S. On
December 6, 1994, bankruptcy petitions were filed on behalf of Orange County and
the Orange County Investment Pools (the "Pools") in the United States Bankruptcy
Court for the Central District of California (the "Bankruptcy Court"). The
Pools' bankruptcy petition subsequently was dismissed. The currently pending
actions involving ML&Co. and Orange County include, in the order summarized
below: an action in the names of Orange County and the current Orange County
Treasurer-Tax Collector; actions by investors and participants in the Pools;
actions by investors in ML&Co. or affiliated entities; and actions by holders of
bonds or other debt instruments issued by or on behalf of Orange County and
other public entities which had funds controlled by the Orange County Treasurer-
Tax Collector.
On January 12, 1995, an action was commenced in the Bankruptcy Court
by Orange County and the Pools against ML&Co. and certain of its subsidiaries
(the "Orange County Action"). Orange County filed a first amended complaint on
June 6, 1995, which was dismissed on October 17, 1995. Orange County filed a
second amended complaint on October 25, 1995 adding John M.W. Moorlach, the
current Orange County Treasurer-Tax Collector, as a plaintiff, and alleging,
among other things, that ML&Co.'s liquidation of certain securities entitles the
plaintiffs to relief under Sections 362, 502, 510, 549 and 922 of Title 11 of
the United States Code (the "Bankruptcy Code"), that various securities
transactions between Orange County and/or the Pools and ML&Co. and its
subsidiaries violated California law and are null and void, that ML&Co. and its
subsidiaries violated Section 10(b) of the Securities Exchange Act of 1934 (the
"Exchange Act") and Rule 10b-5 promulgated thereunder, Section 25401 of the
California Corporations Code (the "California Code"), Section 17200 of the
California Business and Professions Code, Sections 1709-10 of the California
Civil Code, breached fiduciary duties, aided and abetted breaches of fiduciary
duty and conspired to make unauthorized use of public funds. Damages in excess
of $2 billion, injunctive and declaratory relief are sought.
On March 1, 1995, the parties entered into an agreement pursuant to
which the proceeds from the sale of securities purchased by ML&Co. from Orange
County pursuant to certain master repurchase agreements are to be used to
purchase short-term Treasury bills or Treasury notes that will be identifiable
and held separate and subject to any rights that ML&Co. may have in the master
repurchase agreements. This agreement may be terminated by ML&Co. upon 30 days'
written notice.
On October 17, 1996, the United States District Court for the Central
District of California withdrew the reference to the Bankruptcy Court of the
Orange County Action. The case is now pending in the District Court.
On December 13, 1994, a purported class action was commenced in the
Superior Court of the State of California, Orange County, on behalf of
individuals whose funds were deposited with the Orange County Treasurer-Tax
Collector pursuant to proceedings in California Superior Court (the "DeLeon
Action"). On December 27, 1994, plaintiffs filed a first amended class action
complaint; on April 19, 1995, plaintiffs filed a second amended complaint which
was dismissed on November 13, 1995; and on December 18, 1995 plaintiffs filed a
third amended complaint. As amended, the DeLeon Action is brought on behalf of
the same individuals on whose behalf the action was originally brought and on
behalf of individuals who invested funds in the Pools representing deferred
compensation and/or retirement funds. The defendants include ML&Co., a
subsidiary of ML&Co. and an employee of ML&Co. Plaintiffs allege, among other
things, that the defendants breached fiduciary duties, aided and abetted
breaches of fiduciary duties, conspired to breach a fiduciary duty and committed
professional negligence in connection with ML&Co.'s business activities with the
Orange County Treasurer-Tax Collector. Damages in an unspecified amount are
sought. On May 10, 1996, pursuant to agreement of the parties, the court entered
an order staying this action pending final resolution of the Orange County
Action described above.
On January 10, 1995, a purported class action was commenced in the
Superior Court of the State of California, Orange County, on behalf of persons
whose funds were deposited in the Pools pursuant to proceedings in California
Superior Court (the "Small Action"). ML&Co., a subsidiary of ML&Co., an employee
of ML&Co. and Robert L. Citron, formerly the Treasurer-Tax Collector of Orange
County, are named as defendants. Plaintiffs allege claims for breach of
fiduciary duty and fraud in connection with ML&Co.'s business activities with
the Orange County Treasurer-Tax Collector. Injunctive relief and damages in an
unspecified amount are sought. The complaint in this action was never served.
On September 15, 1995, an action was commenced in the Superior Court
of the State of California, San Francisco County, by twelve California public
entities (the "Atascadero State Court Action"). On April 10, 1996, a first
amended complaint was filed. Named as defendants are ML&Co., certain
subsidiaries of ML&Co. and three past or present employees of ML& Co. (two of
whom have been dismissed without prejudice by agreement of the parties).
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As amended, the complaint alleges, among other things, that the defendants
committed fraud and deceit, negligence, negligent misrepresentation, conversion,
breached fiduciary duties, aided and abetted breaches of fiduciary duty and
violated California Penal Code Section 496 and the California Unfair Business
Practices Act, Sections 25400, 25401, 25500 and 25501 of the California Code and
the Racketeer Influenced and Corrupt Organizations Act ("RICO"), in connection
with ML&Co.'s business activities with the Orange County Treasurer-Tax
Collector. Injunctive relief, rescission, restitution and damages in excess of
$50 million are sought. The case has been transferred to Contra Costa County,
California.
On November 27, 1995, an action was commenced in the United States
District Court for the Central District of California by fourteen California
public entities (the "Atascadero Federal Court Action"). On March 22, 1996, an
amended complaint was filed. Named as defendants are ML&Co., certain
subsidiaries of ML&Co. and three past or present employees of ML&Co. (two of
whom have been dismissed without prejudice by agreement of the parties). John
Moorlach is named as a nominal defendant. As amended, the complaint alleges,
among other things, that defendants violated Sections 10(b) and 20(a) of the
Exchange Act and Rule 10b-5 promulgated thereunder, Sections 25400, 25401, 25500
and 25501 of the California Code, Section 496 of the California Penal Code, the
California Unfair Business Practices Act, and RICO, committed fraud and deceit,
negligence and negligent misrepresentation, conversion, breached fiduciary
duties, and aided and abetted breaches of fiduciary duty, in connection with
ML&Co.'s business activities with the Orange County Treasurer-Tax Collector.
Rescission, restitution and damages in excess of $50 million are sought.
Beginning on December 5, 1994, five derivative actions purportedly
brought on behalf of ML&Co. were filed in the Supreme Court of the State of New
York, New York County (the "Wilson Actions"). On February 21, 1995, the court
consolidated the actions and an amended consolidated complaint was filed on June
5, 1995 naming as defendants 22 present or past directors, officers or employees
of ML&Co. and/or certain of its subsidiaries. The amended complaint alleges,
among other things, breach of fiduciary duty and oversight failures, waste of
corporate assets and claims for indemnification in connection with ML&Co.'s
business activities with the Orange County Treasurer-Tax Collector. ML&Co. is
named as a nominal defendant in these actions. Damages in an unspecified amount
are sought on behalf of ML&Co. against the individuals named as defendants. The
Court dismissed this action on August 7, 1996. A notice of appeal was filed on
September 11, 1996.
On December 16, 1994, a purported class action was commenced in the
United States District Court for the Southern District of New York (the "Balan
Action"). An amended complaint was filed on May 15, 1995. As amended, the Balan
Action is brought on behalf of purchasers of ML&Co.'s common stock between March
31, 1994 and December 6, 1994, and names as defendants ML&Co. and two of its
directors and officers. The plaintiff alleges, among other things, violations of
Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated
thereunder in connection with ML&Co.'s disclosure with respect to its business
activities with the Orange County Treasurer-Tax Collector. Damages in an
unspecified amount are sought.
Beginning on December 8, 1994, ten purported class actions were
commenced in the United States District Court for the Central District of
California on behalf of individuals who purchased bonds or other debt
instruments issued by or on behalf of Orange County during various periods of
time (the "Smith Federal Court Action"). Plaintiffs filed an amended
consolidated complaint on January 27, 1995, and a first amended consolidated
complaint on February 27, 1995. As amended, the Smith Federal Court Action
purports to be brought on behalf of all persons who purchased bonds or other
debt instruments between July 1, 1992 and December 6, 1994 that were issued by
Orange County or other public entities with funds controlled by the Orange
County Treasurer-Tax Collector. The defendants in the first amended consolidated
complaint are ML&Co., an employee of ML&Co., PaineWebber, Inc., CS First Boston
Corp., Smith Barney, Inc., Lehman Brothers, Inc., Donaldson, Lufkin & Jenrette,
Inc., Kidder, Peabody & Co., Inc., Stone & Youngberg, Rauscher Pierce Refsnes,
Inc., Leifer Capital, Inc., Fieldman Rolapp & Associates, Inc., CGMS, Inc. and
O'Brien Partners, Inc. Following a stipulation and order filed on July 17, 1995
dismissing certain state law claims without prejudice, the plaintiffs allege,
among other things, that the defendants affiliated with ML&Co. violated Section
10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder with respect to
the sale of bonds and other debt instruments issued by Orange County and other
public entities. Damages in an unspecified amount are sought. On April 1, 1996,
the court granted a motion by plaintiffs to dismiss this action without
prejudice.
On September 28, 1995, a purported class action was commenced in the
Superior Court for the State of California, Orange County, asserting the state
law claims previously dismissed in the Smith Federal Court Action (the "Smith
State Court Action"). The Smith State Court Action is brought on behalf of the
same purported class as the Smith Federal Court Action. Named as defendants are
ML&Co., an employee of ML&Co. and the same defendants not affiliated with
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ML&Co. as in the Smith Federal Court Action and, in addition, KPMG Peat Marwick.
Violations of Sections 25400, 25401, 25500, 25501 and 25504.1 of the California
Code and fraud and deceit are alleged in connection with disclosure made with
respect to the sale of bonds and other debt instruments issued by Orange County
or other public entities with funds controlled by the Orange County Treasurer-
Tax Collector. Damages in an unspecified amount are sought. Certain of the
defendants in the Smith State Court Action other than ML&Co. and the employee of
ML&Co. named as a defendant have entered into settlement agreements with the
plaintiffs in these cases.
On March 9, 1995, an action (the "Kemper Action") was commenced in the
Circuit Court of Cook County, Illinois, Chancery Division, by five money market
mutual funds managed by Kemper Financial Services, Inc. (namely, the Cash
Account Trust, Cash Equivalent Fund, Kemper Investors Fund, Kemper Money Market
Fund and Kemper Portfolios). Named as defendants are a subsidiary of ML&Co. and
an employee of ML&Co. The complaint alleges, among other things, that the
defendants violated Sections 12A, 12F, 12G and 12I of the Illinois Securities
Act and committed common law fraud with respect to disclosure made in connection
with the issuance and sale of 1994-95 Taxable Notes that were issued by Orange
County on July 8, 1994. Rescission and damages in an unspecified amount are
sought. This action had been stayed until June 30, 1996.
The court dismissed this action without prejudice on September 4, 1996 pursuant
to agreement of the parties.
ML&Co. has also received formal and informal inquiries from various
governmental entities and agencies examining the events underlying the above
described litigation and is cooperating with these inquiries.
On December 16, 1994, a consolidated amended complaint was filed in In
Re NASDAQ Market-Makers Antitrust Litigation, MDL No. 1023, in the United States
District Court for the Southern District of New York. As subsequently amended,
the complaint alleges that 33 market-makers, including MLPF&S, engaged in a
conspiracy with respect to the "spread" between "bid" and "ask" prices for
certain securities traded on NASDAQ by refusing to quote "bid" and "ask" prices
in so-called "odd-eighths." The complaint purports to be brought on behalf of
all persons who purchased or sold these securities between May 1, 1989 and May
27, 1994. The complaint alleges violations of antitrust laws and seeks
compensatory damages in an unspecified amount, treble damages, declaratory and
injunctive relief, and attorneys' fees and costs. Judgment against each of the
defendants is sought on a joint and several basis. MLPF&S has filed an answer
denying the allegations in the complaint. Discovery is proceeding.
In connection with their industry-wide investigations into the NASDAQ
market, ML&Co., along with other named defendants, has received inquiries from
the Antitrust Division of the Department of Justice and the SEC and is
cooperating with these inquiries.
On July 17, 1996 the Antitrust Division of the United States
Department of Justice filed a civil antitrust complaint against firms that make
markets in NASDAQ securities, including MLPF&S. The complaint alleged that the
firms violated Section 1 of the Sherman Act through a "common understanding" to
follow a "quoting convention" that the complaint asserts had inflated the
"inside spread" (the difference between the best quoted buying price and the
best quoted selling price on NASDAQ) in certain NASDAQ stocks. This allegedly
resulted in investors having to pay higher transaction costs for buying and
selling stocks than they would have paid otherwise. At the same time the
complaint was filed, a proposed settlement of the action was announced, pursuant
to which the market maker defendants in the action have agreed not to engage in
certain conduct. The proposed settlement, which is subject to court approval,
provides, among other things, for the monitoring and tape recording by each of
the market maker defendants of not less than 3.5 percent, or a maximum of 70
hours per week, of telephone conversations by its over-the-counter desk traders;
the provision to the Department of Justice of any taped conversation that may
violate the terms of the settlement; and for Department of Justice
representatives to appear unannounced, during regular business hours, for the
purpose of monitoring trader conversations as the conversations occur.
In each of the legal proceedings described below except for the
stockholder derivative actions, the claims against the Merrill Lynch defendants
(as defined below) have now either been dismissed pursuant to settlements or
under the terms of a settlement for which court approval is being sought.
All the actions arise from certain securities trading transactions
that occurred at year-end 1984, 1985, 1986 and 1988 between MLPF&S and Merrill
Lynch Government Securities Inc. ("MLGSI") and a Florida insurance company,
Guarantee Security Life Insurance Company ("GSLIC"), which was taken into
liquidation. A principal focus of
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the allegations in the following civil proceedings is an assertion that GSLIC's
purpose in engaging in the year-end transactions was to distort its apparent
financial condition. It is claimed that GSLIC's former officers and employees
improperly took assets from the company and its investment portfolio declined
substantially in value before its true financial condition became known to
insurance regulators, GSLIC's policyholders, and the creditors of GSLIC and its
parent company, Transmark USA, Inc. ("Transmark").
On December 20, 1991, an action (the "Receiver Action") was commenced
by the Florida Department of Insurance as Receiver of GSLIC (the "Receiver") in
the Fourth Judicial Circuit Court in Duval County, Florida naming as defendants
former officers, directors and shareholders of GSLIC and Transmark, GSLIC's
former outside attorneys and accountants, MLPF&S, MLGSI and a former managing
director of MLPF&S (the Merrill Lynch parties in the Receiver Action being
referred to collectively as the "Merrill Lynch defendants"). The complaint
alleges state law claims against the above-mentioned Merrill Lynch defendants
for fraud, breach of fiduciary duty, conspiracy and aiding and abetting a breach
of duty arising from their involvement in the year-end trades with GSLIC,
alleges that GSLIC was damaged in excess of $300 million and seeks relief in an
unspecified amount from the Merrill Lynch defendants. On July 14, 1995, an
agreement was signed among the Receiver of GSLIC, the Merrill Lynch defendants,
along with certain other named defendants, to settle this action. The court has
entered an order severing for purposes of trial the claims against the settling
defendants and otherwise staying all further proceedings in respect of such
defendants. Pursuant to the terms of the final settlement agreement (executed on
October 19, 1995) and subject to the finality of the court's Order of Final
Approval of Settlement dated March 8, 1996, the Merrill Lynch defendants will
pay $45 million to the Receiver, and the Receiver's claims against them will be
dismissed in their entirety. On July 12, 1996, the plaintiffs in the Receiver
Action entered a stipulation of discontinuance with prejudice with respect to
all claims asserted against all defendants, including the Merrill Lynch
defendants.
Substantially the same defendants are named in two consolidated
lawsuits brought in federal court in Jacksonville, Florida on October 15, 1991
and on February 28, 1992 on behalf of an uncertified alleged class of purchasers
of GSLIC insurance policies and annuities between 1984 and 1991 (the
"Haag/Levine Action"). The complaint alleges substantially the same claims as
the Receiver Action as well as claims under RICO and Section 10(b) of the
Exchange Act and seeks unspecified money damages. The court has stayed the
Haag/Levine Action pending the resolution of the Receiver Action. A condition of
the settlement in the Receiver Action is dismissal of the claims in the
Haag/Levine Action against the Merrill Lynch defendants, at no further cost to
the Merrill Lynch defendants. Unopposed motions seeking this dismissal have been
submitted to the court.
The Resolution Trust Corporation ("RTC"), as receiver for four failed
savings institutions (CenTrust Association Savings Bank, Imperial Savings
Association, FarWest Savings and Loan Association and Columbia Savings and Loan
Association) in January 1993 and April 1993 filed civil actions in federal court
in Jacksonville, Florida against ML&Co., MLPF&S, MLGSI, a former MLPF&S managing
director, and former officers, directors and employees of Transmark and GSLIC
(the "RTC Action"). The action seeks to recover damages as a result of purchases
by the four above-named institutions of securities issued by Transmark, GSLIC's
parent corporation. The claims alleged are substantially similar to those in the
Haag/Levine Action mentioned above. In April 1993, Trans-Resources Inc., a
company that alleges it also purchased Transmark securities, filed a complaint
in the federal court in Jacksonville, Florida substantially following the
allegations of the RTC Action and naming substantially the same defendants (the
"Trans-Resources Action"). The RTC Action and Trans-Resources Action each seek
compensatory and punitive damages in unspecified amounts, trebling of damages
under the RICO claim, rescissory relief and reimbursement of the costs of suit.
On August 10, 1995, an agreement was signed among the RTC and these Merrill
Lynch defendants to settle the RTC Action, as well as all other pending
litigation brought by the RTC against ML&Co. or its affiliates. Pursuant to the
agreement, $4.5 million has been paid to the RTC in respect of the RTC Action,
and the RTC's claims against these Merrill Lynch defendants have been dismissed
in their entirety. On December 22, 1995, an agreement was signed among Trans-
Resources and these Merrill Lynch defendants to settle the Trans-Resources
Action. Pursuant to the agreement, $150,000 has been paid to Trans-Resources,
and claims against the Merrill Lynch defendants in this action have been
dismissed in their entirety.
In October 1991, two derivative actions purportedly brought on behalf
of ML&Co. were filed in the Supreme Court of the State of New York, New York
County, naming as defendants directors of ML&Co. who were directors at the time
of the year-end securities transactions in question, among others. These cases,
now consolidated, assert claims of breach of fiduciary duties in connection with
the year-end securities transactions with GSLIC and other claims against
Transmark and one of Transmark's principals. The damages sought in this action
are unspecified. The court has stayed the action for all purposes pending a
resolution of the above-mentioned related litigation in Florida.
ML&Co. believes it has strong defenses to, and will vigorously
contest, the actions described above. Although the ultimate outcome of
the actions described above and other civil actions, arbitration
proceedings and claims
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pending against ML&Co. or its subsidiaries as of the date of this Prospectus
cannot be ascertained at this time and the results of legal proceedings cannot
be predicted with certainty, it is the opinion of the management of ML&Co. that
the resolution of these actions will not have a material adverse effect on the
financial condition or the results of operations of ML&Co.
CONFLICTS OF INTEREST
MERRILL LYNCH AFFILIATED ENTITIES
Other than the Trading Advisors, all parties involved in the
operations of the Fund are affiliated with Merrill Lynch. Consequently, many of
the business terms of the Fund have not been negotiated at arm's-length. Were
investors to seek redress from Merrill Lynch for damages relating to the
offering of the Units or the operations of the Fund, they (i) would be unlikely
to have recourse against any Merrill Lynch entity (other than MLIP or the Fund
itself or MLPF&S in the case of claims relating to the offering of the Units)
which is not in direct privity with the Fund, and (ii) would be likely only to
have such recourse even in the case of entities which are in such privity only
on a derivative basis, suing not individually but in the right of the Fund.
ML PRINCIPAL PROTECTION L.P.
ASSOCIATED MERRILL LYNCH ENTITIES
[CHART OF MERRILL LYNCH ENTITIES APPEARS HERE]
GENERAL
No Merrill Lynch entity or Trading Advisor has established any formal
procedures to resolve the conflicts of interest described below. Limited
Partners are dependent on the good faith of the respective parties subject to
such conflicts to resolve such conflicts equitably.
MLIP and its affiliates will (should the occasion arise) assert that
Limited Partners have consented to the following conflicts of interest by
subscribing to the Fund.
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MLIP
Relationship among the Merrill Lynch Entities
As MLIP sponsored the Fund, MLIP and its affiliates are its service
providers, other than the Trading Advisors, and will continue to be so even if
using other firms in such capacities might be more advantageous for the
Fund.
Other Funds Sponsored by MLIP
MLIP might be able to add more value to the Fund were certain MLIP
personnel to focus exclusively on managing the Fund, but none do so. MLIP
benefits from accounts other than the Fund because such accounts generate
significant revenues for it, and also diversify MLIP's exposure to one or more
of such accounts performing poorly.
There is, in general, a shortage of qualified futures trading advisors
available to manage customer assets. MLIP has a conflict of interest in
selecting Trading Advisors for the Fund and for other accounts sponsored by
MLIP.
MLIP has a conflict of interest in allocating assets among the Trading
Advisors in that MLF receives more net benefit from the brokerage commissions
paid by the Fund the more infrequently an Advisor trades. MLF receives a flat-
rate fee for executing the Fund's futures trades. However, MLF incurs an out-of-
pocket cost in executing each such trade. The less frequently a Trading Advisor
trades, the less these out-of-pocket costs are to MLF and the greater its net
revenues from the Fund (brokers which require per-trade compensation, and their
affiliates, have a conflict of interest in that they will receive more revenues
the more frequently an Advisor trades; brokers which receive a flat-rate will
have exactly the opposite conflict).
MLIP sponsors numerous funds and has financial incentives to favor
such funds over the Fund.
Leveraging Considerations
MLIP has a conflict of interest in determining the Fund's trading
leverage between MLIP's interest in maintaining the leverage which it believes
to be best for the Limited Partners and its interest in protecting ML&Co.'s
guarantee liability. Although the brokerage commissions and the Administrative
Fees paid increase as trading leverage is increased, added revenues are not a
significant factor in MLIP's leverage policy, compared with the need to avoid
any ML&Co. payments under the guarantee.
MLF; MLIB; MLAM
MLF has numerous different clients and executes trades for a wide
range of such clients in the same markets at or about the same time. Executing
orders for different, and possibly competing, customers at the same time
involves an inherent conflict of interest. As a result of executing orders for
many other clients, MLF also has fewer resources to allocate to the Fund's
account.
Certain clients of MLF pay materially lower brokerage rates than does
the Fund. In the case of a number of such clients, particularly clients with an
account as large as that of the Fund, the lower fees paid by its clients can be
in large part attributable to the fact that the significant costs incurred by
MLIP and the ML&Co. group in sponsoring the Fund become embedded in the Fund's
brokerage commission structure, as it is only through receipt of brokerage
commissions that the ML&Co. group can be reimbursed for the amounts so expended.
In the case of institutional accounts, these costs are not incurred by the
Merrill Lynch organization, so that the brokerage commissions charged to such
accounts can be correspondingly reduced without reducing the net revenue
received by Merrill Lynch. See "Charges-- Charges Paid by Merrill Lynch" at page
49 above. Nevertheless, even in terms of the "net brokerage commissions,"
certain institutional clients of MLF receive, as a result of arm's-length
negotiations, a better rate than the Fund.
MLIB and MLAM each also have numerous clients and they have financial
incentives to favor certain accounts over the Fund.
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THE TRADING ADVISORS
Other Clients and Business Activities of the Trading Advisors
The Fund might benefit significantly from an exclusive focus on the
Fund by certain of the Trading Advisors rather than on their other accounts,
including accounts owned by their principals. The Fund could be adversely
affected by the fact that the Trading Advisors trade other accounts at the same
time that they are managing the Fund's account.
The Trading Advisors and their principals devote a substantial portion
of their business time to ventures and accounts other than managing their Fund
account, including, in some cases, ventures which are unrelated to futures
trading.
Certain of the Trading Advisors do now, or may in the future, act as
sponsors of their own single or multi-advisor futures funds which may, from time
to time, be in direct competition with the Fund for positions in the market.
Other client accounts managed by a Trading Advisor may significantly
outperform its Fund account.
Each Trading Advisor has numerous clients and financial incentives to
favor certain accounts over the Fund.
Brokers and Dealers Selected by Trading Advisors
Certain of the Trading Advisors have required, as a condition of their
management of a Fund account, that such account trade through certain non-
Merrill Lynch brokers (even though MLF remains the clearing broker) with which
such Trading Advisors have ongoing business dealings. Such Trading Advisors may
have a conflict of interest between insisting on the use of such brokers and
using the brokers most advantageous for the Fund.
Certain of the Trading Advisors execute a number of the trades for
their Fund accounts through affiliated floor brokers.
FINANCIAL CONSULTANTS
Financial Consultants (the individual MLPF&S brokers) receive initial
selling commissions and ongoing compensation on the Units. Consequently,
Financial Consultants have a financial incentive to encourage investors to
purchase Units and to discourage them from redeeming their Units.
PROPRIETARY TRADING
The Trading Advisors, MLIP, their respective principals, their
respective affiliates and such affiliates' respective principals may trade in
the commodity markets for their own accounts and for the accounts of their
clients, and in doing so may take positions which are the same as or opposite to
those held by the Fund. Prospective investors should be aware that -- as a
result of a neutral allocation system, testing a new trading system, trading
their proprietary accounts more aggressively or other actions not in violation
of their fiduciary or other duties -- such persons may from time to time take
positions in their proprietary accounts ahead of the positions taken for the
Fund and on occasion orders may be filled more advantageously for the account of
one or more such persons than for the Fund's account. Records of this trading
will not be available for inspection by Limited Partners.
___________________
While it is generally true that it is in the best interests of MLIP,
the Trading Advisors and their respective affiliates and principals for the Fund
to trade successfully, in particular circumstances any of the foregoing parties
may receive significantly more benefit from acting in a manner adverse to the
Fund than from acting in, or not opposed to, the Fund's best interests. It is
very difficult, if not impossible, for Limited Partners to know or confirm that
any of the foregoing persons is equitably resolving the conflicts of interest
described above.
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THE LIMITED PARTNERSHIP AGREEMENT
A copy of the Limited Partnership Agreement is included as Exhibit A
to this Prospectus and is incorporated herein by reference. Section and page
references below are to the Limited Partnership Agreement.
LIMITED LIABILITY OF SUBSCRIBERS
The Limited Partnership Agreement provides that (except as otherwise
provided by law -- for example, if the Fund is bankrupt or insolvent at the time
that a distribution is made to a Limited Partner), no Limited Partner shall be
personally liable for the debts of the Fund beyond the amount invested by such
Limited Partner in the Fund, plus his share of any undistributed profits.
(Section 7(e) at page A-6).
ASSIGNMENTS; REDEMPTIONS
Units may only be transferred with the consent of the General Partner,
although the assignment of the economic interest represented by the Units (but
not any of the other rights, such as the right to vote and receive monthly
reports) does not require such consent. The General Partner will generally
consent to assignees being substitute Limited Partners unless doing so would
have adverse federal income tax consequences.
A Limited Partner may redeem any or all of his Units at Net Asset
Value as of the last business day of any month upon ten calendar days'
irrevocable notice to his Merrill Lynch Financial Consultant. Payment of the
redemption price of Units is generally made within ten business days of the
effective date of redemption.
If Units are redeemed on or prior to the end of the twelfth full
calendar month after their sale, 3% of such Units' redemption proceeds are paid
to MLIP as an early redemption charge.
In general, redemption requests need not be made in writing. Limited
Partners may simply contact their Merrill Lynch Financial Consultant. A Limited
Partner who no longer has a Merrill Lynch account must request redemption in
writing (signature guaranteed), by corresponding with MLIP at: Merrill Lynch
World Headquarters, Sixth Floor, South Tower, World Financial Center, New York,
New York 10080-6106. (Section 11 at page A-10).
MANAGEMENT OF PARTNERSHIP AFFAIRS; VOTING RIGHTS
Limited Partners take no part in the management and have no voice in
the operation of the Fund. (Section 8(a) at page A-8). Limited Partners may
remove and replace MLIP as general partner of the Fund, and may, with the
consent of MLIP, amend the Limited Partnership Agreement, except in certain
limited respects, by the affirmative vote of holders of Units representing more
than fifty percent (50%) of the outstanding Units of each series owned by
Limited Partners. (Section 17(b) at page A-14). A majority of the Units held by
Limited Partners may also compel dissolution of the Fund. (Section 17(b) at page
A-14). Ten percent (10%) of the Units held by Limited Partners have the right to
bring a matter before a vote of the Limited Partners. (Section 17(c) at page A-
14).
MLIP has no power under the Limited Partnership Agreement to restrict
any of the Limited Partners' voting rights. (Section 17(c) at page A-14). Any
Units purchased by MLIP or its affiliates are non-voting. (Section 6 at page A-
3).
MLIP has the right unilaterally to amend the Limited Partnership
Agreement to the extent that such amendment is not adverse to the Limited
Partners and also in certain unusual circumstances -- for example, if doing so
is necessary to effect the intent of the Fund's tax allocations or to comply
with certain regulatory requirements. (Section 17(a) at page A-14).
In the event that MLIP or the Limited Partners vote to amend the
Limited Partnership Agreement in any material respect, the amendment will not
become effective prior to all Limited Partners having an opportunity to redeem
their Units. (Section 17(c) at page A-14).
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REPORTS TO LIMITED PARTNERS AND ACCESS TO RECORDS
The books and records of the Fund (including a list of Limited
Partners and their addresses) are maintained at MLIP's principal office, and
Limited Partners and their duly authorized representatives have the right during
normal business hours upon reasonable notice to MLIP to inspect such books and
records for any purpose reasonably related to their interest as Limited
Partners. MLIP will also mail copies of such books and records to Limited
Partners upon request and receipt of reasonable reproduction and mailing costs.
(Section 9 at page A-9).
Each month MLIP distributes summary statements of accounts to all
Limited Partners. All tax information relating to the Fund necessary for the
preparation of Limited Partners' federal income tax is distributed no later than
March 15 of each year. Audited financial statements are distributed by March 31
of each year. (Section 9 at page A-9).
GENERAL
In compliance with the Statement of Policy of the North American
Securities Administrators Association, Inc. relating to the registration of
commodity pool programs under state securities or "Blue Sky" laws (the
"Guidelines"), the Limited Partnership Agreement provides that: (i) the Fund
will make no loans (Section 8(c) at page A-7); (ii) no rebates or give-ups,
among other things, may be received from the Fund by any Trading Advisor, MLIP,
MLF, MLIB, MLAM or any affiliate of the foregoing, and such restriction may not
be circumvented by reciprocal business arrangements among any Trading Advisor,
MLIP, MLF, MLIB, MLAM or any of their respective affiliates and the Fund
(Section 8(d) at page A-7); (iii) any agreements between the Fund and MLIP, MLF,
MLIB, MLAM or any affiliate of MLIP, MLF, MLIB or MLAM must be terminable by the
Fund upon no more than 60 days' written notice (Section 8(e) at page A-8); and
(iv) the assets of the Fund will not be commingled with the assets of any other
person (deposit of assets with a commodity broker, clearinghouse or forward
dealer does not constitute commingling for these purposes). (Section 8(c) at
page A-7).
All Advisors must meet the experience requirements of the Guidelines.
(Section 8(f) at page A-8).
MLIP has agreed in the Limited Partnership Agreement to reimburse the
Fund, with interest, for any Advisory or other fees paid by the Fund during any
fiscal year to any Advisor which exceed the 6% annual management fees and 15%
quarterly incentive fees permitted by the Guidelines. (Section 8(a) at page A-
6).
FEDERAL INCOME TAX CONSEQUENCES
MLIP has been advised by its counsel, Sidley & Austin, that, in its
opinion, the following Summary correctly describes the material federal income
tax consequences, as of the date hereof, to a United States individual taxpayer
of acquiring, owning and disposing of Units.
PARTNERSHIP TAX STATUS OF THE FUND
MLIP has been advised by its counsel, Sidley & Austin, that, in its
opinion, each of the Fund and the trading partnership in which the Fund invests
is properly classified as a partnership for federal income tax purposes. MLIP
believes that all of the income generated by the Fund to date has constituted
and all income expected to be generated will constitute "qualifying income."
Accordingly, Sidley & Austin has advised MLIP that, in its opinion, the Fund
will not be subject to federal income tax as a corporation under the provisions
applicable to "publicly-traded partnerships."
TAXATION OF PARTNERS ON PROFITS OR LOSSES OF THE FUND
Each Partner is required for federal income tax purposes to take into
account his allocable share of all items of Fund income, gain, loss or
deduction. A Partner's share of such items for tax purposes generally is
determined by the allocations in the Limited Partnership Agreement unless such
allocations do not have "substantial economic effect" or are not in accordance
with the Partners' interests in the Fund. Under the Limited Partnership
Agreement, allocations are generally made in proportion to the capital accounts
of each Unit of such series, and therefore such allocations should have
substantial economic effect. However, in cases in which a Partner redeems part
or all of his Units in the Fund the allocations of capital gain or loss
specified in the Limited Partnership Agreement will not be in proportion to
capital accounts. Because such allocations are consistent with the economic
effect of the Limited Partnership Agreement, MLIP files the Fund's tax return
based upon such allocations. In the opinion of Sidley & Austin, the foregoing
allocations should be upheld if audited
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by the IRS. Nevertheless, a legal opinion is not binding on the IRS and it is
not certain that such allocations would, in fact, be respected upon audit. If
such allocations were challenged and not sustained, some or all of a redeeming
Partner's capital gain or loss could be converted from short-term to long-term,
and each remaining Partner's share of the capital gain or loss that is the
subject of such allocations could be increased (solely for tax purposes).
LIMITATIONS ON DEDUCTIBILITY OF FUND LOSSES
The amount of any Fund loss that a Partner is entitled to include in
his personal income tax return is limited to his tax basis for his Units as of
the end of the year in which such loss occurred. Generally, a Partner's tax
basis for his Units is the amount paid for such Units reduced (but not below
zero) by his share of any Fund distributions, realized losses and expenses and
increased by his share of the Fund's realized income and gains. In addition,
losses of the Fund may be limited under the "at risk" rules.
Because of the limitations imposed upon the deductibility of capital
losses (see "-- Tax on Capital Gains and Losses," below), a Partner's
distributive share of any capital losses of the Fund will not materially reduce
the federal income tax payable on his ordinary income (including his allocable
share of the Fund's ordinary income).
TREATMENT OF INCOME AND LOSS UNDER THE "PASSIVE ACTIVITY LOSS RULES"
The Internal Revenue Code of 1986 (the "Code") contains rules (the
"Passive Activity Loss Rules") designed to prevent the deduction of losses from
"passive activities" against income not derived from such activities, including
salary income from investment activities not constituting a trade or business,
such as interest and dividends ("Portfolio Income"). The trading activities of
the Fund will not constitute a "passive activity," and income derived from the
Fund will constitute Portfolio Income or other income not from a "passive
activity."
REDEMPTIONS OF UNITS
Cash received from the Fund by a Partner generally is not reportable
as taxable income by a Partner, except as described below. Rather, such receipt
reduces (but not below zero) the total tax basis of all of the Units held by the
Partner after the redemption.
Redemption for cash of all of a Partner's Units will result in the
recognition of gain or loss for federal income tax purposes. Such gain or loss
will be equal to the difference, if any, between the amount received and the
Partner's adjusted tax basis for his Units. Assuming that the Partner has held
his Units for more than one year, such gain or loss will be long-term capital
gain or loss.
GAIN OR LOSS ON SECTION 1256 CONTRACTS
Under the "mark-to-market" system of taxing futures and commodity
options contracts traded on United States exchanges and certain foreign currency
forward contracts ("Section 1256 Contracts"), any unrealized profit or loss on
positions in such Section 1256 Contracts open as of the end of a fiscal year is
treated as if such profit or loss had been realized for tax purposes as of such
time. In general, 60% of the net gain or loss which is generated as a result of
the "mark-to-market" system is treated as long-term capital gain or loss, and
the remaining 40% of such net gain or loss is treated as short-term capital gain
or loss.
GAIN OR LOSS ON NON-SECTION 1256 CONTRACTS
Except as described below with respect to Section 988 transactions
entered into by a qualified fund, gain or loss with respect to contracts that
are non-Section 1256 Contracts is taken into account for tax purposes only when
realized.
"Section 988 transactions" include entering into or acquiring any
forward contract, futures contract or similar instrument if the amount paid or
received is denominated in terms of (or determined by reference to the value of)
a foreign currency other than the taxpayer's functional currency or if the
underlying property to which the contract or instrument ultimately relates is a
foreign currency other than the taxpayer's functional currency. In general,
foreign currency gain or loss on Section 988 transactions is treated as ordinary
income or loss. However, under the "qualified fund election" made by the Fund,
gain or loss with respect to certain Section 988 transactions will be capital
gain or loss. In addition, all such transactions are subject to the "mark-to-
market" rules (see "-- Gain or Loss on Section 1256 Contracts," above).
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TAX ON CAPITAL GAINS AND LOSSES
Net capital gains (i.e., the excess of net long-term capital gain over
net short-term capital loss) will be taxed for individual taxpayers at a maximum
rate of 28%. See "-- Limitation on Deductibility of Interest on Investment
Indebtedness," at page 61 for a discussion of the reduction in the amount of an
individual taxpayer's net capital gain for a taxable year to the extent such
gain is taken into account as investment income. The Fund's trading generates
almost exclusively capital gain or loss. Capital losses are deductible by
individual taxpayers only to the extent of capital gains for the taxable year
plus $3,000. Accordingly, the Fund could incur significant capital losses but an
investor, nevertheless, would be required to pay substantial taxes in respect of
such investor's allocable share of the Fund's interest and other ordinary
income. See "Risk Factors -- (24) Taxation of Interest Income" at page 14.
If an individual taxpayer incurs a net capital loss for a year, the
portion thereof, if any, which consists of a net loss on Section 1256 Contracts
may, at the election of the taxpayer, be carried back three years. Losses so
carried back may be deducted only against net capital gain for such year to the
extent that such gain includes gains on Section 1256 Contracts. Losses so
carried back will be deemed to consist of 60% long-term capital loss and 40%
short-term capital loss (see "-- Gain or Loss on Section 1256 Contracts," at
page 60 above). To the extent that such losses are not used to offset gains on
Section 1256 Contracts in a carryback year, they will carry forward indefinitely
as losses on Section 1256 Contracts in future years.
LIMITED DEDUCTION FOR CERTAIN EXPENSES
The Code provides that, for individual taxpayers who itemize
deductions when computing taxable income, expenses of producing income,
including "investment advisory fees," are aggregated with unreimbursed employee
business expenses, other expenses of producing income and certain other
deductions (collectively, "Aggregate Investment Expenses"), and that the
aggregate amount of such expenses is deductible only to the extent that such
amount exceeds 2% (the "2% floor") of an individual taxpayer's adjusted gross
income. In addition, Aggregate Investment Expenses in excess of the 2% floor,
when combined with a taxpayer's deductions for certain other items, are subject
to a reduction (the "3% phase-out") equal to, generally, 3% of the taxpayer's
adjusted gross income in excess of a certain threshold amount. Moreover, such
Aggregate Investment Expenses are miscellaneous itemized deductions which are
not deductible by individual taxpayers in calculating his alternative minimum
tax.
Based on the contemplated trading activities of the trading
partnership in which the Fund invests, in the opinion of Sidley & Austin, the
trading partnership should be treated as engaged in the conduct of a trade or
business for federal income tax purposes. As a result, the ordinary and
necessary business expenses incurred by the trading partnership in conducting
its commodity futures trading business should not be subject to the 2% Floor or
the 3% Phase-Out. Substantially all of the expenses related to an investment in
the Fund are incurred and paid by the trading partnership. Investors should be
aware that an opinion of counsel is not binding on the IRS or on any court and
it is possible that the IRS could contend, or that a court could decide, that
the contemplated trading activities of the trading partnership do not constitute
a trade or business for federal income tax purposes. To the extent the
characterization of the trading partnership's expenses as investment Advisory
expenses were to be sustained, each non-corporate Partner's pro rata share of
the amounts so characterized would be deductible only to the extent that such
non-corporate Partner's Aggregate Investment Expenses exceeded the 2% Floor and,
when combined with certain other itemized deductions, exceeded the 3% Phase-Out.
In addition, each non-corporate Partner's distributive share of the income
allocated to the Fund by the trading partnership would be increased (solely for
tax purposes) by such Partner's pro rata share of the amounts so
recharacterized.
TAXATION OF GOVERNMENT SECURITIES INVESTMENTS
The Fund's purchase and sale of Government Securities generates
capital gain or loss -- generally short-term -- as well as interest income.
Taxable income is recognized on any interest accrued on zero-coupon Government
Securities acquired for the Fund, even though no interest is paid on such
Government Securities until they mature.
SYNDICATION FEES
The $239,100 in organizational and initial offering costs, for which
MLIP is being reimbursed by the Fund in 36 equal monthly installments, have been
treated as a non-deductible, non-amortizable, syndication expense by the Fund.
The IRS could take the position that a portion of the brokerage commissions paid
to MLF constitutes non-deductible syndication expenses.
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LIMITATION ON DEDUCTIBILITY OF INTEREST ON INVESTMENT INDEBTEDNESS
Interest paid or accrued on indebtedness properly allocable to
property held for investment constitutes "investment interest." Interest expense
incurred by a Limited Partner to acquire or carry his Units (as well as other
investments) will constitute "investment interest." Such interest is generally
deductible by individual taxpayers only to the extent that it does not exceed
net investment income (that is, generally, the excess of (i) gross income from
interest, dividends, rents and royalties, which would include a Partner's share
of the Fund's interest income, and (ii) certain gains from the disposition of
investment property, over the expenses directly connected with the production of
such investment income). Any investment interest expense disallowed as a
deduction in a taxable year solely by reason of the above limitation is treated
as investment interest paid or accrued in the succeeding taxable year. An
individual taxpayer's net capital gain from the disposition of investment
property is included in clause (ii) of the second preceding sentence only to the
extent that such taxpayer elects to make a corresponding reduction in the amount
of net capital gain that is subject to tax at the maximum 28% rate described
above. (See "-- Tax on Capital Gains and Losses," at page 60 above.)
POSSIBLE PAYMENTS UNDER THE ML&CO. GUARANTEE
Any payment to the Fund pursuant to the ML&Co. guarantee in respect of
a series will give rise to taxable income in the amount of such payment to the
Partners who hold Units of the recipient series.
MLIP'S CONTRIBUTION TO THE PURCHASE PRICE OF CERTAIN UNITS
MLIP contributes $3 to the Fund for each Unit purchased by officers
and employees of ML&Co. or its affiliates, who subscribe for Units at $97. The
$3 MLIP contribution is taxed as ordinary income in the year of purchase, and
subscribers will acquire a tax basis of $100 in their Units.
"UNRELATED BUSINESS TAXABLE INCOME"
In the opinion of Sidley & Austin, income earned by the Fund will not
constitute "unrelated business taxable income" under Section 511 of the Code to
employee benefit plans and other tax-exempt entities which purchase Units;
provided that Units purchased by such plans and entities are not "debt-
financed."
IRS AUDITS OF THE FUND AND ITS PARTNERS
The tax treatment of Fund-related items is determined at the Fund
level rather than at the Partner level. MLIP is the Fund's "tax matters partner"
with general authority to determine the Fund's responses to an audit. The
limitations period for assessment of deficiencies and claims for refunds with
respect to items related to the Fund is three years after the Fund's return for
the taxable year in question is filed, and MLIP has the authority to extend such
period with respect to all Limited Partners.
If an audit results in an adjustment, all Partners may be required to
pay additional taxes plus interest as well as penalties. Partners may themselves
also be subject to audits as the result of an audit of the Fund.
FOREIGN LIMITED PARTNERS NOT PERMITTED
No person who is a non-resident alien individual, foreign corporation,
foreign partnership, foreign trust or foreign estate for federal income tax
purposes may invest in the Fund.
STATE AND OTHER TAXES
In addition to the federal income tax consequences described above,
the Fund and the Partners may be subject to various state and other taxes.
Certain of such taxes could, if applicable, have a significant effect on the
amount of tax payable in respect of an investment in the Fund.
____________________
THE FOREGOING DISCUSSION IS NOT INTENDED AS TAX ADVICE, PARTICULARLY
AS CERTAIN OF THE INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND MAY NOT
BE THE SAME FOR ALL TAXPAYERS. ACCORDINGLY, PROSPECTIVE INVESTORS IN THE FUND
ARE URGED TO CONSULT THEIR TAX ADVISERS WITH SPECIFIC REFERENCE TO THEIR
SITUATION UNDER FEDERAL, STATE AND OTHER LAWS BEFORE DETERMINING WHETHER TO
SUBSCRIBE FOR UNITS.
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PLAN OF DISTRIBUTION
SUBSCRIPTION PROCEDURE
The Units are offered to the public on a continuous basis.
Subscriptions may be submitted at any time for investment (if accepted) in the
Units as of a single settlement date on the first day of the immediately
following calendar quarter. There is no minimum number of Units which must be
sold as of the beginning of any calendar quarter for any Units then to be sold,
and given the "best efforts" nature of the offering, there can be no assurance
as to how many Units of any particular series will be sold. MLPF&S acts as the
exclusive Selling Agent for the Units; see "-- Selling Agent Compensation" at
page 64, below. There is no market for the Units and MLPF&S will not engage in
any form of market-making activities with respect to the Units.
In order to purchase Units, an investor must complete, execute and
deliver to the Selling Agent a copy of the Signature Page to the Subscription
Agreement and Power of Attorney included in Exhibit D to this Prospectus.
Subscription payments are made by authorizing the Selling Agent to debit an
investor's customer securities account in the amount of his subscription.
(Prospective subscribers must open an MLPF&S customer securities account in
order to purchase Units.) Accounts are debited, and subscriptions transmitted
directly by the Selling Agent to The Bank of New York at its offices in New
York, New York by Selling Agent wire transfer or check made payable to "THE BANK
OF NEW YORK, AS ESCROW AGENT FOR ML PRINCIPAL PROTECTION L.P., ESCROW ACCOUNT
NO. 328436," on the settlement dates. Settlement dates are specified by the
Selling Agent and occur not later than five business days following notification
by MLIP of the acceptance of an investor's subscription (which will be received
within five business days of subscription). No sale of Units of any series will
be completed until at least 5 business days after the date a subscriber has
executed, dated and submitted the Signature Page to the Subscription Agreement
and Power of Attorney. Subscriptions must generally be received no less than 5
business days prior to issuance of the Units to be purchased.
Existing Limited Partners subscribing for additional Units need not
(except in certain states) submit a new Signature Page to the Subscription
Agreement and Power of Attorney, but must be in possession of a current
Prospectus as well as recent summary financial information relating to the Fund
(current within 60 calendar days).
FINANCIAL CONSULTANTS (THE INDIVIDUAL MLPF&S BROKERS) ARE REQUIRED TO
RECONFIRM THE SUITABILITY OF EXISTING LIMITED PARTNERS TO MAKE AN ADDITIONAL
INVESTMENT IN THE FUND.
Subscriptions are held in escrow pending investment in the Units as of
the beginning of the calendar quarter immediately following the acceptance of
such subscriptions. Each subscriber is paid the interest actually earned on his
subscription funds while held in escrow, generally by credit to subscribers'
customer securities accounts. Subscription funds are invested in United States
Treasury bills or comparable authorized instruments while held in escrow and
earn interest at prevailing "risk-free" rates.
The Units are being sold when, as and if subscriptions are accepted by
MLIP, subject to the satisfaction of certain conditions set forth in the Selling
Agreement and to the approval by counsel of certain legal matters. The Units are
offered on a continuous basis. MLIP may terminate but not suspend the offering.
FOREIGN PERSONS AND ENTITIES NOT OTHERWISE SUBJECT TO U.S. FEDERAL INCOME TAX
MAY NOT INVEST IN THE FUND.
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PURCHASES BY EMPLOYEE BENEFIT PLANS
SPECIAL INVESTMENT CONSIDERATIONS. In general, the terms "employee
benefit plan" as defined in the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), and "plan" as defined in Section 4975 of the Code together
refer to any plan or account of various types which provide retirement benefits
or welfare benefits. Such plans and accounts include, but are not limited to,
corporate pension and profit sharing plans, "simplified employee pension plans,"
KEOGH plans for self-employed individuals (including partners), individual
retirement accounts and medical plans (collectively, "Plans," and the
fiduciaries of such plans with investment discretion, "Plan Fiduciaries").
Each Plan Fiduciary must give appropriate consideration to the facts
and circumstances that are relevant to an investment in the Fund, including the
role that an investment in the Fund plays in the Plan's overall investment
portfolio. Each Plan Fiduciary, before deciding to invest in the Fund, must be
satisfied that investment in the Fund is a prudent investment for the Plan, that
the investments of the Plan, including the investment in the Fund, are
diversified so as to minimize the risk of large losses and that an investment in
the Fund complies with the Plan and related trust documentation.
THE FUND DOES NOT HOLD "PLAN ASSETS." A regulation issued under ERISA
contains rules for determining when an investment by a Plan in an equity
interest of a limited partnership will result in the underlying assets of the
partnership being considered to constitute assets of the Plan for purposes of
ERISA and Section 4975 of the Code (i.e., "plan assets"). Those rules provide in
pertinent part that assets of a limited partnership will not be considered
assets of a Plan which purchases an equity interest if such interest is a
"publicly-offered security." This exception is satisfied with respect to the
Units. Therefore, the underlying assets of the Fund are not considered to
constitute "plan assets."
INELIGIBLE PURCHASERS. Units may not be purchased with the assets of a
Plan if MLIP, any Advisor, the Selling Agent, any Financial Consultant, MLF,
MLIB, ML&Co., MLAM or any of their respective affiliates either: (a) has
investment discretion with respect to the investment of such plan assets; (b)
has authority or responsibility to give or regularly gives investment advice
with respect to such plan assets, for a fee, and pursuant to an agreement or
understanding that such advice will serve as a primary basis for investment
decisions with respect to such plan assets and that such advice will be based on
the particular investment needs of the plan; or (c) is an employer maintaining
or contributing to such plan.
As a matter of policy, MLIP limits each investor's subscriptions to
the Fund to no more than 10% of such investor's readily marketable assets. In
the case of IRA, BASIC(TM) and SEP accounts, this 10% limitation applies to the
beneficiary of such accounts, while such accounts themselves may not invest more
than 50% of their readily marketable assets in the Fund.
ACCEPTANCE OF SUBSCRIPTIONS ON BEHALF OF INDIVIDUAL RETIREMENT
ACCOUNTS OR OTHER EMPLOYEE BENEFIT PLANS IS IN NO RESPECT A REPRESENTATION BY
ANY PARTY THAT AN INVESTMENT IN THE UNITS IS APPROPRIATE OR AUTHORIZED FOR ANY
PARTICULAR PLAN. EACH PLAN FIDUCIARY CONSIDERING ACQUIRING UNITS MUST CONSULT
WITH ITS OWN LEGAL AND TAX ADVISERS BEFORE DOING SO.
SELLING AGENT COMPENSATION
No selling commissions are paid from the proceeds of subscriptions.
MLIP credits the Selling Agent with "production credits," a portion of which are
paid to the Selling Agent in cash by MLIP. "Production credits" do not represent
actual cash payments but rather internal bookkeeping entries relating to the
securities sold through different Financial Consultants. Pursuant to standard
Selling Agent compensation procedures, a percentage of the amount credited to
the Selling Agent is paid out in cash by the Selling Agent to Financial
Consultants who sell Units. The Selling Agent is credited with production
credits of $5 per Unit on all sales, provided that no initial production credits
accrue to the Selling Agent or Financial Consultants in respect of sales of
Units at $97 per Unit to officers and employees of ML&Co. and its affiliates.
MLIP credits the Selling Agent with ongoing production credits, a
portion of which are paid in cash, with respect to Units which remain
outstanding more than twelve months. Such ongoing production credits will begin
to accrue with the start of the thirteenth month after sale (i.e., after
subscription funds are released from escrow, not when Subscription Agreements
are submitted or investors' funds deposited in escrow) on Units sold by
Financial Consultants who are registered with the CFTC, have passed either the
Series 3 National Commodity Futures Examination or the Series 31 Managed Futures
Fund Examination and agree to provide certain ongoing services to investors,
upon request. Such production credits equal 2% per annum of the average month-
end Net Assets attributable to such Units committed to trading. There can be no
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assurance as to what percentage of any particular series' assets will be
allocated to trading. This percentage begins at 75% and may vary substantially
over time. The Selling Agent will, in turn, pay out a portion of the amounts so
received to qualified Financial Consultants (the individual MLPF&S brokers).
Financial Consultants receive no initial production credits on new
Units purchased with the proceeds of Units redeemed during or as of the end of
the preceding quarter (irrespective of whether redemption charges were paid on
such Units). However, the 2% ongoing production credits, described above, will
begin, to the extent that the redemption proceeds are reinvested, in the
thirteenth month after the sale of the Units redeemed, not in the thirteenth
month after reinvestment.
Ongoing production credits accrue monthly and are paid quarterly.
In the Selling Agreement, each Trading Advisor and MLIP have agreed to
indemnify the Selling Agent against certain liabilities that the Selling Agent
may incur in connection with the offering and sale of the Units, including
liabilities under the Securities Act of 1933 and the Commodity Exchange Act. The
SEC is of the view that indemnification for liabilities arising under the
Securities Act of 1933 is against public policy as expressed in such Act and is,
therefore, unenforceable.
Certain of the ongoing offering costs paid by MLIP might be deemed to
have constituted costs properly allocated to the account of the Selling Agent.
Such costs, which included the expense of producing a revised sales brochure and
organizing certain seminars (such costs did not exceed $100,000 in the
aggregate), were in addition to the selling commissions credited to the Selling
Agent.
MLIP pays the costs of the ongoing offering of the Units. In no event
will any such costs, properly allocated to the account of the Selling Agent,
when added to the selling commissions paid by MLIP, exceed an aggregate of $10
per Unit.
ADVISORS' INVESTMENTS IN THE FUND
All Advisors which would not, due to their "non-U.S. person" status,
incur adverse U.S. income tax consequences, or are not otherwise prohibited by
applicable non-United States securities, tax or other laws from doing so, invest
$10,000 in the Fund during their tenure of providing advisory services to it.
MLIP has, for some years, required such investments from all the Advisors
selected for its domestic funds.
LEGAL MATTERS
Sidley & Austin passes upon legal matters for MLIP, MLF and the
Selling Agent in connection with the Units being offered hereby. Sidley & Austin
advises MLIP (and its affiliates) with respect to its responsibilities as
general partner of, and with respect to matters relating to, the Fund. Sidley &
Austin has reviewed the statements under "Federal Income Tax Consequences."
EXPERTS
The balance sheet of MLIP as of December 30, 1994 and December 29,
1995, and the consolidated financial statements of the Fund as of December 31,
1994 and 1995 included in this Prospectus, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein,
and have been so included in reliance upon such reports given upon the authority
of that firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
This Prospectus constitutes part of the Registration Statement filed
by the Fund with the SEC in Washington, D.C. This Prospectus does not contain
all of the information set forth in such Registration Statement, certain
portions of which have been omitted pursuant to the rules and regulations of the
SEC, including, without limitation, certain exhibits thereto (for example, the
forms of the Selling Agreement, the Advisory Agreements, the Investment Advisory
Contract, the Customer Agreement and the Foreign Exchange Desk Service
Agreement). The descriptions contained herein of agreements included as exhibits
to the Registration Statement are necessarily
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summaries; the exhibits themselves may be inspected without charge at the public
reference facilities maintained by the SEC in Washington, D.C., and copies of
all or part thereof may be obtained from the SEC upon payment of the prescribed
fees. The SEC maintains a Web Site that contains reports, proxy and information
statements and other information regarding registrants, such as the Fund, that
file electronically with the SEC at http://www.sec.gov.
RECENT FINANCIAL INFORMATION
Pursuant to applicable CFTC regulations, prospective subscribers must
receive recent financial information (current within 60 calendar days) relating
to the Fund together with this Prospectus, unless the material that would
otherwise be included in such Report or information has been otherwise included
herein.
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INDEX OF TERMS
A number of specialized terms are used in this Prospectus. The respective
descriptions or definitions of such terms may be found on the following pages of
this Prospectus.
<TABLE>
<CAPTION>
Terms Page(s)
- ----- -------
<S> <C>
Administrative Fee.................................. 46
Advisors............................................ Cover page
"Bid-ask" spreads................................... 46
"Breakeven" level................................... 9
Brokerage commissions............................... 45
CFTC................................................ -i-
Consulting fees..................................... 49
"Core" Advisors..................................... 7
"Customer segregated funds"......................... 41
Differential........................................ 47
EFP................................................. 47
Employee benefit plan............................... 64
ERISA............................................... 64
Escrow Agent........................................ -i-
F/X Desk............................................ 9
Government Securities............................... 7
Guarantee........................................... 38
MLF................................................. Cover page
MLAM................................................ Cover page
ML&Co............................................... Cover page
MLIP................................................ Cover page
MLIB................................................ 33
MLPF&S.............................................. -i-
New Trading Profit.................................. 48
NFA................................................. 34
Non-"core" Trading Advisors......................... 7
"Offset accounts"................................... 42
Ongoing production credits.......................... -i-
Organizational and initial offering
cost reimbursement............................... 45
Peak-to-valley drawdown............................. 18
Principal Assurance Date............................ Cover page
"Principal protection".............................. 7
Profit Shares....................................... 47
Redemption charges.................................. 50
Selling Agent....................................... -i-
Selling commissions................................. -i-
Service fees........................................ 47
Time Horizon........................................ 11
Trading Advisors.................................... Cover page
Yield enhancement................................... 7
</TABLE>
_________________________
-67-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
ORGANIZATIONAL STRUCTURE
[CHART APPEARS HERE]
-68-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ML PRINCIPAL PROTECTION L.P.
Independent Auditors' Report............................................ 70
Consolidated Statements of Financial Condition.......................... 71
Consolidated Statements of Income....................................... 72
Consolidated Statements of Changes in Partners' Capital................. 73
Notes to Consolidated Financial Statements.............................. 74
MERRILL LYNCH INVESTMENT PARTNERS INC.
Independent Auditors' Report............................................ 83
Balance Sheets.......................................................... 84
Notes to Balance Sheets................................................. 85
</TABLE>
____________________
Schedules are 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.
-69-
<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, 1995 and
1994, and the related consolidated statements of income and changes in partners'
capital for the year ended December 31, 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, 1995 and 1994, and the results
of their operations for the year ended December 31, 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
January 26, 1996
New York, New York
-70-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1996 (UNAUDITED), DECEMBER 31, 1995 AND 1994
---------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30,
1996
(unaudited) 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
ASSETS
Cash $ 2,995 $ 19,332 $ --
Accrued interest receivable (Note 2) 618,777 17,852 65,078
U. S. Government Securities 76,528,743 74,280,477 30,850,465
Equity in commodity futures trading accounts:
Cash and option premiums 5,568,353 1,586,839 993,636
Net unrealized gain on open contracts 1,896,238 2,073,538 1,115,935
------------- ------------- ------------
TOTAL $84,615,106 $77,978,038 $33,025,114
============= ============= ============
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Administrative Expenses $ 10,687 $ -- $ --
Settlement payment due to broker -- 1,496,925 --
Redemptions payable 2,110,456 539,877 213,696
Brokerage commissions payable (Note 2) 395,448 356,607 156,876
Profit shares payable 75,861 78,840 129,169
Organization and initial offering costs payable (Note 1) 88,556 148,331 228,030
------------- ------------- ------------
Total liabilities 2,681,008 2,620,580 727,771
------------- ------------- ------------
Minority Interest 698,453 510,914 204,504
------------- ------------- ------------
PARTNERS' CAPITAL:
General Partner (20,873.06, 16,603.42 and 10,572 units) 2,225,385 1,766,403 1,074,985
Limited Partners (758,127.76, 697,715.56 and 306,990
units) 79,010,260 73,080,141 31,017,854
------------- ------------- ------------
Total partners' capital $81,235,645 74,846,544 32,092,839
------------- ------------- ------------
TOTAL $84,615,106 $77,978,038 $33,025,114
============= ============= ============
NET ASSET VALUE PER UNIT (Note 5)
</TABLE>
See notes to consolidated financial statements.
-71-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS JANUARY 1, 1996 TO SEPTEMBER 30, 1996 (UNAUDITED),
JANUARY 1, 1995 TO SEPTEMBER 30, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD
FROM OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
---------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 1, 1996 January 1, 1995
to to October 12, 1994
September 30, September 30, to
1996 1995 1995 December 31, 1994
------------------ ----------------- ------------ ------------------
<S> <C> <C> <C> <C>
REVENUES:
Trading profit (loss):
Realized $2,701,951 $4,142,209 $4,407,833 $ (363,054)
Change in unrealized (177,300) (773,318) 1,355,377 1,115,935
------------------ ----------------- ------------ ------------------
Total trading results 2,524,651 3,368,891 5,763,210 752,881
Interest income (Note 2) 3,465,370 2,327,644 3,415,670 377,303
------------------ ----------------- ------------ ------------------
Total revenues 5,990,021 5,696,535 9,178,880 1,130,184
------------------ ----------------- ------------ ------------------
EXPENSES:
Administrative Fees 96,980 59,042 86,928 10,964
Profit shares 319,464 573,525 652,366 129,169
Brokerage commissions 3,588,269 2,184,180 3,216,364 405,653
------------------ ----------------- ------------ ------------------
Total expenses 4,004,713 2,816,747 3,955,658 545,786
------------------ ----------------- ------------ ------------------
INCOME BEFORE MINORITY 1,985,308 2,879,788 5,223,222 584,398
INTEREST
------------------ ----------------- ------------ ------------------
Minority interest in income (11,134) (17,611) (36,730) (4,504)
------------------ ----------------- ------------ ------------------
NET INCOME $1,974,174 $2,862,177 $5,186,492 $ 579,894
================== ================= ============ ==================
NET INCOME PER UNIT OF
PARTNERSHIP INTEREST:
Weighted average number of Units
outstanding (Note 6) 828,420 491,225 551,944 319,887
================== ================= ============ ==================
Weighted average net income per
General and Limited Partner Unit $2.38 $5.83 $9.40 $1.81
================== ================= ============ ==================
</TABLE>
See notes to consolidated financial statements.
-72-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE PERIODS JANUARY 1, 1996 TO SEPTEMBER 30, 1996 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 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 (189,786.52) (19,730,431) -- (19,730,431)
Subscriptions 254,468.36 25,102,217 344,619 25,446,835
Distributions -- (1,279,994) (21,484) (1,301,478)
Net income -- 1,838,327 135,847 1,974,174
-------------- -------------- ------------ -------------
PARTNERS' CAPITAL,
SEPTEMBER 30, 1996 $2,225,386
==========
779,000.82 $ 79,010,260 $ 81,235,645
=========== ============ ============
</TABLE>
See notes to consolidated financial statements.
-73-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS FROM JANUARY 1, 1996 TO SEPTEMBER 30, 1996 (UNAUDITED),
JANUARY 1, 1995 TO SEPTEMBER 30, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 both in
speculative trading of futures, options and forward contracts on a wide
range of commodities -- through ML Principal Protection Trading L.P. (the
"Trading Partnership"; formerly ML Principal Protection Plus Trading L.P.),
of which the Partnership is the sole limited partner -- and in 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.
("Merrill Lynch"), which in turn is a wholly-owned subsidiary of Merrill
Lynch & Co., Inc., is the general partner of both the Partnership and the
Trading Partnership, and Merrill Lynch Futures Inc. ("MLF"), also a Merrill
Lynch affiliate, is its commodity broker. Merrill Lynch Asset Management,
L.P. ("MLAM"), another affiliate of Merrill Lynch, provides cash management
services to the Partnership, and substantially all of the Partnership's
assets are held in accounts maintained at 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
equity interest 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 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") 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 advisors (the "Trading Advisors" or the
"Advisors"), chosen from time to time by MLIP to manage the Trading
Partnership's trading.
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 by allocating 100% (or more) of the
Partnership's assets to trading against the necessity of preventing Merrill
Lynch & Co., Inc. from ever being required to make any payments to the
Partnership under the Merrill Lynch & Co., Inc. guarantee (see
Note 7).
Certain amounts in prior periods have been reclassified to conform to the
current period presentation.
-74-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS FROM JANUARY 1, 1996 TO SEPTEMBER 30, 1996 (UNAUDITED),
JANUARY 1, 1995 TO SEPTEMBER 30, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
Estimates
---------
The preparation of consolidated 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 consolidated 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 and forward contract transactions are recorded
on the trade date and open contracts are reflected in the consolidated
financial statements at their fair value on the last business day of the
reporting period. The difference between the original contract amount and
fair value is reflected in income as an unrealized gain or loss. Fair value
is based on quoted market prices. All commodity futures, options and
forward contracts are reflected at fair value in the consolidated financial
statements.
U.S. Government Securities
--------------------------
The Partnership invests a portion of its assets in obligations of the U.S.
Treasury and other U.S. Government agencies. 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 is
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 the Net Asset Values of the Units), the Partnership deducts
organization and initial offering cost reimbursements only as actually
paid.
The General Partner pays for 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 a portion of the
brokerage commissions paid to MLF by the Partnership as reimbursement for
the foregoing expenses.
No selling commissions were or are paid by Limited Partners.
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 their Net Asset Value as of the close of business on the
last business day of any calendar 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.
-75-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS FROM JANUARY 1, 1996 TO SEPTEMBER 30, 1996 (UNAUDITED),
JANUARY 1, 1995 TO SEPTEMBER 30, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
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 assets are held by MLF as margin deposits in
respect of the Partnership's futures trading. As a means of approximating
the interest rate which would be earned by the Partnership were 100% of its
Net Assets on deposit with MLF been invested in 91-day Treasury bills, MLF
pays the Partnership interest on its account equity on deposit with MLF at
a rate of 0.5 of 1% per annum below the prevailing 91-day U.S. Treasury
bill rates. In the case of its trading in certain foreign futures
contracts, the Partnership deposits margin in foreign currency denominated
instruments or cash and earns interest generally at the prevailing London
Clearing Broker Rate less 0.5 of 1% per annum. Any additional benefit
derived from possession of the Partnership's assets accrues to MLF and its
affiliates.
The Partnership pays brokerage commissions to MLF, at a flat monthly rate
equal to 0.7917 of 1% (a 9.5% annual rate) of the Partnership's month-end
assets allocated to trading. Effective January 1, 1996 this rate was
reduced to 0.7708 of 1% (a 9.25% annual rate), and the Partnership began to
pay MLIP an Administrative Fee of 0.020833 of 1% (a 0.25 of 1% annual
rate). Assets committed to trading are not reduced for purposes of
calculating brokerage commissions by any accrued but unpaid brokerage
commissions, profit shares or other fees or charges. The General Partner
estimates that the round-turn equivalent commission rate charged to the
Partnership during the period ended September 30, 1996, the year ended
December 31, 1995 and the period ended 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 0.20 of 1% on the first $25 million
of Partnership capital managed by MLAM, 0.15 of 1% on the next $25 million
of capital, 0.125 of 1% on the next $50 million, and 0.10 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, generally ranging
from 1% 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 in respect of such assets.
The Partnership trades forward contracts through a Foreign Exchange 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 fee) 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")
-76-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS FROM JANUARY 1, 1996 TO SEPTEMBER 30, 1996 (UNAUDITED),
JANUARY 1, 1995 TO SEPTEMBER 30, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
currency position is acquired and exchanged for an equivalent futures
position on the Chicago Mercantile Exchange's International Monetary
Market. In its EFP trading, the Partnership acquires cash currency
positions through the F/X Desk in the same manner and on the same terms as
in the case of the Partnership's other F/X Desk trading. When the
Partnership exchanges these positions for futures, there is a
"differential" between the prices of these two positions. This
"differential" reflects, in part, the different settlement dates of the
cash and the futures contracts as well as prevailing interest rates, but
also includes a pricing spread in favor of MLIB or another Merrill Lynch
entity.
The Partnership's F/X Desk service fee and EFP differential costs have to
date totaled no more than 0.25 of 1% of the Partnership's average month-end
Net Assets on an annual basis.
3. ANNUAL DISTRIBUTIONS
The Partnership makes annual fixed-rate distributions, payable irrespective
of profitability, of between $2 and $5 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. For
the period ended December 31, 1994, no distributions were made by the
Partnership, as no Units had been outstanding for a year as of such date.
The first such distribution was made, with respect to the Series A Units,
as of October 1, 1995, the first Issuance Anniversary, as defined, of such
series. At such time, Series A Unitholders received a fixed-rate
distribution equal to $3.50 per Series A Unit and a discretionary
distribution equal to $2.50 per Series A Unit (for a total distribution of
$6.00 per Series A Unit). The first such distribution with respect to
Series B Units was announced as of January 1, 1996, the first Series B
Issuance Anniversary, and also consisted of an annual fixed-rate
distribution equal to $3.50 per Series B Unit as well as a discretionary
distribution equal to $2.50 per Series B Unit (for a total distribution
equal to $6.00 per Series B Unit). The first such distribution with respect
to Series C Units was announced as of April 1, 1996, the first Series C
Issuance Anniversary, and consisted of an annual fixed-rate distribution
equal to $3.50 per Series C Unit but no discretionary distribution. As of
July 1, 1996, the Series D Units received a $3.50 fixed-rate distribution
but no discretionary distribution.
Any distributions made on all series of Units issued after Series H will be
entirely in the discretion of the General Partner, which does not presently
intend to make any such distributions.
4. AGREEMENTS
The Partnership and the Trading 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 Trading 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 Trading Advisors. Such payments are
also made in respect of Units redeemed as of each of the 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
organization and initial offering costs payable to the General Partner at
inception for purposes of determining Net Asset Value. For all other
purposes (including computing Net Asset Value for redemptions), the
Partnership deducts the organization and initial offering cost
reimbursements only as actually paid. At December 31, 1994 and 1995 and
September 30, 1996 , the Net Asset Values of the different series of Units
for financial reporting purposes and for all other purposes were:
-77-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS FROM JANUARY 1, 1996 TO SEPTEMBER 30, 1996 (UNAUDITED),
JANUARY 1, 1995 TO SEPTEMBER 30, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value Net Asset Value per Unit
------------------------ -------------------------------------------
All Other Financial Number of All Other Financial
Purposes Reporting Units Purposes Reporting
----------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
December 31, 1994
-----------------------------------------------------------------------
Series A Units $32,314,228 $32,092,839 317,562.00 $101.76 $101.06
December 31, 1995
-----------------------------------------------------------------------
Series A Units $29,380,564 $29,321,472 274,693.00 $106.96 $106.74
Series B Units 7,011,988 6,999,016 63,540.00 110.36 110.15
Series C Units 6,800,466 6,788,236 65,800.00 103.35 103.16
Series D Units 20,522,519 20,485,530 200,540.00 102.34 102.15
Series E Units 11,272,696 11,252,290 109,745.98 102.72 102.53
----------- ----------- -----------
Total $74,988,233 $74,846,544 $714,318.98
=========== =========== ===========
September 30, 1996
-----------------------------------------------------------------------
Series A Units $22,843,914 208,256.00 *$ 109.80 *$ 109.69
----------- ---------- ---------- ----------
Series B Units 3,926,908 3,923,247 36,656.00 ** 107.13 ** 107.03
--------- --------- --------- ---------- ----------
Series C Units 5,037,250 5,032,361 49,149.00 *** 102.49 *** 102.39
--------- --------- --------- ---------- ----------
Series D Units 13,192,043 13,173,591 130,035.00 ****101.45 ****101.31
---------- ---------- ---------- ---------- ----------
Series E Units 11,250,493 11,240,474 106,835.96 105.31 105.21
---------- ---------- ---------- ---------- ----------
Series F Units 9,799,926 9,791,287 96,000 102.08 101.99
--------- --------- --------- ---------- ----------
Series G Units 6,613,348 6,607,504 65,670.50 100.71 100.62
--------- --------- --------- ---------- ----------
Series H Units 8,630,899 8,623,267 86,398.36 99.90 99.81
----------- ----------- ----------- ---------- ----------
Total $81,317,558 $81,235,645 779,000.82
=========== =========== ===========
</TABLE>
* After reduction for the $6.00 per Series A Unit distribution made as of
October 1, 1995.
** After reduction for the $6.00 per Series B Unit distribution made as of
January 1, 1996.
*** After reduction for the $3.50 per Series C Unit distribution made as of
April 1, 1996.
**** After reduction for the $3.50 per Series D Unit distribution made as
of July 1, 1996.
-78-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS FROM JANUARY 1, 1996 TO SEPTEMBER 30, 1996 (UNAUDITED),
JANUARY 1, 1995 TO SEPTEMBER 30, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
6. WEIGHTED AVERAGE NUMBER OF UNITS
The weighted average number of Units outstanding was computed for purposes
of disclosing consolidated net income per weighted average Unit. The
weighted average number of Units for a period equals the number of Units
outstanding at the end of such period, adjusted proportionately for Units
redeemed or issued based on how long such Units were outstanding during
such period.
7. MERRILL LYNCH & CO., INC. GUARANTEE
Merrill Lynch & Co., Inc. 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 adjustment for all
liabilities to third parties, not less than $100.
8. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership trades futures, options and forward contracts on interest
rates, stock indices, commodities, currencies, energy and metals. The
Partnership's revenues by reporting category were as follows:
<TABLE>
<CAPTION>
1996 (through 1995
September 30) Trading Results
Trading Results
------------------- -------------------
<S> <C> <C>
Interest Rates $ 544,590 $ 3,933,366
Stock Indices (916,975) 587,931
Commodities (104,132) (447,486)
Currencies 559,603 2,914,300
Energy 3,116,342 238,988
Metals (674,777) (1,463,889)
------------------- -------------------
$2,524,651 $ 5,763,210
=================== ===================
</TABLE>
Market Risk
- -----------
Derivative 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 the market values of the financial instruments or commodities
underlying such derivative instruments frequently result in changes in the
Partnership's unrealized gain or loss on such derivative instruments as
reflected in the Consolidated Statements of Financial Condition as of the end of
the period. 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 of the markets
in which the derivative instruments are traded.
The General Partner has procedures in place intended to control market risk,
although there can be no assurance that they will, in fact, succeed in doing so.
These 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 positions, or itself reallocate
Partnership
-79-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS FROM JANUARY 1, 1996 TO SEPTEMBER 30, 1996 (UNAUDITED),
JANUARY 1, 1995 TO SEPTEMBER 30, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
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 or trading policies or to be trading erratically, the General
Partner's basic risk control procedures consist simply of the ongoing process of
Advisor monitoring and selection, with the market risk controls being applied by
the Advisors themselves.
Fair Value
- ----------
The derivative instruments traded by the Trading Partnership are marked to
market daily with the resulting unrealized gains or losses recorded in the
Consolidated Statements of Financial Condition and the related income or 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 September 30, 1996, December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
September 30, 1996
---------------------------------------------------------------
Commitment to Commitment to
Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards)
--------------------- ---------------------
<S> <C> <C>
Interest Rates $ 305,321,578 $ 12,128,094
Stock Indices 8,400,315 726,420
Commodities 13,379,905 5,798,981
Currencies 77,877,518 116,423,644
Energy 7,165,994 _____
Metals 7,102,278 28,543,943
--------------------- ---------------------
$ 419,247,588 $ 163,621,082
===================== =====================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
---------------------------------------- -------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Options & Options & Options &
Forwards) Forwards) Forwards) Forwards)
-------------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Interest Rates $230,060,441 $ 37,950,386 $69,728,257 $64,233,570
Stock Indices 8,866,682 152,858 922,700 1,106,848
Commodities 17,582,456 3,850,643 7,859,990 1,576,977
Currencies 34,118,884 71,457,359 8,884,733 20,155,361
Energy 9,047,015 3,440,800 1,330,952 983,996
Metals 7,796,167 11,765,623 4,270,470 8,486,235
-------------------- ------------------ ------------------ ----------------
$307,471,645 $128,617,669 $92,997,102 $96,542,987
==================== ================== ================== ================
</TABLE>
-80-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS FROM JANUARY 1, 1996 TO SEPTEMBER 30, 1996 (UNAUDITED),
JANUARY 1, 1995 TO SEPTEMBER 30, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
Substantially all of the Trading Partnership's open derivative instruments
outstanding as of September 30, 1996 expire within one year.
The contract/notional value of the Trading Partnership's exchange-traded and
non-exchange-traded derivative instrument positions as of September 30, 1996 and
December 31, 1995 was as follows:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
-------------------------------------- ---------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options Options Options & Options &
& Forwards) & Forwards) Forwards) Forwards)
--------------------- ---------------- -------------------- ----------------
<S> <C> <C> <C> <C>
Exchange-Traded $275,846,356 $ 70,573,962 $238,654,840 $ 76,980,099
Non-Exchange-Traded 143,401,232 93,047,120 68,816,805 51,637,570
--------------------- ---------------- -------------------- ----------------
$419,247,588 $163,621,082 $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 period
January 1, 1996 to September 30, 1996 and during the year ended December 31,
1995 was as follows:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
-------------------------------------- ----------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Options & Options & Options &
Forwards) Forwards) Forwards) Forwards)
-------------------- ---------------- -------------------- ------------------
<S> <C> <C> <C> <C>
Interest Rates $218,540,411 $108,526,682 $170,252,009 $14,100,439
Stock Indices 11,571,864 2,898,381 5,390,839 1,288,747
Commodities 15,947,944 5,350,029 9,360,681 2,915,357
Currencies 92,788,187 115,783,451 36,054,488 38,557,545
Energy 7,556,820 1,940,292 2,823,925 2,417,008
Metals 15,876,474 18,800,139 6,113,263 10,207,341
-------------------- ---------------- -------------------- ------------------
$362,281,700 $253,298,974 $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 econ omically offsetting but are not,
as a technical matter, offset in the forward markets until the settlement date.
-81-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS FROM JANUARY 1, 1996 TO SEPTEMBER 30, 1996 (UNAUDITED),
JANUARY 1, 1995 TO SEPTEMBER 30, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
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 nonperformance, is the
net unrealized gain, 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.
As of September 30, 1996 and December 31, 1995, $6,868,118 and $10,444,577 of
the Trading Partnership's assets were held in segregated accounts in accordance
with Commodity Futures Trading Commission regulations. Substantially all of the
Partnership's assets were held in unregulated accounts maintained at MLF,
Merrill Lynch Pierce, Fenner & Smith Incorporated or certain of their
affiliates.
The gross unrealized gain and the net unrealized gain on the Trading
Partnership's open derivative instrument positions as of September 30, 1996 and
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
----------------------------------------- -----------------------------------------
Gross Unrealized Net Unrealized Gross Unrealized Net Unrealized
Gain Gain (Loss) Gain Gain (Loss)
-------------------- ------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Exchange-Traded $3,166,269 $2,297,661 $2,942,622 $2,223,484
Non-Exchange-Traded 1,072,798 (401,423) 352,246 (149,946)
-------------------- ------------------- -------------------- -------------------
$4,239,067 $1,896,238 $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, such trading which results in receivables from and
payables to MLF will be offset and reported as a net receivable or payable.
-82-
<PAGE>
INDEPENDENT AUDITORS' REPORT
MERRILL LYNCH INVESTMENT PARTNERS INC.
We have audited the accompanying balance sheet of Merrill Lynch Investment
Partners Inc. (the "Company") (formerly, ML Futures Investment Partners Inc.) as
of December 29, 1995. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material respects,
the financial position of the Company at December 29, 1995 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
January 26, 1996
New York, New York
-83-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
(FORMERLY, ML FUTURES INVESTMENT PARTNERS INC.)
BALANCE SHEETS
SEPTEMBER 27, 1996 (UNAUDITED) AND DECEMBER 29, 1995
<TABLE>
<CAPTION>
SEPTEMBER 27, 1996
(UNAUDITED) DECEMBER 29, 1995
------------------ -----------------
<S> <C> <C>
ASSETS
Cash $ 622,262 $ 17,738
Investments in affiliated partnerships 10,102,462 8,397,789
Other investments 538,066 579,127
Due from parent and affiliate 81,289,579 69,476,980
Receivables from affiliated partnerships 4,112,791 3,525,337
Deferred charges 16,039,548 11,759,885
Advances and other receivables 10,977,972 7,742,943
Fixed assets-net of accumulated depreciation of $1,095,428 and
and $1,016,602 130,292 119,823
Other assets 110,000 130,000
------------ ------------
TOTAL ASSETS $123,362,972 $101,749,622
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 590,038 $ 1,759,019
Due to affiliate 2,849,361 1,568,396
Current and deferred income taxes 11,359,167 7,162,014
------------ ------------
Total liabilities 14,798,566 10,489,429
------------ ------------
STOCKHOLDER'S EQUITY:
Preferred stock, par value $10.00 per share; 1,000 shares authorized
none outstanding -- --
Common stock, par value $10.00 per share; 1,000 shares authorized
100 shares outstanding 1,000 1,000
Additional paid-in capital 16,915,000 16,915,000
Retained earnings 91,648,406 74,344,193
------------ ------------
Total stockholder's equity 108,564,406 91,260,193
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $123,362,972 $101,749,622
============ ============
</TABLE>
See Notes to Balance Sheet.
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THE COMPANY
-84-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
(FORMERLY, ML FUTURES INVESTMENT PARTNERS INC.)
NOTES TO BALANCE SHEETS
SEPTEMBER 27, 1996 (UNAUDITED) AND DECEMBER 29, 1995
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Merrill Lynch Investment Partners Inc. (formerly, ML Futures
Investment Partners Inc.) (the "Company") is a wholly-owned subsidiary of
Merrill Lynch Group Inc., a wholly-owned subsidiary of Merrill Lynch & Co., Inc.
("ML&Co."). The Company is registered as a commodity pool operator and a
commodity trading advisor. The Company serves as the sole general partner of The
Futures Expansion Fund Limited Partnership, The Growth and Guarantee Fund L.P.,
ML Futures Investments II L.P. (formerly, The Futures Dimension Fund II L.P.),
ML Futures Investments L.P. (formerly The Tudor Prime Advisors Fund 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) IV L.P., The JWH Global Asset Fund L.P., The SECTOR
Strategy Fund(SM) IV L.P., The SECTOR Strategy Fund(SM) V L.P., ML Global
Horizons L.P., ML Chesapeake L.P., The SECTOR Strategy Fund(SM) VI L.P., RXR
Defensive Equity Alternative Account L.P. I (ceased trading on August 20, 1996),
ML Principal Protection L.P. (formerly ML Principal Protection Plus L.P.) and ML
JWH Strategic Allocation Fund L.P. (collectively, the "Affiliated
Partnerships"). Additionally, the Company has sponsored or initiated the
formation of various offshore entities engaged in the speculative trading of
futures and forward contracts.
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.
INVESTMENTS IN AFFILIATED PARTNERSHIPS - The Company's investments in its
Affiliated Partnerships are accounted for under the equity method of accounting.
DEFERRED CHARGES - Deferred charges represent compensation to ML&Co. affiliates
for the sale of fund units to their customers. Such costs are amortized over 6,
12, 24, 36 or 48-month periods.
2. RELATED PARTIES
Certain of the Company's officers and directors are also officers of other
subsidiaries of ML&Co. An affiliate bears all of the Company's facilities and
employee costs, for which it is reimbursed by the Company. Another affiliate,
Merrill Lynch Futures Inc., executes and clears the Affiliated Partnerships'
trades, as well as those of various offshore funds sponsored or managed by the
Company, for which it receives a fee, generally based on the net assets of the
Affiliated Partnerships and offshore funds.
ML&Co. is holder of the Company's excess cash, which is available on demand to
meet current liabilities. ML&Co. credits the Company with interest, at a
floating rate approximating ML&Co.'s average borrowing rate, based on the
Company's average daily balances receivable. At December 29, 1995 and September
27, 1996, approximately $69,500,000 and $81,300,000, respectively, was subject
to this agreement.
At December 29, 1995 and September 27, 1996, the Company had receivables from
Affiliated Partnerships and offshore funds for certain administrative,
management and redemption fees, all of which are expected to be collected within
90 days. Additionally, the Company had receivables from certain Affiliated
Partnerships and offshore funds for organization and initial offering costs paid
on behalf of such funds which are being reimbursed to the Company over various
time periods (not exceeding three years).
During 1995 and the first nine months of 1996, the Company did not declare or
pay a dividend.
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY
-85-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
(FORMERLY, ML FUTURES INVESTMENT PARTNERS INC.)
NOTES TO BALANCE SHEETS
SEPTEMBER 27, 1996 (UNAUDITED) AND DECEMBER 29, 1995
(CONTINUED)
- --------------------------------------------------------------------------------
3. INVESTMENTS IN AFFILIATED PARTNERSHIPS
Under the terms of the limited partnership agreements of the Affiliated
Partnerships, the Company is required to maintain an investment in each
Affiliated Partnership of at least one percent of the total contributions to
such partnership.
At September 27, 1996 and December 29, 1995, the Company's investments in
its Affiliated Partnerships were as follows:
<TABLE>
<CAPTION>
September 27, 1996 December 29, 1995
<S> <C> <C>
ML Principal Protection L.P. (formerly ML Principal Protection Plus L.P.).. $2,909,601 $2,324,996
ML Global Horizons L.P..................................................... 1,144,158 1,068,112
The SECTOR Strategy Fund(SM) II L.P........................................ 766,218 770,619
John W. Henry & Company/Millburn L.P....................................... 687,073 728,350
The SECTOR Strategy Fund(SM) VI L.P........................................ 707,556 725,174
RXR Defensive Equity Alternative Account L.P. I............................ -- 546,428
The JWH Global Asset Fund L.P.............................................. 516,694 492,278
The S.E.C.T.O.R. Strategy Fund(SM) L.P..................................... 422,756 441,992
ML Futures Investments L.P................................................. 339,813 356,788
The SECTOR Strategy Fund(SM) V L.P......................................... 323,602 339,622
ML Futures Investments II L.P.............................................. 191,465 213,181
The Growth and Guarantee Fund L.P.......................................... 180,874 155,787
The Futures Expansion Fund Limited Partnership............................. 119,250 121,808
The SECTOR Strategy Fund(SM) IV L.P........................................ 99,731 111,654
ML JWH Strategic Allocation Fund L.P....................................... 1,617,236 1,000
ML Chesapeake L.P.......................................................... 76,435 --
---------- ---------
Total...................................................................... $10,102,462 $8,397,789
=========== ==========
</TABLE>
The following represents condensed combined financial information of the
Affiliated Partnerships as of September 27, 1996 and December 29, 1995 (in
thousands):
<TABLE>
<CAPTION>
September 27, 1996 December 29, 1995
<S> <C> <C>
Assets...................................... $552,160 $528,180
======== ========
Liabilities................................. 21,145 15,836
Partners' capital........................... 531,015 512,344
-------- --------
Total.................................. $552,160 $528,180
======== ========
</TABLE>
The Company's Affiliated Partnerships trade various futures, options and forward
contracts. Risk to such partnerships arises from the possible adverse changes in
the market value of such contracts and the potential inability of counterparties
to perform
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY
-86-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
(FORMERLY, ML FUTURES INVESTMENT PARTNERS INC.)
NOTES TO BALANCE SHEETS
SEPTEMBER 27, 1996 (UNAUDITED) AND DECEMBER 29, 1995
(CONTINUED)
- --------------------------------------------------------------------------------
under the terms of the contracts. The risk to the Company is represented by the
portion of its investments in Affiliated Partnerships derived from the
unrealized gains contained in such partnerships' net asset values.
4. INCOME TAXES
The results of operations of the Company are included in the consolidated
Federal and combined state and local income tax return of ML&Co. It is the
policy of ML&Co. to allocate current and deferred taxes associated with such
operating results to its respective subsidiaries in a manner which approximates
the separate Company method. ML&Co. and its affiliates use the asset and
liability method in providing income tax on all transactions that have been
recognized in the financial statements.
The Company provides for deferred income taxes resulting from temporary
differences which arise from recording deferred charges in different years for
income tax reporting purposes than for financial reporting purposes. At
September 27, 1996 and December 29, 1995, the Company had no deferred tax
assets. Deferred tax liabilities consisted of the following:
<TABLE>
<CAPTION>
September 27,1996 December 29, 1995
<S> <C> <C>
State and local $1,604,096 $1,176,130
Federal 5,052,565 3,704,471
---------- ----------
$6,656,661 $4,880,601
========== ==========
</TABLE>
As part of the consolidated group, the Company transfers to ML&Co. its current
Federal, state and local tax liabilities. During 1995 and the first nine months
of 1996, the Company transferred $10,707,045 and $7,388,919, respectively, in
current taxes payable to ML&Co. At September 27, 1996 and December 29, 1995, the
Company had a current tax payable with ML&Co. of $4,702,506 and $2,281,413,
respectively.
5. NET WORTH AGREEMENTS
Pursuant to the limited partnership agreements of the Affiliated Partnerships,
the Company is required to maintain a "substantial net worth," as defined. The
Company's net worth, as defined, approximated $94,376,053 and $79,337,067 at
September 27, 1996 and December 29, 1995, respectively, which, in the opinion of
the Company's counsel, met the definition of "substantial net worth."
6. COMMITMENTS
The Company is obligated to pay to affiliates, from its own funds and without
reimbursement by its Affiliated Partnerships, ongoing fees for units in such
partnerships outstanding as of the end of various periods.
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY
-87-
<PAGE>
THE "CORE" ADVISORS
____________
As of October 1, 1996, approximately 40% of the Fund's trading assets
were allocated between the two current "core" Advisors. Brief descriptions and
performance summaries for these Advisors are included herein. However, Advisors'
trading methods are confidential and proprietary and past performance is not
necessarily indicative of future results. The significance of the following
descriptions and performance records to a decision whether to invest in the Fund
must be considered in light of these material qualifications.
FUTURES TRADING METHODS IN GENERAL
Systematic and Discretionary Trading Approaches
Managed futures strategies are generally classified as either
systematic or discretionary (or both).
A systematic trader will generally rely to some degree on judgmental
decisions concerning, for example, what markets to follow and commodities to
trade, but his primary reliance is on trading programs or models which generate
trading signals. The systems utilized to generate trading signals are changed
from time to time (although generally infrequently), but the trading
instructions generated by the systems being used are followed without
significant additional analysis or interpretation. Discretionary traders, on the
other hand, while they may utilize market charts, computer programs and
compilations of quantifiable fundamental information to assist them in making
trading decisions, make such decisions on the basis of their own judgment and
"trading instinct," not on the basis of trading signals generated by any program
or model.
Each approach involves certain inherent risks. For example, systematic
traders may incur substantial losses when fundamental or unexpected forces
dominate the markets, while discretionary traders may overlook price trends
which would have been clearly signaled by a trading system. Systematic traders
tend to rely more on computerized programs than do discretionary traders, and
some consider the discipline of a systematic trading process to be advantageous.
However, any trader, systematic or discretionary, may suffer substantial losses
by misjudging the market analysis.
Technical and Fundamental Analysis
Managed futures trading analysts are generally classified as either
technical or fundamental (or both).
Technical analysis is based on the theory that the commodities markets
themselves provide a means of anticipating future prices. Technical analysis
operates on the theory that market prices and momentum at any given point in
time reflect all known factors affecting the supply and demand for a particular
commodity. Consequently, technical analysis focuses not on evaluating those
factors directly but on an analysis of price histories, movements and patterns,
theorizing that a detailed analysis of market date is the most effective means
of attempting to predict the future course of prices.
Fundamental analysis, in contrast, focuses on the study of factors
external to the trading markets that affect the supply and demand of a
particular commodity. Such factors might include weather, the economy of a
particular country, government policies, domestic and foreign political and
economic events, and changing trade prospects. Fundamental analysis theorizes
that by monitoring relevant supply and demand factors for a particular
commodity, a state of current or potential disequilibrium of market conditions
may be identified that has yet to be reflected in the price level of that
commodity. Fundamental analysis assumes that markets are imperfect, that
information is not instantaneously assimilated or disseminated and that
econometric models can be constructed that generate equilibrium prices that
reflect "true value" and may indicate market mispricing.
-88-
<PAGE>
Trend-Following
"Trend-following" advisors gear their trading approaches towards
positioning themselves to take advantage of major price movements. "Trend-
following" traders are to be contrasted with traders who seek to achieve overall
profitability by making numerous small profits on short-term trades, or through
arbitrage techniques. "Trend-following" traders assume that most of their trades
will be unprofitable. Their objective is to make a few large profits, more than
offsetting their more numerous but (hopefully) smaller losses, from capitalizing
on major trends. During periods when no major price trends develop in a market,
a "trend-following" trading advisor is likely to incur substantial losses.
Risk Control Techniques
Trading advisors often adopt fairly rigid "risk management" or "money
management" principles. Such principles typically restrict the size of positions
which will be taken as well as establishing "stop-loss" points at which losing
positions must be liquidated. No risk control technique is "fail safe," and none
can, in fact, assure that major drawdowns will be avoided. Not only do estimates
of market volatility themselves require judgmental input, but also market
illiquidity can make it impossible for an account to liquidate a position
against which the market is moving strongly, whatever risk management principles
are utilized. The Advisors' risk management principles should be seen more as a
discipline applied to their trading in highly speculative markets than as an
effective protection against loss.
THE "CORE" ADVISORS
The following descriptions of the current "core" Advisors, their
respective trading systems, methods and strategies and their respective
principals are general and are not intended to be exhaustive. Trading methods
are proprietary and confidential. No attempt has been or could be made to
provide a precise description of any Advisor's method. MLIP believes that the
following descriptions may be of interest to prospective investors. However,
investors must be aware of the inherent limitations of such descriptions.
FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE
OF RISK. THERE CAN BE NO ASSURANCE THAT ANY ADVISOR
WILL TRADE PROFITABLY OR AVOID SUBSTANTIAL LOSSES.
__________________________
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CHESAPEAKE CAPITAL CORPORATION
OCTOBER 1, 1996 ALLOCATION OF TRADED ASSETS: 20%
BACKGROUND
Chesapeake was incorporated under the laws of the Commonwealth of
Virginia in February 1988 for the purpose of offering investment advisory and
portfolio management services to both retail and institutional investors in
trading in the futures and forward markets. On August 19, 1991, Chesapeake was
merged into Chesapeake Capital Corporation, an Illinois corporation formed on
August 13, 1991. References herein to "Chesapeake" refer to the Virginia
corporation prior to August 19, 1991 and to the Illinois corporation on and
after August 19, 1991. Chesapeake is registered as a CTA and a CPO with the
CFTC, and is also a member in good standing of the NFA. Chesapeake has been
registered with the CFTC as a CTA and a CPO since June 20, 1988 and May 8, 1991,
respectively, and a member of the NFA since June 20, 1988.
Mr. R. Jerry Parker, Jr. is the Chairman, Chief Executive Officer,
Director, sole shareholder and a principal of Chesapeake. Mr. Parker received
his B.S. in Commerce, with an emphasis in Accounting, from the University of
Virginia in January 1980. Mr. Parker worked in the accounting field for four
years after graduating from college and became a licensed Certified Public
Accountant in Virginia in 1982. From January 1983 until November 1983, Mr.
Parker was a CPA at Wilkinson & Lester, a certified public accounting firm based
in Richmond, Virginia. From November 1983 until January 1987, Mr. Parker was
employed as an exempt CTA by Richard J. Dennis, a principal and shareholder of
Richard J. Dennis & Company (a Chicago-based CTA and CPO registered with the
CFTC) in his "Turtle" training program. From January 1987 until February 1988,
Mr. Parker traded for Mr. Thomas Dennis as an exempt CTA. During these periods,
Mr. Parker had complete discretionary trading authority over a futures account
of $1 million to $1.5 million. In February 1988, Mr. Parker ceased trading for
Mr. Thomas Dennis and formed Chesapeake, where he serves as the Chairman, Chief
Executive Officer and Chief Trader.
Mr. John M. Hoade is President, Secretary and a principal of
Chesapeake. Mr. Hoade received a B.S. degree in Business Administration from
Lynchburg College in 1978. From 1976 through 1990, Mr. Hoade was employed by
Thurston Metals, Inc., located in Lynchburg, Virginia, in sales, marketing and
general management. Mr. Hoade joined Chesapeake in December 1990 to direct its
operations and marketing efforts.
TRADING STRATEGY
Chesapeake trades pursuant to its "Diversified Program" for the Fund.
The Diversified Program emphasizes diversification with a global portfolio of
futures, forward and cash markets which include, but are not limited to,
agricultural products, precious and industrial metals, currencies, financial
instruments, and stock, financial and economic indices. Chesapeake trades on
numerous U.S. and non-U.S. exchanges.
The investment portfolios currently offered by Chesapeake are the
"Diversified Program," the "Diversified 2XL Program" and the "Financials and
Metals Program" (the "Trading Programs"). The Diversified Program is
Chesapeake's longest operating investment portfolio, with a performance record
beginning in February 1988. While all of the Trading Programs employ the same
general trading methodology, as described below, they differ in their emphasis
on certain markets or market sectors and the exclusion of others. The following
overview is not intended as a detailed or exhaustive description of the trading
methodologies or strategies employed by Chesapeake, as the exact nature of these
methods and strategies is proprietary and confidential.
Relying primarily on technical analysis, Chesapeake believes that
future price movements in all markets may be more accurately anticipated by
analyzing historical price movements within a quantitative framework than by
attempting to predict or forecast changes in price through fundamental economic
analysis. The trading methodologies employed by Chesapeake are based on programs
analyzing a large number of interrelated mathematical
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and statistical formulas and techniques which are quantitative, proprietary in
nature and which have been either learned or developed by Mr. Parker.
In addition to such mathematical evaluations, Chesapeake employs a
technique of technical analysis generally known as "charting" in order to
attempt to determine optimal support and resistance levels and entry and exit
points in the various markets. In an effort to determine the overall technical
condition of the market and as a timing mechanism for trades, Chesapeake also
makes extensive use of internally-generated market information, which includes
but is not limited to price volatility, open interest, daily price action,
volume and market psychology or sentiment.
The profitability of the Chesapeake Trading Programs, traded pursuant
to technical analysis emphasizing mathematical and charting approaches, will
depend upon the occurrence in the future, as in the past, of major trends in
some markets. If there are no trends, the Trading Programs are likely to be
unprofitable. There have been trendless periods in the past which can be
expected to recur, and any factor which lessens the prospect of trends in the
future, such as increased governmental control, regulation, or participation as
a purchaser or seller in the futures markets (including joint governmental
control or regulation of, or participation in, international currency markets),
lessens the prospect that programs utilizing technical analysis, including the
Chesapeake Trading Programs, will be profitable in the future. In addition, the
future profitability of the Trading Programs would also be adversely affected by
factors which increase the number of signals leading to unprofitable trades. For
example, a significant increase in technically-oriented trading (trend-following
or otherwise) in a particular commodity might cause a change in the pattern of
price movements in a manner which might be unfavorable.
Trend-following trading systems, such as those employed by Chesapeake,
will seldom effect market entry or exit at the most favorable price in the
particular market trend. Rather, this type of trading system seeks to close out
losing positions quickly and to hold portions of profitable positions for as
long as the trading system determines that the particular market trend continues
to exist. There can be no assurance, however, that profitable positions can be
liquidated at the most favorable price in a particular trend. As a result, the
number of losing transactions may exceed substantially the number of profitable
transactions. However, if Chesapeake's approach is successful, these losses
should generally be relatively small and more than offset by gains on profitable
transactions.
The Trading Programs are oriented toward the preservation of original
equity. The commencement of trading or a drawdown from starting equity are
considered the situations of highest risk, and risk management techniques at
this point are emphasized over those which invite greater risk in the interest
of enhancing performance. These risk management techniques include
diversification. Also, the Trading Programs adhere to the requirements of a
money management system which determines and limits the equity committed to each
trade, each market, each commodity complex (in Trading Programs which trade in
more than one commodity complex) and each account.
Chesapeake believes that a long-term commitment to its Trading
Programs is necessary for profitable trading. Chesapeake attempts to take a
limited number of positions over the long term in an attempt to capture major
price movements while limiting downside risk on open positions.
Decisions concerning the liquidation of positions, the commodities to
be traded and the size of positions to be taken or maintained will require to
some degree the exercise of judgment by Chesapeake. The decision not to trade
futures interest contracts for a certain period, or not to trade certain futures
interest contracts due to lack of discernible price movements (trends) or lack
of liquidity, may result at times in clients (such as the Fund) missing
significant profit opportunities which might otherwise have been captured by
Chesapeake.
Futures contracts which are traded by Chesapeake may include, but are
not limited to, agricultural products, precious and industrial metals,
currencies, financial instruments, and stock, financial and economic indices.
Exchanges on which these transactions take place include, but are not limited
to, all exchanges in the United States, as well as non-U.S. exchanges (e.g., the
Belgian Futures and Options Exchange (BELFOX), the London International
Financial Futures and Options Exchange Ltd. (LIFFE), the International Petroleum
Exchange of London Ltd., the London Metal Exchange, the London Commodity
Exchange (LCE), the Italian Derivatives Market (IDEM), the Marche a Terme
International de France (MATIF), the Deutsche Terminborse, the Hong Kong Futures
Exchange Ltd., the
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Montreal Exchange (ME), the Tokyo Commodity Exchange, the Tokyo International
Financial Futures Exchange (TIFFE), the Tokyo Stock Exchange (TSE), the
Singapore International Monetary Exchange (SIMEX), the Sydney Futures Exchange
Ltd., and the Winnipeg Commodity Exchange). In addition, Chesapeake continually
monitors numerous markets, both U.S. and non-U.S., and will generally initiate
trades at such point that Chesapeake determines that a market is sufficiently
liquid and tradeable using the methods employed by Chesapeake.
Chesapeake engages in transactions in physical commodities, including
EFPs.
Chesapeake generally uses between 15% and 30% of an account's assets
as original margin for trading in the Diversified Program, but at times this
percentage can be higher.
The trading strategy utilized by Chesapeake's Trading Programs,
including the Diversified Program, may be revised from time to time by
Chesapeake as a result of ongoing research and development which seeks to devise
new trading systems, as well as test methods currently employed. The trading
methods used by Chesapeake in the future may differ significantly from those
presently used, due to the changes which may result from this research.
Since the Trading Programs utilized by Chesapeake are proprietary and
confidential, the above discussion is general in nature and is not intended to
be exhaustive.
PAST PERFORMANCE
The following information describes the composite actual performance
of all customer accounts managed by Chesapeake. Chesapeake trades its
Diversified Program on behalf of the Fund. As of August 31, 1996, Chesapeake was
managing approximately $780 million (excluding "notional" funds) of customer
funds in the futures and forwards markets. Performance information of the
program traded on behalf of the Fund is current as of August 31, 1996.
Performance information is current as of July 31, 1996 for the Chesapeake
programs not traded for the Fund.
Performance information is set forth for the most recent five full
years for each Chesapeake Trading Program or, in the event that a Trading
Program has been trading for less than five years, performance information is
set forth from the inception of trading. Performance information prior to
January 1, 1991 has been excluded in accordance with CFTC regulations.
Chesapeake has adopted a method of computing rate of return and
performance disclosure, referred to as the "Fully-Funded Subset" method,
pursuant to an Advisory (the "Fully-Funded Subset Advisory") published in
February 1993 by the CFTC. To qualify for the use of the Fully-Funded Subset
method, the Fully-Funded Subset Advisory requires that certain computations be
made in order to arrive at the Fully-Funded Subset and that the accounts for
which performance is so reported meet two tests which are designed to provide
assurance that the Fully-Funded Subset and the resultant rates of return are
representative of the trading program. Chesapeake has performed these
computations for periods subsequent to January 1, 1992. However, for periods
prior to January 1, 1992, due to cost considerations, the Fully-Funded Subset
method has not been used. Instead, the rates of return reported are based on a
computation which uses the nominal account sizes of all of the accounts
included, calculated in accordance with the "Only Accounts Traded" ("OAT")
method, also permitted in certain circumstances by the CFTC. Chesapeake believes
that this method yields substantially the same rates of return as would the
Fully-Funded Subset method and that the rates of return in the performance
summaries are representative of the Trading Programs for the periods presented.
For the periods from January 1, 1992 through December 31, 1993, Chesapeake
compared the OAT method and the Fully-Funded Subset method and found that the
two methods yielded substantially the same rates of return. Consequently,
Chesapeake continued to use the OAT method until the end of 1993 (the Fully-
Funded Subset Advisory was released in February 1993). From January 1, 1994 on,
Chesapeake has been using the Fully-Funded Subset method.
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In reviewing the following information, prospective investors should
understand that performance is "net" of all actual fees and charges and includes
interest income applicable to the accounts comprising each composite performance
summary. Such composite performance is not necessarily indicative of the
performance of any individual account. The fees and charges applicable to
individual accounts are not specifically described herein. However, set forth
below is a general description of the charges applicable to such accounts.
Brokerage commissions are accounted for monthly and include the total
amount of all brokerage commissions and other trading fees paid during the month
plus or minus the change in brokerage commissions and other trading fees accrued
on open positions from the preceding month. Brokerage commissions are calculated
on a round-turn or flat-rate basis. Round-turn commissions have ranged from
approximately $7 per round-turn trade to approximately $50 per round-turn trade.
Flat-rate commissions have ranged from approximately 2% of equity to
approximately 9% of equity. Interest income is earned on U.S. government
obligations and cash on deposit with futures commission merchants and is
recorded on the accrual basis. Management fees are accrued monthly and are
charged at rates ranging from 0% to 8% of equity. Incentive fees are accrued
monthly and are charged at rates ranging from 12.5% to 30% of new trading
profits. On certain accounts, incentive fees are reduced by the management fees
paid over an agreed upon period.
The "Notes to the Performance Summaries" are set forth on pages
112 through 114.
The information presented has not been audited. However, Chesapeake
believes that such information is accurate and fairly presented.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
FURTHERMORE, THE RATES OF RETURN ACHIEVED WHEN AN ADVISOR IS MANAGING A LIMITED
AMOUNT OF EQUITY MAY HAVE LITTLE RELATIONSHIP TO THE RATES OF RETURN WHICH SUCH
ADVISOR MAY BE ABLE TO ACHIEVE MANAGING LARGER AMOUNTS OF EQUITY.
THE FOLLOWING FIGURES HAVE IN NO RESPECT BEEN ADJUSTED TO REFLECT THE
CHARGES TO THE FUND. CERTAIN OF THE ACCOUNTS INCLUDED IN THE FOLLOWING
PERFORMANCE SUMMARIES PAID FEES MATERIALLY DIFFERENT FROM, AND IN SOME CASES
MATERIALLY LOWER THAN, THOSE CHARGED TO THE FUND.
COMMODITY INTEREST TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE
OF RISK. THERE CAN BE NO ASSURANCE THAT THE TRADING ADVISOR WILL TRADE
PROFITABLY OR AVOID INCURRING SUBSTANTIAL LOSSES.
INVESTORS SHOULD NOTE THAT INTEREST INCOME MAY CONSTITUTE A
SIGNIFICANT PORTION OF A COMMODITY TRADING ADVISOR'S TOTAL INCOME AND, IN
CERTAIN INSTANCES, MAY GENERATE PROFITS WHERE THERE HAVE BEEN REALIZED OR
UNREALIZED LOSSES FROM COMMODITIES TRADING.
PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS.
See "Risk Factors -- (2) Past Performance Not Necessarily Indicative of Future
Results."
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CHESAPEAKE CAPITAL CORPORATION
DIVERSIFIED PROGRAM
JANUARY 1991 - AUGUST 1996
The following performance summary and chart reflect the composite
performance results from January 1991 through August 1996 of the Diversified
Program. Chesapeake trades this program on behalf of the Fund. The performance
of the program from February 1988 (inception) through December 1990, while
profitable, includes the program's two largest drawdowns, the larger of which
occurred during the period August 1989 through October 1989 and was (20.58)%.
The program has been utilized in trading for 177 accounts since January 1991. As
of August 31, 1996, 114 accounts had been closed and 63 accounts remained open.
Of the closed accounts, 98 were profitable and 16 were unprofitable at their
closing. Of the 63 open accounts, 62 were profitable and one was unprofitable as
of August 31, 1996.
Name of CTA: Chesapeake Capital Corporation
Name of program: Diversified Program
Inception of client account trading by CTA: February 1988
Inception of client account trading in program: February 1988
Number of open accounts: 63
Aggregate assets (excluding "notional" equity) overall: $780 million
Aggregate assets (excluding "notional" equity) in program: $735 million
Aggregate assets (including "notional" equity) overall: $918 million
Aggregate assets (including "notional" equity) in program: $861 million
Largest monthly drawdown: (10.98)% (1/92)
Largest peak-to-valley drawdown: (16.62)% (1/92-5/92)
<TABLE>
<CAPTION>
=============================================================================
Monthly 1996 1995 1994 1993 1992 1991
Performance
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------
January 1.69% (3.23)% (3.33)% 0.42% (10.98) %(1.29)%
- -----------------------------------------------------------------------------
February (4.26) (4.39) (4.88) 15.99 (2.86) 4.84
- -----------------------------------------------------------------------------
March 0.28 8.60 0.09 5.86 0.53 2.32
- -----------------------------------------------------------------------------
April 10.16 1.45 (0.60) 7.38 (0.44) (2.80)
- -----------------------------------------------------------------------------
May (3.04) 6.84 9.06 0.40 (3.66) 0.27
- -----------------------------------------------------------------------------
June 3.26 0.88 7.02 0.98 6.52 (1.25)
- -----------------------------------------------------------------------------
July (7.14) (3.09) (1.70) 9.49 12.96 (1.75)
- -----------------------------------------------------------------------------
August 0.32* (2.66) (2.98) 5.88 3.16 (3.32)
- -----------------------------------------------------------------------------
September 0.20 3.49 (2.63) (6.78) 4.39
- -----------------------------------------------------------------------------
October (1.11) 1.97 (0.06) 5.21 4.21
- -----------------------------------------------------------------------------
November 1.76 4.83 1.03 2.27 (4.68)
- -----------------------------------------------------------------------------
December 9.18 2.86 5.77 (1.93) 12.08
- -----------------------------------------------------------------------------
Compound Annual 0.37*% 14.09% 15.87% 61.82% 1.81% 12.51%
Rate of Return (8 months)
=============================================================================
</TABLE>
* Estimate
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
SEE THE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES 112 THROUGH 114.
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<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
OTHER CHESAPEAKE CAPITAL CORPORATION PROGRAMS*
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NAME OF CTA: Chesapeake Capital Chesapeake Capital Chesapeake Capital Chesapeake Capital
Corporation Corporation Corporation Corporation
-----------------------------------------------------------------------------------------------
NAME OF PROGRAM: Financials and Metals Diversified 2XL Program Pacific Rim Program Foreign Financials
Program Program
-----------------------------------------------------------------------------------------------
INCEPTION OF CLIENT ACCOUNT February 1988 February 1988 February 1988 February 1988
TRADING BY CTA: -----------------------------------------------------------------------------------------------
INCEPTION OF CLIENT ACCOUNT March 1992 April 1994 June 1994 June 1992
TRADING IN PROGRAM: ceased trading 8/95 ceased trading 6/94
-----------------------------------------------------------------------------------------------
NUMBER OF OPEN ACCOUNTS: 6 4 0 0
-----------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING $753 million $753 million $753 million $753 million
"NOTIONAL" EQUITY) OVERALL:
-----------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING $27 million $18 million N/A N/A
"NOTIONAL" EQUITY) IN PROGRAM:
-----------------------------------------------------------------------------------------------
AGGREGATE ASSETS (INCLUDING $923 million $923 million $923 million $923 million
"NOTIONAL" EQUITY) OVERALL:
-----------------------------------------------------------------------------------------------
AGGREGATE ASSETS (INCLUDING $31 million $18 million N/A N/A
"NOTIONAL" EQUITY) IN PROGRAM:
-----------------------------------------------------------------------------------------------
LARGEST MONTHLY DRAWDOWN: (7.86)% (7/96) (16.40)% (7/96) (3.30)% (7/95) (5.77)% (9/92)
-----------------------------------------------------------------------------------------------
LARGEST PEAK-TO-VALLEY (10.36)% (1/94-2/94) (17.59)% (5/96-7/96) (3.30)% (7/95) (5.77)% (9/92)
DRAWDOWN:
-----------------------------------------------------------------------------------------------
1996 COMPOUND RATE OF RETURN: (4.93)% (7 months) (8.3)% (7 months) N/A N/A
-----------------------------------------------------------------------------------------------
1995 COMPOUND RATE OF RETURN: 12.61% 18.77% 37.04% (8 months) N/A
-----------------------------------------------------------------------------------------------
1994 COMPOUND RATE OF RETURN: 3.22% 26.88% (9 months) (2.76)% (7 months) (1.77)% (6 months)
-----------------------------------------------------------------------------------------------
1993 COMPOUND RATE OF RETURN: 68.53% N/A N/A 21.90%
-----------------------------------------------------------------------------------------------
1992 COMPOUND RATE OF RETURN: 24.19% (10 months) N/A N/A 21.42% (7 months)
-----------------------------------------------------------------------------------------------
1991 COMPOUND RATE OF RETURN: N/A N/A N/A N/A
-----------------------------------------------------------------------------------------------
</TABLE>
* The performance information set forth above is current as of July
31, 1996.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
THE FUND'S ACCOUNT IS NOT TRADED PURSUANT TO THE FOREGOING PROGRAMS.
________________________
SEE THE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES 112 THROUGH 114.
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JOHN W. HENRY & COMPANY, INC.
OCTOBER 1, 1996 ALLOCATION OF TRADED ASSETS: 20%
BACKGROUND
John W. Henry & Company began managing assets in 1981 as a sole
proprietorship and was later incorporated in the state of California as John W.
Henry & Company, Inc., to conduct business as a commodity trading advisor. JWH
trades numerous contracts on a 24-hour basis in the United States, Europe and
Asia, and has grown to be one of the largest advisors in the managed futures
industry, managing approximately $1.5 billion (excluding "notional" funds) in
customer capital. The sole shareholder of JWH is the John W. Henry Trust dated
July 27, 1990. The trustee and sole beneficiary of the Trust is John W. Henry.
JWH's registration as a CTA became effective in February 1982 and its
registration as a CPO became effective in July 1989. JWH is a member of the NFA
in these capacities.
Mr. John W. Henry is Chairman of the JWH Board of Directors and is
trustee and sole beneficiary of The John W. Henry Trust dated July 27, 1990. Mr.
Henry is also a member of the Investment Policy Committee of JWH. He currently
concentrates his activities at JWH on portfolio management, business issues and
frequent dialogue with trading supervisors. Mr. Henry is the exclusive owner of
certain trading systems licensed to Elysian Licensing Corporation, a corporation
wholly-owned by Mr. Henry, and sublicensed by Elysian Licensing Corporation to
JWH and utilized by JWH in managing client accounts. Over the last fifteen
years, Mr. Henry has developed many innovative investment programs.
Mr. Henry has served on the Board of Directors of the National
Association of Futures Trading Advisors ("NAFTA"), the Managed Futures Trade
Association ("MFTA") and has served on the nominating committee of the NFA. Mr.
Henry currently serves on the Board of Directors of the Futures Industry
Association ("FIA") and is chairman of the FIA Task Force on Derivatives for
Investment. He also currently serves on a panel created by the Chicago
Mercantile Exchange and the Chicago Board of Trade to study cooperative efforts
related to electronic trading, common clearing and the issues regarding a
potential merger. In 1989, Mr. Henry established residency in Florida and since
that time has performed services from that location as well as at the principal
offices of JWH. Mr. Henry is a principal of Westport Capital Management
Corporation, Global Capital Management Limited, JWH Investments, Inc., JWH Risk
Management Inc., and JWH Asset Management, Inc., all of which are affiliates of
JWH. Since the beginning of 1987, Mr. Henry has and will continue to devote
considerable time to business activities unrelated to JWH and its affiliates.
Mr. Mark H. Mitchell is Vice Chairman and a member of the JWH Board of
Directors. He is also Vice Chairman and a director of JWH Risk Management, Inc.,
director of JWH Asset Management, Inc., and Vice President of JWH Investments,
Inc. Prior to his employment at JWH commencing in January 1994, Mr. Mitchell was
a partner of Chapman and Cutler, a Chicago law firm, where he had headed its
futures law practice since August 1983. From August 1980 to March 1991, he
served as General Counsel of NAFTA and, from March 1991 to December 1993, he
served as General Counsel of the Managed Futures Association ("MFA"). Mr.
Mitchell is currently a member of the CPO/CTA Advisory Committee and the Special
Committee for the Review of the Multi-Tiered Regulatory Approach to NFA Rules,
both of the NFA. In addition, he has served as a member of the Government
Relations Committee of MFA and the Executive Committee of the Law and Compliance
Division of FIA. In 1985, he received the Richard P. Donchian Award for
Outstanding Contributions to the Field of Commodity Money Management. He has
been an editor of Futures International Law Letter and its predecessor
publication, Commodities Law Letter. He received an A.B. with honors from
Dartmouth College and a J.D. from the University of California at Los Angeles,
where he was named to the Order of the Coif, the national legal honorary
society.
Mr. David R. Bailin is an Executive Vice President and a member of the
Operating Committee of JWH. He is also President of JWH Investments, Inc.; JWH
Risk Management, Inc.; JWH Asset Management, Inc.; President and director of
Westport Capital Management Corporation and President and Chairman of the Board
of Directors of Global Capital Management Limited. He is responsible for the
development, implementation and management of JWH's sales and marketing
infrastructure. Prior to joining JWH in December 1995, Mr. Bailin was Managing
Director-Development since April 1994 for Global Asset Management ("GAM"), a
Bermuda-based investment management firm with over $7 billion in managed assets.
He was responsible for overseeing the international distribution of GAM's funds
as well as for establishing new distribution relationships and channels. Prior
to his employment with GAM, Mr. Bailin headed the real estate asset management
division of Geometry Asset Management beginning in July 1992. Prior to that
time, beginning in
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1988, he was President of Warner Financial, an investment advisory business in
Boston, Massachusetts. Mr. Bailin received a B.A. from Amherst College and an
M.B.A. from Harvard Business School.
Mr. Peter F. Karpen is a Managing Director of JWH. Mr. Karpen
announced his resignation from JWH on March 18, 1996 but will continue in his
present capacity through approximately the end of October 1996. Mr. Karpen
joined JWH in June 1995 from CS First Boston where he had been Director of
Futures and Options since 1988 and Vice President since 1981. Mr. Karpen has
been a member of the board of FIA since 1984 and a member of its executive
committee since 1988. Mr. Karpen was chairman of FIA in 1994 and 1995. In
addition, he is public director of the New York Cotton Exchange and serves on
the CFTC's Financial Products Advisory Committee. He has been a Trustee of the
Futures Industry Institute, a member of the CFTC's Regulatory Coordination
Advisory Committee and a member of several commodities and securities exchanges
in the United States. He received his B.A. from Boston University and M.B.A.
from Boston College.
Mr. James E. Johnson, Jr., is chief financial officer and chief
administrative officer for JWH. He also serves as a member of JWH's Operating
Committee. Mr. Johnson is also a principal of Westport Capital Management
Corporation, JWH Investments, Inc., JWH Risk Management, Inc. and JWH Asset
Management, Inc. Mr. Johnson joined JWH in May of 1995 from Bankers Trust
Company where he had been managing director and chief financial officer for
their institutional asset management division since January 1983. His areas of
responsibility included finance, operations, and technology. Prior to joining
Bankers Trust, Mr. Johnson was a product manager at American Express Company
responsible for research and market strategies for the Gold Card. He received a
B.A. with honors from Columbia University and an M.B.A. in Finance and Marketing
from New York University.
Ms. Elizabeth A.M. Kenton is a Senior Vice President, the Director of
Compliance and a member of the Operating Committee of JWH. Since joining JWH in
March 1989, Ms. Kenton has held positions of increasing responsibility in
Research and Development, Administration and Regulatory Compliance. Ms. Kenton
is also a Senior Vice President of JWH Risk Management, Inc., the Vice President
of JWH Asset Management, Inc., a director of Westport Capital Management
Corporation, the Executive Vice President of JWH Investments, Inc., and a
director of Global Capital Management Limited. Prior to her employment at JWH,
Ms. Kenton was Associate Manager of Finance and Trading Operations at Krieger
Investments, a currency and commodity trading firm. From July 1987 to September
1988, Ms. Kenton worked for Bankers Trust Company as a Product Specialist for
foreign exchange and Treasury options trading. She received a B.S. in Finance
from Ithaca College.
Ms. Mary Beth Hardy is Senior Vice President and Director of Trading
Administration and a member of the Operating and Investment Policy Committees of
JWH. Since joining JWH in September 1990, Ms. Hardy has held positions of
increasing responsibility in Research and Development and Trading. Prior to her
employment at JWH, beginning in 1989 Ms. Hardy held the position of Associate
Editor at Waters Information Services, a publishing company, where she wrote
weekly articles covering technological advances in the securities and futures
markets. Prior to joining Waters in 1989, Ms. Hardy was at Shearson Lehman
Brothers, Inc. where she held the position of assistant director of the Managed
Futures Trading Department. Prior to that, Ms. Hardy was an institutional
salesperson at Shearson in a group specializing in financial futures and
options. Previously, Ms. Hardy was an institutional salesperson for Donaldson,
Lufkin and Jenrette with a group which also specialized in financial futures and
options. Ms. Hardy serves on the Board of Directors of the Managed Futures
Association and chairs its Trading and Markets Committee. She received a B.B.A.
in Finance from Pace University.
Mr. David M. Kozak is Counsel to the firm, Vice President and
Secretary of JWH. He is also secretary of JWH Risk Management, Inc., JWH Asset
Management, Inc. and Assistant Secretary of Westport Capital Management
Corporation. Prior to joining JWH in September 1995, Mr. Kozak was employed at
the law firm of Chapman and Cutler, where he was an associate from September
1983 and a partner from 1989. Mr. Kozak has concentrated in commodity futures
law since 1981, with emphasis in the area of commodity money management. During
the time he was employed at Chapman and Cutler, he served as outside counsel to
NAFTA and the MFA. Mr. Kozak is currently a member of the Government Relations
Committee of the MFA, the NFA Special Committee on CPO/CTA Disclosure Issues and
the Visiting Committee of The University of Chicago Library. He received a B.A.
from Lake Forest College, an M.A. from The University of Chicago, and a J.D.
from Loyola University of Chicago.
Mr. Kevin S. Koshi is a Senior Vice President, Chief Trader and a
member of the Investment Policy Committee of JWH. Mr. Koshi is responsible for
the supervision and administration of all aspects of order execution
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strategies and the implementation of trading policies and procedures. Mr. Koshi
joined JWH in August 1988 as a professional in the Finance Department, and since
1990 has held positions of increasing responsibility in the Trading Department.
He received a B.S. in Finance from California State University at Long Beach.
Mr. Barry S. Fox is the Director of Research and is a member of the
Investment Policy Committee of JWH. Mr. Fox is responsible for the design and
testing of new programs. He also supports and maintains proprietary
systems/models used to generate JWH trades. Mr. Fox joined JWH in March 1991,
and since that time he has held positions of increasing responsibility in the
Research and Product Development Departments. Prior to his employment at JWH,
Mr. Fox provided sales and financial analysis support since October 1990 for
Spreadsheet Solutions, a financial software development company. Prior to
joining Spreadsheet Solutions, Mr. Fox operated a trading company where he
traded his own proprietary capital. Before that, he was employed with Bankers
Trust as a product specialist for foreign exchange and treasury options trading.
He received a B.S. in Business Administration from the University of Buffalo.
Ms. Glenda G. Twist is a Director of JWH and has held that position
since August 1993. Ms. Twist joined JWH in September 1991 with responsibilities
for corporate liaison, and she continues her duties in that area. Her
responsibilities include assistance in the day-to-day administration of the
Florida office, and review and compilation of financial information for JWH. Ms.
Twist was President of J.W. Henry Enterprises Corp., for which she performed
financial, consulting and administrative services from January 1991 to August
1991. From 1988 to December 1990, Ms. Twist was Executive Director of Cities in
Schools, a program in Arkansas designed to prevent students from leaving school
before completing their high school education. She received her B.S. in
Education from Arkansas State University.
Mr. John A. F. Ford is the director of marketing at JWH and is
responsible for the development and implementation of strategic marketing and
communications programs. He joined JWH in May 1996 from J.P. Morgan where he had
been vice president and head of corporate communications for the firm's European
operations from February 1994 to October 1995. He was previously in a similar
position with J.P. Morgan at the Euroclear Operations Centre in Brussels from
January 1992 to February 1994. From October 1995 to May 1996 he undertook a
number of consultancy projects while relocating to the United States. Prior to
joining J.P. Morgan, Mr. Ford was managing director of the European headquarters
of Gavin Anderson & Co. (UK), an international corporate and investor relations
consultancy, from February 1987 to December 1991. Mr. Ford has also been
involved in advising the Chicago Mercantile Exchange on marketing its services
to European institutions and advising the International Petroleum Exchange in
London on similar issues. He also helped market Mercury Asset Management to
major institutions and pension funds.
Mr. Michael D. Gould is Director of Investor Services at JWH. He is
responsible for general business development and oversees the investor services
function. He joined JWH in April 1994 from Smith Barney Inc. where he served as
senior sales manager and vice president-futures for the Managed Futures
Department. He held the identical position with the predecessor firms of
Shearson Lehman Bros. and Lehman Bros. from October 1991. Prior to that time, he
was engaged in a proprietary trader development program at Tricon USA from
September 1990 to October 1991. He was a registered financial consultant with
Merrill Lynch from 1985 through August 1990. His professional career began in
1982 as an owner-operator of a nonferrous metals trading and export business
which he ran until September 1985.
Mr. Jack M. Ryng, C.P.A., joined JWH as the Controller in November
1991. Mr. Ryng is also Chief Financial Officer and Secretary of JWH Investments,
Inc. Prior to that time, he was a Senior Manager with Deloitte & Touche where he
held positions of increasing responsibility since September 1985 for commodities
and securities industry clients. Prior to his employment by the Financial
Services Center of Touche Ross & Co. (the predecessor firm of Deloitte &
Touche), he was a senior accountant for Leonard Rosen & Co. Mr. Ryng is a member
of AICPA and the New York C.P.A. Society, and is a member of the board of the
New York Operations Division of the FIA. He received a B.S. in Business
Administration from Duquesne University.
Mr. Michael J. Scoyni is a Managing Director of JWH and is a principal
of Westport Capital Management Corporation. Mr. Scoyni has been associated with
Mr. Henry since 1974 and with JWH since 1982. He was engaged in research and
development for John W. Henry & Company (JWH's predecessor) from November 1981
to December 1982 and subsequently has been employed in positions of increasing
responsibility. He received a B.A. in Anthropology from California State
University.
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Mr. Christopher E. Deakins is a Vice President of JWH. He is
responsible for general business development and investor services support.
Prior to joining JWH in August 1995, he was a vice president, national sales,
and a member of the Management Team for RXR Capital Management, Inc. His
responsibilities consisted of business development, institutional sales, and
broker dealer support. Prior to joining RXR in August 1986, he was engaged as an
account executive for Prudential-Bache Securities starting in February 1985.
Prior to that, Mr. Deakins was an account executive for Merrill Lynch. He
received a B.A. in Economics from Hartwick College.
Mr. Chris J. Lautenslager is a vice president of JWH. He is
responsible for general business development and investor services support.
Prior to joining JWH in April 1996, he was the vice president of institutional
sales for I/B/E/S International, Inc., a distributor of corporate earnings
estimate information. His responsibilities consisted of business development and
support of global money managers and investment bankers. Prior to his employment
with I/B/E/S, Mr. Lautenslager devoted time to personal activities from April
1994 to March 1995, following the closing of the Stamford, Connecticut office of
Gruntal & Co., where he had worked as a proprietary equity trader since November
1993. Before that, he held the same position at S.A.C. Capital Management
starting in February 1993. From October 1987 to December 1992, Mr. Lautenslager
was a partner and managing director of Limitless Option Partners, a registered
Chicago Mercantile Exchange trading and brokerage organization, where he traded
currency futures and options. He received a B.S. in Accounting from the
University of Colorado and a Masters in Management from Northwestern University.
Mr. Edwin B. Twist is a Director of JWH and has held that position
since August 1993. Mr. Twist is also a director of JWH Risk Management, Inc. and
JWH Asset Management, Inc. Mr. Twist joined JWH as Internal Projects Manager in
September 1991. Mr. Twist's responsibilities include assistance in the day-to-
day administration of JWH's Florida office and internal projects. Mr. Twist was
Secretary and Treasurer at J.W. Henry Enterprises Corp., a Florida corporation
engaged in administrative and financial consulting services, for which he
performed financial, consulting and administrative services from January 1991 to
August 1991. Prior to his employment at JWH, Mr. Twist was an owner and manager
for 16 years of a 2,500-acre commercial farm in eastern Arkansas.
Ms. Nancy O. Fox, C.P.A., is a Vice President and the director of
investment support of JWH. She is responsible for the day-to-day activities of
the Investment Support Department, including all aspects of operations and
performance reporting. Prior to joining JWH in January 1992, Ms. Fox was a
senior accountant at Deloitte & Touche, where she served commodities and
securities industry clients and held positions of increasing responsibility
since July 1987. Ms. Fox is a member of the AICPA and the New Jersey Society of
C.P.A.s. She received a B.S. in Accounting and Finance from Fairfield University
and an M.B.A. from the University of Connecticut..
Mr. Julius A. Staniewicz is the senior strategist in JWH's Product
Development Department. He will also be President of JWH Asset Management, Inc.
upon NFA registration. Prior to joining JWH in March of 1992, Mr. Staniewicz was
employed with Shearson Lehman Brothers as a financial consultant starting in
April 1991. Prior to that, beginning in 1990, Mr. Staniewiez was a vice
president of Phoenix Asset Management, a commodity pool operator and introducing
broker. From 1986 to 1989, Mr. Staniewicz worked in the managed futures
department at Prudential-Bache Securities, Inc., lastly as an assistant vice
president and co-director of managed futures. Mr. Staniewicz received a B.A. in
Economics from Cornell University.
Ms. Wendy B. Goodyear is director of the office of the chairman. She
is responsible for managing and coordinating projects involving Mr. Henry. Ms.
Goodyear joined JWH in October 1995 as director of marketing, responsible for
the development and implementation of strategic marketing and communications
programs. Prior to her employment at JWH, Ms. Goodyear was a vice president at
Citibank where she held several positions, including product development manager
for the depository receipt business and marketing manager for the pension
business. Prior to joining Citibank in May 1993, Ms. Goodyear was employed at
Bankers Trust Company from 1985 where she held positions of increasing
responsibility in both the private bank and pension businesses. Ms. Goodyear
received a B.A. in History from the University of Virginia and an M.B.A. from
the Stern School of Business at New York University.
THE INVESTMENT POLICY COMMITTEE
The Investment Policy Committee is one vehicle for decision-making at
JWH about the content and application of JWH trading programs. Composition of
the Investment Policy Committee, and participation in its discussions and
decisions by non-members, may vary over time.
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TRADING STRATEGY
JWH specializes in managing institutional and individual capital in
the global futures, interest rate and foreign exchange markets. Since 1981, JWH
has developed and implemented proprietary trend-following trading techniques
that focus on long-term rather than short-term, day-to-day trends. JWH currently
operates twelve trading programs. JWH implements the Financial and Metals
Portfolio for the Fund.
JWH's systematic investment process is designed to generate, over
market cycles, excellent risk-adjusted rates of return under favorable and
adverse market conditions. The JWH process capitalizes on emerging, long-term,
rising and falling price trends and ignores day-to-day price fluctuations. To
ensure disciplined implementation of its investment philosophy, JWH uses
mathemathical models to execute investment decisions in more than 50 global
markets encompassing currencies, commodities and financial securities. All JWH
investment programs follow the strict money management framework outlined below.
The first step in the JWH investment process is the identification of
a price trend. While there are many ways to identify trends, JWH uses a
methodology which identifies opportunities in order to attempt to capture a
majority of the significant price movements in a given market. The process
presumes that such price movements will often exceed the expectation of the
general marketplace. As such, the JWH discipline is to pare losing positions
relatively quickly while allowing profitable positions to mature. Positions held
for two to four months are not unusual, and certain positions have been held for
more than one year. Historically, only thirty to forty percent of all trades
made pursuant to the trading methods have been profitable. Large profits on a
few trades in positions that typically exist for several months have produced
favorable overall results. Generally, the majority of losing positions have been
liquidated within weeks. The maximum equity retracement JWH has experienced in
any single program was nearly sixty percent (60)%. Similar or greater drawdowns
are possible in the future. There can be no assurance that JWH will trade
profitably for the Fund or avoid losses of such magnitude.
JWH at its sole discretion may override computer-generated signals,
and may at times use discretion in the application of its quantitative models
which may affect performance positively or negatively. Subjective aspects of
JWH's quantitative models also include the determination of program leverage,
commencement of trading in an account, markets traded, contracts traded,
contract month selection, margin utilization and effective trade execution.
A Disciplined Investment Philosophy
JWH's success is based on the following guiding principles:
LONG-TERM PERSPECTIVE. JWH's investment strategies rest on a long-term
perspective in the world's financial and commodities markets. Historical
performance demonstrates that, because trends often last longer than most market
participants expect, strong returns can be generated from positions held over
the long term.
DISCIPLINED INVESTMENT PROCESS. The disciplined investment process
utilized by JWH is designed to generate superior, risk-adjusted rates of return
throughout a market cycle. By consistently applying investment techniques in
financial and commodities markets worldwide, JWH is able to participate in
rising and falling markets without bias.
JWH's ongoing research has led to the development of analytical models
which suggest the appropriate content, weighting, exits and entries for each
investment position. Once established, these positions are monitored around the
clock. While many of these positions are closed out within a few days or weeks
at a profit or loss, others are retained where JWH's investment guidelines
indicate potential opportunity for exceptional returns.
TREND IDENTIFICATION. JWH's strategies are nonpredictive. Instead,
based on comprehensive research on historic pricing data, JWH seeks to recognize
the movement of capital from one market to another after trends have begun.
GLOBAL DIVERSIFICATION. For more than a decade, JWH has recognized the
importance of global trading. Financial markets around the world are
increasingly interrelated, with actions in one country's markets
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often influencing markets in other parts of the world. JWH investments are
positioned to provide access to the performance potential offered by the global
marketplace.
COMPREHENSIVE RISK MANAGEMENT. JWH's risk management strategies are
designed to decrease volatility and improve the risk/reward characteristics of
investments in futures and forwards by relying upon carefully formulated risk
management algorithms that define controlled loss parameters prior to
execution.
PROGRAM MODIFICATIONS
In an effort to maintain and improve performance, JWH has engaged, and
continues to engage, in extensive research. While the basic philosophy
underlying the firm's investment methodology has remained intact throughout its
history, the potential benefits of employing more than one investment
methodology, alternatively, or in varying combinations, is a subject of
continual testing, review and evaluation. Extensive research and analysis may
suggest substitution of alternative investment methodologies with respect to
particular contracts in light of relative differences in historical performance
achieved through testing different methodologies. In addition, risk management
research and analysis may suggest modifications regarding the relative weighting
among various contracts, the addition or deletion of particular contracts for a
program or a change in the degree of leverage employed.
As capital in each JWH trading program increases, additional emphasis
and weighting may be placed on certain markets which have historically
demonstrated the greatest liquidity and profitability. Furthermore, the
weighting of capital committed to various markets in the trading programs is
dynamic, and JWH may vary the weighting at its discretion as market conditions,
liquidity, position limit considerations and other factors warrant. MLIP will
generally not be informed of any such changes.
LEVERAGE
Leverage adjustments have been and continue to be an integral part of
JWH's investment strategy. At its discretion, JWH may adjust leverage in certain
markets or entire programs. Factors which may affect the decision to adjust
leverage include: ongoing research; program volatility; current market
volatility; risk exposure; and subjective judgment and evaluation of these and
other general market conditions. Such decisions to change leverage may
positively or negatively affect performance, and will alter risk exposure for an
account. Leverage adjustments may lead to greater profits or losses, more
frequent and larger margin calls and greater brokerage expense. No assurance is
given that such leverage adjustments will be to the financial advantage of
investors in the Fund.
ADDITION, REDEMPTION AND REALLOCATION OF CAPITAL FOR COMMODITY POOL
ACCOUNTS
JWH has developed procedures for trading pool accounts, such as the
Fund, that provide for the addition, redemption and/or reallocation of capital.
Investors who purchase or redeem units in a fund are most frequently permitted
to do so at a price equal to the net asset value per unit on the close of
business on the last business day of the month or quarter. In addition, funds
often may reallocate capital among advisors at the close of business on the last
business day of the month. In order to provide market exposure commensurate with
the equity in the account on the date of these transactions, JWH's practice is
to adjust positions as nearly as possible to the close of business on the last
trading date of the month. The intention is to provide for additions,
redemptions and reallocations at a net asset value per unit that will be the
same for each of these transactions and to eliminate possible variations in the
net asset value per unit that could occur as a result of inter-day price changes
when additions are calculated on the first day of the subsequent month.
Therefore JWH may, in its sole discretion, adjust its investment of the assets
associated with the addition, redemption and reallocation of capital as nearly
as possible to the close of business on the last trading day of the month to
reflect the amount then available for trading. Based on JWH's determination of
liquidity or other market conditions, JWH may decide to commence trading earlier
in the day on, or even before the last business day of the month. In the case of
an addition to a fund account, JWH may also, in its sole discretion, delay the
actual start of trading for those new assets. No assurance is given that JWH
will be able to achieve the objectives described above in connection with
funding level changes. The use of discretion by JWH in the application of this
procedure may affect performance positively or negatively.
JWH may from time to time trade in physical or cash commodities for
immediate or deferred delivery, including specifically gold bullion, as well as
futures, options, and forward contracts when JWH believes that cash markets
offer comparable or superior market liquidity or ability to execute transactions
at a single price. Cash transactions, as
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opposed to futures transactions, relate to the purchase and sale of specific
physical commodities. Whereas futures contracts are generally uniform except for
price and delivery time, cash contracts may differ from each other with respect
to such terms as quantity, grade, mode of shipment, terms of payment, penalties,
risk of loss and the like. There is no limitation on the daily price movements
of cash or forward contracts transacted through banks, brokerage firms or
government dealers, and those entities are not required to continue to make
markets in any commodity. In addition, the CFTC does not comprehensively
regulate cash transactions, which are subject to the risk of these entities'
failure, inability or refusal to perform with respect to such contracts.
The Financial and Metals Portfolio
Researched through 1983, a systematic method was first traded in a
format using solely financial and metals futures in August 1984. That program,
the Financial and Metals Portfolio, used by JWH in managing Fund assets, uses
quantitative, trend analysis models, participates in four major market sectors
- --interest rates, foreign exchange, stock indices and precious metals -- and
seeks to capitalize on sustained moves in global finanacial markets.
The Financial and Metals Portfolio may take long, short or neutral
positions within the four market sectors traded. Because assets are concentrated
in interest rates, currencies, stock indices and metals only, volatility can be
higher than in a more diversified portfolio.
Other JWH Programs
In addition to the Financial and Metals Portfolio, JWH currently
operates eleven other trading programs for U.S. and non-U.S. investors, none of
which are utilized by JWH for the Fund. Each program is operated separately and
independently. These programs emphasize intermediate and long-term,
quantitative, trend-analysis models designed with the objective of achieving
speculative rates of return.
The Original Investment Program, which began in 1981, uses long-term,
quantitative models. This program trades in seven different market sectors
trading 20 to 25 commodities on both U.S. and non-U.S. exchanges. The KT
Diversified Program began in 1983 and ceased trading in February 1994. This
program utilized a neutral phase, and thus did not maintain constant positions
in the markets. This program participated in eight market sectors and traded 19
to 24 commodities only on U.S. exchanges. The Global Diversified Portfolio
invests in futures and forward contracts in a number of different markets,
sectors, and countries and is JWH's most diversified trading program. This
program has been trading for investors since June 1988. The International
Foreign Exchange Program, begun in 1986, concentrates exclu sively on trading
between 10 to 15 foreign currencies in outright and cross-rate positions,
primarily through forward contracts. Portfolios are dynamic and include from
time to time various matrices of futures positions. InterRate(TM), which
commenced trading in November 1987, uses a portfolio of foreign currency
contracts that seeks to capture interest-rate differentials between countries.
This program utilizes leverage that is significantly lower than other JWH
programs, reducing risk as it seeks to generate returns significantly enhanced
over the prevailing 91-day U.S. government securities rate.
The World Financial Perspective, which began in 1986, trades the
financial and energy sector markets from the perspective of the Japanese yen,
German mark, Swiss franc, British pound, Australian dollar, French franc,
Canadian dollar and the U.S. dollar. The pricing of key global markets in terms
of foreign currencies provides a level of diversification not generally found in
futures portfolios. In February 1991, JWH began trading a portfolio in which the
same techniques utilized in the International Foreign Exchange Program are
primarily applied to the currencies of the major industrial nations, known as
"the Group of Seven" and Switzerland. These currencies are the Japanese yen,
British pound, Canadian dollar, German mark, French franc, Italian lira, the
U.S. dollar and Swiss franc and are among the most liquid, actively traded
currencies in the world. The G-7 Currency Portfolio makes use of both outright
positions and cross-rate positions. Positions are primarily taken in the
interbank market and from time to time on U.S. futures exchanges. The Yen
Financial Portfolio began in August 1991 and uses the same quantitative models
used in the Financial and Metals Portfolio. The Yen Financial Portfolio trades
futures on the Japanese yen, the 10-year Japanese Government Bond, the Euroyen
and the Nikkei 225 stock index. The International Currency and Bond Portfolio,
begun in January 1993, combines the techniques employed in the G-7 Currency
Portfolio and the global bond sector of the Financial and Metals Portfolio to
trade a combined portfolio of currencies and international long-term bonds. In
June 1994, JWH began trading the Global Financial Portfolio, which utilizes the
same reversal approach as the Original Investment Program. The program trades in
four market sectors: interest rates, stock indices, currencies and energy. The
Dollar Program began trading client capital in June 1996. This program is
designed to capitalize on price movements in the U.S. Dollar utilizing
intermediate-term and long-term
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quantitative trend analysis models, and takes outright positions in the Japanese
yen, German mark, Swiss franc, and British pound versus the U.S. dollar.
The Worldwide Bond Program (WWB) began trading client capital in 1994.
WWB invests in the long-term portion of global interest rate markets, including
the U.S. 30-year bond, U.S. 10-year note, British long gilt, the French, German
and Italian bond, and Australian 10-year bond. Unlike most fixed income
investments, WWB is not limited to investments that have the potential to profit
in a stable or declining interest rate environment. Rather, WWB is designed to
capitalize on dominant trends, whether rising or falling, in worldwide bond
markets.
The Delevered Yen Denominated Financial and Metals Profile which began
trading in October 1995 seeks to capitalize on sustained moves in global
financial markets utilized intermediate-term and long-term quantitative trend
analysis models, some of which attempt to employ neutral stances during periods
of nontrending markets. This portfolio is traded at approximately one half of
the leverage of the traditional Financial and Metals portfolio and is traded
from the perspective of the Japanese yen.
PAST PERFORMANCE
The following information describes the composite actual performance
of all customer and proprietary accounts managed by JWH and JWH Investments Inc.
JWH trades its Financial and Metals Portfolio on behalf of the Fund. As of
August 31, 1996, JWH was managing approximately $1.5 billion (excluding
"notional" funds) of customer funds in the futures and forwards markets. All
performance information is current as of August 31, 1996.
Performance information is set forth for the most recent five full
years for each JWH and JWH Investments, Inc. program or, in the event that a
program has been trading for less than five years, performance information is
set forth from the inception of client account trading in such program.
Performance information prior to January 1, 1991 has been excluded in accordance
with CFTC regulations.
The "Notes to the Performance Summaries" are set forth on pages 112
through 114.
An investor should note that in a presentation of past performance
data, different accounts, even though traded according to the same investment
program, can have varying performance results. The reasons for this include
numerous material differences among accounts including, but not limited to: (a)
procedures governing timing for the commencement of trading and means of moving
toward full portfolio commitment of new accounts; (b) the periods during which
accounts are active; (c) the investment program used (although all accounts may
be traded in accordance with the same approach, such approach may be modified
periodically as a result of ongoing research and development by JWH); (d)
leverage employed; (e) the size of the account, which can influence the size of
positions taken and restrict the account from participating in all markets
available to an investment program; (f) the amount of interest income earned by
an account, which will depend on the rates paid by a futures commission merchant
on equity deposits and/or on the portion of an account invested in interest-
bearing obligations such as U.S. Treasury bills; (g) the amount of management
and incentive fees paid to JWH and the amount of brokerage commissions paid; (h)
the timing of orders to open or close positions; (i) the market conditions which
in part determine the quality of trade executions; (j) trading
instructions/restrictions of the client; (k) variations in fill prices; and (l)
the timing of additions and withdrawals..
During the periods covered by the performance summaries, and
particularly since 1989, JWH increased and decreased leverage in certain markets
and entire trading programs, and also altered the composition of the markets and
contracts that it traded for certain programs. In general, before 1993 JWH
traded its programs with greater leverage than it does currently. In addition,
the subjective aspects of JWH's trading methods may have been utilized more
often in recent years and, therefore, have had a more pronounced effect on
performance results during recent periods. In reviewing the JWH performance
summaries, prospective investors should bear in mind the possible effects of
these, and other, variations on rates of return and in the application of JWH's
investment methods.
The composite rates of return indicated should not be taken as
representative of any rate of return actually achieved by any of the accounts
represented in the performance summaries. Investors are further cautioned that
the data set forth in the performance summaries is not indicative of any trading
results which may be attained by JWH in the future, since past performance is
not necessarily indicative of future results. On several occasions, JWH has
decreased leverage over the last five years, in certain markets as well as in
entire trading programs. These actions have reduced the volatility of certain
trading programs when compared to the volatility prior to the decreases in
leverage. While historical returns represent actual
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performance achieved, investors should be aware that the degree of leverage
currently utilized may be significantly different from that used during previous
time periods.
Prior to December 1991 for JWH, and July 1992 for JWH Investments,
Inc., performance summaries are presented on a cash basis except as otherwise
stated herein. The recording of items on a cash basis should not, for most
months, be materially different from presenting such rates of return on an
accrual basis. Any differences in the monthly rates of return between the two
methods would be immaterial to the overall performance presented.
Beginning with the change to the accrual basis of accounting for
incentive fees (in December 1991 for JWH and July 1992 for JWH Investments,
Inc.), the net effect on monthly net performance and the monthly rates of return
in the performance summaries of continuing to record interest income, management
fees, commissions and other expenses on a cash basis differs immaterially from
the results which would be obtained using accrual basis accounting.
Advisory fees vary from account to account managed pursuant to all
programs. Management fees vary from 0% to 6% of assets under management;
incentive fees vary from 0% to 25% of profits. Such variations in advisory fees
may have a material impact on the performance of an account from time to time.
The Notes to the Performance Summaries are an integral part of such
performance summaries, which are presented on a cash basis except as otherwise
described herein.
ADDITIONAL NOTE TO THE FINANCIAL AND METALS PORTFOLIO COMPOSITE PERFORMANCE
- ---------------------------------------------------------------------------
SUMMARY
- -------
In May 1992, 35 percent of the assets in the Financial and Metals
Portfolio was deleveraged 50 percent at the request of a client. The
deleveraging materially affected the rates of return achieved. The 1992 annual
rate of return for these deleveraged accounts was negative 24.3 percent. The
1992 annual rate of return for the Financial and Metals Portfolio performance
summary was negative 10.9 percent. If these accounts had been excluded from the
Financial and Metals Portfolio performance summary, the 1992 annual rate of
return would have been negative 3.9 percent. The effect of this deleveraging was
eliminated in September 1992.
Additionally, the Financial and Metals Portfolio composite performance
summary includes the performance of several accounts that do not participate in
global markets due to their smaller account equities which do not meet the
minimums established for this program. Accounts not meeting such minimums can
experience performance materially different than the performance of an account
which meets the minimum account size. The performance of such accounts has no
material effect on the overall Financial and Metals Portfolio performance
summary.
ADDITIONAL NOTE TO THE YEN FINANCIAL PORTFOLIO COMPOSITE PERFORMANCE SUMMARIES
- ------------------------------------------------------------------------------
The Yen Financial Portfolio is traded from the Japanese yen
perspective. Accounts may be opened with either U.S. dollar or Japanese yen
deposits. Accounts originally opened with U.S. dollars establish additional
interbank positions in Japanese yen in an effort to enable such accounts to
generate returns similar to returns generated by accounts with yen-denominated
balances. Over time, as profits and losses are recognized in yen-denominated
Japanese markets, accounts may hold varying levels of U.S. dollars and Japanese
yen. Additionally, the interbank positions are adjusted periodically to reflect
the actual portions of the account balances remaining in U.S. dollars. Because
performance may be affected by fluctuations in the dollar/yen conversion rate,
and investors may open accounts with either U.S. dollar or Japanese yen
deposits, performance records from the perspective of both denominations are
presented.
Accordingly, as the equity mix between U.S. dollars and Japanese yen
varies, performance from each perspective will also vary. Investors should be
aware that their individual account performance may differ from the composite
performance summaries presented in relation to the perspective of their base
currency. Such differences arise from exchange rate movements, percentage of
account balances held in yen, and fee arrangements.
This program began trading client capital in January 1992. In July
1996, one proprietary account commenced trading pursuant to an investment in a
fund. This proprietary account is traded in exactly the same manner that client
funds would be traded, and is subject to all of the same fees and expenses that
would be charged to a client investment in the fund; therefore, there is no
material impact on the rates of return presented.
-104-
<PAGE>
The performance of the Yen Financial Portfolio is presented on an
individual account basis due to material differences among accounts' historical
performance. Account performance has varied historically due to a number of
factors unique to this portfolio, including whether the portfolio is denominated
in dollars or yen, the exent of hedging currency conversions, the amounts and
frequency of currency conversions, and account size. Several of these factors
that have materially influenced performance depend on clients' specific choices
that effectively result in customized client portfolios.
ADDITIONAL NOTE TO THE GLOBAL FINANCIAL PORTFOLIO COMPOSITE PERFORMANCE
SUMMARY
Since the inception of the Global Financial Portfolio, the timing of
individual account openings has had a material impact on compound rates of
return. Based on the account startup methodology used by JWH, the performance of
individual accounts composing the Global Financial Portfolio composite
performance summary has varied. In 1994, the two accounts that were open
generated separate rates of return of negative 44 percent and negative 17
percent, respectively. For the period January 1995 through June 1995, the three
open accounts achieved separate rates of return of 101 percent, 75 percent and
67 percent, respectively. As of June 1995, these accounts now maintain mature
positions and are performing consistently with each other. Due to the six month
period in 1995 of varied performance, the three accounts therefore achieved
annual rates of return for 1995 of 122%, 92% and 78%, respectively.
This program began trading client capital in June1994. In July 1995,
one proprietary account commenced trading purstant to an investment in a fund.
This proprietary account is traded in exactly the same manner that client funds
would be traded, and is subject to all of the same fees and expenses that would
be charged a client investment in the fund; therefore, there is no material
impact on the rates of return presented.
ADDITIONAL NOTE TO THE ORIGINAL INVESTMENT PROGRAM COMPOSITE PERFORMANCE
SUMMARY
This program began trading client capital in October 1982. In November
1994, one proprietary account commenced trading pursuant to an investment in a
fund. This proprietary account is traded in exactly the same manner that client
funds would be traded, and is subject to all of the same fees and expenses that
would be charged a client investment in the fund; therefore, there is no
material impact on the rates of return presented.
ADDITIONAL NOTE TO THE G-7 CURRENCY PORTFOLIO COMPOSITE PERFORMANCE SUMMARY
G-7 began trading client capital in February 1991. From July 1995
through December 1995 one proprietary account was trading pursuant to an
investment in a fund, and in August 1996 an additional proprietary account began
trading pursuant to the same fund. These proprietary accounts have been traded
in exactly the same manner that client funds would be traded, and have been
subject to all of the same fees and expenses that would be charged a client
investment in the fund; therefore, there is no material impact on the rates of
return presented.
ADDITIONAL NOTE TO THE SUMMARIES PRESENTED WHICH UTILIZE THE FULLY-FUNDED SUBSET
METHOD -- I.E., THE GLOBAL DIVERSIFIED PORTFOLIO AND JWH INVESTMENTS, INC.
INTERRATE(TM) (THE "FULLY-FUNDED SUBSET SUMMARIES")
The level of actual funds in the accounts that comprise these two
performance summaries currently requires additional disclosure. Actual funds are
the amount of margin-qualifying assets on deposit. Nominal account size is a
dollar amount which clients have agreed to in writing and which determines the
level of trading in the account regardless of the amount of actual funds.
Notional funds are the amount by which the nominal account size exceeds the
amount of actual funds. The amount of notional equity in the accounts that
compose these summaries requires additional disclosure under current CFTC
policy. The Fully-Funded Subset Summaries include notional equity in excess of
the 10% disclosure threshold established by the CFTC and reflect the adoption of
a method of presenting rate-of-return and performance disclosure authorized by
the CFTC, referred to as the Fully-Funded Subset method. See "-- Chesapeake
Capital Corporation -- Past Performance," above. This method permits notional
and fully-funded accounts to be included in a single performance summary.
To qualify for the use of the Fully-Funded Subset method, the Fully-
Funded Subset Advisory requires that certain computations be made in order to
arrive at the Fully-Funded Subset and that the accounts for which performance is
so reported meet two tests which are designed to provide assurance that the
Fully-Funded Subset and the resultant rates of return are representative of the
programs.
-105-
<PAGE>
These computations have been performed for the Global Diversified
Portfolio from January 1, 1992 to its close and JWH Investments, Inc.'s
InterRate(TM) from inception to its close. They were designed to provide
assurance that the performance presented in the Fully-Funded Subset Summaries
and calculated on a Fully-Funded Subset basis would be representative of such
performance calculated on a basis which includes notional funds in beginning
equity. The rates of return in the Fully-Funded Subset Summaries are calculated
by dividing net performance by the sum of beginning equity plus additions minus
withdrawals. JWH and JWH Investments, Inc. believe that this method yields
substantially the same adjusted rates of return as would the Fully-Funded Subset
method were there any "fully-funded" accounts, and that the rates of return for
the Fully-Funded Subset Summaries are representative of the performance of the
programs for the periods presented.
The information presented has not been audited. However, JWH and JWH
Investments, Inc. believe that such information is accurate and fairly
presented.
INTERRATE(TM) IS QUALITATIVELY DIFFERENT FROM THE METHODS WHICH
GENERATED THE COMPOSITE PERFORMANCE SUMMARIES OF OTHER JWH INVESTMENT PROGRAMS.
THE PROGRAMS REPRESENTED IN THE COMPOSITE PERFORMANCE RECORD DIFFER FROM
INTERRATE(TM) WITH RESPECT TO: (a) FEES CHARGED; (b) LENGTH OF TIME FOR WHICH
POSITIONS ARE HELD; (c) POSITIONS TAKEN; (d) LEVERAGE USED; AND (e) RATE OF
RETURN OBJECTIVES.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
FURTHERMORE, THE RATES OF RETURN EARNED WHEN AN ADVISOR IS MANAGING A LIMITED
AMOUNT OF EQUITY MAY HAVE LITTLE RELATIONSHIP TO THE RATES OF RETURN WHICH SUCH
ADVISOR MAY BE ABLE TO ACHIEVE MANAGING LARGER AMOUNTS OF EQUITY.
A NUMBER OF THE ACCOUNTS INCLUDED IN THE FOLLOWING PERFORMANCE
SUMMARIES WERE TRADED IN A MANNER MATERIALLY DIFFERENT FROM THAT IN WHICH JWH
TRADES ON BEHALF OF THE FUND.
THE FOLLOWING PERFORMANCE SUMMARIES HAVE IN NO RESPECT BEEN ADJUSTED
TO REFLECT THE CHARGES TO THE FUND. CERTAIN OF THE ACCOUNTS INCLUDED IN THE
FOLLOWING PERFORMANCE SUMMARIES PAID FEES MATERIALLY DIFFERENT FROM, AND IN SOME
CASES MATERIALLY LOWER THAN, THOSE CHARGED THE FUND.
INVESTORS SHOULD NOTE THAT INTEREST INCOME MAY CONSTITUTE A
SIGNIFICANT PORTION OF A COMMODITY TRADING ADVISOR'S TOTAL INCOME AND, IN
CERTAIN INSTANCES, MAY GENERATE PROFITS WHERE THERE HAVE BEEN REALIZED OR
UNREALIZED LOSSES FROM COMMODITIES TRADING.
PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS.
See "Risk Factors -- (2) Past Performance Not Necessarily Indicative of Future
Results."
-106-
<PAGE>
JOHN W. HENRY & COMPANY, INC.
FINANCIAL AND METALS PORTFOLIO
JANUARY 1991 - AUGUST 1996
The following performance summary and chart reflect the composite
performance results from January 1991 through August 1996 of the Financial and
Metals Portfolio. JWH trades this program on behalf of the Fund. The program has
been utilized in trading for 359 accounts since its inception. As of August 31,
1996, 288 accounts had been closed and 71 accounts remained open. Of the closed
accounts, 251 were profitable and 37 were unprofitable at their closing. Of the
71 open accounts, 66 were profitable and 5 were unprofitable as of August 31,
1996.
Name of CTA: John W. Henry & Company, Inc.
Name of program: Financial and Metals Portfolio
Inception of client account trading by CTA: October 1982
Inception of client account trading in program: October 1984
Number of open accounts: 71
Aggregate assets (excluding "notional" equity) overall: $1.5 billion
Aggregate assets (excluding "notional" equity) in program: $912
million
Aggregate assets (including "notional" equity) overall: $1.5 billion
Aggregate assets (including "notional" equity) in program: $912
million
Largest monthly drawdown on a composite basis: (18.0)% (1/92)
Largest monthly drawdown on an individual account basis: (27.7)% (9/92)
Largest peak-to-valley drawdown: (39.5)% (12/91-5/92)
<TABLE>
<CAPTION>
================================================================================
Monthly Performance 1996 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
January 6.0% (3.8)% (2.9)% 3.3% (18.0)% (2.3)%
- --------------------------------------------------------------------------------
February (5.5) 15.7 (0.6) 13.9 (13.5) 3.8
- --------------------------------------------------------------------------------
March 0.7 15.3 7.2 (0.3) 3.0 4.5
- --------------------------------------------------------------------------------
April 2.3 6.1 0.9 9.3 (12.2) (0.8)
- --------------------------------------------------------------------------------
May (1.7) 1.2 1.3 3.3 (5.7) (0.3)
- --------------------------------------------------------------------------------
June 2.2 (1.7) 4.5 0.1 21.9 (1.3)
- --------------------------------------------------------------------------------
July (1.1) (2.3) (6.1) 9.7 25.5 (13.4)
- --------------------------------------------------------------------------------
August (0.8) 2.1 (4.1) (0.8) 10.2 4.8
- --------------------------------------------------------------------------------
September (2.1) 1.5 0.2 (5.2) 25.8
- --------------------------------------------------------------------------------
October 0.3 1.7 (1.1) (4.5) (7.7)
- --------------------------------------------------------------------------------
November 2.6 (4.4) (0.3) (0.8) 6.6
- --------------------------------------------------------------------------------
December 1.7 (3.5) 2.9 (2.6) 39.4
- --------------------------------------------------------------------------------
Compound Annual 1.61% 38.53% (5.32)% 46.82% (10.89)% 61.88%
Rate of Return (8 months)
================================================================================
</TABLE>
In May 1991, one proprietary account commenced trading and in March 1992 a
second proprietary account commenced trading. Both accounts appear in the
capsule performance from their inception until August 1995. The maximum
percentage of proprietary funds during this time period was less than
0.50%. These proprietary funds had no material effect on the rate of
return.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
SEE THE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES 112 THROUGH 114.
-107-
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
OTHER JOHN W. HENRY & COMPANY, INC. PROGRAMS
---------------------------------------------------------------------------------------------------------
NAME OF CTA: John W. Henry John W. Henry John W. Henry John W. Henry
& Company, Inc. & Company, Inc. & Company, Inc. & Company, Inc.
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NAME OF PROGRAM: Original Investment Global Diversified International Currency The World Financial
Program Portfolio and Bond Portfolio Perspective
---------------------------------------------------------------------------------------------------------
INCEPTION OF CLIENT
ACCOUNT TRADING BY CTA: October 1982 October 1982 October 1982 October 1982
---------------------------------------------------------------------------------------------------------
INCEPTION OF CLIENT
ACCOUNT TRADING IN
PROGRAM: October 1982 June 1988 January 1993 April 1987
---------------------------------------------------------------------------------------------------------
NUMBER OF OPEN ACCOUNTS: 27 17 1 5
---------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS
(EXCLUDING "NOTIONAL"
EQUITY) OVERALL: $1.5 billion $1.5 billion $1.5 billion $1.5 billion
---------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS
(EXCLUDING "NOTIONAL"
EQUITY) IN PROGRAM: $157 million $133 million $2 million $18 million
---------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS
(INCLUDING "NOTIONAL"
EQUITY) OVERALL: $1.5 billion $1.5 billion $1.5 billion $1.5 billion
--------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS
(INCLUDING "NOTIONAL"
EQUITY) IN PROGRAM: $157 million $133 million $2 million $18 million
--------------------------------------------------------------------------------------------------------
LARGEST MONTHLY DRAWDOWN
ON A COMPOSITE BASIS: (14.1)% (10/94) (16.8)% (7/91) (6.7)% (7/94) (21.6)% (1/92)
---------------------------------------------------------------------------------------------------------
LARGEST MONTHLY DRAWDOWN
ON AN INDIVIDUAL
ACCOUNT BASIS: (18.1)% (2/92) (20.3)% (7/91) (7.8)% (7/94) (25.5)% (1/92)
---------------------------------------------------------------------------------------------------------
LARGEST PEAK-TO-VALLEY
DRAWDOWN: (26.2)% (6/94-10/94) (29.1)% (12/91-5/92) (20.1)% (6/94-1/95) (32.0)% (12/91-10/92)
---------------------------------------------------------------------------------------------------------
1996 COMPOUND RATE OF
RETURN: (4)% (8 months) (5)% (8 months) (4)% (8 months) 10% (8 months)
---------------------------------------------------------------------------------------------------------
1995 COMPOUND RATE OF
RETURN: 53% 20% 37% 32%
---------------------------------------------------------------------------------------------------------
1994 COMPOUND RATE OF
RETURN: (6)% 10% (2)% (15)%
---------------------------------------------------------------------------------------------------------
1993 COMPOUND RATE OF
RETURN: 41% 60% 15% 14%
---------------------------------------------------------------------------------------------------------
1992 COMPOUND RATE OF
RETURN: 11% (13)% N/A (23)%
---------------------------------------------------------------------------------------------------------
1991 COMPOUND RATE OF
RETURN: 5% 40% N/A 15%
---------------------------------------------------------------------------------------------------------
<CAPTION>
-----------------------------------------------------------------------------
OTHER JOHN W. HENRY & COMPANY, INC. PROGRAMS
-----------------------------------------------------------------------------
John W. Henry JohnW. Henry John W. Henry
NAME OF CTA: & Company, Inc. & Company, Inc. & Company, Inc.
-----------------------------------------------------------------------------
NAME OF PROGRAM: Global Financial Delevered Yen International Foreign
Portfolio Denominated Financial Exchange Program
and Metals Profile
-----------------------------------------------------------------------------
INCEPTION OF CLIENT
ACCOUNT TRADING BY CTA: October 1982 October 1982 October 1982
-----------------------------------------------------------------------------
INCEPTION OF CLIENT
ACCOUNT TRADING IN
PROGRAM: June 1994 October 1995 August 1986
-----------------------------------------------------------------------------
<S> <C> <C> <C>
NUMBER OF OPEN ACCOUNTS: 5 1 7
-----------------------------------------------------------------------------
AGGREGATE ASSETS
(EXCLUDING "NOTIONAL"
EQUITY) OVERALL: $1.3 billion $1.5 billion $1.5 billion
-----------------------------------------------------------------------------
AGGREGATE ASSETS
(EXCLUDING "NOTIONAL"
EQUITY) IN PROGRAM: $58 million (Yen)923 million $67 million
-----------------------------------------------------------------------------
AGGREGATE ASSETS
(INCLUDING "NOTIONAL"
EQUITY) OVERALL: $1.5 billion $1.5 billion $1.5 billion
-----------------------------------------------------------------------------
AGGREGATE ASSETS
(INCLUDING "NOTIONAL"
EQUITY) IN PROGRAM: $58 million (Yen)923 million $67 million
-----------------------------------------------------------------------------
LARGEST MONTHLY DRAWDOWN
ON A COMPOSITE BASIS: (17.4)% (11/94) (3.2)% (2/96) (12.0)% (1/92)
-----------------------------------------------------------------------------
LARGEST MONTHLY DRAWDOWN
ON AN INDIVIDUAL
ACCOUNT BASIS: (19.5)% (11/94) (3.2)% (2/96) (13.6)% (1/92)
-----------------------------------------------------------------------------
LARGEST PEAK-TO-VALLEY
DRAWDOWN: (46.0)% (6/94-1/95) (5.1)% (1/96-8/96) (24.1)% (12/91-4/92)
-----------------------------------------------------------------------------
1996 COMPOUND RATE OF
RETURN: 5% (8 months) (3)% (8 months) (7)% (8 months)
-----------------------------------------------------------------------------
1995 COMPOUND RATE OF
RETURN: 86% 0.2% (3 months) 17%
-----------------------------------------------------------------------------
1994 COMPOUND RATE OF
RETURN: (38)% (7 months) N/A (6)%
-----------------------------------------------------------------------------
1993 COMPOUND RATE OF
RETURN: N/A N/A (5)%
-----------------------------------------------------------------------------
1992 COMPOUND RATE OF
RETURN: N/A N/A 5%
-----------------------------------------------------------------------------
1991 COMPOUND RATE OF
RETURN: N/A N/A 39%
-----------------------------------------------------------------------------
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK.
THE FUND'S ACCOUNT IS NOT TRADED PURSUANT TO THE FOREGOING PROGRAMS.
SEE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES 112 THROUGH 114.
-108-
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
OTHER JOHN W. HENRY & COMPANY, INC. PROGRAMS
--------------------------------------------
--------------------------------------------------------------------------------------------------
NAME OF CTA: John W. Henry John W. Henry John W. Henry & John W. Henry
& Company, Inc. & Company, Inc. Company, Inc. & Company, Inc.
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NAME OF PROGRAM: G-7 Currency Portfolio Worldwide Bond Dollar Program InterRate(TM)
Program
--------------------------------------------------------------------------------------------------
INCEPTION OF CLIENT ACCOUNT
TRADING BY CTA: October 1982 October 1982 October 1982 October 1982
--------------------------------------------------------------------------------------------------
INCEPTION OF CLIENT ACCOUNT December 1988;
TRADING IN PROGRAM: February 1991 July 1996 July 1996 ceased trading 7/96
--------------------------------------------------------------------------------------------------
NUMBER OF OPEN ACCOUNTS: 9 2 2 0
--------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING
"NOTIONAL" EQUITY) OVERALL: $1.5 billion $1.5 billion $1.5 billion $1.5 billion
--------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING
"NOTIONAL" EQUITY) IN PROGRAM: $103 million $9 million $9 millon N/A
--------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (INCLUDING
"NOTIONAL" EQUITY) OVERALL: $1.5 billion $1.5 billion $1.5 billion $1.5 billion
--------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (INCLUDING
"NOTIONAL" EQUITY) IN PROGRAM: $103 million $9 million $9 million N/A
--------------------------------------------------------------------------------------------------
LARGEST MONTHLY DRAWDOWN ON A
COMPOSITE BASIS: (10.7)% (1/92) None (2.3)% (8/96) (9.71)% (9/92)
--------------------------------------------------------------------------------------------------
LARGEST MONTHLY DRAWDOWN ON AN
INDIVIDUAL ACCOUNT BASIS: (12.3)% (1/92) None (2.3)% (8/96) (10.2)% (9/92)
--------------------------------------------------------------------------------------------------
LARGEST PEAK-TO-VALLEY DRAWDOWN: (19.5)% (7/93-1/95) None (3.5)% (7/96-8/96) (17.8)% (8/92-2/94)
--------------------------------------------------------------------------------------------------
1996 COMPOUND RATE OF RETURN: (4)% (8 months) 3% (2 mos.) (4)% (2 mos.) 6% (7 months)
--------------------------------------------------------------------------------------------------
1995 COMPOUND RATE OF RETURN: 32% N/A N/A 5%
--------------------------------------------------------------------------------------------------
1994 COMPOUND RATE OF RETURN: (5)% N/A N/A 3%
--------------------------------------------------------------------------------------------------
1993 COMPOUND RATE OF RETURN: (6)% N/A N/A (5)%
--------------------------------------------------------------------------------------------------
1992 COMPOUND RATE OF RETURN: 15% N/A N/A (1)%
--------------------------------------------------------------------------------------------------
1991 COMPOUND RATE OF RETURN: 49% (11 months) N/A N/A 9%
--------------------------------------------------------------------------------------------------
<CAPTION>
--------------------------------------------------------------------------------------------------
OTHER JOHN W. HENRY & COMPANY, INC. PROGRAMS
--------------------------------------------
--------------------------------------------------------------------------------------------------
John W. Henry
NAME OF CTA: & Company, Inc. JWH Investments, Inc. JWH Investments, Inc.
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NAME OF PROGRAM: KT Diversified Programs Financial and Metals InterRate(TM)
Portfolio
--------------------------------------------------------------------------------------------------
INCEPTION OF CLIENT ACCOUNT
TRADING BY CTA: October 1982 September 1991 September 1991
--------------------------------------------------------------------------------------------------
INCEPTION OF CLIENT ACCOUNT
TRADING IN PROGRAM: January 1984; September 1991; February 1992;
ceased trading 2/94 ceased trading 7/95 ceased trading 11/93
--------------------------------------------------------------------------------------------------
NUMBER OF OPEN ACCOUNTS: 0 0 0
--------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING
"NOTIONAL" EQUITY) OVERALL: $1.5 billion 0 0
--------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING
"NOTIONAL" EQUITY) IN PROGRAM: N/A N/A N/A
--------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (INCLUDING
"NOTIONAL" EQUITY) OVERALL: $1.5 billion 0 0
--------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (INCLUDING
"NOTIONAL" EQUITY) IN PROGRAM: N/A N/A N/A
--------------------------------------------------------------------------------------------------
LARGEST MONTHLY DRAWDOWN ON A
COMPOSITE BASIS: (19.2)% (7/91) (16.6)% (1/92) (9.3)% (9/92)
--------------------------------------------------------------------------------------------------
LARGEST MONTHLY DRAWDOWN ON AN
INDIVIDUAL ACCOUNT BASIS: (28.6)% (1/92) (16.6)% (1/92) (9.3)% (9/92)
--------------------------------------------------------------------------------------------------
LARGEST PEAK-TO-VALLEY DRAWDOWN: (40.6)% (1/91-3/92) (34.4)% (12/91-5/92) (20.6)% (8/92-11/93)
--------------------------------------------------------------------------------------------------
1996 COMPOUND RATE OF RETURN: N/A N/A N/A
--------------------------------------------------------------------------------------------------
1995 COMPOUND RATE OF RETURN: N/A 30% (7 months) N/A
--------------------------------------------------------------------------------------------------
1994 COMPOUND RATE OF RETURN: (14)% (2 months) (1)% N/A
--------------------------------------------------------------------------------------------------
1993 COMPOUND RATE OF RETURN: 21% 46% (10)% (11 months)
--------------------------------------------------------------------------------------------------
1992 COMPOUND RATE OF RETURN: (12)% (4)% 3% (11 months)
--------------------------------------------------------------------------------------------------
1991 COMPOUND RATE OF RETURN: (2)% 59% (4 months) N/A
--------------------------------------------------------------------------------------------------
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK.
THE FUND'S ACCOUNT IS NOT TRADED PURSUANT TO THE FOREGOING PROGRAMS.
SEE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES 112 THROUGH 114.
-109-
<PAGE>
JOHN W. HENRY & COMPANY, INC. TRADING PROGRAMS
PERFORMANCE SUMMARIES
YEN FINANCIAL PORTFOLIO
Name of CTA: John W. Henry & Company, Inc.
Inception of client account trading: October 1982
Inception of client account trading in program: January 1992
Number of open accounts: 7
Aggregate assets (excluding "notional" equity) overall: $1.5 billion
Aggregate assets (excluding "notional" equity) in program: $38 million
Aggregate assets (including "notional" equity) overall: $1.5 billion
Aggregate assets (including "notional" equity) in program: $38 million
See Additional Note on pp. 104-105.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
AGGREGATE LARGEST LARGEST
ACCOUNT NO. INCEPTION OF ASSETS COMPOUND RATE MONTHLY PEAK-TO-VALLEY
TRADING AUGUST 31, 1996 OF RETURN (%) DRAWDOWN % DRAWDOWN %
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 1/92 $5.9 million 1996: (15) (8 months) (14.4)-2/92 (30.5)-4/95-7/96
1995: 21
1994: (13)
1993: 76
1992: 20
- -------------------------------------------------------------------------------------------------------------------------
2 1/93 $1.0 million 1996: (14) (8 months) (6.9) - 7/95 (29.0) - 4/95-7/96
1995: 21
1994: (9)
1993: 71
- -------------------------------------------------------------------------------------------------------------------------
3 1/94 $0.9 million 1996: (14) (8 months) (6.0) - 7/95 (26.6) - 4/95-7/96
1995: 22
1994: (8)
- -------------------------------------------------------------------------------------------------------------------------
4 6/94 $22.4 million 1996: (8) (8 months) (6.5) - 7/95 (22.3) - 4/95-7/96
1995: 24
1994: (2) (6 months)
- -------------------------------------------------------------------------------------------------------------------------
5 8/94 $4.4 million 1996: (12) (8 months) (7.1) - 7/95 (30.4) - 4/95-7/96
1995: 21
1994: (4) (5 months)
- -------------------------------------------------------------------------------------------------------------------------
6 1/95 $2.2 million 1996: (17) (8 months) (7.5) - 7/95 (35.5) - 5/96-7/96
1995: 13
- -------------------------------------------------------------------------------------------------------------------------
7 3/94 (Yen)179 million 1996: (6) (8 months) (6.7) - 7/96 (15.9) - 2/96-7/96
1995: 28
1994: (11) (10 months)
- -------------------------------------------------------------------------------------------------------------------------
8 4/92 closed - 9/93 1993: 63 (9 months) (11.7) - 5/92 (11.7) - 4/92-5/92
1992: 27
- -------------------------------------------------------------------------------------------------------------------------
9 2/92 closed - 12/92 1992: 33 (11 months) (11.5) - 2/92 (11.5) - 2/92
- -------------------------------------------------------------------------------------------------------------------------
10 3/94 closed - 12/94 1994: (7) (10 months) (5.4) - 5/94 (10.5) - 4/94-12/94
- -------------------------------------------------------------------------------------------------------------------------
11 11/93 closed - 8/95 1995: 20 (8 months) (9.0) - 8/95 (18.8) - 4/95-8/95
1994: (13)
1993: 5 (2 months)
- -------------------------------------------------------------------------------------------------------------------------
12 11/93 closed - 1/95 1995: (1) (1 month) (6.3) - 5/94 (16.5) - 4/94-1/95
1994: (15)
1993: 5 (2 months)
- -------------------------------------------------------------------------------------------------------------------------
13 12/92 closed - 3/96 1996: (4) (3 months) (4.9) - 7/95 (15.8) - 12/93-1/95
1995: 31
1994: (14)
1993: 69
1992: 0.1 (1 month)
- -------------------------------------------------------------------------------------------------------------------------
14 1/93 closed - 12/95 1995: (11) (6.2) - 6/95 (15.8) - 4/95-12/95
1994: (4)
1993: 43
- -------------------------------------------------------------------------------------------------------------------------
15 4/93 closed -9/94 1994: (19) (9 months) (5.8) - 5/94 (19.9) - 11/93-9/94
1993: 25 (9 months)
- -------------------------------------------------------------------------------------------------------------------------
16 1/94 closed - 8/94 1994: (7) (8 months) (5.5) - 5/94 (11.0) - 4/94-8/94
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK.
THE FUND'S ACCOUNT IS NOT TRADED PURSUANT TO THE FOREGOING PROGRAMS.
SEE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES 112 THROUGH 114.
-110-
<PAGE>
JOHN W. HENRY & COMPANY, INC. TRADING PROGRAMS
PERFORMANCE SUMMARIES
YEN FINANCIAL PORTFOLIO
Name of CTA: John W. Henry & Company, Inc.
Inception of client account trading: October 1982
Inception of client account trading in program: January 1992
Number of open accounts: 7
Aggregate assets (excluding "notional" equity) overall: $1.5 billion
Aggregate assets (excluding "notional" equity) in program: $38 million
Aggregate assets (including "notional" equity) overall: $1.5 billion
Aggregate assets (including "notional" equity) in program: $38 million
See Additional Note on pp. 104-105.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
AGGREGATE LARGEST LARGEST
ACCOUNT NO. INCEPTION OF ASSETS COMPOUND RATE MONTHLY PEAK-TO-VALLEY
TRADING AUGUST 31, 1996 OF RETURN (%) DRAWDOWN % DRAWDOWN %
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
17 12/92 closed - 1/96 1996: 0.3 (1 month) (6.0) - 7/95 (12.4) - 4/95-10/95
1995: 27
1994: (5)
1993: 74
1992: (1) (1 month)
- ----------------------------------------------------------------------------------------------------------------------------
18 3/94 closed - 4/96 1996: (6) (4 months) (6.2) - 7/95 (18.5) - 4/95-4/96
1995: 19
1994: (10) (10 months)
- ----------------------------------------------------------------------------------------------------------------------------
19 12/94 closed 1996: (8) (4 months) (6.6) - 7/95 (21.1) - 4/95-4/96
1995: 18
1994: 0.2 (1 month)
- ----------------------------------------------------------------------------------------------------------------------------
20 6/94 closed - 12/94 1994: (8) (7 months) (5.1) - 7/94 (10.4) - 6/94-11/94
- ----------------------------------------------------------------------------------------------------------------------------
21 6/94 closed - 3/95 1995: 48 (3 months) (3.6) - 7/94 (9.9) - 6/94-1/95
1994: (7) (7 months)
- ----------------------------------------------------------------------------------------------------------------------------
22 4/94 closed - 9/94 1994: (5) (6 months) (4.7) - 5/94 (7.0) - 4/94-9/94
- ----------------------------------------------------------------------------------------------------------------------------
23 3/94 closed - 9/94 1994: (10) (7 months) (6.3) - 5/94 (11.0) - 4/94-9/94
- ----------------------------------------------------------------------------------------------------------------------------
24 4/94 closed - 9/94 1994: (10) (6 months) (9.1) - 5/94 (12.9) - 4/94-9/94
- ----------------------------------------------------------------------------------------------------------------------------
25 4/93 closed - 12/94 1994: (17) (6.1) - 5/94 (17.9) - 11/93-12/94
1993: 27 (9 months)
- ----------------------------------------------------------------------------------------------------------------------------
26 9/93 closed - 12/94 1994: (12) (6.0) - 5/94 (14.1) - 4/94-12/94
1993: 3 (4 months)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
-111-
<PAGE>
Chesapeake Capital Corporation, one of the current "core" Advisors, will, if
requested, trade "notional" equity for clients -- i.e., trade such clients'
accounts as if more equity were committed to such accounts than is, in fact, the
case. The Fund's accounts do not include any notional equity.
NOTES TO THE PERFORMANCE SUMMARIES
1. Name of CTA is the name of the "core" Advisor which directed the accounts
included in the performance summary.
2. Name of program is the name of the trading program used by the "core"
Advisor in directing the accounts included in the performance summary.
3. Inception of client account trading by CTA is the date on which the
relevant "core" Advisor began directing client accounts.
4. Inception of client account trading in program is the date on which the
relevant "core" Advisor began directing client accounts pursuant to the
program shown in the performance summary.
5. Number of open accounts is the number of accounts directed by the relevant
"core" Advisor pursuant to the program shown in the performance summary, as
of the end of the period covered by the performance summary.
6. Aggregate assets (excluding "notional" equity) overall is the aggregate
amount of actual assets under the management of the relevant "core" Advisor
in all programs operated by such "core" Advisor, as of the end of the
period covered by the performance summary. With respect to Chesapeake,
these numbers include client funds only. With respect to JWH, these numbers
also include proprietary funds; however, all proprietary funds are traded
in the same manner and charged the same fees as client funds, and the
proprietary funds are, in any event, not material in terms of the overall
assets managed by JWH.
7. Aggregate assets (excluding "notional" equity) in program is the aggregate
amount of actual assets under the management of the relevant "core" Advisor
in the program shown in the performance summary, as of the end of the
period covered by the performance summary. With respect to Chesapeake,
these numbers include client funds only. With respect to JWH, these numbers
may also include proprietary funds (as described in the notes to the
performance summaries); however, all proprietary funds are traded in the
same manner and charged the same fees as client funds, and the proprietary
funds are, in any event, not material in terms of the overall assets
managed by JWH.
8. Aggregate assets (including "notional" equity) overall is the aggregate
amount of total equity, including "notional" equity, under the management
of the relevant "core" Advisor in all programs operated by such "core"
Advisor, as of the end of the period covered by the performance summary.
"Notional" equity represents the additional amount of equity which exceeds
the amount of equity actually committed to the "core" Advisor for
management. With respect to Chesapeake, these numbers include client funds
only. With respect to JWH, these numbers also include proprietary funds (as
described in the notes to the performance summaries); however, all
proprietary funds are traded in the same manner and charged the same fees
as client funds, and the proprietary funds are, in any event, not material
in terms of the overall assets managed by JWH.
9. Aggregate assets (including "notional" equity) in program is the aggregate
amount of total equity, including "notional" equity, under the management
of the relevant "core" Advisor in the program shown in the performance
summary, as of the end of the period covered by the performance summary.
"Notional" equity represents the additional amount of equity which exceeds
the amount of equity actually committed to the "core" Advisor for
management. With respect to Chesapeake, these numbers include client funds
only. With respect to JWH, these numbers may also include proprietary funds
(as described in the notes to the performance summaries); however, all
proprietary funds are traded in the same manner and charged the same fees
as client funds, and the proprietary funds are, in any event, not material
in terms of the overall assets managed by JWH.
10. Largest monthly drawdown, is the largest monthly loss experienced by the
relevant program on either a composite or individual account basis, unless
noted otherwise, in any calendar month covered by the performance summary
and includes the month and year of such drawdown.
-112-
<PAGE>
NOTES TO THE PERFORMANCE SUMMARIES
(CONT.)
With respect to Chesapeake's programs, largest monthly drawdown is the
largest monthly loss experienced by the program on a composite basis in any
calendar month expressed as a percentage of the total equity (including
notional equity) in the program. A small number of accounts managed by
Chesapeake have experienced monthly drawdowns which are materially larger
than the largest composite monthly drawdown. These variances result from
such factors as small account size, intra-month account opening or closing,
significant intra-month additions or withdrawals and investment
restrictions imposed by the client. Small account sizes refers to accounts
of $1,000,000 trading level or less, which is substantially below the
minimum account size currently required by Chesapeake for new
accounts.
With respect to JWH's programs, the largest monthly drawdown for an
individual account within a program was determined after identification of
the three largest monthly drawdowns on a composite basis for each
investment program. Within the three months in which the largest composite
monthly drawdowns occurred, individual accounts were reviewed for each
program. The individual account which experienced the largest loss in those
months is the account shown as having the largest individual monthly
drawdown for the investment program. Some individual accounts were excluded
from review if they were being phased in or out, opened or closed during
the month or if material intra-month additions or redemptions were
made.
Differences between the largest monthly drawdown for an individual account
and the largest monthly drawdown on a composite basis for a program are due
to, among other factors, the reasons noted on pages 103 and 104.
11. Largest peak-to-valley drawdown is the largest percentage decline (after
eliminating the effect of additions and withdrawals) during the period
covered by the performance summary from any month-end net asset value,
without such month-end net asset value being equalled or exceeded as of a
subsequent month-end. Largest peak-to-valley drawdown is calculated on the
basis of the loss experienced in the program either on an individual
account or a composite basis, unless noted otherwise, expressed as a
percentage of the total equity (including "notional" equity) in the
program. Individual accounts managed by a "core" Advisor may have
experienced larger peak-to-valley drawdowns. JWH calculates the period over
which the largest peak-to-valley drawdown of a program has occurred as
beginning with the last profitable month immediately preceding the
drawdown. Chesapeake calculates such period as beginning with the first
unprofitable month of the drawdown.
With respect to Chesapeake's programs, a small number of accounts managed
by Chesapeake have experienced peak-to-valley drawdowns which are
materially larger than the largest composite peak-to-valley drawdown. These
variances result from such factors as small account size, intra-month
account opening or closing, significant intra-month additions or
withdrawals and investment restrictions imposed by the client.
12. Monthly Rates of Return, in accordance with CFTC rules, are shown only for
the specific programs currently being traded by the "core" Advisors for the
Fund.
With respect to Chesapeake's Diversified Program, the Monthly Rate of
Return for each month beginning January 1994 is calculated by dividing the
net performance of the "Fully-Funded Subset" by the beginning equity of the
Fully-Funded Subset, except in periods of significant additions or
withdrawals to the accounts in the Fully-Funded Subset. In such instances,
the Fully-Funded Subset is adjusted to exclude accounts with significant
additions or withdrawals, whose inclusion would materially distort the rate
of return calculated pursuant to the Fully-Funded Subset method.
The Monthly Rate of Return for each month prior to January 1992 is
calculated using the Only Accounts Traded (OAT) method (see "Chesapeake
Capital Corporation -- Past Performance"), which uses net performance
divided by beginning equity, subject to certain adjustments. In this
calculation, accounts are excluded from both net performance and beginning
equity if their inclusion would materially distort the Monthly Rate of
Return. The excluded accounts include (1) accounts for which there has been
a material addition or withdrawal during the month, (2) accounts which were
open for only part of the month or (3) accounts which had no open positions
during the month due to the intention to permanently close the account.
Such accounts were not charged with material nonrecurring costs during the
month.
-113-
<PAGE>
NOTES TO THE PERFORMANCE SUMMARIES
(CONT.)
The Monthly Rate of Return for the months from January 1992 through April
1994 was calculated using both the Fully-Funded Subset and OAT methods of
computation, as described herein. No material differences were noted
between the Monthly Rates of Return computed using each method.
With respect to JWH's Financial and Metals Portfolio, the Monthly Rate of
Return for each month is calculated by dividing net performance by the sum
of beginning equity plus additions and minus withdrawals. For such
purposes, all additions and withdrawals are effectively treated as if they
had been made on the first day of the month even if, in fact, they occurred
later, unless, beginning in December 1991, they are material to the
performance of the Financial and Metals Portfolio, in which case they are
time-weighted.
The Monthly Rates of Return for both of the current "core" Advisors are, in
certain cases, calculated on the basis of assets under management including
proprietary capital. However, both of the current "core" Advisors believe
that the inclusion of such capital has had no material effect on their
Monthly Rates of Return.
13. Compound Rate of Return is calculated by multiplying on a compound basis
each of the Monthly Rates of Return and not by adding or averaging such
Monthly Rates of Return. For periods of less than one year, the results are
year-to-date.
-114-
<PAGE>
PERFORMANCE OF THE
PUBLIC SINGLE-ADVISOR FUTURES FUNDS OPERATED BY MLIP
GENERAL
The following is summary performance information for the six single-
advisor funds which MLIP has dis tributed other than as part of its "Managed
Account Program" (which consists of private placements and "feeder funds" which
invest all of their assets directly into different managers' private
funds).
All summary performance information is current as of August 31, 1996.
Performance information is set forth for the most recent five full years of each
fund. Performance information prior to January 1, 1991 has not been included, in
accordance with CFTC regulations.
Four of the funds presented (The Futures Expansion Fund Limited
Partnership, World Currencies Limited, ML JWH Strategic Allocation Fund L.P. and
ML JWH Strategic Allocation Fund Ltd.) have fee structures and interest
arrangements generally comparable to that of the Fund (although these funds,
being single-advisor pools, pay profit shares only in respect of overall fund
performance, not on an advisor-by-advisor basis). The other funds, The Growth
and Guarantee Fund L.P. and InterRate(TM) Limited, were designed as "index" and
yield enhancement funds, respectively, and pay (paid, in the case of The Growth
and Guarantee Fund L.P. -- Series B and InterRate(TM) Limited, each of which has
dissolved) reduced fees.
THE FUNDS WHOSE PERFORMANCE IS SUMMARIZED IN THIS SECTION ARE
MATERIALLY DIFFERENT FROM THE FUND, AND THE PERFORMANCE SUMMARIES OF SUCH FUNDS
ARE NOT REPRESENTATIVE OF HOW THE FUND HAS PERFORMED TO DATE NOR INDICATIVE OF
HOW THE FUND WILL PERFORM IN THE FUTURE.
"MANAGED ACCOUNT PROGRAM" SINGLE-ADVISOR FUNDS NOT PRESENTED
MLIP currently has sponsored, and continues to operate, five single-
advisor funds, as well as several single-advisor "feeder funds," as part of
MLIP's Managed Account Program. These funds are in addition to the six single-
advisor funds the records of which are summarized herein. MLIP selects the
professional advisors for the funds in the Managed Account Program. However,
each client determines with which, if any, of such advisors the client will
invest. The Managed Account Program emphasizes single-advisor funds.
In its single-advisor funds, MLIP does not implement asset allocation
strategies which MLIP does for the Fund. Nor is MLIP's trading leverage analysis
of any relevance in the context of single-advisor funds. All the assets of such
funds are simply allocated to their respective advisors.
Managed Account Program funds are privately distributed with a minimum
investment of $100,000 (although MLIP has from time to time permitted
investments of $50,000).
Although MLIP's ability to select advisors for the Managed Account
Program might be regarded as a reflection on MLIP's ability to select advisors
for its multi-advisor funds, MLIP regards the Managed Account Program and MLIP's
multi-advisor funds as qualitatively different investments. Consequently, while
MLIP will furnish, without charge, full performance records of all MLIP single-
advisor funds upon the request of any existing or prospective investor in the
Fund, such records are not set forth herein.
The three worst performing of the single-advisor Managed Account
Program funds sponsored by MLIP had, as of August 31, 1996, cumulative rates of
return, since inception, of (53.27)% (18 months), (17.67)% (43 months) and
(6.20)% (27 months).
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, AND
MATERIAL DIFFERENCES EXIST BETWEEN THE FUNDS SET FORTH HEREIN AND THE FUND. TO
DATE, THE FUND HAS NOT PERFORMED IN A MANNER COMPARABLE TO MANY OF THESE SINGLE-
ADVISOR MLIP-SPONSORED FUNDS, AND THERE IS NO REASON TO EXPECT THAT THE FUND
WILL PERFORM IN A MANNER COMPARABLE TO ANY OF SUCH FUNDS IN THE FUTURE.
INVESTORS SHOULD NOTE THAT INTEREST INCOME MAY CONSTITUTE A
SIGNIFICANT PORTION OF A COMMODITY POOL'S INCOME AND, IN CERTAIN INSTANCES, MAY
GENERATE PROFITS WHERE THERE HAVE BEEN REALIZED AND UNREALIZED LOSSES FROM
COMMODITY TRADING.
____________________________
-115-
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
MLIP PUBLIC SINGLE-ADVISOR FUNDS
AUGUST 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
WORST WORST
INCEPTION MONTHLY PEAK-TO-VALLEY
TYPE OF OF AGGREGATE CURRENT DRAWDOWN DRAWDOWN
NAME OF FUND OFFERING TRADING SUBSCRIPTIONS CAPITALIZATION PERIOD PERIOD
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
The Futures Expansion Fund Public Jan. 1987 $56,741,035 $8,766,575 (10.92)% (2/96) (17.32)% (1/91-11/91)
Limited Partnership
- -----------------------------------------------------------------------------------------------------------------------------------
The Growth & Guarantee Public Aug. 1987 $148,349,450 $8,612,566 (4.28)% (6/91) (6.93)% (2/94-6/94)
Fund L.P. - Series A Units
- -----------------------------------------------------------------------------------------------------------------------------------
ML JWH Strategic
Allocation Fund L.P. Public July 1996 $110,773,125 $108,525,219 (1.02)% (7/96) (1.11)% (7/96-8/96)
- -----------------------------------------------------------------------------------------------------------------------------------
ML JWH Strategic
Allocation Fund Ltd. Private July 1996 $87,272,808 $85,729,688 (1.05)% (7/96) (1.35)% (7/96-8/96)
- -----------------------------------------------------------------------------------------------------------------------------------
The Growth & Guarantee Public Sept. 1987 $84,282,707 dissolved as (3.65)% (6/91) (4.29)% (9/91-11/91)
Fund L.P. - Series B Units of 12/31/91
- -----------------------------------------------------------------------------------------------------------------------------------
World Currencies Limited Private Aug. 1987 $47,814,293 dissolved as (13.41)% (4/92) (35.81)% (9/92-1/95)
of 4/11/96
- -----------------------------------------------------------------------------------------------------------------------------------
InterRate(TM) Limited Private Dec. 1988 $7,429,200 dissolved as (10.08)% (9/92) (13.49)% (9/92-1/93)
of 1/31/94
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE
RATE OF
RETURN
JAN. 1991 TO 1996 1995 1994 1993 1992 1991
AUG., 1996 COMPOUND COMPOUND COMPOUND COMPOUND COMPOUND COMPOUND
(OR RATE OF RATE OF RATE OF RATE OF RATE OF RATE OF
DISSOLUTION) RETURN RETURN RETURN RETURN RETURN RETURN
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
The Futures Expansion Fund 34.22% (5.96)% 21.95% 5.55% 3.36% 9.23% (1.79)%
Limited Partnership (8 months)
- --------------------------------------------------------------------------------------------------------------------------------
The Growth & Guarantee 80.33% 3.94% 32.01% (2.34)% 5.20% 3.75% 23.30%
Fund L.P. - Series A Units (8 months)
- --------------------------------------------------------------------------------------------------------------------------------
ML JWH Strategic
Allocation Fund L.P. (1.11)% (1.11)%
(2 mos.)
- --------------------------------------------------------------------------------------------------------------------------------
ML JWH Strategic
Allocation Fund Ltd. (1.35)% (1.35)%
(2 mos.)
- --------------------------------------------------------------------------------------------------------------------------------
The Growth & Guarantee 11.77% N/A N/A N/A N/A N/A 11.77%
Fund L.P. - Series B Units
- --------------------------------------------------------------------------------------------------------------------------------
World Currencies Limited 16.19% 1.20% 12.23% (12.84)% (10.46)% (3.10)% 35.28%
(3 1/2 months)
- --------------------------------------------------------------------------------------------------------------------------------
InterRate(TM) Limited 1.07% N/A N/A 0.55% (7.02)% (2.63)% 11.03%
(1 month)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
"WORST MONTHLY DRAWDOWN" AS USED HEREIN MEANS THE LARGEST NEGATIVE
MONTHLY RATE OF RETURN EXPERIENCED BY THE RELEVANT FUND DURING THE PERIOD
COVERED BY THE PERFORMANCE SUMMARY. A "DRAWDOWN" IS MEASURED ON THE BASIS OF
MONTH-END FIGURES ONLY, AND DOES NOT REFLECT INTRA-MONTH PERFORMANCE.
"WORST PEAK-TO-VALLEY DRAWDOWN" AS USED HEREIN MEANS THE GREATEST
PERCENTAGE DECLINE, DURING THE PERIOD COVERED BY THE PERFORMANCE SUMMARY, FROM A
MONTH-END CUMULATIVE MONTHLY RATE OF RETURN WITHOUT SUCH CUMULATIVE MONTHLY RATE
OF RETURN BEING EQUALLED OR EXCEEDED AS OF A SUBSEQUENT MONTH-END. FOR EXAMPLE,
IF THE MONTHLY RATE OF RETURN OF A PARTICULAR FUND WAS (1)% IN EACH OF JANUARY
AND FEBRUARY, 1% IN MARCH AND (2)% IN APRIL, A "PEAK-TO-VALLEY DRAWDOWN"
ANALYSIS CONDUCTED AS OF THE END OF APRIL WOULD CONSIDER THAT "DRAWDOWN" TO BE
STILL CONTINUING AND TO BE APPROXIMATELY (3)% IN AMOUNT, WHEREAS IF THE MONTHLY
RATE OF RETURN HAD BEEN APPROXIMATELY 3% IN MARCH, THE JANUARY-FEBRUARY DRAWDOWN
WOULD HAVE ENDED AS OF THE END OF FEBRUARY AT APPROXIMATELY THE (2)% LEVEL.
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.
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE FUNDS. PAST PERFORMANCE
IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, AND THESE FUNDS ARE
EACH TRADED PURSUANT TO MATERIALLY DIFFERENT PROGRAMS AND
WITH MATERIALLY DIFFERENT OBJECTIVES THAN THE FUND.
-116-
<PAGE>
THE ROLE OF MANAGED FUTURES IN AN INVESTMENT PORTFOLIO
MANAGED FUTURES AS AN ELEMENT IN MODERN PORTFOLIOS
This section presents a general description of the possible role of a
managed futures investment in an overall portfolio. Prospective investors are
cautioned that what may be true of managed futures investments considered in
general may well not be true of the Fund. The Fund does not purport to offer the
full diversification and access to "global trading" which is reflected in the
investment opportunities available in the managed futures industry considered as
a whole. The following statements are qualified in their entirety by the
specific descriptions of the Fund, the Trading Advisors, their strategies and
the markets traded by the Fund set forth herein and elsewhere in this
Prospectus. In addition, prospective investors must be aware that the
deleveraging of the Fund's trading in conjunction with its "principal
protection" feature reduces the market participation as well as the
diversification potential of the Fund.
A global investment perspective may be appropriate in seeking
investment opportunity and increased portfolio diversification. The
globalization of the world's economy offers significant new opportunities.
However, world political and economic events have an influence -- often a
dramatic influence -- on its markets, creating increased risk and volatility.
The market volatility of recent years suggests that stable growth may be
becoming increasingly difficult to achieve.
Over the long term, portfolios are benefitted by having the ability to
adapt to changing social, political and economic trends. A well-diversified
asset allocation strategy enhances this ability and offers a flexible approach
to the objective of building and protecting wealth in today's economic
environment. Incorporating a managed futures investment into portfolios as part
of a well-diversified asset allocation strategy has the potential, if the
managed futures investment is successful, to increase profits while reducing
overall portfolio risk. The Fund's performance to date, even trading with only
60% of its assets allocated to trading, has been somewhat volatile (volatility
being one commonly accepted measure of risk). There can be no assurance that the
Fund will trade successfully, and if it does not do so an investment in the Fund
cannot provide beneficial diversification to a portfolio. Furthermore, even if
profitable, the Fund may not be a successful diversification of an investor's
stock and bond portfolio because the Fund's performance may be correlated (i.e.,
experiencing generally similar returns during similar periods) with these
markets. The past performance of the Fund is not necessarily indicative of its
future results, particularly as newly issued Units will trade with a higher
initial (and, likely, ongoing) percentage of their assets allocated to
trading.
An asset allocation strategy diversifies a portfolio into a variety of
different components such as stocks, bonds and cash equivalents. Such a strategy
may also include, to a limited extent, non-traditional investments such as
managed futures (among a variety of alternatives). The goal is to achieve the
twin investment objectives of long-term total return combined with reduced
portfolio volatility and limited risk of major losses. An investment's
anticipated return, relative risk level and historical correlation with the
other components in the portfolio should be principal factors taken into account
in allocating a portfolio's assets. Different investment components are expected
to respond differently to changing economic conditions. Consequently, combining
a number of such components may add a potentially valuable element of
diversification to an overall portfolio. There can be no assurance that the Fund
will not respond to prevailing economic conditions in the same manner, as well
as incur losses at or about the same time, as the general debt and equity
markets.
PROFESSIONAL MANAGEMENT
Depending upon the fund and advisors selected, an investment in
managed futures has the potential to offer access to professionally managed
trading in a variety of commodity markets, including currencies, interest rates,
stock indices, energy, metals and agriculture. These markets may be traded
through futures, options on futures and forward contracts, and offer the ability
to trade either side of a market and at a wide range of different leverage
factors. The Fund does not trade in all, or even most, of the available markets,
and its positions may frequently be concentrated in particular markets and
sectors. There is, in many cases, substantial overlap among the markets traded
by the Advisors.
-117-
<PAGE>
FUTURES VOLUME BY MARKET SECTOR
[PIE CHART OF FUTURES VOLUME BY MARKET SECTOR APPEARS HERE]
INTERNATIONAL MARKETS
The futures markets have expanded in recent years to include a wide
range of instruments representing major sectors of the world's economy.
Coinciding with the development of an increasingly broad range of markets has
been greatly increased liquidity. The expansion of futures trading on major
exchanges in Chicago, Frankfurt, London, New York, Paris, Singapore, Sydney and
Tokyo offers the possibility of access to international market sectors as well
as the potential for a global diversification of portfolios traditionally
concentrated in a single nation's economy and currency. Managed futures advisors
are often able quickly to deploy and redeploy capital across a wide range of
international markets. No representation is or could be made that the
diversification or internationalization of futures trading in general has been
or will be reflected in the trading of the Fund.
At the same time that the rapid geographical expansion of the
available markets and the introduction of an array of innovative products have,
in the case of certain managers, created new opportunities for both profit and
diversification, these developments have made trading very much more complex and
difficult for the individual investor. Managed futures investments offer the
investor the opportunity to participate in a range of different economic sectors
through the futures, options on futures and forward markets, utilizing
professional money managers. Managed futures investments have profit potential,
but also involve a high degree of risk. The "principal protection" feature of
the Fund in no respects assures investors against substantial present value
losses. A managed futures investment is suitable only for a limited portion of
the risk segment of a portfolio.
SUBSTANTIAL INVESTOR PARTICIPATION
A large number of investors, both individuals and institutions
(although only a small percentage of the investing public), have committed a
limited portion of their assets to managed futures during the last 10 to 15
years. In 1980, client assets in the managed futures industry were estimated by
Managed Account Reports ("MAR"), a leading industry publication in the United
States, at approximately $0.3 billion. As of the end of 1995, the same
publication estimated such assets, which peaked at around an estimated $25
billion as of the end of 1993, at approximately $21.1 billion. Of this amount,
approximately $2.5 billion to $3.5 billion is invested in pools such as the
Fund, publicly distributed in the United States. The assets invested in managed
futures are invested in a wide range of different products, including single-
advisor and multi-advisor funds, "funds of funds," "principal protection" pools
(such as the Fund, in which only a fraction of the assets invested are committed
to trading) and individual managed accounts. Many of these investments are
materially different from the Fund in design and fee structure as well as in
investor base, performance and risk control objectives.
NON-CORRELATION -- A POTENTIALLY IMPORTANT COMPONENT OF RISK REDUCTION
Historically, the returns of many managed futures investments have
exhibited a substantial degree of non-correlation with the performance of the
general equity and debt markets, suggesting that a managed futures component, if
successful, may provide a valuable complement to a traditional portfolio. Modern
portfolio theory suggests that investments with positive returns and low
correlation with other holdings can improve the reward/risk characteristics of
an investor's overall portfolio. Consequently, allocating a limited portion of
the risk segment of a portfolio to managed futures, if the managed futures
performance is, in fact, profitable as well as non-correlated with stocks and
bonds, can
-118-
<PAGE>
potentially add a valuable aspect of diversification to a traditionally
structured portfolio. On an interim basis, a non-correlated asset may benefit a
portfolio even if that asset is not itself profitable, by helping to preserve
equity during periods when "core" investments are incurring significant losses.
However, over time an investment can only be beneficial if it is itself
profitable. There can be no assurance that any managed futures investment will
be successful, avoid substantial losses or generate performance non-correlated
with the equity or debt markets. Even if the performance of the Fund is, in
fact, non-correlated with these markets (of which there can be no assurance),
this does not mean that the Fund's results will not parallel general stock and
bond price levels during significant periods of time. Non-correlation is not
negative correlation. The Fund may well incur losses at the same time as an
investor's traditional holdings, increasing, rather than mitigating, overall
portfolio losses. Furthermore, even if a managed futures investment is non-
correlated to general equity and debt prices, it must also be profitable to add
value as an element of diversification in a portfolio.
Allocating assets to non-traditional investments ("alternative
investments") is based on the premise that while securities (e.g., stocks and
bonds) prices are often affected by overall market price trends, alternative
investments may not be, at least to the same degree. In addition, the results of
many types of alternative investments have historically been largely non-
correlated with each other. This creates the possibility of assembling a
portfolio whose various investments have been developed with the objective of
participating successfully in different economic cycles and national financial
markets, potentially multiplying profit opportunities while decreasing the
effect of price movements in any given market on the overall volatility of the
portfolio. The purely speculative nature of the return recognized from a managed
futures investment such as the Fund indicates that prospective investors must
not rely on such investment either to generate profits or to help diversify a
portfolio, because the actual results of such an investment are entirely
unpredictable.
There are a number of different "alternative investments" to which one
could commit assets with the objective of diversifying and improving the overall
reward/risk ratio of a traditional portfolio --venture capital, natural
resources, real estate, private lending and managed futures are only certain of
the options available. Many "alternative investments" are likely to generate
results largely non-correlated with those of the debt and equity markets. A
managed futures investment is typically more liquid and more readily valued than
many other alternative investments, but unlike many such investments, does not
involve the acquisition of any assets with any intrinsic value. Although the
commodities and instruments which underlie the Fund's futures and forward
contracts have value, the success of a managed futures program depends on the
results of purely speculative trading. There will be not object of value
acquired by the Fund. Rather, the Fund will acquire market exposures, hoping to
profit from price movements in commodities and financial instruments which the
Fund, in fact, never owns. The fundamental characteristic of a managed futures
investment is that it is a commitment to trading rather than investing, to
speculating on price differences, not to acquiring assets which grow in value
over time. The inherently speculative character of managed futures trading
results in the Fund's performance to date not being predictive of its prospects
for the future.
All of the performance information in this Prospectus is presented on
a pre-tax basis. The tax costs of investing in the Fund are materially higher
than those that would be applicable to an investment in either of the indices
included in the foregoing graph.
Investors could obtain the 91-day Treasury bill or a stock or bond
index return with minimal expense, whereas the total charges to the Fund in 1995
were approximately 8% of its average Net Assets.
The futures markets are fundamentally different from the securities
markets in a number of respects, and any comparison between them (whether
relating to correlation, volatility or absolute performance) is subject to
certain inherent and material limitations.
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<PAGE>
SUMMARY
Participation in a professionally managed futures program, obtaining
access to the experience and expertise of a professional trading managers and
trading advisors involves significant risks but offers the opportunity to
potentially:
. Diversify into new markets;
. Profit (or incur losses) in rising as well as falling markets;
. Increase portfolio returns as well as reduce total portfolio risk
(through adding an investment component with the potential for
performance non-correlated with other portfolio components); and
. Participate in the highly leveraged futures, options on futures and
forward markets with liability limited to the amount invested, plus
any undistributed profits.
There are a number of different "alternative investments" to which one
could commit assets with the objective of diversifying and improving the overall
risk/reward ratio of a traditional portfolio --venture capital, natural
resources, real estate, private lending and managed futures are only certain of
the options available. Many "alternative investments" are likely from time to
time to generate results largely non-correlated with those of the debt and
equity markets. A managed futures investment is typically more liquid and more
readily valued than many other alternative investments but unlike many such
investments, does not involve the acquisition of any assets with an intrinsic
value. Although the commodities and instruments which underlie the Fund's
futures and forward contracts have value, the success of its managed futures
program depends on the results of purely speculative trading. The Fund acquires
market exposures hoping to profit from price movements in commodities and
financial instruments which the Fund, in fact, never owns. A fundamental
characteristic of a managed futures investment is that it is a commitment to
trading rather than investing; to speculating on price differences, not to
acquiring assets which grow in value over time. The purely speculative character
of the Fund's profit potential is in no respect reduced or made less speculative
by the Fund's "principal protection" feature.
Prudence demands that an investor carefully examine all aspects of a
managed futures investment and weigh the associated benefits of profit potential
and possible portfolio diversification against the risks of such investment. A
managed futures investment is not suitable for all investors, and is not a
suitable investment for more than a limited portion of the risk segment of any
investor's portfolio. The potential benefits of a successful managed futures
investment must be considered in light of how small a portion of an overall
portfolio such an investment can suitably constitute. However, for the investor
who can tolerate the risks, a managed futures investment, if successful, has the
potential to yield portfolio diversification benefits. See "Risk Factors."
-120-
<PAGE>
APPENDIX
BLUE SKY GLOSSARY
The following definitions are included in this Appendix in compliance
with the requirements of various state securities administrators who review
public futures fund offerings for compliance with the "Guidelines for the
Registration of Commodity Pool Programs" Statement of Policy promulgated by the
North American Securities Administrators Association, Inc. The following
definitions are reprinted verbatim from such Guidelines and may, accordingly,
not in all cases be relevant to an investment in the Fund.
DEFINITIONS -- As used in the Guidelines, the following terms have the
following meanings:
Administrator -- The official or agency administering the security
laws of a state.
Advisor -- Any person who for any consideration engages in the
business of advising others, either directly or indirectly, as to the value,
purchase, or sale of commodity contracts or commodity options.
Affiliate -- An Affiliate of a Person means: (a) any Person directly
or indirectly owning, controlling or holding with power to vote 10% or more of
the outstanding voting securities of such Person; (b) any Person 10% or more of
whose outstanding voting securities are directly or indirectly owned, controlled
or held with power to vote, by such Person; (c) any Person, directly or
indirectly, controlling, controlled by, or under common control of such Person;
(d) any officer, director or partner of such Person; or (e) if such Person is an
officer, director or partner, any Person for which such Person acts in any such
capacity.
Capital Contributions -- The total investment in a Program by a
Participant or by all Participants, as the case may be.
Commodity Broker -- Any Person who engages in the business of
effecting transactions in commodity contracts for the account of others or for
his own account.
Commodity Contract -- A contract or option thereon providing for the
delivery or receipt at a future date of a specified amount and grade of a traded
commodity at a specified price and delivery point.
Cross Reference Sheet -- A compilation of the Guideline sections,
referenced to the page of the Prospectus, Program agreement, or other exhibits,
and justification of any deviation from the Guidelines.
Net Assets -- The total assets, less total liabilities, of the Program
determined on the basis of generally accepted accounting principles. Net Assets
shall include any unrealized profits or losses on open positions, and any fee or
expense including Net Asset fees accruing to the Program.
Net Asset Value Per Program Interest -- The Net Assets divided by the
number of Program Interests outstanding.
Net Worth -- The excess of total assets over total liabilities as
determined by generally accepted accounting principles. Net Worth shall be
determined exclusive of home, home furnishings and automobiles.
New Trading Profits -- The excess, if any, of Net Assets at the end of
the period over Net Assets at the end of the highest previous period or Net
Assets at the date trading commences, whichever is higher, and as further
adjusted to eliminate the effect on Net Assets resulting from new Capital
Contributions, redemptions, or capital distributions, if any, made
APP-1
<PAGE>
during the period decreased by interest or other income, not directly related to
trading activity, earned on Program assets during the period, whether the assets
are held separately or in margin account.
Organizational and Initial Offering Expenses -- All expenses incurred
by the Program in connection with and in preparing a Program for registration
and subsequently offering and distributing it to the public, including, but not
limited to, total underwriting and brokerage discounts and commissions
(including fees of the underwriter's attorneys), expenses for printing,
engraving, mailing, salaries of employees while engaged in sales activity,
charges of transfer agents, registrars, trustees, escrow holders, depositories,
experts, expenses of qualification of the sale of its Program Interest under
federal and state law, including taxes and fees, accountants' and attorneys'
fees.
Participant -- The holder of a Program Interest.
Person -- Any natural Person, partnership, corporation, association or
other legal entity.
Pit Brokerage Fee -- Pit Brokerage Fee shall include floor brokerage,
clearing fees, National Futures Association fees, and exchange fees.
Program -- A limited partnership, joint venture, corporation, trust or
other entity formed and operated for the purpose of investing in Commodity
Contracts.
Program Broker -- A Commodity Broker that effects trades in Commodity
Contracts for the account of a Program.
Program Interest -- A limited partnership interest or other security
representing ownership in a Program.
Pyramiding -- A method of using all or a part of an unrealized profit
in a Commodity Contract position to provide margin for any additional Commodity
Contracts of the same or related commodities.
Sponsor -- Any Person directly or indirectly instrumental in
organizing a Program or any Person who will manage or participate in the
management of a Program, including a Commodity Broker who pays any portion of
the Organizational Expenses of the Program, and the general partner(s) and any
other Person who regularly performs or selects the Persons who perform services
for the Program. Sponsor does not include wholly independent third parties such
as attorneys, accountants, and underwriters whose only compensation is for
professional services rendered in connection with the offering of the units. The
term "Sponsor" shall be deemed to include its Affiliates.
Valuation Date -- The date as of which the Net Assets of the Program
are determined.
Valuation Period -- A regular period of time between Valuation Dates.
APP-2
<PAGE>
EXHIBIT A
ML PRINCIPAL PROTECTION L.P.
THIRD AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
Dated as of July 1, 1996
<PAGE>
ML PRINCIPAL PROTECTION L.P.
THIRD AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C>
1. Formation and Name................................................... A-1
2. Principal Office..................................................... A-1
3. Business............................................................. A-1
4. Term, Dissolution, Fiscal Year and Net Asset Value................... A-2
5. Net Worth of General Partner......................................... A-3
6. Capital Contributions; Units......................................... A-3
7. Allocation of Profits and Losses..................................... A-3
(a) Capital Accounts and Allocations............................... A-3
(b) Allocation of Profit and Loss for Federal Income
Tax Purposes.................................................. A-4
(c) Adjustments.................................................... A-5
(d) Expenses....................................................... A-5
(e) Limited Liability of Limited Partners.......................... A-6
(f) Return of Capital Contributions................................ A-6
8. Management of the Partnership........................................ A-6
(a) General........................................................ A-6
(b) Fiduciary Duties............................................... A-7
(c) Loans; Investments............................................. A-7
(d) Certain Conflicts of Interest Prohibited....................... A-7
(e) Certain Contracts.............................................. A-8
(f) Trading Advisors............................................... A-8
(g) Other Activities............................................... A-8
(h) Tax Matters Partner............................................ A-8
(i) The Trading Partnership........................................ A-8
(j) "Pyramiding" Prohibited........................................ A-9
9. Audits and Reports to Limited Partners............................... A-9
10. Assignability of Units............................................... A-9
11. Redemptions; Distributions........................................... A-10
12. Offering of Units.................................................... A-11
13. Additional Offerings................................................. A-11
14. Special Power of Attorney............................................ A-11
15. Withdrawal of a Partner.............................................. A-12
16. Standard of Liability; Indemnification............................... A-12
17. Amendments; Meetings................................................. A-14
(a) Amendments with Consent of the General Partner................. A-14
(b) Amendments and Actions without Consent of the
General Partner............................................... A-14
(c) Meetings; Other................................................ A-14
18. Governing Law........................................................ A-15
19. Miscellaneous........................................................ A-15
</TABLE>
A-i
<PAGE>
ML PRINCIPAL PROTECTION L.P.
THIRD AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
This Third Amended and Restated Limited Partnership Agreement
(this "Limited Partnership Agreement") is made as of July 1, 1996, by and among
MERRILL LYNCH INVESTMENT PARTNERS INC., a Delaware corporation, as general
partner (the "General Partner"), and each other party who becomes a party to
this Limited Partnership Agreement as a limited partner (individually, a
"Limited Partner" or, collectively, the "Limited Partners") (the General Partner
and the Limited Partners being collectively referred to herein as "Partners").
WITNESSETH:
1. Formation and Name.
(a) The parties hereto do hereby continue a limited partnership
heretofore formed under the Delaware Revised Uniform Limited Partnership Act, as
amended (the "Act"). Subject to Section 1(b) below, the Units, as hereinafter
defined, subscribed for prior to the date hereof shall be subject to the terms
of the Second Amended and Restated Limited Partnership Agreement of the
Partnership (the "Prior Agreement") which shall remain in full force and effect
with respect to those Units and those Units only. The terms of this Limited
Partnership Agreement shall apply to all Units subscribed for on and after the
date hereof. The name of the limited partnership is ML PRINCIPAL PROTECTION L.P.
(the "Partnership").
(b) The Prior Agreement is hereby amended to reflect the change
of the name of this limited partnership to "ML Principal Protection L.P.," and
the change of the name of the Trading Partnership (as hereinafter defined) to
"ML Principal Protection Trading L.P." Notwithstanding any provision in this
Limited Partnership Agreement or the Prior Agreement to the contrary, any and
all references in the Prior Agreement to the "Prospectus" shall be deemed to
refer to the specific prospectus, including any applicable supplements thereto,
under and in connection with which specific Units were issued. The Prior
Agreement and this Limited Partnership Agreement shall be deemed to constitute
one agreement, which shall be the partnership agreement of the Partnership. The
Guarantee Agreement, between ML&Co. (as hereinafter defined) and the
Partnership, dated as of October 11, 1994, shall apply only to the Units
subscribed for prior to July 1, 1996. The Guarantee Agreement, between ML&Co.
and the Partnership, dated as of [October __], 1996, shall apply only to the
Units subscribed for on and after July 1, 1996.
2. Principal Office.
The address of the principal office of the Partnership shall be
c/o the General Partner, Merrill Lynch World Headquarters, 6th Floor, South
Tower, World Financial Center, New York, New York 10080-6106; telephone: (212)
236-4167. The address of the registered office of the Partnership in the State
of Delaware is c/o The Corporation Trust Company, Corporation Trust Center, 1209
Orange Street, Wilmington, New Castle County, Delaware 19801, and the name and
address of the registered agent for service of process on the Partnership in the
State of Delaware is The Corporation Trust Company, Corporation Trust Center,
1209 Orange Street, Wilmington, New Castle County, Delaware 19801.
3. Business.
The Partnership's business and purpose is to trade, buy, sell or
otherwise acquire, hold or dispose of forward and futures contracts for all
manner of commodities, financial instruments and currencies, any rights
pertaining thereto and any options thereon or on physical commodities, as well
as securities and any rights pertaining thereto, and to engage in all activities
necessary, convenient or incidental thereto. The Partnership may also engage in
"hedge," arbitrage and cash trading of commodities, futures, forwards and
options, as well as in yield enhancement and other fixed-income strategies. The
objective of the Partnership's business is appreciation of its assets through
speculative trading. The Partnership may engage in the foregoing speculative
trading directly, through investing in other partnerships and funds and
A-1
<PAGE>
through investing in subsidiary limited partnerships or other limited liability
entities structured so that, to the maximum extent permitted by law, Limited
Partners can be assured that the assets attributable to one series of units of
limited partnership interest ("Units") in the Partnership will never be used to
pay losses or expenses attributable to any other series. In particular, it is
contemplated that the Partnership shall engage in speculative trading through ML
PRINCIPAL PROTECTION TRADING L.P. (the "Trading Partnership"), of which the
General Partner shall be the sole general partner, and the Partnership the sole
limited partner.
In addition to its trading activities, as described above, the
Partnership and the Trading Partnership retain MERRILL LYNCH ASSET MANAGEMENT,
L.P. ("MLAM") to implement cash management strategies in -- in MLAM's absolute
discretion within investment parameters established by, and the responsibility
of, the General Partner -- United States Treasury securities and securities
issued by U.S. government agencies and instrumentalities. The Partnership
instructs Merrill Lynch Futures Inc., the Trading Partnership's commodity
broker, to pay MLAM's fees for such cash management services from the flat-rate
brokerage commissions paid by the Trading Partnership to Merrill Lynch Futures
Inc., and the General Partner is hereby specifically empowered to (i) retain
MLAM to provide cash management advice and services to the Partnership and the
Trading Partnership, (ii) arrange for Merrill Lynch Futures Inc. to pay MLAM's
fees for such advice and services and (iii) establish investment parameters for
MLAM's cash management services for the Partnership and the Trading Partnership.
In the event that Merrill Lynch Futures Inc. does not pay MLAM's cash management
fees, the General Partner, not the Partnership, shall be responsible for doing
so.
The Partnership has been formed in conjunction with a "principal
protection" undertaking by Merrill Lynch & Co., Inc. ("ML&Co."), the parent of
the General Partner, pursuant to which ML&Co. has agreed to make sufficient
payments to the Partnership, to be allocated to the appropriate series of Units
in the Partnership, so that the Net Asset Value per Unit of all Units of such
series outstanding on such series' Principal Assurance Date, as defined in the
Prospectus of the Partnership, as amended and updated from time to time (the
"Prospectus"), in each case relating to the public offering of the Units, will
equal at least $100.
Other than as set forth above, it is specifically intended that
the Partnership function in a manner analogous to a "commercial paper issuer" so
as to have no operations and incur no debts or obligations whatsoever, except as
explicitly set forth herein (including, without limitation, in Section 16(e)).
In no event shall the Partnership as a whole, or any series of
Units, considered individually, be permitted to operate as an entity which is
principally engaged in trading or investing in securities, as opposed to in
futures and forward contracts and options thereon.
4. Term, Dissolution, Fiscal Year and Net Asset Value.
(a) Term. The term of the Partnership commenced on the day on
which the Certificate of Limited Partnership was filed with the Secretary of
State of the State of Delaware pursuant to the provisions of the Act and shall
end upon the first to occur of the following: (1) December 31, 2024; (2) receipt
by the General Partner of an approval to dissolve the Partnership at a specified
time by Limited Partners owning Units representing more than fifty percent (50%)
of the outstanding Units of each series then owned by Limited Partners, notice
of which is sent by certified mail, return receipt requested, to the General
Partner not less than ninety (90) days prior to the effective date of such
dissolution; (3) the death, insanity, bankruptcy, retirement, resignation,
expulsion or dissolution of the General Partner or any other event that causes
the General Partner to cease to be a general partner unless (i) at the time of
such event there is at least one remaining general partner of the Partnership
who carries on the business of the Partnership (and each remaining general
partner of the Partnership is hereby authorized to carry on the business of the
Partnership in such an event), or (ii) within ninety (90) days after such event
all Partners agree in writing to continue the business of the Partnership and to
the appointment, effective as of the date of such event, of one or more general
partners of the Partnership; (4) a decline in the aggregate Net Assets of the
Partnership to less than $250,000; (5) dissolution of the Partnership pursuant
hereto; or (6) any other event which shall make it unlawful for the existence of
the Partnership to be continued or requires termination of the Partnership.
(b) Dissolution. Upon the occurrence of an event causing the
dissolution of the Partnership, the Partnership shall be dissolved and
terminated.
A-2
<PAGE>
(c) Fiscal Year. The fiscal year of the Partnership shall begin
on January 1 of each year and end on the following December 31.
(d) Net Asset Value. Net Assets of the Partnership are its
assets less its liabilities determined in accordance with generally accepted
accounting principles. If an open position cannot be liquidated on the day with
respect to which Net Assets are being determined, the settlement price on the
first subsequent day on which the contract can be liquidated shall be the basis
for determining the liquidating value of such contract for such day, or such
other value as the General Partner may deem fair and reasonable. The liquidating
value of a commodity futures or option contract not traded on a United States
commodity exchange shall mean its liquidating value as determined by the General
Partner on a basis consistently applied for each different variety of contract.
The Net Asset Value of the Partnership's investment in the Trading Partnership
will be valued in accordance with the foregoing principles.
The Partnership's accrued but unpaid liability for reimbursement
to the General Partner of the Partnership's organizational and initial offering
costs shall not reduce Net Asset Value for any purpose, including calculating
brokerage commissions, the Administrative Fees or the redemption value of Units.
Reimbursement payments will reduce Net Asset Value (for all such purposes) only
as actually paid out in the manner described in the Prospectus.
5. Net Worth of General Partner.
The General Partner agrees that at all times so long as it
remains general partner of the Partnership, it will maintain its net worth--
determined without reference to the General Partner's interests in the
Partnership or any other limited partnership or to any notes or accounts
receivable from and payable to any limited partners in which the General Partner
has an interest -- at an amount not less than 5% of the total contributions by
all partners to the Partnership and all other partnerships of which the General
Partner is general partner. The General Partner will not permit its net worth to
decline below $10 million without the approving majority vote of each series of
Units then owned by Limited Partners.
The requirements of the first sentence of the preceding
paragraph may be modified if the General Partner obtains an opinion of counsel
for the Partnership that a proposed modification will not adversely affect the
classification of the Partnership as a partnership for federal income tax
purposes, and if such modification will reflect or exceed applicable state
securities and Blue Sky laws and qualify under any guidelines or statements of
policy promulgated by any body or agency constituted by the various state
securities administrators having jurisdiction in the premises.
6. Capital Contributions; Units.
The Partners' respective capital contributions to the
Partnership shall be as shown on the books and records of the Partnership.
The General Partner shall invest in the Partnership, as a
general partner interest, no less than 1% of the total contributions to the
Partnership (including the General Partner's contribution) made with respect to
each series of Units issued by the Partnership. The General Partner, so long as
it is a general partner of the Partnership, or any substitute general partner,
shall maintain a minimum investment of 1% of the outstanding contributions to
the Partnership with respect to each series of Units. The General Partner need
not maintain an equal percentage investment in each series, but must maintain at
least a 1% investment in each. The General Partner may withdraw any interest it
may have as a general partner in excess of the foregoing requirement, and may
redeem any Units of any series which it may acquire as of any month-end on the
same terms as any Limited Partner, provided that the General Partner must, at
all times while it is the sole general partner of the Partnership, maintain the
minimum 1% interest in each series of Units described in the preceding sentence.
Units of any series acquired by the General Partner or any of
its affiliates will be non-voting, and will not be considered outstanding for
purposes of determining whether the majority approval of the outstanding Units
of such series has been obtained.
A-3
<PAGE>
7. Allocation of Profits and Losses.
(a) Capital Accounts and Allocations. A capital account shall
be established for each series of Units sold by the Partnership and, within each
such series a capital account shall be established for each Unit of such series
as well as for the General Partner's interest in such series on a Unit-
equivalent basis. The initial balance of each series' and of each Unit's capital
account shall be the amount contributed to the Partnership with respect to such
series or Unit. As of the close of business (as determined by the General
Partner) on the last day of each month, (i) any increase or decrease in the
value of the Partnership's U.S. Treasury and federal government agency or
instrumentality securities and short-term foreign sovereign debt instruments, as
well as any increase or decrease in the Partnership's cash (other than as a
result of distributions, redemptions or payments described in the following
paragraphs of this Section 7(a)), plus (ii) any increase or decrease in the Net
Asset Value of the Partnership's capital account in the Trading Partnership
attributable to capital (a) invested in the Trading Partnership or (b) committed
to the Trading Partnership by the Partnership pursuant to Section 16(e), shall
be allocated among the series, in the case of (i) above, pro rata based on the
relative amounts of assets (without regard to accrued but unpaid brokerage
commissions, Administrative Fees or Profit Shares) attributable to each series
as of the close of business on the last day of the immediately preceding month
(after deducting amounts payable as a result of the redemption of Units as of
the last day of such immediately preceding month) and, in the case of (ii)
above, pro rata based on the relative amounts set forth in (ii)(a) and (b) with
respect to each series as of the close of business on the last day of the
immediately preceding month (after deducting amounts payable as a result of the
redemption of Units as of the last day of such immediately preceding month).
The capital accounts of each series of Units shall be reduced by
the amount of any distributions, redemption payments and related redemption
charges paid out with respect to such series.
Any Profit Share payments made by the Partnership shall be
allocated among the series based upon the Profit Shares that would have been
paid by the Partnership for the relevant period if the Partnership's only assets
during such period had been those of the appropriate series.
Any reimbursement of organizational and initial offering costs
made pursuant to Section 7(d) as of the last day of any given month shall be
allocated among the series based on the relative net asset value (without regard
to accrued but unpaid brokerage commissions, Administrative Fees or Profit
Shares) of each series as of the last day of the immediately preceding month
(after deducting amounts payable as a result of the redemption of Units on the
last day of such immediately preceding month).
Any payments made under the Merrill Lynch & Co., Inc. guarantee
of the minimum Net Asset Value per Unit of each series, as of the "Principal
Assurance Date," as defined in the Prospectus, for such series and any indemnity
payments by the General Partner pursuant to Section 16(d) hereof shall be
allocated to the appropriate series.
The amounts allocated to a series shall be allocated equally
among the Units of such series outstanding as of the last day of such month
(including Units redeemed as of such day), except that redemption payments,
related redemption charges and Profit Shares payable upon the redemption of
Units as of a date other than the last day of a calendar quarter shall be
allocated solely to the redeemed Units.
For purposes of maintaining capital accounts, amounts paid or
payable to the General Partner for items such as reimbursement of organizational
and initial offering costs and service fees shall be treated as if paid or
payable to a third party and, except for the General Partner's pro rata share of
such amounts, shall not affect the capital account of the interest held by the
General Partner.
(b) Allocation of Profit and Loss for Federal Income Tax
Purposes. As of the end of each fiscal year, the Partnership's income, expense,
Capital Gain and Capital Loss shall be allocated among the series of Units, and
among the Partners of each such series, pursuant to the following subparagraphs
for federal income tax purposes. Such allocations shall, as among the series and
as among Partners holding the same series, be pro rata from the short-term
Capital Gain and Capital Loss and long-term Capital Gain and Capital Loss of the
Partnership or allocated to such series,
A-4
<PAGE>
as the case may be. For purposes of this Section 7(b), Capital Gain and Capital
Loss shall be allocated separately and not netted.
(1) Income, expense, Capital Gain and Capital Loss shall be
allocated to each series of Units in the same manner that the financial
allocations are made to each such series as provided in Section 7(a). The
following allocations relate to the allocations of income, expense, Capital Gain
and Capital Loss among the Partners holding Units of the same series.
(2) First, the series' share of the items of ordinary income
and expense (other than Profit Shares, which shall be allocated as set forth in
Section 7(b)(3)) and of any Capital Gain and Capital Loss that is not
attributable to the activities of the Trading Partnership shall be allocated
equally among the Units of such series outstanding as of the end of each month
in which such items accrue.
(3) Second, the series' share of any Profit Share paid to the
Advisors for any calendar quarter with respect to Units redeemed as of a date
other than the last day of such calendar quarter shall be allocated to such
Units based upon the Profit Share that was taken into account in determining the
Net Asset Value of such Units as of their redemption date, and the series' share
of any additional Profit Share paid to the Advisors for such calendar quarter
shall be allocated equally among the Units outstanding at the end of such
calendar quarter.
(4) Third, the series' share of the Capital Gain and Capital
Loss attributable to the activities of the Trading Partnership ("Trading Capital
Gain" or "Trading Capital Loss") shall be allocated as follows:
(A) There shall be established a tax account with respect to
each outstanding Unit of such series. The initial balance of such tax
account shall be the amount contributed to the Partnership for such Unit.
For each of the first 36 months of the Partnership's operations, the
balance of such tax account shall be reduced by the Unit's allocable share
of the series' share of the amount payable as of the end of such month by
the Partnership to the General Partner in respect of the reimbursement of
organizational and initial offering costs, as described in the Prospectus.
The adjustment to reflect the reimbursement of organizational and initial
offering costs shall be made prior to the allocations of Trading Capital
Gain and Trading Capital Loss (and shall be taken into account in making
such allocations). As of the end of each fiscal year:
(i) Each tax account shall be increased by the amount of
income allocated to such Unit pursuant to Sections 7(b)(2) and
7(b)(4)(C).
(ii) Each tax account shall be decreased by the amount of
expense or loss allocated to such Unit pursuant to Sections
7(b)(2), 7(b)(3) and 7(b)(4)(E) and by the amount of any
distributions paid out with respect to such Unit other than upon
redemption.
(iii) When a Unit is redeemed, the tax account
attributable to such Unit (determined after making all
allocations described in this Section 7(b)) shall be eliminated.
(B) Each Partner who redeems Units of a given series (including
Units redeemed as of the end of the last day of such fiscal year) shall be
allocated such series' share of Trading Capital Gain, if any, up to the
amount of the excess, if any, of the aggregate amount received in respect
of such Units (before taking into account any early redemption charges)
over the aggregate tax accounts for such Partner's redeemed Units
(determined after making the allocations described in Sections 7(b)(2) and
7(b)(3), but prior to making the allocations described in this Section
7(b)(4)(B)) allocable to such Units (a "Positive Excess"). In the event the
series' share of Trading Capital Gain is less than the aggregate amount of
Trading Capital Gain to be allocated pursuant to the first sentence of this
Section 7(b)(4)(B), the series' share of Trading Capital Gain shall be
allocated among all such redeeming Partners in the ratio which each such
Partner's Positive Excess bears to the aggregate Positive Excess of all
such Partners.
(C) The series' share of Trading Capital Gain remaining after
the allocation described in Section 7(b)(4)(B) shall be allocated among all
Partners who hold Units in such series outstanding as of the end of the
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applicable fiscal year (other than Units redeemed as of the end of the last
day of such fiscal year) equally among such Units.
(D) Each Partner who redeems Units of a given series (including
Units redeemed as of the end of the last day of such fiscal year) shall be
allocated such series' share of Trading Capital Loss, if any, up to the
excess of the aggregate tax accounts for such Partner's redeemed Units
(determined after making the allocations described in Sections 7(b)(2) and
7(b)(3), but prior to making the allocations described in this Section
7(b)(4)(D)) over the aggregate amount received in respect of such Units
(before taking into account any early redemption charges) (a "Negative
Excess"). In the event the series' share of Trading Capital Loss is less
than the aggregate amount of Trading Capital Loss to be allocated pursuant
to the first sentence of this Section 7(b)(4)(D), the series' share of
Trading Capital Loss shall be allocated among all such redeeming Partners
in the ratio that each such Partner's Negative Excess bears to the
aggregate Negative Excess of all such Partners.
(E) The series' share of Trading Capital Loss remaining after
the allocation described in Section 7(b)(4)(D) shall be allocated among all
Partners who hold Units in such series outstanding as of the end of the
applicable fiscal year (other than Units redeemed as of the end of the last
day of such fiscal year) equally among such Units.
(F) For purposes of this Section 7(b), "Capital Gain" or
"Capital Loss" shall mean gain or loss characterized as gain or loss from
the sale or exchange of a capital asset, by the Internal Revenue Code of
1986, as amended (the "Code"), including, but not limited to, gain or loss
required to be taken into account pursuant to Sections 988 and 1256
thereof.
(G) The foregoing allocations shall be made separately in
respect of each series of Units as if each such series constituted a
separate partnership, irrespective of whether the same Partner owns Units
of more than one series. Without limiting the foregoing, Limited Partners
who redeem their Unit(s) in one series and invest in another shall be
treated no differently than Limited Partners making their initial
investment in the latter series.
(5) The allocation of profit and loss for federal income tax
purposes set forth herein is intended to allocate taxable profit and loss among
Partners generally in the ratio and to the extent that profit and loss are
allocated to such Partners so as to eliminate, to the extent possible, any
disparity between a Partner's capital account and his tax account, consistent
with principles set forth in Section 704 of the Code, including, without
limitation, a "Qualified Income Offset."
(6) The allocations of profit and loss to the Partners in
respect of the Units shall not exceed the allocations permitted under Subchapter
K of the Code, as determined by the General Partner, whose determination shall
be binding. For purposes of this Section 7(b), unless specified to the contrary,
Units redeemed as of the end of any month shall be considered outstanding as of
the end of such month.
(c) Adjustments. The General Partner may adjust the allocations
set forth in Section 7(b), in the General Partner's discretion, if the General
Partner believes that doing so will achieve more equitable allocations or
allocations more consistent with the Code.
(d) Expenses. The General Partner has paid $239,100 incurred as
organizational and initial offering costs in connection with the initial public
offering of Units, for which the General Partner is being reimbursed by the
Partnership in equal monthly installments of $6,642 through October 31, 1997, as
described in the Prospectus; provided that in the event that the Partnership
dissolves at any time prior to the end of such 36-month period, any remaining
reimbursement obligation of the Partnership to the General Partner shall be
extinguished. The General Partner shall not be paid interest on any funds
advanced for organizational and initial offering costs.
The General Partner shall pay, without reimbursement, the
selling commissions and ongoing compensation relating to the offering of the
Units.
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The Partnership shall not itself pay any advisory fees due to
MLAM or any other manager providing cash management services to the Partnership.
All such fees shall be paid by Merrill Lynch Futures Inc., or, if Merrill Lynch
Futures Inc. does not do so, by the General Partner.
The Partnership shall bear all of any taxes applicable to it.
The Partnership shall pay to the General Partner Administrative
Fees as described in the Prospectus, and the General Partner shall pay all of
the Partnership's routine legal, accounting and administrative expenses. None of
the General Partner's "overhead" expenses incurred in connection with the
administration of the Partnership (including, but not limited to, salaries, rent
and travel expenses) will be charged to the Partnership. Any goods and services
provided to the Partnership by the General Partner shall be provided at rates
and terms at least as favorable as those which may be obtained from third
parties in arm's-length negotiations. All of the expenses which are for the
Partnership's account shall be billed directly to the Partnership. Appropriate
reserves may be created, accrued and charged against Net Assets for contingent
liabilities, if any, as of the date any such contingent liability becomes known
to the General Partner. Such reserves shall reduce Net Asset Value for all
purposes. Reserves may, in circumstances in which the General Partner believes
it to be appropriate to do so, be established in respect of one or more but less
than all series of Units.
(e) Limited Liability of Limited Partners. Each Unit, when
purchased in accordance with this Limited Partnership Agreement, shall, except
as otherwise provided by law, be fully paid and nonassessable. Any provisions of
this Limited Partnership Agreement to the contrary notwithstanding, except as
otherwise provided by law, no Limited Partner shall be liable for Partnership
obligations in excess of the capital contributed by such Limited Partner, plus
his share of undistributed profits and assets.
(f) Return of Capital Contributions. No Partner or subsequent
assignee shall have any right to demand the return of his capital contribution
or any profits added thereto, except through redeeming Units as provided in
Section 11 or upon dissolution of the Partnership, in each case as provided
herein. In no event shall a Partner or subsequent assignee be entitled to demand
or receive any property from the Partnership other than cash.
8. Management of the Partnership.
(a) General. The General Partner, to the exclusion of all
Limited Partners, shall control, conduct and manage the business of the
Partnership as well as of the Trading Partnership, and have full authority to
retain brokers, dealers, advisors, cash management advisors and other service
providers on their behalf. The General Partner shall execute various documents
on behalf of the Partnership and the Partners pursuant to powers of attorney and
supervise the liquidation of the Partnership if an event causing dissolution of
the Partnership occurs.
The General Partner may in furtherance of the business of the
Partnership cause the Partnership to buy, sell, hold or otherwise acquire or
dispose of commodities, futures contracts and options traded on exchanges or
otherwise, arbitrage positions, repurchase agreements, debt securities, deposit
accounts and similar instruments and other assets, as well as cause the
Partnership's trading to be limited to only certain of the foregoing
instruments. The General Partner is specifically authorized to enter into, on
behalf of the Partnership and the Trading Partnership, (A) the Investment
Advisory Contract with MLAM, whereby it is contemplated that MLAM will manage
the available assets of the Partnership and the Trading Partnership pursuant to
the investment parameters established by the General Partner (in its capacity as
respective general partner of each of the Partnership and Trading Partnership),
and the Customer Agreement with Merrill Lynch Futures Inc., which will receive
futures brokerage commissions from the Trading Partnership, and will pay MLAM's
cash management fees for services rendered to the Partnership and the Trading
Partnership as described in the Prospectus, and (B) "offset account"
arrangements as described in the Prospectus. Effective January 1, 1996, a
portion of the Partnership's brokerage commissions, in the amount of 0.25 of 1%
per annum of the Partnership's average month-end assets committed to trading,
has been recharacterized as Administrative Fees payable directly to the General
Partner -- the Partnership hereby agreeing to make such payments -- and,
accordingly, the Partnership's brokerage commissions has been correspondingly
reduced from 9.5% to 9.25% of the Partnership's average month-end assets
committed to trading.
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The General Partner may engage, and compensate on behalf of the
Partnership from funds of the Partnership, or agree to share profits and losses
with, such persons, firms or corporations, including (except as described in
this Limited Partnership Agreement) the General Partner and any affiliated
person or entity, as the General Partner in its sole judgment shall deem
advisable for the conduct and operation of the business of the Partnership;
provided, that no such arrangement shall allow brokerage commissions paid by the
Partnership in excess of the amount described in the Prospectus or as permitted
under applicable North American Securities Administrators Association, Inc.
Guidelines for the Registration of Commodity Pool Programs (the "NASAA
Guidelines") in effect as of the date of the Prospectus (i.e., 80% of the
published retail rate plus pit brokerage fees, or 14% annually -- including pit
brokerage and F/X Desk service fees -- of average Partnership Net Assets,
excluding Partnership Net Assets not directly related to trading activity),
whichever is higher. The General Partner is hereby specifically authorized to
enter into, on behalf of the Partnership and/or the Trading Partnership, the
Advisory Agreements, the Investment Advisory Contract, the Guarantee Agreement
and the Selling Agreement as referred to in the Prospectus. The Partnership's
brokerage commissions will not be increased during the period in which
redemption charges are in effect with respect to any series of Units, unless
such charges are waived or the series to which redemption charges are still
applicable are not subject to such increase. The Partnership's brokerage
commissions may not be increased without prior written notice to Limited
Partners within sufficient time for the exercise of their redemption rights.
Such notification shall contain a description of Limited Partners' voting and
redemption rights and a description of any material effect of such increases.
The Partnership's brokerage commissions and Administrative Fees, taken together,
may not be increased above an annual level of 9.5% of the average month-end
assets committed to trading without the unanimous consent of all Limited
Partners.
The General Partner may at any time and without the consent of
any Partners of the Partnership admit persons acquiring any series of Units as
Limited Partners of the Partnership.
The General Partner may take such other actions on behalf of the
Partnership as it deems necessary or desirable to manage the business of the
Partnership, including without limitation all actions in connection with the
future issuance of Units of different series.
In addition to any specific contract or agreement described
herein, the Partnership, either directly through the Trading Partnership or
together with the Trading Partnership, may enter into any other contracts or
agreements specifically described in or contemplated by the Prospectus without
any further act, approval or vote of the Limited Partners, notwithstanding any
other provisions of this Limited Partnership Agreement, the Act or any
applicable law, rule or regulations.
(b) Fiduciary Duties. The General Partner shall be under a
fiduciary duty to conduct the affairs of the Partnership in the best interests
of the Partnership. The Limited Partners will under no circumstances be deemed
to have contracted away the fiduciary obligations owed them by the General
Partner under the common law. The General Partner's fiduciary duty includes,
among other things, the safekeeping of all Partnership funds and assets and the
use thereof for the benefit of the Partnership. The General Partner shall at all
times act with integrity and good faith and exercise due diligence in all
activities relating to the conduct of the business of the Partnership and in
resolving conflicts of interest. The Partnership's brokerage arrangements shall
be non-exclusive, and the brokerage commissions paid by the Partnership shall be
competitive. The Partnership shall seek the best price and services available
for its commodity transactions.
(c) Loans; Investments. The Partnership shall make no loans to
any party, and the funds of the Partnership will not be commingled with the
funds of any other person or entity (deposit of funds with a commodity broker,
securities dealer, clearinghouse or forward dealer or entering into joint
ventures or partnerships shall not be deemed to constitute "commingling" for
these purposes). The General Partner shall make no loans to the Partnership
unless approved by the Limited Partners in accordance with Section 17(a) of this
Limited Partnership Agreement. If the General Partner makes a loan to the
Partnership, the General Partner shall not receive interest in excess of its
interest costs, nor may the General Partner receive interest in excess of the
amounts which would be charged the Partnership (without reference to the General
Partner's financial resources or guarantees) by unrelated banks on comparable
loans for the same purpose. The General Partner shall not receive "points" or
other financing charges or fees regardless of the amount. The Partnership shall
not invest in any debt instruments other than Treasury securities, securities
issued by U.S. government agencies or instrumentalities, other CFTC-authorized
investments and foreign sovereign debt instruments acquired in connection with
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the Trading Partnership's trading of foreign futures and options, and shall not
invest in any equity security (other than as a limited partner in the Trading
Partnership) without prior notice to all Limited Partners.
(d) Certain Conflicts of Interest Prohibited. No person or
entity may receive, directly or indirectly, any advisory, management or
incentive fees, or any profit-sharing allocation from joint ventures,
partnerships or similar arrangements in which the Partnership participates, for
investment advice or management, who shares or participates in any commodity
brokerage commissions; no broker may pay, directly or indirectly, rebates or
give-ups to any trading advisor or manager or to the General Partner or any of
their respective affiliates; and such prohibitions may not be circumvented by
any reciprocal business arrangements. No trading advisor for the Partnership
shall be affiliated with Merrill Lynch Futures Inc., the General Partner or any
of their respective affiliates (this prohibition shall not preclude (i) the
General Partner retaining a manager for which the General Partner provides
administrative services or (ii) MLAM from providing cash management services to
the Partnership, provided that MLAM's fees are paid either by Merrill Lynch
Futures Inc. or by the General Partner, and that MLAM does not execute
transactions for the account of either the Partnership or the Trading
Partnership through any Merrill Lynch affiliate).
(e) Certain Contracts. The maximum period covered by any
contract entered into by the Partnership, except for the various provisions of
the Selling Agreement which survive the closing of the sale of the Units, shall
not exceed one year. Any agreements between the Partnership and the General
Partner or any affiliate of the General Partner shall be terminable by the
Partnership upon no more than 60 days' written notice. All sales of Units in the
United States will be conducted by registered brokers.
(f) Trading Advisors. All trading advisors for the Partnership
must meet the NASAA Guidelines' minimum experience requirement.
The General Partner shall reimburse the Partnership for any
advisory or other fees (including Profit Shares) paid by the Partnership to any
trading advisor over the course of any fiscal year, to the extent that such fees
exceed the 6% annual management fees and the 15% quarterly incentive fees
(calculating New Trading Profit, as defined in the Prospectus, after all
expenses and without including interest income or any yield enhancement return)
contemplated by the NASAA Guidelines during such year. Any such reimbursement
shall be made on a present value basis, fully compensating the Partnership for
having made payments at any time during the year which would not otherwise have
been due from it. The General Partner shall disclose any such reimbursement in
the next Annual Report delivered to Limited Partners.
(g) Other Activities. The General Partner is engaged, and may
in the future engage, in other business activities and shall not be required to
refrain from any other activity nor forego any profits from any such activity,
whether or not in competition with the Partnership. Limited Partners may
similarly engage in any such other business activities. The General Partner
shall devote to the Partnership such time as the General Partner may deem
advisable to conduct the Partnership's business and affairs.
(h) Tax Matters Partner. The General Partner is hereby
authorized to perform all other duties imposed by Sections 6221 through 6232 of
the Code on the General Partner as the "tax matters partner" of the Partnership.
(i) The Trading Partnership. The General Partner shall not
permit the Partnership to undertake any debts or obligations other than as set
forth herein, including without limitation pursuant to Section 16(e). The
General Partner further covenants and agrees that as general partner of the
Trading Partnership, the General Partner will not permit the Trading Partnership
(A) to engage in any activities or incur any obligations except in respect of
the Trading Partnership's speculative futures and forward trading on behalf of
the Partnership or (B) to enter into any brokerage, F/X or other agreement or
undertaking, unless all other parties to such agreement explicitly acknowledge
and agree that (i) they will in no event seek to assert, other than pursuant to
and to the extent of the Partnership's undertaking set forth in Section 16(e),
that the Partnership or any of its assets is in any respects subject to any
debts of or claims against the Trading Partnership, either through "piercing the
corporate veil," "substantive consolidation" or any other theory, and (ii) they
will take no action and institute no action or proceeding seeking to adjudicate
the Trading Partnership a bankrupt or insolvent, or seeking liquidation, winding
up, reorganization, arrangement, adjustment, protection, relief, or composition
of it or its debts under any law relating to bankruptcy, insolvency or
reorganization or relief of debtors, or seeking the entry of an order for relief
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or the appointment of a receiver, trustee, custodian or other similar official
for the Trading Partnership or for any substantial part of its property.
The General Partner shall ensure that (i) the Partnership is at
all times the sole limited partner of the Trading Partnership and (ii) the
General Partner is at all times the sole general partner of the Trading
Partnership and at all times controls the Trading Partnership, by virtue of the
Partnership's equity ownership of the Trading Partnership and the General
Partner's serving as sole general partner of both the Partnership and the
Trading Partnership -- the intent of the parties being that the Trading
Partnership should function solely as a conduit for the Partnership's own
trading activities and not as any form of investment by the Partnership.
The General Partner, as general partner of the Trading
Partnership, will cause the Trading Partnership to comply with all provisions of
the NASAA Guidelines.
The General Partner is, by way of greater certainty and not by
way of limitation, specifically authorized as general partner of the Partnership
and the Trading Partnership to retain the General Partner's affiliate, MLAM, to
provide cash management services to the Partnership and the Trading Partnership
and to instruct and authorize Merrill Lynch Futures Inc. to pay the cash
management fees due to MLAM from the futures brokerage commissions received by
Merrill Lynch Futures Inc. from the Trading Partnership. In the event that
Merrill Lynch Futures Inc. does not pay MLAM's fees, the General Partner will do
so without reimbursement from either the Partnership or the Trading Partnership.
(j) "Pyramiding" Prohibited. The Partnership is prohibited from
employing the trading technique commonly known as "pyramiding," and will not
permit the Trading Partnership to employ any such technique. A trading manager
or advisor of the Partnership taking into account the Partnership's open trade
equity on existing positions in determining generally whether to acquire
additional commodity positions on behalf of the Partnership will not be
considered to constitute "pyramiding."
9. Audits and Reports to Limited Partners.
The Partnership books shall be audited annually by an
independent certified public accountant. The Partnership will use its best
efforts to cause each Limited Partner to receive (i) within ninety (90), but in
no event later than one hundred twenty (120), days after the close of each
fiscal year certified financial statements of the Partnership for the fiscal
year then ended, (ii) within ninety (90) days of the end of each fiscal year
(but in no event later than March 15 of each year) such tax information relating
to the Partnership as is necessary for a Limited Partner to complete his federal
income tax return and (iii) such other annual and monthly information as the
Commodity Futures Trading Commission may by regulation require. The General
Partner shall include in the annual reports sent to Limited Partners an
approximate estimate (calculated as accurately as may be reasonably practicable)
of the round-turn equivalent brokerage commission rate paid by the Trading
Partnership during the preceding year. Limited Partners or their duly authorized
representatives may inspect the Partnership books and records for any purpose
reasonably related to such Limited Partner's interest as a limited partner in
the Partnership during normal business hours upon reasonable written notice to
the General Partner. Copies of such records may be made upon payment of
reasonable reproduction costs for any purpose reasonably related to such Limited
Partner's interest as a limited partner in the Partnership and, upon request,
shall be sent to any Limited Partner upon payment of reasonable reproduction and
mailing costs.
The General Partner shall calculate the approximate Net Asset
Value per Unit of each series on a daily basis and furnish such information upon
request to any Limited Partner.
The General Partner will send written notice to each Limited
Partner within seven (7) days of any decline in the aggregate Net Asset Value
attributable to any series of Units held by such Limited Partner or in the Net
Asset Value per Unit of any such series to 50% or less of such Net Asset Value
as of the previous month-end. Any such notice shall contain a description of
Limited Partners' voting rights.
The General Partner shall maintain and preserve all Partnership
records for a period of not less than six (6) years.
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Not by way of qualifying the General Partner's obligations under
Section 8(a) to ensure that the Partnership's brokerage commissions are
competitive, but rather as a means of providing additional information to the
Limited Partners, the General Partner will, with the assistance of the
Partnership's commodity broker, make an annual review of the commodity brokerage
arrangements applicable to the Partnership (including the commodity brokerage
arrangements applicable to any subsidiary entity, such as the Trading
Partnership, through which the Partnership trades). In connection with such
review, the General Partner will ascertain, to the extent practicable, the
commodity brokerage rates charged to other major commodity pools whose trading
and operations are, in the opinion of the General Partner, comparable to those
of the Partnership in order to assess whether the rates charged the Partnership
are competitive in light of the services it receives. If, as a result of such
review, the General Partner determines that such rates are not competitive in
light of the services provided to the Partnership, the General Partner will
notify the Limited Partners, setting forth the rates charged to the Partnership
and several funds which are, in the General Partner's opinion, comparable to the
Partnership. The General Partner shall also conduct a similar review of the
Partnership's forward trading arrangements.
In addition to the undertakings in the preceding paragraph, the
Partnership will seek the best price and services available in its commodity
brokerage transactions. All brokerage transactions will be effected at
competitive rates. Brokerage fees may not exceed the cap in Section 8(a). The
General Partner will annually review rates to guarantee that the criteria of
this paragraph is followed. The General Partner may not rely solely on the rates
charged by other major commodity pools to make its determinations.
10. Assignability of Units.
Each Limited Partner expressly agrees that he will not assign,
transfer or dispose of, by gift or otherwise, any of his Units or all or any
part of his right, title and interest in the capital or profits of the
Partnership in violation of any applicable federal or state securities laws or
without giving written notice to the General Partner. No assignment, transfer or
disposition by an assignee of Units or of all or any part of his right, title
and interest in the capital or profits of the Partnership shall be effective
against the Partnership or the General Partner until the General Partner
receives written notice of the assignment; and the General Partner shall not be
required to give any assignee any rights hereunder prior to receipt of such
notice. The General Partner may, in its sole discretion, waive any such notice.
No such assignee, except with the consent of the General Partner, which consent
may be withheld in its sole and absolute discretion, may become a substituted
Limited Partner, nor will the estate or any beneficiary of a deceased Limited
Partner or assignee have any right to withdraw or receive assets from the
Partnership except by redemption as provided in Section 11 or upon dissolution
of the Partnership. Each Limited Partner agrees that with the consent of the
General Partner any assignee may become a substituted Limited Partner without
need of any further act or approval of any Limited Partner. If the General
Partner withholds consent, an assignee shall not become a substituted Limited
Partner, and shall not have any of the rights of a Limited Partner, except that
the assignee shall be entitled to receive that share of capital and profits and
shall have that right of redemption and those rights upon dissolution to which
his assignor would otherwise have been entitled. No assignment, transfer or
disposition of Units shall be effective against the Partnership or the General
Partner until the first day of the month succeeding the month in which the
General Partner receives notice of such assignment, transfer or disposition.
11. Redemptions; Distributions.
A Limited Partner, the General Partner to the extent that it
owns Units or any assignee of Units of whom the General Partner has received
written notice as described above, may redeem all or any of his Units (a
"redemption"), effective as of the close of business (as determined by the
General Partner) on the last business day of any month, provided, that (i) all
liabilities, contingent or otherwise, of the Partnership (including the
Partnership's allocable share of the liabilities, contingent or otherwise, of
any entities, such as the Trading Partnership, in which the Partnership
invests), except any liability to Partners on account of their capital
contributions, have been paid or there remains property of the Partnership
sufficient to pay them and (ii) the General Partner shall have timely received a
request for redemption.
If a Limited Partner redeems Units during or as of the end of a
calendar quarter, and subscribes as of the date of redemption to the new series
of Units to be issued immediately following such quarter, any otherwise
applicable 3% charge is waived to the extent that the redemption proceeds are so
reinvested. The Units acquired upon reinvestment are, however, subject to a 3%
redemption charge until the end of the twelfth full month after their issuance.
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Financial Consultants receive no initial production credits on
new Units purchased with the proceeds of Units redeemed during or as of the end
of the preceding quarter. However, the 2% ongoing production credits, described
above, will begin, to the extent that the redemption proceeds are reinvested, in
the thirteenth month after the sale of the Units redeemed, not in the thirteenth
month after reinvestment.
Units redeemed on or before the end of the twelfth full month
after they are issued are subject to redemption charges of 3% of the Net Asset
Value at which they are redeemed. Such charges shall be paid to the General
Partner.
Redemption charges shall not apply to distributions.
Requests for redemption must be received by the General Partner
at least ten (10) calendar days, or such lesser period as shall be acceptable to
the General Partner, in advance of the requested effective date of redemption.
Such requests need not be in writing so long as the Limited Partner has a
Merrill Lynch customer securities account. If a redeeming Limited Partner no
longer has a Merrill Lynch customer securities account, requests for redemption
must be submitted in writing and with the signature guaranteed (not notarized;
guaranteed) by a member firm of the National Association of Securities Dealers,
Inc.
The General Partner may waive any of the foregoing charges or
restrictions on redemptions in the General Partner's discretion, and may declare
additional redemption dates upon notice to the Limited Partners as well as to
those assignees of whom the General Partner has received notice as described
above.
Payment will be made within ten (10) business days after the
month-end of redemption, except that under special circumstances, including, but
not limited to, inability to liquidate commodity positions as of a redemption
date or default or delay in payments due the Trading Partnership or the
Partnership from commodity brokers, banks or other persons or entities, the
Partnership may in turn delay payment to Partners or assignees requesting
redemption of their Units of the proportionate part of the Net Asset Value of
such Units equal to the proportionate part of the Partnership's aggregate Net
Asset Value allocable to all series of Units being redeemed, and represented by
the sums which are the subject of such default or delay.
The General Partner may require a Limited Partner to redeem all
or a portion of such Partner's Units if the General Partner considers doing so
to be desirable for the protection of the Partnership, and will do so to the
extent the General Partner deems appropriate or necessary to prevent the
Partnership or any series of Units considered individually from being deemed to
hold "plan assets" within the meaning of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), or the Code, with respect to any "employee
benefit plan" as defined in and subject to ERISA or with respect to any "plan"
as defined in Section 4975 of the Code.
The General Partner may, in its discretion, establish "Special
Redemption Dates" in respect of one or more series of Units as a means of
implementing "stop loss" or similar policies. "Special Redemption Dates" may
require the suspension of all trading and the liquidation of all open positions
held with respect to such series.
The General Partner may -- but shall be under no obligation
whatsoever (and does not presently intend) to -- make any distributions in
respect of the Units. Any such distributions would be made pro rata to all
outstanding series of Units and would not reduce the $100 minimum Net Asset
Value per Unit guaranteed to investors as of the Principal Assurance Date for
their series of Units, as described in the Prospectus.
12. Offering of Units.
The General Partner on behalf of the Partnership shall (i) cause
to be filed such Prospectus Supplements and amended Registration Statements as
the General Partner may deem advisable, with the Securities and Exchange
Commission for the registration and public offering of Units, (ii) use its best
efforts to maintain the qualification of the Units for sale under the securities
laws of such States of the United States or other jurisdictions as the General
Partner shall deem
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advisable and (iii) take such action with respect to the matters described in
(i) and (ii) as the General Partner shall deem advisable or necessary.
The General Partner shall not accept any subscriptions for Units
if doing so would cause the Partnership, or any series of Units considered
individually, to have "plan assets" status under ERISA. If an ERISA subscriber
has its subscription reduced in order to avoid "plan assets" status, such
subscriber shall be entitled to rescind its subscription in its entirety even
though subscriptions are otherwise irrevocable.
13. Additional Offerings.
The General Partner may, in its discretion, continue the ongoing
offering of Units contemplated by the Prospectus as well as make additional
public or private offerings of Units, provided that doing so does not dilute
existing Limited Partners' economic interest in the Partnership. No Limited
Partner shall have any preemptive, preferential or other rights with respect to
the issuance or sale of any additional Units, other than as set forth in the
preceding sentence.
The General Partner intends to offer series of Units for sale as
of the beginning of each calendar quarter, subject to the minimum investment and
minimum capitalization requirements set forth in the Prospectus; provided that,
unless otherwise expressly required by law, the assets attributable to each such
series shall under no circumstances be subject to being used in any respect to
satisfy or discharge any debt or obligation of any other such series.
The General Partner may terminate (subject to the General
Partner's discretion to reopen) but not suspend the offering of Units.
Each additional series of Units issued hereunder must comply
with the NASAA Guidelines in the same manner and to the same extent as the
initial series of Units issued hereunder.
14. Special Power of Attorney.
Each Limited Partner by his execution of this Limited
Partnership Agreement does hereby irrevocably constitute and appoint the General
Partner and each officer of the General Partner, with power of substitution, as
his true and lawful attorney-in-fact, in his name, place and stead, to execute,
acknowledge, swear to (and deliver as may be appropriate) on his behalf and file
and record in the appropriate public offices and publish (as may in the
reasonable judgment of the General Partner be required by law): (i) this Limited
Partnership Agreement, including any amendments and/or restatements hereto duly
adopted as provided herein; (ii) certificates of limited partnership in various
jurisdictions, and amendments and/or restatements thereto, and of assumed name
or of doing business under a fictitious name with respect to the Partnership;
(iii) all conveyances and other instruments which the General Partner deems
appropriate to qualify or continue the Partnership in the State of Delaware and
the jurisdictions in which the Partnership may conduct business, or which may be
required to be filed by the Partnership or the Partners under the laws of any
jurisdiction or under any amendments or successor statutes to the Act, to
reflect the dissolution or termination of the Partnership or the Partnership
being governed by any amendments or successor statutes to the Act or to
reorganize or refile the Partnership in a different jurisdiction; and (iv) to
file, prosecute, defend, settle or compromise litigation, claims or arbitrations
on behalf of the Partnership. The Power of Attorney granted herein shall be
irrevocable, deemed to be a power coupled with an interest (including, without
limitation, the interest of the other Partners in the General Partner being able
to rely on the General Partner's authority to act as contemplated by this
Section 14) and shall survive and shall not be affected by the subsequent
incapacity, disability or death of a Limited Partner.
15. Withdrawal of a Partner.
The Partnership shall be dissolved upon the withdrawal,
dissolution, admitted or court-decreed insolvency or removal of the General
Partner, or any other event that causes the General Partner to cease to be a
general partner under the Act, unless the Partnership is continued pursuant to
the terms of Section 4. In addition, the General Partner may withdraw from the
Partnership, without any breach of this Limited Partnership Agreement, at any
time upon one hundred and twenty (120) days' written notice by first class mail,
postage prepaid, to each Limited Partner and assignee of whom
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the General Partner has notice. If the General Partner withdraws as general
partner and the Partnership's business is continued, the withdrawing General
Partner shall pay all expenses incurred as a result of its withdrawal.
The General Partner may not assign its general partner interest
or its obligation to direct the management or trading of the Partnership's or
the Trading Partnership's assets without the consent of each Limited Partner.
The General Partner will notify all Limited Partners of any change in the
principals of the General Partner.
The death, incompetency, withdrawal, insolvency or dissolution
of a Limited Partner or any other event that causes a Limited Partner to cease
to be a limited partner of the Partnership shall not terminate or dissolve the
Partnership, and a Limited Partner, his estate, custodian or personal
representative shall have no right to redeem, receive proceeds from or value
such Limited Partner's interest in the Partnership except as provided in Section
11 hereof and upon dissolution of the Partnership. Each Limited Partner
expressly agrees that in the event of his death, he waives on behalf of himself
and his estate, and directs the legal representatives of his estate and any
person interested therein to waive, the furnishing of any inventory, accounting
or appraisal of the assets of the Partnership and any right to an audit or
examination of the books of the Partnership. Nothing in this Section 15 shall,
however, waive any right given elsewhere in this Limited Partnership Agreement
for a Limited Partner to be informed of the Net Asset Value of his Units, to
receive periodic reports, audited financial statements and other information
from the General Partner or the Partnership or to redeem or transfer Units.
16. Standard of Liability; Indemnification.
(a) Standard of Liability for the General Partner. The General
Partner and its Affiliates, as defined below, shall have no liability to the
Partnership or to any Partner for any loss suffered by the Partnership which
arises out of any action or inaction of the General Partner or its Affiliates if
the General Partner or such Affiliates, in good faith, determined that such
course of conduct was in the best interests of the Partnership, and such course
of conduct did not constitute negligence or misconduct by the General Partner or
its Affiliates.
(b) Indemnification of the General Partner by the Partnership.
To the fullest extent permitted by law, subject to this Section 16, the General
Partner and its Affiliates, shall be indemnified by the Partnership against any
losses, judgments, liabilities, expenses and amounts paid in settlement of any
claims sustained by them in connection with the Partnership; provided that such
claims were not the result of negligence or misconduct on the part of the
General Partner or its Affiliates, and the General Partner or such Affiliates,
in good faith, determined that such conduct was in the best interests of the
Partnership; and provided further that Affiliates of the General Partner shall
be entitled to indemnification only for losses incurred by such Affiliates in
performing the duties of the General Partner and acting wholly within the scope
of the authority of the General Partner.
Notwithstanding anything to the contrary contained in the
preceding two paragraphs, the General Partner and its Affiliates and any persons
acting as selling agent for the Units shall not be indemnified for any losses,
liabilities or expenses arising from or out of an alleged violation of federal
or state securities laws unless (1) there has been a successful adjudication on
the merits of each count involving alleged securities law violations as to the
particular indemnitee and the court approves indemnification of the litigation
costs, or (2) such claims have been dismissed with prejudice on the merits by a
court of competent jurisdiction as to the particular indemnitee and the court
approves indemnification of the litigation costs, or (3) a court of competent
jurisdiction approves a settlement of the claims against a particular indemnitee
and finds that indemnification of the settlement and related costs should be
made.
In any claim for indemnification for federal or state securities
law violations, the party seeking indemnification shall place before the court
the position of the Securities and Exchange Commission, the Massachusetts
Securities Division, the Pennsylvania Securities Commission, the Tennessee
Securities Division, the Texas Securities Board, and any other state or
applicable regulatory authority with respect to the issue of indemnification for
securities law violations.
The Partnership shall not incur the cost of that portion of any
insurance which insures any party against any liability the indemnification of
which is herein prohibited.
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For the purposes of this Section 16, the term "Affiliates" shall
mean any person acting on behalf of or performing services on behalf of the
Partnership who: (1) directly or indirectly controls, is controlled by, or is
under common control with the General Partner; or (2) owns or controls 10% or
more of the outstanding voting securities of the General Partner; or (3) is an
officer or director of the General Partner; or (4) if the General Partner is an
officer, director, partner or trustee, is any entity for which the General
Partner acts in any such capacity.
Advances from Partnership funds to the General Partner and its
Affiliates for legal expenses and other costs incurred as a result of any legal
action initiated against the General Partner by a Limited Partner are
prohibited.
Advances from Partnership funds to the General Partner and its
Affiliates for legal expenses and other costs incurred as a result of a legal
action will be made only if the following three conditions are satisfied: (1)
the legal action relates to the performance of duties or services by the General
Partner or its Affiliates on behalf of the Partnership; (2) the legal action is
initiated by a third party who is not a Limited Partner; and (3) the General
Partner or its Affiliates undertake to repay the advanced funds, with interest
from the initial date of such advance, to the Partnership in cases in which they
would not be entitled to indemnification under this Section 16.
In no event shall any indemnity or exculpation provided for
herein be more favorable to the General Partner or any Affiliate than that
contemplated by the NASAA Guidelines as in effect on the date of this Limited
Partnership Agreement.
In no event shall any indemnification permitted by this Section
16(b) be made by the Partnership unless all provisions of this Section for the
payment of indemnification have been complied with in all respects. Furthermore,
it shall be a precondition of any such indemnification that the Partnership
receive a determination of qualified independent legal counsel in a written
opinion that the party which seeks to be indemnified hereunder has met the
applicable standard of conduct set forth herein. Receipt of any such opinion
shall not, however, in itself, entitle any such party to indemnification unless
indemnification is otherwise proper hereunder. Any indemnification payable by
the Partnership hereunder shall be made only as provided in the specific case.
In no event shall any indemnification obligations of the
Partnership under this Section 16(b) subject a Limited Partner to any liability
in excess of that contemplated by Section 7(e).
(c) Indemnification of the Partnership by the Partners. In the
event that the Partnership is made a party to any claim, dispute or litigation
or otherwise incurs any loss or expense as a result of or in connection with any
Partner's activities, obligations or liabilities unrelated to the Partnership's
business, such Partner shall indemnify and reimburse the Partnership for all
loss or expense incurred, including reasonable attorneys' fees.
The General Partner shall indemnify and hold the Partnership
harmless from all loss or expense which the Partnership may incur (including,
without limitation, any indemnity payments) as a result of (i) the differences
between MLAM's standard of liability under the Investment Advisory Contract and
MLIP's standard of liability as set forth herein or (ii) the differences between
Merrill Lynch, Pierce, Fenner & Smith Incorporated's standard of liability under
the Custody Agreement and MLIP's standard of liability as set forth herein.
(d) Series Default Indemnification of the Partners by the
General Partner. In addition, and not by way of limitation of the provisions of
Section 13, the General Partner shall indemnify and hold harmless each Limited
Partner against all loss or expense incurred by the Units of any series held by
such Limited Partner, which loss or expense is properly attributable to trading
losses or expenses allocable to any other series of Units.
(e) Undertaking to Make Additional Payments to the Trading
Partnership. The Partnership hereby agrees and undertakes that it will pay to
the Trading Partnership or the Trading Partnership's estate, or to the Trading
Partnership's brokers and dealers, an amount equal to the excess, if any,
between the amount which the Trading Partnership commits, at the direction of
the General Partner and on behalf of the Partnership, to the Trading Advisors
for trading and the amount of assets invested in the Trading Partnership by the
Partnership. In the event that the Partnership is obligated to make any payments
pursuant to this undertaking, it shall allocate such payments among the
different series of Units pro
A-15
<PAGE>
rata based on the respective excesses between the respective amounts committed
to trading in respect of each such series by the Trading Partnership and the
amount of assets invested in the Trading Partnership and attributable to such
series. The General Partner is authorized and directed to provide in the Trading
Partnership's brokerage and dealer agreements that the amounts agreed to be paid
to the Partnership hereunder may be debited directly from the Partnership's
account without need of giving any advance notice of any such debit to the
Partnership.
17. Amendments; Meetings.
(a) Amendments with Consent of the General Partner. If at any
time during the term of the Partnership the General Partner shall deem it
necessary or desirable to amend this Limited Partnership Agreement, the General
Partner may proceed to do so, provided that such amendment shall be effective
only if embodied in an instrument approved by the General Partner and, subject
to the immediately following sentence, by the holders of Units representing more
than fifty percent (50%) of the aggregate number of Units then owned by the
Limited Partners. In any such vote, Units of different series shall vote
separately, and the approving majority vote of each such series must be obtained
for approval unless a series is not adversely affected by such amendment, in
which case such series shall not have the right to vote with respect to such
amendment. No meeting procedure or specified notice period is required in the
case of amendments made with the consent of the General Partner, mere receipt of
an adequate number of unrevoked written consents being sufficient. The General
Partner may amend this Limited Partnership Agreement without the consent of the
Limited Partners in order (i) to clarify any clerical inaccuracy or ambiguity or
reconcile any inconsistency (including any inconsistency between this Limited
Partnership Agreement and the Prospectus), (ii) to effect the intent of the
allocations proposed herein to the maximum extent possible in the event of a
change in the Code or the interpretations thereof affecting such allocations,
(iii) to attempt to ensure that the Partnership is not treated as an association
taxable as a corporation for federal income tax purposes, (iv) to qualify or
maintain the qualification of the Partnership as a limited partnership in any
jurisdiction, (v) to delete or add any provision of or to this Limited
Partnership Agreement required to be deleted or added by the Staff of the
Commodity Futures Trading Commission, the Securities and Exchange Commission or
any other federal agency or any state "Blue Sky" official or similar official or
in order to opt to be governed by any amendment or successor statute to the Act,
(vi) to better insulate the different series of Units from the risk of paying
the debts of any other such series, (vii) to make any amendment to this Limited
Partnership Agreement which the General Partner deems advisable provided that
such amendment is not adverse to the Limited Partners, or that is required by
law, (viii) to make any amendment that is appropriate or necessary, in the
opinion of the General Partner, to prevent the Partnership or the General
Partner or its directors, officers or controlling persons from in any manner
being subjected to the provisions of the Investment Company Act of 1940, as
amended, and (ix) to make any amendment that is appropriate or necessary, in the
opinion of the General Partner, to avoid causing the assets of the Partnership,
or of any series of Units considered individually, from constituting assets of
any "employee benefit plan" as defined in and subject to ERISA, or a "plan" as
defined in and subject to Section 4975 of the Code.
(b) Amendments and Actions without Consent of the General
Partner. In any vote called by the General Partner or by a Limited Partner
pursuant to Section 17(c), upon the affirmative vote (which may be in person or
by proxy) of the holders of Units representing more than fifty percent (50%) of
the aggregate number of Units of each series then owned by Limited Partners, the
following actions may be taken, irrespective of whether the General Partner
concurs: (i) this Limited Partnership Agreement may be amended, provided,
however, that approval of all Limited Partners holding Units of any series shall
be required in the case of amendments changing or altering this Section 17,
extending the term of the Partnership, or materially changing the Partnership's
basic investment policies or structure; in addition, reduction of the capital
account of any Limited Partner or assignee or modification of the percentage of
profits, losses or distributions to which a Limited Partner or an assignee is
entitled hereunder shall not be effected by any amendment or supplement to this
Limited Partnership Agreement without such Limited Partner's or assignee's
written consent; (ii) the Partnership may be dissolved; (iii) the General
Partner may be removed and, as of the time of such removal, the General Partner
may be replaced; (iv) a new general partner or general partners may be elected
if the General Partner withdraws from the Partnership, provided that such
election takes place prior to or as of the time the General Partner withdraws;
(v) the sale of all or substantially all of the assets of the Partnership may be
approved; and (vi) any contract with the General Partner or any affiliate
thereof may be disapproved of and, as a result, terminated upon sixty (60) days'
notice. In any such vote, Units of different series shall vote separately, and
the approving majority vote of each such series must be obtained for
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<PAGE>
approval, except that in the case of clause (i) above, the approval of a series
of Units need not be obtained if such series is not adversely affected by the
proposed amendment to this Limited Partnership Agreement.
(c) Meetings; Other. Any Limited Partner, upon written request
addressed to the General Partner, shall be entitled to obtain from the General
Partner, upon payment, in advance, of reasonable reproduction and mailing costs,
a list of the names and addresses of record of all Limited Partners and the
number of Units of each series held by each (which shall be mailed by the
General Partner to the Limited Partner within ten (10) days of the receipt of
the request). Upon receipt of a written proposal, signed by Limited Partners
owning Units representing at least ten percent (10%) of the aggregate number of
Units then owned by Limited Partners of any series, that a meeting of the
Partnership (or of any or all series of Units) be called to vote upon any matter
upon which the Limited Partners may vote pursuant to this Limited Partnership
Agreement, the General Partner shall, by written notice to each Limited Partner
of record mailed within fifteen (15) days after such receipt, call a meeting of
the Partnership (or of such series of Units). Such meeting shall be held at
least thirty (30) but not more than sixty (60) days after the mailing of such
notice, and such notice shall specify the date of, a reasonable place and time
for, and the purpose of such meeting.
The General Partner may not restrict the voting rights of
Limited Partners except as set forth herein.
In the event that the General Partner or the Limited Partners
vote to amend this Limited Partnership Agreement in any material respect, the
amendment will not become effective prior to all Limited Partners having an
opportunity to redeem their Units.
18. Governing Law.
THE VALIDITY AND CONSTRUCTION OF THIS LIMITED PARTNERSHIP
AGREEMENT SHALL BE DETERMINED AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE,
INCLUDING SPECIFICALLY THE ACT (WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAW); PROVIDED, HOWEVER, CAUSES OF ACTION FOR VIOLATIONS OF FEDERAL OR STATE
SECURITIES LAW SHALL NOT BE GOVERNED BY THIS SECTION 18.
19. Miscellaneous.
(a) Compliance with the Investment Advisers Act of 1940. No
provision of this Limited Partnership Agreement shall be deemed, nor does any
such provision purport, to waive compliance with the Investment Advisers Act of
1940, as amended.
(b) Notices. All notices under this Limited Partnership
Agreement shall be in writing and shall be effective upon personal delivery, or
if sent by first class mail, postage prepaid, addressed to the last known
address of the party to whom such notice is to be given, upon the deposit of
such notice in the United States mails.
(c) Binding Effect. This Limited Partnership Agreement shall
inure to and be binding upon all of the parties, their successors and assigns,
custodians, estates, heirs and personal representatives. For purposes of
determining the rights of any Partner or assignee hereunder, the Partnership and
the General Partner may rely upon the Partnership records as to who are Partners
and assignees, and all Partners and assignees agree that their rights shall be
determined and they shall be bound thereby.
(d) Captions. Captions in no way define, limit, extend or
describe the scope of this Limited Partnership Agreement nor the effect of any
of its provisions. Any reference to "persons" in this Limited Partnership
Agreement shall also be deemed to include entities, unless the context otherwise
requires.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Limited Partnership Agreement as of the day and year first above written.
GENERAL PARTNER: LIMITED PARTNERS:
MERRILL LYNCH INVESTMENT PARTNERS INC. All Limited Partners now and
hereafter admitted as limited
partners of the Partnership pursuant
to Powers of Attorney now or
hereafter executed in favor of, and
delivered to, the General Partner.
By /s/ John R. Frawley, Jr.
---------------------------------
John R. Frawley, Jr.
President and Chief
Executive Officer
MERRILL LYNCH INVESTMENT PARTNERS INC.
By /s/ John R. Frawley, Jr.
----------------------------------
John R. Frawley, Jr.
President and Chief
Executive Officer
A-18
<PAGE>
EXHIBIT B
ML PRINCIPAL PROTECTION L.P.
AMENDED
FORM OF
GUARANTEE AGREEMENT
GUARANTEE AGREEMENT made as of the ___ day of October, 1996 between
MERRILL LYNCH & CO., INC., a Delaware corporation ("ML&Co."), and ML PRINCIPAL
PROTECTION L.P., a Delaware limited partnership (the "Partnership").
1. ML&Co. shall make, on December 31, 2001 and as of each calendar
quarter-end thereafter (the "Principal Assurance Dates") (subject to adjustment
by up to one month in the discretion of MERRILL LYNCH INVESTMENT PARTNERS INC.
("MLIP")), sufficient payments to the Partnership so that the Net Asset Value
per Unit of each series of Units, as of the Principal Assurance Date for such
series, which is available for distribut ion to Limited Partners (after
adjustment for all liabilities of the Partnership to third parties) will be at
least $100, as of such date. Such $100 minimum Net Asset Value per Unit shall
not be reduced by any distributions made by the Partnership in respect of the
series of Units in question from the date of issuance of such Units through the
Principal Assurance Date for such Units.
2. This Guarantee Agreement -- which supports a corresponding
obligation of MLIP, an indirect wholly-owned subsidiary of ML&Co. -- will remain
in effect unless the Partnership is dissolved or MLIP is removed as the general
partner of the Partnership, in each case with the approving vote of the Limited
Partners -- upon either of which events this Guarantee Agreement will terminate
without any payment obligation on behalf of ML&Co.
3. ML&Co. acknowledges and agrees that its risk under this Guarantee
Agreement is in no respect mitigated by the fact that the Partnership will not
trade directly, but rather through a wholly-owned subsidiary limited
partnership, ML PRINCIPAL PROTECTION TRADING L.P. (the "Trading Partnership"),
because the Partnership will commit to pay losses and expenses incurred by the
Trading Partnership in amounts in excess of the capital invested in the Trading
Partnership by the Partnership.
4. ML&Co. agrees that in the event it is required to make one or
more payments under this Guarantee Agreement, any such payment will be made
without recourse to the Partnership, the Trading Partnership, MLIP, Merrill
Lynch Futures Inc. or any Limited Partner.
5. ML&Co. shall be obligated to make payments under this Guarantee
Agreement only on the Principal Assurance Date for each series and only in
respect of Units of such series outstanding on such date (including Units then
being redeemed).
6. This Guarantee Agreement is an agreement between ML&Co. and the
Partnership; investors in the Partnership are in no respects parties hereto.
7. This Guarantee Agreement will terminate as to each series of
Units on the Principal Assurance Date for such series, upon payment by ML&Co. of
any amounts due hereunder at such time. No series, except as of the Principal
Assurance Date for such series, shall have any rights hereunder.
8. This Guarantee Agreement shall inure to the benefit of the
Partnership only in respect of each series of Units as of its Principal
Assurance Date, not in respect of Units of other series.
9. This Guarantee Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without regard to principles
of conflicts of law.
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<PAGE>
IN WITNESS WHEREOF, this Guarantee Agreement has been executed for and
on behalf of the undersigned as of the day and year first above written.
MERRILL LYNCH & CO., INC.
By:________________________________
Title:_____________________________________
ML PRINCIPAL PROTECTION L.P.
By: Merrill Lynch Investment Partners Inc.
(General Partner)
By:________________________________
Title:_____________________________________
B-2
<PAGE>
EXHIBIT C
ML PRINCIPAL PROTECTION L.P.
____________________
SUBSCRIPTION REQUIREMENTS
By executing a Subscription Agreement and Power of Attorney Signature
Page for Limited Partnership Units ("Units") of ML PRINCIPAL PROTECTION L.P.
(the "Fund"), each purchaser ("Purchaser") of Units irrevocably subscribes for
Units at the price of $100 per Unit ($97 per Unit in the case of officers and
employees of Merrill Lynch & Co., Inc. and its affiliates) as described in the
Fund's Prospectus dated October __, 1996, as the same may from time to time be
supplemented and amended (the "Prospectus"). EXCEPT AS SET FORTH BELOW IN THE
CASE OF MAINE AND MICHIGAN RESIDENTS, INVESTORS WHO ARE CURRENTLY LIMITED
PARTNERS IN THE FUND NEED NOT EXECUTE AN ADDITIONAL SUBSCRIPTION AGREEMENT AND
POWER OF ATTORNEY SIGNATURE PAGE IN ORDER TO PURCHASE ADDITIONAL UNITS. HOWEVER,
SUCH PERSONS MUST RECEIVE A CURRENT PROSPECTUS FOR THE FUND AND CAREFULLY REVIEW
THIS EXHIBIT C -- SUBSCRIPTION REQUIREMENTS AS WELL AS THE SUBSCRIPTION
AGREEMENT AND POWER OF ATTORNEY. SUCH PERSONS' FINANCIAL CONSULTANTS WILL BE
REQUIRED TO RECONFIRM THAT SUCH PERSONS CONTINUE TO MEET THE SUITABILITY
REQUIREMENTS SET FORTH BOTH HEREIN AND THEREIN IN ORDER FOR SUCH PERSONS TO BE
ABLE TO PURCHASE ADDITIONAL UNITS.
By executing a Subscription Agreement and Power of Attorney Signature
Page, Purchaser has thereby authorized Merrill Lynch, Pierce, Fenner & Smith
Incorporated or one of its affiliates (the "Selling Agent") to debit Purchaser's
customer securities account in the full amount of Purchaser's subscription. If
Purchaser's Subscription Agreement and Power of Attorney Signature Page is
accepted, Purchaser agrees to contribute Purchaser's subscription to the Fund
and to be bound by the terms of the Fund's Third Amended and Restated Limited
Partnership Agreement, included in the Prospectus as Exhibit A. Purchaser agrees
to reimburse the Fund and Merrill Lynch Investment Partners Inc. ("MLIP"), the
General Partner of the Fund, for any expense or loss incurred by either as a
result of the cancellation of Purchaser's Units due to a failure of the
Purchaser to deliver good funds in the full amount of the subscription price of
the Units subscribed for by Purchaser.
FOREIGN PERSONS AND ENTITIES NOT OTHERWISE SUBJECT TO
U.S. FEDERAL INCOME TAX MAY NOT INVEST IN THE UNITS.
Representations and Warranties
As an inducement to MLIP to accept this subscription, Purchaser, by
executing and delivering Purchaser's Subscription Agreement and Power of
Attorney Signature Page, represents and warrants to the Fund, ML Principal
Protection Plus Trading L.P., MLIP, Merrill Lynch Futures Inc. and the Selling
Agent as follows:
(a) Purchaser is of legal age to execute the Subscription Agreement
and Power of Attorney Signature Page and is legally competent to do so.
Purchaser acknowledges that Purchaser has received (prior to any direct or
indirect solicitation of Purchaser's investment) a copy of the Prospectus--
including the applicable Prospectus Supplement, the Appendices, the Third
Amended and Restated Limited Partnership Agreement and summary financial
information relating to the Fund current within 60 calendar days-- the
earliest date of such documents to be dated within nine months of the date
as of which Purchaser has subscribed to purchase Units.
(b) All information that Purchaser has heretofore furnished to MLIP
or that is set forth in the Subscription Agreement and Power of Attorney
submitted by Purchaser is correct and complete as of the date of such
Subscription Agreement and Power of Attorney, and if there should be any
change in such information prior to acceptance of Purchaser's subscription,
Purchaser will immediately furnish such revised or corrected information to
MLIP.
(c) Unless (d) below is applicable, Purchaser's subscription is made
with Purchaser's funds for Purchaser's own account and not as trustee,
custodian or nominee for another.
SR-1
<PAGE>
(d) The subscription, if made as custodian for a minor, is a gift
Purchaser has made to such minor and is not made with such minor's funds
or, if not a gift, the representations as to net worth and annual income
set forth below apply only to such minor.
(e) If Purchaser is subscribing in a representative capacity,
Purchaser has full power and authority to purchase the Units and enter into
and be bound by the Subscription Agreement and Power of Attorney on behalf
of the entity for which Purchaser is acquiring the Units, and such entity
has full right and power to purchase such Units and enter into and be bound
by the Subscription Agreement and Power of Attorney and to become a Limited
Partner pursuant to the Limited Partnership Agreement.
(f) If Purchaser is subscribing in a representative capacity, the
entity for which the Purchaser is acquiring Units either is not required to
be registered with the Commodity Futures Trading Commission ("CFTC") or to
be a member of the National Futures Association ("NFA") or, if required to
be so, is duly registered with the CFTC and is a member in good standing of
the NFA. It is an NFA requirement that MLIP attempt to verify that any
entity which seeks to purchase Units be duly registered with the CFTC and a
member in good standing of the NFA, if required. Purchaser agrees to supply
MLIP with such information as MLIP may reasonably request in order to
attempt such verification.
(g) If Purchaser is acting on behalf of an "employee benefit plan,"
as defined in and subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or any "plan," as defined in Section 4975 of
the Internal Revenue Code, as amended (the "Code") (the "Plan"), Purchaser,
in addition to the representations and warranties set forth above, hereby
further represents and warrants as, or on behalf of, the fiduciary of the
Plan responsible for purchasing the Units (the "Plan Fiduciary") that: the
Plan Fiduciary has considered an investment in the Units in light of the
risks relating thereto; the Plan Fiduciary has determined that, in view of
such considerations, an investment in the Fund is consistent with the Plan
Fiduciary's responsibilities under ERISA; the Plan's investment in the Fund
does not violate and is not otherwise inconsistent with the terms of any
legal document constituting the Plan or any trust agreement thereunder; and
the Plan Fiduciary (i) is responsible for the decision to invest in the
Units, including the determination that such investment is consistent with
the requirement imposed by Section 404 of ERISA that Plan investments be
diversified so as to minimize the risks of large losses, (ii) is
independent of MLIP, Merrill Lynch Asset Management, L.P., any Trading
Advisor, the Selling Agent and any of their respective affiliates, (iii) is
qualified to make such investment decision, and (iv) none of MLIP, Merrill
Lynch Asset Management, L.P., any Trading Advisor, the Selling Agent or any
of their respective affiliates or any of their respective employees either:
(a) has investment discretion with respect to the investment of assets of
the Plan; (b) has authority or responsibility to or regularly gives
investment advice with respect to the Plan for a fee and pursuant to an
agreement or understanding that such advice will serve as a primary basis
for investment decisions with respect to the Plan and that such advice will
be based on the particular investment needs of the Plan; or (c) is an
employer maintaining or contributing to the Plan. The undersigned will, at
the request of MLIP, furnish MLIP with such information as MLIP may
reasonably require to establish that the purchase of the Units by the Plan
does not violate any provision of ERISA or the Code, including, without
limitation, those provisions relating to "prohibited transactions" by
"parties in interest" or "disqualified persons."
THE REPRESENTATIONS AND STATEMENTS SET FORTH HEREIN MAY BE ASSERTED IN
THE DEFENSE OF THE FUND, ML PRINCIPAL PROTECTION L.P., MLIP, MERRILL LYNCH
FUTURES INC., THE SELLING AGENT, MLAM, OR OTHERS IN ANY LITIGATION OR OTHER
PROCEEDING.
Investor Suitability
PURCHASER UNDERSTANDS THAT THE PURCHASE OF UNITS MAY BE MADE ONLY BY
PERSONS WHO, AT A MINIMUM, HAVE (I) A NET WORTH OF AT LEAST $150,000 (EXCLUSIVE
OF HOME, FURNISHINGS AND AUTOMOBILES) OR (II) AN ANNUAL GROSS INCOME OF AT LEAST
$45,000 AND A NET WORTH OF AT LEAST $45,000 (EXCLUSIVE OF HOME, FURNISHINGS AND
AUTOMOBILES). RESIDENTS OF THE FOLLOWING STATES MUST MEET THE REQUIREMENTS SET
FORTH BELOW ("NET WORTH" FOR SUCH PURPOSES IS IN ALL CASES IS CALCULATED
EXCLUSIVE OF HOME, FURNISHINGS AND AUTOMOBILES). IN ADDITION, PURCHASER MAY NOT
INVEST MORE THAN 10% OF PURCHASER'S READILY MARKETABLE ASSETS IN THE FUND.
1. Arizona -- Net worth of at least $225,000 or a net worth of at
least $60,000 and an annual income of at least $60,000.
2. California -- Net worth of at least $100,000 and an annual income
of at least $50,000.
SR-2
<PAGE>
3. Indiana -- Net worth of at least $250,000 or a net worth of at
least $100,000 and an annual income of at least $100,000.
4. Iowa -- Net worth of at least $225,000 or a net worth of at least
$60,000 and an annual taxable income of at least $60,000.
5. Maine -- Minimum subscription per investment, both initial and
additional, of $5,000; net worth of at least $200,000 or a net worth of at least
$50,000 and an annual income of at least $50,000. ALL MAINE RESIDENTS, INCLUDING
EXISTING LIMITED PARTNERS IN THE FUND SUBSCRIBING FOR ADDITIONAL UNITS, MUST
EXECUTE A SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE. MAINE
RESIDENTS MUST SIGN A SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE
PAGE SPECIFICALLY PREPARED FOR MAINE RESIDENTS, A COPY OF WHICH SHALL ACCOMPANY
THIS PROSPECTUS AS DELIVERED TO ALL MAINE RESIDENTS.
6. Massachusetts -- Net worth of at least $250,000 or a net worth of
at least $100,000 and an annual income of at least $100,000.
7. Michigan -- Net worth of at least $225,000 or a net worth of at
least $60,000 and taxable income in 1995 of at least $60,000. ALL MICHIGAN
RESIDENTS, INCLUDING EXISTING LIMITED PARTNERS IN THE FUND SUBSCRIBING FOR
ADDITIONAL UNITS, MUST EXECUTE A SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
SIGNATURE PAGE.
8. Minnesota -- Net worth of at least $250,000 or a net worth of at
least $100,000 and an annual income of at least $100,000.
9. Mississippi -- Net worth of at least $225,000 or a net worth of
at least $60,000 and an annual income of at least $60,000.
10. Missouri -- Net worth of at least $250,000 or a net worth of at
least $100,000 and an annual income of at least $100,000.
11. New Hampshire -- Net worth of at least $250,000 or a net worth of
at least $125,000 and an annual income of at least $50,000.
12. North Carolina -- Net worth of at least $225,000 or a net worth
of at least $60,000 and an annual income of at least $60,000.
13. Oklahoma -- Net worth of at least $225,000 or a net worth of at
least $60,000 and an annual income of at least $60,000.
14. Oregon -- Net worth of at least $225,000 or a net worth of at
least $60,000 and an annual taxable income of at least $60,000.
15. Pennsylvania -- Net worth of at least $175,000 or a net worth of
at least $100,000 and an annual taxable income of at least $50,000 in the past
year and an expectation of the same in the current year.
16. South Carolina -- Net worth of at least $100,000 or a net income
in 1995 some portion of which was subject to maximum federal and state income
tax.
17. South Dakota -- Net worth of at least $250,000 or a net worth of
at least $100,000 and an annual income of at least $100,000.
18. Tennessee -- Net worth of at least $250,000 and gross income
during 1995 and an expectation of gross income during 1996 of at least $65,000
or a net worth of at least $500,000.
19. Texas -- Net worth of at least $250,000 or a net worth of at
least $100,000 and an annual taxable income of at least $100,000.
SR-3
<PAGE>
EXHIBIT D
ML PRINCIPAL PROTECTION L.P.
______________________
SUBSCRIPTION INSTRUCTIONS
ANY PERSON CONSIDERING PURCHASING UNITS SHOULD CAREFULLY READ AND
REVIEW THE PROSPECTUS OF THE FUND DATED OCTOBER __, 1996, INCLUDING THE
PROSPECTUS SUPPLEMENT AND RECENT FINANCIAL INFORMATION (CURRENT WITHIN 60
CALENDAR DAYS) RELATING TO THE FUND, BOTH OF WHICH ACCOMPANY THE
PROSPECTUS.
The Units are speculative and involve a high degree of risk. No person
may invest more than 10% of his readily marketable assets in the Fund.
The Units are sold in separate series as of the beginning of each
calendar quarter. Different series of Units are each sold at $100 per Unit but
over time come to have different Net Asset Values.
Foreign persons and entities not otherwise subject to U.S. federal
income tax may not invest in the Fund.
EXISTING LIMITED PARTNERS WHO ARE SUBSCRIBING FOR ADDITIONAL UNITS
(EXCEPT MAINE AND MICHIGAN RESIDENTS) NEED NOT COMPLETE AN ADDITIONAL
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE BUT MUST CAREFULLY
REVIEW THE SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY AND EXHIBIT C --
SUBSCRIPTION REQUIREMENTS. SUCH LIMITED PARTNERS' FINANCIAL CONSULTANTS MUST
RECONFIRM THAT SUCH LIMITED PARTNERS CONTINUE TO MEET THE STANDARDS AND
REQUIREMENTS SET FORTH HEREIN AND IN EXHIBIT C --SUBSCRIPTION REQUIREMENTS IN
ORDER FOR SUCH LIMITED PARTNERS TO BE ELIGIBLE TO PURCHASE ADDITIONAL UNITS.
ANY ADDITIONAL UNITS PURCHASED BY AN EXISTING LIMITED PARTNER WILL BE
A DIFFERENT SERIES OF UNITS THAN THE UNITS ALREADY OWNED BY SUCH LIMITED
PARTNER.
______________________
FILL IN ALL OF THE BOXES ON PAGES SA-5 and SA-6; TYPE OR PRINT
USING BLACK INK ONLY AND ONE LETTER OR NUMBER PER BOX, AS FOLLOWS:
Item 1 -- Financial Consultants must complete the information required.
Item 2 -- Enter the number of Units to be purchased.
Item 3 -- Enter the dollar amount (no cents) of the purchase (the dollar
amount must be $100 per Unit; $97 per Unit for officers and
employees of Merrill Lynch & Co., Inc. and its affiliates).
Item 4 -- Enter customer's Merrill Lynch Account Number.
Item 5 -- Enter the Social Security Number or Taxpayer ID Number. In
case of joint ownership, either Social Security Number may be used.
The Signature Page is self-explanatory for most types of investors;
however, we have provided specific instructions for the following types of
investors:
Trust -- Enter the Trust name on line 8 and the trustee's name on line
9, followed by "Trustee." If applicable, use line 10 for the custodian's name,
followed by "Custodian." Be sure to furnish the Taxpayer ID Number of the Trust.
Custodian Under Uniform Gifts to Minors Act -- Complete line 6 with
the name of minor followed by "UGMA." On line 9 enter the custodian's name,
followed by "Custodian." Be sure to furnish the minor's Social Security Number.
SA-(i)
<PAGE>
Partnership or Corporation -- The Partnership or Corporation name is
required on line 8. Enter an officer's or partner's name on line 9. Be sure to
furnish the Taxpayer ID Number of the Partnership or Corporation.
Items 6, 7, 8 -- Enter the exact name in which the Units are to be held.
Items 9, 10 -- Complete information as required.
Item 11 -- The investor(s) (EXCEPT CURRENT LIMITED PARTNERS IN THE FUND
OTHER THAN RESIDENTS OF MAINE OR MICHIGAN) must execute the
Subscription Agreement and Power of Attorney Signature Page
(Item 11, Page SA-6) and review the representation relating
to backup withholding tax underneath the signature and
telephone number lines in Item 11.
Item 12 -- Financial Consultants must complete the information required.
THE SPECIMEN COPY OF THE SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE
PAGE
(PAGES SA-3 AND SA-4) SHOULD NOT BE EXECUTED.
Instructions to Financial Consultants:
THE EXECUTED SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE MUST
BE RETAINED IN THE BRANCH OFFICE.
RECONFIRMATIONS (I.E., SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
SIGNATURE PAGES EXECUTED BY FINANCIAL CONSULTANTS) OR ANOTHER FORM OF WRITTEN
RECONFIRMATION APPROVED BY THE BRANCH OFFICE REGARDING THE CONTINUING
SUITABILITY OF EXISTING LIMITED PARTNERS SUBSCRIBING FOR ADDITIONAL UNITS MUST
ALSO BE RETAINED IN THE BRANCH OFFICE.
SA-(ii)
<PAGE>
ML PRINCIPAL PROTECTION L.P.
LIMITED PARTNERSHIP UNITS
__________________
BY EXECUTING THIS SUBSCRIPTION AGREEMENT
SUBSCRIBERS ARE NOT WAIVING ANY RIGHTS UNDER THE SECURITIES ACT
OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934
_________________
SUBSCRIPTION AGREEMENT AND
POWER OF ATTORNEY
ML PRINCIPAL PROTECTION L.P.
c/o Merrill Lynch Investment Partners Inc.
General Partner
Merrill Lynch World Headquarters
Sixth Floor
South Tower
World Financial Center
New York, New York 10080-6106
Dear Sirs:
1. Subscription for Units. I hereby subscribe for the number of
limited partnership units ("Units") in ML PRINCIPAL PROTECTION L.P. (the "Fund")
set forth in the Subscription Agreement and Power of Attorney Signature Page
attached hereto; a minimum of 50 Units ($5,000) must be purchased -- 10 Units if
I am an existing Limited Partner; any greater number of whole Units may be
purchased. The purchase price is $100 per Unit-- $97 per Unit if I am an officer
or employee of Merrill Lynch & Co., Inc. or any of its affiliates. The terms of
the offering of the Units are described in the Prospectus of the Fund dated
October __, 1996, together with the accompanying Prospectus Supplement
(collectively, the "Prospectus"). Units are offered as of the beginning of each
calendar quarter. Concurrently with or prior to the delivery of this
Subscription Agreement and Power of Attorney, I have authorized Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Selling Agent") to debit my customer
securities account in the amount of my subscription. I acknowledge that I must
have my subscription payment in such account on but not before the settlement
date for my purchase of Units, which will occur no later than five business days
after the acceptance of my subscription. My Merrill Lynch Financial Consultant
will inform me of such settlement date, on which my account will be debited and
the amount so debited transmitted, in the form of a Selling Agent check or wire
transfer, directly to the Escrow Agent for the Fund pending investment in the
Units, as described in the Prospectus. MERRILL LYNCH INVESTMENT PARTNERS INC.
("MLIP"), the General Partner of the Fund, may, in its sole and absolute
discretion, accept or reject this subscription in whole or in part, except that,
if this subscription is to be accepted in part only, it shall not be reduced to
an amount less than 50 Units (10 Units if I am an existing Limited Partner). All
subscriptions once submitted are irrevocable. All Units are offered subject to
prior sale.
Foreign persons and entities which are not otherwise subject to
U.S. federal income tax may not invest in the Fund.
2. Representations and Warranties of Subscriber. I have received the
Prospectus together with summary financial information relating to the Fund
current within 60 calendar days. I understand that by submitting this
Subscription Agreement and Power of Attorney I am making the representations and
warranties set forth in Exhibit C --Subscription Requirements in the Prospectus,
including, without limitation, those representations and warranties relating to
my net worth (exclusive of home, furnishings and automobiles), annual income and
readily marketable assets.
SA-1
<PAGE>
3. Power of Attorney. In connection with my subscription for Units,
I do hereby irrevocably constitute and appoint MLIP, and its successors and
assigns, as my true and lawful Attorney-in-Fact, with full power of
substitution, in my name, place and stead, to (i) file, prosecute, defend,
settle or compromise litigation, claims or arbitrations on behalf of the Fund
and (ii) make, execute, sign, acknowledge, swear to, deliver, record and file
any documents or instruments which may be considered necessary or desirable by
MLIP to carry out fully the provisions of the Limited Partnership Agreement of
the Fund, including, without limitation, by executing said Limited Partnership
Agreement itself, and by effecting all amendments permitted by the terms
thereof. I acknowledge that the other investors in the Fund are relying on
MLIP's authority to act pursuant to the Power of Attorney granted hereby. The
Power of Attorney granted hereby shall be deemed to be coupled with an interest,
shall be irrevocable and shall survive, and shall not be affected by, my
subsequent death, incapacity, disability, insolvency or dissolution or any
delivery by me of an assignment of the whole or any portion of my Units.
4. Irrevocability; Governing Law. I hereby acknowledge and agree
that I am not entitled to cancel, terminate or revoke this subscription or any
of my agreements hereunder after the Subscription Agreement and Power of
Attorney Signature Page attached hereto has been submitted (and not rejected),
and that this subscription and such agreements shall survive my death or
disability. This Subscription Agreement and Power of Attorney shall be governed
by and interpreted in accordance with the laws of the State of New York, without
regard to principles of conflicts of law.
SA-2
<PAGE>
<TABLE>
<C> <S>
SPECIMEN
- ------------------------------------------------------------------------------------------------------------------------------------
1 Financial Consultant [_][_][_][_][_][_][_][_][_][_][_][_] [_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_][_][_][_][_]
Name First M.I. Last Sub. Order Ref. #
Financial Consultant
Phone Number [_][_][_] - [_][_][_] - [_][_][_][_] Financial Consultant Number [_][_][_][_] Branch Wire Code [_][_][_]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ML PRINCIPAL PROTECTION L.P.
LIMITED PARTNERSHIP UNITS
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE
PLEASE PRINT OR TYPE. USE BLACK INK ONLY AND ONLY ONE CHARACTER PER BOX.
The investor named below, by execution and delivery of this Signature Page,
by payment of the purchase price for Limited Partnership Units in ML
Principal Protection L.P. and by authorizing Merrill Lynch, Pierce, Fenner &
Smith Incorporated to debit investor's customer securities account in the
amount set forth below, hereby subscribes for the purchase of Units at a
purchase price of $100 per Unit or $97 per Unit for officers and employees of
Merrill Lynch & Co., Inc. and its affiliates.
The named investor acknowledges receipt of the Prospectus of the Fund dated
, 1996, and the accompanying Prospectus Supplement as well as summary
financial information current within 60 calendar days, including the Third
Amended and Restated Limited Partnership Agreement, the Subscription
Requirements and the Subscription Agreement and Power of Attorney set forth
therein, the terms of which govern the investment in the Units being
subscribed for hereby.
If the subscriber is a participant in a Merrill Lynch sponsored IRA,
Basic(TM) or SEP account and is purchasing Units for such an account, the
subscriber hereby acknowledges that:
1. An amount at least equal to the purchase price for the Units is in an
IRA, Basic(TM) or SEP account at Merrill Lynch, Pierce, Fenner & Smith
Incorporated;
2. The minimum value of all securities and funds in such IRA, Basic(TM) or
SEP account is $10,000;
3. The minimum subscription is 50 Units and the amount of this subscription
is no more than 50% of the value of the IRA, Basic(TM) or SEP account on
the subscription date; and
4. Each separate IRA, Basic(TM) or SEP account of the subscriber seeking to
purchase Units meets the above eligibility requirements.
<TABLE>
<S> <C> <C>
2[_][_][_][_][_][_][_][_] 3[_][_][_][_][_][_][_][_][_][_] 4[_][_][_] - [_][_][_][_][_]
Number of Units (minimum 50 Units; Total $ Amount (No. of Units X Merrill Lynch Account #
10 Units for existing Limited Partners $100; $97 for Merrill Lynch officers
subscribing for additional Units) and employees)
5 [_][_][_] - [_][_] - [_][_][_][_] [_][_] - [_][_][_][_][_][_][_]
Social Security Number or Taxpayer ID Number
Limited Partner Name
6[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
First Name M.I. Last Name
Joint Partner Name
7[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
First Name M.I. Last Name
Partnership, Corporate or Trust Limited Partner Name
8 [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Partner, Officer, Trustee, Beneficiary, Power of Attorney or Custodian under UGMA/UTMA
9 [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Additional Information
10 [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Residence Address of Limited Partner (P.O. Box Numbers are Not Acceptable For Residence Address)
[_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_][_][_][_]
Street Number Street Name Apt. Number
[_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_] [_][_][_][_][_][_][_][_][_][_]
Bldg. No. City State Zip Code
[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Country (If Other Than U.S.A.)
Mailing Address of Limited Partner (If Other Than Residence Address)
[_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_][_][_][_]
Street Number Street Name Apt. Number
[_][_][_][_][_] [_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_]
Bldg. No. P.O. Box No. City State
[_][_][_][_][_][_][_][_][_][_]
Zip Code
[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Country (If Other Than U.S.A.)
[_] Check box if Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") is custodian.
Name of Custodian, if Not Merrill Lynch
[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Mailing Address of Custodian, Other Than Merrill Lynch
[_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_][_][_][_]
Street Number Street Name Apt. Number
[_][_][_][_][_] [_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_]
Bldg. No. P.O. Box No. City State
[_][_][_][_][_][_][_][_][_][_]
Zip Code
[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Country (If Other Than U.S.A.)
</TABLE>
SA-3
<PAGE>
SPECIMEN
ML PRINCIPAL PROTECTION L.P.
LIMITED PARTNERSHIP UNITS
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE (CONTINUED)
________________________________________________________________________________
11 FOR USE BY INVESTOR
X _______________________________ X ___________________________________
Signature of Investor Date Signature of Joint Date
Investor (if any)
( ) - Subscription for the series of
-------------------------------- Units to be sold as of
Telephone Number of Investor
______________________[insert date]
EXECUTING AND DELIVERING THIS SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
SIGNATURE PAGE SHALL IN NO RESPECT BE DEEMED TO CONSTITUTE A WAIVER OF ANY
RIGHTS UNDER THE SECURITIES ACT OF 1933 OR UNDER THE SECURITIES EXCHANGE
ACT OF 1934. I ACKNOWLEDGE THAT I HAVE RECEIVED, IN ADDITION TO THE
PROSPECTUS DATED , 1996, THE PROSPECTUS SUPPLEMENT AND SUMMARY
FINANCIAL INFORMATION RELATING TO THE FUND CURRENT WITHIN 60 CALENDAR DAYS.
I have checked the following box if I am subject to backup withholding
under the provisions of Section 3406(a)(1)(C) of the Internal Revenue Code:
[_]. Under the penalties of perjury, by signature above I hereby certify
that the Social Security Number or Taxpayer ID Number shown on the front of
this Subscription Agreement and Power of Attorney Signature Page next to my
name is my true, correct and complete Social Security Number or Taxpayer ID
Number and that the information given in the immediately preceding sentence
is true, correct and complete.
________________________________________________________________________________
________________________________________________________________________________
12 FINANCIAL CONSULTANT MUST SIGN
I have reasonable grounds to believe, based on information obtained from
the investor concerning his/her investment objectives, other investments,
financial situation and needs and any other information known by me, that
investment in the Fund is suitable for such investor in light of his/her
financial position, net worth and other suitability characteristics. I have
also informed the investor of the unlikelihood of a public trading market
developing for the Units.
The Financial Consultant MUST sign below in order to substantiate
compliance with Appendix F to Article 3, Section 34 of the NASD's Rules of
Fair Practice.
X __________________________________________________________________________
Financial Consultant Signature Date
Office Manager approval of Merrill Lynch sponsored retirement account
purchases.
X __________________________________________________________________________
Office Manager Signature Date
________________________________________________________________________________
FOR OFFICE DATE RECEIVED COUNTRY CODE ADDITIONAL ORDER CONTROL NUMBER
USE ONLY [_][_][_][_][_][_] [_][_] [_] [_][_][_][_][_]
SA-4
<PAGE>
<TABLE>
EXECUTION COPY
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
1 Financial Consultant [_][_][_][_][_][_][_][_][_][_][_][_] [_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_][_][_][_][_]
Name First M.I. Last Sub. Order Ref. #
Financial Consultant
Phone Number [_][_][_] - [_][_][_] - [_][_][_][_] Financial Consultant Number [_][_][_][_] Branch Wire Code [_][_][_]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ML PRINCIPAL PROTECTION L.P.
LIMITED PARTNERSHIP UNITS
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE
PLEASE PRINT OR TYPE. USE BLACK INK ONLY AND ONLY ONE CHARACTER PER BOX.
The investor named below, by execution and delivery of this Signature Page,
by payment of the purchase price for Limited Partnership Units in ML
Principal Protection L.P. and by authorizing Merrill Lynch, Pierce, Fenner &
Smith Incorporated to debit investor's customer securities account in the
amount set forth below, hereby subscribes for the purchase of Units at a
purchase price of $100 per Unit or $97 per Unit for officers and employees of
Merrill Lynch & Co., Inc. and its affiliates.
The named investor acknowledges receipt of the Prospectus of the Fund dated
, 1996, and the accompanying Prospectus Supplement as well as summary
financial information current within 60 calendar days, including the Third
Amended and Restated Limited Partnership Agreement, the Subscription
Requirements and the Subscription Agreement and Power of Attorney set forth
therein, the terms of which govern the investment in the Units being
subscribed for hereby.
If the subscriber is a participant in a Merrill Lynch sponsored IRA,
Basic(TM) or SEP account and is purchasing Units for such an account, the
subscriber hereby acknowledges that:
1. An amount at least equal to the purchase price for the Units is in an
IRA, Basic(TM) or SEP account at Merrill Lynch, Pierce, Fenner & Smith
Incorporated;
2. The minimum value of all securities and funds in such IRA, Basic(TM) or
SEP account is $10,000;
3. The minimum subscription is 50 Units and the amount of this subscription
is no more than 50% of the value of the IRA, Basic(TM) or SEP account on
the subscription date; and
4. Each separate IRA, Basic(TM) or SEP account of the subscriber seeking to
purchase Units meets the above eligibility requirements.
<TABLE>
<S> <C> <C>
2[_][_][_][_][_][_][_][_] 3[_][_][_][_][_][_][_][_][_][_] 4[_][_][_] - [_][_][_][_][_]
Number of Units (minimum 50 Units; Total $ Amount (No. of Units X Merrill Lynch Account #
10 Units for existing Limited Partners $100; $97 for Merrill Lynch officers
subscribing for additional Units) and employees)
5 [_][_][_] - [_][_] - [_][_][_][_] [_][_] - [_][_][_][_][_][_][_]
Social Security Number or Taxpayer ID Number
Limited Partner Name
6[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
First Name M.I. Last Name
Joint Partner Name
7[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
First Name M.I. Last Name
Partnership, Corporate or Trust Limited Partner Name
8 [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Partner, Officer, Trustee, Beneficiary, Power of Attorney or Custodian under UGMA/UTMA
9 [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Additional Information
10 [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Residence Address of Limited Partner (P.O. Box Numbers are Not Acceptable For Residence Address)
[_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_][_][_][_]
Street Number Street Name Apt. Number
[_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_] [_][_][_][_][_][_][_][_][_][_]
Bldg. No. City State Zip Code
[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Country (If Other Than U.S.A.)
Mailing Address of Limited Partner (If Other Than Residence Address)
[_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_][_][_][_]
Street Number Street Name Apt. Number
[_][_][_][_][_] [_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_]
Bldg. No. P.O. Box No. City State
[_][_][_][_][_][_][_][_][_][_]
Zip Code
[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Country (If Other Than U.S.A.)
[_]
Check box if Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") is custodian.
Name of Custodian, if Not Merrill Lynch
[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Mailing Address of Custodian, Other Than Merrill Lynch
[_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_][_][_][_]
Street Number Street Name Apt. Number
[_][_][_][_][_] [_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_]
Bldg. No. P.O. Box No. City State
[_][_][_][_][_][_][_][_][_][_]
Zip Code
[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Country (If Other Than U.S.A.)
</TABLE>
SA-5
<PAGE>
EXECUTION COPY
________________________________________________________________________________
________________________________________________________________________________
ML PRINCIPAL PROTECTION L.P.
LIMITED PARTNERSHIP UNITS
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE (CONTINUED)
- --------------------------------------------------------------------------------
11 FOR USE BY INVESTOR
X X
-------------------------------- -----------------------------------
Signature of Investor Date Signature of Joint Date
Investor (if any)
( ) - Subscription for the series of
-------------------------------- Units to be sold as of
Telephone Number of Investor
[insert date]
----------------------
EXECUTING AND DELIVERING THIS SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
SIGNATURE PAGE SHALL IN NO RESPECT BE DEEMED TO CONSTITUTE A WAIVER OF ANY
RIGHTS UNDER THE SECURITIES ACT OF 1933 OR UNDER THE SECURITIES EXCHANGE
ACT OF 1934. I ACKNOWLEDGE THAT I HAVE RECEIVED, IN ADDITION TO THE
PROSPECTUS DATED , 1996, THE PROSPECTUS SUPPLEMENT AND SUMMARY
FINANCIAL INFORMATION RELATING TO THE FUND CURRENT WITHIN 60 CALENDAR DAYS.
I have checked the following box if I am subject to backup withholding
under the provisions of Section 3406(a)(1)(C) of the Internal Revenue Code:
[_]. Under the penalties of perjury, by signature above I hereby certify
that the Social Security Number or Taxpayer ID Number shown on the front of
this Subscription Agreement and Power of Attorney Signature Page next to my
name is my true, correct and complete Social Security Number or Taxpayer ID
Number and that the information given in the immediately preceding sentence
is true, correct and complete.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
12 FINANCIAL CONSULTANT MUST SIGN
I have reasonable grounds to believe, based on information obtained from
the investor concerning his/her investment objectives, other investments,
financial situation and needs and any other information known by me, that
investment in the Fund is suitable for such investor in light of his/her
financial position, net worth and other suitability characteristics. I have
also informed the investor of the unlikelihood of a public trading market
developing for the Units.
The Financial Consultant MUST sign below in order to substantiate
compliance with Appendix F to Article 3, Section 34 of the NASD's Rules of
Fair Practice.
X
--------------------------------------------------------------------------
Financial Consultant Signature Date
Office Manager approval of Merrill Lynch sponsored retirement account
purchases.
X
--------------------------------------------------------------------------
Office Manager Signature Date
- --------------------------------------------------------------------------------
FOR OFFICE DATE RECEIVED COUNTRY CODE ADDITIONAL ORDER CONTROL NUMBER
USE ONLY [_][_][_][_][_][_] [_][_] [_] [_][_][_][_][_]
SA-6
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
MLIP advanced all initial organization and offering costs (for a total
of $239,100), as described in the Prospectus, for which it is being reimbursed
by the Registrant in 36 equal monthly installments. MLIP will pay the costs
associated with this updating of the Prospectus and this Amendment No. 2 to the
Registration Statement. The following is an estimate of such costs:
<TABLE>
<CAPTION>
Approximate
Amount
-----------
<S> <C>
Securities and Exchange Commission Registration Fee............... $ 8,621*
National Association of Securities Dealers, Inc. Filing Fee....... 3,000*
Printing Expenses................................................. 125,000
Fees of Certified Public Accountants.............................. 50,000
Blue Sky Expenses (Excluding Legal Fees).......................... 10,000
Fees of Counsel................................................... 100,000
Escrow Fees....................................................... 20,000
Miscellaneous Offering Costs...................................... 33,379
--------
Total............................................................ $350,000
========
</TABLE>
___________________
*Fees marked with an asterisk are exact.
____________________
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 16 of the Third Amended and Restated Limited Partnership
Agreement (attached as Exhibit A to the Prospectus which forms a part of this
Registration Statement) provides for the indemnification of the General Partner,
certain of its affiliates and certain of its directors, officers and controlling
persons by the Registrant in certain circumstances for any loss suffered by the
Registrant which arises out of any action or inaction, if the party, in good
faith, determined that such course of conduct was in the best interest of the
Registrant and such conduct did not constitute negligence or misconduct.
In the Selling Agreement, each Trading Advisor has agreed to indemnify
each person who controls MLIP within the meaning of Section 15 of the Securities
Act of 1933 and each person who signed this Registration Statement or is a
director of MLIP against losses, claims, damages, liabilities or expenses
arising out of or based upon any untrue statement or omission or alleged untrue
statement or omission relating or with respect to such Trading Advisor or any
principal of such Trading Advisor or their operations, trading systems, methods
or performance, which was made in this Registration Statement, the Prospectus
included in this Registration Statement when declared effective, or in any
amendment or supplement thereto and furnished by or approved by such Trading
Advisor for inclusion therein.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents (unless otherwise indicated) are filed
herewith and made a part of this Registration Statement:
(a) Exhibits.
The following exhibits are filed herewith.
Exhibit
Number Description of Document
------- -----------------------
5.01 Opinion of Sidley & Austin relating to the legality of
the Units.
8.01 Opinion of Sidley & Austin with respect to federal
income tax consequences.
23.06 Consent of Sidley & Austin.
23.07 Consent of Deloitte & Touche.
27.02 Financial Data Schedule.
The following exhibits are incorporated by reference herein from the
exhibits of the same description and number filed with Amendment No. 1 to
Registrant's Registration Statement on Form S-1 filed with the Commission on
August 27, 1996 (Reg. No. 333-7593) which also constituted Post-Effective
Amendment No. 6 to Registrant's Registration Statement on Form S-1 (Reg. No.33-
73914).
Exhibit
Number Description of Document
------ -----------------------
1.01 Form of Selling Agreement among the Partnership,
(Amended) the Trading Partnership, the General Partner,
Merrill Lynch Futures, the Selling Agent and the
Trading Advisors.
1.02 Form of Amendment to the Selling Agreement among
the Partnership, the Trading Partnership, the
General Partner, Merrill Lynch Futures, the
Selling Agent and each additional Trading Advisor.
3.02(ii) Third Amended and Restated Limited Partnership Agreement
(Amended) of the Partnership (included as Exhibit A to
the Prospectus).
The following exhibits are incorporated by reference herein from the
exhibits of the same description and number filed with Registrant's Registration
Statement on Form S-1, as filed with the Commission on July 3, 1996 (Reg. No.
333-7593) which also constituted Post-Effective Amendment No. 5 to Registrant's
Registration Statement on Form S-1 (Reg. No. 33-73914).
Exhibit
Number Description of Document
------- ------------------------------
3.01(i) Amended and Restated Certificate of Limited Partnership
of the Partnership.
3.02(i) Amended and Restated Certificate of Limited Partnership
of the Trading Partnership.
S-2
<PAGE>
3.03(ii) Second Amended and Restated Limited Partnership
Agreement of the Trading Partnership.
5.01(a) Opinion of Sidley & Austin relating to the legality of
the Units.
5.01(b) Opinion of Richards, Layton & Finger relating to the
legality of the Units.
8.01 Opinion of Sidley & Austin with respect to federal
income tax consequences.
10.01 Form of Advisory Agreement among the Partnership,
Trading Partnership, the General Partner and each
Trading Advisor.
10.02 Form of Consulting Agreement between Merrill Lynch
Futures and each Trading Advisor.
10.03 Form of Customer Agreement between the Trading
Partnership and Merrill Lynch Futures.
10.04 Form of Escrow Agreement among the Partnership, the
Escrow Agent, the Selling Agent and the General Partner.
10.05 Merrill Lynch & Co., Inc. Guarantee Agreement (included
as Exhibit B to the Prospectus).
10.06 Form of Subscription Agreement and Power of Attorney
(included as Exhibit D to the Prospectus).
10.07 Foreign Exchange Desk Service Agreement with Amendment
adding the Trading Partnership as a party thereto.
10.08 Investment Advisory Contract among Merrill Lynch
Futures, the Partnership, the Trading Partnership and
MLAM.
10.09(a) Note from Merrill Lynch Futures Inc. to the Trading
Partnership.
10.09(b) Note from Merrill Lynch, Pierce, Fenner & Smith
Incorporated to the Partnership.
10.10 Minimum Net Asset Value per Unit undertaking of the
General Partner.
10.11 Form of Custody Agreement between Merrill Lynch, Pierce,
Fenner & Smith Incorporated and the Partnership.
23.01 Consent of Sidley & Austin.
23.03 Consent of Richards, Layton & Finger (included in
exhibit 5.01(b)).
The following exhibits are incorporated by reference herein from
the exhibits of the same description and number filed with Post-Effective
Amendment No. 4 to the Registrant's Registration Statement on Form S-1, as filed
with the Commission on April 4, 1996 (Reg. No. 33-73914).
Exhibit
Number Description of Document
------- -----------------------
23.12 Consent of Deloitte & Touche LLP.
S-3
<PAGE>
_________________________
The following exhibits are incorporated by reference herein from
the exhibits of the same description and number filed with Post-Effective
Amendment No. 3 to the Registrant's Registration Statement on Form S-1, as filed
with the Commission and which became effective on January 25, 1996.
Exhibit
Number Description of Document
------ -----------------------
1.01 Amendment No. 4 to the Selling Agreement among the
Partnership, the Trading Partnership, the General
Partner, Merrill Lynch Futures, the Selling Agent and
AIB Investment Managers Limited.
3.05(ii) Second Amended and Restated Limited Partnership
(Amended) Agreement of the Partnership (included as Exhibit A to
the Prospectus).
10.12 Subscription Agreement and Power of Attorney
(Amended) (included as Exhibit D to the Prospectus).
23.11 Consent of Deloitte & Touche LLP.
The following exhibits are incorporated by reference herein from
the exhibits of the same description and number filed with Amendment No. 3
(Second Post-Effective) to the Registrant's Registration Statement on Form S-1,
as filed with the Commission on December 8, 1995:
Exhibit
Number Description of Document
------ -----------------------
1.01 Amendment No. 2 to the Selling Agreement among the
Partnership, the Trading Partnership, the General
Partner, Merrill Lynch Futures, the Selling Agent, and
the Advisors amending certain provisions thereof; and
Amendment No. 3 to the Selling Agreement among the
Partnership, the Trading Partnership, the General
Partner, Merrill Lynch Futures, the Selling Agent, and
Millburn Ridgefield Corporation.
1.02 Form of Assignment of Selling Agreement.
3.03(i) Amended and Restated Certificate of Limited Partnership
of the Partnership.
3.04(i) Amended and Restated Certificate of Limited Partnership
of the Trading Partnership.
3.06(ii) Amendment to the Limited Partnership Agreement of the
Trading Partnership.
5.01(a) Opinion of Sidley & Austin relating to the legality of
the Units.
5.01(b) Opinion of Richards, Layton & Finger relating to the
legality of the Units.
8.01 Opinion of Sidley & Austin with respect to federal
income tax consequences.
10.10 Form of Assignment of Advisory Agreement.
10.11 Form of Assignment of Consulting Agreement.
S-4
<PAGE>
10.13 Amendment No. 1 to the Customer Agreement.
23.08 Consent of Sidley & Austin.
23.10 Consent of Richards, Layton & Finger (contained in
their opinion in Exhibit 5.01(b)).
The following exhibits are incorporated by reference herein from
the exhibits of the same description and number filed with Amendment No. 2
(First Post-Effective) to the Registrant's Registration Statement on Form S-1,
as filed with the commission on March 24, 1995 and which became effective on
April 20, 1995:
1.01 Amendment No. 1 to the Selling Agreement among the
Partnership, the Trading Partnership, the General
Partner, Merrill Lynch Futures, the Selling Agent,
Emcor Eurocurrency Management Corporation and Trendstat
Capital Management, Inc.
10.09 Custody Agreement among the Partnership and Merrill
Lynch, Pierce, Fenner & Smith Incorporated.
The following exhibits are incorporated by reference herein from
the exhibits of the same description and number filed with Amendment No. 1 to
the Registrant's Registration Statement on Form S-1, as filed with the
Commission on June 14, 1994 and which became effective on July 14, 1994:
Exhibit
Number Description of Document
------ -----------------------
1.01 Selling Agreement among the Partnership, the Trading
(Amended) Partnership, the General Partner, Merrill Lynch
Futures, the Selling Agent and the Trading Advisors.
3.03(ii) Limited Partnership Agreement of the Trading
Partnership dated May 26, 1994.
3.04(ii) Form of Amended and Restated Limited Partnership
Agreement of the Trading Partnership.
10.01 Form of Advisory Agreement among the Partnership, the
(Amended) Trading Partnership, MLFIP and each Trading Advisor.
10.02 Form of Consulting Agreement between Merrill Lynch
(Amended) Futures and each Trading Advisor.
10.03 Form of Customer Agreement between the Trading
(Amended) Partnership and Merrill Lynch Futures.
10.04 Form of Escrow Agreement among the Partnership,
(Amended) the Escrow Agent, the Selling Agent and MLFIP.
10.05 Merrill Lynch & Co., Inc. Guarantee Agreement
(Amended) (included as Exhibit B to the Prospectus).
10.07 Foreign Exchange Desk Service Agreement with
(Amended) Amendment adding the Trading Partnership as a party
thereto.
10.08 Investment Advisory Contract among Merrill Lynch
Futures, the Partnership, the Trading Partnership and
MLAM.
S-5
<PAGE>
(b) Financial Statement Schedules.
No Financial Schedules are required to be filed herewith.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in
the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such information
in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities under the
Securities Act of 1933 may be permitted to officers, directors or
controlling persons of the registrant pursuant to the provisions described
in Item 14 above, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by an officer, director, or controlling person of
the registrant in the successful defense of any such action, suit or
proceeding) is asserted by such officer, director or controlling person in
connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
S-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
General Partner of the Registrant has duly caused this Registration Statement
Amendment to be signed on its behalf by the undersigned, thereunto duly
authorized, in The City of New York in the State of New York on the 25th day of
October, 1996.
ML PRINCIPAL PROTECTION L.P.
By: Merrill Lynch Investment Partners Inc.
General Partner
By JOHN R. FRAWLEY, JR.
--------------------------------------------
John R. Frawley, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement Amendment has been signed below by the following persons
on behalf of the General Partner of the Registrant in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
Signature Title With Registrant Date
--------- --------------------- ----
<S> <C> <C>
JOHN R. FRAWLEY, JR. President, Chief Executive October 25, 1996
- ---------------------------------
John R. Frawley, Jr. Officer and Director
(Principal Executive Officer)
JAMES M. BERNARD Chief Financial Officer, October 25, 1996
- ---------------------------------
James M. Bernard Treasurer and Senior
Vice-President
(Principal Financial and
Accounting Officer)
ALLEN N. JONES Director October 25, 1996
- ---------------------------------
Allen N. Jones
</TABLE>
(Being principal executive officer, the principal financial and
accounting officer and a majority of the directors of Merrill Lynch Investment
Partners Inc.)
<TABLE>
<S> <C> <C>
Merrill Lynch Investment General Partner of Registrant October 25, 1996
Partners Inc.
By JOHN R. FRAWLEY, JR.
------------------------------
John R. Frawley, Jr.
President and Chief
Executive Officer
</TABLE>
S-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
General Partner of the Co-Registrant has duly caused this Registration Statement
Amendment to be signed on its behalf by the undersigned, thereunto duly
authorized, in The City of New York in the State of New York on the 25th day of
October, 1996.
ML PRINCIPAL PROTECTION L.P.
By: Merrill Lynch Investment Partners Inc.
General Partner
By JOHN R. FRAWLEY, JR.
--------------------------------------------
John R. Frawley, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement Amendment has been signed below by the following persons
on behalf of the General Partner of the Co-Registrant in the capacities and on
the date indicated.
<TABLE>
<CAPTION>
Signature Title With Registrant Date
--------- --------------------- ----
<S> <C> <C>
JOHN R. FRAWLEY, JR. President, Chief Executive October 25, 1996
- ---------------------------------
John R. Frawley, Jr. Officer and Director
(Principal Executive Officer)
JAMES M. BERNARD Chief Financial Officer, October 25, 1996
- ---------------------------------
James M. Bernard Treasurer and Senior
Vice-President
(Principal Financial and
Accounting Officer)
ALLEN N. JONES Director October 25, 1996
- ---------------------------------
Allen N. Jones
</TABLE>
(Being principal executive officer, the principal financial and
accounting officer and a majority of the directors of Merrill Lynch Investment
Partners Inc.)
<TABLE>
<S> <C> <C>
Merrill Lynch Investment General Partner of Registrant October 25, 1996
Partners Inc.
By JOHN R. FRAWLEY, JR.
----------------------------------
John R. Frawley, Jr.
President and Chief
Executive Officer
</TABLE>
S-8
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 1996
REGISTRATION NO. 333-7593
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
EXHIBITS
To
Amendment No. 2
To
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
------------
ML PRINCIPAL PROTECTION L.P.
(formerly, ML Principal Protection Plus L.P.)
ML PRINCIPAL PROTECTION TRADING L.P.
(formerly, ML Principal Protection Plus Trading L.P.)
(Rule 140 Co-Registrant)
================================================================================
<PAGE>
ML PRINCIPAL PROTECTION L.P.
ML PRINCIPAL PROTECTION TRADING L.P.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ------- -----------------------
<S> <C>
5.01 Opinion of Sidley & Austin relating to
the legality of the Units.
8.01 Opinion of Sidley & Austin with respect
to federal income tax consequences.
23.06 Consent of Sidley & Austin.
23.07 Consent of Deloitte & Touche.
27.02 Financial Data Schedule.
</TABLE>
<PAGE>
EXHIBIT 5.01
[LETTERHEAD OF SIDLEY & AUSTIN]
October 25, 1996
Merrill Lynch Investment Partners Inc.,
as general partner of ML Principal Protection L.P.
Merrill Lynch World Headquarters
South Tower, 6th Floor
World Financial Center
New York, New York 10080-6106
RE: ML PRINCIPAL PROTECTION L.P.
$100,000,000 OF UNITS OF LIMITED PARTNERSHIP INTEREST (THE "UNITS")
Dear Sir or Madam:
We refer to the Registration Statement on Form S-1 (Registration No.
333-7593) (the "Registration Statement") filed by ML Principal Protection L.P.
(formerly, ML Principal Protection Plus L.P.), a Delaware limited partnership
(the "Partnership"), and ML Principal Protection Trading L.P. (formerly, ML
Principal Protection Plus Trading L.P.), a Delaware limited partnership (the
"Trading Partnership"), with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Securities Act"), as amended by
Amendment No. 1 thereto filed with the Securities and Exchange Commission on
August 27, 1996 and Amendment No. 2 thereto filed with the Securities and
Exchange Commission on or about October 25, 1996. Pursuant to Rule 429 under the
Securities Act, the form of prospectus set forth in the Registration Statement
(the "Prospectus") also relates to the Registration Statement on Form S-1
declared effective on July 14, 1994 (Registration No. 33-73914). Capitalized
terms not defined herein have the meanings specified in the Registration
Statement.
We are familiar with the proceedings to date with respect to the
proposed issuance and sale of the Units pursuant to the Prospectus and have
examined such records, documents and questions of law, and satisfied ourselves
as to such matters of fact, as we have considered relevant and necessary as a
basis for this opinion.
For purposes of rendering this opinion, we have assumed the genuineness
of all signatures, the legal capacity of natural persons, the authenticity of
all documents submitted to us as originals, the conformity to originals of all
documents submitted to us as certified or photostatic copies and the
authenticity of the original of such copies.
Based on the foregoing, we are of the opinion that:
<PAGE>
Sidley & Austin Chicago
Merrill Lynch Investment Partners Inc.
October 25, 1996
Page 2
1. The Partnership and the Trading Partnership have each been duly
formed and are validly existing in good standing as limited partnerships under
the Delaware Revised Uniform Limited Partnership Act (the "Act").
2. The General Partner has taken all necessary corporate action
required to be taken by it to authorize the issuance and sale of the Units to
the Limited Partners and to authorize the admission to the Partnership of the
Limited Partners as limited partners of the Partnership.
3. Assuming (i) the due authorization, execution and delivery to the
General Partner of a Subscription Agreement by each subscriber for Units (the
"Subscribers"), (ii) the due acceptance by the General Partner of each
Subscription Agreement and the due acceptance by the General Partner of the
admission of each of the Subscribers as limited partners of the Partnership,
(iii) the payment by each Subscriber of the full consideration due for the Units
to which it subscribed, (iv) that the books and records of the Partnership set
forth all information required by the Limited Partnership Agreement and the Act,
including all information with respect to all persons and entities to be
admitted as Partners and their contributions to the Partnership, (v) that the
Subscribers, as limited partners of the Partnership, do not participate in the
control of the business of the Partnership within the meaning of the Act, (vi)
that the Units are offered and sold as described in the Prospectus and the
Limited Partnership Agreement and (vii) that the Subscribers meet all of the
applicable suitability standards set forth in the Prospectus and that the
representations and warranties of the Subscribers in their respective
Subscription Agreements are true and correct, the Units to be issued to the
Subscribers will represent valid and legally issued limited partner interests in
the Partnership and will be fully paid and nonassessable limited partner
interests in the Partnership, as to which the Subscribers, as limited partners
of the Partnership, will have no liability in excess of their obligations to
make contributions to the Partnership, their obligations to make other payments
provided for in the Limited Partnership Agreement and their share of the
Partnership's assets and undistributed profits (subject to the obligation of a
Limited Partner to repay funds distributed to such Limited Partner by the
Partnership in certain circumstances).
4. There are no provisions in the Limited Partnership Agreement the
inclusion of which, subject to the terms and conditions therein, would cause the
Limited Partners, as limited partners of the Partnership, to be deemed to be
participating in the control of the business of the Partnership within the
meaning of the Act.
This opinion is limited to the Act and the General Corporation Law of
the State of Delaware. We express no opinion as to the application of the
securities or blue sky laws of the various states (including the State of
Delaware) to the sale of the Units.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to all references to our firm included in or made a
part of the Registration Statement.
Very truly yours,
SIDLEY & AUSTIN
<PAGE>
EXHIBIT 8.01
[LETTERHEAD OF SIDLEY & AUSTIN]
October 25, 1996
Merrill Lynch Investment Partners Inc.
General Partner of
ML Principal Protection L.P.
Merrill Lynch World Headquarters
South Tower, 6th Floor
World Financial Center
New York, New York 10080-6106
Re: Registration Statement on Form S-1
----------------------------------
Dear Sir or Madam:
We refer to the Amendment No. 2 to the Registration Statement on Form
S-1 (Registration No. 333-7593), filed by ML Principal Protection L.P. (the
"Partnership") and ML Principal Protection Trading L.P. (the "Trading
Partnership") with the Securities and Exchange Commission under the Securities
Act of 1933 (the "Securities Act") on or about October 25, 1996. Pursuant to
Rule 429 under the Securities Act, the form of prospectus set forth in the
Registration Statement (the "Prospectus") also relates to the Registration
Statement on Form S-1 declared effective on July 14, 1994.
We have reviewed such data, documents, questions of law and fact and
other matters as we have deemed pertinent for the purpose of this opinion. Based
upon the foregoing, we hereby confirm our opinions expressed under the caption
"Federal Income Tax Consequences" in the Prospectus that: (i) each of the Part-
nership and the Trading Partnership in which the Partnership will invest, will
be taxed as a partnership for federal income tax purposes (assuming that Merrill
Lynch Investment Partners Inc. will, when the Partnership's Units of Limited
Partnership Interest are sold to the public, have a capitalization no less than
that indicated in the audited financial statements included
<PAGE>
Sidley & Austin Chicago
Merrill Lynch Investment Partners Inc.
October 25, 1996
Page 2
in the Registration Statement and that Merrill Lynch Investment Partners Inc.
makes a capital contribution to each of the Partnership and the Trading
Partnership in at least the amount contemplated by the Prospectus); (ii) based
upon the contemplated trading activities of the Trading Partnership, the Trading
Partnership should be treated as engaged in the conduct of a trade or business
for federal income tax purposes, and, as a result, the ordinary and necessary
business expenses incurred by the Trading Partnership in conducting its
commodity futures trading business should not be subject to limitation under
section 67 of the Internal Revenue Code of 1986, as amended (the "Code") or
under section 68 of the Code; and (iii) based on the contemplated trading
activities of the Trading Partnership and of the Fund, the income earned by the
Fund will not constitute "unrelated business taxable income" under section 511
of the Code to employee benefit plans and other tax-exempt entities which
purchase Units; provided that such Units purchased by such plans and entities
are not "debt-financed" within the meaning of Section 514 of the Code.
We also advise you that in our opinion the description set forth under
the caption "Federal Income Tax Consequences" in the Prospectus correctly
describes (subject to the uncertainties referred to therein) the material
aspects of the federal income tax treatment to United States investors, as of
the date hereof, of an investment in the Partnership.
Very truly yours,
SIDLEY & AUSTIN
<PAGE>
EXHIBIT 23.06
[LETTERHEAD OF SIDLEY & AUSTIN]
CONSENT
OF
SIDLEY & AUSTIN
---------------
Sidley & Austin hereby consents to all references made to it in Amendment
No. 2 to the Registration Statement on Form S-1 of ML Principal Protection L.P.,
as filed with the Securities and Exchange Commission on October 25, 1996 (Reg.
No. 333-7593).
Date: October 25, 1996
Very truly yours,
SIDLEY & AUSTIN
258129.01
<PAGE>
EXHIBIT 23.07
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to the Registration Statement No.
333-7593 of ML Principal Protection L.P. (formerly, ML Principal Protection Plus
L.P.) on Form S-1 of our report dated January 26, 1996 relating to the
consolidated financial statements of ML Principal Protection L.P. and of our
report dated January 26, 1996 relating to the balance sheet of Merrill Lynch
Investment Partners Inc. (formerly, ML Futures Investment Partners Inc.),
appearing in the Prospectus, which is a part of such Registration Statement, and
to the reference to us under the headings "Selected Financial Data" and
"Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
October 25, 1996
New York, New York
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<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>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,995
<SECURITIES> 76,528,743
<RECEIVABLES> 8,083,368
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 84,615,106
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 84,615,106
<CURRENT-LIABILITIES> 3,379,461
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 81,235,645
<TOTAL-LIABILITY-AND-EQUITY> 84,615,106
<SALES> 0
<TOTAL-REVENUES> 5,990,021
<CGS> 0
<TOTAL-COSTS> 4,004,713
<OTHER-EXPENSES> 11,134
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,974,174
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,974,174
<EPS-PRIMARY> 2.38
<EPS-DILUTED> 2.38
</TABLE>
