<PAGE>
As filed with the Securities and Exchange Commission on November 26, 1996
Registration No. 333-7593
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 3
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.
Merrill Lynch World Headquarters
Sixth Floor, South Tower
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.
c/o Merrill Lynch Investment Partners Inc.
Merrill Lynch World Headquarters
Sixth Floor, South Tower
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:
James B. Biery
Kirsten Carlson
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>
Form S-1 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 and Interest Income
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; The Two-Tier Structure of the Fund;
Management's Discussion and Analysis of
Financial Condition and Results of Operations;
The Advisor Selection Process; The Advisors;
MLIP and MLF; Leverage Considerations; The
ML&Co. Guarantee; Use of Proceeds and
Interest Income; Charges; Certain Litigation;
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 DECEMBER __, 1996
TO
PROSPECTUS DATED NOVEMBER __, 1996
The Series J Units will be sold on or about January__, 1997
pursuant to acceptable subscriptions received on or before December 31, 1996.
The Principal Assurance Date for the Series J Units will be December 31,
2001.
Series J Units are offered at $100 per Unit ($97 in the case
of officers and employees of Merrill Lynch & Co., Inc. and its affiliates). The
minimum initial investment is 50 Units ($5,000); the minimum investment for
existing Limited Partners is 10 Units ($1,000). Any greater number of whole
Units may be purchased.
75% of the Series J Units capital will initially be committed
to trading.
No distributions are presently contemplated to be made on the
Series J Units.
The Series J Units may be redeemed as of the end of any
calendar month at Net Asset Value, subject to a 3% redemption charge payable to
MLIP on redemptions made on or prior to December 31, 1997.
-------------------------
The reverse side of this Prospectus Supplement provides
certain outline information regarding the Fund's current Advisors.
-------------------------
IN ADDITION TO THE PROSPECTUS SUPPLEMENT, THE PROSPECTUS MUST BE ACCOMPANIED
BY A RECENT MONTHLY REPORT OF ML PRINCIPAL PROTECTION L.P.
-------------------------
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 PROSPECTUS SUPPLEMENT.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT. 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.
(formerly, ML Principal Protection Plus L.P.)
--------------
As of November 1, 1996, the Net Asset Value of a Series A Unit
initially issued as of October 12, 1994 had risen to $108.24 (adding back to Net
Asset Value aggregate distributions of $12.00 per Series A Unit).
--------------
As of December 1, 1996 the Fund's Advisors were as follows. The
allocation of the Fund's trading assets among the Advisors is set forth below in
the parentheses following each Advisor's name. The accompanying Prospectus sets
forth more detailed information concerning the core Advisors. See "The Advisors"
and "The Core Advisors" in the Prospectus.
<TABLE>
<CAPTION>
Annualized Assets Under
Worst/Best Standard Management General
Monthly Deviation In Strategy
Rate of Return/1/ of Return/2/ Fund Program/3/ Classification/4/
<S> <C> <C> <C> <C>
Core Advisors
Chesapeake Capital Corporation (10.98)%/15.99% 17.8% $711 million Technical;
Diversified Trading Program (19%) trend-following
John W. Henry & Company, Inc. (27.7)%/39.4%/5/ 31.2% $912 million Technical;
Financial and Metals Portfolio (15%) trend-following
Non-Core Advisors
AIS Futures Management, Inc. (10.65)%/13.39% 18.4% $101 million Systematic;
MAAP-2x-4x Program (8.5%) trend-following
ARA Portfolio Management Company, L.L.C. (14.46)%/14.48% 21.5% $99 million Technical;
Gamma Program (8.5%) trend-following
Trendstat Capital Management, Inc. (5.83)%/10.71% 10.25% $192 million Technical;
World Currency Program (8.5%) trend-related
Graham Capital Management L.P. (6.31)%/12.33% 15.18% $137 million Technical;
Diversified Program (8.5%) trend-following
Hill Financial Group, Ltd. (6.2)%/10.6% 10.2% $31 million Technical;
Multiple Strategy Program (7.5%) systematic
Millburn Ridgefield Corporation (9.04)%/19.38% 17.35% $192 million Technical;
Global Portfolio - Normal Leverage (7.2%) trend-following
Quantitative Financial Strategies Inc./6/ (7.62)%/13.29% 13.8% $88 million/6/ Systematic;
The Currency Program (5.5%) fundamental
Range Wise, Inc. (6.92)%/17.22% 16.2% $41 million Discretionary;
Range Wise Trading Program (5%) fundamental
AIB Investment Managers Limited (1.29)%/2.98% 2.59% $39 million Discretionary;
Currency Program (4.3%) fundamental
Fundamental Futures Incorporated (8.36)%/11.23% 14.7% $99 million Discretionary;
Fundamental Futures Trading Program (2.5%) fundamental
</TABLE>
Past performance is not necessarily indicative of future results.
Performance and assets under management information is
current as of August 31, 1996.
Performance figures are not audited.
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.
In considering the leverage at which the different Advisors
trade and the volatility of their performance, prospective investors should
recognize that due to the limited percentage of the Fund's assets allocated to
each of them, none of the non-core Advisors, individually, is likely to have a
material effect over the short-term on either the overall return or the overall
performance volatility of the Fund. The non-core Advisors as a group can have a
significant effect on performance. However, the likely performance non-
correlation among at least certain of these Advisors reduces the likelihood of
any major short-term effect.
The current non-core Advisors each receive Consulting Fees of up to 2%
per annum of the Fund's assets managed by each of them respectively, plus Profit
Shares ranging from 15% to 20% of any cumulative New Trading Profits achieved by
each such Advisor.
- -------------------------
/1/ The lowest and the highest monthly rate of return for the program traded
for the Fund. Performance information is presented for the period from
January 1, 1991 (or inception, if later) through August 31, 1996.
/2/ An annualized standard deviation of 2% and a mean return of 1% would mean
that 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
returns. In general, the more variable an Advisor's historical returns, the
greater the risk that substantial losses have been included within the
historical range of returns.
/3/ Assets under management in the program used for the Fund (notional funds
excluded).
/4/ See "The Core Advisors" in the Prospectus for a description of these
strategy classifications.
/5/ (27.7)% is the worst Monthly Rate of Return of any individual account, not
of the Financial and Metals Portfolio on a composite basis.
/6/ Notional funds are included in assets under management for Quantitative
Financial Strategies Inc.
<PAGE>
Preliminary Prospectus dated November 26, 1996 -- Subject to Completion
ML PRINCIPAL PROTECTION L.P.
(formerly, ML Principal Protection Plus L.P.)
$100,000,000
Units of Limited Partnership Interest
ML Principal Protection L.P. (the "Fund"), a limited
partnership, is a multi-strategy, multi-market managed futures investment,
employing a range of proprietary strategies diversified across major markets of
the global economy -- financials, currencies, energy, metals and agriculture.
The Fund's objectives are achieving, through speculative trading and trading
leverage adjustments, 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 to the Fund 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 no less than the initial $100 subscription price
per Unit. The ML&Co. undertaking is effective only in respect of Units
outstanding on the Principal Assurance Date.
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
$81 million and the initial series of Units had recognized a cumulative rate of
return of approximately 15.80% during its first two years of trading.
The minimum initial investment is 50 Units ($5,000); the minimum
investment for existing Limited Partners is 10 Units ($1,000). Any whole number
of Units over the minimum may be purchased.
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.
No distributions on the Units are presently contemplated by MLIP.
---------------------
THE UNITS ARE SPECULATIVE SECURITIES.
AN INVESTMENT IN THE FUND INVOLVES SIGNIFICANT RISKS.
---------------------
The following are certain of the significant risks of this investment.
. Investors must be prepared to lose all or substantially all of the
time value of their investment in the Fund. At a 7% annual interest
rate, the present value of the assured minimum $100 per Unit five
years in the future would be only approximately $71.
. The 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 immediate
opportunity costs and the risk of significantly increased opportunity
costs in the future. MLIP initially allocates only 75% of each series'
capital to 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 or even the termination of trading in
the event that the Fund does not recognize sufficient profits for the
Net Asset Value of a series of Units to increase above its initial $100
per Unit after all fees and expenses.
. Relatively small losses could result in MLIP further deleveraging or
terminating trading.
. If MLIP deleverages any one series of Units, it must similarly
deleverage all series.
. Irrespective of the deleveraging of the Fund's trading, the risk control
characteristics of the Fund's multi-advisor approach make it highly
unlikely that the ML&Co. guarantee, despite its significant opportunity
costs, will ever benefit investors .
. 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.
. The Fund is subject to substantial charges. Estimated gross trading
profits of approximately 7.58% 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 its initial $100 subscription
price.
. Certain general types of market conditions -- in particular, trendless
periods without major price movements -- make it difficult for the
Advisors to trade successfully.
See "RISK FACTORS" beginning at page 11.
---------------------
SUBSCRIBERS WILL BE REQUIRED TO MAKE CERTAIN REPRESENTATIONS AND WARRANTIES
ON THEIR SUBSCRIPTION AGREEMENT AND POWER 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 PROSPECTUS.
---------------------
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 Limited
Partnership Interest Price to Public (1) Selling Commissions(2)(3) Proceeds to Fund (2)(3)
==================================================================================================================
<S> <C> <C> <C>
Per Unit.................................. $100 None $100
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes on page (i).
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Selling Agent
Merrill Lynch Investment Partners Inc.
General Partner
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.
<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").
All Units for which subscriptions are accepted during a
calendar quarter are sold at a single closing date as of the beginning of the
immediately following quarter. Units participate in the profits and losses of
the Fund on and after such closing date.
Subscriptions for Units are accepted throughout each calendar
quarter. Subscribers' Merrill Lynch customer securities accounts are debited in
the amount of their subscription, on a settlement date designated by MLPF&S
approximately five business days after their subscriptions are accepted by MLIP.
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. Subscribers receive all interest earned,
and no fees or costs are assessed, on subscriptions while held in escrow.
There is no minimum number of Units that must be sold as of
the beginning of any given calendar quarter for any Units then to be sold.
(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 with MLIP contributing the
difference to the Fund to avoid dilution of other investors' interests.
Beginning with the thirteenth full month after a series of
Units is sold (Units are sold as of the beginning of the calendar quarter
immediately following the quarter during which the related subscriptions were
accepted), the Selling Agent receives ongoing production credits on all Units of
such series which remain outstanding (including Units purchased at a 3% discount
by officers and employees of ML&Co. and its affiliates) and which were sold by
Financial Consultants (the individual MLPF&S brokers) 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 after the sale of a Unit for as long as such
Unit remains outstanding. These ongoing production credits equal 2% per annum of
the average month-end Net Assets attributable to each Unit committed to trading;
75% of the capital attributable to each Unit sold under this Prospectus will
initially be committed to trading, which would result in annual ongoing
production credits of 1.5%.
MLIP provides all initial and ongoing production credits to
the Selling Agent at no additional cost to the Fund.
Financial Consultants receive no initial production credits on
new Units acquired with the proceeds of redemptions during or as of the end of
the preceding calendar quarter. However, the 2% ongoing production credits of
such Units, described above, will accrue on the new Units beginning with the
thirteenth month after the sale of the Units redeemed, rather than with the
thirteenth month after the reinvestment of the redemption proceeds of such
Units.
If a Limited Partner redeems Units during or as of the end of
a calendar quarter, and subscribes on or before the redemption date to the new
series of Units to be issued as of the beginning of the following quarter, any
otherwise applicable 3% redemption charge is waived on the reinvested redemption
proceeds. (The 3% redemption charge is primarily intended to reimburse MLIP for
selling commissions paid by it on Units which remain outstanding for a year or
less. No initial production credits are generated by the reinvestment of
redemption proceeds.) The Units acquired with redemption proceeds are subject to
a 3% redemption charge through the end of the twelfth month after their date of
sale.
-------------------------
-i-
<PAGE>
REGULATORY NOTICES
- ------------------
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, MLF, MLPF&S, ANY TRADING ADVISOR OR ANY
OTHER PERSON.
-------------------------
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF 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 42 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 AN
INVESTOR'S UNITS ARE WORTH NO MORE ON THEIR PRINCIPAL ASSURANCE DATE (FIVE YEARS
AFTER ISSUANCE) THAN THE GUARANTEED MINIMUM $100 PER UNIT, SUCH INVESTOR WILL
HAVE LOST THE ENTIRE USE OF HIS OR HER CAPITAL FOR FIVE YEARS. AT A 7% ANNUAL
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 INITIAL DELEVERAGING OF TRADING SUBSTANTIALLY REDUCES PROFIT
POTENTIAL.
3. ON AN ONGOING BASIS, MLIP CONTROLS THE LEVERAGE AT
WHICH THE FUND TRADES WITH THE PRIMARY OBJECTIVE OF PREVENTING 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 THE
NET ASSET VALUE OF A NEWLY-ISSUED UNIT DECLINED BY ONLY APPROXIMATELY 20% AND
WOULD BEGIN TO DELEVERAGE TRADING BELOW ITS INITIAL 75% LEVEL WELL BEFORE LOSSES
APPROACHING 20% PER UNIT HAD BEEN INCURRED.
5. EVEN IF THE FUND AVOIDS TRADING LOSSES, UNLESS THE
FUND EARNS SUFFICIENT PROFITS, MLIP WILL FURTHER DELEVERAGE OR TERMINATE
TRADING.
6. IF ONE SERIES OF UNITS IS REQUIRED TO DELEVERAGE OR
TERMINATE TRADING, ALL SERIES OF UNITS WILL BE REQUIRED TO DO SO.
7. IF THE FUND IS SUCCESSFUL, ITS PERFORMANCE WOULD HAVE
BEEN SUBSTANTIALLY BETTER WITHOUT ITS "PRINCIPAL PROTECTION" FEATURE.
8. "PRINCIPAL PROTECTION" DOES NOT PROTECT INVESTORS
AGAINST THE EFFECTS OF INFLATION.
9. "PRINCIPAL PROTECTION" DOES NOT TAKE INTO
CONSIDERATION THE TAX CONSEQUENCES OF INVESTING IN THE FUND.
10. THE ML&CO. GUARANTEE IS EFFECTIVE ONLY IN RESPECT OF
UNITS OUTSTANDING ON THEIR PRINCIPAL ASSURANCE DATE.
11. 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.
12. THE ML&CO. GUARANTEE IS A GENERAL, UNSECURED
OBLIGATION OF ML&CO.
13. 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 BEING SUBJECT TO THE FUND'S
REDEMPTION RESTRICTIONS AND COST STRUCTURE.
14. IRRESPECTIVE OF THE FUND'S "PRINCIPAL PROTECTION"
FEATURE (AND RESULTING OPPORTUNITY COSTS), ITS MULTI-ADVISOR STRATEGY
SIGNIFICANTLY REDUCES THE POSSIBILITY OF THE NET ASSET VALUE PER UNIT DECLINING
BELOW THE GUARANTEED LEVEL, CORRESPONDINGLY REDUCING THE LIKELIHOOD OF THE
GUARANTEE EVER BEING OF ANY BENEFIT TO INVESTORS.
15. PROSPECTIVE INVESTORS MUST CAREFULLY CONSIDER WHETHER
THE "PRINCIPAL PROTECTION" FEATURE OF THE FUND MERITS THE OPPORTUNITY COSTS
INVOLVED,
------------------
SEE "RISK FACTORS" BEGINNING AT PAGE 11, "LEVERAGE
CONSIDERATIONS" AT PAGE 36 AND "THE ML&CO. GUARANTEE" BEGINNING AT PAGE 37.
-2-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
Table of Contents
Prospectus Section Page
- ------------------ ----
Summary............................................ 5
The Fund......................................... 5
Risk Factors..................................... 6
Fund Operations.................................. 7
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 Opportunity Costs and Risks of
"Principal Protection"....................... 11
(5) Multi-Advisor Risk Control and
"Principal Protection"....................... 12
(6) Substantial Charges.......................... 12
(7) Importance of General Market
Conditions................................... 12
(8) No Diversification Benefits if the
the Fund Is Not Profitable................... 12
(9) No Assurance of Non-Correlation;
Limitations on Non-Correlation
Even if Achieved............................. 12
(10) The New Series of Units...................... 13
(11) Combining Independent Strategies............. 13
(12) Systematic Strategies........................ 13
(13) Discretionary Strategies..................... 13
(14) Increased Assets Under Management............ 13
(15) No Assurance of Advisors'
Continued Services........................... 13
(16) Changes in Trading Strategy.................. 13
(17) Illiquid Markets............................. 14
(18) Cash Management Risks........................ 14
(19) Redemptions Restricted ...................... 14
(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.................................... 15
(26) Bankruptcy or Default........................ 15
(27) Regulatory Change............................ 15
Investment Factors................................. 15
Performance of the Fund............................ 17
Performance of the Other MLIP Multi-Advisor
Futures Funds ................................... 18
Selected Financial Data............................ 23
The Two-Tier Structure of the Fund................. 24
Management's Discussion and Analysis of
Financial Condition and Results
of Operations..................................... 25
The Advisor Selection Process...................... 29
The Advisors....................................... 31
MLIP and MLF....................................... 32
Background........................................ 32
Principals........................................ 33
MLF............................................... 34
Fiduciary Obligations of MLIP...................... 34
Leverage Considerations............................ 36
The ML&Co. Guarantee............................... 37
Use of Proceeds and Interest Income................ 39
Charges............................................ 42
Charges Paid by the Fund......................... 43
Organizational and Initial Offering
Costs.................................... 44
Brokerage Commissions...................... 44
Use of Fund Assets......................... 45
Administrative Fees........................ 45
Bid-Ask Spreads............................ 46
F/X Desk Service Fees; EFP
Differentials ........................... 46
Securities Bid-Ask Spreads................. 46
Profit Shares.............................. 46
Extraordinary Expenses..................... 48
Charges Paid by Merrill Lynch.................... 48
Selling Commissions; Ongoing
Compensation............................. 48
Consulting Fees............................ 48
MLAM Fees.................................. 49
Redemption Charges............................... 49
-3-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
Table of Contents (cont.)
Prospectus Section Page
- ------------------ ----
Certain Litigation................................. 49
Conflicts of Interest.............................. 54
Merrill Lynch Affiliated Entities ......... 54
General.................................... 54
MLIP....................................... 55
MLF; MLIB; and MLAM........................ 55
The Trading Advisors....................... 55
Financial Consultants...................... 56
Proprietary Trading........................ 56
The Limited Partnership Agreement.................. 57
Federal Income Tax Consequences.................... 58
Plan of Distribution............................... 62
General...................................... 62
Subscription Procedure....................... 62
Purchases by Employee Benefit Plans.......... 63
Selling Agent Compensation................... 64
Legal Matters...................................... 64
Experts............................................ 64
Additional Information............................. 65
Index of Terms..................................... 66
Index to Financial Statements...................... 67
The Core Advisors................................... 89
Performance of the
Single-Advisor Futures
Funds Operated by MLIP.......................... 116
The Role of Managed
Futures in an Investment Portfolio.............. 118
Appendix -- Blue Sky Glossary...................... APP-1
Exhibit A -- Third Amended and Restated
Limited Partnership Agreement................... LPA-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)
-----------------------
MERRILL LYNCH INVESTMENT PARTNERS INC.
General Partner
Merrill Lynch World Headquarters
South Tower, Sixth 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.
--------------------
The Fund
ML Principal Protection L.P. (the "Fund") is a limited
partnership which trades in the international futures, commodity options and
forward markets, with the objectives of achieving long-term capital appreciation
while controlling performance volatility. The general partner of the Fund is
Merrill Lynch Investment Partners Inc. ("MLIP").
The Fund's assets are allocated and reallocated by MLIP to the
trading management of independent professional advisors (the "Trading Advisors"
or the "Advisors") applying proprietary strategies in numerous markets.
Merrill Lynch & Co. Inc. ("ML&Co.") has agreed to contribute
sufficient assets to the Fund so that each Unit outstanding as of its Principal
Assurance Date (five years from the date of issuance) will be no less than such
Unit's initial $100 subscription price. In order to prevent trading losses which
might require ML&Co. to make payments under such guarantee, each series of Units
commences trading with only 75% of its assets allocated to the Advisors for
management. On an ongoing basis, MLIP controls the percentage of each series'
assets allocated to trading primarily in order to protect ML&Co. from any
liability under its guarantee but also with the objective of increasing the
percentage of each series' capital allocated to trading, thereby increasing such
series' profit potential (and risk).
The Fund offers its Units, and receives and processes
subscriptions, on a continuous basis, throughout each calendar quarter.
Investors whose subscriptions are accepted at any time during a calender quarter
are admitted to the Fund as Limited Partners as of the beginning of the
immediately following quarter. Investors' customer securities accounts are
debited in the amount of their subscriptions on settlement dates throughout each
quarter shortly after their subscriptions are accepted by MLIP. Subscription
proceeds received during a quarter are held in escrow pending investment in
Units as of the beginning of the following quarter. All interest earned on
subscriptions while held in escrow is paid to the investors.
The Fund began trading on October 12, 1994 with an initial
investment of $32,000,000. To date, a total of an additional $69,903,536 has
been invested in the Units at seven subsequent quarter-end closings (the last
sale of the Units occurred as of July 16, 1996). Through September 30, 1996, an
aggregate of 1,019,035 of Units had been sold and 240,034 redeemed. As of
September 30, 1996, the Fund's capitalization was $81,235,645, and the Fund had
a total of 3,765 Limited Partners.
Through September 30, 1996, the highest month-end Net Asset
Value of a Series A Unit was $110.40 and the lowest $101.04. See "Performance of
the Fund" at page 17 and "Selected Financial Data" at page 23.
As of September 30, 1996, the Net Asset Value of the series of
Units, each issued at $100 per Unit as of the beginning of successive calendar
quarters, were as follows:
<TABLE>
<CAPTION>
September 30, 1996
Unit September 30, 1996 Net Asset Value per Unit
Series Date of Issuance Net Asset Value per Unit Adding back Distributions
------ ---------------- ------------------------ -------------------------
<S> <C> <C> <C>
A October 12, 1994 $109.80 115.80
B January 9, 1995 $107.13 113.13
C April 10, 1995 $102.49 105.99
D July 11, 1995 $101.45 104.95
E October 12, 1995 $105.31 105.31
F January 16, 1996 $102.08 102.08
G April 19, 1996 $100.71 100.71
H July 16, 1996 $ 99.90 99.90
</TABLE>
-5-
<PAGE>
SUMMARY (cont.)
Distributions of $6.00 per Series A Units and Series B Units were paid on
October 1, 1995 and January 1, 1995, respectively, and distributions of $3.50
per Series C Unit and Series D Unit were paid on April 1, 1996 and July 1, 1996
respectively. No distributions for Series E-H Units had been paid as of
September 30, 1996. Distributions of $6.00 per Series A Unit and $3.50 per
Series E Unit were paid in October 1996.
All series of Units issued to date have (i) traded with 60% of
their capital allocated to trading, (ii) received annual fixed-rate and possible
discretionary distributions and (iii) had a Principal Assurance Date seven years
after issuance. Units sold pursuant to this Prospectus and thereafter will (x)
commence trading with 75% of their assets allocated to trading, (y) receive (in
all likelihood) no distributions and (z) have a Principal Assurance Date five
years after issuance. These different leverage, distribution and Principal
Assurance Date parameters could materially affect both performance returns and
volatility.
Risk Factors
The following are certain of the significant risks of this
investment.
. Investors must be prepared to lose all or substantially all of the time
value of their investment. At a 7% annual interest rate, the present
value of receiving the assured minimum $100 per Unit five years in the
future would be only approximately $71. See "Risk Factors -- (1)
Investors May Incur Substantial Losses" at page 11.
. The 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 immediate
opportunity costs and the risk of significantly increased opportunity
costs in the future. MLIP initially allocates only 75% of each series'
capital to 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 or even the termination of trading in
the event that the Fund does not make sufficient profits for the Net
Asset Value of a series of Units to increase above its initial $100 per
Unit after all fees and expenses. See "Risk Factor (4) -- The Costs and
Risks of 'Principal Protection'" at page 11.
. Relatively small losses could result in MLIP further deleveraging or
terminating trading. See "Risk Factor (4) -- The Costs and Risks of
'Principal Protection'" at page 11.
. If MLIP deleverages any one series of Units, it must similarly
deleverage all series. See "Risk Factors --(4) The Costs and Risks of
'Principal Protection'" at page 11.
. Irrespective of the deleveraging of the Fund's trading, the risk
control characteristics of the Fund's multi-advisor approach make it
highly unlikely that the ML&Co. guarantee, despite its significant
opportunity costs, will ever benefit investors. See "Risk Factors --
(5) Multi-Advisor Risk Control and 'Principal Protection'" at page
12.
. 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.
See "Risk Factors -- (4) The Opportunity Costs and Risks of 'Principal
Protection'" at page 11.
. The Fund is subject to substantial charges. Estimated gross trading
profits of 7.58% 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
-6-
<PAGE>
SUMMARY (cont.)
value to equal the initial $100 subscription price. See "-- Breakeven
Table" below at page 9, "Charges" at page 42 and "Risk Factors -- (6)
Substantial Charges" at page 12.
. Certain general types of market conditions -- in particular, trendless
periods without major price movements -- make it difficult for the
Advisors 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.
Fund Operations
The Fund's Multi-Advisor 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.
The Fund has to date retained between five and ten Advisors at
any one time, trading independently of each other and employing diverse trading
methods. A number of Advisor changes, as well as reallocations of assets among
Advisors, have been made since inception. MLIP allocates a substantial portion
of the Fund's trading assets to a limited group of core Advisors, each of which
receives significant allocations -- typically 20% or more of the assets
committed to trading. ("Core Advisors" is the term used by MLIP to identify
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. See "-- The Advisors," below, "The Advisor Selection Process" at
page 29 and "The Core Advisors" at page 89.
Since inception, traditional commodities -- energy, metals and
agriculture -- have represented approximately 20% to 40% of the Fund's holdings,
with the remainder of its market commitments in currencies and financial
instruments.
The Fund offers investors the opportunity to diversify a
limited portion of the risk segment of their portfolios into an investment field
that has historically often demonstrated a low degree of performance correlation
with traditional stock and bond holdings. 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. Since it began trading,
the Fund's returns have, in fact, frequently been significantly non-correlated
(not, however, negatively correlated) with the United States stock and bond
markets. See "The Role of Managed Futures in an Investment Portfolio" at page
118.
MLIP
MLIP is one of the largest managed futures sponsors in the
United States (or elsewhere) in terms of both financial and personnel 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 two current core Advisors were
collectively managing approximately $2.26 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.
-7-
<PAGE>
SUMMARY (cont.)
See "The Core Advisors" beginning at page 89 for certain
performance and other information relating to the current core Advisors. The
accompanying Prospectus Supplement identifies the current non-core
Advisors.
"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' Principal
Assurance Date.
Units redeemed before the Principal Assurance Date are
entitled to no benefits under the guarantee, and there is no assurance as to any
minimum redemption value for such Units.
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 approximately 80% to 90% of the
Fund's capital, investing on an unleveraged basis in U.S. Treasury bills, notes
and bonds, as well as 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.
As of October 31, 1996, MLAM and its affiliates, collectively,
had a total of approximately $217.8 billion in investment company and other
portfolio assets under management, including accounts of certain affiliates of
MLAM.
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. The Fund's liability for any
trading losses is limited to the Fund's investment in the Trading Partnership.
Trading through the limited liability conduit of the Trading Partnership rather
than directly makes it possible for MLIP to ensure, as required by applicable
CFTC rules, that the assets attributable to any one series of Units cannot
become subject to paying trading losses attributable to any other series. The
combination of the pro rata sharing of losses at the Trading Partnership and the
insulation of the Fund assets not invested in the Trading Partnership from the
risk of trading losses eliminates the possibility of one series' assets paying
debts attributable to another. See "The Two-Tier Structure of the Fund" at page
24 and "Leverage Considerations" at page 36.
There can be no assurance that the Fund will achieve its objectives or
avoid substantial losses. No Advisor or Merrill Lynch entity has
guaranteed the success of the Fund. The ML&Co. guarantee
of the minimum Net Asset Value per Unit as of its
Principal Assurance Date is not a guarantee
of success or of avoiding substantial
present value losses.
-8-
<PAGE>
SUMMARY (cont.)
Breakeven Table
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Column I Column II
Breakeven
Dollar Return Required
Breakeven ($5,000 Initial
Percentage Return Investment) First
Required First Twelve Months
Twelve Months of Investment (based on a
of Investment constant
(based on a constant 75% allocation of assets
Expenses and 75% allocation of to trading)
Interest Income assets to trading)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Brokerage Commission/(1)/ 6.94% $347.00
- ---------------------------------------------------------------------------------------------------------------
Administrative Fees/(2)/ 0.19% $ 9.50
- ---------------------------------------------------------------------------------------------------------------
Organizational and Initial Offering Costs/(3)/ 0.10% $ 5.00
- ---------------------------------------------------------------------------------------------------------------
F/X Desk Service and Related Fees/(4)/ 0.25% $ 12.50
- ---------------------------------------------------------------------------------------------------------------
Profit Shares/(5)/ 2.00% $100.00
- ---------------------------------------------------------------------------------------------------------------
Redemption Charge/(6)/ 3.10% $155.00
- ---------------------------------------------------------------------------------------------------------------
Interest Income/(7)/ (5.00)% $(250.00)
- ---------------------------------------------------------------------------------------------------------------
RETURN ON A $5,000 INITIAL INVEST-
MENT REQUIRED TO BREAKEVEN 7.58% $379.00
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Notes to Breakeven Table
(1) Brokerage Commissions include the Consulting Fees payable to
the Advisors by Merrill Lynch Futures. Consulting Fees range
from 2% to 4% per annum of Fund assets managed, depending on
the Advisor.
(2) Beginning January 1, 1996, the annual Brokerage Commission
payable by MLF was reduced to 9.25% from 9.50% with 0.25% per
annum being recharacterized as an Administrative Fee payable
directly to MLIP by the Fund. This recharacterization had no
effect on investors.
(3) Estimated, based on the Fund's October 1, 1996 capitalization.
(4) Estimated; paid on a per-transaction basis. The bid-ask
spreads paid on forward currency trades are difficult to
estimate and are not included as an expense in the Breakeven
Table. The F/X Desk is the Foreign Exchange Desk organized by
MLIP through which the Fund trades forward currency contracts.
See "Charges" at page 42.
(5) It is not possible to predict the Profit Shares which might be
paid in a breakeven year. MLIP believes, based on the
experience of the Fund to date, that 2.00% of average
month-end capitalization is a reasonable estimate of breakeven
Profit Share expense; however, actual Profit Shares could
differ.
(6) Redemption charges would equal 3.1% of the initial $5,000
investment because these charges would equal 3% of the $5,155
year-end Net Asset Value necessary in order for the investor
to receive net redemption proceeds of $5,000 after subtracting
the 3% redemption charge.
(7) Estimated; the total yield earned on the Fund's assets,
including the results of MLAM's cash management services, is
assumed to approximate the 91-day Treasury bill rate for
purposes of this estimate; in fact, however, MLAM's cash
management may be unable to produce an enhanced yield or avoid
a loss of principal. Such estimate is net of the yield earned
on the Fund's assets but retained by MLF. See "Use of Proceeds
and Interest Income" at page 39.
----------------
If the percentage of a series' capital allocated to trading
were to increase, so would Brokerage Commissions and
Administrative Fees (as well as F/X Desk service and related
fees) as a percentage of total capital. At 100% leverage, the
Fund's annual Brokerage Commissions and Administrative Fees
would equal 9.25% and 0.25%, respectively, of average
month-end Net Assets, and the Trading Profits required for an
initial $5,000 investment to breakeven would increase to 9.95%
or $497.50.
-9-
<PAGE>
SUMMARY (cont.)
Federal Income Tax Consequences
In the opinion of counsel, the Fund and the Trading
Partnership are each properly classified as partnerships for federal income tax
purposes. Limited Partners 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 trading gains and
losses allocable to the Fund are treated as capital gains or losses for tax
purposes; interest income received by the Fund is treated as ordinary income.
The Fund could be allocated significant capital losses from the Trading
Partnership, and investors nevertheless be required to pay tax on their
allocable share of the Fund's 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. The "principal protection" feature of the Fund limits the
maximum loss which an investor can incur but in no respects guarantee that the
Fund will be successful. 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 all
or substantially all or of the 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 SUBSCRIBER 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 all or substantially all of
the time value of their investment in the Fund for the entire five-year Time
Horizon from a Unit's issuance to its Principal Assurance Date. At a 7% annual
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, may 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 Opportunity 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,
correspondingly reducing profit potential, in order to protect ML&Co. from any
liability 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 per
Unit of a given series to increase above 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 need to ensure that the Net Asset Value per Unit does not decline
below the present value of $100 will reduce or eliminate the Fund's profit
potential by diminishing or terminating its ability to trade, to the material
detriment of investors.
In the event that MLIP deleverages any particular series of
Units, it must deleverage all series to the same level. Consequently, a series
could be deleveraged as a result of losses which accrued subsequent to such
series having recognized profits more than sufficient to offset such losses, but
which were earned before a more recent series was issued and, consequently, were
not available to offset the same losses incurred by such series. Conversely,
losses incurred before a particular series is issued could indirectly cause a
further deleveraging of such series' trading due to the effect of such losses on
the leverage which MLIP believes it is appropriate to use for an earlier-issued
series.
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. Derivative actions are subject to a
number of procedural requirements.
-11-
<PAGE>
(5) Multi-Advisor Risk Control and "Principal Protection"
In addition to the opportunity costs of the deleveraged
trading resulting from 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 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, decreasing the likelihood of material gains or losses. 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 possibility of the ML&Co. guarantee
ever being of any tangible benefit to investors. See "-- (11) Combining
Independent Strategies" below at page 13.
(6) Substantial Charges
The Fund is subject to substantial charges. Due to the
"principal protection" structure of the Fund, it is particularly important that
the capital of any series 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% leverage rather than
the 60% leverage used by previous series. Brokerage Commissions as well as
Administrative Fees and the Fund's per-trade costs (for example, F/X Desk
service 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 the 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
different Advisors at or about the same time, despite their implementing
different and independent strategies. 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 for a
traditional portfolio.
(9) No Assurance of Non-Correlation; Limitations on Non-Correlation Even 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 fulfill 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, (iv) have almost not risk of loss of principal, and (v) incur
virtually no costs or expenses.
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, thereby reducing or eliminating the
Fund's diversification benefits. During unfavorable economic cycles, an
investment in the Fund may increase rather than mitigate a portfolio's aggregate
losses.
-12-
<PAGE>
(10) The New Series of Units
All series of Units issued under this Prospectus will commence
trading at 75% leverage. Previously issued series began trading at 60% leverage
and have maintained that leverage to date. The previously issued series of Units
have mandatory distribution policies which increase the risk of their trading
being deleveraged. Consequently, MLIP reduces the initial leverage at which
these Units trade. The higher leverage applied by the new series of Units will
result in their expected performance being more volatile and involving a high
degree of risk (as well as profit potential) than is the case with Units issued
prior to the date hereof.
If MLIP makes a leverage adjustment to any series issued under
this Prospectus, MLIP must make corresponding adjustments to the other series
issued hereunder or subsequently so that all such series trade at the same level
of leverage. This regulatory requirement could affect certain series adversely.
See "-- (4) The Costs and Risks of 'Principal Protection'" at page 11.
MLIP does not presently intend to make any distributions on
Units issued under this or subsequent Prospectuses.
(11) 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. See "--
Multi-Advisor Risk Control and Principal Protection," above at page 12.
(12) Systematic Strategies
Most of the Fund's trading assets have been allocated since
inception to Advisors which 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.
(13) Discretionary Strategies
Certain of the Fund's Advisors may be 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.
(14) 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 which it may manage, and most of them are at or near their all-time high
in assets under management.
(15) 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.
(16) Changes in Trading Strategy
An Advisor may make changes in its trading strategies without
the knowledge of MLIP.
-13-
<PAGE>
(17) Illiquid Markets
Certain positions held 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.
(18) 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.
(19) Redemptions Restricted
Investors' limited ability to redeem Units could result in
there being a substantial difference between a Unit's redemption value and its
Net Asset Value as of the date by which irrevocable redemption requests must be
received. Redemption charges of 3% apply through the end of the twelfth month
after a Unit is sold.
(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 profits and losses derived from trading foreign futures
and options will generally be denominated in foreign currencies; consequently,
the Fund will be subject to a certain degree of exchange-rate risk in trading
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 54.
(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.
All performance information 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 allocable to the Fund, as investment advisory
fees, which are subject to substantial restrictions on deductibility for
individual taxpayers. MLIP has not, to date, 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 are almost exclusively capital
losses for tax purposes. 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.
-14-
<PAGE>
(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 were to result 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 such tax consequences differ among
investors. See "Federal Income Tax Consequences" at page 58.
(26) Bankruptcy or Default
In the event of the bankruptcy of MLF, the Fund could be
unable to recover its assets, and investors could incur substantial losses,
despite the Fund having been otherwise highly profitable.
(27) Regulatory Change
Future regulatory changes could be materially adverse to the
Fund.
--------------------
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
The Advisors selected by MLIP for the Fund generally satisfy
MLIP's criteria of having performed successfully for a significant period of
time (no less than approximately 12-18 months) prior to their selection. MLIP
evaluates successful performance in a variety of ways, including cumulative
profitability, performance volatility and the duration and frequency of
drawdowns. Although MLIP uses a variety of statistical measures in assessing
prospective Advisors' performance, because of the inherent uncertainty of future
performance, MLIP relies heavily on its subjective evaluation of a prospective
Advisor's abilities in the selection process. Other than in exceptional
circumstances, prospective Advisors who do not satisfy MLIP's quantitative past
performance criteria are not given further consideration. However, even Advisors
which are considered eligible on the basis of past performance must also meet
MLIP's qualitative standards (e.g., trading discipline, market view, reputation
in the industry, past experience, willingness to negotiate fees, etc.) in order
to be selected.
(3) Market and Strategy Diversification
In its asset allocation, 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 89 and
90.
(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
stability. 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 reward/risk profile of a
portfolio. Non-correlation without positive performance will not provide any
diversification advantages, and there can be no assurance that the Fund will
trade profitably.
-15-
<PAGE>
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 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, reflecting MLIP's belief 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.
(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 limited portion of the risk segment of their
portfolios to a managed futures investment such as the Fund in which selected
advisors specializing in global futures and forwards trade with the ability to
move capital rapidly among the world's economies and markets, investors have the
potential, if their futures investment is, in fact, profitable as well as non-
correlated with stocks and bonds, to add a valuable aspect of diversification to
a traditionally structured portfolio enhancing their prospects for superior
performance as well as reducing both the volatility of their portfolios over
time and their dependence on any single nation's economy.
(6) Potential Yield Enhancement
MLAM manages approximately 80% to 90% of the Fund's assets
through investments in Government Securities, maintaining a short-term portfolio
with a maximum duration of two years (i.e., the overall portfolio has a maximum
exposure to changes in prevailing interest rates comparable to that of a
treasury note with a maturity of slightly longer than two years). The remainder
of the Fund's assets are credited with interest by MLF at approximately 0.50%
per annum below the prevailing 91-day Treasury bill rate. See "Use of Proceeds
and Interest Income" at page 39. 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 31, 1996, the total return on
the Fund's assets managed by MLAM had equalled approximately 3/5 of 1% per annum
over the prevailing 91-day Treasury bill return. 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 and Interest
Income" at page 39.
(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). Any greater number of whole Units may be purchased.
The small minimum investment required by the Fund makes it
possible for first-time investors to gain exposure to managed futures through
investing in the Fund 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.
(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 itself provides the
remaining $3 per Unit to the Fund 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 eligible 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.
-16-
<PAGE>
PERFORMANCE OF THE FUND
ML PRINCIPAL PROTECTION L.P.
October 1, 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:/(2)/ (3.70)% (2/96)
Worst Peak-to-Valley Drawdown:/(3)/ (3.70)% (2/96)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Monthly Rates of Return/(4)/
- ---------------------------------------------------------------------------------------------
Month 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
January 2.45% (0.55)% --
- ---------------------------------------------------------------------------------------------
February (3.70)% 2.24% --
- ---------------------------------------------------------------------------------------------
March 1.06% 4.17% --
- ---------------------------------------------------------------------------------------------
April 3.10% 0.91% --
- ---------------------------------------------------------------------------------------------
May (1.98)% 1.20% --
- ---------------------------------------------------------------------------------------------
June 1.36% (0.21)% --
- ---------------------------------------------------------------------------------------------
July (1.68)% (1.30)% --
- ---------------------------------------------------------------------------------------------
August 0.49% 0.95% --
- ---------------------------------------------------------------------------------------------
September 1.62% (0.32)% --
- ---------------------------------------------------------------------------------------------
October -- 0.29% 1.04%
- ---------------------------------------------------------------------------------------------
November -- 0.69% 0.32%
- ---------------------------------------------------------------------------------------------
December -- 2.12% 0.40%
- ---------------------------------------------------------------------------------------------
Compound 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
with 75% of their assets allocated to trading. All series of Units issued to
date have traded at only approximately 60% leverage. Increasing trading leverage
should increase monthly rates of return (both positive and negative), drawdowns,
profit potential, risk and volatility.
-------------------------
(1) Pursuant to applicable CFTC regulations, a Multi-Advisor
fund is defined as one that allocates no more than 25% of its trading assets to
any single manager. The Fund does not currently allocate more than 25% of its
trading assets to any single Advisor but may do so in the future; consequently,
it is referred to as a Multi-Advisor; Selected Advisor fund. Applicable CFTC
regulations define a "Principal Protected" fund as one which is designed to
limit the loss of participants' initial investment. MLIP's trading leverage
policies and the ML&Co. guarantee limit Limited Partners' losses on their Units
to the time value of their investment.
(2) Worst Monthly Drawdown represents the largest negative
Monthly Rate of Return experienced by the Fund; a drawdown is measured on the
basis of month-end Net Asset Value only, and does not reflect intra-month
figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest
percentage decline from a month-end cumulative Monthly Rate of Return without
such cumulative Monthly Rate of Return being equalled or exceeded as of a
subsequent month-end. For example, if the Monthly Rate of Return was (1)% in
each of January and February, 1% in March and (2)% in April, the Peak-to-Valley
Drawdown would still be continuing at the end of April in the amount of
approximately (3)%, whereas if the Monthly Rate of Return had been approximately
3% in March, the Peak-to-Valley Drawdown would have ended as of the end of
February at approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the Fund
during the month of determination (including interest income and after all
expenses 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 during the same period the
performance of all series then outstanding. 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.
--------------------------
-17-
<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 certain single advisor funds sponsored by MLIP is
set forth beginning at page 116. MLIP, in general, specializes in sponsoring
multi-advisor and selected-advisor funds.
The MLIP funds with "principal protection" features, such as the
Fund, generally allocate less than all of their capital to trading as a means of
managing the risk of losses which could lead to the further deleveraging or even
termination of their trading. Different MLIP "principal protection" funds have,
however, come over time to 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 prior
hereto 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) which do not have "principal protection" features) each began trading
with approximately 70% of their respective assets allocated to trading, and
certain of such SECTOR Strategy Funds(SM) have traded at significantly more or
less than 70% leverage over time. The MLIP funds without "principal protection"
features generally trade at 100% leverage.
A number of offshore funds sponsored by MLIP began operations
investing in a domestic MLIP fund implementing the same trading strategy.
Consequently, the subscriptions to such offshore funds are also reflected as
subscriptions to their domestic counterparts.
All but one of the "principal protected" MLIP funds are also
multi-advisor or selected-advisor funds.
The fee structures of the various MLIP multi- and selected-
advisor funds vary somewhat. However, to date the aggregate fees of such funds,
as a percentage of their respective assets allocated to trading, have not
differed materially.
ML Principal Protection Plus Ltd. (see page 19) has operated to
date as an offshore counterpart of the Fund. However, in the future it will
trade at a different degree of leverage and maintain a different distribution
policy than will be applicable to the Units issued under this Prospectus.
The MLIP funds are each different investments, have different
advisors and different numbers of advisors, and may allocate different
percentages of assets to trading in general as well as among such advisors.
As of the date of this Prospectus, each of the current Advisors
is managing one or more accounts for other MLIP Funds. However, no MLIP Fund has
the same Advisor group as does the Fund.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS, AND MATERIAL DIFFERENCES EXIST BETWEEN SUBSTANTIALLY ALL OF THE
FOLLOWING FUNDS AND THE FUND.
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.
-18-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
MLIP SELECTED-ADVISOR AND MULTI-ADVISOR FUNDS
WITH "PRINCIPAL PROTECTION" FEATURES
SEPTEMBER 1, 1996
- ---------------------------------------------------------------------------------------------------------------
Worst Monthly
Type of Inception Aggregate Current Drawdown/(1)//(2)/
NAME OF FUND Offering of Trading Subscriptions Capitalization % Month
- ---------------------------------------------------------------------------------------------------------------
<S> <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)
- ---------------------------------------------------------------------------------------------------------------
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)
- ---------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund/(SM)/
II L.P. (SECTOR II Units) Public Dec. 1990 $136,410,000 $14,681,835 (4.73)% (2/96)
- ---------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund/(SM)/
II L.P. (SECTOR III Units) Public July 1991 $194,005,000 $26,906,145 (8.64)% (2/96)
- ---------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund/(SM)/
International II Ltd.
(SECTOR III Shares) Private July 1991 $85,701,800 $8,230,204 (7.10)% (1/92)
- ---------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund/(SM)/
II L.P. (Series A Units) Public July 1992 $75,646,400 $4,154,937 (6.41)% (2/96)
- ---------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund/(SM)/
International IV Ltd.
(Series A Shares) Private July 1992 $55,189,400 $3,825,437 (6.22)% (2/96)
- ---------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund/(SM)/
V L.P. Public Jan. 1993 $137,500,000 $13,772,259 (7.51)% (2/96)
- ---------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund/(SM)/
International V Ltd. Private Jan. 1993 $81,252,600 $5,924,535 (3.41)% (7/95)
- ---------------------------------------------------------------------------------------------------------------
SECTOR/(SM)/ International
Limited Private Sept. 1993 $163,806,100 $14,203,992 (4.60)% (2/94)
- ---------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund/(SM)/
VI L.P. Public Sept. 1993 $108,693,900 $31,916,415 (5.89)% (7/96)
- ---------------------------------------------------------------------------------------------------------------
Yen Linked ML PPP Ltd. Private Oct. 1995 (Yen)8,723,000,000 (Yen)8,674,648,656 (1.67)% (2/96)
- ---------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund/(SM)/ dissolved as of
International II Ltd. Private Dec. 1990 $55,181,600 12/31/95 (4.56)% (8/94)
- ---------------------------------------------------------------------------------------------------------------
ML Japan Investment Partners dissolved as of
Ltd Private Aug. 1993 (Yen)1,050,000,000 6/30/96 (3.52)% (7/94)
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
MLIP SELECTED-ADVISOR AND MULTI-ADVISOR FUNDS
WITH "PRINCIPAL PROTECTION" FEATURES
SEPTEMBER 1, 1996
- ------------------------------------------------------------------------------------------------------------------------------
Cumulative
Rate of
Return 1996
Worst Month Jan. 1, 1991- Compound 1995 1994 1993
Peak-to-Valley Aug. 31, 1996 Rate of Compound Compound Compound
Drawdown/(3)/ (or dissolu- Return Rate of Rate of Rate of
NAME OF FUND % Period tion) (8 months) Return Return Return
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ML Principal Protection Plus
Ltd. 1. (offshore 14.27% 1.48%
counterpart of the Fund) (3.72)% (2/96) (composite)* 1.35% 11.10% (2 1/2mos.) N/A
- ------------------------------------------------------------------------------------------------------------------------------
The S.E.C.T.O.R. Strategy
Fund/(SM)/ L.P. (13.78)% (1/92-5/92) 55.89% 1.50% 19.25% (9.29)% 19.36%
- ------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund/(SM)/
II L.P. (SECTOR II Units) (15.93)% (8/93-1/95) 25.15% (0.96)% 13.50% (9.93)% 5.49%
- ------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund/(SM)/ II L.P.
(SECTOR III Units) (14.25)% (1/92-5/92) 22.88% (4.19)% 9.30% (3.22)% 15.99%
- ------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund/(SM)/
International II Ltd.
(SECTOR III Shares) (14.25)% (1/92-5/92) 28.23% 2.06% 2.84% 0.77% 15.99%
- ------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund/(SM)/ IV L.P.
(Series A Units) (8.98)% (6/95-10/95) 9.36% (7.29)% 9.78% (5.73)% 13.40%
- ------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund/(SM)/
International IV Ltd. (Series
A Shares) (8.30)% (1/94-1/95) 12.59% (4.81)% 11.84% (7.21)% 13.40%
- ------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund/(SM)/ V L.P. (10.14)% (2/96-6/96) 5.68% (8.51)% 14.22% (3.68)% 4.99%
- ------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund/(SM)/
International V Ltd. (8.00)% (6/95-10/95) 9.16% (2.59)% 11.11% (3.94)% 4.99%
- ------------------------------------------------------------------------------------------------------------------------------
(3.25)%
SECTOR/(SM)/ International Limited (10.43)% (9/93-2/94) (0.66)% (0.66)% 7.65% (3.99)% (3 2/3 mos.)
- ------------------------------------------------------------------------------------------------------------------------------
(1.72)%
The SECTOR Strategy Fund/(SM)/ VI L.P. (8.97)% (5/96-7/96) 8.25% 4.04% 6.72% (0.80)% (4 mos.)
- ------------------------------------------------------------------------------------------------------------------------------
(0.30)% 0.16%
Yen Linked ML PPP Ltd. (1.67)% (2/96) (composite)* (0.46)% (3 mos.) N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund/(SM)/
International II Ltd. (16.49)% (8/93-1/95) 35.45% N/A 21.27% (9.64)% 5.49%
- ------------------------------------------------------------------------------------------------------------------------------
(1.69)% 1.13%
ML Japan Investment Partners Ltd. (7.32)% (1/94-2/95) (2.80)% (6 mos.) 3.95% (5.95)% (5 mos.)
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------
MLIP SELECTED-ADVISOR AND MULTI-ADVISOR FUNDS
WITH "PRINCIPAL PROTECTION" FEATURES
SEPTEMBER 1, 1996
- -----------------------------------------------------------
1992 1991
Compound Compound
Rate of Rate of
NAME OF FUND Return Return
- -----------------------------------------------------------
<S> <C> <C>
ML Principal Protection Plus
Ltd. 1.35% (offshore
counterpart of the Fund) N/A N/A
- -----------------------------------------------------------
The S.E.C.T.O.R. Strategy
Fund/(SM)/ L.P. (3.43)% 23.18%
- -----------------------------------------------------------
The SECTOR Strategy Fund/(SM)/
II L.P. (SECTOR II Units) (2.76)% 20.50%
- -----------------------------------------------------------
The SECTOR Strategy Fund/(SM)/ II L.P. 13.99%
(SECTOR III Units) (8.30)% (6 mos.)
- -----------------------------------------------------------
The SECTOR Strategy Fund/(SM)/
International II Ltd. 13.99%
(SECTOR III Shares) (8.30)% (6 mos.)
- -----------------------------------------------------------
The SECTOR Strategy Fund/(SM)/ IV L.P. 0.51%
(Series A Units) (6 mos.) N/A
- -----------------------------------------------------------
The SECTOR Strategy Fund/(SM)/
International IV Ltd. (Series 0.51%
A Shares) (6 mos.) N/A
- -----------------------------------------------------------
The SECTOR Strategy Fund/(SM)/ V L.P. N/A N/A
- -----------------------------------------------------------
The SECTOR Strategy Fund/(SM)/
International V Ltd. N/A N/A
- -----------------------------------------------------------
SECTOR/(SM)/ International Limited N/A N/A
- -----------------------------------------------------------
The SECTOR Strategy Fund/(SM)/ VI L.P. N/A N/A
- -----------------------------------------------------------
Yen Linked ML PPP Ltd. N/A N/A
- -----------------------------------------------------------
The SECTOR Strategy Fund/(SM)/
International II Ltd. (2.76)% 20.50%
- -----------------------------------------------------------
ML Japan Investment Partners Ltd. N/A N/A
- -----------------------------------------------------------
</TABLE>
* The composite return of the fund, not the performance of any individual
series of Shares/Units.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE FUNDS. 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 22 are an integral part of the
above performance information.
-19-
<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)//(2)/ Drawdown/(3)/
NAME OF FUND Offering of Trading Subscriptions Capitalization % Month % Period
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ML Futures Investments II L.P. Public May 1988 $269,809,880 $13,467,354 (10.34)% (1/91) (17.81)% (11/90-8/91)
- --------------------------------------------------------------------------------------------------------------------------------
ML Futures Investments L.P. Public Mar. 1989 $86,500,700 $23,557,474 (5.09)% (2/91) (10.85)% (6/95-7/96)
- --------------------------------------------------------------------------------------------------------------------------------
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 Ltd. Private July 1992 $9,131,000 $499,712 (7.32)% (2/96) (10.79)% (1/94-1/95)
(Series B Shares)
- --------------------------------------------------------------------------------------------------------------------------------
ML Global Horizons L.P. Public Jan. 1994 $116,181,819 $84,299,930 (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)
- --------------------------------------------------------------------------------------------------------------------------------
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>
- ------------------------------------------------------------------------------------------------------------------------
MLIP SELECTED-ADVISOR AND MULTI-ADVISOR FUNDS
WITHOUT "PRINCIPAL PROTECTION" FEATURES
SEPTEMBER 1, 1996
- ------------------------------------------------------------------------------------------------------------------------
Cumulative
Rate of
Return
Jan. 1,
1991- 1996
Aug. 31, Compound 1995 1994 1993 1992 1991
1996 (or Rate of Compound Compound Compound Compound Compound
dissolu- Return Rate of Rate of Rate of Rate of Rate of
NAME OF FUND tion) (8 months) Return Return Return Return Return
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ML Futures Investments II L.P. 18.07% (7.36)% 17.07% (1.36)% 18.67% (3.17)% (3.95)%
- ------------------------------------------------------------------------------------------------------------------------
ML Futures Investments L.P. 34.28% (6.29)% 11.80% 2.95% 16.56% 4.06% 2.64%
- ------------------------------------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L.P. 53.00% (3.97)% 34.89% (8.64)% 20.64% (16.65)% 28.57%
(Series 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 Ltd. 18.96% (4.85)% 14.51% (9.37)% 19.56% 0.76% N/A
(Series B Shares) (6 mos.)
- ------------------------------------------------------------------------------------------------------------------------
ML Global Horizons L.P. 24.28% (0.06)% 19.48% 4.08% N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
ML Global Horizons Ltd.
(Series A) 25.21% 0.38% 19.77% 4.15% N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
ML Global Horizons Ltd.
(Series B) 27.95% 0.47% 22.62% 3.86% N/A N/A N/A
(4 mos.)
- ------------------------------------------------------------------------------------------------------------------------
The JLI Trading Co. Fund 4.67% 2.17% 2.45% N/A N/A N/A N/A
(10 mos.)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE
FUNDS. THESE FUNDS ARE EACH TRADED PURSUANT TO
MATERIALLY DIFFERENT PROGRAMS AND WITH MATERIALLY
DIFFERENT OBJECTIVES THAN THE FUND.
The Notes on Page 22 are an integral part of the
above performance information.
-20-
<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)(2)/ Drawdown/(3)/
NAME OF FUND Offering of Trading Subscription Capitalization % Month % Period
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Futures Opportunities
Limited Private Dec. 1988 $45,310,202 dissolved as of (8.94)% (1/92) (17.34)% (1/92-
7/31/92 5/92)
- ----------------------------------------------------------------------------------------------------------------------------------
ML Futures Investments
Ltd. Private Mar. 1989 $68,202,237 dissolved as of (6.17)% (2/94) (11.10)% (1/94-
8/31/94 2/94)
- ----------------------------------------------------------------------------------------------------------------------------------
MLIP ceased
functioning as
Canadian Diversified general partner
Futures Fund Public July 1989 $13,060,222 as of (6.42)% (4/91) (18.38)% (12/90-
Limited Partnership 12/31/91 8/91)
- ----------------------------------------------------------------------------------------------------------------------------------
Currency Investment
Partners, Ltd. Private April 1991 $55,114,566 dissolved as of (5.13)% (8/91) (16.10)% (7/91-
8/31/94 5/94)
- ----------------------------------------------------------------------------------------------------------------------------------
The Managed Futures
Trust Fund L.P. Private May 1991 $11,090,759 dissolved as of (6.22)% (7/91) (14.50)% (1/92-
9/24/93 5/92)
- ----------------------------------------------------------------------------------------------------------------------------------
Commodity Trading
Company, Ltd. Private July 1991 $25,797,626 dissolved as of (6.47)% (2/94) (23.31)% (1/92-
10/31/94 12/92)
- -----------------------------------------------------------------------------------------------------------------------------------
ML Institutional
Partners L.P. Public Feb. 1992 $57,312,700 dissolved as of (3.58)% (1/94) (8.78)% (10/93-
12/31/94 4/94)
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative
Rate of
Return 1996
Jan. 1, 1991 Compound 1995 1994 1993 1992 1991
- Aug. 31, Rate of Compound Compound Compound Compound Compound
1996 (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
Limited (1.86)% N/A N/A N/A N/A (13.56)% 13.54%
(7 mos.)
- ----------------------------------------------------------------------------------------------------------------------------------
ML Futures Investments
Ltd. 13.39% N/A N/A (3.78)% 15.26% 3.12% (0.85)%
(8 mos.)
- ----------------------------------------------------------------------------------------------------------------------------------
Canadian Diversified
Futures Fund (15.21)% N/A N/A N/A N/A N/A (15.21)%
Limited Partnership
- ----------------------------------------------------------------------------------------------------------------------------------
Currency Investment
Partners, Ltd. (14.25)% N/A N/A (4.05)% (2.06)% (1.57)% (7.52)%
(8 mos.) (9 mos.)
- ----------------------------------------------------------------------------------------------------------------------------------
The Managed Futures
Trust Fund L.P. 36.19% N/A N/A N/A 20.58% 2.63% 10.06%
(8-2/3 mos.) (8 mos.)
- ----------------------------------------------------------------------------------------------------------------------------------
Commodity Trading
Company, Ltd. (14.46)% N/A N/A (6.21)% 14.91% (23.31)% 3.50%
(10 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>
*The composite return of the fund, not the performance of any individual
series of Shares/Units.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE
FUNDS. THESE FUNDS ARE EACH TRADED PURSUANT TO
MATERIALLY DIFFERENT PROGRAMS AND WITH MATERIALLY
DIFFERENT OBJECTIVES THAN THE FUND.
The Notes on Page 22 are an integral part of 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 Drawdown
NAME OF FUND Offering of Trading Subscription Capitalization % Month % Period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Permal F/X, Financials & Futures Private July 1992 $106,495,710 MLIP resigned as (5.67)% (2/94) (12.24)% (2/94-
Ltd. trading manager 4/94)
as of 3/31/96
- ------------------------------------------------------------------------------------------------------------------------------------
dissolved as of
Daiwa Hudson River Fund Private Feb. 1994 $7,044,701 2/29/96 (4.72)% (3/94) (17.21)% (2/94-
1/95)
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
MLIP SELECTED-ADVISOR AND MULTI-ADVISOR FUNDS
WITHOUT "PRINCIPAL PROTECTION" FEATURES
SEPTEMBER 1, 1996
- ---------------------------------------------------------------------------------------------------------------------
Cumulative
Rate of
Return 1996
Jan. 1, 1991 Compound 1995 1994 1993 1992 1991
-Aug 31, Rate of Compound Compound Compound Compound Compound
1996 (or Return Rate of Rate of Rate of Rate of Rate of
NAME OF FUND dissolution (6 months) Return Return Return Return Return
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Permal F/X, Financials & Futures 21.22% 6.63% 14.78% (5.33)% 11.05% (5.79)% N/A
Ltd. (3 mos) (6 mos.)
- ---------------------------------------------------------------------------------------------------------------------
Daiwa Hudson River Fund 0.65% 0.26% 19.82% (16.22)% N/A N/A N/A
(2 mos.) (11 mos.)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(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) Monthly rate of return, on the basis of which Worst Monthly
Drawdown, Worst Peak-to-Valley Drawdown, Cumulative Rate of Return and
Compound Rate of Return is calculated, is the net performance during
the month of determination (including interest income and after all
expenses accrued or paid) divided by the total equity as of the
beginning of such month.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage
decline from a month-end cumulative monthly rate of return without such
cumulative monthly rate of return being 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.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE FUNDS. THESE FUNDS ARE
EACH TRADED PURSUANT TO MATERIALLY DIFFERENT PROGRAMS AND WITH MATERIALLY
DIFFERENT OBJECTIVES THAN THE FUND.
The Notes on this Page 22 are an integral part of the above performance
information.
-22-
<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 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report included in this Prospectus (see "Index to
Financial Statements" at page 67), and which are included herein in reliance
upon the authority of Deloitte & Touche LLP as experts in auditing and
accounting; and (ii) from the interim financial statements of the Fund for the
periods from January 1, 1996 (unaudited) to September 30, 1996 and January 1,
1995 to September 30, 1995 (unaudited).
<TABLE>
<CAPTION>
January 1, 1996 January 1, 1995 October 12, 1994
to to January 1, 1995 (commencement of
September 30, 1996 September 30, 1995 to operations) to
Income Statement Data (Unaudited) (Unaudited) December 31, 1995 December 31, 1994
- --------------------- ----------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Trading Profits (Loss)
Realized Gain (Loss) $2,701,951 $4,142,209 $4,407,833 $ (363,054)
Change in Unrealized Gain (Loss) (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:
Brokerage Commissions 3,588,269 2,184,180 3,216,364 405,653
Administrative Fees/1/ 96,980 59,042 86,928 10,964
Profit Shares 319,464 573,525 652,366 129,169
----------- ---------- ---------- ----------
Total Expenses 4,004,713 2,816,747 3,955,658 545,786
Net Income 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
========== ========== ========== ==========
<CAPTION>
Balance September September December 31, December 31,
Sheet Data/3/ 30, 1996 30, 1995 ------------ ------------
------------- (Unaudited) (Unaudited) 1995 1994
----------- ----------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Aggregate Aggregate Aggregate Aggregate
Net Asset Value Net Asset Value Net Asset Value Net Asset Value
(Series A-H) $81,317,558 (Series A-D) $67,018,891 (Series A-E) $74,988,233 (Series A) $32,314,228
Net Asset Value Net Asset Value Net Asset Value Net Asset Value
per Unit/4/ per Unit per Unit/5/ per Unit
Series A $109.80 Series A $109.62 Series A $106.96 Series A $101.76
Series B $107.13 Series B $106.91 Series B $110.36
Series C $102.49 Series C $100.13 Series C $103.35
Series D $101.45 Series D $ 99.23 Series D $102.34
Series E $105.31 Series E $102.72
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.
Certain amounts in prior periods have been reclassified to conform to
the current period presentation of the Administrative Fees.
2 MLIP is general partner of the Trading Partnership. Because the Fund
owns substantially all of the Trading Partnership, Trading Partnership
activities are referred to as Fund activities in this 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 data is based on redemption values which differ
immaterially from Net Asset Values as determined under Generally
Accepted Accounting Principals ("GAAP") due to the treatment of
organization and initial offering cost reimbursements.
4 Net of annual distributions of $6.00 on the Series A and B Units and
$3.50 on the Series C and D Units.
5 Net of an annual distribution of $6.00 on the Series A Units.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
-23-
<PAGE>
THE TWO-TIER STRUCTURE OF THE FUND
The Fund does not trade directly through opening managed
accounts with the Advisors, but rather through investing in the Trading
Partnership. The Trading Partnership, in turn, allocates substantially all of
its capital to the Advisors, and the different series of Units share pro rata in
the overall profits and losses of the Trading Partnership based on their
respective investments in it. No series of Units can lose more in its trading
than the amount which such series has invested in the Trading Partnership.
Although different series of Units invest different
percentages of their overall capital in the Trading Partnership, all assets so
invested are 100% allocated to trading. All trading losses are shared pro rata
among the different series based on their respective investments in the Trading
Partnership.
The use of the Trading Partnership by the Fund has no effect
on the leverage at which the different series of Units trade. The Fund trades
through investing in the Trading Partnership rather than directly, solely in
order to eliminate the highly unlikely risk that one series of Units might be
subject to paying trading debts attributable to another. This risk arises
because it is theoretically possible that catastrophic losses could deplete all
the assets of a particular series allocated to the Advisors for management. Any
remaining losses would remain a debt of the Fund to which all other series'
capital would be subject. The Fund/Trading Partnership structure eliminates the
risk of such inter-series liability. The CFTC would not permit the Fund to
continue the offering of the Units unless inter-series liability were
eliminated.
For example, assume that each of Series I and Series II Units
had $10 million in capital, and Series I allocated $9.5 million (95% leverage)
and Series II $8.5 million (85% leverage) to the Trading Partnership. If losses
bankrupted the Trading Partnership, each Series' trading account would share pro
rata in such losses, however, the Series I Units would create a larger deficit
balance because of the higher degree of leverage at which that Series traded.
However, there would be no risk that, for example, a $3 million deficit balance
allocable to Series I trading account would be subject to being repaid from any
of the $1.5 million withheld from trading by the Series II Units (or from any of
the $0.5 million withheld from trading by the Series I Units, for that matter),
because the Fund itself is not liable for the debts of its subsidiary Trading
Partnership. Any deficit balance incurred by a bankrupt Trading Partnership
would become an uncollectible debt due to MLF. MLF accepts such deficit balance
risk each time it accepts a limited liability entity such as the Trading
Partnership as a client.
There is no benefit (or detriment) to investors from the two-
tier Fund/Trading Partnership structure other than permitting the Fund to issue
the series of Units at different times, which series, may, over time, trade with
different percentages of their capital allocated to trading.
[GRAPHIC APPEARS HERE]
-24-
<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 and the Advisors' ability to trade profitably. MLIP's selection
procedures and trading leveraging analysis, as well as the Advisors' trading
methods, are confidential, so that substantially the only available information
relevant to the Fund's results of operations is its actual performance record to
date. Because of the speculative nature of its trading, the Fund's past
performance is not necessarily indicative of its future results.
In the Fund's almost two years of trading through September
1996, MLIP has (i) terminated one core Advisor, (ii) added 6 non-core Advisors,
(iii) terminated 2 non-core Advisors, and (iv) reallocated trading assets as of
the beginning of 9 different months. MLIP expects to continue making frequent
changes to both allocations and Advisor combinations. All series of Units trade
under the direction of the same Advisor allocation and combination, as the same
may be changed from time to time by MLIP.
As of October 1, 1996, the trading assets attributable to each
series of Units were allocated approximately as follows:
Chesapeake Capital Corporation 20.0%
John W. Henry & Company, Inc 20.0%
Non-Core Advisors 60.0%
------
Total 100.0%
======
MLIP's decision to terminate or reallocate assets among
Trading Advisors is based on a combination of numerous factors, as described
under "The Advisor Selection Process" at page 29. Advisors are, in general,
terminated primarily for unsatisfactory performance, but other factors -- for
example, a change in MLIP's or an Advisor's market outlook, apparent deviation
from announced risk control policies, excessive turnover of positions, changes
in principals, commitment of resources to other business activities, etc. -- may
also have a role in the termination or reallocation decision. The market
judgment and experience of MLIP's principals is an important factor in its
allocation decisions.
MLIP has no timetable or schedule for making Advisor changes
or reallocations, and generally makes a medium- to long-term commitment to all
Advisors selected. There can be no assurance as to the frequency or number of
the Advisor changes that may take place in the future, or as to how long any of
the current Advisors will continue to manage assets for the Fund.
Results of Operations
General
- -------
MLIP believes that multi-advisor futures funds should be
regarded as medium- to long-term investments (i.e., three to five years), 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,
forward and options trading (the Fund does not trade derivatives other than
futures and forward contracts and options thereon) by trading only through MLF.
MLF acts solely as a broker, or counterparty to the Fund's trades; it does not
advise with respect to, or direct, any such trading.
MLIP attempts to control the market risk inherent in the
Fund's trading in the manner described under "The Advisor Selection Process --
MLIP and Its Advisor Selection and Monitoring Process" at page 29 and "Leverage
-25-
<PAGE>
Considerations" at page 36. 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 on a daily basis in an effort to determine whether the overall
positions of the Fund may have become what MLIP analyzes as being excessively
concentrated in a limited number of markets or under the direction of generally
similar strategies -- in which case MLIP may, as of the next month-end or
quarter-end, adjust the Fund's Advisor combination and/or allocations so as to
attempt to reduce the risk of such over-concentration occurring in the future.
See "Leverage Considerations" at page 36 and "The ML&Co. Guarantee" at page 37.
To date, all series of Units have allocated approximately 60%
of their assets to trading. All series of Units sold pursuant to this Prospectus
will initially allocate 75% of their assets to trading.
MLIP may consider making distributions on the Units offered
hereby under certain circumstances (for example, if substantial profits are
recognized); however, MLIP does not presently intend to do so. MLIP does,
however, have to make certain distributions on all Units issued prior to date of
this Prospectus.
The performance of the different series of Units differs
somewhat over the same period, primarily, because as the various series begin
trading at different times, they pay different Profit Shares (although at the
same base rate), during the same periods.
Performance Summary
- -------------------
1994 (2 2/3 months)
Statistics. During 1994 (22/3 months), the Fund's average
month-end Net Assets equalled $32,552,448, and the Fund recognized gross trading
gains of $752,881 and incurred Brokerage Commissions of $416,617 (inclusive of
Administrative Fees of $10,964) and Profit Shares of $129,169 (2.3%, 1.28% and
0.49%, respectively, of average month-end net assets) 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 its profits and
losses of 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 22/3 months of trading during 1994 were
characterized by relatively quiet markets without many major price trends.
United States interest rates generally declined during the period and as they
did, so did the U.S. dollar as compared to the Deutschemark and certain other
major currencies. During this period, the Fund recorded a modest gain.
1995
Statistics. During 1995, the Fund's average month-end Net
Assets equalled $55,827,125, and the Fund recognized gross trading gains of
$5,763,210 and incurred Brokerage Commissions of $3,303,292 (inclusive of
Administrative Fees of $86,928) and Profit Shares of $652,366 (10.32%, 5.92% and
1.17%, respectively) of average month-end Net Assets 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 its profits
and losses of the Trading Partnership of $36,730) or 9.29% of average month-end
Net Assets.
Overview. In 1995, prevailing price trends in several key
markets enabled the Advisors to trade profitably for the Fund. Although trading
in many of the traditional commodity markets may have been lackluster, the
currency and financial markets offered exceptional trading conditions. After
months characterized by very difficult trading environments, solid price trends
across many markets (including bond markets, U.S. Treasury and non-dollar
markets) began to emerge during the first quarter of 1995. In the second quarter
of 1995, market volatility once again began to affect trading, as many
previously strong price trends began to weaken and, in some cases, reverse. The
U.S. dollar hit new lows versus the Japanese yen and Deutschemark before
rebounding sharply. In addition, there were strong indications that the U.S.
economy was slowing which when coupled with a failure of the German Central Bank
to lower interest rates, stalled a rally in the German bond market. During the
third quarter there was a correction in U.S. bond prices after several months of
a strong uptrend. Despite exposure to the global interest-rate markets, the
Fund's long positions in U.S. Treasury bonds had a negative impact on the Fund.
Throughout August and into September, the U.S. dollar rallied sharply against
the Japanese yen and the Deutschemark as a result of the coordinated
intervention by major central banks and widespread recognition of
-26-
<PAGE>
the growing banking crisis in Japan. Despite continued price volatility during
the final quarter of 1995, the Trading Advisors were able to identify several
trends in key markets. U.S. Treasury bond prices continued their strong move
upward throughout November, due both to weak economic data and optimism on
Federal budget talks. The 30-year Treasury bond rate was pushed to its lowest
level in more than two years.
1996 (9 months)
Statistics. From January 1, 1996 through September 30, 1996,
the Fund's average month-end Net Assets equalled $83, 687,751 and the Fund
recognized gross trading gains of $2,524,651 and incurred Brokerage Commissions
of $3,588,269, Administrative Fees of $96,980 and Profit Shares of $319,464
(3.02%, 4.29%, 0.12% and 0.38%, respectively), 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 of $1,974,174 (before organizational and initial
offering cost reimbursement payments of $59,775 and after deducting MLIP's
"minority interest" in the profits and losses of the Trading Partnership of
$11,134), or 2.36% of average month-end Net Assets.
Overview. The first nine months of 1996 included the two
largest single monthly drawdowns as well as two of the three most profitable
months in the Fund's history. The year began with the East Coast blizzard,
continuing difficulties in the U.S. federal budget talks and an economic
slowdown having a negative impact on many markets. The Fund was profitable in
January due to the strong profits in currency trading as the U.S. dollar reached
a 23-month high against the Japanese Yen. In February, however, the Fund
incurred its largest monthly loss due to the sudden reversals in several strong
price trends and considerable volatility in the currency and financial markets.
During March, large profits were taken in the crude oil and gasoline markets as
strong demand continued and talks between the United Nations and Iraq were
suspended. This trend continued into the second quarter, during which strong
gains were also recognized in the agricultural markets as a combination of
drought and excessive rain drove wheat and grain prices to historic highs. In
the late summer and early fall months, however, the Fund gave back much of these
gains as difficult trading conditions in many markets prevailed and a 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
the Fund are gross profitability and interest income. During all periods set
forth in "Selected Financial Data," the interest rates in many countries were at
unusually low levels. This negatively impacted revenue because interest income
is typically a major component of commodity pool profitability. In addition, low
interest rates are frequently associated with reduced fixed income market
volatility, and in static markets the Fund's profit potential generally tends to
be diminished. On the other hand, during periods of higher interest rates, the
relative attractiveness of a high risk investment such as the Fund may be
reduced as compared to high yielding and much lower risk fixed-income
investments.
The Fund's Brokerage Commissions and Administrative Fees are a
constant percentage of assets allocated to trading charge. The only Fund costs
(other than the insignificant F/X Desk service fees and EFP differentials) which
are not based on a percentage of the Fund's assets allocated to trading are the
Profit Shares payable to the Trading Advisors on an Advisor-by-Advisor basis.
During periods when Profit Shares are a high percentage, or perhaps even in
excess, of net trading gains, it is likely that there has been substantial
performance non-correlation among Advisors (so that the total Profit Shares paid
to those Advisors which have traded profitably are a high percentage, or even
excess, of total profits recognized, as other Advisors have incurred offsetting
losses, reducing overall trading gains but not the Profit Shares paid to
successful Advisors) -- suggesting the likelihood of generally trendless,
non-consensus markets.
The events that primarily determine the Fund's profitability
are those that produce sustained and major price movements. The Advisors are
generally more likely to be able to profit from sustained trends, irrespective
of their direction, than from static markets. During the course of the Fund's
performance to date, such events have ranged from Federal Reserve Board
reductions in interest rates, the apparent refusal of Iraq to arrive at a
settlement which would permit it to sell oil internationally, the inability of
the U.S. government to agree upon a federal budget, and a combination of drought
and excessive rain negatively impacting U.S. agricultural harvesting as well as
planting. While these events are representative of the type of circumstances
which materially affect the Fund, the specific events which will do so in the
future cannot be predicted or identified.
Unlike many investment fields, there is no meaningful
distinction in the operation of the Fund between realized and unrealized
profits. Most of the contracts traded by the Fund are highly liquid and can be
closed out at any time.
-27-
<PAGE>
Furthermore, the profits on many open positions are effectively realized on a
daily basis through the payment of variation margin.
Except in unusual circumstances, factors -- regulatory
approvals, cost of goods sold, employee relations and the like -- which often
materially affect an operating business have virtually no impact on the Fund.
The Different Series of Units
All series of Units to be issued under this Prospectus and
thereafter will begin trading with the same percentage (75%) of their total
capital allocated to trading (by investment in the Trading Partnership). All
series trade in a common trading account and are subject to the same method of
calculating their fees. Furthermore, any discretionary action taken by MLIP --
e.g., making a distribution or adjusting trading leverage -- must be done in
such a way, for example, that all Units receive the same distribution and have
the same percentage of capital allocated to trading after the adjustment.
Despite these fundamental similarities among the different series, because the
series begin trading at different times they are likely to come, as a result of
trading profits and losses, to have different percentages of their capital
allocated to trading, pay different Profit Shares (although to the same group of
Advisors) and have different Net Asset Values.
Liquidity and Capital Resources
The amount of capital raised for the Fund should not, except
at extremely high levels of capitalization, have a significant impact on its
operations. The Fund's costs are generally proportional to its asset base and,
within broad ranges of capitalization, the Advisors' trading positions (and the
resulting gains and losses) should increase or decease in approximate proportion
to the size of the Fund account managed by each of them, respectively.
The Fund raises additional capital only through the continuous
offering of its Units. The Fund does not borrow, and sells no securities 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 (discounted back from the relevant
Principal Assurance Date) of the guaranteed $100 minimum Net Asset Value per
Unit and, accordingly, the assets which a given series of Units has available
for trading.
In its trading to date, the Fund has from time to time had
substantial unrealized gains and losses on its open positions. These gains or
losses are paid on a periodic basis as part of the routine clearing cycle on
exchanges or in the over-the-counter markets (the only over-the-counter market
in which the Fund trades is the inter-bank forward market in currencies). In
highly unusual circumstances, market illiquidity could make it difficult for
certain Advisors to close out open positions, and any such illiquidity could
expose the Fund to significant losses, or cause it to be unable to recognize
unrealized gains. However, in general, there is no meaningful difference between
the Fund's realized and unrealized gains.
In terms of cash flow, it makes little difference whether a
market position remains open, (so that the profit or loss on such position
remains "unrealized"), as cash settlement of "unrealized" gains and losses
occurs periodically whether or not positions are closed out. The only meaningful
difference between realized and unrealized gains or losses in the case of the
Fund is that unrealized items reflect gains or losses on positions which the
Advisors have determined not to close out (presumably, in the hope of future
profits), whereas realized gains or losses reflect amounts received or paid in
respect of positions no longer being maintained.
-28-
<PAGE>
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
in the past 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.
In addition to certain qualitative factors concerning the Advisors, certain
mathematical optimization procedures are used to develop an Advisor combination
which, based on a trading scenario in which the past performance of the
respective Advisors is combined for purposes of MLIP's selection analysis,
exhibits a reward/risk 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. MLIP may allocate Fund assets both to Advisors specializing in
particular market sectors and Advisors which trade broadly diversified
portfolios. See "The Core Advisors --Futures Trading Methods in General" at
pages 89 and 90. 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 which
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.
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 will 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.
-29-
<PAGE>
Access to Global Markets
The Fund has access to global markets including, but not
limited to, the following:
<TABLE>
<CAPTION>
Currencies
<S> <C>
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
Interest Rates
Australian Bonds German Bonds
Australian Treasury Bills Italian Bonds
Canadian Bonds Japanese Bonds
Eurodollars PIBOR
Eurolira Spanish Bonds
Euromarks U.K. Gilts
Euroswiss U.K. Short Sterling
Euroyen U.S. Treasury Bills
French Bonds U.S. Treasury Bonds
U.S. Treasury Notes
Stock Indices
CAC 40 Stock Index (France) S&P 500 Stock Index (U.S.)
Financial Times 100 Stock Index (U.K.) Tokyo Stock Price Index
Major Market Stock Index (U.S.) U.S. Dollar Index
MEFF&S Stock Index (Spain) Value Line Stock Index (U.S.)
Nikkei Stock Average (Japan)
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
</TABLE>
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,
either over time or from time to time.
-30-
<PAGE>
THE ADVISORS
Core Advisor Summaries
The two core Advisors which were, in the aggregate, managing
approximately 40% of the Fund's trading assets as of October 1, 1996 were
managing approximately $2.26 billion of customer assets in the futures, cash and
forward markets, of which approximately $1.6 billion was being traded in the
programs used for the Fund.
The Core Advisors
<TABLE>
<CAPTION>
Approximate
October 1, 1996 Assets under Management*
Advisor Trading Asset Allocation August 31, 1996
------- -------------------------- -------------------------
<S> <C> <C>
Chesapeake Capital 20% $757 million (total)
Corporation $711 million (Diversified
Program)
John W. Henry & 20% $1.5 billion (total)
Company, Inc. $912 million (Financial
and Metals Portfolio)
40%
===
</TABLE>
-------------------------
Both of the current core Advisors is a systematic, technical,
trend-following trader.
CHESAPEAKE CAPITAL CORPORATION (20% Allocation of Trading
Assets as of October 1, 1996) -- Chesapeake has offered investment advisory and
portfolio management services to clients since 1988. Chesa eake 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 August 31, 1996, Chesapeake
was managing approximately $711 million of customer funds in the Diversified
Program and approximately $757 million 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 0.83%
(8 months), respectively. During such period, the worst monthly drawdown was
(10.98)% (1/92) and the worst peak-to-valley drawdown (16.62)% (1/92-5/92).
See pages 93 through 96 for performance information relating
to Chesapeake.
JOHN W. HENRY & COMPANY, INC. (20% Allocation of Trading Assets
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 of customer funds
in the Financial and Metals Portfolio and approximately $1.5 billion 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 worst
monthly drawdown on a composite basis was (18.0)% (1/92), the worst monthly
drawdown on an individual account basis was (27.7)% (1/92) and the worst
peak-to-valley drawdown on a composite basis (39.5)% (12/91-5/92).
See pages 104 through 112 for performance information relating
to JWH.
-31-
<PAGE>
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, has the
right to terminate any Advisory Agreement at will and upon short notice.
Each Advisory Agreement provides that the Fund will indemnify
the Advisor 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.
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.
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 from doing so by applicable non-United States securities, tax or
other laws, are required by MLIP to 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 as a
token of the Advisors' commitment to managing such accounts.
The MLAM 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.
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.
-32-
<PAGE>
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 Fund(sm) IV L.P., The SECTOR Strategy Fund(sm) V L.P., The SECTOR
Strategy Fund(sm) VI L.P., ML Global Horizons L.P., ML JWH Strategic Allocation
Fund L.P. and the Fund. Because MLIP serves as the sole general partner of each
of these funds, the officers and directors of MLIP effectively manage them as
officers and directors of such funds.
Principals
The principal officers of MLIP and their business backgrounds
are as follows.
John R. Frawley, Jr. Chief Executive Officer, President
and Director
James M. Bernard Chief Financial Officer,
Senior Vice President and Treasurer
Jeffrey F. Chandor Senior Vice President 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 as well as 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 Advisory Committee. In January 1996, he was re-elected to a
one-year term as Chairman of the Managed Futures Association, the national trade
association of the United States managed futures industry. Mr. Frawley is a
Director of that organization, and a Director of the Futures Industry Institute.
Mr. Frawley also currently serves on a panel created by the Chicago Mercantile
Exchange and the Chicago Board of Trade to study cooperative efforts related to
electronic trading, common clearing, and issues regarding a potential
merger.
James M. Bernard was born in 1950. Mr. Bernard is Chief
Financial Officer, Senior Vice President and Treasurer of MLIP. He joined MLF in
1983. Before that he was the Commodity Controller for Nabisco Brands Inc. from
November 1976 to 1982 and a Supervisor at Ernst & Whinney from 1972 to November
1976. Mr. Bernard is a member of the American Institute of Certified Public
Accountants and holds a Bachelor of Science degree from St. John's University
and a Master of Business Administration degree from Fordham University.
Jeffrey F. Chandor was born in 1942. Mr. Chandor is Senior
Vice President and the Director of Sales, Marketing and Research of MLIP. He
joined MLPF&S in 1971 and has served as the Product Manager of Equity,
Derivative Products and Mortgage-Backed Securities as well as Managing Director
of International Sales in the United States, and
-33-
<PAGE>
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, the principals of MLIP had no
investment in the Fund and MLIP's general partner interest in the Fund was
valued at approximately $2.2 million. 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 is treated as a partnership for federal income tax
purposes.
MLF
MLF, the exclusive clearing futures commission merchant
(commodity broker) 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. 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 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 54.
Having once established the business terms of the Fund, MLIP
may be effectively precluded from changing these terms in a manner that
disproportionately benefits MLIP, as any such change could constitute
self-dealing unless consented to by investors in the Fund.
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 42. 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 there is no party which
negotiates on behalf of the Fund to obtain lower rates from the Merrill Lynch
entities which provide services to it.
-34-
<PAGE>
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.
The Limited Partnership Agreement provides 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 SEC with respect to the issue of indemnification for securities law
violations. In the view of the SEC, 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 in cases in which the losses result
from the general partner's violation of the anti-fraud provisions of the federal
securities laws.
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 available to investors
in commodity pools (such as the Fund).
In the case of most public companies, 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 in 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 consult their own counsel regarding
their possible rights of action in respect of the Fund.
-35-
<PAGE>
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 losses are incurred that might 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 that when a particular series of Units is
issued the present value of the $100 subscription price per Unit as of its
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 after issuance, 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
approximately 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,
resulting from the diminution in the time remaining until such series' Principal
Assurance Date, 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 compelled to terminate trading and dissolve, due in part to
a drop in interest rates which caused the net asset value of the fund and the
present value of its guarantee to converge.
In order to be able to continue to offer its Units on a
continuous basis under applicable SEC rules, the Fund has agreed that if it
deleverages any series of Units issued after the date hereof, all such series
will be comparably deleveraged. This policy could require a series to deleverage
or even terminate trading under circumstances in which it would not otherwise
have been required to do so.
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. However, to date, MLIP has not
upleveraged any series of Units, and MLIP must upleverage all series issued
after the date hereof to the same level if MLIP upleverages any such series -- a
constraint which substantially reduces the prospects of any upleveraging
occurring. (Discretionary upleveraging is to be distinguished from the
upleveraging caused simply by the reinvestment over time of trading profits, if
any, in the Trading Partnership. Such reinvestment can and will, over time, lead
to different series trading at different levels of leverage, but is permissible
under applicable regulatory interpretations concerning what constitutes a
continuous offering of the Units.)
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, even should MLIP intervene to adjust the leverage at
which the Units trade, there will not necessarily be a corresponding adjustment
in the market exposure of the Fund.
-36-
<PAGE>
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 dissolve 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 advance 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 36.
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 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.
-37-
<PAGE>
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 September 27, 1996, the aggregate net worth
(stockholders' equity) of ML&Co. was approximately $6.62 billion.
The following is certain summary financial information for
ML&Co. for the fiscal year ended December 29, 1995 and the fiscal quarters ended
September 27, 1996 and September 29, 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>
Quarter Ended Quarter Ended Year Ended
September 27, 1996 September 29, 1995 December 29, 1995
------------------ ------------------ -----------------
<S> <C> <C> <C>
Income Statement Data
Revenues................................ $3,093 $2,682 $21,513
Earnings before income taxes and
cumulative effect of changes
in accounting principles............. $522 $485 $1,811
Net earnings............................ $331 $300 $1,114
Share Data
Average number of primary shares
outstanding............................ 236,330,162 236,330,162 236,330,162
Common shares outstanding................ 236,330,162 236,330,162 236,330,162
Balance Sheet Data
Total assets (billions)................. $207.91 $176.86 $176.86
Total liabilities (billions)............ $201.29 $170.72 $170.72
Stockholders' equity (billions)......... $6.62 $6.14 $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 September 27, 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 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.
-38-
<PAGE>
USE OF PROCEEDS AND INTEREST INCOME
SUBSCRIPTION PROCEEDS
MLIP pays from its own funds the selling commissions relating to the sale
of the Units. Accordingly, 100% of the proceeds of Unit sales are received in
cash by the Fund and available for use in its speculative trading. In such
trading, however, the Fund's capital is not used to purchase or acquire any
asset but rather only as security for and to pay the Fund's trading losses.
Consequently, substantially all of such capital is available to earn interest at
the same time that such capital is being used to support the Fund's trading. The
primary use of the proceeds of subscriptions is to permit the Advisors to trade,
on a speculative basis, in a wide range of different futures, forward and
options on futures markets on behalf of the Fund. However, until such time, if
any, as are paid out to cover trading losses, Fund expenses or redemptions, such
proceeds, whether or not required for margin purposes, are available to be and
are invested in non-speculative (although by no means riskless) interest
programs.
MARKET SECTORS
The Fund trades in a diversified group of markets under the direction of
multiple independent Advisors. These Advisors can, and do, from time to time
materially alter the allocation of their overall trading commitments among
different market sectors. Except in the case of certain trading programs which
are purposefully limited in the markets which they trade, there is essentially
no restriction on the commodity interests which may be traded by any Advisor or
the rapidity with which an Advisor may alter its market sector allocations.
In its Diversified Program, Chesapeake Capital Corporation 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.
The Financial and Metals Portfolio of John W. Henry & Company, Inc.
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 Fund's financial statements contain information relating to the market
sectors traded by the Fund. There can, however, be no assurance as to which
markets may be included in the Fund's portfolio or as to which market sectors
the Fund's trading may be concentrated at any one time or over time. See "Index
to Financial Statements" at page 67.
MARKET TYPES
The Fund trades on a variety of United States and foreign futures
exchanges. Applicable exchange rules differ significantly among different
countries and exchanges. Substantially all of the Fund's off-exchange trading
takes place in the highly liquid, institutionally based currency forward
markets. The Fund's forward currency trading is executed exclusively through the
F/X Desk, with MLF as the back-to-back intermediary to the ultimate
counterparties with which the Advisors trade on behalf of the Fund.
As in the case of its market sector allocations, the Fund's commitments to
different types of markets -- U.S. and non-U.S., regulated and unregulated --
differ substantially from time to time as well as over time. The Fund has no
policy restricting its relative commitment to any of these different types of
markets, although the bulk of the Fund's trading takes place on regulated
exchanges.
The Fund's financial statements contain information relating to the types
of markets traded by the Fund. There can, however, be no assurance as to in
which markets the Fund's trading may be concentrated at any one time or over
time.
CUSTODY OF ASSETS
All of the Fund's capital--other than the assets managed by MLAM and held
in a custodial account as described below under "--MLAM"--is currently held in
CFTC-regulated customer accounts at MLF. The assets held to margin positions on
non-U.S. exchanges are held in CFTC-designated "foreign secured amount"
accounts; the remainder of the Fund's assets are held CFTC-designated "customer
segregated funds" accounts. Both these types of accounts would be accorded
certain protections from MLF's general (i.e., non-customer) creditors in the
event of an MLF bankruptcy. In the future, MLF may elect to hold substantial
portions of the Fund's assets in unregulated accounts at MLPF&S or other Merrill
Lynch affiliates. Such accounts are not accorded the same bankruptcy protection
as are CFTC-regulated customer accounts, although they do constitute a general
obligation of MLPF&S or its affiliates, as the case may be. Maintaining Fund
assets in unregulated accounts would reduce the regulatory net capital
requirements (and associated costs) imposed on Merrill Lynch in respect of
assets held in regulated accounts.
-39-
<PAGE>
MLAM
- ----
Approximately 80% the Fund's assets are managed directly by MLAM, pursuant
to guidelines established by MLIP, in the U.S. government securities and
repurchase agreement markets. MLIP's objective in retaining MLAM to provide cash
management services to the Fund is to enhance the return earned on the Fund's
assets held by MLF to slightly above the 91-day Treasury bill rate, while
maintaining minimal (but by no means eliminating) risk of market losses on the
Fund's cash management operations.
Securities acquired by MLAM on behalf of the Fund are maintained in a
custodial account and are specifically traceable to the Fund. On the other hand,
Fund assets maintained as part of MLF's general customer funds are commingled
with the assets of numerous other MLF customers so that none of MLF's customer
fund investments (see below) are specifically traceable to any particular
customer (including the Fund).
MLAM has been providing cash management services to the Fund since its
inception and has, through October 31, 1996, been able to generate a return on
the assets managed by MLAM (approximately 80% of the Fund's assets) of
approximately 6/10 of 1% per annum greater than the 91-day Treasury bill return
during the same period. MLAM, however, gives no assurance that performance at
this level will continue. There can be no assurance that MLAM's cash management
will achieve higher yields for the Fund or avoid a loss of principal.
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 October 31,
1996, MLAM and its affiliates, collectively, had a total of approximately $217.8
billion in investment company and other portfolio assets under management,
including accounts of certain affiliates of MLAM.
INCOME EARNED AND PAID BY MERRILL LYNCH ON THE FUND'S ASSETS
This section describes the investment and maintenance of the approximately
20% of the Fund's assets not managed directly by MLAM.
MLF's Portfolio of Customer Funds
- ---------------------------------
The Fund's assets, not managed by MLAM, are maintained by MLF, together
with the assets of other MLF customers, as a single aggregate portfolio, without
tracing any specific investments made with such assets to the Fund or any other
MLIP customer. MLF earns a return on the overall pool of customer assets held by
it through: (i) itself investing such customer funds in interest-bearing
instruments authorized by the CFTC for such purposes; (ii) retaining--at the
expense of MLF--MLAM to invest a portion of such customer funds, also in CFTC-
authorized investments; and (iii) holding the remainder of such funds in cash in
the non-interest bearing offset accounts as described below. The combination of
these three sources of revenues comprises MLF's overall return on the customer
funds held by it.
CFTC-Authorized Investment; MLAM Services
- -----------------------------------------
CFTC-authorized investments are essentially limited to U.S. government
securities and repurchase agreements on such securities. The CFTC does not,
however, impose any formal limitations as to the duration, or resulting market
risk, of such securities. MLF itself invests a substantial portion of its
customer funds in such instruments, but in so doing limits itself to short-term
instruments. In an attempt to increase the yield earned on its investment of
customer funds in CFTC-authorized investments, MLF retains MLAM to direct
certain of such investments,--generally in somewhat longer-term, and presumably
higher yielding, instruments than MLF itself acquires with customer funds.
Unlike in the case of the approximately 80% of the Fund's assets managed
directly by MLAM, any incremental yield which MLAM obtains on the customer funds
which MLAM manages for MLF inures to insures the -40-benefit of MLF, not its
customers.
Offset Accounts
- ---------------
Offset accounts are non-interest bearing demand deposit accounts
maintained with banks unaffiliated with Merrill Lynch. These accounts are
similar to "compensating balances," except that the participating banks
specifically acknowledge that the funds held in MLF offset accounts are customer
assets, not subject to any Merrill Lynch liability. The banks involved make
available to ML&Co. and certain of its affiliates interest-free overnight
credits or overdrafts in the amount of the daily customer cash balances in the
MLF offset accounts, charging a small fee for this service.
Trading on Foreign Exchanges
- ----------------------------
Under the recently instituted MLF "single currency margining system,"
the Fund itself does not generally deposit foreign currency margin in respect of
its trading on non-U.S. exchanges. Rather, the Fund maintains substantially all
of its assets in U.S. dollar-denominated securities or U.S. dollars (i.e.,
either invested in CFTC-authorized investments by MLF or MLAM or held in cash in
offset accounts). MLF charges the Fund a fee based on the Fund's "foreign
currency requirements," as calculated by MLF, in respect of the Fund's trading
on foreign exchanges. Such fee equals approximately 3/4 of 1% per annum in
excess of the prevailing overnight rate on the relevant currency, calculated on
the amount of initial margin which MLF would have required the Fund to post on
the exchange in question as a stand-alone customer. Gains and
-40-
<PAGE>
losses on open positions denominated in foreign currencies decrease and
increase, respectively, the amount of the Fund's "foreign currency requirements"
on which the MLF fee is assessed. MLF pays the Fund interest on any trading
gains in excess of its "foreign currency requirements" temporarily held in non-
dollar currencies at the prevailing overnight rate on the relevant currency, but
minus a fee of approximately 3/4 of 1% per annum. This 3/4 of 1% per annum
increment or deduction in yield from the overnight rate -- like the 1/2 of 1%
per annum deducted by MLF from the 91-day Treasury bill rate in crediting the
Fund with interest on its U.S. dollar deposits, as described under "--Interest
Paid by MLF to the Fund," below--represents in part compensation for MLF's costs
and services in providing single currency margining and in part a source of
profit for Merrill Lynch.
To the limited extent that the Fund may from time to time hold assets
in foreign currencies (generally, the Fund holds foreign currencies only
temporarily as a result of profits recognized on positions held on foreign
exchanges which, as a matter of administrative convenience for Merrill Lynch,
are converted into dollars weekly rather than daily), Merrill Lynch receives
bid-ask spreads upon the periodic exchange of such currencies into dollars.
Interest Paid By MLF To The Fund
- --------------------------------
All the return achieved by the Government Securities acquired on
behalf of the Fund by MLAM is paid to the Fund. MLF receives no benefit from the
possession of such assets (in a custodial account opened in the name of the
Fund). In respect of the remaining approximately 20% of the Fund's assets which
are held by MLF in its customer accounts, Merrill Lynch retains for its own
benefit the difference between (a) the aggregate return it is able to achieve
from a combination of investing (or hiring MLAM to invest) customer funds in
CFTC-authorized securities and depositing such funds in offset accounts, and (b)
the interest which MLF agrees to pay to each of its customers. MLF's interest
income arrangements with different customers vary. In the case of the Fund, MLF
has agreed to credit the Fund with interest as if the Fund's Available Assets on
deposit in U.S. dollars with MLF and not managed by MLAM were invested at 1/2 of
1% per annum below the prevailing 91-day Treasury bill rate, while charging or
crediting the Fund with certain amounts in respect of its trading on foreign
exchanges as described under "--Trading on Foreign Exchanges," above. Available
Assets are the same as Net Assets but do not include monies due to the Fund in
respect of open forward contracts, commodity options and certain other
interests, such as various foreign futures contracts, but which have not
actually been received by the Fund. Conversely, Available Assets are not
reduced, as are Net Assets, by monies due from, but not yet paid by, the Fund in
respect of such open positions or in respect of accrued but unpaid expenses or
charges. Available Assets may, at any given time, be either higher or lower than
Net Assets for purposes of determining the Net Asset Value per Unit.
Aggregate Return Earned By Merrill Lynch
- ----------------------------------------
The aggregate interest income and other economic benefits to the
Merrill Lynch organization -- net of the interest credits paid to the Fund, the
expenses of maintaining and managing the MLF customer portfolio and of margining
MLF customers' trading positions -- derived from the various sources of revenue
available to Merrill Lynch from possession of the Fund's assets not managed by
MLAM (Merrill Lynch receive no benefit from possession of the Fund's assets
managed by MLAM) generally ranged between 1/4 of 1% and 3/4 of 1% per annum of
the Fund's average daily Available Assets in MLF's customer accounts not managed
by MLAM. Merrill Lynch's net revenues from possession of MLF customer funds are
expected to continue to fall within this range under single currency margining
(which reduces Merrill Lynch's administrative expense as well as, to a limited
extent, the Fund's potential exchange-rate exposure on its margin deposits).
These net revenues to Merrill Lynch are in addition to the Brokerage Commissions
and Administrative Fees paid by the Fund to MLF and MLIP, respectively.
Forward Transactions
- --------------------
Spot and forward currency contracts are the only non-exchange traded
instruments held by the Fund.
To date, approximately 20% to 30% of the Fund's trades by volume have
been in forward currency contracts, but from time to time the percentage of the
Fund's trading represented by forward currency trades may fall substantially
outside this range. In using the F/X Desk, the Fund trades through MLF.
Because the Fund need not deposit any margin with MLF in respect of the Fund's
forward trading, the Fund's additional risk in trading in such unregulated
markets should be limited to a possible loss of unrealized profits on open
forward positions which a counterparty accessed through MLF would not, in the
event of its bankruptcy, be able to pay to MLF for the account of the Fund.
Having the Fund (and other MLF clients using the F/X Desk) trade
through the F/X Desk on the basis of MLF's credit lines permits the F/X Desk to
access a wide range of counterparties without need of such counterparties
evaluating the individual credit of the Fund (or any other MLF client).
-41-
<PAGE>
CHARGES
The following table summarizes the charges incurred 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 % Cost as a %
of of Cost as a % of
Average Average Average
Dollar Month-End Dollar Month-End Dollar Month-End
Cost Amount Net Assets* Amount Net Assets Amount Net Assets*
---- ------ ---------- ------ ---------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Brokerage
Commissions** $3,588,269 5.72% $3,216,364 5.76% $405,653 5.61%
Administrative
Fees** 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 6.48% $4,035,358 7.23% $563,498 7.79%
========== ==== ========== ==== ======== ====
</TABLE>
- -------------------------------
* Annualized. Only approximately 60% of the Fund's assets were allocated to
trading during the periods presented; accordingly, percentage figures would be
correspondingly higher as a percentage of the Fund's trading assets.
** A portion of the Brokerage Commissions in prior periods have been
reclassified to conform to the current period presentation of the
Administrative Fees.
--------------
The flat-rate Brokerage Commissions and Administrative Fees
will in the future likely be higher than those in the foregoing table as the
Units issued under this Prospectus will trade at 75% rather than 60% initial
average.
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, or the benefits which MLF derives from
possession of the Fund's assets. See "Use of Proceeds and Interest Income
- --Interest Earned and Paid by MLF on a Portion of the Fund's Assets" at page 40.
During 1994 (2 2/3 months), 1995 and 1996 (9 months), the Fund
earned $377,303, $3,415,670 and $3,465,370 in interest income, or approximately
1.16%, 6.12% and 4.14% of the Fund's average month-end Net Assets.
See the Breakeven Table included in the "Summary" at page 9.
-----------------------
-42-
<PAGE>
<TABLE>
<CAPTION>
Charges Paid by the Fund
Recipient Nature of Payment Amount of Payment
- --------- ----------------- -----------------
<S> <C> <C>
MLIP Organizational and The Fund is reimbursing MLIP for organizational and initial
initial offering costs offering costs in 36 monthly installments of $6,642 (a total of
$239,100) ending October 31, 1997.
MLF Brokerage Commissions A flat-rate monthly commission of 0.7708 of 1% of the month-end
assets committed to trading. The Fund initially commits 75% of
the capital attributable to each series of Units to trading.
MLF Use of Fund assets MLF receives an aggregate annual benefit
from the use of the Fund's assets not managed directly by MLAM
(after payment of interest to the Fund of between 1/4 of 1% and
3/4 of 1% of the Fund's average daily Available Assets).
MLIP Administrative Fees A flat-rate monthly charge, payable to MLIP, of 0.020833 of 1%
of the Fund's month-end assets committed to trading (the Fund
will initially commits 75% of the capital attributable to each
series of Units to trading), MLIP pays all of the Fund's
routine administrative costs.
MLIB Bid-ask spreads Under MLIP's F/X Desk arrangements, MLIB receives bid-ask
spreads on all forward trades executed on behalf of the Fund
with MLIB.
Other Bid-ask spreads The counterparties other than MLIB with which the F/X Desk
Counterparties deals each receive bid-ask spreads on the forward trades
executed with the Fund.
MLIP F/X Desk service fees Under the F/X Desk arrangements, MLIP or another Merrill Lynch
entity receives a service fee equal, at current exchange rates,
to approximately $5.00 to $12.50 on each purchase or sale of
each futures contract-equivalent forward contract executed with
counterparties other than MLIB.
MLIB EFP differentials MLIB or an affiliate receives a differential spread for
exchanging the Fund's spot currency positions for equivalent
futures positions.
Government Securities Bid-ask spreads The dealers with which MLAM executes Govern-ment Securities
Dealers trades include bid-ask spreads in the prices they quote to the
Fund.
</TABLE>
-43-
<PAGE>
<TABLE>
<CAPTION>
Charges Paid by the Fund (cont.)
Recipient Nature of Payment Amount of Payment
- --------- ----------------- -----------------
<S> <C> <C>
Trading Advisors 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 in respect of each Advisor's individual performance
for each series of Units, not the overall performance of each
series of Units.
MLF; Extraordinary expenses Actual costs incurred; none paid to date, and expected to be
Others 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 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) and the subsequent
offsetting sale (or purchase) of a commodity futures contract. The Fund does not
pay its commodity Brokerage Commissions on a per-trade basis, but rather at a
monthly flat rate of 0.7708 of 1% of the Fund's month-end assets committed to
trading (a 9.25% annual rate). MLF receives these flat-rate payments
irrespective of the number of trades executed on the Fund's behalf. These
Brokerage Commissions include the Advisors' Consulting Fees and all execution
and clearing costs. Month-end assets committed to trading are not reduced for
purposes of calculating Brokerage Commissions by any accrued but unpaid Profit
Shares, Administrative Fees or the accrued Brokerage Commissions being
calculated. The Fund could obtain lower rates for similar brokerage services
from firms other than MLF.
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 month-end assets
which each series commits to trading, without reduction for accrued but unpaid
Profit Shares, Administrative Fees or Brokerage Commissions.
During 1994 (22/3 months), 1995 and 1996 (9 months), the Fund
paid Brokerage Commissions of $416,617, $3,303,292 and $3,685,249, respectively;
(including the Administrative Fee portion of the Brokerage Commissions which was
recharacterized as such as of January 1, 1996) these flat-rate Brokerage
Commissions were the approximate equivalent of per-trade commissions of $53,
$134 and $116, respectively. These "round-turn" equivalent rates were somewhat
higher than those of most MLIP funds. The per-trade equivalent of the Fund's
flat-rate commodity Brokerage Commissions varies over time depending upon the
frequency with which the Advisors trade.
The audited financial statements distributed by MLIP to
Limited Partners include the approximate round-turn equivalent commission rate
paid by the Fund during the previous year.
-44-
<PAGE>
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 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 the benefits derived from the
possession of the Fund's assets as described under "Use of Proceeds and
Interest Income"), 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 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.
A number of the Advisors execute trades through brokers other
than MLF, in which case the trades are "given-up" to be cleared by MLF. The
additional costs involved in such third-party trade executions are paid by MLF.
Use of Fund Assets
As described under "Use of Proceeds and Interest Income" at
pages 39-41, Merrill Lynch receives a net benefit, after payment of all related
costs and the interest due to the Fund, of between 1/4 of 1% and 3/4 of 1% of
the Fund's average daily Available Assets not managed by MLAM (approximately 10%
to 15% of total Available Assets of the Fund) from possession of such assets.
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 pur-
poses are not reduced by accrued but unpaid Profit Shares or the Administrative
Fees being calculated. At the same time, the Fund's flat-rate Brokerage
Commissions were reduced in an amount corresponding to the Administrative Fees,
so that there was 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.
-45-
<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.
F/X Desk 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 the 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. 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. EFPs
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 EFPs.
The combined F/X Desk service fees and EFP differentials have
to date not exceeded 1/4 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. The non-core Advisors generally receive quarterly
Profit Shares of 15% to 20% of any New Trading Profit which they earn for each
series, also considered individually. 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 April 1, 1997 might incur losses during the second
quarter of 1997. Accordingly, such Advisor will have a loss carryforward with
respect to such series at the time that the series sold as of July 1, 1997 was
issued. The July 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 third quarter
of 1997, such Advisor would be entitled to a Profit Share in respect of the July
1, 1997 series, although such Advisor may not have recognized the losses
incurred by the April 1, 1997 series during such third quarter.
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
-46-
<PAGE>
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).
In the case of certain Advisors, New Trading Profit is not
reduced by the full amount of the Brokerage Commissions paid by their Fund
account.
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.
Redemption charges do not reduce New Trading Profit.
The Profit Shares are calculated separately in respect of each
series of Units.
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.
Assume that as of the end of a series' first calendar quarter
of trading, 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. The New Trading Profit in respect of such series 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 Chesa-peake 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.
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 Profit Shares
previously paid to them in order for the Fund account managed by them to
generate additional New Trading Profit on which an incremental Profit Share will
accrue).
Redemption charges do not reduce New Trading Profit for
purposes of calculating the Profit Shares.
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.
-47-
<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, $652,366 and
$319,464, and had net income of $579,894, $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.
Because the Profit Shares are generally 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 for each
series, that a series will pay substantial Profit Shares during a year even
though the Net Asset Value per Unit of such series 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 managing other futures funds such charges
have been negligible.
--------------------
MLIP sends each Limited Partner a monthly statement that
includes a description of performance during the prior month and sets forth,
among other things, the Brokerage Commissions, Administrative Fees and Profit
Shares paid or accrued during such month.
--------------------
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 due on the 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 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 or less than 0.167% (2% annually) of the month-end Fund assets committed to
their management.
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.
-48-
<PAGE>
During 1994 (22/3 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 (22/3 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.
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. However, the Units acquired upon reinvestment of redemption proceeds
are subject to a 3% redemption charge for the twelve months following the date
of their issuance, not of the issuance of the redeemed series.
For purposes of determining whether redemption charges apply,
Units are considered to be issued as of the first day of the calendar quarter
immediately following the quarter during which the subscriptions for such Units
are accepted.
Receipt of redemption charges does not reduce the Fund's
reimbursement obligations to MLIP for organizational and initial offering costs
or for the payment of any other expense charged to the Fund as described herein.
During 1994 (22/3 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
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 stockholder 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.
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
-49-
<PAGE>
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). 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
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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 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
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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, will be dismissed.
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 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").
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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 which are still pending. Although the
ultimate outcome of the actions described above and other civil actions,
arbitration proceedings and claims 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.
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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 which is not a direct party to
an agreement with the Fund, and (ii) would be likely to have such recourse even
in the case of such entities only on a derivative basis, suing not individually
but in the right of the Fund.
ML PRINCIPAL PROTECTION L.P.
ASSOCIATED MERRILL LYNCH ENTITIES
[GRAPHIC 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
Relationships among the Merrill Lynch Affiliates
MLIP and its affiliates are the Fund's primary service
providers, other than the Trading Advisors, and will remain so even if using
other firms would 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 operating 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 out-of-pocket costs in executing each such trade. The less frequently an
Advisor trades, the lower these out-of-pocket costs to MLF and the greater its
net revenues from the Fund.
MLIP may from time to time have a conflict of interest between
facilitating the ongoing offering of the Units and making Advisor or other
changes which MLIP would otherwise believe to be in the best interest of the
Fund.
MLIP sponsors numerous funds and has financial incentives to
favor certain of 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. from any potential liability under the ML&Co. guarantee. 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 its need to avoid any ML&Co. payments under the
guarantee.
MLF; MLIB; and 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. Furthermore, 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 charged by
MLF are in large part attributable to the significant costs incurred by MLIP and
the ML&Co. group in sponsoring the Fund and distributing the Units being
embedded in the Fund's Brokerage Commission costs. In the case of institutional
accounts, no sponsorship or distribution costs are incurred by the Merrill Lynch
organization, so that MLF can lower Brokerage Commissions without reducing the
net revenue received by Merrill Lynch. See "Charges -- Charges Paid by Merrill
Lynch" at page 48 above. Nevertheless, even factoring in sponsorship and
distribution costs, certain institutional clients of MLF receive, as a result of
arm's-length negotiations, better commission rates than the Fund.
MLF, MLIB and MLAM each have numerous clients, and they have
financial incentives to favor certain of such clients over the Fund.
The Trading Advisors
Other Clients and Business Activities of the Trading Advisors
The Fund might benefit significantly from an exclusive focus
by certain of the Trading Advisors on the Fund 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.
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<PAGE>
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 act, or may in the future act,
as sponsors of their own single or multi- advisor futures funds. Such funds 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 for the
Fund) 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 in respect of the Units
sold by them. Consequently, Financial Consultants have a financial incentive to
encourage investors to purchase, and to discourage them from redeeming, their
Units.
Proprietary Trading
MLIP, the Advisors, their respective affiliates and related
persons may trade in the commodity markets for their own accounts as well as for
the accounts of their clients. In doing so, such persons 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 or her share of any undistributed
profits. (Section 7(e) at page LPA-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 becoming substitute Limited Partners unless doing
so would have adverse federal income tax consequences for the Fund.
A Limited Partner may redeem any or all of his or her Units at
Net Asset Value as of the last business day of any month upon ten calendar days'
irrevocable notice to his or her 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. No such redemption charges are
assessed (even if otherwise applicable) on the redemption proceeds received by a
Limited Partner who redeems Units as of the end of or during a calendar quarter
and subscribes as of the date of redemption to the new series of Units to be
issued as of the beginning of the immediately following quarter. The redemption
charge period for Units acquired with reinvested redemption proceeds will,
however, extend until after the end of the twelfth full month after the issuance
of such newly acquired Units.
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 LPA-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 LPA-6). 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 LPA-14). A majority of
the Units of each series held by Limited Partners may also compel dissolution of
the Fund. (Section 17(b) at page LPA-14). Ten percent (10%) of the Units then
held by Limited Partners of any series have the right to bring a matter before a
vote of the Limited Partners. (Section 17(c) at page LPA-15).
MLIP has no power under the Limited Partnership Agreement to
restrict any of the Limited Partners' voting rights. (Section 17(c) at page
LPA-15). Any Units purchased by MLIP or its affiliates are non-voting. (Section
6 at page LPA-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 LPA-14).
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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 LPA-15).
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. 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
LPA-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 LPA-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 LPA-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 LPA-8); (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 LPA-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 LPA-7).
All Advisors must meet the experience requirements of the
Guidelines. (Section 8(f) at page LPA-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 LPA-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 and the Trading Partnership
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 or her 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 or her Units in the Fund the
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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 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 or her personal income tax return is limited to his or her tax
basis for his or her Units as of the end of the year in which such loss
occurred. Generally, a Partner's tax basis for his or her Units is the amount
paid for such Units reduced (but not below zero) by his or her share of any Fund
distributions, realized losses and expenses and increased by his or her 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" at page 60 below), a
Partner's distributive share of any capital losses of the Fund will not
materially reduce the federal income tax payable on his or her ordinary income
(including his or her 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 Trading Partnership do not constitute "passive activities,"
and income derived from the Fund constitutes 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 the Units held
by such Partner.
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 or her Units. Assuming that the Partner
has held his or her 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 in the following paragraph with respect to
"Section 988 transactions," 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
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such transactions are subject to the "mark-to-market" rules, whether or not they
involve Section 1256 contracts (see "-- Gain or Loss on Section 1256 Contracts,"
above).
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, 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 59 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 or her alternative
minimum tax.
Based on the trading activities of the Trading Partnership to
date, 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.) This is the position which MLIP has taken to date.
Investors should be aware, however, that an opinion of counsel is not binding on
the IRS or on any court, and that it is possible that the IRS could contend, or
that a court could decide, that the 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
through October 31, 1997, have been treated as a non-deductible,
non-amortizable,
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syndication expense by the Fund. The IRS could take the position that a portion
of the Brokerage Commissions paid to MLF also constitutes non-deductible
syndication expenses.
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 or her 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 (A) (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 (B) 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," above at page 60.)
MLIP's Contribution to the Purchase Price of Certain Units
MLIP contributes $3 to the Fund for each Unit purchased by
officers or employees of ML&Co. and its affiliates, who subscribe for Units at
$97. The $3 MLIP contribution is taxed as ordinary income in the year of
purchase, and affected subscribers acquire a tax basis of $100 in their Units.
Possible Payments Under the ML&Co. Guarantee
Any payment to the Fund pursuant to the ML&Co. guarantee in
respect of a series of Units would give rise to taxable income in the amount of
such payment to the recipient Partners.
"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" (a contingency which is entirely within the control of the
purchasing plans and entities).
IRS Audits of the Fund and Its Partners
The tax treatment of Fund-related items is determined at the
Fund rather than 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 United
States 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.
--------------------
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<PAGE>
THE FOREGOING SUMMARY 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
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.
PLAN OF DISTRIBUTION
General
The Units are offered to the public on a continuous basis. The
minimum initial investment is 50 Units ($5,000); the minimum additional
investment for existing Limited Partners is 10 Units ($1,000).
Subscriptions may be submitted at any time during a calendar
quarter. If accepted, such subscriptions will be applied to the purchase of
Units as of the first day of the immediately following calendar quarter.
Settlement of Unit purchases generally occurs within five (5) business days of
the beginning of the acceptance of the related subscriptions.
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. 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 does not engage in any form of market-making activities with
respect to the Units.
Subscription Procedure
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 or her
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 specified by the Selling Agent. As
described above under "-- General," settlement dates generally take place not
later than five (5) business days following the acceptance of the subscription.
No sale of Units will be completed until at least five (5) business days after
the date a subscriber has executed, dated and submitted related Signature Page
to the Subscription Agreement and Power of Attorney.
Subscriptions must generally be received no less than five (5)
business days prior to the beginning of the calendar quarter as of which the
Units subscribed for are 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 and Prospectus Supplement 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 wishing 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 or her 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 eligible instruments
while held in escrow and earn interest at prevailing "risk-free" rates.
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<PAGE>
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.
Purchases by Employee Benefit Plans
Application. This section sets forth certain consequences
under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code, which a fiduciary of an "employee benefit plan" as defined in and
subject to ERISA or of a "plan" as defined in Section 4975 of the Code who has
investment discretion should consider before deciding to invest the plan's
assets in the Fund (such "employee benefit plans" and "plans" being referred to
herein as "Plans," and such fiduciaries being referred to herein as "Plan
Fiduciaries"). In general, the terms "employee benefit plan" as defined in 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, KEOGH plans for self-employed individuals (including
partners), "simplified employee pension plans," individual retirement accounts
and medical benefit plans.
Special Investment Considerations. 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. 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.
The Fund Should Not Be Considered To Hold "Plan Assets." A
regulation issued under ERISA (the "ERISA Regulation") 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." Accordingly, the underlying assets of the Fund should not be
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.
ACCEPTANCE OF SUBSCRIPTIONS ON BEHALF OF AN INDIVIDUAL
RETIREMENT ACCOUNT OR OTHER EMPLOYEE BENEFIT PLAN IS IN NO RESPECT A
REPRESENTATION BY ANY
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PARTY THAT AN INVESTMENT IN THE UNITS IS APPROPRIATE OR AUTHORIZED FOR SUCH
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 (the
individual MLPF&S brokers). Pursuant to standard Selling Agent compensation
procedures, a percentage of the production credits awarded to a particular
Financial Consultant is paid out in cash by the Selling Agent to such Financial
Consultant. 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 is paid in cash, with respect to Units which remain
outstanding more than twelve months. Such ongoing production credits accrue only
with respect to 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 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. Ongoing production credits accrue
monthly and are paid quarterly. 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.
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 constitute costs properly allocated to the account of the Selling
Agent. Such costs, which to date have included the expense of producing a
revised sales brochure and organizing certain seminars (but have not exceeded
$100,000 in the aggregate), are in addition to the selling commissions credited
to the Selling Agent. 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.
LEGAL MATTERS
Sidley & Austin passes upon legal matters for MLIP, MLF and
MLPF&S in connection with the Units being offered hereby. Sidley & Austin
advises MLIP (and its affiliates) with respect to its responsibilities as
general partner of the Fund, and with respect to related matters Sidley & Austin
has reviewed the statements under the section, "Federal Income Tax
Consequences," in this Prospectus, and rendered the opinions described therein
to MLIP.
EXPERTS
The balance sheet of MLIP as of 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.
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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 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.
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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........................................... 45
Advisors..................................................... Cover page
Available Assets............................................. 40
Bid-ask spreads.............................................. 46
Breakeven level.............................................. 9
Brokerage Commissions........................................ 44
CFTC......................................................... -i-
Consulting Fees.............................................. 48
Core Advisors................................................ 7
"Customer segregated funds".................................. 39
Differential................................................. 46
EFP.......................................................... 46
Employee benefit plan........................................ 63
ERISA........................................................ 63
Escrow Agent................................................. -i-
"Foreign secured amount account"............................. 39
F/X Desk..................................................... 9
Fund......................................................... Cover page
Government Securities........................................ 8
Guarantee.................................................... 37
Investment advisory fees..................................... 14
Limited Partners............................................. Cover page
MLF.......................................................... Cover page
MLAM......................................................... Cover page
ML&Co........................................................ Cover page
MLIP......................................................... Cover page
MLIB......................................................... 32
MLPF&S....................................................... -i-
New Trading Profit........................................... 46
NFA.......................................................... 32
Non-core Advisors............................................ 7
Offset accounts.............................................. 41
Ongoing production credits................................... -i-
Opportunity costs............................................ 11
Organizational and initial offering
cost reimbursement........................................ 44
Peak-to-Valley Drawdown...................................... 17
Principal Assurance Date..................................... Cover page
"Principal protection"....................................... 7
Profit Shares................................................ 46
Redemption charges........................................... 49
Round-turn commissions....................................... 44
SEC.......................................................... -ii-
Selling Agent................................................ -i-
Selling commissions.......................................... -i-
Service fees................................................. 46
Time Horizon................................................. 11
Trading Advisors............................................. Cover page
Variation margin............................................. 28
Worst Monthly Drawdown....................................... 17
Worst Peak-to-Valley Drawdown................................ 17
Yield enhancement............................................ 8
</TABLE>
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ML Principal Protection L.P.
Independent Auditors' Report............................... 68
Consolidated Statements of Financial Condition ............ 69
Consolidated Statements of Income.......................... 70
Consolidated Statements of Changes in Partners' Capital.... 71
Notes to Consolidated Financial Statements................. 72
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.
-67-
<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
-68-
<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) December 31, 1995 December 31, 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:
Redemptions payable $ 2,110,456 $ 539,877 $ 213,696
Administrative Fees payable 10,687 9,384 4,128
Settlement payment due to broker -- 1,496,925 --
Brokerage Commissions payable (Note 2) 395,448 347,223 152,748
Profit Shares payable 75,861 78,840 129,169
Organizational 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
================== ==================== ===================
</TABLE>
NET ASSET VALUE PER UNIT (Note 5)
See Notes to Consolidated Financial Statements.
----------------
Past performance is not necessarily indicative of future results.
-69-
<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) AND
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 January 1, 1995
September 30, September 30, to October 12, 1994
1996 1995 December 31, to
(unaudited) (unaudited) 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
Brokerage Commissions 3,588,269 2,184,180 3,216,364 405,653
Administrative Fees 96,980 59,042 86,928 10,964
Profit Shares 319,464 573,525 652,366 129,169
------------------ -------------------- ------------------ --------------------
Total expenses 4,004,713 2,816,747 3,955,658 545,786
------------------ -------------------- ------------------ --------------------
INCOME BEFORE MINORITY INTEREST 1,985,308 2,879,788 5,223,222 584,398
------------------ -------------------- ------------------ --------------------
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
Weighted average number of Units
outstanding (Note 6) 828,420 491,225 551,944 319,887
================== ==================== ================== ====================
Net income per weighted average General
Partner and Limited Partner Unit $ 2.38 $ 5.83 $ 9.40 $ 1.81
================== ==================== ================== ====================
</TABLE>
See Notes to Consolidated Financial Statements.
----------------
Past performance is not necessarily indicative of future results.
-70-
<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 PERIOD 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>
Units of
Partnership Limited General
Interest Partners Partner Total
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Initial offering 320,000.00 $30,942,800 $1,057,200 $32,000,000
Organizational 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
Subscriptions 444,567.00 43,851,304 605,396 44,456,700
Redemptions (47,810.02) (5,054,249) -- (5,054,249)
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
Subscriptions 254,468.36 25,102,217 344,619 25,446,836
Redemptions (189,786.52) (19,730,431) -- (19,730,431)
Distributions -- (1,279,994) (21,484) (1,301,478)
Net income -- 1,838,327 135,847 1,974,174
--------------- --------------- -------------- ---------------
PARTNERS' CAPITAL,
SEPTEMBER 30, 1996 779,000.82 $79,010,260 $2,225,385 $81,235,645
(Unaudited) ============== ============= ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
----------------
Past performance is not necessarily indicative of future results.
-71-
<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) AND
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
Organization
- ------------
ML Principal Protection L.P. (formerly ML Principal Protection
Plus L.P.) (the "Fund") 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 Fund 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 Fund is the sole limited
partner -- and in investing in U.S. Government Securities, as defined. The
Trading Partnership as well as the Fund are hereinafter sometimes referred to as
"the Fund" unless the context otherwise requires. Merrill Lynch Investment
Partners Inc. (formerly ML Futures Investment Partners Inc.) ("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 Fund 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 Fund, and substantially all of the
Fund's assets are held in accounts maintained at Merrill Lynch, Pierce, Fenner &
Smith Incorporated, a Merrill Lynch affiliate. MLIP has agreed to maintain a
general partner's interest of at least 1% of the total equity interest in each
of the Fund and the Trading Partnership. MLIP and the Limited Partners share in
the profits and losses of the Fund, and MLIP and the Fund share in the profits
and losses of the Trading Partnership, in proportion to the respective interests
in the Fund and the Trading Partnership owned by each.
The consolidated financial statements include the accounts of
the Trading Partnership in which the Fund is the sole limited partner. All
related transactions and intercompany balances between the Fund and the Trading
Partnership are eliminated in consolidation.
The ownership by MLIP in the Trading Partnership represents a
minority interest when the financial results of the Trading Partnership are
consolidated into those of the Fund. MLIP's share of the Trading Partnership's
profits and losses is deducted from the Consolidated Statements of Income, and
MLIP'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 Fund 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 come to allocate different
percentages of their total capital to trading, but all series trade under the
direction of the same combination of independent advisors (the "Trading
Advisors" or the "Advisors"), chosen from time to time by MLIP to manage the
Trading Partnership's trading.
MLIP selects the Advisors to manage the Fund's assets, and
allocates and reallocates the Fund's trading assets among existing, replacement
and additional Advisors.
MLIP also determines what percentage of the Fund's total
capital to allocate to trading from time to time, attempting to balance the
desirability of reducing the opportunity costs of the Fund's "principal
protection" structure by allocating 100% (or more) of the Fund's assets to
trading against the necessity of preventing Merrill Lynch & Co., Inc. from ever
being required to make any payments to the Fund 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.
----------------
Past performance is not necessarily indicative of future results.
-72-
<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) AND
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
(continued)
- --------------------------------------------------------------------------------
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 Fund 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.
Organizational and Initial Offering Costs, Operating Expenses and Selling
Commissions
MLIP advanced all organizational and initial offering costs
relating to the Fund and the Trading Partnership. The Fund is reimbursing MLIP
for such costs in 36 equal monthly installments. For financial reporting
purposes, the Fund deducted the organizational 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
Fund deducts organization and initial offering cost reimbursements only as
actually paid.
MLIP pays for all routine operating costs (including legal,
accounting, printing and similar administrative expenses) of the Fund and the
Trading Partnership, including the cost of the ongoing offering of the Units.
MLIP receives as well as the Administrative Fee as well as a portion of the
Brokerage Commissions paid to MLF by the Fund as reimbursement for the foregoing
expenses.
No selling commissions have been 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 Fund's consolidated income and expenses as reported for income tax
purposes.
----------------
Past performance is not necessarily indicative of future results.
-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) AND
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
(continued)
- --------------------------------------------------------------------------------
Redemptions
- -----------
A Limited Partner may require the Fund to redeem some or all
of his or her Units at Net Asset Value as of the close of business on the last
business day of any month upon ten calendar days' notice. Units redeemed on or
prior to the end of the twelfth full month after purchase are assessed an early
redemption charge of 3% of their Net Asset Value as of the date of redemption.
If an investor acquires Units at more than one time, such Units are treated on a
"first-in, first-out" basis for purposes of determining whether redemption
charges are applicable.
Dissolution of the Fund
- -----------------------
The Fund 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 Fund's assets are held by MLF as margin
deposits in respect of the Fund's futures trading. The remainder is managed by
MLAM. As a means of approximating the interest rate which would be earned by the
Fund were 100% of its Net Assets on deposit with MLF invested in 91-day Treasury
bills, MLF pays the Fund interest on its account equity on deposit in U.S.
dollars with MLF at a rate of 0.5 of 1% per annum below the prevailing 91-day
Treasury bill rates. In the case of its trading in certain foreign futures
contracts, the Fund either retains the related equity in dollars or deposits
margin in foreign currency denominated instruments and is charged or credited
with interest generally at approximately 0.5 of 1% per annum above or below the
applicable sovereign overnight rate. The additional benefit derived from
possession of the Fund's assets accrues to MLF and its affiliates.
The Fund pays Brokerage Commissions to MLF at a flat monthly
rate equal to 0.7917 of 1% (a 9.5% annual rate) of the 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 Fund began to pay MLIP an Administrative
Fee of 0.020833 of 1% (a 0.25 of 1% annual rate) of the month-end assets
allocated to trading. Assets committed to trading are not reduced for purposes
of calculating Brokerage Commissions by any accrued but unpaid Brokerage
Commissions, Administrative Fees, Profit Shares or other fees or charges. MLIP
estimates that the round-turn equivalent commission rate charged to the Fund
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 (including the component of the Brokerage Commission reclassified
as an Administrative Fee, but 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 Fund 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 average month-end assets of the Fund,
after reduction for a portion of the Brokerage Commissions, managed by each of
them, respectively.
----------------
Past performance is not necessarily indicative of future results.
-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) AND
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
(continued)
- --------------------------------------------------------------------------------
The Fund trades forward contracts through a Foreign Exchange
Service Desk (the "F/X Desk") established by MLIP that contacts at least two
counterparties along with Merrill Lynch International Bank ("MLIB") for all of
the Fund's currency transactions. All counterparties other than MLIB are
unaffiliated with any Merrill Lynch entity. The F/X Desk charges a service fee
equal (at current exchange rates) to approximately $5.00 to $12.50 on each
purchase or sale of a futures-contract equivalent face amount of a foreign
currency. No service fees are charged on trades awarded to MLIB (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 MLF. The
Fund is not required to margin or otherwise guarantee its F/X Desk trading.
Certain of the Fund's currency trades are executed in the form
of "exchange of futures for physical" ("EFP") transactions involving MLIB and
MLF. In these transactions, a spot or forward (collectively referred to as
"cash") currency position is acquired and exchanged for an equivalent futures
position on the International Monetary Market of the Chicago Mercantile
Exchange. In its EFP trading, the Fund acquires cash currency positions through
the 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. When the Fund 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 Fund's F/X Desk service fee and EFP differential costs
combined have, to date, totaled no more than 0.25 of 1% per annum of the Fund's
average month-end Net Assets.
(3) Annual Distributions
The Fund makes annual fixed-rate distributions, payable
irrespective of profitability, of between $2 and $5 per Unit on the Series A-H
Units. The Fund 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 Fund, 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 MLIP, which does not presently
intend to make any such distributions.
----------------
Past performance is not necessarily indicative of future results.
-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) AND
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
(continued)
- --------------------------------------------------------------------------------
(4) Agreements
The Fund 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 Fund. The Trading Advisors determine the commodity futures and forward
contract trades to be made on behalf of their respective Fund accounts, subject
to certain trading policies and to certain rights reserved for MLIP.
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 Fund, as of the end of each
calendar quarter are paid to the appropriate Trading Advisors by the Trading
Partnership. Profit Shares are also paid out as in respect of Units redeemed as
of the end of interim months during a quarter to the extent of the applicable
percentage of any New Trading Profit attributable to such Units with respect to
each Advisor.
(5) Net Asset Value Per Unit
For financial reporting purposes, the Fund deducted the total
organizational and initial offering costs payable to MLIP at inception in
determining Net Asset Value. For all other purposes (including computing Net
Asset Value for redemptions), the Fund deducts the organizational 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:
<TABLE>
<CAPTION>
Net Asset Value Net Asset Value per Unit
------------------------------------ ---------------------------------------------------------
All Other Financial Number of All Other Financial
Purposes Reporting Units Purposes Reporting
---------------- ----------------- ----------------- -------------- -----------------
December 31, 1994
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
================ ================= =================
</TABLE>
----------------
Past performance is not necessarily indicative of future results.
-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) AND
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
(continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value Net Asset Value
--------------- ---------------
All Other Purposes Financial Reporting All Other Purposes Financial Reporting
------------------ ------------------- ------------------ -------------------
September 30, 1996
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Series A Units $22,866,691 $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
================= ================= ================
* 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.
</TABLE>
(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 outstanding at September 30, 1996, December
31, 1995 and December 31, 1994 equals the Units outstanding as of such date,
adjusted proportionately for Units sold or redeemed based on the respective
length of time each was outstanding during the preceding period.
(7) Merrill Lynch & Co., Inc. Guarantee
Merrill Lynch & Co., Inc. has guaranteed to the Fund 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.
----------------
Past performance is not necessarily indicative of future results.
-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) AND
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
(continued)
- --------------------------------------------------------------------------------
(8) Fair Value and Off-Balance Sheet Risk
The Fund trades futures, options and forward contracts on
interest rates, stock indices, commodities, currencies, energy and metals. The
Fund's revenues by reporting category were as follows:
<TABLE>
<CAPTION>
January 1, 1996 to January 1, 1995 to
September 30, 1996 December 31, 1995
Total Trading Results Total 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)
------------------------------ -------------------------------
Total $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 Fund'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 Fund'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 these derivative instruments are traded.
MLIP 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 Fund, adjusting the percentage of the Fund's
total assets allocated to trading with respect to each series of Units,
calculating the Net Asset Value of the Advisors' respective Trading 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 Fund basis. While MLIP will not itself intervene in the markets to hedge
or diversify the Fund's market exposure, MLIP may urge Advisors to reallocate
positions, or itself reallocate Fund 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, MLIP'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.
----------------
Past performance is not necessarily indicative of future results.
-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) AND
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
(continued)
- --------------------------------------------------------------------------------
Fair Value
- ----------
The derivative instruments used in the Trading Partnership's
trading activities are marked to market daily with the resulting unrealized
gains or losses recorded in the Consolidated Statements of Financial Condition
and the related profit 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 December 31, 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
----------------------------- ----------------------------
Total $419,247,588 $163,621,082
============================= ============================
<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
------------------------ ------------------------ ------------------------ ------------------------
Total $307,471,645 $128,617,669 $92,997,102 $96,542,987
======================== ======================== ======================== ========================
</TABLE>
----------------
Past performance is not necessarily indicative of future results.
-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) AND
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
(continued)
- --------------------------------------------------------------------------------
Fair Value (cont.)
- ----------
Substantially all of the Trading Partnership's derivative
instruments outstanding as of September 30, 1996 and December 31, 1995 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 nine months ended September 30, 1996 and during the twelve months ended
December 31, 1995 was as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1996 Twelve Months Ended 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
------------------------ ------------------------ ------------------------ -----------------------
Total $362,281,700 $253,298,974 $229,995,205 $69,486,437
======================== ======================== ======================== =======================
</TABLE>
----------------
Past performance is not necessarily indicative of future results.
-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) AND
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
(continued)
- --------------------------------------------------------------------------------
A portion of the amounts indicated as off-balance sheet risk
reflects offsetting commitments to purchase and to sell the same derivative
instrument on the same date in the future. These commitments are economically
offsetting but are not, as a technical matter, offset in the forward markets
until the settlement date.
Credit Risk
- -----------
The risks associated with exchange-traded contracts are
typically perceived to be less than those associated with over-the-counter
(non-exchange-traded) transactions, because exchanges typically (but not
universally) provide clearinghouse arrangements in which the collective credit
(in some cases limited in amount, in some cases not) of the members of the
exchange is pledged to support the financial integrity of the exchange. In
over-the-counter transactions, on the other hand, traders must rely solely on
the credit of their respective individual counterparties. Margins, which may be
subject to loss in the event of a default, are generally required in exchange
trading, and counterparties may require margin in the over-the-counter markets.
The fair value amounts in the above tables represent the extent
of the Trading Partnership's market exposure in the particular class of
derivative instrument, but not the credit risk associated with counterparty
nonperformance. The credit risk associated with these instruments, from
counterparty 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 U.S. Commodity Futures Trading Commission regulations.
Substantially all of the Fund'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>
September 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 Fund controls credit risk by dealing almost exclusively with
Merrill Lynch entities as brokers and counterparties.
----------------
Past performance is not necessarily indicative of future results.
-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) AND
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
(continued)
- --------------------------------------------------------------------------------
The Fund through its normal course of business enters into
various contracts with MLF acting as its commodity broker. Pursuant to the
brokerage arrangement with MLF, to the extent that such trading results in
receivables from and payables to MLF, these receivables and payables are offset
and reported as a net receivable or payable.
(9) Subsequent Events
On October 1, 1996, distributions were announced with respect
to Series A Units and Series E Units. Series A Units received an annual fixed
rate distribution equal to $3.50 per Series A Unit as well as a discretionary
distribution equal to $2.50 per Unit. Series E Units received an annual fixed
rate distribution equal to $3.50 per Series A Series E Unit.
----------------
Past performance is not necessarily indicative of future results.
-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
------------------ -----------------
ASSETS
<S> <C> <C>
Cash $ 62,262 $ 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 Sheets.
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS 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. (Safety of Equity Capital;
Targeting Overall Return), The SECTOR Strategy Fund(sm) II 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 in May of 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 September 27, 1996 and December
29, 1995, approximately $81,300,000 and $69,500,000, respectively, was subject
to this agreement.
At September 27, 1996 and December 29, 1995, 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.
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
(countinued)
- --------------------------------------------------------------------------------
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.
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 JWH Strategic Allocation Fund L.P.......................................... 1,617,236 1,000
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 Chesapeake L.P............................................................. 76,435 --
----------- --------
Total......................................................................... $10,102,462 $8,397,789
=========== ==========
</TABLE>
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)
- --------------------------------------------------------------------------------
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 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 Funds' 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
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY.
-87-
<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)
- --------------------------------------------------------------------------------
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.
-88-
<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 or her 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 data 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.
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
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<PAGE>
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 Trading Asset Allocation: 20%
Background
Chesapeake Capital Corporation 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
The Diversified Program which Chesapeake trades for the Fund
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 and statistical formulas
and techniques which are quantitative, proprietary in nature and which have been
either learned or developed by Mr. Parker.
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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
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. (IPE), the London Metal Exchange (LME), 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 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-
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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. As of August 31,
1996, Chesapeake was managing approximately $757 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 and approximately $711 million (excluding notional funds) in the
Diversified Program.
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.
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.
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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 113 through 115.
The following performance information 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 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 TO THE FUND.
COMMODITY INTEREST TRADING IS SPECULATIVE AND INVOLVES A HIGH
DEGREE OF RISK. THERE CAN BE NO ASSURANCE THAT ANY TRADING ADVISOR WILL TRADE
PROFITABLY OR AVOID INCURRING SUBSTANTIAL LOSSES.
INVESTORS SHOULD NOTE THAT INTEREST INCOME MAY CONSTITUTE A
SIGNIFICANT PORTION OF ANY 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 1, 1991 - August 31, 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, 60 were profitable and 3
were 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: $757 million
Aggregate assets (excluding notional equity) in program: $711 million
Aggregate assets (including notional equity) overall: $912 million
Aggregate assets (including notional equity) in program: $861 million
Worst monthly drawdown: (10.98)% (1/92)
Worst peak-to-valley drawdown: (16.62)% (1/92-5/92)
<TABLE>
<CAPTION>
======================================================================================================
Monthly 1996 1995 1994 1993 1992 1991
Rates of Return
- ------------------------------------------------------------------------------------------------------
<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 3.27 0.88 7.02 0.98 6.52 (1.25)
- ------------------------------------------------------------------------------------------------------
July (7.09) (3.09) (1.70) 9.49 12.96 (1.75)
- ------------------------------------------------------------------------------------------------------
August 0.78 (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 0.83% 14.09% 15.87% 61.82% 1.81% 12.51%
Rate of Return (8 months)
======================================================================================================
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
SEE THE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES 113 THROUGH 115.
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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: 7 4 0 0
------------------------------------------------------------------------------------------------
Aggregate Assets (excluding $757 million $757 million $757 million $757 million
"notional" equity) Overall:
------------------------------------------------------------------------------------------------
Aggregate Assets (excluding $29 million $17 million N/A N/A
"notional" equity) in Program:
------------------------------------------------------------------------------------------------
Aggregate Assets (including $912 million $912 million $912 million $912 million
"notional" equity) Overall:
------------------------------------------------------------------------------------------------
Aggregate Assets (including $33 million $18 million N/A N/A
"notional" equity) in Program:
------------------------------------------------------------------------------------------------
Worst Monthly Drawdown: (7.86)% (7/96) (16.40)% (7/96) (3.30)% (7/95) (5.77)% (9/92)
------------------------------------------------------------------------------------------------
Worst 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: (3.61)% (8 months) (7.25)% (8 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>
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 113 THROUGH 115.
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JOHN W. HENRY & COMPANY, INC.
October 1, 1996 Trading Asset Allocation: 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., and a director of JWH Asset Management, 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.; 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 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.
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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. Ms. Kenton
is a member of MFA's Trading and Markets Committee. She received a B.S. in
Finance from Ithaca College.
Ms. Mary Elizabeth 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. ("Shearson") 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
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.
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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.
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
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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 is also President of JWH Asset Management,
Inc. 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. Staniewicz 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.
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
mathematical 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
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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 strategy 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. JWH
believes that 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 research into 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 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 with the objective of decreasing 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.
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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 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.
Legal and Ethical Concerns
JWH and Mr. Henry may engage in discretionary trading for
their own accounts, and may trade for the purpose of testing new investment
programs and concepts, as long as such trading does not amount to a breach of
fiduciary duty. In the course of such trading, JWH and Mr. Henry may take
positions in their own accounts which are the same or opposite from client
positions, and on occasion orders may be filled better for their accounts than
for client accounts due to testing a new quantitative model or program, a
neutral allocation system, and/or trading pursuant to individual discretionary
methods. Records for these accounts will not be made available to clients.
Employees and principals of JWH (other than Mr. Henry) are not permitted to
trade on a discretionary basis in futures, options on futures or forward
contracts. However, such principals and employees may invest in investment
vehicles that trade futures, options on futures, or forward
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contracts, when an independent trader manages trading in that vehicle, and in
the JWH Employee Fund, L.P., which is managed by JWH. The records of these
accounts also will not be made available to clients. Please see "Certain
Litigation" on page 49.
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 financial
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.
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
as 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 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.
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The Delevered Yen Denominated Financial and Metals Profile
which began trading in October 1995 seeks to capitalize on sustained moves in
global financial markets utilizing 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.
InterRate(TM), which commenced trading in November 1987 and
closed in July 1996, used a portfolio of foreign currency contracts that sought
to capture interest-rate differentials between countries. This program utilized
leverage that was significantly lower than other JWH programs, reducing risk as
it sought to generate returns significantly enhanced over the prevailing 91-day
U.S. government securities rate.
The K-T Diversified Program began in January 1984 and closed
in February 1994. This program participated in eight market sectors on U.S.
exchanges only.
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.
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 performance achieved,
investors should be aware that the degree of leverage currently utilized may be
significantly different from that used during previous time periods.
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Due to the commencement of trading in July 1996 by a new multi-program
fund managed by JWH, JWH developed a new method for treating the accrual of
incentive fees for the multi-advisor funds and multi-program accounts it
manages. For these accounts, JWH agreed that it would earn incentive fees only
when overall fund performance for multi-advisor funds, or overall JWH
performance for multi-program accounts, as the case may be, is profitable. As
applied, this new method presents incentive fees due for each program on a
stand-alone basis-in essence, to reflect the performance results that would
have been experienced by an investor in that program regardless of any external
business arrangements (such as a multi-advisor structure or the use of multiple
JWH programs) that might have affected actual incentive fees paid. The new
method was applied initially in August 1996 performance. In that month, a
one-time adjustment to performance rate of return was made to each affected
program to show the impact of this adjustment from program inception through
August 1996. In the case of certain programs, the adjustment had a material,
i.e., greater than 10%, impact on the rate of return that otherwise would have
been shown. In the case of accounts that closed before JWH received an incentive
fee due to the operation of such netting arrangements, a balancing entry was
made to offset the effect of incentive fee accrual on ending equity.
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.
See Notes to the Performance Summaries are set forth on pages
113-115.
Additional Note to the Financial and Metals Portfolio Composite Performance
- ---------------------------------------------------------------------------
Summary
- -------
In May 1992, 35% of the assets in the Financial and Metals
Portfolio was deleveraged 50% 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 (24.3)%. The 1992 annual rate of return for
the Financial and Metals Portfolio performance summary was (10.9)%. If these
accounts had been excluded from the Financial and Metals Portfolio performance
summary, the 1992 annual rate of return would have been (3.9)%. 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.
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.
-105-
<PAGE>
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 for such
account.
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 extent 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.
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 (44)% and (17)%, respectively. For
the period January 1995 through June 1995, the three open accounts achieved
separate rates of return of 101%, 75% and 67%, 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.
The Original Investment Program began trading client capital
in June 1994. In July 1995, 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 Original Investment Program Composite Performance Summary
- --------------------------------------------------------------------------------
The Original Investment 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")
- ---------------------------------------------------
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 the Fully-Funded Subset 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," at page 93. This method permits notional and fully-funded accounts
to be included in a single performance summary.
-106-
<PAGE>
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.
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 following performance information 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 PERFORMANCE PRESENTED IN THE CASE OF THE OTHER JWH PROGRAMS.
THE OTHER JWH PROGRAMS 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.
COMMODITY INTEREST TRADING IS SPECULATIVE AND INVOLVES A HIGH
DEGREE OF RISK. THERE CAN BE NO ASSURANCE THAT ANY 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."
-107-
<PAGE>
JOHN W. HENRY & COMPANY, INC.
Financial And Metals Portfolio
January 1, 1991 - August 31, 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
Worst monthly drawdown on a composite basis: (18.0)% (1/92)
Worst monthly drawdown on an individual account basis: (27.7)% (1/92)
Worst peak-to-valley drawdown: (39.5)% (12/91-5/92)
<TABLE>
<CAPTION>
============================================================================================================
Monthly Rates
of Return 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 summary performance and chart from their inception until
August 1995. The maximum percentage of proprietary funds during this
time period was less than 1/2 of 1%. 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 113 THROUGH 115.
-108-
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
OTHER JOHN W. HENRY & COMPANY, INC. PROGRAMS
----------------------------------------------------------------------------
<S> <C> <C> <C>
Name of CTA: John W. Henry John W. Henry John W. Henry
& Company, Inc. & Company, Inc. & Company, Inc.
----------------------------------------------------------------------------
<S> <C> <C> <C>
Name of Program: Original Investment Global Diversified International Currency
Program Portfolio Bond Portfolio
----------------------------------------------------------------------------
Inception of Client Account Trading by
CTA: October 1982 October 1982 October 1982
----------------------------------------------------------------------------
Inception of Client Account Trading in
Program: October 1982 June 1988 January 1993
----------------------------------------------------------------------------
Number of Open Accounts: 27 17 1
----------------------------------------------------------------------------
Aggregate Assets (excluding "notional"
equity) Overall: $1.5 billion $1.5 billion $1.5 billion
----------------------------------------------------------------------------
Aggregate Assets (excluding "notional"
equity) in Program: $157 million $133 million $2 million
----------------------------------------------------------------------------
Aggregate Assets (including "notional"
equity) Overall: $1.5 billion $1.5 billion $1.5 billion
----------------------------------------------------------------------------
Aggregate Assets (including "notional"
equity) in Program: $157 million $133 million $2 million
----------------------------------------------------------------------------
Worst Monthly Drawdown on a
Composite Basis: (14.1)% (10/94) (16.8)% (7/91) (6.7)% (7/94)
----------------------------------------------------------------------------
Worst Monthly Drawdown on an
Individual Account Basis: (18.1)% (2/92) (20.3)% (7/91) (7.8)% (7/94)
----------------------------------------------------------------------------
Worst Peak-to-Valley Drawdown: (26.2)% (6/94-10/94) (29.1)% (12/91-5/92) (20.1)% (6/94-1/95)
----------------------------------------------------------------------------
1996 Compound Rate of Return: (4)% (8 months) (5)% (8 months) (4)% (8 months)
----------------------------------------------------------------------------
1995 Compound Rate of Return: 53% 20% 37%
----------------------------------------------------------------------------
1994 Compound Rate of Return: (6)% 10% (2)%
----------------------------------------------------------------------------
1993 Compound Rate of Return: 41% 60% 15%
----------------------------------------------------------------------------
1992 Compound Rate of Return: 11% (13)% N/A
----------------------------------------------------------------------------
1991 Compound Rate of Return: 5% 40% N/A
----------------------------------------------------------------------------
-----------------------------------------------------------------------------------
OTHER JOHN W. HENRY & COMPANY, INC. PROGRAMS
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Name of CTA: John W. Henry John W. Henry John W. Henry John W. Henry
& Company, Inc. & Company, Inc. & Company, Inc. & Company, Inc.
----------------------------------------------------------------------------------
Delevered Yen
Name of Program: The World Financial Global Financial Denominated Financial International Foreign
Perspective Portfolio and Metals Profile Exchange Program
----------------------------------------------------------------------------------
Inception of Client Account Trading by
CTA: October 1982 October 1982 October 1982 October 1982
----------------------------------------------------------------------------------
Inception of Client Account Trading in
Program: April 1987 June 1994 October 1995 August 1986
----------------------------------------------------------------------------------
Number of Open Accounts: 5 5 1 7
----------------------------------------------------------------------------------
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: $18 million $58 million (Yen)923 million $67 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: $18 million $58 million (Yen)923 million $67 million
----------------------------------------------------------------------------------
Worst Monthly Drawdown on a
Composite Basis: (21.6)% (1/92) (17.4)% (11/94) (3.2)% (2/96) (12.0)% (1/92)
----------------------------------------------------------------------------------
Worst Monthly Drawdown on an
Individual Account Basis: (25.5)% (1/92) (19.5)% (11/94) (3.2)% (2/96) (13.6)% (1/92)
----------------------------------------------------------------------------------
Worst Peak-to-Valley Drawdown: (32.0)% (12/91-10/92)(46.0)% (6/94-1/95) (5.1)% (1/96-8/96) (24.1)% (12/91-4/92)
----------------------------------------------------------------------------------
1996 Compound Rate of Return: 10% (8 months) 5% (8 months) (3)% (8 months) (7)% (8 months)
----------------------------------------------------------------------------------
1995 Compound Rate of Return: 32% 86% 0.2% (3 months) 17%
----------------------------------------------------------------------------------
1994 Compound Rate of Return: (15)% (38)% (7 months) N/A (6)%
----------------------------------------------------------------------------------
1993 Compound Rate of Return: 14% N/A N/A (5)%
----------------------------------------------------------------------------------
1992 Compound Rate of Return: (23)% N/A N/A 5%
----------------------------------------------------------------------------------
1991 Compound Rate of Return: 15% 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 113 THROUGH 115.
-109-
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
OTHER JOHN W. HENRY & COMPANY, INC. PROGRAMS
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John W. Henry John W. Henry John W. Henry & John W. Henry
Name of CTA: & Company, Inc. & Company, Inc. Company, Inc. & Company, Inc.
-----------------------------------------------------------------------------------------------------
Name of Program: G-7 Currency Portfolio Worldwide Bond Dollar Program InterRate/TM/
Program
-----------------------------------------------------------------------------------------------------
Inception of Client Account October 1982 October 1982 October 1982 October 1982
Trading by CTA:
-----------------------------------------------------------------------------------------------------
Inception of Client Account February 1991 July 1996 July 1996 December 1988
Trading in Program: ceased trading 7/96
-----------------------------------------------------------------------------------------------------
Number of Open Accounts: 9 2 2 0
-----------------------------------------------------------------------------------------------------
Aggregate Assets (excluding
"national" equity) Overall: $1.5 billion $1.5 billion $1.5 billion $1.5 billion
-----------------------------------------------------------------------------------------------------
Aggregate Assets (excluding
"national" equity) in Program: $103 million $9 million $9 million N/A
-----------------------------------------------------------------------------------------------------
Aggregate Assets (including
"national" equity) Overall: $1.5 billion $1.5 billion $1.5 billion $1.5 billion
-----------------------------------------------------------------------------------------------------
Agregate Assets (including
"national" equity) in Program $103 million $9 million $9 million N/A
-----------------------------------------------------------------------------------------------------
Worst Monthly Drawdown on a
Composite Basis: (10.7)% (1/92) None (2.3)% (8/96) (9.71)% (9/92)
-----------------------------------------------------------------------------------------------------
Worst Monthly Drawdons on an
Individual Account Basis: (12.3)% (1/92) None (2.3)% (8/96) (10.2)% (9/92)
-----------------------------------------------------------------------------------------------------
Worst 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%
-----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
OTHER JOHN W. HENRY & COMPANY, INC. PROGRAMS
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John W. Henry JWH Investments JWH Investments
Name of CTA: & Company, Inc. Inc. Inc.
-----------------------------------------------------------------------------------------------------
Name of Program: KT Diversified Program Financial and Metals InterRate/SM/
Portfolio
-----------------------------------------------------------------------------------------------------
Inception of Client Account
Trading by CTA: October 1982 September 1991 September 1991
-----------------------------------------------------------------------------------------------------
Inception of Client Account January 1984; September 1991; February 1992;
Trading in Program: ceased trading 2/94 ceased trading 7/95 ceased trading 11/93
-----------------------------------------------------------------------------------------------------
Number of Open Accounts: 0 0 0
-----------------------------------------------------------------------------------------------------
Aggregate Assets (excluding
"national" equity) Overall: $1.5 billion 0 0
-----------------------------------------------------------------------------------------------------
Aggregate Assets (excluding
"national" equity) in Program: N/A N/A N/A
-----------------------------------------------------------------------------------------------------
Aggregate Assets (including
"national" equity) Overall: $1.5 billion 0 0
-----------------------------------------------------------------------------------------------------
Agregate Assets (including
"national" equity) in Program N/A N/A N/A
-----------------------------------------------------------------------------------------------------
Worst Monthly Drawdown on a
Composite Basis: (19.2)% (7/91) (16.6)% (1/92) (9.3)% (9/92)
-----------------------------------------------------------------------------------------------------
Worst Monthly Drawdons on an
Individual Account Basis: (28.6)% (1/92) (16.6)% (1/92) (9.3)% (9/92)
-----------------------------------------------------------------------------------------------------
Worst 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 113 THROUGH 115.
-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. 105-106.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Aggregate Worst Worst
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 PROGRAM.
SEE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES 113 THROUGH 115.
-111-
<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. 105-106.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Aggregate Worst Worst
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>
PART 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 PROGRAM.
SEE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES 113 THROUGH 115.
-112-
<PAGE>
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; 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; 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. Worst Monthly Drawdown is the worst 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.
With respect to Chesapeake's programs, worst monthly drawdown is the worst
-------------------------------------
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 size 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 worst monthly drawdown for an individual
------------------------------
account within a program was determined after identification of the three
worst monthly drawdowns on a composite basis for each investment
-113-
<PAGE>
NOTES TO THE PERFORMANCE SUMMARIES
(Cont.)
program. Within the three months in which the worst composite monthly
drawdowns occurred, individual accounts were reviewed for each program.
The individual account which experienced the worst loss in those months
is the account shown as having the worst 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 worst monthly drawdown for an individual
account and the worst monthly drawdown on a composite basis for a
program are due to, among other factors, the reasons noted under "John
W. Henry & Company, Inc. -- Past Performance" at page 106.
11. Worst Peak-to-Valley Drawdown is the worst 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. Worst 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 worse peak-to-valley drawdowns. JWH calculates the
period over which the worst 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 worse than the worst 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" at page 93), 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.
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 the current core Advisors are, in
certain cases, calculated on the basis of assets under management
including proprietary capital. However, each of the current core
Advisors believes that the inclusion of such capital has had no
material effect on their respective Monthly Rates of Return.
-114-
<PAGE>
NOTES TO THE PERFORMANCE SUMMARIES
(Cont.)
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.
-115-
<PAGE>
PERFORMANCE OF THE
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 (had, in the case of World
Currencies Limited, which dissolved) 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 as 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.
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.
----------------------------
-116-
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
MLIP SINGLE-ADVISOR FUNDS
SEPTEMBER 1, 1996
- -----------------------------------------------------------------------------------------------------------------------------
Worst
Inception Worst 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 Public July 1996 $110,773,125 $108,525,219 (1.02)% (7/96) (1.11)% (7/96-8/96)
Fund L.P.
- -----------------------------------------------------------------------------------------------------------------------------
ML JWH Strategic Allocation Private July 1996 $87,272,808 $85,729,688 (1.05)% (7/96) (1.35)% (7/96-8/96)
Fund Ltd.
- -----------------------------------------------------------------------------------------------------------------------------
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>
- ------------------------------------------------------------------------------------------------------------------
MLIP SINGLE-ADVISOR FUNDS
SEPTEMBER 1, 1996
- ------------------------------------------------------------------------------------------------------------------
Cumulative
Rate of
Return
Jan. 1, 1991
to 1996 1995 1994 1993 1992 1991
Aug. 31, 1996 Compound Compound Compound Compound Compound Compound
(or Rate of Rate of Rate of Rate of Rate of Rate of
NAME OF FUND 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 (1.11)% (1.11)% N/A N/A N/A N/A N/A
Fund L.P. (1 1/2 mos.)
- ------------------------------------------------------------------------------------------------------------------
ML JWH Strategic Allocation (1.35)% (1.35)% N/A N/A N/A N/A N/A
Fund Ltd. (1 1/2 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, on the basis of which Worst Monthly
Drawdown, Worst Peak-to-Valley Drawdown, Cumulative Rate of Return and
Compound Rate of Return is calculated, 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.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE FUNDS. PAST PERFORMANCE
THESE FUNDS ARE EACH TRADED PURSUANT TO MATERIALLY DIFFERENT PROGRAMS
AND WITH MATERIALLY DIFFERENT OBJECTIVES THAN THE FUND.
-117-
<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 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
and the accompanying Prospectus Supplement. 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
in 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). Furthermore, all series of Units
issued under this Prospectus will commence trading with 75% of their assets
allocated to trading, increasing expected volatility and 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.
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 at or about the same
time) with these markets. The past performance of the Fund is not necessarily
indicative of its future results, or of performance relative to the debt or
equity markets. This may be particularly true in the case of the Fund 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, historical correlation with other
components in the portfolio and the percentage of an investor's holdings which
can suitably be committed to speculative alternative investments 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 substantial overlap among the markets traded by the Advisors,
and the deleveraging of the Fund's trading reduces its profit potential.
-118-
<PAGE>
FUTURES VOLUME BY MARKET SECTOR
[PIE CHART HERE]
The futures volume figures and market sector distributions presented
above include both speculative and hedging transactions, as well as
options on futures. Source: Futures Industry Association. A
significant portion of currency trading is done in the forward rather
than in the futures markets, and, accordingly, is not reflected in the
foregoing chart.
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
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 which may limit the diversification
potential of the investment.
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 $22.8 billion. Of this amount,
approximately $2.5 billion to $3.5 billion is estimated to be 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.
-119-
<PAGE>
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, such as the Fund -- if the
managed futures performance is, in fact, profitable as well as non-correlated
with stocks and bonds, can 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 or about 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 in
order to add value as an element of overall diversification in a portfolio.
Allocating assets to non-traditional, 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 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 non-traditional, 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 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 speculative trading. No object of value is
acquired by the Fund. Rather, the Fund obtains 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 to investing; to
speculating on price differences, not to acquiring assets reasonably expected to
grow in value over time. Furthermore, 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.
All performance information in this Prospectus and the accompanying
Prospectus Supplement is presented exclusively on a pre-tax basis. The tax costs
of maintaining an investment in the Fund are materially higher than those that
would be applicable to a "buy and hold" investment in the constituent securities
in a stock or bond index.
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 are
anticipated to be approximately 10% of its average Net Assets per year.
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.
-120-
<PAGE>
Summary
Participation in a professionally managed futures program, obtaining
access to the experience and expertise of 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.
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. Furthermore, different managed futures investments have
materially different objectives and reward/risk profiles. The potential benefits
of a successful managed futures investment must be considered in light of the
limited portion of an overall portfolio which 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" beginning at page 11.
-121-
<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 securities
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 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 a 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.
APP-1
<PAGE>
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
November 1, 1996
MERRILL LYNCH INVESTMENT PARTNERS INC.
General Partner
<PAGE>
ML PRINCIPAL PROTECTION L.P.
THIRD AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
1. Formation and Name............................................. LPA-1
2. Principal Office............................................... LPA-1
3. Business....................................................... LPA-1
4. Term, Dissolution, Fiscal Year and Net Asset Value............. LPA-2
5. Net Worth of General Partner................................... LPA-3
6. Capital Contributions; Units................................... LPA-3
7. Allocation of Profits and Losses............................... LPA-3
(a) Capital Accounts and Allocations........................ LPA-3
(b) Allocation of Profit and Loss for Federal Income
Tax Purposes.......................................... LPA-4
(c) Adjustments............................................. LPA-6
(d) Expenses................................................ LPA-6
(e) Limited Liability of Limited Partners................... LPA-6
(f) Return of Capital Contributions......................... LPA-6
8. Management of the Fund......................................... LPA-6
(a) General................................................. LPA-6
(b) Fiduciary Duties........................................ LPA-7
(c) Loans; Investments...................................... LPA-7
(d) Certain Conflicts of Interest Prohibited................ LPA-8
(e) Certain Contracts....................................... LPA-8
(f) Trading Advisors........................................ LPA-8
(g) Other Activities........................................ LPA-8
(h) Tax Matters Partner..................................... LPA-8
(i) The Trading Partnership................................. LPA-8
(j) "Pyramiding" Prohibited................................. LPA-9
9. Audits and Reports to Limited Partners......................... LPA-9
10. Assignability of Units......................................... LPA-10
11. Redemptions; Distributions .................................... LPA-10
12. Offering of Units.............................................. LPA-11
13. Continuous Offering; Additional Offerings...................... LPA-11
14. Special Power of Attorney...................................... LPA-12
15. Withdrawal of a Partner........................................ LPA-12
16. Standard of Liability; Indemnification......................... LPA-12
17. Amendments; Meetings........................................... LPA-14
(a) Amendments with Consent of the General Partner.......... LPA-14
(b) Amendments and Actions without Consent of the
General Partner....................................... LPA-14
(c) Meetings; Other......................................... LPA-15
18. Governing Law.................................................. LPA-15
19. Miscellaneous.................................................. LPA-15
</TABLE>
LPA-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 November 1, 1996, by and among
Merrill Lynch Investment Partners Inc., a Delaware corporation, as general
partner (the "General Partner"), and each other party who has become or 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 "Fund").
(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 Fund. The Guarantee Agreement,
between ML&Co. (as hereinafter defined) and the Fund, dated as of October 11,
1994, shall apply only to the Units subscribed for prior to the date hereof. The
Guarantee Agreement, between ML&Co. and the Fund, dated as of the date hereof
shall apply only to the Units subscribed for on and after the date hereof.
2. Principal Office.
The address of the principal office of the Fund 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 Fund 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 Fund 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 Fund'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 Fund 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 Fund's
business is appreciation of its assets through speculative trading while
controlling performance volatility. The Fund may engage in the foregoing
speculative trading directly, through investing in other partnerships and funds
and 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 Fund will never be used
to pay losses or expenses attributable to any other series. In particular, it is
contemplated that the Fund shall continue to engage in speculative trading
solely through investing in ML Principal Protection Trading L.P. (the "Trading
Partnership"), of which the General Partner shall be the sole general partner,
and the Fund the sole limited partner.
In addition to its trading activities, as described above, the Fund
and the Trading Partnership retain Merrill Lynch Asset Management, L.P. ("MLAM")
to implement cash management strategies in -- in MLAM's absolute
LPA-1
<PAGE>
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 Fund 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 Fund 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 Fund 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 Fund, shall be responsible for doing so.
The Fund has been formed in conjunction with a "principal protection"
undertaking by Merrill Lynch & Co., Inc. ("ML&Co."), the indirect parent of the
General Partner, pursuant to which ML&Co. has agreed to make sufficient payments
to the Fund, to be allocated to the appropriate series of Units in the Fund, 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 Fund,
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
Fund 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 Fund 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 (not, for these
purposes, to include the limited partnership interest in the Trading
Partnership), 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 Fund 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 Fund 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 Fund who carries on the
business of the Fund (and each remaining general partner of the Fund is hereby
authorized to carry on the business of the Fund in such an event), or (ii)
within ninety (90) days after such event all Partners agree in writing to
continue the business of the Fund and to the appointment, effective as of the
date of such event, of one or more general partners of the Fund; (4) a decline
in the aggregate Net Assets of the Fund to less than $250,000; (5) dissolution
of the Fund pursuant hereto; or (6) any other event which shall make it unlawful
for the existence of the Fund to be continued or requires termination of the
Fund.
(b) Dissolution. Upon the occurrence of an event causing the
dissolution of the Fund, the Fund shall be dissolved and terminated.
(c) Fiscal Year. The fiscal year of the Fund begins on January 1 of
each year and ends on the following December 31.
(d) Net Asset Value. Net Assets of the Fund 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 Fund's investment in the Trading Partnership will be
valued in accordance with the foregoing principles.
The Fund's accrued but unpaid liability for reimbursement to the
General Partner of the Fund'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.
LPA-2
<PAGE>
5. Net Worth of General Partner.
The General Partner agrees that at all times so long as it remains
general partner of the Fund, it will maintain its net worth --determined without
reference to the General Partner's interests in the Fund 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 fund 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 vote of Limited Partners owning Units representing more than fifty
percent (50%) of the outstanding Units of each series 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 Fund 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 Fund shall be as
shown on the books and records of the Fund.
The General Partner shall invest in the Fund, as a general partner
interest, no less than 1% of the total contributions to the Fund (including the
General Partner's contribution) made with respect to each series of Units issued
by the Fund. The General Partner, so long as it is a general partner of the
Fund, or any substitute general partner, shall maintain a minimum investment of
1% of the outstanding contributions to the Fund 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 Fund, maintain the minimum 1% interest in each series of Units described
in the preceding sentence.
The General Partner may, without the consent of any Partners, admit to
the Fund purchasers of Units as limited partners.
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.
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 Fund 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 Fund 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 Fund'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 Fund'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 Fund'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 Fund 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 or redemption payments paid out with respect to such
series.
LPA-3
<PAGE>
Any Profit Share payments made by the Fund shall be allocated among
the series based upon the Profit Shares that would have been paid by the Fund
for the relevant period if the Fund's only assets during such period had been
those of the appropriate series.
The 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, service fees, "exchange of futures for physical" charges
and Administrative 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.
For purposes of this Section 7, 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.
(b) Allocation of Profit and Loss for Federal Income Tax Purposes. As
of the end of each fiscal year, the Fund'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 Fund or
allocated to such series, 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 Fund for such Unit. For each of the
first 36 months of the Fund'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 Fund 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:
LPA-4
<PAGE>
(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
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 or her 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.
LPA-5
<PAGE>
(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 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 Fund
in equal monthly installments of $6,642 through October 31, 1997, as described
in the Prospectus; provided that in the event that the Fund dissolves at any
time prior to the end of such 36-month period, any remaining reimbursement
obligation of the Fund 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 pays, without reimbursement, the selling
commissions and ongoing compensation relating to the offering of the Units.
The Fund shall not itself pay any advisory fees due to MLAM or
any other manager providing cash management services to the Fund. 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 Fund shall bear all of any taxes applicable to it.
The Fund shall pay to the General Partner Administrative Fees
of 0.020833 of 1% of the Fund's month-end assets (0.25% annually), as described
in the Prospectus, and the General Partner shall pay all of the Fund's routine
legal, accounting and administrative expenses. None of the General Partner's
"overhead" expenses incurred in connection with the administration of the Fund
(including, but not limited to, salaries, rent and travel expenses) will be
charged to the Fund. Any goods and services provided to the Fund 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 Fund's account shall be billed directly to the
Fund. 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 Fund
obligations in excess of the capital contributed by such Limited Partner, plus
his or her 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 or her capital
contribution or any profits added thereto, except through redeeming Units as
provided in Section 11 or upon dissolution of the Fund, 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 Fund other than cash.
8. Management of the Fund.
(a) General. The General Partner, to the exclusion of all
Limited Partners, shall control, conduct and manage the business of the Fund 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
Fund and the Partners pursuant to powers of attorney and supervise the
liquidation of the Fund if an event causing dissolution of the Fund occurs.
The General Partner may in furtherance of the business of the
Fund cause the Fund 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 Fund'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 Fund and the Trading
Partnership, (A) the Investment Advisory Contract
with MLAM, pursuant to which MLAM manages the available assets of the Fund 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
Fund and Trading Partnership), and the Customer Agreement with Merrill Lynch
Futures Inc., which receives futures Brokerage Commissions from the Trading
Partnership, and pays MLAM's cash management fees for services rendered to the
Fund and the Trading Partnership as described in the Prospectus, and (B) the
cash management arrangement as described under "Use of Proceeds
LPA-6
<PAGE>
and Interest Income" arrangements as described in the Prospectus (pursuant to
which certain affiliates of the General Partner will retain a portion of the
yield earned on the Fund's assets.).
Effective January 1, 1996, a portion of the Fund's Brokerage
Commissions, in the amount of 0.25 of 1% per annum of the Fund's average
month-end assets committed to trading, was recharacterized as Administrative
Fees payable directly to the General Partner -- the Fund hereby agreeing to make
such payments -- and, accordingly, the Fund's Brokerage Commissions have been
correspondingly reduced from 9.5% to 9.25% of the Fund's average month-end
assets committed to trading.
The General Partner may engage, and compensate on behalf of the
Fund from funds of the Fund, 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 Fund; provided, that no such arrangement
shall allow Brokerage Commissions paid by the Fund 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
Fund Net Assets, excluding Fund 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 Fund 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 Fund'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 sum of the Fund's Brokerage
Commissions and Administrative Fee 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 sum of the Fund'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 Fund admit persons acquiring any series of Units as Limited
Partners of the Fund.
The General Partner may take such other actions on behalf of
the Fund as it deems necessary or desirable to manage the business of the Fund,
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 Fund, 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 Fund in the best interests of the
Fund. 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 Fund funds and assets and the use thereof for the
benefit of the Fund, all as described under "Use of Proceeds and Interest
Income" in the Prospectus. 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 Fund and in resolving conflicts of
interest. The Fund's brokerage arrangements shall be non-exclusive, and the
Brokerage Commissions paid by the Fund shall be competitive. The Fund shall seek
the best price and services available for its commodity transactions.
(c) Loans; Investments. The Fund shall make no loans to any
party, and the funds of the Fund 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 Fund unless approved
by the Limited Partners in accordance with Section 17(a) of this Limited
Partnership Agreement (the fees charged by Merrill Lynch Futures Inc. in respect
of the Fund's trading of certain foreign futures transactions, as described
under "Use of Proceeds and Interest Income" in the Prospectus, not being deemed
to constitute a loan for such purposes). If the General Partner makes a loan to
the Fund, 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 Fund (without reference to the General
Partner's financial
LPA-7
<PAGE>
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 Fund 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 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 Fund 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 Fund 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 from retaining a trading advisor for which the General Partner provides
administrative services or (ii) MLAM from providing cash management services to
the Fund, provided that MLAM's fees are paid either by Merrill Lynch Futures
Inc. or by the General Partner, and that MLAM does not execute principal
transactions for the account of either the Fund or the Trading Partnership
through any Merrill Lynch affiliate).
(e) Certain Contracts. The maximum period covered by any
contract entered into by the Fund, except for the various provisions of the
Selling Agreement which survive the final closing of the sale of the Units,
shall not exceed one year. Any agreements between the Fund and the General
Partner or any affiliate of the General Partner shall be terminable by the Fund
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 Fund must
meet the NASAA Guidelines' minimum experience requirement.
The General Partner shall reimburse the Fund for any advisory
or other fees (including Profit Shares) paid by the Fund 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 Fund 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 Fund. Limited Partners may similarly
engage in any such other business activities. The General Partner shall devote
to the Fund such time as the General Partner may deem advisable to conduct the
Fund'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 Fund.
(i) The Trading Partnership. The General Partner shall not
permit the Fund 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
Fund 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 Fund's undertaking set forth in Section 16(e), that the Fund 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
or the appointment of a receiver, trustee, custodian or other similar official
for the Trading Partnership or for any substantial part of its property.
LPA-8
<PAGE>
The General Partner shall ensure that (i) the Fund 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 Fund's equity
ownership of the Trading Partnership and the General Partner's serving as sole
general partner of both the Fund and the Trading Partnership -- the intent of
the parties being that the Trading Partnership should function solely as a
conduit for the Fund's own trading activities and not as any form of investment
by the Fund.
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 Fund and
the Trading Partnership to retain the General Partner's affiliate, MLAM, to
provide cash management services to the Fund 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 Fund or the Trading Partnership.
(j) "Pyramiding" Prohibited. The Fund 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 Fund taking into account the Fund's open trade equity on
existing positions in determining generally whether to acquire additional
commodity positions on behalf of the Fund will not be considered to constitute
"pyramiding."
9. Audits and Reports to Limited Partners.
The Fund books shall be audited annually by an independent
certified public accountant. The Fund 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 Fund 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 Fund as is necessary
for a Limited Partner to complete his or her 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
Fund books and records for any purpose reasonably related to such Limited
Partner's interest as a limited partner in the Fund 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 Fund 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 Fund
records for a period of not less than six (6) years after such records are
created or after the event to which such records relate (whichever is later).
Not by way of qualifying the General Partner's obligations
under Section 8(a) to ensure that the Fund'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 Fund's
commodity broker, make an annual review of the commodity brokerage arrangements
applicable to the Fund (including the commodity brokerage arrangements
applicable to any subsidiary entity, such as the Trading Partnership, through
which the Fund 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 Fund in order to assess whether
the rates charged the Fund 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 Fund, the General
Partner will notify the Limited Partners, setting forth the rates charged to the
Fund and several funds which are, in the
LPA-9
<PAGE>
General Partner's opinion, comparable to the Fund. The General Partner shall
also conduct a similar review of the Fund's forward trading arrangements.
In addition to the undertakings in the preceding paragraph, the
Fund 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 set forth 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 or she will not
assign, transfer or dispose of, by gift or otherwise, any of his or her Units or
all or any part of his or her right, title and interest in the capital or
profits of the Fund 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 or
her right, title and interest in the capital or profits of the Fund shall be
effective against the Fund 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 Fund
except by redemption as provided in Section 11 or upon dissolution of the Fund.
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 (including the right to
receive any payments due under the ML&Co. Guarantee Agreement in respect of his
or her Units) and shall have that right of redemption and those rights upon
dissolution to which his or her assignor would otherwise have been entitled. No
assignment, transfer or disposition of Units shall be effective against the Fund
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 or her 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 Fund (including the Fund's
allocable share of the liabilities, contingent or otherwise, of any entities,
such as the Trading Partnership, in which the Fund invests), except any
liability to Partners on account of their capital contributions, have been paid
or there remains property of the Fund 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.
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 (whether or not the 3% redemption charge was waived
with respect to the Units redeemed as described us the preceding paragraphs).
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
LPA-10
<PAGE>
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 Fund
from commodity brokers, banks or other persons or entities, the Fund 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 Fund'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 Fund, and will do so to the extent the
General Partner deems appropriate or necessary to prevent the Fund 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 Fund 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 ongoing registration of the continuous 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 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 Fund, 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. Continuous Offering; 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 Fund or cause the
ongoing offering of the Units (unless otherwise discontinued) not to constitute
a "continuous offering" within the meaning of applicable Securities and Exchange
Commission rules. 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 continue to offer the series of
Units on continuous basis throughout each calendar quarter, the sales of each
series to take place as of the beginning of the immediately following calendar
quarter; 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.
LPA-11
<PAGE>
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 or her 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 or her true and lawful attorney-in-fact, in his or her name, place and
stead, to execute, acknowledge, swear to (and deliver as may be appropriate) on
his or her 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 Fund; (iii) all conveyances and other instruments which the
General Partner deems appropriate to qualify or continue the Fund in the State
of Delaware and the jurisdictions in which the Fund may conduct business, or
which may be required to be filed by the Fund 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 Fund or the Fund being governed by
any amendments or successor statutes to the Act or to reorganize or refile the
Fund in a different jurisdiction; and (iv) to file, prosecute, defend, settle or
compromise litigation, claims or arbitrations on behalf of the Fund. 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 Fund 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 Fund is continued pursuant to the terms of Section 4.
In addition, the General Partner may withdraw from the Fund, 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 the General Partner has notice. If the General
Partner withdraws as general partner and the Fund'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 Fund'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 Fund shall not terminate or dissolve the Fund,
and a Limited Partner, his or her estate, custodian or personal representative
shall have no right to redeem, receive proceeds from or value such Limited
Partner's interest in the Fund except as provided in Section 11 hereof and upon
dissolution of the Fund. Each Limited Partner expressly agrees that in the event
of his or her death, he or she waives on behalf of himself or herself and his or
her estate, and directs the legal representatives of his or her estate and any
person interested therein to waive, the furnishing of any inventory, accounting
or appraisal of the assets of the Fund and any right to an audit or examination
of the books of the Fund. 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 or her Units, to receive
periodic reports, audited financial statements and other information from the
General Partner or the Fund 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
Fund or to any Partner for any loss suffered by the Fund 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 Fund, 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 Fund. To the
fullest extent permitted by law, subject to this Section 16, the General Partner
and its Affiliates, shall be indemnified by the Fund against any losses,
judgments, liabilities, expenses and amounts paid in settlement of any claims
sustained by them in connection with the Fund; provided that such claims were
not the result of negligence or misconduct on the part of the General Partner or
its Affiliates,
LPA-12
<PAGE>
and the General Partner or such Affiliates, in good faith, determined that such
conduct was in the best interests of the Fund; 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 Fund 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.
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 Fund 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 Fund 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 Fund 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 Fund; (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 Fund 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 Fund 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 Fund 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 Fund hereunder shall be made only as provided in the specific case.
In no event shall any indemnification obligations of the Fund
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 Fund by the Partners. In the event
that the Fund 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 Fund's business, such
Partner shall indemnify and reimburse the Fund for all loss or expense incurred,
including reasonable attorneys' fees.
The General Partner shall indemnify and hold the Fund harmless
from all loss or expense which the Fund may incur (including, without
limitation, any indemnity payments) as a result of (i) the differences between
MLAM's
LPA-13
<PAGE>
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
the second paragraph 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 Fund 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 Fund, to the Trading Advisors for
trading and the amount of assets invested in the Trading Partnership by the
Fund. In the event that the Fund is obligated to make any payments pursuant to
this undertaking, it shall allocate such payments among the different series of
Units pro 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 Fund hereunder may be debited directly from the Fund's account
without need of giving any advance notice of any such debit to the Fund, in the
same manner as a "safekeeping account."
17. Amendments; Meetings.
(a) Amendments with Consent of the General Partner. If at any
time during the term of the Fund 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 Fund is not treated as an association
taxable as a corporation for federal income tax purposes, (iv) to qualify or
maintain the qualification of the Fund 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 Fund 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 Fund, 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 Fund, or materially changing the Fund'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 Fund 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
LPA-14
<PAGE>
general partner or general partners may be elected if the General Partner
withdraws from the Fund, 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 Fund 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 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 Fund
(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 Fund
(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 Fund and the
General Partner may rely upon the Fund 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.
LPA-15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Limited Partnership Agreement as of the day and year first above written.
<TABLE>
<CAPTION>
GENERAL PARTNER: LIMITED PARTNERS:
<S> <C>
MERRILL LYNCH INVESTMENT PARTNERS INC. All Limited Partners now and hereafter
admitted as limited partners of the Fund
pursuant to Powers of Attorney now or
By /s/John R. Frawley, Jr. hereafter executed in favor of, and delivered
--------------------------------------- to, the General Partner.
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
</TABLE>
LPA-16
<PAGE>
EXHIBIT B
ML PRINCIPAL PROTECTION L.P.
AMENDED
FORM OF
GUARANTEE AGREEMENT
GUARANTEE AGREEMENT made as of the ___ day of November, 1996
between Merrill Lynch & Co., Inc., a Delaware corporation ("ML&Co."), and ML
Principal Protection L.P., a Delaware limited Partnership (the "Fund").
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 Fund 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 distribution to Limited Partners (after
adjustment for all liabilities of the Fund 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 the distributions, if any, made by the Fund in respect of the series
of Units in question, which distributions are entirely in the discretion of the
General Partner.
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 Fund is dissolved or MLIP is removed as the general partner
of the Fund, 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 Fund will
not trade directly, but rather through a wholly-owned subsidiary limited
partnership, ML Principal Protection Trading L.P. (the "Trading Partnership"),
because the Fund 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 Fund.
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 Fund, 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 Fund; investors in the Fund 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
Fund 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.
B-1
<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 November __, 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 -- together with the applicable Prospectus Supplement,
and summary financial information relating to the Fund current within 60
calendar days -- dated within nine months of the date as of which
Purchaser 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.
(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
SR-1
<PAGE>
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 Trading L.P., MLIP,
Merrill Lynch Futures Inc., the Selling Agent, MLAM, or others in any litiga-
tion 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.
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
SR-2
<PAGE>
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 1996 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 wort 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 1996 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 1996 and an expectation of gross income during 1997 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 November __, 1996,
together with the current Prospectus Supplement and summary
financial information relating to the Fund current within 60
calendar days which accompanies the prospectus.
The Units are speculative and involve a high degree of risk. No
person may invest more than 10% of his or her readily marketable assets in the
Fund.
The Units are sold in separate series as of the beginning of
each calendar quarter. The 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 receive a
current Prospectus for the Fund (together with the current Prospectus Supplement
and summary financial information relating to the Fund current within 60
calendar days) and carefully review the Subscription Agreement and Power of
Attorney as well as 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 partner's or officer'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
Partnership 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 AND POWER OF ATTORNEY
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
November __, 1996, together with the accompanying Prospectus Supplement and
summary financial information relating to the Fund current within 60 days
(collectively, the "Prospectus," as the same may be from time to time amended).
Units are continuously offered during each calendar quarter, but generally are
sold only as of the beginning of the immediately following calendar quarter
(until such time as offering is discontinued). 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. Such settlement date will
not be more than five business days after the purchase date for any Units, which
will occur as of the first day of the calendar quarter immediately following the
quarter during which the subscription is accepted. 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 a current Prospectus Supplement and
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.
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
SA-1
<PAGE>
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>
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-4
<PAGE>
<TABLE>
<S> <C>
EXECUTION COPY
- ------------------------------------------------------------------------------------------------------------------------------------
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. 3
to the Registration Statement. The following is an estimate of such costs:
Approximate
Amount
-----------
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
========
- -------------------
*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.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
3.02(ii) Third Amended and Restated Limited Partnership Agreement of the Partnership
(Amended) (included as Exhibit A to the Prospectus).
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.
10.06 Form of Subscription Agreement and Power of Attorney (included as
(Amended) Exhibit D to the Prospectus).
23.08 Consent of Sidley & Austin (contained in their opinion in Exhibit
5.01).
23.09 Consent of Deloitte & Touche.
</TABLE>
The following exhibit is incorporated by reference herein from the
exhibit of the same description and number filed with Amendment No. 2 to
Registrant's Registration Statement on Form S-1 filed with the Commission on
October 28, 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).
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).
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
1.01 Form of Selling Agreement among the Partnership, the Trading Partnership, the
(Amended) 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 of the Partnership
(Amended) (included as Exhibit A to the Prospectus).
</TABLE>
S-2
<PAGE>
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).
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
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.
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)).
</TABLE>
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. 4 to the Registrant's Registration Statement on Form S-1, as filed with the
Commission on April 4, 1996 (Reg. No. 33-73914).
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
23.12 Consent of Deloitte & Touche LLP.
</TABLE>
-------------------------
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.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
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 Agreement of the Partnership
(Amended) (included as Exhibit A to the Prospectus).
10.12 Subscription Agreement and Power of Attorney (included as Exhibit D to the
(Amended) Prospectus).
23.11 Consent of Deloitte & Touche LLP.
</TABLE>
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:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
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.
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
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.
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)).
</TABLE>
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:
<TABLE>
<S> <C>
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.
</TABLE>
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:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
1.01 Selling Agreement among the Partnership, the Trading Partnership, the General
(Amended) 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 Trading Partnership, MLFIP
(Amended) and each Trading Advisor.
10.02 Form of Consulting Agreement between Merrill Lynch Futures and each Trading
(Amended) Advisor.
10.03 Form of Customer Agreement between the Trading Partnership and Merrill
(Amended) Lynch Futures.
10.04 Form of Escrow Agreement among the Partnership, the Escrow Agent, the Selling
(Amended) Agent and MLFIP.
10.05 Merrill Lynch & Co., Inc. Guarantee Agreement (included as Exhibit B to the
(Amended) Prospectus).
10.07 Foreign Exchange Desk Service Agreement with Amendment adding the Trading
(Amended) Partnership as a party thereto.
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
10.08 Investment Advisory Contract among Merrill Lynch Futures, the Partnership, the
Trading Partnership and MLAM.
</TABLE>
(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
end 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 a 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 director, officer 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 November, 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 November 25, 1996
- -------------------------- Officer and Director
John R. Frawley, Jr. (Principal Executive Officer)
JAMES M. BERNARD Chief Financial Officer, November 25, 1996
- -------------------------- Treasurer and Senior
James M. Bernard Vice-President
(Principal Financial and
Accounting Officer)
ALLEN N. JONES Director November 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 November 25, 1996
PARTNERS INC.
</TABLE>
By JOHN R. FRAWLEY, JR.
--------------------------
John R. Frawley, Jr.
President and Chief
Executive Officer
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
November, 1996.
ML PRINCIPAL PROTECTION TRADING 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 November 25, 1996
- -------------------------- Officer and Director
John R. Frawley, Jr. (Principal Executive Officer)
JAMES M. BERNARD Chief Financial Officer, November 25, 1996
- -------------------------- Treasurer and Senior
James M. Bernard Vice-President
(Principal Financial and
Accounting Officer)
ALLEN N. JONES Director November 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 Co-Registrant November 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 November 26, 1996
Registration No. 333-7593
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------
EXHIBITS
To
Amendment No. 3
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
Exhibit
Number Description of Document
- ------- -----------------------
3.02(ii) Third Amended and Restated Limited Partnership Agreement of the
(Amended) Partnership (included as Exhibit A to the Prospectus).
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.
10.06 Form of Subscription Agreement and Power of Attorney (included as
(Amended) Exhibit D to the Prospectus).
23.08 Consent of Sidley & Austin (contained in their opinion in Exhibit
5.01).
23.09 Consent of Deloitte & Touche.
<PAGE>
Exhibit 5.01
[LETTERHEAD OF SIDLEY & AUSTIN APPEARS HERE]
November 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, Amendment No. 2 thereto filed with the Securities and Exchange
Commission on October 28, 1996 and Amendment No. 3 thereto filed with the
Securities and Exchange Commission on or about November 26, 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.
<PAGE>
SIDLEY & AUSTIN CHICAGO
Merrill Lynch Investment Partners Inc.
November 25, 1996
Page 2
Based on the foregoing, we are of the opinion that:
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 APPEARS HERE]
November 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 Amendment No. 3 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 November 26, 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 (Reg. No. 33-73914) 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 Partnership 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 in the
Registration Statement and that Merrill Lynch Invest ment 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) each Partner will be
required to report on his tax return his allocable share of the Partnership's
income, gains, losses,
<PAGE>
SIDLEY & AUSTIN CHICAGO
Merrill Lynch Investment Partners Inc.
November 25, 1996
Page 2
and deductions; (iii) 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 (iv) 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 individual
investors, as of the date hereof, of an investment in the Partnership.
We hereby consent to the filing of this opinion as an Exhibit to
the Registration Statement and to the inclusion in the Prospectus of our opinion
set forth under the caption "Federal Income Tax Consequences."
Very truly yours,
SIDLEY & AUSTIN
<PAGE>
Exhibit 23.09
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 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
November 25, 1996
New York, New York
